UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
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Commission
For the fiscal year ended June 30, 2001 File Number 0-12957
[LOGO] ENZON, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2372868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Kingsbridge Road, Piscataway, New Jersey 08854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 980-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the Common Stock, par value $.01 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on September 20, 2001 was approximately $1,933,080,976. There is no market
for the Series A Cumulative Convertible preferred stock, the only other class of
stock outstanding.
As of September 20, 2001, there were 42,202,109 shares of Common Stock, par
value $.01 per share, outstanding.
The Index to Exhibits appears on page 45.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on December 4, 2001, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year, has been incorporated by reference, in whole or in part, into Part III
Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.
ENZON, INC.
2001 Form 10-K Annual Report
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 22
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 24
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 43
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 45
ADAGEN(R), ONCASPAR(R) and PROTHECAN(R) are our registered trademarks. Other
trademarks and trade names used in this annual report are the property of their
respective owners.
Information contained in this Annual Report contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof, or other variations thereon, or comparable terminology, or by
discussions of strategy. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The matters set
forth in the section entitled Risk Factors, constitute cautionary statements
identifying important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
vary materially from the future results indicated in such forward-looking
statements. Other factors could also cause actual results to vary materially
from the future results indicated in such forward-looking statements.
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PART I
Item 1. BUSINESS
Overview
We are a biopharmaceutical company that develops and commercializes
enhanced therapeutics for life-threatening diseases through the application of
our two proprietary platform technologies: PEG and single-chain antibodies. We
apply our PEG, or polyethylene glycol, technology to improve the delivery,
safety and efficacy of proteins and small molecules with known therapeutic
efficacy. We apply our single-chain antibody, or SCA, technology to discover and
produce antibody-like molecules that offer many of the therapeutic benefits of
monoclonal antibodies while addressing some of their limitations.
PEG Products
PEG-INTRON(TM) is a PEG-enhanced version of Schering-Plough's
alpha-interferon product, INTRON(R) A. We have designed PEG-INTRON to allow for
less frequent dosing and to yield greater efficacy as compared to INTRON A. Our
worldwide partner for PEG-INTRON, Schering-Plough, received approval for the
treatment of adult patients with chronic hepatitis C in May 2000 in the European
Union and in January 2001 in the United States. PEG-INTRON was also recently
approved in the European Union and the United States for use in combination with
REBETOL(R) (ribavirin, USP) Capsules for the treatment of chronic hepatitis C in
adult patients not previously treated with alpha-interferon. A Phase III
clinical trial is also being conducted for PEG-INTRON for the treatment of
malignant melanoma, and earlier stage clinical trials of PEG-INTRON are being
conducted for other indications, including HIV. Schering-Plough's worldwide
sales of INTRON A, REBETRON(TM) Combination Therapy and PEG-INTRON for all
indications in 2000 totaled $1.4 billion.
PROTHECAN(R) is a PEG-enhanced version of camptothecin, a compound in the
class of molecules called topoisomerase I inhibitors. Camptothecin has been
shown in clinical testing to be potent against certain tumor types, but it
possesses limited clinical utility due to significant side effects and poor
solubility. We have shown in pre-clinical studies that PROTHECAN preferentially
accumulates in tumors and has better efficacy compared to camptothecin as well
as other topoisomerase I inhibitors. In July 2001, we initiated a Phase II
clinical trial of PROTHECAN in patients with small-cell lung cancer.
PEG-paclitaxel is a PEG-modified version of paclitaxel. We have designed
PEG-paclitaxel to be delivered without the need for solubilizing agents or
premedications and to be more efficacious than TAXOL(R) (paclitaxel). We filed
an Investigational New Drug, or IND, application with the FDA for PEG-paclitaxel
in December 2000. In May 2001, we initiated the patient dosing in a Phase I
clinical trial for PEG-paclitaxel. The trial is designed to determine the
safety, tolerability and pharmacology of PEG-paclitaxel in patients with
advanced solid tumors and lymphomas.
We have commercialized two additional products based on our PEG technology:
ADAGEN(R) for the treatment of a congenital enzyme deficiency disease called
Severe Combined Immunodeficiency Disease, or SCID, and ONCASPAR(R) for the
treatment of acute lymphoblastic leukemia. Each of these products is a
PEG-enhanced version of a naturally occurring enzyme. Both products have been on
the market for several years and have demonstrated the safe and effective
application of our PEG technology.
Single-Chain Antibodies
SCAs are genetically engineered proteins which possess the binding
specificity and affinity of monoclonal antibodies and are designed to expand on
the therapeutic and diagnostic applications possible with monoclonal antibodies.
Preclinical studies have shown that SCAs allow for greater tissue penetration
and faster clearance from the body. We believe that we possess strong
intellectual property in the area of
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SCAs. The most clinically advanced SCA based on our technology is being
developed by one of our licensees, Alexion Pharmaceuticals, for complications
arising during cardiopulmonary bypass surgery, for which a Phase IIb clinical
trial has been completed, and myocardial infarction, for which Phase II clinical
trials are ongoing.
Strategy
To further realize the potential value of our PEG and SCA technologies, we
intend to pursue the following strategic initiatives:
o continue to identify proteins and small molecules of known therapeutic
value that we believe can be improved by our PEG technology and
develop PEG-enhanced versions of such compounds;
o acquire technologies and companies which are complementary to our
technologies and clinical focus;
o enter into license agreements with third parties to apply our PEG
technology to their existing compounds; and
o advance our SCA technology through in-licensing, collaborations and
entering into license agreements with third parties.
PEG Technology
Our proprietary PEG technology involves chemically attaching PEG to
therapeutic proteins or small molecules for the purpose of enhancing therapeutic
value. PEG is a relatively non-reactive and non-toxic polymer that is frequently
used in food and pharmaceutical products. We have demonstrated, both in our
marketed products and our products under development, that for some proteins and
small molecules, we can impart significant pharmacologic advantages over the
unmodified forms of the compound by modifying a compound using our PEG
technology.
These advantages include:
o extended circulating life,
o lower toxicity,
o increased drug stability, and
o enhanced drug solubility.
[GRAPHIC OMITTED]
A depiction of a PEG-enhanced molecule.
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For many years, we have applied our PEG technology to enhance the
pharmacologic characteristics of potential or existing protein therapeutics.
When we modify proteins with our PEG technology, it often causes these proteins
to have properties, such as improved circulating life and reduced toxicities
that significantly improve their therapeutic performance. In some cases, PEG can
render a protein therapeutically effective, where the unmodified form had been
ineffective. For example, proteins are often limited in their use as
therapeutics because they frequently induce an immunologic response. When PEG is
attached, it disguises the compound and reduces recognition by the patient's
immune system. As a result, many of the favorable characteristics listed above
are achieved. Given such improvement, frequency of dosing can be reduced without
diminishing potency and the delay in clearance can achieve an improved
therapeutic effect due to the prolonged exposure to the protein.
We have developed a next generation PEG technology that allows us to apply
PEG to small molecules. We are currently applying this technology to develop
PEG-enhanced versions of anti-cancer compounds. Like proteins, many anti-cancer
compounds of potentially significant therapeutic value possess undesired
pharmacologic characteristics such as toxicity, poor solubility, and limited
half-life. The attachment of PEG to anti-cancer compounds not only disguises the
molecule, thereby lowering potential immunogenicity and extending its
circulatory life, but also greatly increases the solubility of these compounds.
We attach PEG to anti-cancer compounds by means of a covalent bond that is
designed to temporarily inactivate the compound, and then deteriorate over time,
releasing the compound in the proximity of targeted tissue. By inactivating and
then reactivating the compound in the body we create a Pro Drug version of such
compounds. These attributes may significantly enhance the therapeutic value of
new chemicals, drugs already marketed by others and off-patent drugs with
otherwise limited utility. We believe that this technology has broad usefulness
and that it can be applied to a wide range of small molecules, such as:
o cancer chemotherapy agents,
o antibiotics,
o anti-fungals, and
o immunosuppressants.
We also believe that we will be able to use this PEG technology to impart
Pro Drug attributes to proteins and peptides, including enzymes and growth
factors.
We have significant expertise and intellectual property in the methods by
which PEG can be attached to a compound, the selection of appropriate sites on
the compound to which PEG is attached, and the amount and type of PEG used. If
PEG is attached to the wrong site on the protein, it can result in a loss of the
protein's activity or therapeutic effect. Similarly, inappropriate linkers or
the incorrect type or amount of PEG applied to a compound will typically fail to
produce the desired outcome. Given our expertise, we are able to tailor the PEG
technology to produce the desired results for the particular substance being
modified.
PEG Products
PEG-INTRON
PEG-INTRON is a PEG-enhanced version of Schering-Plough's recombinant
alpha-interferon product called INTRON A. We have modified the INTRON A compound
by attaching PEG to it, to allow for less frequent dosing and to yield greater
efficacy as compared to unmodified INTRON-A. We have developed PEG-INTRON in
conjunction with Schering-Plough. Schering-Plough currently markets
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INTRON A for 16 major antiviral and oncology indications worldwide. The largest
indication for INTRON A is hepatitis C. INTRON A is also used to treat certain
types of cancer. Our worldwide partner for PEG-INTRON, Schering-Plough, received
approval for the treatment of adult patients with chronic hepatitis C in May
2000 in the European Union and in January 2001 in the United States. PEG-INTRON
was also recently approved in the United States and the European Union for use
in combination with REBETOL (ribavirin, USP) Capsules for the treatment of
chronic hepatitis C in adult patients not previously treated with
alpha-interferon. A clinical trial is being conducted for PEG-INTRON as
combination therapy with REBETOL in patients with chronic hepatitis C who did
not respond to or had relapsed following previous interferon-based therapy. A
Phase III clinical trial is also being conducted for PEG-INTRON for the
treatment of malignant melanoma and earlier stage clinical trials of PEG-INTRON
are being conducted for other indications, including HIV. Schering-Plough's
worldwide sales of INTRON A, REBETRON Combination Therapy and PEG-INTRON for all
indications in 2000 totaled $1.4 billion.
Hepatitis C
According to an article published in the New England Journal of Medicine,
approximately 3.9 million people in the United States are infected with the
hepatitis C virus. Approximately 2.7 million of these people are characterized
as having chronic hepatitis C infection. We believe that the number of people
infected with the hepatitis C virus in Europe is comparable to that in the
United States. According to the World Health Organization, there were
approximately 170 million chronic cases of hepatitis C worldwide. A substantial
number of people in the United States who were infected with hepatitis C more
than 10 years ago are thought to have contracted the virus through blood
transfusions. Prior to 1992, the blood supply was not screened for the hepatitis
C virus. In addition, the majority of people infected with the virus are thought
to be unaware of the infection because the hepatitis C virus can incubate for up
to 10 years before patients become symptomatic. We estimate that only 10 to 15
percent of patients with hepatitis C have been treated.
The current standard of care for hepatitis C infection is alpha-interferon
administered three times per week for one year in combination with ribavirin,
another antiviral drug. The alpha-interferon plus ribavirin therapy was approved
in the United States for the treatment of hepatitis C in December 1998. Prior to
such approval, hepatitis C infection was typically treated with alpha-interferon
alone. In clinical studies, alpha-interferon stand-alone therapy for 48 weeks
has reduced viral loads below the detectable levels in 10% to 15% of patients
treated. In clinical studies, alpha-interferon plus ribavirin in combination
therapy has reduced viral loads below detectable levels in 31% to 38% of
patients treated. The clinical efficacy of alpha-interferon, both as a
stand-alone or combination therapy, has been limited by serious side effects,
which include flu-like symptoms, gastro-intestinal disorders and depression, in
addition to undesirable dosing requirements. The requirement of three times per
week dosing for the treatment of hepatitis C has also limited patient
compliance.
Schering-Plough reported the following results of clinical trials conducted
with PEG-INTRON for the treatment of hepatitis C. In a clinical study comparing
PEG-INTRON to INTRON A as stand-alone therapy, 24% of patients treated with
PEG-INTRON had sustained virologic response at the end of the 24 week follow-up
period following completion of 48 weeks of therapy, compared to 12% of patients
treated with INTRON A who had sustained virologic response. Sustained virologic
response is the reduction of viral loads below detectable levels. In a clinical
study comparing PEG-INTRON plus REBETOL to REBETRON Combination Therapy
containing REBETOL Capsules and INTRON A, when analyzed based upon optimal body
weight dosing, 61% of patients treated with PEG-INTRON plus REBETOL had
sustained virologic response compared to 47% of patients treated with REBETRON
combination therapy who had sustained virologic response. When the results of
this clinical trial were analyzed without using optimal body weight dosing, 54%
of the patients treated with PEG-INTRON plus REBETOL had sustained virologic
response compared to 47% of patients treated with REBETRON who had sustained
virologic response. Of the patients in this study who received at least 80% of
their treatment of PEG-INTRON plus REBETOL, 72% had sustained virologic response
compared to sustained virologic response in 46% of
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patients who received less than 80% of their treatment.
Under our licensing agreement with Schering-Plough, we earned milestone
payments and will earn royalties on worldwide sales of PEG-INTRON. We received a
$1.0 million milestone payment based on the FDA's acceptance in February 2000 of
Schering-Plough's U.S. marketing application for the use of PEG-INTRON in the
treatment of hepatitis C. We received a final $2.0 million milestone payment
based on the FDA's approval of PEG-INTRON in January 2001. Schering-Plough is
responsible for all marketing and development activities for PEG-INTRON.
Cancer
INTRON A is also used in the treatment of cancer. Of the 16 indications for
which INTRON A is approved throughout the world, 12 are cancer indications.
Currently, INTRON A is approved in the U.S. for three cancer indications and
used in some cases for other indications on an off-label basis.
INTRON A may be prescribed in the U.S. for the treatment of late stage
malignant melanoma, follicular NHL (low grade), chronic myelogenous leukemia and
AIDS-related Kaposi's sarcoma.
In June 2001, we reported that Schering-Plough completed its Phase III
study comparing PEG-INTRON to INTRON A in patients with newly diagnosed chronic
myelogenous leukemia, or CML. In this study, PEG-INTRON administered once weekly
demonstrated clinical comparability to INTRON A administered daily, with a
comparable safety profile. Despite demonstrating clinical comparability, the
efficacy results for PEG-INTRON did not meet the protocol-specified statistical
criteria for non-inferiority, the primary endpoint of the study. The major
cytogenic response rates at month 12 for both PEG-INTRON and INTRON A were
similar to those previously reported in the literature for alpha interferon. The
results of this Phase III study have not yet been presented or published, and
are not publicly available at this time.
In addition to conducting this Phase III study of PEG-INTRON in CML,
Schering-Plough has advised us that it is working with independent investigators
to research initiatives with PEG-INTRON in oncology indications through a
comprehensive medical affairs program. This program includes ongoing studies
with PEG-INTRON in high-risk melanoma, myeloma and non-Hodgkin's lymphoma, both
as monotherapy and in combination with other agents. A Phase III clinical trial
of PEG-INTRON for high-risk malignant melanoma is ongoing.
Published data from a Phase I clinical trial of PEG-INTRON in various
cancer types showed that some patients who previously did not respond to
unmodified INTRON A treatment did respond to PEG-INTRON. In that trial,
PEG-INTRON was administered once per week as opposed to up to five times per
week, which is a typical therapy regimen using unmodified INTRON A, and we
expect that the once per week dosing regimen may be used in treating various
cancer types.
Potential Other Indications
We believe that PEG-INTRON may be applied in treating other diseases,
including HIV, hepatitis B and multiple sclerosis. A Phase I clinical trial of
PEG-INTRON has been conducted for HIV. In this study, 58% of the 30 patients had
substantial reductions in their levels of HIV after adding a weekly injection of
PEG-INTRON to their combination treatments.
PROTHECAN
PROTHECAN is a PEG-enhanced version of a small molecule called
camptothecin, which is an anticancer compound in the class of drugs called
topoisomerase I inhibitors. Camptothecin, which was originally developed at the
National Institutes of Health and is now off patent, is believed to be a potent
topoisomerase I inhibitor.
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For many years camptothecin has been known to be a very effective oncolytic
agent but its drug delivery problems have limited its use. Two camptothecin
derivatives, topotecan and irinotecan, have been approved by the FDA for the
treatment of small-cell lung, ovarian and colorectal cancers. While these two
new products are more soluble than camptothecin, their efficacy rate is
relatively low. Despite their limitations, these two products together achieved
2000 worldwide sales of approximately $700 million.
We believe that by adjusting the way PEG is covalently attached to
camptothecin, the PEG attachment can be used to inactivate the compound's toxic
mechanism, which allows it to circulate in the bloodstream for longer periods of
time. This allows the compound to accumulate in the proximity of tumor sites.
Preliminary animal tests have shown that camptothecin modified with our PEG
technology preferentially accumulates in tumors and has better efficacy compared
to camptothecin, as well as other topoisomerase I inhibitions. The covalent bond
used in PROTHECAN to attach PEG to the camptothecin is designed to deteriorate
over time, resulting in the PEG falling off and allowing the compound once again
to become active.
We are currently conducting a Phase II clinical trial of PROTHECAN in small
cell lung cancer and expect to inititate additional Phase II clinical trials in
non-small cell lung, pancreatic and gastric cancers.
PEG-paclitaxel
PEG-paclitaxel is a PEG-modified version of paclitaxel formulated for ease
of administration. TAXOL (paclitaxel) is a powerful chemotherapeutic agent with
delivery limitations. It is used to treat various types of cancers, including
ovarian, breast, non-small cell lung, and AIDS-related Kaposi's sarcoma. In
2000, sales of TAXOL were reported to be approximately $1.6 billion. Using our
proprietary PEG technology, our scientists have modified paclitaxel through the
chemical attachment of PEG using a linker designed to deteriorate over time,
giving PEG-paclitaxel prodrug attributes. We designed PEG-paclitaxel to be
delivered without the need for solubilizing agents or premedications and to be
more efficacious than TAXOL. TAXOL, a commercial formulation of paclitaxel,
contains the solubilizing agent CREMOPHOR and patients are required to take
premedications prior to treatment to reduce the potential for adverse reactions,
which may be caused by CREMOPHOR.
In May 2001, we initiated the patient dosing in a Phase I clinical trial
for PEG-paclitaxel. The trial is designed to determine the safety, tolerability
and pharmacology of PEG-paclitaxel in patients with advanced solid tumors and
lymphomas.
ADAGEN
ADAGEN, our first FDA-approved PEG product, is used to treat patients
afflicted with a type of Severe Combined Immunodeficiency Disease, or SCID, also
known as the Bubble Boy Disease, which is caused by the chronic deficiency of
the adenosine deaminase enzyme, or ADA. ADAGEN represents the first successful
application of enzyme replacement therapy for an inherited disease. SCID results
in children being born without fully functioning immune systems, leaving them
susceptible to a wide range of infectious diseases. Currently, the only
alternative to ADAGEN treatment is a well-matched bone marrow transplant.
Injections of unmodified ADA are not effective because of its short circulating
life (less than 30 minutes) and the potential for immunogenic reactions to a
bovine-sourced enzyme. The attachment of PEG to ADA allows ADA to achieve its
full therapeutic effect by increasing its circulating life and masking the ADA
to avoid immunogenic reactions.
The adenosine deaminase or the ADA enzyme in ADAGEN is obtained from bovine
intestine. We purchase this enzyme from the world's only FDA-approved supplier
which, until recently, has obtained it from cattle of German origin. Bovine
spongiform encephalopathy (BSE or mad cow disease) has been detected in cattle
herds in the United Kingdom and more recently, in other European countries. In
November 2000, BSE was identified for the first time in cattle in Germany. There
is evidence of a link
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between the agent that causes BSE in cattle and a new variant form of
Creutzfeld-Jakob disease or nvCJD in humans. The ADA that has been used in
ADAGEN and will be used through early 2002, is derived from bovine intestines
harvested prior to November 2000, when herds were identified in Germany as
BSE-free. The BSE agent has not been detected in the herds from which ADA was
derived for ADAGEN and we have no reason to believe that these herds were
infected with that agent. Based upon the timing of the harvest of the
intestines, the use of certain purification steps taken in the manufacture of
ADAGEN and from our analysis of relevant information concerning this issue, we
consider the risk of product contamination to be extremely low. However, the
lengthy incubation period of BSE and the absence of a validated test for the BSE
agent in pharmaceutical products makes it impossible to be absolutely certain
that ADAGEN is free of the agent that causes nvCJD. To date, cases of nvCJD have
been rare in the United Kingdom, where large numbers of BSE-infected cattle are
known to have entered the human food chain. To date, no cases of nvCJD have been
linked to ADAGEN or, to our knowledge, any other pharmaceutical product,
including vaccines manufactured using bovine derived materials from countries
where BSE has been detected.
We have been in discussions with the FDA concerning our continued
distribution of ADAGEN. Given the significant benefit to the patients who take
this product and the likely significant adverse consequences to these patients
if this product were not available, we have agreed with the FDA to continue to
distribute the product. In order to avoid any potential BSE-related risk from
ADAGEN and to be consistent with recommendations from the FDA, our supplier has
secured a new source of bovine intestines from New Zealand, which has no
confirmed cases of BSE. We are working closely with our supplier to expedite the
delivery of ADA from New Zealand herds, but do not anticipate being able to
supply ADAGEN derived from this source until early in 2002. In the longer term,
we are pursuing development of a recombinant form of human ADA, but a product
based on this technology will not be available for several years, if ever.
We are marketing ADAGEN on a worldwide basis. We utilize outside
distributors in certain territories including the United States, Europe and
Japan. Currently, 69 patients in twelve countries are receiving ADAGEN therapy.
We believe many newborns with ADA-deficient SCID go undiagnosed and we are
therefore focusing our marketing efforts for ADAGEN on new patient
identification. Our sales of ADAGEN for the fiscal years ended June 30, 2001,
2000 and 1999 were $13.4 million, $12.2 million and $11.2 million respectively.
ONCASPAR
ONCASPAR, our second FDA-approved product, is a PEG-enhanced version of a
naturally occurring enzyme called L-asparaginase. It is currently approved in
the United States, Canada and Germany, and is used in conjunction with other
chemotherapeutics to treat patients with acute lymphoblastic leukemia who are
hypersensitive, or allergic, to native, or unmodified, forms of L-asparaginase.
Aventis Pharmaceuticals (formerly Rhone-Poulenc Rorer Pharmaceuticals) has the
exclusive license to market ONCASPAR in the U.S. and Canada, and MEDAC GmbH has
the exclusive right to market ONCASPAR in Europe.
L-asparaginase is an enzyme, which depletes the amino acid asparagine upon
which certain leukemic cells are dependent for survival. Other companies market
unmodified L-asparaginase in the United States for pediatric acute lymphoblastic
leukemia and in Europe to treat adult acute lymphoblastic leukemia and
non-Hodgkin's lymphoma, as well as pediatric acute lymphoblastic leukemia.
The therapeutic value of unmodified L-asparaginase is limited by its short
half-life, which requires every-other-day injections, and its propensity to
cause a high incidence of allergic reactions. We believe that ONCASPAR offers
significant therapeutic advantages over unmodified L-asparaginase. ONCASPAR has
a significantly increased half-life in blood, allowing every-other-week
administration, and it causes fewer allergic reactions. Based upon the current
use of unmodified L-asparaginase, we believe that
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ONCASPAR may potentially be used in other cancer indications, including
lymphoma.
Other PEG Products
Our PEG technology may be applicable to other potential products. We are
currently conducting pre-clinical studies for additional PEG-enhanced compounds.
We will continue to seek opportunities to develop other PEG-enhanced products.
SCA Proteins
General
Antibodies are proteins produced by the immune system in response to the
presence in the body of bacteria, viruses or other disease causing agents.
Antibodies of identical molecular structure that bind to a specific target are
called monoclonal antibodies. Over the past few years, several monoclonal
antibodies have been approved for therapeutic use and have achieved significant
clinical and commercial success. Much of the clinical utility of monoclonal
antibodies results from the affinity and specificity with which they bind to
their targets, as well as a long circulating life due to their relatively large
size. Monoclonal antibodies, however, are not well suited for use in indications
where a short half-life is advantageous or where their large size inhibits them
physically from reaching the area of potential therapeutic activity.
SCAs are genetically engineered proteins designed to expand on the
therapeutic and diagnostic applications possible with monoclonal antibodies.
SCAs have the binding specificity and affinity of monoclonal antibodies and, in
their native form, are about one-fifth to one-sixth of the size of a monoclonal
antibody, typically giving them very short half lives. We believe that human
SCAs offer the following benefits compared to most monoclonal antibodies:
o faster clearance from the body,
o greater tissue penetration for both diagnostic imaging and therapy,
o a significant decrease in immunogenic problems when compared with
mouse-based antibodies,
o easier and more cost effective scale-up for manufacturing when
compared with monoclonal antibodies,
o enhanced screening capabilities which allow for the more rapid
assessment of SCA proteins of desired specificity using high
throughput screening methods, and
o a better opportunity to be used orally, intranasally, transdermally or
by inhalation.
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[GRAPHIC OMITTED]
Comparison of a standard monoclonal antibody and a single-chain antibody.
In addition to these benefits, fully human SCAs can be isolated directly
from human SCA libraries without the need for costly and time consuming
humanization procedures. SCAs are also readily produced through intracellular
expression (inside cells) allowing for their use in gene therapy applications
where SCA molecules act as specific inhibitors of cell function.
We, along with numerous other academic and industrial laboratories, have
demonstrated through in vitro testing the binding specificity of dozens of SCAs.
We, in collaboration with the National Cancer Institute, have shown in published
preclinical studies that SCAs localize to specific tumors and rapidly penetrate
the tumors.
SCAs Under Development
We believe that we have a strong patent position in the area of SCAs. We
also believe that all products made by or incorporating SCA-based proteins or
genes will require a license under our patents. However, we cannot assure you
that this will prove to be the case. We have granted licenses to a number of
corporations and intend to issue additional licenses. To date, we have granted
SCA product licenses to more than 15 companies, including Bristol-Myers Squibb,
Baxter Healthcare and the Gencell Division of Aventis. These product licenses
generally provide for upfront payments, milestone payments and royalties on
sales of any SCA products developed. Some of the areas being explored with SCAs
are cancer therapy, cardiovascular indications and AIDS.
One of our licensees, Alexion Pharmaceuticals, Inc., is developing an SCA
directed against complement protein C5, which is a component of the body's
normal defense against foreign pathogens. Inappropriate complement activation
during cardiopulmonary bypass and myocardial infarction can lead to clinical
problems. In Phase I trials during cardiopulmonary bypass, this SCA improved
cardiac and neurological function and reduced blood loss. Alexion reported that
it and its partner, Procter & Gamble, completed a Phase IIb study to evaluate
this SCA in patients undergoing cardiopulmonary bypass surgery and are currently
conducting two additional 1,000 patient Phase II trials to evaluate this SCA in
heart
11
attack patients. This product has been given fast track review status by the FDA
for bypass surgery.
Internal Development
Internally, our research staff is currently working on a SCA protein
candidate, as well as evaluating the feasibility of partnering with other
companies that are currently developing SCA proteins that are already in
clinical development. We are also developing new technology which combines our
proprietary SCA and PEG technologies. We have shown that it is possible to
increase the half life of an SCA, by a factor of two to twenty-fold, by
attaching PEG to it.
Strategic Alliances and Licenses
In addition to internal product development, we seek to enter into joint
development and licensing arrangements with other pharmaceutical and
biopharmaceutical companies to expand the pipeline of products utilizing our
proprietary PEG and SCA protein technologies. We believe that our technologies
can be used to improve products that are already on the market or that are under
development to produce therapeutic products that provide a safer, more effective
and more convenient therapy.
Schering-Plough Agreement
In November 1990, we entered into an agreement with Schering-Plough. Under
this agreement, Schering-Plough agreed to apply our PEG technology to develop a
modified form of Schering-Plough's INTRON A. Schering-Plough is responsible for
conducting and funding the clinical studies, obtaining regulatory approval and
marketing and manufacturing the product worldwide on an exclusive basis and we
will receive royalties on worldwide sales of PEG-INTRON for all indications. The
royalty percentage to which we are entitled will be lower in any country where a
pegylated alpha-interferon product is being marketed by a third party in
competition with PEG-INTRON, where such third party is not Hoffmann-La Roche.
In June 1999, we amended our agreement with Schering-Plough, which resulted
in an increase in the effective royalty rate that we receive for PEG-INTRON
sales. In exchange, we relinquished our option to retain exclusive U.S.
manufacturing rights for this product. In addition, we granted Schering-Plough a
non-exclusive license under some of our PEG patents relating to Branched or
U-PEG technology. This license gives Schering-Plough the ability to sublicense
rights under these patents to any party developing a competing interferon
product. During August 2001, Schering-Plough, pursuant to a cross license
agreement entered into as part of the settlement of certain patent lawsuits,
granted Hoffmann-La Roche a sublicense under our Branched PEG patents to allow
Hoffmann-La Roche to make, use, and sell its pegylated alpha-interferon product,
PEGASYS.
In February 2000, we earned a $1.0 million milestone payment when the FDA
accepted the marketing application for PEG-INTRON filed by Schering-Plough and
in January 2001 we earned a final $2.0 million milestone payment upon the FDA's
approval of PEG-INTRON. Schering-Plough's obligation to pay us royalties on
sales of PEG-INTRON terminates, on a country-by-country basis, upon the later of
the date the last patent of ours to contain a claim covering PEG-INTRON expires
in the country or 15 years after the first commercial sale of PEG-INTRON in such
country.
Schering-Plough has the right to terminate this agreement at any time if we
fail to maintain the requisite liability insurance of $5,000,000.
Aventis License Agreements
We have entered into a license agreement with Aventis Pharmaceuticals
(formerly Rhone-Poulenc
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Rorer Pharmaceutical, Inc.), as amended, under which we granted Aventis an
exclusive license to sell in the United States ONCASPAR and any other
asparaginase or PEG-asparaginase product developed by us or Aventis during the
term of the amended license agreement. During July 2000, we further amended our
license agreement with Aventis to increase the base royalty payable to us on net
sales of ONCASPAR from 23.5% to 27.5% on annual sales up to $10 million and 25%
on annual sales exceeding $10 million. These royalty payments will include
Aventis' cost of purchasing ONCASPAR from us under our supply agreement. The
term of the agreement was also extended until 2016. Additionally, the amended
license agreement eliminated the super royalty of 43.5% on net sales of ONCASPAR
which exceed certain agreed-upon amounts. The Aventis U.S. License Agreement
also provided for a payment of $3.5 million in advance royalties, which was
received in January 1995.
The payment of royalties to us under the amended license agreement will be
offset by an original credit of $5.9 million, which represents a royalty advance
plus reimbursement of certain amounts due to Aventis under the original license
agreement and interest expense. The royalty advance is shown as a long term
liability, with the corresponding current portion included in accrued expenses
on our consolidated balance sheets as of June 30, 2001 and 2000. The royalty
advance will be reduced as royalties are recognized under the agreement.
The amended license agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the agreement
or, if the agreement is terminated earlier, five years after termination. The
agreement terminates in December 2016 but automatically renews for additional
one-year periods unless either party notifies the other in writing that it
intends not to renew the agreement at least three months prior to the end of the
current term. It can be terminated earlier by either party due to a default by
the other. In addition, Aventis may terminate the agreement at any time upon one
year's prior notice to us or if we are unable to supply product for more than 60
days under our separate supply agreement with Aventis. When the amended license
agreement terminates, all rights we granted to Aventis under the agreement will
revert to us. Under its supply agreement with us, Aventis is required to
purchase from us all of its product requirements for sales of ONCASPAR in North
America. If we are unable to supply product to Aventis under the supply
agreement for more than 60 days for any reason other than a force majeure event,
Aventis may terminate the supply agreement and we will be required to
exclusively license Aventis the know-how required to manufacture ONCASPAR for
the period of time during which the agreement would have continued had the
license agreement not been terminated.
During August 2000 we made a $1.5 million payment to Aventis, which was
accrued for at June 30, 2000, to settle a disagreement over the purchase price
of ONCASPAR under the supply agreement and to settle Aventis' claim that we
should be responsible for its lost profits while ONCASPAR was under the
temporary labeling and distribution restrictions described in "Raw Materials and
Manufacturing." The settlement also calls for a payment of $100,000 beginning in
May 2000 and for each month thereafter that expires prior to the resumption of
normal distribution and labeling of this product by Aventis. During the quarter
ended December 31, 2000, the FDA gave final approval to our manufacturing
changes, which were made to correct these problems, and all previously imposed
restrictions on ONCASPAR were lifted. This will allow for resumption of normal
distribution and labeling of this production by Aventis, which is expected to
occur during the first quarter of calendar year 2002.
Under separate license agreements, Aventis has exclusive rights to sell
ONCASPAR in Canada and Mexico. These agreements provide for Aventis to seek to
obtain marketing approval of ONCASPAR in Canada and Mexico and for us to receive
royalties on net sales of ONCASPAR in these countries, if any. These agreements
expire 10 years after the first commercial sale of ONCASPAR in each country, but
automatically renew for consecutive five-year periods unless either party elects
to terminate at least three
13
months prior to the end of the current term. Aventis may terminate these
agreements on one year's prior notice to us.
We also have a license agreement with Aventis for the Pacific Rim region,
specifically, Australia, New Zealand, Japan, Hong Kong, Korea, China, Taiwan,
the Philippines, Indonesia, Malaysia, Singapore, Thailand, Laos, Cambodia and
Vietnam. Under the license agreement, Aventis is responsible for obtaining
approvals for indications in the licensed territories. Our supply agreement for
the Pacific Rim region provides for Aventis to purchase ONCASPAR for the region
from us at established prices, which increase over the term of the agreement.
The license agreement also provides for minimum purchase requirements for the
first four years of the agreement. These agreements expire on a
country-by-country basis 10 years after the first commercial sale of ONCASPAR in
each country, but automatically renew for consecutive five-year periods unless
either party elects to terminate at least three months prior to the end of the
current term. Aventis may terminate these agreements on one year's prior notice
to us.
MEDAC License Agreement
We have also granted an exclusive license to MEDAC to sell ONCASPAR and any
PEG-asparaginase product developed by us or MEDAC during the term of the
agreement in Western Europe, Turkey and Russia. Our supply agreement with MEDAC
provides for MEDAC to purchase ONCASPAR from us at certain established prices,
which increase over the initial five-year term of the agreement. Under the
license agreement, MEDAC is responsible for obtaining additional approvals and
indications in the licensed territories, beyond the currently approved
hypersensitive indication in Germany. Under the agreement, MEDAC is required to
meet certain minimum purchase requirements. The MEDAC license terminates in
October 2001. We are currently in negotiations with MEDAC to enter into a new
license agreement.
Welfide Agreements
We have two license agreements with the Welfide Corporation (formerly
Yoshitomi Pharmaceutical Industries, Ltd.) for the development of a recombinant
human serum albumin, or rHSA, as a blood volume expander. In 1998, Yoshitomi
Pharmaceutical Industries, Ltd. and Green Cross Corporation merged to form
Yoshitomi Pharmaceutical Industries, Ltd. and during 2000 such entity was
renamed Welfide Corporation. Yoshitomi had reported that it filed for approval
of this product in Japan in November 1997. The agreements, which were assigned
to us in connection with our acquisition of Genex Corporation in 1991, entitle
us to a royalty on sales of a rHSA product sold by Welfide in much of Asia and
North and South America. We believe, this product is currently being developed
only for the Japanese market. A binding arbitration was concluded in February
2000 regarding the royalty rate required under the agreements. The arbitrators
awarded us a 1% royalty on Welfide sales of rHSA in Japan, South East Asia,
India, China, Australia, New Zealand and North and South America for a period of
15 years after the first commercial sale of Yoshitomi's rHSA following market
approval of that product in Japan or the United States.
Marketing
Other than ADAGEN, which we market on a worldwide basis to a small patient
population, we do not engage in the direct commercial marketing of any of our
products and therefore do not have an established sales force. For some of our
products, we have provided exclusive marketing rights to our corporate partners
in return for royalties on sales. We have an agreement with Gentiva Health
Services to purchase and distribute ADAGEN and ONCASPAR in the United States and
Canada. The agreement provides for Gentiva to purchase ADAGEN and ONCASPAR from
us at certain prices established in the agreement. We pay Gentiva a service fee
for the distribution of the products. The agreement with Gentiva will terminate
as to ONCASPAR when Aventis resumes distribution of that product.
14
We expect to evaluate whether to create or acquire a sales force to market
certain products in the United States or to continue to enter into licensing and
marketing agreements with others for United States and foreign markets. These
agreements generally provide that our licensees or marketing partners will
conduct all or a significant portion of the marketing of these products.
Raw Materials and Manufacturing
In the manufacture of our products, we couple activated forms of PEG with
unmodified proteins. We do not have a long-term supply agreement for the raw
polyethylene glycol material that we use to manufacture the PEG we require.
Instead, we maintain a level of inventory, which we believe should provide us
sufficient time to find an alternate supplier of PEG, in the event it becomes
necessary, without materially disrupting our business.
During 1998, we began to experience manufacturing problems with one of our
FDA-approved products, ONCASPAR. The problems were due to increased levels of
white particulates in batches of ONCASPAR, which resulted in an increased
rejection rate for this product. During fiscal 1999, we agreed with the FDA to
temporary labeling and distribution restrictions for ONCASPAR and instituted
additional inspection and labeling procedures prior to distribution. During May
1999, the FDA required us to limit distribution of ONCASPAR to only those
patients who are hypersensitive to native L-asparaginase. As a result of certain
manufacturing changes we made, the FDA withdrew this distribution restriction in
November 1999.
In July 1999, the FDA conducted an inspection of our manufacturing facility
in connection with our product license for ADAGEN. Following that inspection,
the FDA documented several deviations from Current Good Manufacturing Practices,
known as cGMP, in a Form 483 report. We provided the FDA with a corrective
action plan. In November 1999, the FDA issued a warning letter citing the same
cGMP deviations listed in the July 1999 Form 483, but it also stated that the
FDA was satisfied with our proposed corrective actions. As a result of the
deviations, the FDA decided not to approve product export requests from us for
ONCASPAR until it determined that all noted cGMP deviations were either
corrected or in the process of being corrected. This restriction was removed in
August 2000.
Since January 2000, the FDA has conducted follow-up inspections as well as
routine inspections of our manufacturing facility related to ONCASPAR and
ADAGEN. Following certain of these inspections, the FDA issued Form 483 reports,
citing deviations from cGMP. We have or are in the process of responding to such
reports with corrective action plans and are currently in discussion with the
FDA concerning some observations set forth in the Form 483s.
In March 2001, we voluntarily replaced a batch of ADAGEN that was found to
have an impurity which we believe was introduced in the filling process.
Research and Development
Our primary source of new products is our internal research and development
activities. Research and development expenses for the fiscal years ended June
30, 2001, 2000 and 1999 were approximately $13.0 million, $8.4 million, and $6.8
million, respectively.
Our research and development activities during fiscal 2001 concentrated
primarily on the Phase I clinical trials of PROTHECAN, pre-clinical studies, and
continued research and development of our proprietary technologies. We expect
our research and development expenses for fiscal 2002 and beyond to be at
significantly higher levels as we continue clinical trials for PROTHECAN and
PEG-paclitaxel, and additional compounds enter clinical trials.
15
Patents
We have licensed, and been issued, a number of patents in the United States
and other countries and have other patent applications pending to protect our
proprietary technology. Although we believe that our patents provide adequate
protection for the conduct of our business, we cannot assure you that such
patents:
o will be of substantial protection or commercial benefit to us,
o will afford us adequate protection from competing products, or
o will not be challenged or declared invalid.
We also cannot assure you that additional United States patents or foreign
patent equivalents will be issued to us.
The patent covering our original PEG technology, which we had licensed from
Research Corporation Technologies, Inc., contained broad claims covering the
attachment of PEG to polypeptides. However, this United States patent and its
corresponding foreign patents have expired. Based upon the expiration of the
Research Corporation patent, other parties will be permitted to make, use, or
sell products covered by the claims of the Research Corporation patent, subject
to other patents, including those which we hold. We have obtained and intend to
continue to pursue patents with claims covering improved methods of attaching or
linking PEG to therapeutic compounds. We also have obtained patents relating to
the specific composition of the PEG-modified compounds that we have identified
or created. We will continue to seek such patents as we develop additional
PEG-enhanced products. We cannot assure you that any of these patents will
enable us to prevent infringement or that competitors will not develop
competitive products outside the protection that may be afforded by our patents.
We are aware that others have also filed patent applications and have been
granted patents in the United States and other countries with respect to the
application of PEG to proteins and other compounds. Owners of any such patents
may seek to prevent us or our collaborators from selling our products.
We also believe that there are PEG-modified products being developed by
third parties that infringe on one or more of our current PEG technology
patents. On December 7, 1998, we filed a patent infringement suit against
Shearwater Polymers Inc., a company that reportedly has developed a Branched
PEG, or U-PEG, used in Hoffmann-La Roche's product, PEGASYS, a PEG-modified
version of its alpha-interferon product ROFERON-A. Shearwater has filed a
counterclaim in this litigation alleging that our Branched PEG patent is invalid
and unenforceable.
During August 2001, Schering-Plough granted a sub-license to Hoffmann-La
Roche under our Branched PEG patents to allow Hoffmann-La Roche to make, use and
sell its pegylated alpha interferon product, PEGASYS. We plan to continue to
prosecute our suit against Shearwater for Shearwater's infringement of our
branched PEG patents based upon Shearwater's making, using and selling branched
PEG reagents to parties other than Hoffmann-La Roche solely with regard to
PEGASYS. During August 2001, we dismissed a similar infringement suit against
Hoffmann-La Roche as a result of the sublicense by Schering-Plough of our
Branched PEG patents for PEGASYS to Hoffmann-La Roche.
In the field of SCA proteins, we have several United States and foreign
patents and pending patent applications, including a patent granted in August
1990 covering the genes needed to encode SCA proteins. Curis Inc. (formerly
known as Creative BioMolecules Inc.) or Curis, provoked an interference with
this patent and on June 28, 1991, the United States Patent and Trademark Office
entered summary judgment terminating the interference proceeding and upholding
our patent. Curis subsequently lost its
16
appeal of this decision in the United States Court of Appeals and did not file a
petition for review of this decision by the United States Supreme Court within
the required time period.
In November 1993, Curis signed cross license agreements with us in the
field of our SCA protein technology and Curis' Biosynthetic Antibody Binding
Site protein technology. Under the agreements, each company is free, under a
non-exclusive, worldwide license, to make, use and sell products utilizing the
technology claimed by both companies' SCA patents, without paying royalties to
the other. Each company may grant sublicenses under the other company's antibody
engineering patents to third parties to use and sell products developed or
conceived and reduced to practice by the company granting such sublicense. If
such a sublicense is granted, the company granting the sublicense will be
required to pay to the other company a portion of any license fees or royalties
received by such company under the sublicense. Our limited right to grant
sublicenses under Curis' patents may require a licensee of ours to obtain a
license from Curis if the product being developed by such licensee would
infringe Curis' patents. We cannot assure you that any such license could be
obtained on terms that are favorable to our licensee, if at all. In addition,
the agreements provide for the release and discharge by each company of the
other from any and all claims based on past infringement of the technology,
which is the subject of the agreements. The agreements also provide for any
future disputes between the companies regarding new patents in the area of
engineered monoclonal antibodies to be resolved pursuant to agreed-upon
procedures. In July 2001, Curis reported that it had entered into a purchase and
sale agreement with Micromet AG, a German corporation, pursuant to which Curis
assigned its single chain polypeptide technology to Micromet. We have been
advised that Curis assigned its cross license agreement with us to Micromet as
part of its sale of its single chain polypeptide assets.
The degree of patent protection to be afforded to biotechnological
inventions is uncertain and our products are subject to this uncertainty. There
may be issued third party patents or patent applications containing subject
matter which we or our licensees or collaborators will require in order to
research, develop or commercialize at least some of our products. We cannot
assure you that we will be able to obtain a license to such subject matter on
acceptable terms, or at all.
In addition to the litigation described above, we expect that there may be
significant litigation in the industry regarding patents and other proprietary
rights and, to the extent we become involved in such litigation, it could
consume a substantial amount of our resources. An adverse decision in any such
litigation could subject us to significant liabilities. In addition, we rely
heavily on our proprietary technologies for which pending patent applications
have been filed and on unpatented know-how developed by us. Insofar as we rely
on trade secrets and unpatented know-how to maintain our competitive
technological position, we cannot assure you that others may not independently
develop the same or similar technologies. Although we have taken steps to
protect our trade secrets and unpatented know-how, third parties nonetheless may
gain access to such information.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements on the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval and promotion of our
products. All of our products will require regulatory approval before
commercialization. In particular, therapeutic products for human use are subject
to rigorous pre-clinical and clinical testing and other requirements of the
Federal Food, Drug, and Cosmetic Act and the Public Health Service Act,
implemented by the FDA, as well as similar statutory and regulatory requirements
of foreign countries. Obtaining these marketing approvals and subsequently
complying with ongoing statutory and regulatory requirements is costly and time
consuming. Any failure by us or our collaborators, licensors or licensees to
obtain, or any delay in obtaining, regulatory approval or in complying with
other requirements, could adversely affect the commercialization of products
that we are then developing and our ability to receive product or royalty
revenues.
17
The steps required before a new drug or biological product may be
distributed commercially in the United States generally include:
o conducting appropriate pre-clinical laboratory evaluations of the
product's chemistry, formulation and stability, and animal studies to
assess the potential safety and efficacy of the product,
o submitting the results of these evaluations and tests to the FDA,
along with manufacturing information and analytical data, in an
Investigational New Drug Application, or IND,
o making the IND effective after the resolution of any safety or
regulatory concerns of the FDA,
o obtaining approval of Institutional Review Boards, or IRBs, to
introduce the drug or biological product into humans in clinical
studies,
o conducting adequate and well-controlled human clinical trials that
establish the safety and efficacy of the drug or biological product
candidate for the intended use, typically in the following three
sequential, or slightly overlapping stages:
Phase I. The drug or biologic is initially introduced into
healthy human subjects or patients and tested for safety, dose
tolerance, absorption, metabolism, distribution and excretion,
Phase II. The drug or biologic is studied in patients to identify
possible adverse effects and safety risks, to determine dose
tolerance and the optimal dosage, and to collect initial efficacy
data,
Phase III. The drug or biologic is studied in an expanded patient
population at multiple clinical study sites, to confirm efficacy
and safety at the optimized dose, by measuring a primary endpoint
established at the outset of the study,
o submitting the results of preliminary research, pre-clinical studies,
and clinical studies as well as chemistry, manufacturing and control
information on the drug or biological product to the FDA in a New Drug
Application, or NDA, for a drug product, a Biologics License
Application, or BLA, for a biological product, and
o obtaining FDA approval of the NDA or BLA prior to any commercial sale
or shipment of the drug or biological product.
An NDA or BLA must contain, among other things, data derived from
nonclinical laboratory and clinical studies which demonstrate that the product
meets prescribed standards of safety, purity and potency, and a full description
of manufacturing methods. The biological product may not be marketed in the
United States until a biological license is issued.
The approval process can take a number of years and often requires
substantial financial resources. The results of pre-clinical studies and initial
clinical trials are not necessarily predictive of the results from large-scale
clinical trials, and clinical trials may be subject to additional costs, delays
or modifications due to a number of factors, including the difficulty in
obtaining enough patients, clinical investigators, drug supply, or financial
support. The FDA has issued regulations intended to accelerate the approval
process for the development, evaluation and marketing of new therapeutic
products intended to treat life-threatening or severely debilitating diseases,
especially where no alternative therapies exist. If applicable, this procedure
may shorten the traditional product development process in the United States.
Similarly, products that represent a substantial improvement over existing
therapies may be eligible for
18
priority review with a target approval time of six months. Nonetheless, approval
may be denied or delayed by the FDA or additional trials may be required. The
FDA also may require testing and surveillance programs to monitor the effect of
approved products that have been commercialized, and the agency has the power to
prevent or limit further marketing of a product based on the results of these
post-marketing programs. Upon approval, a drug product or a biological product
may be marketed only in those dosage forms and for those indications approved in
the NDA or BLA, although information about off-label indications may be
distributed in certain circumstances.
In addition to obtaining FDA approval for each indication to be treated
with each product, each domestic drug product manufacturing establishment must
register with the FDA, list its drug products with the FDA, comply with Current
Good Manufacturing Practices and permit and pass inspections by the FDA.
Moreover, the submission of applications for approval may require additional
time to complete manufacturing stability studies. Foreign establishments
manufacturing drug products for distribution in the United States also must list
their products with the FDA and comply with Current Good Manufacturing
Practices. They also are subject to periodic inspection by the FDA or by local
authorities under agreement with the FDA.
Any products manufactured or distributed by us pursuant to FDA approvals
are subject to extensive continuing regulation by the FDA, including
record-keeping requirements and a requirement to report adverse experiences with
the drug. In addition to continued compliance with standard regulatory
requirements, the FDA also may require post-marketing testing and surveillance
to monitor the safety and efficacy of the marketed product. Adverse experiences
with the product must be reported to the FDA. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if problems
concerning safety or efficacy of the product are discovered following approval.
The Federal Food, Drug, and Cosmetic Act also mandates that drug products
be manufactured consistent with Current Good Manufacturing Practices. In
complying with the FDA's regulations on Current Good Manufacturing Practices,
manufacturers must continue to spend time, money and effort in production,
record-keeping, quality control, and auditing to ensure that the marketed
product meets applicable specifications and other requirements. The FDA
periodically inspects drug product manufacturing facilities to ensure compliance
with Current Good Manufacturing Practices. Failure to comply subjects the
manufacturer to possible FDA action, such as:
o warning letters,
o suspension of manufacturing,
o seizure of the product,
o voluntary recall of a product,
o injunctive action, or
o possible civil or criminal penalties.
To the extent we rely on third parties to manufacture our compounds and
products, those third parties will be required to comply with Current Good
Manufacturing Practices.
Even after FDA approval has been obtained, and often as a condition to
expedited approval, further studies, including post-marketing studies, may be
required. Results of post-marketing studies may limit or expand the further
marketing of the products. If we propose any modifications to the product,
including changes in indication, manufacturing process, manufacturing facility
or labeling, an NDA or BLA supplement may be required to be submitted to the
FDA.
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Products manufactured in the United States for distribution abroad will be
subject to FDA regulations regarding export, as well as to the requirements of
the country to which they are shipped. These latter requirements are likely to
cover the conduct of clinical trials, the submission of marketing applications,
and all aspects of product manufacture and marketing. Such requirements can vary
significantly from country to country. As part of our strategic relationships
our collaborators may be responsible for the foreign regulatory approval process
of our products, although we may be legally liable for noncompliance.
We are also subject to various federal, state and local laws, rules,
regulations and policies 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 and infectious disease agents, used in connection with our research
work. Although we believe that our safety procedures for handling and disposing
of such materials comply with current federal, state and local laws, rules,
regulations and policies, the risk of accidental injury or contamination from
these materials cannot be entirely eliminated.
We cannot predict the extent of government regulation which might result
from future legislation or administrative action. In this regard, although the
Food and Drug Administration Modernization Act of 1997 modified and created
requirements and standards under the Federal Food, Drug, and Cosmetic Act with
the intent of facilitating product development and marketing, the FDA is still
in the process of implementing the Food and Drug Administration Modernization
Act of 1997. Consequently, the actual effect of these developments on our
business is uncertain and unpredictable.
Moreover, we anticipate that Congress, state legislatures and the private
sector will continue to review and assess controls on health care spending. Any
such proposed or actual changes could cause us or our collaborators to limit or
eliminate spending on development projects and may otherwise impact us. We
cannot predict the likelihood, nature or extent of adverse governmental
regulation that might result from future legislative or administrative action,
either in the United States or abroad. Additionally, in both domestic and
foreign markets, sales of our proposed products will depend, in part, upon the
availability of reimbursement from third-party payors, such as government health
administration authorities, managed care providers, private health insurers and
other organizations. Significant uncertainty often exists as to the
reimbursement status of newly approved health care products. In addition,
third-party payors are increasingly challenging the price and cost-effectiveness
of medical products and services. There can be no assurance that our proposed
products will be considered cost-effective or that adequate third-party
reimbursement will be available to enable us to maintain price levels sufficient
to realize an appropriate return on our investment in product research and
development.
PEG-INTRON was approved in the European Union and the United States for the
treatment of hepatitis C in May 2000 and January 2001, respectively. ONCASPAR
was approved for marketing in the United States and Germany in 1994 and in
Canada in December 1997 for patients with acute lymphoblastic leukemia who are
hypersensitive to native forms of L-asparaginase, and in Russia in April 1993
for therapeutic use in a broad range of cancers. ADAGEN was approved by the FDA
in March 1990. Except for these approvals, none of our other products have been
approved for sale and use in humans in the United States or elsewhere.
With respect to patented products, delays imposed by the government
approval process may materially reduce the period during which we will have the
exclusive right to exploit them.
Competition
Competition in the biopharmaceutical industry is intense and based
significantly on scientific and technological factors. These factors include the
availability of patent and other protection of technology and products, the
ability to commercialize technological developments and the ability to obtain
20
governmental approval for testing, manufacturing and marketing. We compete with
specialized biopharmaceutical firms in the United States, Europe and elsewhere,
as well as a growing number of large pharmaceutical companies that are applying
biotechnology to their operations. These companies, as well as academic
institutions, governmental agencies and private research organizations, also
compete with us in recruiting and retaining highly qualified scientific
personnel and consultants.
We are aware that other companies are conducting research on chemically
modified therapeutic proteins and that certain companies are modifying
pharmaceutical products, including proteins, by attaching PEG. Other than
PEG-INTRON and our ONCASPAR and ADAGEN products, and Hoffmann-La Roche's
PEGASYS, which has been approved in Switzerland, we are not aware of any
PEG-modified therapeutic proteins that are currently available commercially for
therapeutic use. Nevertheless, other drugs or treatments that are currently
available or that may be developed in the future, and which treat the same
diseases as those that our products are designed to treat, may compete with our
products.
Prior to the development of ADAGEN, the only treatment available to
patients afflicted with ADA-deficient SCID was a bone marrow transplant.
Completing a successful transplant depends upon finding a matched donor, the
probability of which is low. More recently, researchers at the National
Institutes of Health, or NIH, have been attempting to treat SCID patients with
gene therapy, which if successfully developed, would compete with, and could
eventually replace ADAGEN as a treatment. The patients in these trials are also
receiving ADAGEN treatment in addition to the gene therapy. The theory behind
gene therapy is that cultured T-lymphocytes that are genetically engineered and
injected back into the patient will express adenosine deaminase, the deficient
enzyme in people afflicted with ADA-deficient SCID, permanently and at normal
levels. To date, patients in gene therapy clinical trials have not been able to
stop ADAGEN treatment and, therefore, the trials have been inconclusive.
Current standard treatment of patients with acute lymphoblastic leukemia
includes administering unmodified L-asparaginase along with the drugs
vincristine, prednisone and daunomycin. Studies have shown that long-term
treatment with L-asparaginase increases the disease-free survival in high risk
patients. ONCASPAR, our PEG-modified L-asparaginase product, is used to treat
patients with acute lymphoblastic leukemia who are hypersensitive to unmodified
forms of L-asparaginase. Currently, there is one unmodified form of
L-asparaginase (Elspar) available in the United States and several available in
Europe. We believe that ONCASPAR has two advantages over these unmodified forms
of L-asparaginase: increased circulating blood life and generally reduced
immunogenicity.
The current market for INTRON A, Schering-Plough's interferon alpha-2b
product, is highly competitive, with Hoffmann-La Roche, Amgen, Inc. and several
other companies selling similar products. We believe that PEG-INTRON may have
several potential advantages over the interferon products currently approved for
marketing in the United States and the European Union, including:
o once per week dosing versus the current three times per week dosing,
and
o increased efficacy.
It has also been reported that Hoffmann-La Roche's PEGASYS product is a
pegylated longer lasting version of its interferon product, ROFERON-A.
Hoffmann-La Roche filed for United States marketing approval for PEGASYS in May
2000. Currently the product has not received FDA or European Union approval or
approval in any other countries, with the exception of Switzerland where it
received marketing clearance in August 2001.
There are several technologies which compete with our SCA protein
technology, including chimeric antibodies, humanized antibodies, human
monoclonal antibodies, recombinant antibody Fab fragments, low molecular weight
peptides and mimetics. These competing technologies can be categorized into two
areas:
21
o those modifying monoclonal antibodies to minimize immunological
reaction to a foreign protein, which is the strategy employed with
chimerics, humanized antibodies and human monoclonal antibodies, and
o those creating smaller portions of monoclonal antibodies, which are
more specific to the target and have fewer side effects, as is the
case with Fab fragments and low molecular weight peptides.
We believe that the smaller size of our SCA proteins should permit better
penetration into the tumor, result in rapid clearance from the blood and cause a
significant decrease in the immunogenic problems associated with conventional
monoclonal antibodies. A number of organizations have active programs in SCA
proteins. We believe that our patent position on SCA proteins will likely
require companies that have not licensed our SCA protein patents to obtain
licenses from us in order to commercialize their products, but we cannot assure
you this will prove to be the case.
Employees
As of June 30, 2001, we employed 106 persons, including 21 persons with
Ph.D. degrees. At that date, 52 employees were engaged in research and
development activities, 31 were engaged in manufacturing, and 23 were engaged in
administration and management. None of our employees are covered by a collective
bargaining agreement. All of our employees are covered by confidentiality
agreements. We consider our relations with our employees to be good.
Item 2. Properties
We own no real property. The following are all of the facilities that we
currently lease:
Approx. Approx.
Principal Square Annual Lease
Location Operations Footage Rent Expiration
-------- ---------- ------- ---- ----------
20 Kingsbridge Road Research & Development 56,000 $496,000(1) June 15, 2007
Piscataway, NJ and Administrative
300 Corporate Ct. Manufacturing 24,000 183,000 March 31, 2007
S. Plainfield, NJ
(1) Under the terms of the lease, annual rent increases over the remaining term
of the lease from $496,000 to $581,000.
We believe that our facilities are well maintained and generally adequate
for our present and future anticipated needs.
Item 3. Legal Proceedings
In December 1998, we filed a patent infringement suit against Shearwater
Polymers Inc., a company that has manufactured, used and sold a Branched PEG, or
U-PEG, reagent to Hoffmann-La Roche for its use to make its PEGASYS product, a
pegylated version of its alpha-interferon product called ROFERON-A. This case is
being heard in the U.S. District Court for the Northern District of Alabama.
During September 2000, we filed a similar infringement suit in Federal Court in
New Jersey against Hoffmann-La Roche.
In January 2000, Hoffmann-LaRoche filed lawsuits in both the United States
and France against Schering-Plough alleging that PEG-INTRON infringes certain
patents held by Hoffmann-La Roche. Hoffmann-La
22
Roche filed a similar suit in Germany. During August 2001, Schering-Plough
entered into a licensing agreement with Hoffmann-La Roche that settled all
patent disputes relative to the two companies' respective peginterferon
products. The settlement agreement included a Schering-Plough sublicense of our
branched PEG patents (among others) to Hoffmann-La Roche. The sublicense of our
patents pertains only to pegylated versions of alpha interferon. Consequently,
we agreed to dismiss the patent infringement lawsuit we filed against
Hoffmann-La Roche asserting that PEGASYS infringes our branched PEG patents. We
plan to continue to prosecute the patent infringement lawsuit against Shearwater
for infringement of our branched PEG patents based upon Shearwater's making,
using, and selling branched PEG reagents to parties other than Hoffmann-La Roche
solely with regard to Hoffmann-La Roche's PEG interferon product, PEGASYS.
Shearwater has filed a counter-claim in this litigation alleging that our
Branched PEG patent is invalid and unenforceable.
The licensing agreement between Schering-Plough and Hoffmann-La Roche
provides for each company to manufacture and market worldwide its peginterferon
products free from liability for infringement under the other's existing patent
rights. Additionally, Schering-Plough and Hoffmann-La Roche dismissed all patent
litigation in the United States and Europe involving the two companies'
respective peginterferon products. Schering-Plough and Hoffmann-La Roche cross
licensed to each other all patents applicable to their pegylated alpha
interferon products, PEG-INTRON (peginterferon alfa-2b) and PEGASYS
(peginterferon alfa-2a), respectively. In addition, each party will license to
the other its patents applicable to peginterferon as combination therapy with
ribavirin.
There is no other pending material litigation to which we are a party or to
which any of our property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
None.
23
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our common stock is traded in the over-the-counter market and is quoted on
the NASDAQ National Market under the trading symbol "ENZN".
The following table sets forth the high and low sale prices for our common
stock for the years ended June 30, 2001 and 2000, as reported by the NASDAQ
National Market. The quotations shown represent inter-dealer prices without
adjustment for retail markups, markdowns or commissions, and may not necessarily
reflect actual transactions.
High Low
---- ---
Year Ended June 30, 2001
First Quarter 74.13 41.38
Second Quarter 84.13 50.75
Third Quarter 67.75 33.13
Fourth Quarter 79.40 39.56
Year Ended June 30, 2000
First Quarter 34.63 20.08
Second Quarter 46.25 26.63
Third Quarter 70.50 37.69
Fourth Quarter 47.63 25.69
As of September 20, 2001 there were 1,743 holders of record of our common
stock.
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth of
our business. Holders of our Series A preferred stock are entitled to an annual
dividend of $2.00 per share, payable semiannually, but only when and if declared
by our board of directors, out of funds legally available. As of June 30, 2001
there were 7,000 shares of Series A preferred stock issued and outstanding.
Dividends on the Series A preferred stock are cumulative and accrue and
accumulate but will not be paid, except in liquidation or upon conversion, until
such time as the board of directors deems it appropriate. No dividends are to be
paid or set apart for payment on our common stock, nor are any shares of common
stock to be redeemed, retired or otherwise acquired for valuable consideration
unless we have paid in full or made appropriate provision for the payment in
full of all dividends which have then accumulated on the Series A preferred
stock.
On June 21, 2001 we completed a private placement of $400 million principal
amount of 4.5% convertible subordinated notes due 2008. The sale of the notes
was made in reliance on the exemption from registration contained in Section
4(2) of the Securities Act of 1933, as amended. Following this sale, resales
were permitted by the initial purchasers to qualified institutional buyers under
Rule 144A of the Securities Act. The initial purchasers were Morgan Stanley &
Co. Inc., CIBC World Markets Corp., SG Cowen Securities Corp. and Legg Mason
Wood Walker Inc. The aggregate discount to the initial purchasers was
$12,000,000. We received net proceeds of approximately $387,200,000 from the
sale of
24
the notes. The notes are convertible, subject to prior redemption, in whole or
in part, into shares of common stock at any time on or before July 1, 2008 at a
conversion price of $70.98 per share, subject to adjustment upon certain events.
We will not issue fractional shares of common stock upon conversion of the
notes. Instead, we will pay cash equal to the market price of the common stock
on the business day prior to the conversion date. We may redeem all or some of
the notes at any time on or after July 7, 2004 at redemption prices declining
from 102.57% of their principal amount in 2004 to 100% of the principal amount
in 2008, plus accrued and unpaid interest.
25
Item 6. Selected Financial Data
Set forth below is our selected financial data for the five fiscal years
ended June 30, 2001.
Consolidated Statement of Operations Data:
Year Ended June 30
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues $ 31,587,709 $ 17,017,797 $ 13,158,207 $ 14,644,032 $ 12,727,052
Net Income (Loss) 11,525,064 (6,306,464) (4,919,208) (3,617,133) (4,557,025)
Net Income (Loss) per
Diluted Share $ .26 $ (0.17) $ (0.14) $ (0.12) $ (0.16)
Dividends on
Common Stock None None None None None
Consolidated Balance Sheet Data:
June 30,
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Total Assets $ 549,675,817 $ 130,252,250 $ 34,916,315 $ 13,741,378 $ 16,005,278
Long-Term Obligations $ 400,000,000 -- -- -- --
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal Years Ended June 30, 2001, 2000, and 1999
Revenues. Revenues for the year ended June 30, 2001 were $31,588,000
compared to $17,018,000 for the year ended June 30, 2000 and $13,158,000 for the
year ended June 30, 1999. The components of revenues are sales of our products,
royalties we earn on the sale of our products by others, and contract revenues.
Sales increased by 35% to $20,941,000 for the year ended June 30, 2001, as
compared to $15,558,000 for the year ended June 30, 2000 primarily due to
increased ONCASPAR sales. The increase in ONCASPAR sales was due to the lifting
of all of the FDA distribution and labeling restrictions, which were in place
during the prior year. These restrictions were put in place in fiscal 1999 as a
result of manufacturing problems that caused an increase in the levels of
particulates in batches of ONCASPAR, which in turn resulted in an increased
rejection rate for this product. Our marketing partner, Aventis Pharmaceuticals
(formerly Phone-Poulenc Rorer Pharmaceuticals, Inc.) stopped distributing
ONCASPAR in fiscal 1999 and we took over distribution of ONCASPAR directly to
patients on an as-needed basis. During the year ended June 30, 2001, the FDA
gave final approval to manufacturing changes which we made to correct these
manufacturing problems, and all previously imposed restrictions have been
lifted. This will allow for the resumption of normal distribution and labeling
of this product by Aventis, which is expected to take place during the first
quarter of calendar year 2002. Net sales of ADAGEN were $13,369,000 for the year
ended June 30, 2001 and $12,159,000 for the year ended June 30, 2000. The
increase in ADAGEN sales resulted from an increase in the number of patients
receiving ADAGEN treatment.
Sales increased by 21% to $15,558,000 for the year ended June 30, 2000 as
compared to
26
$12,856,000 for the prior year due to increased ONCASPAR and ADAGEN sales.
ONCASPAR sales for the year ended June 30, 2000 increased due to the lifting in
November 1999 of some of the temporary labeling and distribution restrictions
which were placed on ONCASPAR by the FDA as a result of certain difficulties
encountered in our manufacturing process discussed above. The increase was also
due to an increase in ADAGEN sales of approximately 8%, resulting from an
increase in the number of patients receiving ADAGEN treatment.
Royalties for the year ended June 30, 2001, increased to $8,254,000
compared to $34,000 in the prior year. The increase in royalties was due to the
commencement of sales of PEG-INTRON in the U.S. and Europe. Schering-Plough, our
marketing partner for PEG-INTRON, began selling PEG-INTRON in the European Union
in June 2000 and in the U.S. in February 2001. PEG-INTRON received marketing
approval as once-weekly monotherapy for the treatment of chronic hepatitis C in
the European Union in May 2000 and in the U.S. in January 2001. PEG-INTRON also
received marketing approval for use in combination with REBETOL for the
treatment of hepatitis C in the European Union in March 2001 and in the U.S. in
August 2001. We did not recognize any royalties related to PEG-INTRON in the
year ended June 30, 1999.
Sales of ADAGEN are expected to increase at rates comparable to those
achieved during the last two years as additional patients are treated. We
anticipate ONCASPAR revenues will decline significantly when Aventis resumes
distribution of the product and our revenues related to the product will revert
back to a 27.5% royalty on net sales. We expect royalties on PEG-INTRON to
increase in future quarters with the U.S. approval of PEG-INTRON as combination
therapy with REBETOL for hepatitis C in August 2001. Schering-Plough is also
conducting clinical trials for additional indications for PEG-INTRON. We cannot
assure you that any particular sales levels of ADAGEN, ONCASPAR or PEG-INTRON
will be achieved or maintained.
Contract revenues for the year ended June 30, 2001 increased by $966,000,
as compared to the prior year. The increase in contract revenues was due to a
$2,000,000 milestone payment from Schering-Plough, which was earned as a result
of the FDA's approval of PEG-INTRON in January 2001. During the prior year a
$1,000,000 milestone payment was recognized as a result of the FDA's acceptance
in February 2000 of Schering-Plough's U.S. marketing application for the use of
PEG-INTRON in the treatment of chronic hepatitis C. Contract revenues for the
year ended June 30, 2000 increased by $1,124,000, as compared to the prior year
as a result of this $1,000,000 milestone payment from Schering-Plough.
We had export sales and royalties recognized on export sales of $11,115,000
for the year ended June 30, 2001, $4,137,000 for the year ended June 30, 2000
and $3,075,000 for the year ended June 30, 1999. Of these amounts, sales in
Europe and royalties recognized on sales in Europe, were $10,418,000 for the
year ended June 30, 2001, $3,617,000 for the year ended June 30, 2000 and
$2,559,000 for the year ended June 30, 1999.
Cost of Sales. Cost of sales, as a percentage of net sales improved to 18%
for the year ended June 30, 2001, as compared to 31% for the prior year. The
improvement was primarily due to the prior year's write-off of ONCASPAR finished
goods related to the previously discussed manufacturing problems.
Cost of sales, as a percentage of sales, for the year ended June 30, 2000
was 31% as compared to 34% in 1999. During each of the years ended June 30, 2000
and 1999, we recorded a charge related to a write-off of ONCASPAR finished goods
on hand.
Research and Development. Research and development expenses increased by
$4,669,000 or 56% to $13,052,000 for the year ended June 30, 2001, as compared
to $8,383,000 for the same period last year. The increase was due to increased
payroll and related expenses due to increases in research personnel and
increased contracted services related to clinical trials and pre-clinical
studies for products under
27
development, including PROTHECAN (PEG-camptothecin) and PEG-paclitaxel. Research
and development activities are expected to continue to increase significantly as
we continue the advancement of the current and additional Phase II clinical
trials for PROTHECAN, we continue our Phase I clinical trials for
PEG-paclitaxel, and as we conduct clinical trials for additional compounds.
Research and development expenses for the year ended June 30, 2000
increased by 23% to $8,383,000 as compared to $6,836,000 in 1999. The increase
in research and development expenses resulted from an increase in expenses
related to the clinical development of PROTHECAN and other PEG products in
pre-clinical development.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 2001 decreased by $1,161,000
to $11,795,000, as compared to $12,956,000 in 2000. The decrease was primarily
due to a net charge of $2,600,000 recorded in the prior year, which was the
result of a binding arbitration award in a lawsuit brought by a former financial
advisor, as discussed below. The decrease was partially offset by increased
legal fees associated with patent filings and patent litigation costs.
Selling, general and administrative expenses for the year ended June 30,
2000 increased by 59% to $12,956,000, as compared to $8,133,000 in 1999. The
increase in selling, general and administrative expenses was principally due to
a net charge to earnings of $2,600,000 recorded in the third quarter. This net
charge was the result of a $6,000,000 payment we made, pursuant to a binding
arbitration in a lawsuit brought by LBC Capital Resources Inc., a former
financial advisor, for fees related to our 1996 private placement, partially
offset by the reversal of certain other contingency reserves. The increase in
selling, general and administrative expenses was also due to an increase in
legal fees associated with patent filing and litigation costs.
Other Income/Expense. Other income/expense increased by $5,234,000 to
$8,137,000 for the year ended June 30, 2001, as compared to $2,903,000 for the
prior year. The increase in other income/expense is attributable to an increase
in interest income as a result of an increase in interest bearing investments.
Other income/expense increased by $1,702,000 to $2,903,000 for the year
ended June 30, 2000, as compared to $1,201,000 for the prior year. The increase
was attributable to an increase in interest income due to an increase in
interest bearing investments.
Provision for taxes. We were profitable for the year ended June 30, 2001,
and accordingly we have recognized a tax provision for the year ended June 30,
2001. The tax provision represents our anticipated Alternative Minimum Tax
liability based on the fiscal 2001 taxable income. The tax provision was offset
by the sale of a portion of our net operating losses for the state of New
Jersey. During March 2001, we sold approximately $9,255,000 of our state net
operating loss carry forwards and recognized a tax benefit of $728,000 from this
sale.
Liquidity and Capital Resources
Total cash reserves, including cash, cash equivalents and marketable
securities, as of June 30, 2001 were $516,379,000, as compared to $118,413,000
as of June 30, 2000. We invest our excess cash primarily in United States
government-backed securities. The increase in total cash reserves was primarily
the result of our sale of $400,000,000 of 4.5% convertible subordinated notes
during June 2001. We received net proceeds of $387,200,000 from this offering
after deducting costs. The notes bear interest at an annual rate of 4.5%.
Interest is payable on January 1 and July 1 of each year beginning January 1,
2002. Accrued interest on the notes was approximately $250,000 as of June 30,
2001. The holders may convert all or a portion of the notes into common stock at
any time on or before July 1, 2008. The notes are convertible into our common
stock at a conversion price of $70.98 per share, subject to adjustment in
certain events. The notes are subordinated to all existing and future senior
28
indebtedness. On or after July 7, 2004, we may redeem any or all of the notes at
specified redemption prices, plus accrued and unpaid interest to the day
preceding the redemption date. The notes will mature on July 1, 2008 unless
earlier converted, redeemed at our option or redeemed at the option of the
noteholder upon a fundamental change, as described in the indenture for the
notes. Neither we nor any of our subsidiaries are subject to any financial
covenants under the indenture. In addition, neither we nor any of our
subsidiaries are restricted under the indenture from paying dividends, incurring
debt, or issuing or repurchasing our securities.
To date, our sources of cash have been the proceeds from the sale of our
stock through public offerings and private placements, the issuance of the
notes, sales of and royalties on sales of ADAGEN, ONCASPAR, and PEG-INTRON,
sales of our products for research purposes, contract research and development
fees, technology transfer and license fees and royalty advances.
Under our amended license agreement with Aventis, we received a payment of
$3,500,000 in advance royalties in January 1995. Royalties due under the amended
license agreement will be offset against an original credit of $5,970,000, which
represents the royalty advance plus reimbursement of certain amounts due Aventis
under the original agreement and interest expense, before cash payments will be
made under the agreement. The royalty advance is shown as a long-term liability.
The corresponding current portion of the advance is included in accrued expense
on the consolidated balance sheets. We will reduce the advance as royalties are
recognized under the agreement. Through June 30, 2001, an aggregate of
$4,307,000 in royalties payable by Aventis has been offset against the original
credit.
As of June 30, 2001, 1,043,000 shares of Series A preferred stock had been
converted into 3,325,000 shares of common stock. Accrued dividends on the
converted Series A preferred stock in the aggregate of $3,770,000 were settled
by the issuance of 235,000 shares of common stock and cash payments of
$1,947,000. The shares of Series A preferred stock outstanding at June 30, 2001
are convertible into approximately 16,000 shares of common stock. Dividends
accrue on the remaining outstanding shares of Series A preferred stock at a rate
of $14,000 per year. As of June 30, 2001, there were accrued and unpaid
dividends totaling $158,000 on the 7,000 shares of Series A preferred stock
outstanding. We have the option to pay these dividends in either cash or common
stock.
Our current sources of liquidity are cash, cash equivalents and interest
earned on such cash reserves, sales of and royalties on sales of ADAGEN,
ONCASPAR, and PEG-INTRON, and sales of our products for research purposes and
license fees. Based upon our currently planned research development activities
and related costs and our current sources of liquidity, we anticipate our
current cash reserves will be sufficient to meet our capital, debt service and
operational requirements for the foreseeable future.
We may seek additional financing, such as through future offerings of
equity or debt securities or agreements with collaborators with respect to the
development and commercialization of products, to fund future operations and
potential acquisitions. We cannot assure you, however, that we will be able to
obtain additional funds on acceptable terms, if at all.
Recently Issued Accounting Standards
In July 2001, the FASB issued SFAS No. 141, Business Combination, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that all
business combinations be accounted for under a single method - the purchase
method. Use of the pooling-of-interests method no longer is permitted. SFAS 141
requires that the purchase method be used for business combinations initiated
after June 30, 2001. SFAS 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. SFAS 142 has no impact on our
historical financial statements as we do not have any goodwill or intangible
assets, which resulted from business combinations.
29
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 requires an enterprise to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets. Since the requirement is to recognize the obligation when
incurred, approaches that have been used in the past to accrue the asset
retirement obligation over the life of the asset are no longer acceptable. SFAS
143 also requires the enterprise to record the contra to the initial obligation
as an increase to the carrying amount of the related long-lived asset (i.e., the
associated asset retirement costs) and to depreciate that cost over the life of
the asset. The liability is increased at the end of each period to reflect the
passage of time (i.e., accretion expense) and changes in the estimated future
cash flows underlying the initial fair value measurement. Enterpreises are
required to adopt Statement 143 for fiscal years beginning after June 15, 2002.
We are in the process of evaluating this SFAS and the effect that it will have
on our consolidated financial statements and current impairment policy.
Risk Factors
Our near term success is heavily dependent on Schering-Plough's effective
marketing of PEG-INTRON.
In the near term, our results of operations are heavily dependent on
Schering-Plough's sales of PEG-INTRON. Under our agreement with Schering-Plough,
pursuant to which we applied our PEG technology to develop a modified form of
Schering-Plough's INTRON A, we will receive royalties on worldwide sales of
PEG-INTRON. Schering-Plough is responsible for conducting and funding the
clinical studies, obtaining regulatory approval and marketing the product
worldwide on an exclusive basis. Schering-Plough received marketing
authorization for PEG-INTRON in the United States in January 2001 and in the
European Union in May 2000 for the treatment of hepatitis C. Schering-Plough has
also been granted marketing approval for the sale of PEG-INTRON and REBETOL
Capsules as combination therapy for the treatment of hepatitis C in March 2001
in the European Union and in August 2001 in the U.S. If Schering-Plough fails to
effectively market PEG-INTRON or discontinues the marketing of PEG-INTRON for
these indications this would have a material adverse effect on our business,
financial condition and results of operations.
Even though the use of PEG-INTRON as a stand alone therapy and as
combination therapy with REBETOL received FDA approval, we cannot assure you
that Schering-Plough will be successful in marketing PEG-INTRON or that
Schering-Plough will not continue to market INTRON A, either as a stand-alone
product or in combination therapy with REBETOL. The amount and timing of
resources dedicated by Schering-Plough to the marketing of PEG-INTRON is not
within our control. If Schering-Plough breaches or terminates its agreement with
us, the commercialization of PEG-INTRON could be slowed or blocked completely.
Our revenues will be negatively affected if Schering-Plough continues to market
INTRON A in competition with PEG-INTRON or if it cannot meet the manufacturing
demands of the market. If Schering-Plough breaches the agreement, a dispute may
arise between us. A dispute would be both expensive and time-consuming and may
result in delays in the commercialization of PEG-INTRON, which would likely have
a material adverse effect on our business, financial condition and results of
operations.
We have a history of losses and we may not sustain profitability.
We have incurred substantial losses since our inception. As of June 30,
2001, we had an accumulated deficit of approximately $118 million. Although we
earned a profit for the year ended June
30
30, 2001, we cannot assure you that we will be able to remain profitable. Our
ability to remain profitable will depend primarily on Schering-Plough's
effective marketing of PEG-INTRON, as well as on the rate of growth in our other
product sales or royalty revenue and on the level of our expenses. Our ability
to achieve long-term profitability will depend upon our or our licensees'
ability to obtain regulatory approvals for additional product candidates. Even
if our product candidates receive regulatory approval, we cannot assure you that
our products will achieve market acceptance or will be commercialized
successfully or that our operations will sustain profitability.
We are subject to extensive regulation. Compliance with these regulations
can be costly, time consuming and subject us to unanticipated delays in
developing our products.
The manufacturing and marketing of pharmaceutical products in the United
States and abroad are subject to stringent governmental regulation. The sale of
any of our products for use in humans in the United States will require the
prior approval of the FDA. Similar approvals by comparable agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards that apply to the clinical testing, manufacture and marketing
of pharmaceutical products. Obtaining FDA approval for a new therapeutic product
may take several years and involve substantial expenditures. ADAGEN was approved
by the FDA in 1990. ONCASPAR was approved in the United States and in Germany in
1994, and in Canada in 1997, in each case for patients with acute lymphoblastic
leukemia who are hypersensitive to native forms of L-asparaginase. ONCASPAR was
approved in Russia in April 1993 for therapeutic use in a broad range of
cancers. PEG-INTRON was approved in Europe and the United States for the
treatment of hepatitis C in May 2000 and January 2001, respectively. Except for
these approvals, none of our other products have been approved for sale and use
in humans in the United States or elsewhere.
We cannot assure you that we or our licensees will be able to obtain FDA or
other relevant marketing approval for any of our other products. In addition,
any approved products are subject to continuing regulation. If we or our
licensees fail to comply with applicable requirements it could result in:
o criminal penalties,
o civil penalties,
o fines,
o recall or seizure,
o injunctions requiring suspension of production,
o orders requiring ongoing supervision by the FDA, or
o refusal by the government to approve marketing or export applications
or to allow us to enter into supply contracts.
If we or our licensees fail to obtain or maintain requisite governmental
approvals or fail to obtain or maintain approvals of the scope requested, it
will delay or preclude us or our licensees or marketing partners from marketing
our products. It could also limit the commercial use of our products. Any such
failure or limitation may have a material adverse effect on our business,
financial condition and results of operations.
We have experienced problems complying with the FDA's regulations for
manufacturing
31
our products, and we may not be able to resolve these problems.
Manufacturers of drugs also must comply with the applicable FDA good
manufacturing practice regulations, which include quality control and quality
assurance requirements as well as the corresponding maintenance of records and
documentation. Manufacturing facilities are subject to ongoing periodic
inspection by the FDA and corresponding state agencies, including unannounced
inspections, and must be licensed as part of the product approval process before
they can be used in commercial manufacturing. We or our present or future
suppliers may be unable to comply with the applicable good manufacturing
practice regulations and other FDA regulatory requirements. We manufacture
ONCASPAR and ADAGEN, and Schering-Plough is responsible for the manufacture of
PEG-INTRON.
During 1998, we began to experience manufacturing problems with one of our
FDA-approved products, ONCASPAR. The problems were due to increased levels of
white particulates in batches of ONCASPAR, which resulted in an increased
rejection rate for this product. During fiscal 1999, we agreed with the FDA to
temporary labeling and distribution restrictions for ONCASPAR and instituted
additional inspection and labeling procedures prior to distribution. During May
1999, the FDA required us to limit distribution of ONCASPAR to only those
patients who are hypersensitive to native L-asparaginase. In November 1999, as a
result of manufacturing changes we implemented the FDA withdrew this
distribution restriction.
In July 1999, the FDA conducted an inspection of our manufacturing facility
in connection with our product license for ADAGEN. Following that inspection,
the FDA documented several deviations from Current Good Manufacturing Practices,
known as cGMP, in a Form 483 report. We provided the FDA with a corrective
action plan. In November 1999, the FDA issued a warning letter citing the same
cGMP deviations listed in the July 1999 Form 483, but it also stated that the
FDA was satisfied with our proposed corrective actions. As a result of the
deviations, the FDA decided not to approve product export requests from us for
ONCASPAR until it determined that all noted cGMP deviations were either
corrected or in the process of being corrected. This restriction was removed in
August 2000.
Since January 2000, the FDA has conducted follow-up inspections as well as
routine inspections of our manufacturing facility related to ONCASPAR and
ADAGEN. Following certain of these inspections, the FDA issued Form 483 reports,
citing deviations from cGMP. We have or are in the process of responding to such
reports with corrective action plans and are currently in discussion with the
FDA concerning some observations set forth in the Form 483s.
We are aware that the FDA has conducted inspections of certain of the
manufacturing facilities of Schering-Plough and those inspections have resulted
in the issuance of Form 483s citing deviations from cGMP.
In March 2001, we voluntarily replaced a batch of ADAGEN that was found to
have an impurity, which we believe was introduced in the filling process.
If we or our licensees, including Schering-Plough, face additional
manufacturing problems in the future or if we or our licensees are unable to
satisfactorily resolve current or future manufacturing problems, the FDA could
require us or our licensees to discontinue the distribution of our products or
to delay continuation of clinical trials. If we or our licensees, including
Schering-Plough, cannot market and distribute our products for an extended
period, sales of the products will suffer, which would adversely affect our
financial results.
Our clinical trials could take longer to complete and cost more than we
expect.
We will need to conduct significant additional clinical studies of all of
our product candidates, which have not yet been approved for sale. These studies
are costly, time consuming and unpredictable.
32
Any unanticipated costs or delays in our clinical studies could harm our
business, financial condition and results of operations.
A Phase III clinical trial is being conducted for PEG-INTRON for one cancer
indication. Schering-Plough is also in early stage clinical trials for
PEG-INTRON in other cancer indications. We are currently conducting early stage
clinical trials of two other PEG products, PROTHECAN currently in Phase II and
PEG-paclitaxel currently in Phase I. The rate of completion of clinical trials
depends upon many factors, including the rate of enrollment of patients. If we
or the other sponsors of these clinical trials are unable to accrue sufficient
clinical patients in such trials during the appropriate period, such trials may
be delayed and will likely incur significant additional costs. In addition, FDA
or institutional review boards may require us to delay, restrict, or discontinue
our clinical trials on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
The cost of human clinical trials varies dramatically based on a number of
factors, including:
o the order and timing of clinical indications pursued,
o the extent of development and financial support from corporate
collaborators,
o the number of patients required for enrollment,
o the difficulty of obtaining clinical supplies of the product
candidate, and
o the difficulty in obtaining sufficient patient populations and
clinicians.
All statutes and regulations governing the conduct of clinical trials are
subject to change in the future, which could affect the cost of our clinical
trials. Any unanticipated costs or delays in our clinical studies could harm our
business, financial condition and results of operations.
In some cases, we rely on corporate collaborators or academic institutions
to conduct some or all aspects of clinical trials involving our product
candidates. We will have less control over the timing and other aspects of these
clinical trials than if we conducted them entirely on our own. We cannot assure
you that these trials will commence or be completed as we expect or that they
will be conducted successfully.
If pre-clinical and clinical trials do not yield positive results, our
product candidates will fail.
If pre-clinical and clinical testing of one or more of our product
candidates do not demonstrate the safety and efficacy of the desired
indications, those potential products will fail. Numerous unforeseen events may
arise during, or as a result of, the testing process, including the following:
o the results of pre-clinical studies may be inconclusive, or they may
not be indicative of results that will be obtained in human clinical
trials,
o potential products may not have the desired effect or may have
undesirable side effects or other characteristics that preclude
regulatory approval or limit their commercial use if approved,
o results attained in early human clinical trials may not be indicative
of results that are obtained in later clinical trials, and
33
o after reviewing test results, we or our corporate collaborators may
abandon projects which we might previously have believed to be
promising.
Clinical testing is very costly and can take many years. The failure to
adequately demonstrate the safety and efficacy of a therapeutic product under
development would delay or prevent regulatory approval, which could adversely
affect our business and financial performance.
In June 2001, we reported that Schering-Plough completed its Phase III
clinical trial which compared PEG-INTRON to INTRON A in patients with newly
diagnosed chronic myelogenous leukemia, or CML. In the study, although
PEG-INTRON demonstrated clinical comparability and a comparable safety profile
with INTRON A, the efficacy results for PEG-INTRON did not meet the
protocol-specified statistical criteria for non-inferiority, the primary
endpoint of the study. The results of this Phase III study have not yet been
presented or published, and are not publicly available at this time. We cannot
assure you that those results will support any marketing approval of PEG-INTRON
for the treatment of CML.
Even if we obtain regulatory approval for our products, they may not be
accepted in the marketplace.
The commercial success of our products will depend upon their acceptance by
the medical community and third-party payors as clinically useful,
cost-effective and safe. Even if our products obtain regulatory approval, we
cannot assure you that they will achieve market acceptance of any kind. The
degree of market acceptance will depend on many factors, including:
o the receipt, timing and scope of regulatory approvals,
o the timing of market entry in comparison with potentially competitive
products,
o the availability of third-party reimbursement, and
o the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of drug candidates,
as well as their advantages over existing technologies and
therapeutics.
If any of our products do not achieve market acceptance, we will likely
lose our entire investment in that product.
We depend on our collaborative partners. If we lose our collaborative
partners or they do not apply adequate resources to our collaborations, our
product development and financial performance may suffer.
We rely heavily and will depend heavily in the future on collaborations
with corporate partners, primarily pharmaceutical companies, for one or more of
the research, development, manufacturing, marketing and other commercialization
activities relating to many of our product candidates. If we lose our
collaborative partners, or if they do not apply adequate resources to our
collaborations, our product development and financial performance may suffer.
The amount and timing of resources dedicated by our collaborators to their
collaborations with us is not within our control. If any collaborator breaches
or terminates its agreements with us, or fails to conduct its collaborative
activities in a timely manner, the commercialization of our product candidates
could be slowed or blocked completely. We cannot assure you that our
collaborative partners will not change their strategic focus or pursue
34
alternative technologies or develop alternative products as a means for
developing treatments for the diseases targeted by these collaborative programs.
Our collaborators could develop competing products. In addition, our revenues
will be affected by the effectiveness of our corporate partners in marketing any
successfully developed products.
We cannot assure you that our collaborations will be successful. Disputes
may arise between us and our collaborators as to a variety of matters, including
financing obligations under our agreements and ownership of intellectual
property rights. These disputes may be both expensive and time-consuming and may
result in delays in the development and commercialization of products.
We are dependent upon a single outside supplier for each of the crucial raw
materials necessary to the manufacture of each of our products and product
candidates.
We cannot assure you that sufficient quantities of our raw material
requirements will be available to support the continued research, development or
manufacture of our products. We purchase the unmodified compounds utilized in
our approved products and products under development from outside suppliers. We
may be required to enter into supply contracts with outside suppliers for
certain unmodified compounds. We do not produce the unmodified adenosine
deaminase used in the manufacture of ADAGEN or the unmodified forms of
L-asparaginase used in the manufacture of ONCASPAR. We have a supply contract
with an outside supplier for the supply of each of these unmodified compounds.
If we experience a delay in obtaining or are unable to obtain any unmodified
compound, including unmodified adenosine deaminase or unmodified L-asparaginase,
on reasonable terms, or at all, it could have a material adverse effect on our
business, financial condition and results of operations.
If we are required to obtain an alternate source for an unmodified compound
utilized in a product, the FDA and relevant foreign regulatory agencies will
likely require that we perform additional testing to demonstrate that the
alternate material is biologically and chemically equivalent to the unmodified
compound previously used in our clinical trials. This testing could delay or
stop development of a product, limit commercial sales of an approved product and
cause us to incur significant additional expenses. If we are unable to
demonstrate that the alternate material is chemically and biologically
equivalent to the previously used unmodified compound, we will likely be
required to repeat some or all of the pre-clinical and clinical trials conducted
for the compound. The marketing of an FDA approved drug could be disrupted while
such tests are conducted. Even if the alternate material is shown to be
chemically and biologically equivalent to the previously used compound, the FDA
or relevant foreign regulatory agency may require that we conduct additional
clinical trials with the alternate material.
There is one FDA-approved supplier of the adenosine deaminase enzyme, or
ADA, in ADAGEN. The ADA enzyme, until recently, was obtained by our supplier
from bovine intestines in cattle of German origin. Bovine spongiform
encephalopathy (BSE or mad cow disease) has been detected in cattle herds in
Germany after we acquired the ADA enzyme and at a time when the herds were
identified by the supplier as BSE-free. The FDA has advised us that we may
continue to distribute our current inventory of ADAGEN which contains the ADA
enzyme obtained from cattle of German origin until such time as we are able to
obtain FDA approval of the use of the ADA enzyme obtained from cattle of New
Zealand origin. We cannot assure you that the FDA will approve the use of the
ADA obtained in New Zealand prior to the time that our current inventory of
ADAGEN is exhausted. If we do not receive such timely approval, we will be
unable to distribute ADAGEN.
The United States and foreign patents upon which our original PEG
technology was based have expired. We depend on patents and proprietary rights,
which may offer only limited protection against potential infringement and the
development by our competitors of competitive products.
35
Research Corporation Technologies, Inc. held the patent upon which our
original PEG technology was based and had granted us a license under such
patent. Research Corporation's patent contained broad claims covering the
attachment of PEG to polypeptides. However, this United States patent and its
corresponding foreign patents have expired. Based upon the expiration of the
Research Corporation patent, other parties will be permitted to make, use or
sell products covered by the claims of the Research Corporation patent, subject
to other patents, including those which we hold. We have obtained several
patents with claims covering improved methods of attaching or linking PEG to
therapeutic compounds. We cannot assure you that any of these patents will
enable us to prevent infringement or that competitors will not develop
alternative methods of attaching PEG to compounds potentially resulting in
competitive products outside the protection that may be afforded by our patents.
We are aware that others have also filed patent applications and have been
granted patents in the United States and other countries with respect to the
application of PEG to proteins and other compounds. We cannot assure you that
the expiration of the Research Corporation patent or other patents related to
PEG that have been granted to third parties will not have a material adverse
effect on our business, financial condition and results of operations.
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
Our success depends, in part, on our ability to develop and maintain a strong
patent position for our products and technologies both in the United States and
in other countries. We have been licensed, and been issued, a number of patents
in the United States and other countries, and we have other patent applications
pending to protect our proprietary technology. Although we believe that our
patents provide certain protection from competition, we cannot assure you that
such patents will be of substantial protection or commercial benefit to us, will
afford us adequate protection from competing products, or will not be challenged
or declared invalid. In addition we cannot assure you that additional United
States patents or foreign patent equivalents will be issued to us. The scope of
patent claims for biotechnological inventions is uncertain, and our patents and
patent applications are subject to this uncertainty.
To facilitate development of our proprietary technology base, we may need
to obtain licenses to patents or other proprietary rights from other parties. If
we are unable to obtain such licenses, our product development efforts may be
delayed or blocked.
We are aware that certain organizations are engaging in activities that
infringe certain of our PEG and SCA technology patents. We cannot assure you
that we will be able to enforce our patent and other rights against such
organizations.
We expect that there will continue to be significant litigation in the
biotechnology and pharmaceutical industries regarding patents and other
proprietary rights. We have become involved in patent litigation, and we may
likely become involved in additional patent litigation in the future. We may
incur substantial costs in asserting any patent rights and in defending suits
against us related to intellectual property rights. Such disputes could
substantially delay our product development or commercialization activities and
could have a material adverse effect on our business, financial condition and
results of operations. We are involved in one pending litigation matter in which
we are seeking to enforce certain of our patents.
We also rely on trade secrets, know-how and continuing technological
advancements to protect our proprietary technology. We have entered into
confidentiality agreements with our employees, consultants, advisors and
collaborators. However, these parties may not honor these agreements, and we may
not be able to successfully protect our rights to unpatented trade secrets and
know-how. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets and
know-how.
36
We have limited sales and marketing experience, which makes us dependent on
our marketing partners.
Other than ADAGEN, which we market on a worldwide basis to a small patient
population, we have not engaged in the direct commercial marketing of any of our
products and therefore we do not have significant experience in sales, marketing
or distribution. For some of our products, we have provided exclusive marketing
rights to our corporate partners in return for milestone payments and royalties
to be received on sales. To the extent that we enter into licensing arrangements
for the marketing and sale of our products, any revenues we receive will depend
primarily on the efforts of these third parties. We will not control the amount
and timing of marketing resources that such third parties devote to our
products. In addition, if we market products directly, significant additional
expenditures and management resources would be required to increase the size of
our internal sales force. In any sales or marketing effort, we would compete
with many other companies that currently have extensive and well-funded sales
operations. Our marketing and sales efforts may be unable to compete
successfully against other such companies.
We may acquire other companies and may be unable to successfully integrate
such companies with our operations.
We may expand and diversify our operations with acquisitions. If we are
unsuccessful in integrating any such company with our operations, or if
integration is more difficult than anticipated, we may experience disruptions
that could have a material adverse effect on our business, financial condition
and results of operations. Some of the risks that may affect our ability to
integrate or realize any anticipated benefits from any acquisition include those
associated with:
o unexpected losses of key employees or customers of the acquired
company;
o conforming the acquired company's standards, processes, procedures and
controls with our operations;
o coordinating our new product and process development;
o diversion of existing management relating to the integration and
operation of the acquired company;
o hiring additional management and other critical personnel; and
o increasing the scope, geographic diversity and complexity of our
operations.
We may need to obtain additional financing to meet our future capital
needs, and this financing may not be available when we need it.
Our current development projects require substantial capital. We may
require substantial additional funds to conduct research activities,
pre-clinical studies, clinical trials and other activities relating to the
successful commercialization of potential products. In addition, we may seek to
acquire additional technologies and companies, which could require substantial
capital. We do not expect to achieve significant sales or royalty revenue from
our current FDA-approved products, ADAGEN and ONCASPAR. In addition, we cannot
be sure that we will be able to obtain significant revenue from PEG-INTRON.
Additional funds from other sources may not be available on acceptable terms, if
at all. If adequate funds are unavailable from operations or additional sources
of financing, we may have to delay, reduce the scope of or eliminate one or more
of
37
our research or development programs or one or more of our proposed acquisitions
of technologies or companies which could materially and adversely affect our
business, financial condition and operations.
While we believe that our cash, cash equivalents and investments will be
adequate to satisfy our capital needs for the foreseeable future, our actual
capital requirements will depend on many factors, including:
o the level of revenues we receive from our FDA-approved products and
product candidates,
o continued progress of our research and development programs,
o our ability to establish additional collaborative arrangements,
o changes in our existing collaborative relationships,
o progress with pre-clinical studies and clinical trials,
o the time and costs involved in obtaining regulatory clearance for our
products,
o the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims,
o competing technological and market developments, and
o our ability to market and distribute our products and establish new
collaborative and licensing arrangements.
We may seek to raise any necessary additional funds through equity or debt
financings, collaborative arrangements with corporate partners or other sources
which may be dilutive to existing stockholders. We cannot assure you that we
will be able to obtain additional funds on acceptable terms, if at all. If
adequate funds are not available, we may be required to:
o delay, reduce the scope or eliminate one or more of our development
projects,
o obtain funds through arrangements with collaborative partners or
others that may require us to relinquish rights to technologies,
product candidates or products that we would otherwise seek to develop
or commercialize ourselves, or
o license rights to technologies, product candidates or products on
terms that are less favorable to us than might otherwise be available.
We depend on key personnel and may not be able to retain these employees or
recruit additional qualified personnel, which would harm our business.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical and managerial personnel. There
is intense competition for qualified personnel in the pharmaceutical field.
Therefore, we may not be able to attract and retain the qualified personnel
necessary for the development of our business. The loss of the services of
existing personnel, as well as the failure to recruit additional key scientific,
technical and managerial personnel in a timely manner, would harm our research
and development programs and our business.
38
Risks Related To Our Industry
We face rapid technological change and intense competition, which could
harm our business and results of operations.
The biopharmaceutical industry is characterized by rapid technological
change. Our future success will depend on our ability to maintain a competitive
position with respect to technological advances. Rapid technological development
by others may result in our products and technologies becoming obsolete.
We face intense competition from established biotechnology and
pharmaceutical companies, as well as academic and research institutions that are
pursuing competing technologies and products. We know that competitors are
developing or manufacturing various products that are used for the prevention,
diagnosis or treatment of diseases that we have targeted for product
development. Many of our competitors have substantially greater research and
development capabilities and experiences and greater manufacturing, marketing
and financial resources than we do. Accordingly, our competitors may develop
technologies and products that are superior to those we or our collaborators are
developing and render our technologies and products or those of our
collaborators obsolete and noncompetitive. In addition, many of our competitors
have much more experience than we do in pre-clinical testing and human clinical
trials of new drugs, as well as obtaining FDA and other regulatory approval. If
we cannot compete effectively, our business and financial performance would
suffer.
We may be sued for product liability.
Because our products and product candidates are new treatments with
limited, if any, past use on humans, their use during testing or after approval
could expose us to product liability claims. We maintain product liability
insurance coverage in the total amount of $40.0 million for claims arising from
the use of our products in clinical trials prior to FDA approval and for claims
arising from the use of our products after FDA approval. We cannot assure you
that we will be able to maintain our existing insurance coverage or obtain
coverage for the use of our other products in the future. Also, this insurance
coverage and our resources may not be sufficient to satisfy any liability
resulting from product liability claims, and a product liability claim may have
a material adverse effect on our business, financial condition or results of
operations.
Sales of our products could be adversely affected if the costs for these
products are not reimbursed by third-party payors.
In recent years, there have been numerous proposals to change the health
care system in the United States. Some of these proposals have included measures
that would limit or eliminate payments for medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. In addition,
government and private third-party payors are increasingly attempting to contain
health care costs by limiting both the coverage and the level of reimbursement
of drug products. Consequently, significant uncertainty exists as to the
reimbursement status of newly-approved health care products.
Our ability to commercialize our products will depend, in part, on the
extent to which reimbursement for the cost of the products and related
treatments will be available from third-party payors. If we or any of our
collaborators succeeds in bringing one or more products to market, we cannot
assure you that third-party payors will establish and maintain price levels
sufficient for realization of an appropriate return on our investment in product
development. In addition, lifetime limits on benefits included in most private
health plans may force patients to self-pay for treatment. For example, patients
who receive ADAGEN are expected to require injections for their entire lives.
The cost of this treatment
39
may exceed certain plan limits and cause patients to self-fund further
treatment. Furthermore, inadequate third-party coverage may lead to reduced
market acceptance of our products. Significant changes in the health care system
in the United States or elsewhere could have a material adverse effect on our
business and financial performance.
Risks Related To Our Subordinated Notes and Common Stock
The price of our common stock has been, and may continue to be, volatile
which may significantly affect the trading price of our notes.
Historically, the market price of our common stock has fluctuated over a
wide range, and it is likely that the price of our common stock will fluctuate
in the future. The market price of our common stock could be impacted due to a
variety of factors, including:
o the results of pre-clinical testing and clinical trials by us, our
corporate partners or our competitors,
o announcements of technical innovations or new products by us, our
corporate partners or our competitors,
o the status of corporate collaborations and supply arrangements,
o regulatory approvals,
o government regulation,
o developments in patent or other proprietary rights,
o public concern as to the safety and efficacy of products developed by
us or others,
o litigation,
o acts of war or terrorism in the United States or worldwide, and
o general market conditions in our industry.
In addition, due to one or more of the foregoing factors in one or more
future quarters, our results of operations may fall below the expectations of
securities analysts and investors. In that event, the market price of our common
stock could be materially and adversely affected.
The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and healthcare-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our common stock.
Our notes are subordinated.
Our 4.5% convertible subordinated notes are unsecured and subordinated in
right of payment to all of our existing and future senior indebtedness. In the
event of our bankruptcy, liquidation or reorganization, or upon acceleration of
the notes due to an event of default under the indenture and in
40
certain other events, our assets will be available to pay obligations on the
notes only after all senior indebtedness has been paid. As a result, there may
not be sufficient assets remaining to pay amounts due on any or all of the
outstanding notes. We are not prohibited from incurring debt, including senior
indebtedness, under the indenture. If we were to incur additional debt or
liabilities, our ability to pay our obligations on the notes could be adversely
affected. As of June 30, 2001, we had no senior indebtedness outstanding.
We may be unable to redeem our notes upon a fundamental change.
We may be unable to redeem our notes in the event of a fundamental change.
Upon a fundamental change, holders of the notes may require us to redeem all or
a portion of the notes. If a fundamental change were to occur, we may not have
enough funds to pay the redemption price for all tendered notes. Any future
credit agreements or other agreements relating to our indebtedness may contain
similar provisions, or expressly prohibit the repurchase of the notes upon a
fundamental change or may provide that a fundamental change constitutes an event
of default under that agreement. If a fundamental change occurs at a time when
we are prohibited from purchasing or redeeming notes, we could seek the consent
of our lenders to redeem the notes or could attempt to refinance this debt. If
we do not obtain a consent, we could not purchase or redeem the notes. Our
failure to redeem tendered notes would constitute an event of default under the
indenture. In such circumstances, or if a fundamental change would constitute an
event of default under our senior indebtedness, the subordination provisions of
the indenture would restrict payments to the holders of notes. A "fundamental
change" is any transaction or event (whether by means of an exchange offer,
liquidation, tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) in connection with which all or substantially all
of our common stock is exchanged for, converted into, acquired for or
constitutes solely the right to receive, consideration which is not all or
substantially all common stock that:
o is listed on, or immediately after the transaction or event will be
listed on, a United States national securities exchange, or
o is approved, or immediately after the transaction or event will be
approved, for quotation on the Nasdaq National Market or any similar
United States system of automated dissemination of quotations of
securities prices.
The term fundamental change is limited to certain specified transactions
and may not include other events that might adversely affect our financial
condition or the market value of the notes or our common stock. Our obligation
to offer to redeem the notes upon a fundamental change would not necessarily
afford holders of the notes protection in the event of a highly leveraged
transaction, reorganization, merger or similar transaction involving us.
A public market for our notes may fail to develop or be sustained.
The initial purchasers of the notes, although they have advised us that
they intend to make a market in the notes, are not obligated to do so and may
discontinue this market making activity at any time without notice. In addition,
market making activity by the initial purchasers will be subject to the limits
imposed by the Securities Act and the Exchange Act of 1934, as amended. As a
result, we cannot assure you that any market for the notes will develop or, if
one does develop, that it will be maintained. If an active market for the notes
fails to develop or be sustained, the trading price of the notes could be
materially adversely affected.
Events with respect to our share capital could cause the price of our
common stock to decline.
41
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. An adverse effect on the price of our common stock may adversely
affect the trading price of the notes. We had 41,990,859 shares of common stock
outstanding as of June 30, 2001. The following securities that may be exercised
for, or are convertible into, shares of our common stock were issued and
outstanding as of June 30, 2001:
o Options. Stock options to purchase 3,283,817 shares of our common
stock at a weighted average exercise price of approximately $24.98 per
share; of this total, 1,939,502 were exercisable at a weighted average
exercise price of $6.23 per share as of such date.
o Series A preferred stock. 7,000 shares of our Series A preferred stock
are outstanding, which were convertible into an aggregate of 15,909
shares of our common stock as of such date.
The shares of our common stock that may be issued under the options are
currently registered with the SEC. The shares of common stock that may be issued
upon conversion of the Series A preferred stock are eligible for sale without
any volume limitations pursuant to Rule 144(k) under the Securities Act.
We have a significant amount of indebtedness.
As a result of the initial offering of the notes, our long-term debt is
$400,000,000. This indebtedness has affected us by:
o significantly increasing our interest expense and related debt service
costs, and
o making it more difficult to obtain additional financing.
We may not generate sufficient cash flow from operations to satisfy the
annual debt service payments that will be required under the notes. This may
require us to use a portion of the proceeds of the notes to pay interest or
borrow additional funds or sell additional equity to meet our debt service
obligations. If we are unable to satisfy our debt service requirements,
substantial liquidity problems could result, which would negatively impact our
future prospects.
The market for unrated debt is subject to disruptions, which could have an
adverse effect on the market price of the notes.
Our notes have not been rated. As a result, holders of the notes have the
risks associated with an investment in unrated debt. Historically, the market
for unrated debt has been subject to disruptions that have caused substantial
volatility in the prices of such securities and greatly reduced liquidity for
the holders of such securities. If the notes are traded, they may trade at a
discount from their initial offering price, depending on, among other things,
prevailing interest rates, the markets for similar securities, general economic
conditions and our financial condition, results of operations and prospects. The
liquidity of, and trading markets for, the notes also may be adversely affected
by general declines in the market for unrated debt. Such declines may adversely
affect the liquidity of, and trading markets for, the notes, independent of our
financial performance or prospects. In addition, certain regulatory restrictions
prohibit certain types of financial institutions from investing in unrated debt,
which may further suppress demand for such securities. We cannot assure you that
the market for the notes will not be subject to similar disruptions. Any such
disruptions may have an adverse effect on the holders of the notes.
42
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges was negative for all periods
presented, other than the year ended June 30, 2001, because we incurred net
losses in the periods prior to the year ended June 30, 2001. The dollar amounts
of the deficiencies for these periods and the ratio of earnings to fixed charges
for the year ended June 30, 2001 are disclosed below (dollars in thousands):
Year Ended June 30,
----------------------------------------------------------------
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
Ratio of earnings to fixed charges* 22:1 N/A N/A N/A N/A N/A
Deficiency of earnings available to
cover fixed charges* N/A ($6,306) ($4,919) ($3,617) ($4,557) ($5,175)
*Earnings consist of net income (loss) plus fixed charges less capitalized
interest and preferred stock dividends. Fixed charges consist of interest
expense, including amortization of debt issuance costs and that portion of
rental expense we believe to be representative of interest.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities, and
time deposits. All such instruments are classified as securities
available-for-sale. We do not invest in portfolio equity securities or
commodities or use financial derivatives for trading purposes. Our debt security
portfolio represents funds held temporarily pending use in our business and
operations. We manage these funds accordingly. We seek reasonable assuredness of
the safety of principal and market liquidity by investing in rated fixed income
securities while at the same time seeking to achieve a favorable rate of return.
Our market risk exposure consists principally of exposure to changes in interest
rates. Our holdings are also exposed to the risks of changes in the credit
quality of issuers. We typically invest the majority of our investments in the
shorter-end of the maturity spectrum, and at June 30, 2001 all of our holdings
were in instruments maturing in 3 years or less.
The table below presents the principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio as of June 30,
2001.
2002 2003 2004 Total Fair Value
----------------------------------------------------------------------------
Fixed Rate $124,715,000 $ 46,136,000 $ 30,499,000 $201,350,000 $202,281,000
Average Interest Rate 5.01% 4.29% 5.98% 4.90% --
Variable Rate 3,920,000 -- -- 3,920,000 --
Average Interest Rate 4.0% -- -- 4.8% 3,874,000
----------------------------------------------------------------------------
$128,635,000 $ 46,136,000 $ 30,499,000 $205,270,000 $206,155,000
============================================================================
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report
commencing on Page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
43
PART III
The information required by Item 10 - Directors and Executive Officers of
the Registrant; Item 11 - Executive Compensation; Item 12 - Security Ownership
of Certain Beneficial Owners and Management; and Item 13 - Certain Relationships
and Related Transactions is incorporated into Part III of this Annual Report on
Form 10-K by reference to the Proxy Statement for our Annual Meeting of
Stockholders scheduled to be held on December 4, 2001.
44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as a
separate section of this report commencing on page F-1.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
Page Number
or
Exhibit Incorporation
Number Description By Reference
------ ----------- ------------
3(i) Certificate of Incorporation as amended ~~
3(ii) By laws, as amended *(4.2)
3(iv) Amendment to Certificate of Incorporation dated
January 5, 1998 ##3(iv)
4.1 Indenture dated as of June 26, 2001, between the
Company and Wilmington Trust Company, as trustee,
including the form of 4 1/2% Convertible
Subordinated Note due 2008 attached as Exhibit A
thereto ++++(4.1)
4.2 Registration Rights Agreement dated as of June 26,
2001, between the Company and the initial
purchasers ++++(4.2)
10.1 Form of Change of Control Agreements dated as of
January 20, 1995 entered into with the Company's
Executive Officers ###(10.2)
10.2 Lease - 300-C Corporate Court, South Plainfield,
New Jersey ***(10.3)
10.3 Lease dated April 1, 1995 regarding 20 Kingsbridge
Road, Piscataway, New Jersey ###(10.7)
10.4 Lease 300A-B Corporate Court, South Plainfield,
New Jersey ++(10.10)
10.5 Form of Stock Purchase Agreement between the
Company and the purchasers of the Series A
Cumulative Convertible Preferred Stock +(10.11)
10.6 Employment Agreement with Peter G. Tombros dated
as of August 10, 2000 //(10.15)
10.7 Stock Purchase Agreement dated as of June 30, 1995 ~(10.16)
10.8 Independent Directors' Stock Plan ~~~(10.24)
10.9 Underwriting Agreement dated March 20, 2000 with
Morgan Stanley & Co. Inc., CIBC World Markets
Corp., and SG Cowen Securities Corporation /(10.29)
10.10 Employment Agreement dated May 9, 2001, between
the Company and Arthur J. Higgins ///(10.30)
10.11 Amendment dated May 23, 2001, to Employment
Agreement between the Company and Arthur J.
Higgins dated May 9, 2001 ///(10.31)
10.12 Form of Restricted Stock Award Agreement between
the Company and Arthur J. Higgins ////(4.3)
10.13 Form of Employee Retention Agreement dated as of
August 3, 2001 between the Company and certain key
employees !
12.1 Computation of Ratio of Earnings to Fixed Charges !
21.0 Subsidiaries of Registrant !
23.0 Consent of KPMG LLP !
! Filed herewith
45
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-2 (File No. 33-34874) and incorporated herein by reference thereto.
*** Previously filed as an exhibit to the Company's Registration Statement on
Form S-18 (File No. 2-88240-NY) and incorporated herein by reference
thereto.
+ Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-39391) filed with the Commission and incorporated
herein by reference thereto.
++ Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference thereto.
++++ Previously filed as an exhibit to the Company's Registration Statement on
Form S-3 (File No. 333-67509) filed with the Commission and incorporated
herein by reference thereto.
## Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997 and incorporated herein by
reference thereto.
### Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995 and incorporated herein by
reference thereto.
~ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1995 and incorporated herein by
reference thereto.
~~ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 and incorporated herein by
reference thereto.
~~~ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 and incorporated herein by
reference thereto.
/ Previously filed as an exhibit to the Company's Registration Statement on
Form S-3 (File No. 333-30818) filed with the Commission and incorporated
herein by reference thereto.
// Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended June 30, 2000 and incorporated herein by reference
thereto.
/// Previously filed as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on June 13, 2001 and incorporated herein by
reference thereto.
//// Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-64110) filed with the Commission and incorporated
herein by reference thereto.
46
(b) Reports on Form 8-K.
On May 7, 2001, we filed with the Commission a Current Report on Form 8-K
dated May 7, 2001 reporting the initiation of patient dosing in a Phase I
clinical trial for PEG-paclitaxel designed to determine the safety,
tolerability, and pharmacology of PEG-paclitaxel in patients with advanced solid
tumors and lymphomas.
On May 9, 2001, we filed with the Commission a Current Report on Form 8-K
dated May 8, 2001 reporting our financial results for the third quarter of
fiscal year 2001.
On May 23, 2001, we filed with the Commission a Current Report on Form 8-K
dated May 22, 2001 reporting that Schering-Plough released the interim results
of two ongoing investigational clinical studies with once-weekly PEG-INTRON(TM)
(peginterferon alfa-2b) Injection plus daily REBETOL(R) (Ribavirin, USP)
Capsules in patients with chronic hepatitis C who did not respond to, or had
relapsed following previous interferon-based therapy. The study evaluating two
different doses of both PEG-INTRON(TM) and REBETOL(R) showed that 35 percent of
patients who did not respond to prior combination therapy had a virologic
response after 24 weeks of treatment (half way through the therapy).
On May 24, 2001, we filed with the Commission a Current Report on Form 8-K
dated May 24, 2001 reporting that Arthur J. Higgins became our President and
Chief Executive Officer.
On June 13, 2001, we filed with the Commission a Current Report on Form 8-K
dated June 7, 2001 reporting that Schering-Plough completed its Phase III study
comparing PEG-INTRON(TM) (peginterferon alfa-2b) Injection to INTRON(R) A
(interferon alfa-2b) Injection in patients with newly diagnosed chronic
myelogenous leukemia (CML). In the study, although PEG-INTRON(TM) administered
once weekly demonstrated clinical comparability to INTRON(R) A administered
daily, the efficacy result for PEG-INTRON(TM) did not meet the
protocol-specified statistical criteria for non-inferiority - the primary
endpoint in the study. In addition, we reported that Peter Tombros resigned as
one of our Directors as of June 7, 2001.
On June 14, 2001, we filed with the Commission a Current Report on Form 8-K
dated June 14, 2001 reporting that we intended to make a private offering of
$400 million of Convertible Subordinated Notes due 2008 with an option to issue
an additional $60 million of notes.
On June 21, 2001, we filed with the Commission a Current Report on Form 8-K
dated June 21, 2001 reporting the private placement of $400 million principal
amount of 4 1/2 % Convertible Subordinated Notes due 2008 with an option for the
initial purchasers to purchase an additional $60 million of notes.
47
ENZON, INC.
Dated: September 28, 2001 by: /s/ ARTHUR J. HIGGINS
----------------------------
Arthur J. Higgins
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Name Title Date
---- ----- ----
/s/ ARTHUR J. HIGGINS President, Chief Executive September 28, 2001
--------------------------- Officer and Director
Arthur J. Higgins (Principal Executive Officer)
/s/ KENNETH J. ZUERBLIS Vice President, Finance, September 28, 2001
--------------------------- Chief Financial Officer and
Kenneth J. Zuerblis Corporate Secretary
(Principal Financial and
Accounting Officer)
/s/ RANDY H. THURMAN Chairman of the Board September 28, 2001
---------------------------
Randy H. Thurman
/s/ DAVID S. BARLOW Director September 28, 2001
---------------------------
David S. Barlow
/s/ ROLF A. CLASSON Director September 28, 2001
---------------------------
Rolf A. Classon
/s/ ROSINA B. DIXON Director September 28, 2001
---------------------------
Rosina B. Dixon
/s/ DAVID W. GOLDE Director September 28, 2001
---------------------------
David W. Golde
/s/ ROBERT LEBUHN Director September 28, 2001
---------------------------
Robert LeBuhn
48
ENZON, INC. AND SUBSIDIARIES
Index
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 2001 and 2000 F-3
Consolidated Statements of Operations - Years ended
June 30, 2001, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity -
Years ended June 30, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows - Years ended
June 30, 2001, 2000 and 1999 F-7
Notes to Consolidated Financial Statements - Years ended
June 30, 2001, 2000 and 1999 F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Enzon, Inc.:
We have audited the consolidated financial statements of Enzon, Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enzon, Inc. and
subsidiaries as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2001, in conformity with accounting principles generally accepted in the
United States of America.
KPMG LLP
Short Hills, New Jersey
August 21, 2001
F-2
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2001 and 2000
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 310,223,837 $ 31,935,410
Short-term investments 129,520,083 16,986,278
Accounts receivable 11,087,748 5,442,455
Inventories 1,852,144 946,717
Other current assets 2,837,199 2,269,884
------------- -------------
Total current assets 455,521,011 57,580,744
------------- -------------
Property and equipment 13,181,671 12,439,729
Less accumulated depreciation and amortization 9,761,999 10,650,859
------------- -------------
3,419,672 1,788,870
Other assets:
Investments 76,675,557 69,557,482
Deposits 528,150 426,731
Deferred offering costs 12,774,951 --
Patents, net 756,476 898,423
------------- -------------
90,735,134 70,882,636
------------- -------------
Total assets $ 549,675,817 $ 130,252,250
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,670,259 $ 2,465,360
Accrued expenses 4,740,081 5,706,811
------------- -------------
Total current liabilities 9,410,340 8,172,171
------------- -------------
Accrued rent 581,438 607,914
Unearned revenue 694,814 510,001
Notes payable 400,000,000 --
------------- -------------
401,276,252 1,117,915
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares;
issued and outstanding 7,000 shares in 2001 and 2000
(liquidation preference aggregating $333,000 in 2001 and
$319,000 in 2000) 70 70
Common stock-$.01 par value, authorized 60,000,000 shares;
shares issued and outstanding 41,990,859 shares in 2001
and 40,838,115 shares in 2000 419,909 408,381
Additional paid-in capital 257,682,479 250,567,774
Accumulated other comprehensive income 884,935 --
Deferred compensation (1,509,171) --
Accumulated deficit (118,488,997) (130,014,061)
------------- -------------
Total stockholders' equity 138,989,225 120,962,164
------------- -------------
Total liabilities and stockholders' equity $ 549,675,817 $ 130,252,250
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ ------------
Revenues:
Net sales $ 20,940,633 $ 15,557,906 $ 12,855,995
Royalties 8,254,368 33,582 --
Contract revenue 2,392,708 1,426,309 302,212
------------ ------------ ------------
Total revenues 31,587,709 17,017,797 13,158,207
------------ ------------ ------------
Costs and expenses:
Cost of sales 3,864,284 4,888,357 4,309,956
Research and development expenses 13,051,714 8,382,772 6,835,521
Selling, general and administrative expenses 11,795,398 12,956,118 8,133,366
------------ ------------ ------------
Total costs and expenses 28,711,396 26,227,247 19,278,843
------------ ------------ ------------
Operating income (loss) 2,876,313 (9,209,450) (6,120,636)
------------ ------------ ------------
Other income (expense):
Interest and dividend income 8,401,526 2,943,311 1,145,009
Interest expense (275,049) (4,051) (8,348)
Other 10,627 (36,274) 64,767
------------ ------------ ------------
8,137,104 2,902,986 1,201,428
------------ ------------ ------------
Net income (loss) before taxes 11,013,417 (6,306,464) (4,919,208)
Tax benefit 511,647 -- --
------------ ------------ ------------
Net income (loss) $ 11,525,064 ($ 6,306,464) ($ 4,919,208)
============ ============ ============
Basic earnings (loss) per common share $0.28 ($0.17) ($0.14)
============ ============ ============
Diluted earnings (loss) per common share $0.26 ($0.17) ($0.14)
============ ============ ============
Weighted average number of common
shares outstanding - basic 41,602,104 38,172,515 35,699,133
============ ============ ============
Weighted average number of common shares
and dilutive potential common shares
outstanding 43,606,194 38,172,515 35,699,133
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 2001, 2000 and 1999
Preferred stock Common stock
--------------------------------------------- --------------------------------------------
Additional
Amount Number of Par Amount Number of Par paid-in
per share Shares Value per share Shares Value capital
--------- ------ ----- --------- ------ ----- -------
Balance, July 1, 1998 107,000 $1,070 31,341,353 313,414 $123,453,874
Common stock issued for
exercise of non-qualified
stock options -- -- -- 4.40 1,000,919 10,009 4,396,477
Common stock issued for
exercise of common
stock warrants -- -- -- 2.50 150,000 1,500 373,500
Net proceeds from Private
Placement, July 1998 -- -- -- 4.75 3,983,000 39,830 17,510,265
Common stock issued for
Independent Directors'
Stock Plan -- -- -- 8.88 8,514 84 75,539
Common stock options and
warrants issued for
consulting services -- -- -- -- -- -- 1,130,683
Common stock issued for
consulting services -- -- -- 6.13 4,898 49 29,951
Net loss -- -- -- -- -- -- --
----- -------- ------ ------ ---------- -------- ------------
Balance, June 30, 1999 107,000 1,070 36,488,684 364,886 146,970,289
Common stock issued for
exercise of non-qualified
stock options -- -- -- 4.25 807,181 8,072 3,286,246
Common stock issued for
conversion of Series A
preferred stock 25.00 (100,000) (1,000) 11.00 227,271 2,273 (1,273)
Dividends issued on Series A
preferred stock -- -- -- -- -- -- --
Common stock issued for
exercise of common stock
warrants -- -- -- 4.57 1,012,116 10,121 4,395,803
Net Proceeds from common
stock offering 44.50 2,300,000 23,000 95,647,262
Common stock issued for
Independent Directors'
Stock Plan -- -- -- 30.82 2,863 29 88,208
Common stock options issued
for consulting services -- -- -- -- -- -- 181,239
Net loss -- -- -- -- -- -- --
Balance, June 30, 2000, ----- -------- ------ ------ ---------- -------- ------------
carried forward 7,000 $70 40,838,115 $408,381 $250,567,774
Other
Comprehensive Deferred Accumulated
Income Compensation Deficit Total
------ ------------ ------- -----
Balance, July 1, 1998 -- -- ($116,841,818) $6,926,540
Common stock issued for
exercise of non-qualified
stock options -- -- -- 4,406,486
Common stock issued for
exercise of common
stock warrants -- -- -- 375,000
Net proceeds from Private
Placement, July 1998 -- -- -- 17,550,095
Common stock issued for
Independent Directors'
Stock Plan -- -- -- 75,623
Common stock options and
warrants issued for
consulting services -- -- -- 1,130,683
Common stock issued for
consulting services -- -- -- 30,000
Net loss -- -- (4,919,208) (4,919,208)
---- ---- ------------- ------------
Balance, June 30, 1999 (121,761,026) 25,575,219
Common stock issued for
exercise of non-qualified
stock options -- -- -- 3,294,318
Common stock issued for
conversion of Series A
preferred stock -- -- -- --
Dividends issued on Series A
preferred stock (1,946,571) (1,946,571)
Common stock issued for
exercise of common stock
warrants -- -- -- 4,405,924
Net Proceeds from common
stock offering -- -- -- 95,670,262
Common stock issued for
Independent Directors'
Stock Plan -- -- -- 88,237
Common stock options issued
for consulting services -- -- -- 181,239
Net loss -- -- (6,306,464) (6,306,464)
Balance, June 30, 2000, ---- ---- ------------- ------------
carried forward -- -- ($130,014,061) $120,962,164
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years ended June 30, 2001, 2000 and 1999
Preferred stock Common stock
--------------------------------------------- ------------------------------------------
Additional
Amount Number of Par Amount Number of Par paid-in
per share Shares Value per share Shares Value capital
--------- ------ ----- --------- ------ ----- -------
Balance June 30, 2000,
brought forward 7,000 $70 5.25 40,838,115 $408,381 $250,567,774
Common stock issued for
exercise of non-qualified
stock options -- -- -- -- 1,032,468 10,325 5,345,647
Issuance of restricted
common stock -- -- -- 61.40 25,000 250 1,534,750
Common stock issued on
conversion of common
stock warrants -- -- -- 1.79 93,993 940 167,810
Common stock issued for
Independent Directors'
Stock Plan -- -- -- 51.84 1,283 13 66,498
Amortization of deferred
compensation -- -- -- -- -- -- --
Unrealized gain on
securities -- -- -- -- -- -- --
Net income -- -- -- -- -- -- --
---- ----- --- ---------- -------- ------------
Balance, June 30, 2001 7,000 $70 41,990,859 $419,909 $257,682,479
==== ===== === ========== ======== ============
Other
Comprehensive Deferred Accumulated
Income Compensation Deficit Total
------ ------------ ------- -----
Balance June 30, 2000,
brought forward -- -- ($130,014,061) $120,962,164
Common stock issued for
exercise of non-qualified
stock options -- -- -- 5,355,972
Issuance of restricted
common stock -- (1,534,750) -- 250
Common stock issued on
conversion of common
stock warrants -- -- -- 168,750
Common stock issued for
Independent Directors'
Stock Plan -- -- -- 66,511
Amortization of deferred
compensation -- 25,579 -- 25,579
Unrealized gain on
securities 884,935 -- -- 884,935
Net income -- -- 11,525,064 11,525,064
-------- ------------ -------------- ------------
Balance, June 30, 2001 $884,935 ($1,509,171) ($118,488,997) $138,989,225
======== ============ ============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2001, 2000 and 1999
2001 2000 1999
------------ ----------- -----------
Cash flows from operating activities:
Net income (loss) $11,525,064 ($6,306,464) ($4,919,208)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 587,495 499,245 835,503
Amortization of Bond Premium/Discount (830,481) -- --
Loss (gain) on retirement of assets 2,746 36,274 (38,521)
Non-cash expense for issuance of restricted
common stock, warrants, and options 92,090 269,476 1,236,306
Changes in operating assets and liabilities:
Increase in accounts receivable (5,645,293) (837,608) (2,304,801)
(Increase) decrease in inventories (905,427) 379,884 (304,071)
Increase in other current assets (567,315) (1,232,483) (586,375)
(Increase) decrease in deposits (101,419) 326,952 (288,936)
Increase in accounts payable 2,204,899 749,271 4,233
(Decrease) Increase in accrued expenses (966,730) (473,442) 2,691,353
Decrease in accrued rent (26,476) (26,476) (92,770)
Increase (decrease) in unearned revenue 184,814 (300,363) (76,558)
------------ ----------- -----------
Net cash provided by (used in) operating
Activities 5,553,967 (6,915,734) (3,843,845)
------------ ----------- -----------
Cash flows from investing activities:
Capital expenditures (2,082,621) (768,415) (424,670)
Proceeds from sale of equipment 3,525 -- 131,932
Proceeds from sale of investments 24,972 -- --
Purchase of investments (163,244,000) (90,478,010) --
Maturities of investments 45,303,000 4,000,000 --
Decrease in long-term investments (20,437) -- 179
------------ ----------- -----------
Net cash used in investing activities (120,015,561) (87,246,425) (292,559)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,524,972 103,370,504 22,331,581
Proceeds from issuance of notes 400,000,000 -- --
Deferred offering costs (12,774,951) -- --
Preferred stock dividends paid -- (1,946,571) --
------------ ----------- -----------
Net cash provided by financing activities 392,750,021 101,423,933 22,331,581
------------ ----------- -----------
Net increase in cash and cash equivalents 278,288,427 7,261,774 18,195,177
Cash and cash equivalents at beginning of year 31,935,410 24,673,636 6,478,459
------------ ----------- -----------
Cash and cash equivalents at end of year $310,223,837 $31,935,410 $24,673,636
============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 2001, 2000 and 1999
(1) Company Overview
Enzon, Inc. ("Enzon" or "Company") is a biopharmaceutical company that
develops, manufactures and markets enhanced therapeutics for
life-threatening diseases through the application of its proprietary
technologies. The Company was originally incorporated in 1981. To date, the
Company's sources of cash have been the proceeds from the sale of its
equity and debt securities through public offerings and private placements,
sales of ADAGEN(R), and ONCASPAR(R), royalties on sales of PEG-INTRON(TM),
sales of its products for research purposes, contract research and
development fees, technology transfer and license fees and royalty
advances. The manufacturing and marketing of pharmaceutical products in the
United States is subject to stringent governmental regulation, and the sale
of any of the Company's products for use in humans in the United States
will require the prior approval of the United States Food and Drug
Administration ("FDA"). To date, ADAGEN, ONCASPAR and PEG-INTRON are the
only products of the Company which have been approved by the FDA, all of
which utilize the Company's PEG technology.
(2) Summary of Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany transactions
and balances are eliminated in consolidation. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States of America requires management to make 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 reporting period. Actual results could differ from those
estimates.
Accounting for Derivative and Hedging Activities
Effective July 1, 2000, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which
establishes new accounting and reporting guidelines for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. SFAS 133 requires the recognition of all
derivative financial instruments as either assets or liabilities in the
consolidated balance sheet and measurement of those derivatives at fair
value. The adoption of SFAS 133 did not have any effect on the Company's
results of operations or financial position, as the Company does not use
any derivatives.
Investments
The Company classifies its debt and marketable equity securities into
held-to-maturity or available-for-sale categories. Debt and marketable
equity securities classified as available-for-sale are carried at fair
market value, with the unrealized gains and losses, net of tax, included in
the determination of comprehensive income and reported in stockholders'
equity. As of June 30, 2001, all of the Company's debt and marketable
equity securities were classified as available-for sale as the Company does
not have the intent to hold them to maturity.
F-8
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The amortized cost, gross unrealized holding gains or losses, and fair
value for the Company's available-for-sale securities by major security type at
June 30, 2001 were as follows:
Gross
Unrealized Gross
Amortized Holding Unrealized Fair Market
Cost Gains Holding Losses Value
------------ ------------ -------------- ------------
U.S. Government agency debt $19,921,000 $467,000 -- $20,388,000
U.S. Corporate debt 171,807,000 520,000 (253,000) 172,074,000
Foreign corporate debt 13,542,000 151,000 -- 13,693,000
------------ ------------ ------------ ------------
$205,270,000 $1,138,000 ($253,000) $206,155,000
============ ============ ============ ============
Maturities of debt securities classified as available-for-sale were as
follows at June 30, 2001:
Years ended June, 30 Amortized Cost Fair Market Value
-------------- -----------------
2002 $128,635,000 $129,485,000
2003 46,136,000 46,108,000
2004 30,499,000 30,562,000
-------------- -----------------
$205,270,000 $206,155,000
============== =================
Gross realized gains from the sale of investment securities included in
income for the year ended June 30, 2001 were $178,000.
At June 30, 2000, the Company's debt and marketable equity securities were
classified as held-to-maturity. Held-to-maturity securities are recorded as
either short-term or long-term on the balance sheet based on contractual
maturity date and are stated at amortized cost.
As of June 30, 2000, the amortized cost, gross unrealized holding gains or
losses, and fair value for securities held-to-maturity by major security type
were as follows:
Gross
Unrealized Gross
Amortized Holding Unrealized Fair Market
Cost Gains Holding Losses Value
------------ ------------ -------------- ------------
U.S. Government agency debt $3,630,000 $134,000 -- $3,764,000
U.S. Corporate debt 87,881,000 112,000 (143,000) 87,850,000
Foreign corporate debt 13,649,000 -- (86,000) 13,563,000
------------ ------------ ------------ ------------
$105,160,000 $246,000 ($229,000) $105,177,000
============ ============ ============ ============
Included in cash and cash equivalents at June 30, 2000 were $18,681,000 of
debt securities, which matured prior to October 30, 2000.
F-9
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The fair value of substantially all securities is determined by quoted
market prices. Gains or losses on securities sold are based on the specific
identification method.
Inventory Costing and Idle Capacity
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method and includes the cost of
raw materials, labor and overhead.
Costs associated with idle capacity at the Company's manufacturing
facility are charged to cost of sales as incurred.
Patents
The Company has licensed, and been issued, a number of patents in the
United States and other countries and has other patent applications pending
to protect its proprietary technology. Although the Company believes that
its patents provide adequate protection for the conduct of its business,
there can be no assurance that such patents will be of substantial
protection or commercial benefit to the Company, will afford the Company
adequate protection from competing products, or will not be challenged or
declared invalid, or that additional United States patents or foreign
patent equivalents will be issued to the Company. The degree of patent
protection to be afforded to biotechnological inventions is uncertain, and
the Company's products are subject to this uncertainty.
Patents related to the acquisition of SCA Ventures, Inc., formerly
Genex Corporation, were recorded at their fair value at the date of
acquisition and are being amortized over the estimated useful lives of the
patents ranging from 8 to 17 years. Accumulated amortization as of June 30,
2001 and 2000 was $1,372,000 and $1,230,000, respectively.
Costs related to the filing of patent applications related to the
Company's products and technology are expensed as incurred.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed
using the straight-line method. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts, and any resulting gain or loss is recognized in operations
for the period. The cost of repairs and maintenance is charged to
operations as incurred; significant renewals and improvements are
capitalized.
Long-lived Assets
The Company reviews long-lived assets for impairment whenever events
or changes in business circumstances occur that indicate that the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of long-lived assets held and to be used based on
undiscounted cash flows and measures the impairment, if any, using
discounted cash flows.
F-10
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Revenue Recognition
Revenues from the sale of the Company's products that are sold are
recognized at the time of shipment and provision is made for estimated
returns. Reimbursement for ADAGEN sold directly to third party payers is
handled on an individual basis due to the high cost of treatment and
limited patient population. Because of the uncertainty of reimbursement and
the Company's commitment of supply to the patient regardless of whether or
not the Company will be reimbursed, revenues for the sale of ADAGEN are
recognized when reimbursement from third party payers becomes likely.
Royalties under the Company's license agreements with third parties
are recognized when earned (See note 10).
Contract revenues are recorded as the earnings process is completed.
Non-refundable milestone payments that represent the completion of a
separate earnings process are recognized as revenue when earned.
Non-refundable payments received upon entering into license and other
collaborative agreements where the Company has continuing involvement are
recorded as deferred revenue and recognized ratably over the estimated
service period.
Research and Development
Research and development costs are expensed as incurred.
Stock Compensation
The Company maintains a Non-Qualified Stock Option Plan (the "Stock
Option Plan") for which it applies Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for the Stock Option Plan. Stock options
issued to employees are granted with an exercise price equal to the market
price and in accordance with APB No. 25, compensation expense is not
recognized. The Company records compensation expense equal to the value of
stock options granted for consulting services rendered to the Company by
non-employees. The value of the options granted to non-employees is
determined by the Black-Scholes option-pricing model.
The Company issued 25,000 shares of restricted stock to its President
and Chief Executive Officer in conjunction with his commencement of
employment. The fair value of the shares on the grant date will be expensed
over the vesting period of the stock.
Financial Instruments
The carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued expenses
approximate fair value because of the short maturity of these instruments.
The interest rates on notes payable approximates rates for similar types of
borrowing arrangements at June 30, 2001 and therefore the fair value of the
notes payable approximates the carrying value at June 30, 2001.
Cash Flow Information
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents.
F-11
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
There were no conversions of Series A Cumulative Convertible Preferred
Stock ("Series A Preferred Stock" or "Series A Preferred Shares") during
the years ended June 30, 2001 and 1999. During the year ended June 30,
2000, 100,000 shares of Series A Preferred Stock were converted to 227,271
shares of Common Stock. Accrued dividends of $1,947,000 on the Series A
Preferred Shares that were converted, were settled by cash payments.
Additionally, cash payments totaling $19 were made for fractional shares
related to the conversions.
Cash payments for interest were approximately $25,000, $4,000 and
$8,000 for the years ended June 30, 2001, 2000 and 1999, respectively.
There were no income tax payments made for the years ended June 30, 2001,
2000 and 1999.
(3) Comprehensive Income
The following table reconciles net income (loss) to comprehensive income
(loss):
Years ended June 30,
--------------------------------------
2001 2000 1999
----------- ----------- -----------
Net income (loss) $11,525,000 ($6,306,000) ($4,919,000)
Unrealized gain on securities 885,000 -- --
----------- ----------- -----------
Total comprehensive income (loss) $12,410,000 ($6,306,000) ($4,919,000)
=========== =========== ===========
(4) Earnings (loss) Per Common Share
Basic earnings (loss) per share is computed by dividing the net income
(loss) available to common shareholders adjusted for cumulative undeclared
preferred stock dividends for the relevant period, by the weighted average
number of shares of Common Stock issued and outstanding during the periods.
For purposes of calculating diluted earnings per share for the year ended
June 30, 2001, the denominator includes both the weighted average number of
shares of Common Stock outstanding and the number of dilutive Common Stock
equivalents. The number of dilutive Common Stock equivalents includes the
effect of non-qualified stock options calculated using the treasury stock
method and the number of shares issuable upon conversion of the outstanding
Series A Preferred Stock. The number of shares issuable upon conversion of
the Company's 4.5% Convertible Subordinated Notes due 2008 (the "Notes")
have not been included as the effect of their inclusion would be
antidilutive. For the years ended June 30, 2000 and 1999, the exercise or
conversion of all dilutive potential common shares is not included for
purposes of the diluted loss per share calculation as the effect of their
inclusion would be antidilutive due to the net loss recorded for those
periods. As of June 30, 2001, the Company had 9,866,000 dilutive potential
common shares outstanding that could potentially dilute future earnings per
share calculations.
F-12
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table reconciles the basic and diluted earnings (loss) per
share calculation:
Years ended June 30,
----------------------------------------
2001 2000 1999
----------------------------------------
Net income (loss) $11,525,000 ($6,306,000) ($4,919,000)
Less: preferred stock dividends
14,000 14,000 214,000
----------- ------------ ------------
Net income (loss) available
to common stockholders $11,511,000 ($6,320,000) ($5,133,000)
=========== ============ ============
Weighted average number of
common shares issued and
outstanding - basic 41,602,104 38,172,515 35,699,133
Effect of dilutive common stock
equivalents:
Conversion of preferred stock 16,000 -- --
Exercise of non-qualified
stock options 1,988,090 -- --
----------- ------------ ------------
43,606,194 38,172,515 35,699,133
=========== ============ ============
(5) Inventories
Inventories consist of the following:
June 30,
------------------------
2001 2000
---- ----
Raw materials $421,000 $283,000
Work in process 737,000 504,000
Finished goods 694,000 160,000
---------- --------
$1,852,000 $947,000
========== ========
(6) Property and Equipment
Property and equipment consist of the following:
--------------------------- Estimated
2001 2000 useful lives
---- ---- ------------
Equipment $8,692,000 $8,356,000 3-7 years
Vehicles 1,446,000 1,440,000 7 years
Leasehold improvements 24,000 24,000 3 years
3,020,000 2,619,000 3-15 years
----------- -----------
$13,182,000 $12,439,000
=========== ===========
During the years ended June 30, 2001 and 2000, the Company's fixed
asset disposals were approximately $991,000 and $383,000, respectively.
Depreciation and amortization charged to operations relating to
property and equipment totaled $442,000, $348,000 and $692,000 for the
years ended June 30, 2001, 2000 and 1999, respectively.
F-13
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Long-term debt
In June 2001, the Company completed a private placement of
$400,000,000 in 4.5% Convertible Subordinated Notes due July 1, 2008 (the
"Notes"). The Company received net proceeds from this offering of
$387,200,000, after deducting costs associated with the offering. The Notes
bear interest at an annual rate of 4.5%. Accrued interest on the Notes was
approximately $250,000 as of June 30, 2001. The holders may convert all or
a portion of the Notes into Common Stock at any time on or before July 1,
2008. The Notes are convertible into Common Stock at a conversion price of
$70.98 per share, subject to adjustment in certain events. The Notes are
subordinated to all existing and future senior indebtedness. On or after
July 7, 2004, the Company may redeem any or all of the Notes at specified
redemption prices, plus accrued and unpaid interest to the day preceding
the redemption date. Upon the occurrence of a "fundamental change", as
defined in the indenture governing the Notes, holders of the Notes may
require the Company to redeem the Notes at a price equal to 100 percent of
the principal amount. In August 2001, the Company filed a registration
statement with the U.S. Securities and Exchange Commission covering the
resale of the Notes and the Common Stock issuable upon conversion of the
Notes.
(8) Stockholders' Equity
During the year ended June 30, 2001, the Company issued 25,000 shares
of restricted Common Stock to its President and Chief Executive Officer.
Such shares were issued in conjunction with an employment agreement and
vest ratably over five years. Total compensation expense of approximately
$1.5 million shall be recognized over the five year vesting period.
During the year ended June 30, 2000, the Company sold 2,300,000 shares
of Common Stock in a public offering at a gross offering price of $44.50
per share. The offering resulted in gross proceeds of approximately
$102,350,000 and net proceeds of approximately $95,670,000.
During the year ended June 30, 1999, the Company sold 3,983,000 shares
of Common Stock in a private placement to a small group of investors. The
private placement resulted in gross proceeds of approximately $18,919,000
and net proceeds of approximately $17,550,000.
The board of directors has the authority to issue up to 3,000,000
shares of preferred stock, par value $0.01 per share, and to determine the
price and terms, including preferences and voting rights, of those shares
without stockholder approval.
Series A Preferred Stock
The Company's Series A Preferred Shares are convertible into Common
Stock at a conversion rate of $11 per share. The value of the Series A
Preferred Shares for conversion purposes is $25 per share. Holders of the
Series A Preferred Shares are entitled to an annual dividend of $2 per
share, payable semiannually, but only when and if declared by the Board of
Directors, out of funds legally available. Dividends on the Series A
Preferred Shares are cumulative and accrue and accumulate but will not be
paid, except in liquidation or upon conversion, until such time as the
Board of Directors deems it appropriate in light of the Company's then
current financial condition. No dividends are to be paid or set apart for
payment
F-14
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
on the Company's Common Stock, nor are any shares of Common Stock to be
redeemed, retired or otherwise acquired for valuable consideration unless
the Company has paid in full or made appropriate provision for the payment
in full of all dividends which have then accumulated on the Series A
Preferred Shares. Holders of the Series A Preferred Shares are entitled to
one vote per share on matters to be voted upon by the stockholders of the
Company. As of June 30, 2001 and 2000, undeclared accrued dividends in
arrears were $158,000 or $22.54 per share and $144,000 or $20.54 per share,
respectively. All Common Shares are junior in rank to the Series A
Preferred Shares, with respect to the preferences as to dividends,
distributions and payments upon the liquidation, dissolution or winding up
of the Company.
Common Stock
Holders of shares of Common Stock are entitled to one vote per share
on matters to be voted upon by the stockholders of the Company.
As of June 30, 2001, the Company has reserved its common shares for
special purposes as detailed below:
Shares issuable upon conversion of
Series A Preferred Shares 30,000
Non-Qualified Stock Option Plan 4,201,000
Shares issuable upon conversion of Notes 5,635,000
---------
9,866,000
=========
Common Stock Warrants
As of June 30, 2001, there were no warrants outstanding.
During the year ended June 30, 2001, warrants were exercised to
purchase 94,000 shares of the Company's Common Stock. Of this amount 34,000
warrants were issued in connection with the Company's January and March
1996 private placements of Common Stock and 60,000 were issued during the
year ended June 30, 1999 as compensation for consulting services.
During the year ended June 30, 2000, warrants were exercised to
purchase 1,012,000 shares of the Company's Common Stock. Of this amount,
702,000 warrants were issued in connection with our January 1996 private
placement and 134,000 were issued during the year ended June 30, 1999 as
compensation for consulting services. The exercise price of and the number
of shares issuable under these warrants were adjusted under standard
anti-dilution provisions, as defined in the warrants.
During the year ended June 30, 1999, 150,000 warrants were exercised
to purchase 150,000 shares of the Company's Common Stock at $2.50 per
share. These warrants were issued during the year ended June 30, 1996, as
part of the commission due to a real estate broker in connection with the
termination of the Company's former lease at 40 Kingsbridge Road.
F-15
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During the year ended June 30, 1999, the Company issued 200,000
five-year warrants to purchase its Common Stock at $6.50 per share, the
closing price of the Common Stock on the date of grant. The warrants are
consideration for consulting services to be rendered through February 2002.
The estimated fair value of the warrants of approximately $917,000 is being
amortized over the service period of three years. The unamortized portion
is included as a component of other assets with the corresponding current
portion included in other current assets on the consolidated balance sheet
as of June 30, 2001 and 2000.
(9) Independent Directors' Stock Plan
On December 3, 1996, the stockholders voted to approve the Company's
Independent Directors' Stock Plan, which provides for compensation in the
form of quarterly grants of Common Stock to non-executive, independent
directors serving on the Company's Board of Directors. Each independent
director is granted shares of Common Stock equivalent to $2,500 per quarter
plus $500 per Board of Director's meeting attended. The number of shares
issued is based on the fair market value of Common Stock on the last
trading day of the applicable quarter. In October 2000, the Compensation
Committee of the Board of Directors amended the Plan to provide that the
Independent Directors will be entitled to elect to receive up to 50% of the
fees payable in cash with the remainder of the fee to be paid in Common
Stock. During the years ended June 30, 2001, 2000 and 1999, the Company
issued 1,000, 3,000 and 9,000 shares of Common Stock, respectively, to
independent directors, pursuant to the Independent Directors' Stock Plan.
(10) Non-Qualified Stock Option Plan
In November 1987, the Company's Board of Directors adopted a
Non-Qualified Stock Option Plan (the "Stock Option Plan"). As of June 30,
2001, 4,201,000 shares of Common Stock were reserved for issuance pursuant
to options, which may be granted to employees, non-employee directors or
consultants to the Company. The exercise price of the options granted must
be at least 100% of the fair market value of the stock at the time the
option is granted. Options may be exercised for a period of up to ten years
from the date they are granted. The other terms and conditions of the
options generally are to be determined by the Board of Directors, or an
option committee appointed by the Board, at their discretion.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation". The Company continues to use APB No. 25,
"Accounting for Stock Issued to Employees," to account for the Stock Option
Plan. All options granted under the Stock Option Plan are granted with
exercise prices which equal or exceed the fair market value of the stock at
the date of grant. Accordingly, there is no compensation expense recognized
for options granted to employees.
F-16
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following pro forma financial information shows the effect and the
Company's net income (loss) and net income (loss) per share, had
compensation expense been recognized consistent with the fair value method
of SFAS 123.
2001 2000 1999
---- ---- ----
Net income (loss) - as reported $11,525,000 ($6,306,000) ($4,919,000)
Net income (loss) - pro forma 1,609,000 ($10,008,000) ($7,289,000)
Net income (loss) per diluted share - as reported $0.26 ($0.17) ($0.14)
Net income (loss) per diluted share - pro forma $0.04 ($0.26) ($0.21)
The fair value of each option granted during the three years ended
June 30, 2001 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (i) dividend yield of
0%, (ii) expected term of five years, (iii) volatility of 83%, 84% and 86%
and (iv) a risk-free interest rate of 5.72%, 6.19% and 5.06% for the years
ended June 30, 2001, 2000 and 1999, respectively. The weighted average fair
value at the date of grant for options granted during the years ended June
30, 2001, 2000 and 1999 was $56.79, $33.78 and $9.68 per share,
respectively.
The following is a summary of the activity in the Company's Stock Option
Plan:
Weighted
Average
Exercise Range of
Shares Price Prices
------ ----- ------
Outstanding at July 1, 1998 4,422,000 4.06 $ 1.88 to $14.88
Granted at exercise prices which equaled the
fair market value on the date of grant 475,000 9.68 $ 4.88 to $15.75
Exercised (1,001,000) 4.40 $ 2.00 to $9.88
Canceled (172,000) 7.25 $ 2.81 to $14.50
-----------
Outstanding at June 30, 1999 3,724,000 4.51 $ 1.88 to $15.75
Granted at exercise prices which equaled
the fair market value on the date of grant 302,000 33.78 $21.50 to $69.50
Exercised (809,000) 4.25 $ 2.06 to $32.00
Canceled (11,000) 20.53 $ 6.00 to $37.38
-----------
Outstanding at June 30, 2000 3,206,000 7.35 $ 1.88 to $69.50
Granted at exercise prices which equaled
the fair market value on the date of grant 1,150,000 56.79 $44.75 to $73.22
Exercised (1,033,000) 5.25 $ 2.06 to $39.94
Canceled (39,000) 36.31 $14.13 to $58.63
-----------
Outstanding at June 30, 2001 3,284,000 24.98 $ 1.88 to $73.22
===========
F-17
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
As of June 30, 2001, the Stock Option Plan had options outstanding and
exercisable by price range as follows:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$1.88 - $2.69 418,000 3.22 $2.43 418,000 $2.43
$2.75 - $2.94 451,000 4.76 $2.86 451,000 $2.86
$3.38 - $3.50 82,000 4.11 $3.47 82,000 $3.47
$3.56 - $4.50 442,000 2.93 $4.41 442,000 $4.41
$4.63 - $14.13 452,000 6.93 $7.52 412,000 $6.87
$15.75 - $44.75 707,000 8.74 $38.81 132,000 $34.73
$47.19 - $70.00 692,000 9.68 $63.39 2,000 $59.60
$70.69 - $73.22 40,000 9.32 $71.20 --
--------- ---------
3,284,000 6.55 $24.98 1,939,000 $6.23
========= =========
(11) Income Taxes
Under the asset and liability method of Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The Company was
profitable for the year ended June 30, 2001, and accordingly the Company
recognized a tax provision for the year ended June 30, 2001. The tax
provision represents the Company's anticipated Alternative Minimum Tax
liability based on the fiscal 2001 taxable income. The tax provision was
offset by the sale of a portion of our net operating losses for the state
of New Jersey. During March 2001, the Company sold approximately $9,255,000
of its state net operating loss carry forwards and recognized a tax benefit
of $728,000 from this sale.
F-18
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At June 30, 2001 and 2000, the tax effects of temporary differences that
give rise to the deferred tax assets and deferred tax liabilities are as
follows:
2001 2000
---- ----
Deferred tax assets:
Inventories $ 116,000 $ 603,000
Investment valuation reserve 78,000 86,000
Contribution carryover 36,000 28,000
Compensated absences 190,000 157,000
Excess of financial statement over tax depreciation 862,000 924,000
Royalty advance - Aventis 396,000 395,000
Non-deductible expenses 315,000 1,025,000
Federal and state net operating loss carryforwards 63,662,000 50,808,000
Research and development and investment tax
Credit carryforwards 9,851,000 8,860,000
----------- -----------
Total gross deferred tax assets 75,506,000 62,886,000
Less valuation allowance (74,800,000) (62,180,000)
----------- -----------
Net deferred tax assets 706,000 706,000
----------- -----------
Deferred tax liabilities:
Book basis in excess of tax basis of acquired assets (706,000) (706,000)
----------- -----------
Net deferred tax $ 0 $ 0
=========== ===========
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
net change in the total valuation allowance for the years ended June 30,
2001 and 2000 was an increase of $12,620,000 and $6,775,000, respectively.
The tax benefit assumed using the federal statutory tax rate of 34% has
been reduced to an actual benefit of zero excluding sale of net operating
losses referred to above, due principally to the aforementioned valuation
allowance. Subsequently recognized tax benefits as of June 30, 2001
attributed to stock option deductions of $26,500,000 relating to the
valuation allowance for deferred tax assets will be allocated to additional
paid-in capital.
At June 30, 2001, the Company had federal net operating loss
carryforwards of approximately $168,901,000 for tax reporting purposes,
which expire in the years 2002 to 2021. The Company also has investment tax
credit carryforwards of approximately $3,200 and federal research and
development tax credit carryforwards of approximately $7,784,000 for tax
reporting purposes, which expire in the years 2002 to 2021. In addition,
the Company has $2,067,000 state research and development tax credit
carryforwards, which expire in the years 2001 to 2008. The Company's
ability to use such net operating loss, investment and research and
development tax credits carryforwards are subject to certain limitations
due to ownership changes, as defined by rules pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended. Of the deferred tax asset
valuation allowance related to the net operating loss carryforwards,
approximately $66,479,000 relates to a tax deduction for non-qualified
stock options. The Company will increase capital contributed in excess of
par when these benefits are deemed to be realizable.
F-19
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In addition, the net operating loss carryforward of $168,901,000
includes $39,945,000 from the acquisition of Enzon, Labs, Inc. which is
limited to a maximum of $4,921,000.
(12) Significant Agreements
Schering Agreement
In November 1990, the Company entered into an agreement with
Schering-Plough. Under this agreement, Schering-Plough agreed to apply
Enzon's PEG technology to develop a modified form of Schering-Plough's
INTRON A. Schering-Plough is responsible for conducting and funding the
clinical studies, obtaining regulatory approval and marketing and
manufacturing the product worldwide on an exclusive basis and Enzon will
receive royalties on worldwide sales of PEG-INTRON for all indications. The
royalty percentage to which Enzon is entitled will be lower in any country
where a pegylated alpha-interferon product is being marketed by a third
party in competition with PEG-INTRON, where such third party is not
Hoffmann-La Roche.
PEG-INTRON received marketing authorization in the European Union as a
stand-alone therapy for hepatitis C in May 2000 and as a combination
therapy with REBETOL in March 2001. Schering-Plough received FDA approval
for PEG-INTRON as a stand-alone therapy for the treatment of hepatitis C in
January 2001 and as a combination therapy with REBETOL for the treatment of
hepatitis C in August 2001.
In June 1999, the Company amended its agreement with Schering-Plough,
which resulted in an increase in the effective royalty rate that it
receives for PEG-INTRON sales. In exchange, the Company relinquished its
option to retain exclusive U.S. manufacturing rights for this product. In
addition, the Company granted Schering-Plough a non-exclusive license under
some of its PEG patents relating to Branched or U-PEG technology. This
license gives Schering-Plough the ability to sublicense rights under these
patents to any party developing a competing interferon product. During
August 2001, Schering-Plough, pursuant to a cross license agreement entered
into as part of the settlement of certain patent lawsuits, granted
Hoffmann-La Roche a sublicense under the Company's Branched PEG patents to
allow Hoffmann-La Roche to make, use, and sell its pegylated
alpha-interferon product, PEGASYS.
In January 2001 the Company earned a final $2,000,000 million
milestone payment upon the FDA's approval of PEG-INTRON and in February
2000 the Company earned a $1,000,000 million milestone payment when the FDA
accepted the Biologics License Application, or BLA, for PEG-INTRON filed by
Schering-Plough. These milestone payments were recognized when received, as
the earnings process was complete. Schering-Plough's obligation to pay the
Company royalties on sales of PEG-INTRON terminates, on a
country-by-country basis, upon the later of the date the last patent of the
Company to contain a claim covering PEG-INTRON expires in the country or 15
years after the first commercial sale of PEG-INTRON in such country.
Schering-Plough has the right to terminate this agreement at any time
if the Company fails to maintain the requisite liability insurance of
$5,000,000.
F-20
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Aventis Agreement
Under the Company's Amended Aventis Pharmaceuticals, (formerly Rhone
Poulenc Rorer Pharmaceuticals, Inc.) U.S. License Agreement (the "Amended
License Agreement"), Enzon granted an exclusive license to Aventis to sell
ONCASPAR in the U.S. Enzon has received licensing payments totaling
$6,000,000 and is entitled to royalties on net sales of ONCASPAR. During
July 2000, the Company further amended the license agreement with Aventis
to increase the base royalty payable to the Company on net sales of
ONCASPAR from 23.5% to 27.5% on annual sales up to $10,000,000 and 25% on
annual sales exceeding $10,000,000. These royalty payments will include
Aventis' cost of purchasing ONCASPAR under a separate supply agreement. The
agreement was also extended until 2016. Additionally, the Amended License
Agreement eliminated the super royalty of 43.5% on net sales of ONCASPAR
which exceed certain agreed-upon amounts. The Amended Aventis U.S. License
Agreement also provides for a payment of $3,500,000 in advance royalties,
which was received in January 1995.
The payment of royalties to Enzon under the Amended License Agreement
will be offset by an original credit of $5,970,000, which represents the
royalty advance plus reimbursement of certain amounts due to Aventis under
the original License Agreement and interest expense. The royalty advance is
shown as a long-term liability, with the corresponding current portion
included in accrued expenses on the Consolidated Balance Sheets as of June
30, 2001 and 2000. The royalty advance will be reduced as royalties are
recognized under the Amended License Agreement. Through June 30, 2001 an
aggregate of $4,307,000 in royalties payable by Aventis has been offset
against the original credit.
The Amended License Agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the
agreement or, if the agreement is terminated earlier, five years after
termination. The Amended License Agreement terminates in December 2016 but
automatically renews for additional one-year periods unless either party
notifies the other in writing that it intends not to renew the agreement at
least three months prior to the end of the current term. It can be
terminated earlier by either party due to a default by the other. In
addition, Aventis may terminate the Amended License Agreement at any time
upon one year's prior notice to the Company or if the Company is unable to
supply product for more than 60 days under the Company's separate supply
agreement with Aventis. When the Amended License Agreement terminates, all
rights granted to Aventis under the agreement will revert to Enzon. Under a
separate supply agreement, Aventis is required to purchase from Enzon all
of its product requirements for sales of ONCASPAR in North America. If the
Company is unable to supply product to Aventis, under the supply agreement
for more than 60 days for any reason other than a force majeure event,
Aventis may terminate the supply agreement and the Company will be required
to exclusively license Aventis the know-how required to manufacture
ONCASPAR for the period of time during which the agreement would have
continued had the license agreement not been terminated.
F-21
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During August 2000, the Company made a $1,500,000 million payment to
Aventis which was accrued at June 30, 2000 to settle a disagreement over
the purchase price of ONCASPAR under the supply agreement and to settle
Aventis' claim that Enzon should be responsible for Aventis' lost profits
while ONCASPAR is under temporary labeling and distribution modifications.
In November 1998, the Company and the FDA agreed to temporary labeling and
distribution modifications for ONCASPAR, as a result of certain previously
disclosed manufacturing problems. These temporary modifications resulted in
Enzon, rather than Aventis distributing ONCASPAR directly to patients on an
as needed basis.
The settlement also calls for a payment of $100,000 beginning in May
2000 and for each month that expires prior to the resumption of normal
distribution and labeling of this product by Aventis. During the quarter
ended December 31, 2000, the FDA gave final approval to the Company's
manufacturing changes, which were made to correct these problems, and all
previously imposed restrictions on ONCASPAR were lifted. This will allow
for resumption of normal distribution and labeling of this production by
Aventis, which is expected to occur during the first quarter of calendar
2002.
Under separate license agreements, Aventis has exclusive rights to
sell ONCASPAR in Canada and Mexico. These agreements provide for Aventis to
seek to obtain marketing approval of ONCASPAR in Canada and Mexico and for
the Company to receive royalties on sales of ONCASPAR in these countries,
if any. These agreements expire 10 years after the first commercial sale of
ONCASPAR in each country, but automatically renew for consecutive five-year
periods unless either party elects to terminate at least three months prior
to the end of the current term. Aventis may terminate these agreements on
one year's prior notice to the Company.
The Company also has a license agreement with Aventis for the Pacific
Rim region, specifically, Australia, New Zealand, Japan, Hong Kong, Korea,
China, Taiwan, Philippines, Indonesia, Malaysia, Singapore, Thailand and
Vietnam, (the "Pacific Rim"). The agreement provides for Aventis to
purchase ONCASPAR for the Pacific Rim from the Company at certain
established prices which increase over the ten year term of the agreement.
Under the agreement, Aventis is responsible for obtaining additional
approvals and indications in the licensed territories. The agreement also
provides for minimum purchase requirements for the first four years of the
agreement.
MEDAC Agreement
The Company also granted an exclusive license to MEDAC to sell
ONCASPAR and any PEG-asparaginase product, developed by the Company or
MEDAC, during the term of the agreement in Western Europe, Turkey and
Russia. The Company's supply agreement with MEDAC provides for MEDAC to
purchase ONCASPAR from the Company at certain established prices, which
increase over the initial five-year term of the agreement. Under the
license agreement, MEDAC is responsible for obtaining additional approvals
and indications in the licensed territories, beyond the currently approved
hypersensitive indication in Germany. Under the agreement, MEDAC is
required to meet certain minimum purchase requirements. The MEDAC license
terminates in October 2001. The Company is currently in negotiations with
MEDAC to enter into a new license agreement.
F-22
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Gentiva Agreement
The Company has an agreement with Gentiva Health Services ("Gentiva") to
purchase and distribute ADAGEN and ONCASPAR in the United States and
Canada. The agreement provides for Gentiva to purchase the products from
the Company at prices established in the agreement. Gentiva also receives a
service fee for the distribution of the products.
(13) Commitments and Contingencies
In the course of normal operations, the Company is subject to the
marketing and manufacturing regulations as established by the FDA. During
fiscal 1999, the Company agreed with the FDA to temporary labeling and
distribution modifications for ONCASPAR due to increased levels of
particulates in certain batches of ONCASPAR, which the Company
manufactured. The Company, rather than its marketing partner, Aventis, took
over distribution of ONCASPAR directly to patients, on an as needed basis.
During fiscal 2001, the FDA gave final approval to manufacturing
changes which the Company made to correct these manufacturing, and all
previous imposed restrictions were lifted. This will allow for the
resumption of normal distribution and labeling of this product by the
Company's partner, Aventis, which is expected to occur during the first
quarter of calendar 2002.
During August 2000, the Company made a $1.5 million payment to Aventis
which was accrued for at June 30, 2000 to settle a disagreement over the
purchase price of ONCASPAR under the supply agreement and to settle
Aventis' claim that the Company should be responsible for Aventis' lost
profits while ONCASPAR is under the temporary labeling and distribution
modifications described above. The settlement also calls for a payment of
$100,000 beginning in May 2000 and for each month that expires prior to
Aventis' resumption of marketing and distribution of ONCASPAR.
During April 2000, the Company agreed to binding arbitration to settle
a lawsuit, filed by LBC Capital Resources, Inc. ("LBC") a former financial
advisor, in the United States District Court for the District of New
Jersey. The arbitrator awarded LBC a $6,000,000 judgment. In its suit LBC
claimed that under a May 2, 1995 letter agreement between LBC and the
Company, LBC was entitled to a commission in connection with the Company's
January and March 1996 private placements, comprised of $675,000 and
warrants to purchase 1,250,000 shares of the Company's Common Stock at an
exercise price of $2.50 per share. As a result of the arbitration award,
the Company recognized a net charge to selling, general and administrative
expenses of approximately $2,600,000 during the third quarter of the year
ended June 30, 2000. The charge represents the net
F-23
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
profit and loss effect of the incremental reserves provided specifically
for this litigation, offset by the reduction during the quarter of
$2,900,000 of other contingency accruals that were deemed to not be
required for certain other contingencies.
The Company has agreements with certain members of its upper
management, which provide for payments following a termination of
employment occurring after a change in control of the Company. The Company
also has an employment agreement, dated May 9, 2001 with its Chief
Executive Officer which provides for severance payments in addition to the
change in control provisions discussed above. In addition, the Company has
entered into retention agreements with certain employees, which provide for
payment in the event the employee is terminated prior to May 30, 2002.
(14) Leases
The Company has several leases for office, warehouse, production and
research facilities and equipment.
Future minimum lease payments, net of subleases, for noncancelable
operating leases with initial or remaining lease terms in excess of one
year as of June 30, 2001 are:
Year ending Operating
June 30, leases
-------- ------
2002 $717,000
2003 779,000
2004 766,000
2005 765,000
2006 765,000
Later years, through 2007 1,222,000
----------
Total minimum lease payments $5,014,000
==========
Rent expense amounted to $856,000, $1,055,000 and $1,394,000 for the
years ended June 30, 2001, 2000 and 1999, respectively.
For the year ended June 30, 1999, rent expense is net of subrental
income of $110,000. As of June 30, 1999, the Company no longer subleased
any portion of its facilities.
(15) Retirement Plans
The Company maintains a defined contribution, 401(k) pension plan for
substantially all its employees. The Company currently matches 50% of the
employee's contribution of up to 6% of compensation, as defined. The
Company's match is invested solely in a fund which purchases the Company's
Common Stock in the open market. Total Company contributions for the years
ended June 30, 2001, 2000 and 1999 were $156,000, $128,000 and $115,000,
respectively.
F-24
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Accrued Expenses
Accrued expenses consist of:
June 30,
-----------------------
2001 2000
---- ----
Accrued wages and vacation $1,596,000 $1,238,000
Accrued Medicaid rebates 943,000 962,000
Unearned revenue 630,000 854,000
Contract and legal accrual -- 1,500,000
Accrued costs associated with
subordinated notes offering 371,000 --
Accrued interest payable 250,000 --
Other 950,000 1,153,000
---------- ----------
$4,740,000 $5,707,000
========== ==========
(17) Business and Geographical Segments
The Company is managed and operated as one business segment. The
entire business is comprehensively managed by a single management team that
reports to the Chief Executive Officer. The Company does not operate
separate lines of business or separate business entities with respect to
any of its products or product candidates. In addition, the Company does
not conduct any of its operations outside of the United States.
Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by location and does
not have separately reportable segments as defined by SFAS No. 131.
During the years ended June 30, 2001, 2000 and 1999, the Company had
export sales and royalties recognized on export sales of $11,115,000,
$4,137,000 and $3,075,000, respectively. Of these amounts, sales and
royalties in Europe and royalties recognized on sales in Europe represented
$10,418,000, $3,617,000 and $2,559,000 during the years ended June 30,
2001, 2000 and 1999, respectively.
ADAGEN sales represent approximately 64%, 78% and 90% of the Company's
total net sales for the year ended June 30, 2001, 2000 and 1999,
respectively. ADAGEN's Orphan Drug designation under the Orphan Drug Act
expired in March 1997. The Company believes the expiration of ADAGEN's
Orphan Drug designation will not have a material impact on the sales of
ADAGEN. A portion of the Company's ADAGEN sales for the years ended June
30, 2001, 2000 and 1999, were made to Medicaid patients.
F-25
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(18) Quarterly Financial Data (unaudited)
The tables below summarize the Company's unaudited quarterly operating
results for fiscal years 2001 and 2000.
Three Months Ended
September 30, December 31, March 31, June 30, Fiscal Year
2000 2000 2001 2001 2001
------------------------------------------------------------------------
Revenues $ 5,173,614 $ 6,019,145 $ 9,931,754 $ 10,463,196 $ 31,587,709
Net income 571,052 2,137,483 5,508,221 3,308,308 11,525,064
Net income per common share:
Basic 0.01 0.05 0.13 0.08 0.28
Diluted 0.01 0.05 0.13 0.08 0.26
Three Months Ended
September 30, December 31, March 31, June 30, Fiscal Year
1999 1999 2000 2000 2000
------------------------------------------------------------------------
Revenues $ 2,913,813 $ 3,765,072 $ 5,723,117 $ 4,615,795 $ 17,017,797
Net loss (1,950,463) (1,509,731) (1,684,944) (1,161,326) (6,306,464)
Net loss per common share:
Basic (0.05) (0.04) (0.04) (0.03) (0.17)
Diluted (0.05) (0.04) (0.04) (0.03) (0.17)
F-26
EXHIBIT INDEX
Exhibit Page
Numbers Description Number
------- ----------- ------
10.13 Form of Employee Retention Agreement dated as of
August 3, 2001 between the Company and certain key employees E-2
12.1 Computation of Ratio of Earnings to Fixed Charges E-13
21.0 Subsidiaries of Registrant E-14
23.0 Consent of KPMG LLP E-15
E-1
Exhibit 10.13
EMPLOYEE RETENTION AGREEMENT
AGREEMENT by and between Enzon, Inc., a Delaware corporation (the
"Company"), and [ ](the "Employee"), dated as of the 3rd day of
August, 2001 (the "Effective Date").
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its stockholders to assure
that the Company will have the continued services and dedication of the
Employee, notwithstanding the change in the chief executive officer of the
Company which occurred on May 31, 2001 ("Change in CEO"). The Board believes it
is imperative to diminish the inevitable distraction of the Employee by virtue
of the personal uncertainties and risks created by the Change in CEO and to
encourage the Employee's full attention and dedication to the Company and to
provide the Employee with compensation and benefits arrangements which ensure
that the compensation and benefits expectations of the Employee will be
satisfied and are competitive with those of other corporations. Therefore, in
order to accomplish these objectives, the Board has caused the Company to enter
into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. CERTAIN DEFINITIONS
(a) Annual Base Salary. "Annual Base Salary" shall mean the salary which is
paid as consideration for the Employee's service during the calendar year,
excluding any special form of compensation, cash or otherwise, such as
incentives, commissions, bonuses, stock options or other stock based forms of
compensation or any type of fringe benefit.
(b) Cause. "Cause" shall mean:
(i) a material breach by the Employee of the Employee's duties (other
than as a result of incapacity due to physical or mental illness) which is
demonstrably willful and deliberate on the Employee's part, which is
committed in bad faith or without reasonable belief that such breach is in
the best interests of the Company;
(ii) the Employee's conviction of any crime involving moral turpitude
or any felony; or
(iii) the willful engaging by the Employee in conduct that is
demonstrably and materially injurious to the Company.
(c) Compensation Committee. "Compensation Committee" shall mean the
Compensation Committee of the Board or such other Committee of the Board as
shall administer the Company's option plans.
(d) Date of Termination. "Date of Termination" means (i) if the Employee's
Full-Time Employment with the Company is terminated by the Company for Cause, or
by the Employee for Good Reason, the date of receipt of the Notice of
Termination or any later date
E-2
specified therein, as the case may be, and (ii) if the Employee's Full-Time
Employment with the Company is terminated by the Company other than for Cause,
the Date of Termination shall be the date on which the Company notifies the
Employee of such termination.
(e) Employment Period. "Employment Period" began as of May 31, 2001 and
ends as of the close of business on May 30, 2002.
(f) Full-Time Employment. "Full-Time Employment" shall mean employment for
at least 37.5 hours per week.
(g) Good Reason. "Good Reason" shall mean:
(i) a diminution in the Employee's position (including status,
offices, title and reporting requirements), authority, duties or
responsibilities or any other action by the Company which results in a
diminution in such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent
action not taken in bad faith and which is remedied by the Company promptly
after receipt of notice thereof given by the Employee;
(ii) the Company's requiring the Employee to be based at any office or
location other than (A) the office located at 20 Kingsbridge Road,
Piscataway, New Jersey, or (B) any office which is less than twenty (20)
miles from such location;
(iii) a reduction by the Company in the Employee's Annual Base Salary
below the Annual Base Salary payable to by Employee as of the date the
Employment Period began; or
(iv) the failure by the Company to provide employee benefit plans,
programs, policies and practices (including, without limitation, retirement
plans and medical, dental, life and disability insurance coverage) to the
Employee and the Employee's family and dependents (if applicable) that
provide substantially similar benefits, in terms of aggregate monetary
value, to the Employee and the Employee's family and dependents (if
applicable) at substantially similar costs to the Employee as the benefits
provided by those plans, programs, policies and practices in effect as of
the date the Employment Period began.
For purposes of this Section 1(g), any good faith determination of "Good Reason"
made by the Employee shall be conclusive.
(h) Notice of Termination. Any termination by the Company for Cause or by
the Employee for Good Reason during the Employment Period shall be communicated
by Notice of Termination to the other party hereby given in accordance with
Section 8(b). For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Employee's employment under the provision so indicated and (iii) if the Date
of Termination is other than the date of receipt of such notice, specifies the
termination date (which date shall be not more than 15 days after the giving of
such notice). The failure by the Employee or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of the Employee or the Company
E-3
hereunder or preclude the Employee or the Company from asserting such fact or
circumstance in enforcing the Employee's or the Company's rights hereunder.
2. OBLIGATIONS OF THE COMPANY UPON TERMINATION
(a) If, during the Employment Period, the Company shall terminate the
Employee's Full-Time Employment with the Company other than for Cause or the
Employee shall terminate his Full-Time Employment with the Company for Good
Reason:
(i) The Company shall pay to the Employee, as severance, Employee's
Annual Base Salary in effect as of the Date of Termination. Such severance
payment shall be made during the twelve (12) months following the Date of
Termination in accordance with the Company's standard payroll and
withholding practice.
(ii) As severance, Employee will be entitled to participate in the
bonus pool which may be awarded to the officers of the Company for the year
in which such termination occurs (and any prior year with respect to which
a bonus was awarded to Employee but not paid) to the same extent as if
Employee's Full-Time Employment with the Company had not terminated during
the year for which the bonus is awarded; provided that the amount of the
bonus awarded to Employee will be pro rated based on the number of days
during such year on which Employee was employed with the Company on a
Full-Time basis. For example, if Employee's Full-Time Employment with the
Company covers six months of the year for which the bonus is awarded he
would receive 50% of the bonus he would have been entitled to receive if
his Full-Time Employment with the Company had covered the entire year.
Nothing contained herein shall guarantee that any bonus will be paid to
Employee and Employee will only receive a bonus as determined hereunder if
the other officers of the Company are awarded a bonus.
(iii) Effective as of the Date of Termination, the Company agrees to
provide Employee, and any spouse and/or dependents receiving medical and
dental coverage on the Date of Termination under a group health plan
sponsored by the Company ("Family Members"), with continued group health
coverage, including medical and dental coverage, as otherwise required
under applicable state continuation law and the Consolidated Omnibus Budget
Reconciliation Act of 1986, 29 U.S.C. ss.ss. 1161-1168; 26 U.S.C. ss.
4980B(f), as amended, and all applicable regulations (referred to
collectively as "COBRA"). The Company will reimburse Employee for the total
applicable premium cost for the medical and dental COBRA continuation
coverage elected for Employee and his or her Family Members for a period of
up to twelve (12) months commencing on the Date of Termination. Such
reimbursements shall be subject to all applicable taxes, including but not
limited to state and federal income and employment taxes.
(iv) In the event Employee obtains Full-Time Employment within twelve
(12) months of the Date of Termination with an entity other than the
Company, and Employee and his or her Family Members become eligible for a
group health plan of such entity providing medical and/or dental coverage,
the Company's obligation to reimburse Employee for the total applicable
premium cost of medical and dental continuation coverage elected shall
cease as of the date such coverage for Employee and his or her Family
Members under such group health plan becomes effective.
E-4
(v) For purposes of the Company's Non-Qualified Stock Option Plan and
determining the vesting of options granted to Employee under such Plan, the
Compensation Committee has determined that Employee will continue to be
deemed to be an employee of the Company during the period in which he works
for the Company as a part-time employee or makes himself available to work
for the Company as a part-time employee pursuant to Section 3 hereof,
provided that if Employee refuses or fails to provide such part-time
services, or if Employee accepts Full-Time Employment with any other
employer during such period, or if Employee dies during such period, he
will no longer be deemed to be an employee of the Company for such purposes
as of the date he refuses or fails to provide such part-time services, or
the date he commences such Full-Time Employment, or the date he dies.
(vi) In the event that Employee dies after becoming fully entitled to
the severance payments provided in section 2(a)(i) hereof but before the
Employee actually receives all of such payments, any remaining unpaid
payments will be made first to the Employee's surviving spouse, if any, and
if there is no surviving spouse, to the Employee's estate. In the event
Employee dies after becoming entitled to the benefits provided in section
2(a)(iii) hereof, the Company shall continue to reimburse Employee's Family
Members for the premium cost for COBRA continuation coverage through the
date which is twelve (12) months from the Date of Termination.
(vii) [Hardman only: The Company shall waive, in writing, the
obligation of Employee pursuant to the letter dated ________, from the
Company to Employee, to reimburse the Company for relocation costs paid by
the Company on behalf of Employee in the amount of [_____________.]
(b) This Agreement is unfunded. No fund is being set aside or allocated
specifically for the purpose of this Agreement. All severance payments shall be
paid out of the general assets of the Company. Employee shall not have any
secured or preferred interest by way of a trust, escrow, lien or otherwise in
any specific asset of the Company for unpaid severance payments.
(c) No compensation or benefits shall be payable to Employer hereunder in
the event Employee's employment with the Company is terminated for any reason
after the Employment Period or in the event Employee's employment with the
Company is terminated for Cause during the Employment Period or in the event
Employee voluntarily terminates his employment with the Company other than for
Good Reason during the Employment Period. In the event Employee accepts
Full-Time Employment with an employer other than the Company during the twelve
(12) months following the Date of Termination, Employee shall promptly notify
the Company that he has accepted such Full-Time Employment and advise the
Company of the anticipated commencement date for such Full-Time Employment.
Employee shall no longer be entitled to receive compensation payable under
section 2(a)(i) hereof as of the date Employee commences Full-Time Employment
with such new employer.
3. OBLIGATIONS OF THE EMPLOYEE UPON TERMINATION
(a) In the event the Company terminates Employee's Full-Time Employment
other than for Cause during the Employment Period or Employee terminates his
Full-Time Employment with the Company for Good Reason during the Employment
Period, Employee will
E-5
continue to work up to five (5) hours per month for the Company as a part-time
employee as requested by the Company for a period of one (1) year following the
Date of Termination.
(b) Employee may perform the part-time employment required pursuant to
Section 3(a) hereof by phone, if acceptable to the Company, or at the Company's
offices in Piscataway, New Jersey. The Company will use its best efforts to
aggregate services requested in a month.
4. NONCOMPETITION AND CONFIDENTIALITY
(a) The "Noncompete Period" shall commence upon execution of this Agreement
and continue through the date which is one year following the date on which
Employee's Full-Time Employment with the Company terminates. In consideration
for the benefits provided to Employee under this Agreement, during the
Noncompete Period, Employee will not directly, or indirectly, whether as an
officer, director, stockholder, partner, proprietor, associate, employee,
consultant, representative or otherwise, become, or be interested in or
associated with any other person, corporation, firm, partnership or entity,
engaged to a significant degree in (x) developing, marketing or selling enzymes,
protein-based biopharmaceuticals or other pharmaceuticals that are modified
using polyethylene glycol ("PEG"), (y) developing, marketing or selling
single-chain antigen-binding proteins or (z) any technology or area of business
in which the Company becomes involved to a significant degree during the term of
Employee's Full-Time Employment with the Company . For purposes of the preceding
sentence to determine whether any entity is engaged in such activities to a
"significant degree" comparison will be made to the Company's operations at that
time. In other words, an entity will be deemed to be engaged in an activity to a
significant degree if the number of employees and/or amount of funds devoted by
such entity to such activity would be material to the Company's operations at
that time. Notwithstanding anything to the contrary contained herein, Employee
shall be entitled to work with or for (i) an entity that is developing,
marketing or manufacturing monoclonal antibodies, (ii) a licensee of the Company
if the only activities conducted by such licensee that would be covered by the
restrictions in this Section 4(a) are conducted pursuant to, and covered by, the
license granted by the Company and (iii) an entity that is engaged in a research
project that would be covered by the restrictions in this Section 4(a) if such
research project is not material to such entity and Employee would have no
direct involvement in such research project; provided in the case of employment
covered by clauses (ii) and (iii) Employee shall have provided the Board with a
detailed description of the proposed employment and obtained the written consent
of the Board (which consent will not be unreasonably withheld) prior to
commencing any such employment. Employee is hereby prohibited from ever using
any of the Company's proprietary information or trade secrets to conduct any
business, except for the Company's business, while Employee is employed by the
Company. The provision contained in the preceding sentence shall survive the
termination of Employee's employment with the Company. In the event Employee
breaches any of the covenants set forth in this Section 4(a), the running of the
period of restriction set forth herein shall recommence upon Employee's
compliance with the terms of this Section 4(a). Notwithstanding the above,
ownership by the Employee, as a passive investment, of less than five percent of
the outstanding shares of capital stock of any corporation listed on a national
securities exchange or publicly traded on Nasdaq shall not constitute a breach
of this Section 4(a).
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(b) Employee recognizes and acknowledges that information relating to the
Company's business, including, but not limited to, information relating to
patent applications filed or to be filed by the Company, trade secrets relating
to the Company's products or services, and information relating to the Company's
research and development activities, shall be and remain the sole and exclusive
property of the Company and is a valuable, special and unique asset of the
Company's business. The Employee will not, during or after the term of his
employment by the Company, disclose any such information to any person,
corporation, firm, partnership or other entity; provided, however, that,
notwithstanding the foregoing, during the term of Employee's Full-Time
Employment with the Company, Employee may make such disclosure if such
disclosure is in the Company's best interests, is made in order to promote and
enhance the Company's business, and sufficient arrangements are made with the
person or entity to whom such disclosure is made to ensure the confidentiality
of such disclosure. The provisions of this Section 4(b) shall survive the
termination of Employee's employment with the Company.
(c) Employee agrees that the covenants and agreements contained in this
Section 4 are the essence of this Agreement; that each of such covenants is
reasonable and necessary to protect and preserve the Company's interests,
properties and business; that irreparable loss and damage will be suffered by
the Company should Employee breach any of such covenants and agreements; that
given the unique nature of the Company's business such loss and damage would be
suffered by the Company regardless of where a breach of such covenants and
agreements occur, thus, making the absence of a geographical limitation
reasonable; that each of such covenants and agreements is separate, distinct and
severable not only from the other of such covenants and agreements but also from
the other and remaining provisions of this Agreement; that the unenforceability
or breach of any such covenant or agreement shall not affect the validity or
enforceability of any other such covenant or agreement or any other provision of
this Agreement; and that, in addition to other remedies available to it, the
Company shall be entitled to both temporary and permanent injunctions and any
other rights or remedies it may have, at law or in equity, to prevent a breach
or contemplated breach by Employee of any such covenants or agreements.
Notwithstanding anything herein to the contrary, if a period of time or other
restriction specified in this Section 4 should be determined to be unreasonable
in a judicial proceeding, then the period of time or other restriction shall be
revised so that the covenants contained in this Section 4 may be enforced during
such period of time and in accordance with such other restrictions as may be
determined to be reasonable.
(d) Employee agrees to assign and does hereby assign to the Company all
tangible and intangible property, including, but not limited to, inventions,
developments or discoveries conceived, made or discovered by Employee solely or
in collaboration with others during the term of Employee's employment with the
Company, which relate in any manner to the Company's business.
5. NONEXCLUSIVITY OF RIGHTS
Nothing in this Agreement shall prevent or limit the Employee's continuing
or future participation in any plan, program, policy or practice provided by the
Company and for which the Employee may qualify, nor shall anything herein limit
or otherwise affect such rights as the Employee may have under any contract or
agreement with the Company. Amounts which are vested benefits or which the
Employee is otherwise entitled to receive under any plan, policy,
E-7
practice or program of or any contract or agreement with the Company at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
6. FULL SETTLEMENT; DETERMINATIONS; RESOLUTION OF DISPUTES
(a) The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Employee or others. In no event
shall the Employee be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Employee under any of
the provisions of this Agreement and such amounts shall not be reduced whether
or not the Employee obtains other employment, except as otherwise provided in
this Agreement. The Company agrees to pay promptly upon invoice, to the full
extent permitted by law, all legal fees and expenses which the Employee may
incur as a result of any contest by the Company or the Employee of the validity
or enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Employee concerning the amount of any payment pursuant to this Agreement) in the
event Employee shall prevail to a substantial extent in such contest action.
(b) The following claims procedure shall be the claims procedure for the
resolution of disputes and disposition of claims arising under this Agreement:
(i) The Employee or beneficiary of the Employee may file with the
Company a written request for benefits under this Agreement in a form and
manner prescribed by the Company. Within thirty (30) days after the filing
of such request, the Company shall notify the claimant in writing whether
the request is upheld or denied, in whole or in part. If the request is
denied, in whole or in part, the Company shall state in writing: (i) the
specific reasons for the denial; (ii) the specific references to the
pertinent provisions of this Agreement on which the denial is based; (iii)
a description of any additional material or information necessary for the
claimant to perfect the claim and an explanation of why such material or
information is necessary; and (iv) an explanation of the claims review
procedure set forth herein.
(ii) Within sixty (60) days after receipt of an initial benefit
determination in which benefits have been denied, in whole or in part, the
claimant may file with the Company a written request for a review and may,
in conjunction therewith, submit written issues and comments. Within thirty
(30) days after the request for review was filed, the Company shall make a
decision on the request for review and notify the claimant in writing of
the Company's decision.
(c) If there shall be any dispute between the Company and the Employee (i)
in the event of any termination of the Employee's Full-Time Employment by the
Company, whether such termination was for Cause, or (ii) in the event of any
termination of Full-Time Employment by the Employee, whether Good Reason
existed, then, unless and until there is a final, nonappealable judgment by a
court of competent jurisdiction declaring that such termination was for Cause or
that the determination by the Employee of the existence of Good Reason was not
made in good faith, the Company shall pay all amounts, and provide all benefits,
to the
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Employee and/or the Employee's family or other beneficiaries, as the case may
be, that the Company would be required to pay or provide pursuant to Section 2
hereof as though such termination were by the Company without Cause or by the
Employee with Good Reason; provided, however, that the Company shall not be
required to pay any disputed amounts pursuant to this paragraph except upon
receipt of an undertaking satisfactory in form and substance to the Company by
or on behalf of the Employee to repay to the Company all such amounts to which
the Employee is ultimately adjudged by such court not to be entitled.
7. SUCCESSORS
(a) This Agreement is personal to the Employee and without the prior
written consent of the Company shall not be assignable by the Employee otherwise
than by will or the laws of descent and distribution. This Agreement shall inure
to the benefit of and be enforceable by the Employee's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
8. MISCELLANEOUS
(a) This Agreement shall, except to the extent that federal law is
controlling, be governed by and construed in accordance with the laws of the
State of New Jersey, without reference to principles of conflict of laws. The
captions of this Agreement are not part of the provisions hereof and shall have
no force or effect. This Agreement may not be amended or modified otherwise than
by a written agreement executed by the parties hereto or their respective
successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Employee:
-------------------
-------------------
-------------------
If to the Company:
Enzon, Inc.
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20 Kingsbridge Road
Piscataway, New Jersey 08854
Attention: Corporate Secretary
with a copy to:
Dorsey & Whitney, LLP
250 Park Avenue
New York, NY 10177
Attention: Kevin Collins
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state or local taxes as shall be required to be withheld pursuant
to any applicable law or regulation.
(e) The Employee's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Employee or the Company may have hereunder,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(f) The Employee and the Company acknowledge that, except as may otherwise
be provided under any other written agreement between the Employee and the
Company, the employment of the Employee by the Company is "at will" and, subject
to the terms of this Agreement, may be terminated by either the Employee or the
Company at any time.
(g) This Agreement contains the complete agreement between the parties and
supersedes any prior understandings, agreements or representations by or between
the parties, written or oral, which may have related to the subject matter
hereof in any way, including, without limitation, the Employee's Secrecy,
Invention Assignment, and Non-Competition Agreement, executed by the Employee on
__________.
(h) This Agreement may be executed in counterpart, each of which
counterpart shall be deemed an original, but all of which together shall
constitute one and the same instrument.
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IN WITNESS WHEREOF, the Employee has hereunto set his hand and, pursuant to
the authorization from its Board of Directors, the Company has caused this
Agreement to be executed in its name on its behalf, all as of the day and year
first above written.
ENZON, INC.
By:
---------------------------------------
Name: Kenneth J. Zuerblis
Title: Vice President, Finance, Chief
Financial Officer and Secretary
EMPLOYEE
-------------------------------------------
Name: [ ]
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Schedule
The following individuals entered into an agreement with Enzon on August 3,
2001, substantially similar to the attached:
Norman Hardman
Josef Bossart
Kenneth Zuerblis
Jeffrey McGuire
Christopher Phillips
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EXHIBIT 12.1
Enzon, Inc.
Ratio of Earnings to Fixed Charges
(in thousands)
Years ended June 30,
--------------------------------------------------------------
2001 2000 1999 1998 1997 1996
--------------------------------------------------------------
Net Income (Loss) $11,525 ($6,306) ($4,919) ($3,617) ($4,557) ($5,175)
Add:
Fixed Charges 557 352 468 597 546 498
Less:
Capitalized interest -- -- -- -- -- --
--------------------------------------------------------------
Net Income (Loss) as adjusted $12,082 ($5,954) ($4,451) ($3,020) ($4,011) ($4,677)
==============================================================
Fixed charges:
Interest (gross) $ 275 $ 4 $ 8 $ 14 $ 15 $ 13
Portion of rent representative of
the interest factor 282 348 460 583 531 485
--------------------------------------------------------------
Fixed charges $ 557 $ 352 $ 468 $ 597 $ 546 $ 498
--------------------------------------------------------------
Deficiency of earnings available
to cover fixed charges N/A ($6,306) ($4,919) ($3,617) ($4,557) ($5,175)
==============================================================
Ratio of earnings to fixed charges 22:1 N/A N/A N/A N/A N/A
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EXHIBI 21.0
SUBSIDIARIES OF REGISTRANT
Symvex Inc. is a wholly-owned subsidiary of the Registrant incorporated in the
State of Delaware. Symvex Inc. did business under its own name.
SCA Ventures Inc., (formerly Enzon Labs Inc.) is a wholly-owned subsidiary of
the Registrant incorporated in the State of Delaware. SCA Ventures does business
under its own name.
Enzon GmbH is a wholly-owned subsidiary of the Registrant incorporated in
Germany.
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EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Enzon, Inc.:
We consent to incorporation by reference in Registration Statement Nos.
333-64110, 333-18051 and 33-50904 on Form S-8 and Registration Statement Nos.
333-58269, 333-46117, 333-32093, 333-1535 and 333-30818 on Form S-3 of Enzon,
Inc. of our report dated August 21, 2001, relating to the consolidated balance
sheets of Enzon, Inc. and subsidiaries as of June 30, 2001 and 2000 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 2001, which
report appears in the June 30, 2001 annual report on Form 10-K of Enzon, Inc.
/s/ KPMG LLP
KPMG LLP
Short Hills, New Jersey
September 28, 2001
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