Item 1. Business
Aquila Biopharmaceuticals, Inc. ("Aquila" or the "Company") creates and commercializes products which modulate the immune system to control, prevent or treat infectious diseases and cancers.
Background
Aquila's technology and product development programs are based on enhancement of the immune system using the Stimulon(TM) family of adjuvants. Advances in biotechnology and immunology have enabled scientists to develop a new generation of products which contain disease specific agents and components which specifically modulate the immune system so that an effective immune response is achieved. Traditional vaccines can prevent infection through antibody based immune responses. While antibodies alone can be effective in preventing or eliminating pathogen infection in certain diseases, scientists now recognize that the cell mediated response, where cytotoxic T lymphocytes ("CTL") are activated, is probably necessary to eliminate intracellular pathogens. By stimulating a CTL response it may be possible to develop therapeutic products to treat diseases involving herpes, hepatitis and HIV infections or cancers.
The Stimulon(TM) family of adjuvants have been shown to enhance the quality and the quantity of the immune response to a variety of antigens, both in pre-clinical studies and in a number of human clinical trials. Aquila believes that the Stimulon(TM) adjuvants will allow scientists to design products which can activate specific T cell responses and result in a new highly effective class of vaccines for both therapeutic and prophylactic applications. The market potential of such products is high since this new understanding of the immune system will allow expansion of the market to address new areas and the development of safer, more effective substitutions for older products. New applications include diseases involving poorly immunogenic antigens such as polysaccharides or populations, such as the elderly, whose immune systems have deteriorated so that they do not respond to traditional approaches. New therapeutic products for treating people with diseases such as chronic hepatitis infection, malaria, acquired immune deficiency syndrome ("AIDS") or various cancers where a CTL response is thought to be essential may be possible using the StimulonT adjuvants.
Aquila's product development programs include the Quilimmune(TM) human health products and the Quilvax(TM) products for animal health. Phase I clinical trials of the Company's lead product, Quilimmune-P(TM) for preventing S. pneumonia infections in people over the age of 65 years, have been completed. Phase II trials have been initiated. Aquila's lead animal health product, Quilvax-M(TM) for controlling bovine mastitis has undergone extensive testing in bovine immunogenicity and challenge trials. The Company plans to initiate formal United States Department of Agriculture ("USDA") licensing trials shortly. A third potential product, to help control malaria infections incorporating the antigen SPf66 and QS-21 is in Phase I clinical trials. The Company's corporate partners are SmithKline Beecham p.l.c. ("SB"), Wyeth-Lederle Vaccines and Pediatrics ("Wyeth-Lederle"), a business group of Wyeth-Ayerst International, Inc., a subsidiary of American Home Products Corporation, Pasteur Merieux Connaught ("PMC"), Progenics Pharmaceuticals, Inc. ("Progenics"), VaxGen, Inc ("VaxGen"), Virbac S.A. and NABI.
Scientific Background
The human immune system is made up of several different cell types including antigen presenting cells ("APCs"), B cells and T cells. In general, the role of APCs is to process protein antigens from pathogens such as viruses, bacteria or parasites into smaller fragments and to present the resulting peptides to T- cells. Antigens can be processed by APC's through one of two pathways, the Class I or Class II pathway. Peptide fragments from antigens processed through the Class I pathway are displayed on the surface of the APC by an immune system protein called the MHC Class I protein and typically result in a cellular immune response. Those processed by the Class II pathway are displayed by MHC Class II proteins and typically result in a humoral response. When a humoral response is stimulated, B cells are activated by a specific type of T cell, called a helper T cell, to produce antibodies which are specific for the antigen encountered. Two populations of T-helper cells have been identified, Th-1 and Th-2. T-helper cells secrete biologically active molecules called cytokines, which mediate the effects of immune system cells. Th-1 and Th-2 T-helper cells secrete different types of cytokines and promote the synthesis of different classes of antibodies. The antibodies produced by B cells will bind to and can neutralize the pathogens - bacteria, parasites and viruses - which have invaded the body. In the cellular response, a second type of T cell, called a cytotoxic T lymphocyte (CTL) is activated. These cells recognize and kill cells containing pathogens. T-helper cells and the cytokines they produce are also important in generating a CTL response. The specific activation of cytotoxic T cells, called a CTL response, is thought to be very important in products designed to treat or prevent diseases such as herpes, hepatitis, HIV and malaria. It is also thought to be critical for many immunotherapeutic approaches to the treatment of cancer.
Traditional approaches for developing immune protection from infection in humans involved the use of animal viruses, or the use of attenuated or killed pathogens as vaccines. For example, the injection of cowpox virus protects humans against smallpox infection. Vaccines to protect against polio have been developed using either attenuated or killed polio viruses. While these approaches are effective, there is a small but significant risk of disease developing in people receiving these types of vaccines. With the advent of recombinant technology, scientists realized that safer products could be created, using specific components of an organism rather than the whole organism. For example, the genes for the surface antigens from a pathogen can be cloned using genetic engineering and used to make recombinant proteins. The recombinant proteins are then used in a vaccine, to make a so called sub-unit vaccine. Other specific components have been used to stimulate disease specific responses, including proteins isolated from the pathogen itself, synthetic peptides, carbohydrates and lipoproteins.
When these newer technologies were first used, it was found that while a pathogen specific immune response was stimulated, often this response was not of the right quality or strong enough to provide protection from infection or disease. As a result, immune modulation technologies have been developed that are coupled with pathogen specific antigen approaches. These methods for modulating the immune system include conjugation of the antigen to a carrier protein, the use of viral or bacterial vectors to carry specific genes, the use of cytokines or lymphokines to stimulate the immune system and the use of adjuvants. Carrier proteins such as keyhole limpet hemocyanin (KLH) or the toxoids from diphtheria, tetanus and cholera have been used effectively. An example of this type of vaccine is the Haemophilus influenzae type b conjugate vaccine, such as HibTITER(TM) sold by Wyeth-Lederle Vaccines and Pediatrics, where the antigen is conjugated to a diphtheria protein. Viral vectors such as vaccinia, canary pox, or the bacteria BCG are under evaluation as carriers of disease specific genes to determine whether they stimulate a protective immune response. Adjuvants that have been used or which are in development include aluminum hydroxide (Alum); MF59, a product of Chiron Corporation and its affiliates ("Chiron"); monophosphoryl lipid A (MPL), a product of Ribi ImmunoChem Research, Inc. ("Ribi"); LeIF, a product of Corixa Corporation ("Corixa"); and saponins from Quillaja saponaria such as QS-21. These adjuvant technologies are not all the same, affecting the humoral and cell mediated pathways differently. Some approaches result in general immune stimulation. Others are more specific. Aquila is developing the Stimulon(TM) family of saponin adjuvants (QS-21, QS-7) as an immune modulation technology. The Company uses biotechnology approaches for the creation of specific antigens, and combines these with the Company's proprietary Stimulon(TM) adjuvants to develop safe and effective products.
With the advent of new technology, changes are occurring in the market for immune modulating agents. Because development of these new products involves a high rate of technological innovation, it is possible to protect new products through patenting, which can result in increased profit margins. While product liability costs are high for traditional vaccines (because of the safety concerns), product liability costs for products using the new technology are comparable to those for therapeutic products. Manufacturing costs can be lower for new immune modulation products than for other therapeutic products. In the manufacturing of recombinant therapeutic enzymes it is often difficult to retain the enzymatic activity, and this can limit the choice of manufacturing methods. The limitations are not so stringent for products used to modulate the immune system. Historically, vaccines were generally low priced because the products were used to prevent disease in healthy people (prophylaxis) and, due to the lack of product differentiation, companies generally competed on price. However, in today's approaches to disease management and with the new proprietary innovations, immune stimulation products have been recognized as very effective contributors to controlling the total medical costs of certain diseases. Therapeutic products involving immune stimulation are in development for a number of intractable diseases, as are products for populations beyond infancy - young adults and the elderly.
The Use of Adjuvants: Technology to Enhance the Immune System
Adjuvants are agents which are added to a product to improve or adjust the immune response. Alum is the only adjuvant currently used in human vaccines licensed by the United States Food and Drug Administration ("FDA"). This adjuvant probably acts by a depot effect, which means that the addition of alum to a vaccine causes the antigen to remain at the site of injection for a longer period of time, which seems to increase the humoral immune response. Another adjuvant under development by Ribi is a mixture of lipopolysaccharides derived from bacterial cell walls, and is called MPL. Its use can increase the level of antibodies that are produced in response to an antigen, but additional components are often required to stimulate a significant CTL response. Chiron is developing an adjuvant called MF59 which is an emulsion of three lipids and water. It is a general, broad immune stimulant which will activate the immune system in the absence of an antigen. Oil/water emulsions have been used in older vaccines and also act by a depot effect. Corixa is developing LeIF, a protein produced by the parasite Leishmania, which is believed to stimulate certain APCs. Aquila's Stimulon(TM) family of adjuvants, QS-21 and QS-7, are purified, defined molecules, isolated from natural sources. They stimulate antigen specific responses and have been shown to promote both antibody and CTL immune responses in animals.
Aquila's Core Technology
Aquila and its corporate partners are developing new products based on two core technologies: (1) the Stimulon(TM) family of adjuvants that specifically enhance antibody and CTL responses; and (2) proprietary antigens that are specific for the target disease.
The StimulonT Family of Adjuvants
QS-21 is the lead Stimulon(TM) adjuvant. It is a natural product, purified from the bark of a tree which grows in South America, called Quillaja saponaria. Up to 10% of the bark from Quillaja is composed of saponins of which QS-21 is typically one of the more prominent. The bulk bark extract is available in the United States. The Company believes QS-21 is well-suited to pharmaceutical development and formulation because it has good stability as a dried powder (at least 3 years), is water soluble, and, when rehydrated, is a clear liquid that mixes easily with other vaccine components. QS-21 is compatible with alum and microparticles which are used in many experimental product formulations. QS-21 is well-characterized with a known molecular structure - distinguishing it from competing adjuvant candidates, which are typically emulsions or biologicals. Because QS-21 is currently regulated by the FDA as a "constituent material" used in drug preparation, the FDA does not require licensure of facilities used for its manufacture. A second Stimulon(TM) molecule, QS-7, which has a slightly different safety and activity profile, is in development. Patents have issued to Aquila with composition of matter claims covering QS-7 and QS-21, as well as two other identified saponins, QS-17 and QS-18. The Company has also been issued a patent for chemically modified saponins. All patents include the use of all of these molecules as adjuvants. See "Patents and Proprietary Rights".
The use of Stimulon(TM) adjuvants improves the quality of the immune response. Addition of QS-21 to antigens will generally broaden the type of antibody produced and stimulate cell mediated responses. The quality of these responses is important for the development of effective products. QS-21 also produces a strong quantitative response; that is, higher antibody levels are achieved. It is potent and active at microgram doses.
QS-21 increases the titer, or amount, of antibodies produced by the immune system in response to vaccination with many types of antigens, including recombinant proteins derived from viruses and bacteria and free polysaccharide antigens from bacterial pathogens. An unusual property of QS-21 not shared by other adjuvants is its ability both to increase significantly the antibody response to free polysaccharide antigens and to boost the titer further with a subsequent vaccination.
QS-21 broadens the antibody profile by promoting both Th-1 and Th- 2 dependent immune responses. The type of protective immunity elicited by an infection with a virus or bacterium typically includes antibodies of several isotypes (also called classes and subclasses). Some of these isotypes can be more important than others in mediating protection against viral or bacterial pathogens. Vaccination with a recombinant antigen typically stimulates only a few isotypes. Some adjuvants, such as alum, also only stimulate a narrow range of antibody isotypes. Hence, alum may stimulate a high quantity, but a lower quality, antibody. In contrast, QS-21 stimulates high quantities of a broad range of antibody isotypes, enabling the antigen-induced antibody response to resemble natural protective immune responses.
QS-21 also stimulates cell-mediated immune responses and induces the production of cytotoxic T-lymphocytes. The CTL response is a critical means of natural defense against viral infections and, is believed to eliminate abnormal cells that might otherwise develop into cancer. Until recently, it was generally thought that recombinant antigens could not be used to elicit CTL responses. Alum and simple oil/water emulsions typically fail to induce CTL responses. However, Company scientists discovered that the simple addition of QS-21 to these antigens stimulates the production of a CTL response to the recombinant antigens in animal studies. Other investigators have also reported that CTL responses induced by recombinant vaccines adjuvanted with QS-21 can mimic the protective CTL responses induced by viral infection.
The Company believes that the performance of QS-21 will vary depending upon the nature of the antigen and the target population. Initial human studies conducted by the Company's licensees and collaborators have focused on proving the safety of QS-21 and experimenting with different formulations and dose levels. Aquila and its collaborators have completed 24 studies to date; an additional 24 studies are underway and over 1300 subjects have received QS-21 in various different formulations. These studies have shown that the addition of QS-21 to product formulations improves the immune response to certain antigens, as evidenced by increased antibody titer. No serious adverse events attributed to QS-21 have occurred thus far in the clinical studies. Some local reactogenicity which is thought to be due to the enhanced immune response and some pain on injection have been seen in certain vaccine formulations. The Company has recently completed initial human clinical trials of a new formulation of QS-21 which it believes will reduce the pain on injection seen in these particular vaccine formulations.
Disease Specific Antigens
Aquila's ability to develop and produce proprietary disease specific antigens allows it to develop products targeted at specific applications and populations. Company scientists have scientific expertise in: (1) recombinant DNA cloning methods; (2) mammalian, insect and bacterial cell expression; (3) extraction and purification of compounds from natural sources and (4) carbohydrate and polysaccharide production. Furthermore, Company scientists have demonstrated their expertise with a variety of antigens from both viral and bacterial pathogens including those that require high level biocontainment (i.e. BL-3). These antigens include the envelope protein from feline leukemia virus, two outer surface proteins from Borellia burgdorferi, fibronectin binding proteins from Stapholococcal aureus, and a variety of cell surface proteins from granulocytic Ehrlichia.
The typical development pathway for a disease specific antigen includes antigen identification, preparation of research quantities of the antigen, demonstration of a biological effect of a product containing the antigen and development of commercial scale antigen production procedures. These developmental efforts can include those primarily accomplished within the Company or technology licensed by the Company from outside sources, or a combination of both approaches. This pathway has been completed for the feline leukemia virus and B. burgdorferi antigens, is nearing completion for the S. aureus antigen and is at an early antigen identification stage for those from Ehrlichia. The Company has research ongoing on the production of S. pneumonia polysaccharide antigens by fermentation and purification.
The Company attempts to protect its antigen technology either through maintenance of trade secrets or filing of patent applications. U.S. patents have been issued covering the company's FeLV(TM) and S. aureus antigen technology as well as its baculovirus expression system. In addition, patents have been filed which address antigens from B. burgdorferi and Ehrlichia. However, there can be no assurance that patents will issue from the patent applications or that if issued such patents will not be challenged or that the rights granted under any issued patents will provide adequate proprietary protection. In certain cases the Company has licensed proprietary technology covering specific antigens from third parties. See "Patents and Proprietary Information."
Aquila's Strategy
Aquila's objective is to create and commercialize products which modulate the immune system to prevent, control or treat infectious diseases and cancers. The Company's strategy is to exploit its expertise in adjuvant and antigen research, to create products and develop them through FDA or USDA licensure, to support its corporate partner's product development programs, to develop its manufacturing capacity, and to in-license and develop related technology.
Exploit Expertise in Adjuvant and Antigen Research
Aquila has developed unique expertise in understanding the role of adjuvants in stimulating and tuning the immune response to specific antigens to allow the development of safe and effective therapeutic and prophylactic products. The Company intends to continue to integrate its proprietary core technologies and to identify targeted applications of its technology. In addition, the Company plans to broaden its expertise in research and development involving different antigens including recombinant proteins, peptides, polysaccharides and other classes of antigenic molecules. Aquila's strategy is to acquire related products and technologies to supplement its scientific expertise, its capabilities and its product portfolio.
Create and Develop its Own Products
Aquila has established a large number of corporate partnerships and a significant number of products are being developed through these partnerships. However, Aquila believes that it can develop and retain significant value through its own product development efforts. The Company has three products in clinical development: (i) Quilimmune-P(TM) for preventing pneumococcal infections in the elderly for which Phase I trials have been completed and Phase II commenced; (ii) Quilvax-M(TM) to control bovine mastitis for which immunogenicity and challenge trials have been completed; and (iii) Quilimmune-M(TM) for controlling malaria, which is in Phase I trials. Aquila has research ongoing with other potential adjuvants and on the discovery and development of antigens for tick borne diseases. The Company has completed the development and licensure of one product, Quilvax-FeLV(TM) for preventing leukemia in cats. See "Aquila's Product Development Programs".
Aquila has a large number of academic collaborations ongoing involving other antigens. A number of these are cancer vaccines. In certain cases the Company has options to license related technology should it wish to accelerate the development of these products. The Company intends to develop human products primarily but will exploit unique, significant product opportunities in animal health.
Support Corporate Partners Programs
Aquila has entered into collaboration agreements with SB, PMC, Wyeth-Lederle, VaxGen, NABI and Progenics as well as a number of other biotechnology companies. Aquila intends to leverage these partnerships to speed discovery and development of certain products which the Company does not have the resources or skills to develop. These collaborations allow the Company to focus its own efforts on products which have different markets than those of interest to large pharmaceutical companies. The Company has a number of potential licensing discussions underway and intends to continue to selectively license its technology. See "Corporate Partner Programs".
Continue Developing Manufacturing Capacity
Aquila has retained rights to the manufacture of QS-21 on a worldwide basis in all of its licensing agreements, and has been producing QS-21 for clinical trials for all of its partners and its product programs. In addition, the Company operates a small manufacturing facility to supply FeLV antigens and vaccine to its corporate partner Virbac S.A. Aquila has produced commercial scale quantities of its canine lyme product and has the capacity to produce specific commercial requirements of its Quilvax-M(TM) product for bovine mastitis. Aquila intends to continue to develop manufacturing expertise and capacity to allow it to retain value from the products which it develops.
In-license Related Technology
Aquila has been and will continue to be opportunistic in licensing in products and technology related to immune modulation to supplement its product pipeline. In addition to expanding the product portfolio, this strategy will allow the Company to capitalize on newly developed technologies which are synergistic with the Company's existing technology base.
Aquila's Product Development Programs
Aquila's strategy is to develop products itself and in partnership with other companies. The Company has six products in development or commercialized.
Quilimmune(TM) & Quilvax(TM) Product Development
Product Market Status Partner
Quilimmune-P(TM) Adults >= 50 Phase I complete. Aquila, Product to years 34 mil. Phase II trials worldwide prevent people in ongoing. rights. pneumococcal U.S. infections
Quilvax-M(TM) 30 million Immunogenicity Aquila, N. Product to control milk cows in and challenge America bovine mastitis the U.S. & trials complete. Virbac S.A. (S. aureus & E. Europe. Licensing trials Europe. coli) anticipated to start in 1998.
Quilimmune-M(TM) 1-2 billion Phase I ongoing. Collaboration (SPf66) Product to persons at with control malaria risk. World (Plasmodium Health falciparum) Organization.
Quilvax-FeLV(TM) ~ 15 million On market, Virbac S.A. Product to prevent cats Leucogen(R), Worldwide. feline leukemia vaccinated (Europe); per year. Genetivac(R), (U.S.).
Quilimmune-T(TM) Persons at Pre-clinical Aquila Product to prevent risk for tick research. worldwide Lyme and bites. rights. Ehrlichiosis diseases
Quilvax-L(TM) 10 million Licensing Schering- Product to prevent dogs at risk efficacy and Plough. canine Lyme in endemic safety trials diseases areas. completed.
Quilimmune-P(TM) for the Prevention of Pneumococcal Infections
Infections by Streptococcus pneumoniae ("S. pneumoniae") cause serious disease in young children and in the elderly. Healthy adults are not typically at risk for developing disease following exposure to S. pneumoniae. There are over 80 recognized serotypes of pneumococci, each with varying geographic and age- group prevalence. The resulting diseases and serotypes involved are different between the young and the elderly, and as a consequence, separate vaccine products for the young and the elderly are appropriate. Quilimmune-P(TM) is intended to be used to prevent pneumococcal infections in the elderly.
There are approximately 34 million people over the age of 65 in the United States, and an additional 36 million adults with immune compromising conditions who are at risk for developing disease caused by S. pneumoniae. Various strains of S. pneumoniae are responsible for most community-acquired cases of pneumonia (500,000 cases per year) and are the second most common cause of bacteria (50,000 cases per year, with 25% mortality). It is estimated that S. pneumoniae causes 40,000 deaths in the elderly and immunocompromised adults each year.
The currently available vaccines, which were developed and approved in the early 1980s, cover the 23 serotypes which cause about 90% of infections in the United States and Europe. The two vaccines approved in the U.S. are composed of purified capsular polysaccharides from each of the 23 serotypes. Vaccination rates in the U.S. elderly population are currently running at about 30%. These vaccines are underutilized by the elderly for a number of reasons. Reports in the medical literature indicate that the current vaccines are effective in the elderly in only 50- 60% of the recipients. A number of side effects are caused by the current vaccines, including pain on injection, a sore arm, fever, and a general feeling of malaise for a few days. Because of these side effects, these traditional vaccines have not been licensed for repeat use, resulting in a misconception in the market that these vaccines give lifetime protection. In addition, the antibody titers drop over a number of years. Typically after 3 or more years, the effective levels of antibodies in vaccines is quite low. Furthermore, data has recently been presented suggesting that the ability to elicit functional antibodies particularly decreases with age. Another reason these vaccines are poorly utilized is because physicians have an option of treating patients who develop pneumonia with antibiotics. However, strains of S. pneumonia that are resistant to several classes of antibiotics have been isolated with increasing frequency over the past few years. With increased antibiotic resistance, the option of using antibiotics may not be as effective, and physicians are moving towards prevention as a therapeutic choice. As a result there is an urgent need for a more effective and safe pneumococcal vaccine for the elderly.
S. pneumoniae also causes half of childhood otitis media, the most frequent reason (one out of three) for visits to pediatricians. In some developing countries, pneumococcal pneumonia kills approximately 10% of the children under the age of five, making it the single leading cause of death. Compared to the elderly, a smaller number of S. pneumonia serotypes is responsible for most of the disease seen in children. Development efforts are underway by several companies to improve the immune response to S. pneumoniae capsular polysaccharides by conjugating the polysaccharides to immunogenic carrier proteins. This approach was used in developing the successful Hib (Hemophilus influenzae type b) vaccines. The companies developing conjugate vaccines have chosen to focus on the ten or eleven strains most prevalent in infants and young children.
A different approach is required for development or an improved S. pneumoniae vaccine for the elderly. The pediatric conjugate vaccine, if successfully developed, would likely not be appropriate for immunization of adults and the elderly because it would address only the limited number of strains that are problematic in children rather than the broader range required in the elderly. It would also be difficult to include all 23 of the strains in the currently available vaccine as conjugates because of the overall manufacturing expense and cumulative mass of the conjugated components. There is also some evidence that conjugation does not improve the performance of polysaccharide vaccines in the elderly.
In animal studies Aquila scientists have shown that the use of Quilimmune-P(TM), which contains 23 different capsular polysaccharides and QS-21, improves the immune response over that seen with the current approved vaccine. For instance, many polysaccharides to which mice do not typically respond become immunogenic with Quilimmune-P(TM). In addition, antibody titers to many strains increase. The effect may make the use of a lower antigen dose feasible, which could make the product less expensive and also reduce side effects. Finally, mice re- vaccinated with Quilimmune-P(TM) experience a booster effect for many strains, a response not seen with existing vaccines. This effect may allow the administration of periodic booster shots to maintain immunity levels.
Aquila has completed a Phase I clinical trial in healthy young or middle aged adult volunteers. The study was carried out in collaboration with and supported by the National Institutes of Health (NIH). The primary end point of the study was to evaluate safety; a secondary goal was to evaluate immune responses. The study was designed as a dose response study, evaluating several different dosage levels of the polysaccharide antigens and adjuvant. The control group received the marketed vaccine.
Quilimmune-P(TM) was generally well tolerated after intramuscular injection. Transient pain on injection was seen in some subjects but in most cases the pain was mild or moderate. Otherwise, local and systemic reactogenicity was infrequent and similar to the control licensed product. No serious adverse events or clinically significant abnormal laboratory values were encountered in any study subject.
Quilimmune-P(TM) was immunogenic in all subjects in a fashion similar to the control recipients. This included subjects who received Quilimmune-P(TM) formulated with lower than normal doses of antigen. Because healthy adults, not elderly people, were used as subjects for the study, these results were expected. The small number of subjects in each of the groups limited the Company's ability to draw conclusions about the relative immunogenicity of the different formulations. However, formulations of Quilimmune-P(TM) containing a full dose of pneumococcal polysaccharides induced a higher level of total IgG and nasal wash IgA for some but not all polysaccharide types than the control vaccine.
In Phase II studies which began recently, Aquila is evaluating Quilimmune-P(TM) formulations that were shown to be well tolerated in Phase I studies. This study will be a prospective, randomized, double blind comparison of Quilimmune-P(TM) to the currently licensed vaccine product in an elderly population, the target population for the product. The study is expected to involve about 400 subjects with clinical endpoints of safety, quality and quantity of the immune response.
Quilvax-M(TM) for the Control of Bovine Mastitis
Bovine Mastitis is an inflammation of a dairy cow's udder. Two pathogens cause the vast majority of infections resulting in mastitis: Staphylococcus aureus ("S. aureus") and Escherichia coli ("E. coli"). Mastitis is the most costly disease affecting the dairy industry. The economic impact in the United States of bovine mastitis is estimated to be between $1-2 billion per year. According to the National Mastitis Council, the value of the losses per cow per year are $184 (there are about 9.5 million dairy cows in the U.S.). The principal losses occur from reduced milk production, from milk that is of poor quality and thus has a lower economic value, from milk which has to be discarded, and from animal replacement costs. Many times when an animal develops mastitis, it is simply culled from the herd. There are also extra labor costs, treatment, and veterinary services to cope with this disease.
There are a number of bovine mastitis vaccines on the market, but these are directed towards E. coli only. Aquila's Quilvax-M(TM) bovine mastitis product is bivalent, containing antigens for both S. aureus and E. coli, and is expected to provide broader control of mastitis.
The S. aureus component of Quilvax-M(TM) is based on a patented cell surface protein from S. aureus called fibronectin binding protein. Fibronectin binding protein is primarily responsible for attachment of S. aureus to host tissue, in this case the epithelium of the bovine mammary gland. It is believed that this attachment is a critical step in the disease process and results in the inflammation and tissue destruction that characterizes mastitis. In the Company's Quilvax-M(TM) program, fibronectin binding protein is used as the target antigen for development of a beneficial immune response. Antibodies directed against fibronectin binding protein may block the attachment of S. aureus to mammary gland tissue or play a role in antibody dependent opsonophagocytic activity.
The Company has been making use of the ability to experimentally cause S. aureus mastitis by direct challenge of dairy cattle with bacteria deposited in the mammary gland. In a typical challenge experiment, the response of several groups of animals, both treated and non-treated controls, to a S. aureus challenge are compared. Recent studies indicate that Quilvax-M(TM) is safe and that it reduces the inflammatory response that develops upon infection. Measurement of parameters that determine milk quality and the price dairy producers would receive for their milk indicates that milk from animals vaccinated with Quilvax-M(TM) would have a higher value than that from non-treated controls.
The E. coli portion of Quilvax-M(TM) is modeled after the E. coli mastitis products currently on the market. The marketed products make use of a mutant strain of E. coli that has slightly altered surface carbohydrate structure. Quilvax-M(TM) makes use of a similar E. coli mutant. Immunogenicity studies in dairy cattle indicate that the amount of anti-E. coli antibody generated by Quilvax-M(TM) is similar to the amount generated by a marketed E. coli mastitis product.
In order to receive authorization from the USDA to market Quilvax- M(TM), the Company must conduct formal efficacy trials for both the S. aureus and E. coli components of the product. Following successful completion of these studies, a formal safety study using the product on working dairy farms is required. The Company believes it could add a streptococcal component in a next generation product.
The research and development costs are 50% funded by Virbac. The Company has retained exclusive marketing rights in North America. Virbac has exclusive marketing rights in Europe. The parties share marketing rights in the rest of the world.
Quilimmune-M(TM) for the Control of Malaria
According to estimates in published reports, over two billion people reside in malaria-infected areas. The yearly incidence of malaria is estimated by the World Health Organization at 300 to 500 million cases, with a death toll of 1.5 to 3 million persons. While anti-malarial drugs have been in use for decades, they are expensive and resistant malarial strains are becoming increasingly common. The World Health Organization has identified malaria as a priority vaccine target in developing countries.
Aquila is involved in a number of development programs to develop products to control malaria. One of the programs is a collaboration with SB (see "Corporate Partner Programs").
In addition to this program, Aquila has a collaboration with the World Health Organization (WHO) on another malaria product involving the antigen SPf66. SPf66, a polymerized synthetic peptide developed by Dr. Manuel Patarroyo of the Institute de Inmunologia in Columbia, contains sequences from proteins expressed during several stages of the parasite's life cycle. The antigen has been tested with an alum adjuvant in three large clinical trials in humans. Protection was achieved from malaria in two of the trials in about 30% of the adults and children. In the third trial there was no protection. These mixed results are thought to be the result of several factors: different manufacturing processes were used for the SPf66; the design of the trials was different; the clinical definition of malaria varied between studies; and the study populations were different.
Aquila has investigated the effectiveness of a Quilimmune-M(TM) product containing QS-21 and SPf66. In a study in Aotus monkeys, 57% of the animals were protected from malaria on challenge after vaccination with SPf66 plus QS-21. In this study, a control vaccine of SPf66 alum (the product that was used in the human studies) gave only 25% protection, comparable to the results obtained previously in humans.
A human clinical trial of this malaria product containing SPf66 and QS-21 has been initiated. In this Phase I trial, approximately 90 volunteers enrolled in five groups received the SPf66 product formulated with the QS-21 adjuvant, alum or various doses of QS-21 adjuvant with alum. Treatment with three sequential subcutaneous injections will be used to determine the safety and immunogenicity of the potential product. The study is expected to be completed in approximately twelve months.
Quilvax-FeLV(TM) for the Prevention of Feline Leukemia
Aquila has developed a recombinant subunit vaccine against the feline leukemia virus. The product was approved in 1990 in the U.S. and 1991 in Europe. It is marketed by Virbac in Europe, Australia and Japan under the tradename Leucogen(R) and was marketed by Mallinckrodt Veterinary, Inc. ("MVI") prior to the sale of MVI to SP in the U.S. under the tradename Genetivac(R). Sales to Virbac amount to greater than ten percent (10%) of the Company's total revenues. FeLV(TM) is a highly contagious and commonly fatal disease of cats. Aquila's product was the first recombinant vaccine ever developed against a tumor-causing virus in mammals. A patent covering Quilvax-FeLV(TM) has been issued in the U.S. and a number of other countries. Aquila manufactures bulk formulated product for the United States and Australian markets, and supplies Virbac with bulk antigen and adjuvant for further manufacture for the European and Japanese markets. The product is the leading FeLV vaccine in Europe, and in a recent independent study was found to be the most effective of three leading FeLV products on the market.
Quilvax-L(TM) for the Prevention of Canine Lyme Disease
Aquila is developing a product for dogs pursuant to a 1991 agreement, currently with SP against Borellia burgdorferi ("Borellia"), the pathogen that causes Lyme disease. There are currently three Lyme disease vaccine products on the market. During 1993-94, Aquila conducted efficacy trials of its canine Lyme disease product using a protocol approved by the USDA. SP has conducted field safety studies and the results are under review at the USDA. Additional safety studies may be required. The Company is unable to predict the timing of or whether this product will reach the marketplace.
Quilimmune-T(TM) for the Prevention of Tick Borne Diseases
Ticks can transmit pathogens that cause a variety of diseases, including Lyme disease, Rocky Mountain Spotted Fever and Babesiosis. In 1991 scientists reported the discovery of a new disease, human granulocytic ehrlichiosis ("HGE"), caused by a microorganism in the genus Ehrlichia transmitted by the bite of the same tick that carries Lyme disease. HGE's flu-like symptoms include fever, headache and muscular aches, as well as joint pain, nausea, vomiting and cough. HGE is believed to have caused several deaths in immune-compromised patients. Aquila scientists were the first to successfully cultivate the HGE organism in tissue culture. Patent applications on infected cell lines, the methods of growing the organism, potential vaccine antigens and their genes, and diagnostic reagents derived from the pathogen have been filed. Aquila has been working with the Centers for Disease Control and Prevention to develop a blood test to be used in epidemiological surveys that will determine how widespread the disease may be. In addition, Aquila Scientists have cloned and characterized genes for the immunodominant protein and immunogenic surface proteins. Aquila's work in HGE may also have applicability for animal health applications. The HGE organism appears to cause illness in dogs.
Corporate Partner Programs
In addition to Aquila's own product development programs, the Company has six corporate partners who have licensed the Stimulon(TM) adjuvants for a variety of human diseases. The six corporate partners are SB, Wyeth-Lederle, PMC, Progenics, VaxGen, and NABI. Three of the world's four largest vaccine manufacturers are partners using Aquila's adjuvants. In return for rights to use Stimulon adjuvants for specific diseases, the corporate partners have agreed to pay Aquila license fees, milestone payments, and royalties on product sales. Aquila has retained worldwide manufacturing rights for QS-21. In addition to corporate partners, the Company has developed a number of academic collaborations to test potential vaccine formulations containing QS-21.
PARTNER/COLLAB. CLINICAL DEVELOPMENT STATUS
Research Preclinical Phase I Phase II Phase III
Melanoma* (Th) --------------------------------------------- HIV-1* (Pr) ----------------------------------------- Herpes II (Th) ------------------------------------ Hepatitis B (Th) ------------------------------------ Malaria* (Pr) ------------------------------------ Respiratory Virus (Pr) ------------------------------- B Cell Lymphona* (Th) -------------------------- Colon Cancer* (Th) -------------------------- Pancreatic Cancer (Th) -------------------------- Prostate Cancer* (Th) -------------------------- Lung Cancer (Th) -------------------------- Breast Cancer (Th) -------------------------- HPV (Th) --------------------------
*multiple programs, most advanced program shown Th = Therapeutic; Pr= Prophylatic
SmithKline Beecham, p.l.c. has licensed QS-21 for a number of different applications. The world's leading manufacturer of hepatitis B vaccine, SB is aggressively marketing its existing portfolio of vaccines, while developing new and improved products. SB has completed a number of Phase I clinical trials of potential products containing QS-21 and is also investigating the use of combinations of different adjuvants. Sales to SB of QS-21 amount to approximately ten percent (10%) of total revenues of the Company.
SB in collaboration with the Walter Reed Army Institute of Research reported in the New England Journal of Medicine (Stoute et al., NEJM, January 9, 1997, pp. 86-91) results of a Phase I human challenge study involving the testing of a potential malaria product formulated with different adjuvants. The three different product formulations all contained a recombinant circumsporozoite malaria antigen fused to a hepatitis B surface antigen as a carrier protein. The first formulation also contained MPL and alum; the second an emulsion of oil and water; and, the third was formulated with QS-21, MPL and the oil and water emulsion. In the first formulation, with MPL and alum only, there was an immunological response, but following challenge with the malaria parasite after treatment, only one of the seven subjects in this group was protected from malaria. In the second formulation, with the oil and water emulsion, the immune response was much stronger, but in the malaria challenge, only two of seven subjects were protected. In the third product formulation, with the addition of QS-21, the immune response was the highest. Most importantly, the quality of the immune response was significantly different, as six of seven subjects exposed to the challenge with malaria were protected. These results demonstrate that the quality of the immune response is critical. Aquila has been informed that SB is planning further clinical testing of this potential product.
Pasteur Merieux Connaught has licensed QS-21 for use in its HIV vaccine programs. PMC has ongoing pre-clinical work on two potential HIV products and has started a Phase I clinical trial to evaluate a third HIV vaccine candidate. PMC also licensed QS- 21 for use in influenza and completed two clinical trials. Recently PMC elected to continue influenza trials with another company's product and not to incur further development expenses with QS-21. Aquila has exercised its option to cancel this agreement covering PMC's influenza license with QS-21.
Wyeth-Lederle Vaccines and Pediatrics licensed QS-21 in 1992 for use in five vaccines. Wyeth-Lederle, formed as a result of the acquisition of American Cyanamid by American Home Products, is a leader in pediatric vaccines. Wyeth-Lederle has completed a Phase I clinical trial using QS-21 and continues pre-clinical development of other candidate vaccines.
Progenics Pharmaceuticals, Inc. licensed QS-21 in 1995 for use in certain therapeutic products for cancer. Progenics' most advanced program involves the use of QS-21 with a ganglioside preparation called GM2 to treat melanoma. Phase I/II clinical trials of this product, which was initially developed by physicians at Memorial Hospital for Cancer and Related Diseases, have been completed, and two pivotal Phase III studies have been initiated. The first of these is being conducted in the U.S. by cooperative cancer research groups supported by the National Cancer Institute. Another trial commenced in 1997 and is being conducted outside the U.S. A third trial is expected to commence in 1998. A second cancer product, GD2, is being developed for the treatment of various cancers. Phase I/II clinical trials commenced in 1996. Aquila has licensed Progenics to use QS-21 in exchange for a license fee, an equity interest in Progenics, and royalties. Progenics recently entered into a collaboration with Bristol-Myers Squibb Company to develop and commercialize GM2 and GD2.
VaxGen, Inc. (an early stage company whose major corporate shareholder is Genentech, Inc.) has licensed QS-21 for use in its HIV-1 vaccine program. VaxGen has conducted Phase I clinical trials in healthy volunteers with a product formulated with QS- 21, under the auspices of the National Institutes of Health. This trial was expanded in 1994 after improved neutralizing antibody responses were observed in volunteers receiving products containing QS-21. Some volunteers in this study reported pain on injection. Enrollment in a third trial has just been completed. Volunteers received very low doses of gp120 antigen combined with QS-21 and/or alum. These product formulations were well tolerated and preliminary immunogenicity results are promising.
NABI has licensed QS-21 for use in production of immunoglobulin for prevention and treatment of gram-negative and gram-positive bacterial infections. NABI is currently evaluating its products in clinical trials without using adjuvants. The Company is uncertain if or when NABI will commence clinical trials using QS-21.
Manufacturing and Scale-up
As part of each Stimulon(TM) adjuvant licensing agreement, the Company has retained the right to be the exclusive supplier of Stimulon(TM) adjuvants. The license agreements stipulate the supply prices, within certain ranges. Pursuant to the license agreements, the Company will also receive royalties on its licensees' product sales.
The Company currently manufactures QS-21 for commercial animal health use and for use in human clinical trials. The Company produces QS-21 with an average batch size sufficient for approximately 200,000 doses. The Company has scaled the critical steps of the process to produce a batch size suitable for large scale commercial production up to 2,000,000 doses.
QS-21 is currently classified by the FDA as a constituent material used in vaccine preparation. As a result, the FDA does not require licensure of facilities used for its manufacture. Aquila believes that classification of QS-21 as a constituent material affords flexibility in the timing of investment in commercial manufacturing facilities. After the safety and effectiveness of QS-21 has been demonstrated, Aquila expects to be in a position to reasonably project the plant capacity and the capital investment required and can adjust the scale of manufacturing as additional products reach the market.
The Company also currently manufactures Quilvax-FeLV(TM) antigen and vaccine, which were licensed for sale in the U.S. by the USDA in 1990 and for European sales in the European Community ("E.C.") in 1991. The Company produces commercial quantities at the 400 L fermentation scale in USDA and E.C. approved facilities. Two additional animal vaccines are under development and will also be manufactured in these facilities. Quilvax-M(TM) for the control of bovine mastitis will begin licensing trials in 1998. Quilvax- L(TM), for prevention of canine lyme disease, has completed licensing trials and has been scaled to commercial quantities.
Patents and Proprietary Rights
Aquila has pursued a policy of obtaining patent protection both in the United States and in selected foreign countries for patentable subject matter in its proprietary technologies. The Company has filed or has rights to a number of U.S. patents and patent applications and their foreign counterparts. Aquila also relies on trade secrets, proprietary know-how, and continuing technical innovation to develop and maintain its competitive position.
Aquila's future success will depend, in part, upon its ability to develop patentable products and technologies and obtain patent protection for its products and technologies both in the United States and Europe. There can be no assurance that patent applications owned or licensed by the Company will issue as patents, that patent protection will be secured for any particular technology, or that, if issued, such patents will be valid, or that they will provide the Company with meaningful protection against competitors with a competitive advantage. There can be no assurance that the patents will not be challenged or designed around by others. Proceedings brought against Aquila's patents could expose it to significant expense and the risk of adverse determinations.
Aquila is not aware of any issued third party patents which would interfere with development of any of its products, but there can be no assurance that it will not infringe on existing or future patents owned by others, that third parties will not bring suit against it for infringement of such patents, that the Company could obtain necessary or desirable licenses on acceptable terms, or that it could design around such patents. Any litigation instituted by third party patent holders could expose Aquila to significant expense and the risk of adverse determination.
QS-21 and other Adjuvants
Aquila received U.S. Patent No. 5,057,540 in 1991, covering purified QS-21, QS-7 and the other principal fractions of Quillaja saponaria and methods of their use in vaccines. The Company believes that the standard of purity specified in the patent for the saponin fractions is necessary to achieve a safety profile acceptable for human use. CSL International ACN ("CSL") controls certain patents and patent applications covering ISCOMS (immune stimulating complexes) prepared from crude saponin fractions, lipids and various antigens. The Company believes that its products do not infringe CSL's U.S. patent due to process differences and formulation techniques which avoid ISCOM formation. In Europe, CSL has a corresponding pending application with published claims broader than those that issued in the U.S. Although the Company believes that the claims may be narrowed during the European examination, if claims do issue as published they may dominate QS-21 in combination with lipid formulations. In the event patents do issue to CSL or other parties which dominate QS-21, there can be no assurance that Aquila will be able to obtain licenses or obtain such licenses on favorable terms.
CSL and Seed Capital Inc., another company with an interest in ISCOM technology, have filed an opposition with the European Patent Office ("EPO") on the issuance of the QS-21 patent in Europe. A hearing before the EPO is scheduled for October of 1998. The Company has recently received correspondence from CSL claiming that CSL will present information to the EPO prior to the October hearing which will allow CSL to prevail in the opposition, and in addition that it intends to challenge the Company's U.S. patent. The Company has carefully reviewed the prior art with respect to both the European and U.S. patents and does not believe that CSL's claims have merit or are likely to succeed. There can be no assurance, however, that Aquila will prevail in any action taken to attack the validity of its QS-21 patents.
Mastitis
Aquila exclusively licensed from Alfa Laval Agri AB ("Alfa Laval") certain base technology used in the mastitis program. This technology includes patents and patent applications on fibronectin binding proteins from S. aureus, E. coli and S. dysgalactiae. The Alfa Laval license calls for payment of an initial license fee, royalties, and additional license fees as additional patents issue and when Aquila commercializes the vaccines. As part of the joint development agreement with Virbac, Aquila arranged for Alfa Laval to grant a direct license to Virbac in certain territories.
To date seven patents have been issued in the U.S. related to fibronectin binding proteins, the genes that encode these proteins, related synthetic peptides and the use of these materials for treating bovine mastitis. These patents are U.S. Patent Numbers 5,175,096; 5,189,015; 5,320,951; 5,416,021; 5,440,014; 5,571,514 and 5,652,217.
Lyme Disease
Aquila has filed a patent application on its vaccine formulation of using both the A and the B outer surface proteins and QS-21; animal data indicates this formulation induces group-specific immune responses (important for protection against multiple Borrelia strains) significantly better than vaccines containing only one or two of these components. There are several patents pending in the United States and in Europe which, if issued in their current form, may dominate Aquila's Lyme vaccine. Aquila believes that it is unlikely that any dominant claims will issue because of the extensive prior art, but there can be no assurance that the Company's position is correct and, if dominating patents do issue, there can be no assurance that it will be able to obtain the necessary licenses or obtain such licenses on favorable terms.
Human Granulocytic Ehrlichiosis
Aquila believes that it was the first to successfully cultivate the HGE organism in tissue culture. The Company has filed patent applications on infected cell lines, the methods of growing the organism, and potential vaccine antigens and diagnostic reagents derived from the cell line. Other researchers in the field of HGE have filed patent applications that might conflict with Aquila's patent applications. There can be no assurance that any of Aquila's patent applications will issue.
Other Patents
Aquila holds U.S. patents on its Quilvax-FeLV(TM) vaccine and on drug delivery compounds. Patents on methods of expressing and purifying proteins made in a baculovirus expression system have issued. Aquila also has a fully paid-up royalty-free license to U.S. Patent No. 4,734,362 and foreign counterparts (protein purification) in the vaccine, therapeutic and related research fields; a fully paid-up royalty-free license to U.S. Patent No. 4,753,873 in the veterinary diagnostic field; and a non-exclusive sublicense to U.S. Patent No. 4,725,669 and U.S. Patent No. 5,068,174 (HIV-gp120-p27) in the vaccine, therapeutic and related research fields.
Competition
The biotechnology and pharmaceutical industries are subject to rapid and significant technological change. Competitors of Aquila in the United States and abroad are numerous. They include, among others, major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. There can be no assurance that Aquila's competitors will not succeed in developing technologies and products that are more effective than any which have been developed by the Company or may be developed by the Company in the future or which would render the Company's technology and products obsolete and noncompetitive. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than Aquila. In addition, some of Aquila's competitors have substantially greater experience than the Company in preclinical testing and human clinical trials of pharmaceutical products and in obtaining FDA and other regulatory approvals of products for use in healthcare. Accordingly, Aquila's competitors may succeed in obtaining FDA approval for products more rapidly than could the Company. There can be no assurance that Aquila's products under development will be able to compete successfully with existing products or products under development by other companies, universities and other institutions or that they will attain regulatory approval in the United States or elsewhere. If Aquila commences significant commercial sales of its products, it will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which it may have less experience. A significant amount of research in the field is also being carried out at academic and government institutions. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more aggressive in pursuing patent protection and negotiating licensing arrangements to collect royalties for use of technology that they have developed. These institutions may also market competitive commercial products on their own or in collaboration with competitors and will compete with Aquila in recruiting highly qualified scientific personnel.
Aquila is aware of certain programs and products under development by others which may compete with its programs and products. Several companies, including Ribi, Corixa Corporation, Virus Research Institute and Chiron Corporation, are developing adjuvants.
Merck Laboratories, Wyeth-Lederle, SB, PMC and possibly others are in human clinical trials with conjugate pneumococcal vaccines for the pediatric market, and have existing non-adjuvanted products on the market. Several companies market mastitis vaccines for infections caused by E. coli, but these vaccines do not protect against staphylococcal or streptococcal infections. The existence of products developed by these and other competitors, or other products of which Aquila is not aware or which may be developed in the future, may adversely affect the marketability of products developed by Aquila.
At least two of Aquila's adjuvant licensees are also licensees of Ribi for certain diseases. The USDA has licensed three canine Lyme disease vaccines. PMC and SB have completed successful human trials with Lyme disease vaccines.
Government Regulation
The FDA, the USDA, the Environmental Protection Agency, and comparable state and other agencies, including those in foreign countries, impose requirements governing the development, manufacture and marketing of certain of Aquila's products and products under development. The regulatory process can take several years, involves lengthy and detailed laboratory and clinical testing, and requires substantial expenditures. U.S. Government user fee legislation has recently been approved by Congress and signed into law, which is expected to further reduce review times at FDA. Human biologicals and pharmaceuticals, including vaccines, typically require three stages of clinical trials: Phase I to determine the preliminary safety of the product; Phase II, during which the efficacy of the product is preliminary assessed and treatment regimens refined; and Phase III (sometimes referred to as "pivotal trials") during which final safety and efficacy data are generated. Regulatory approval is required prior to commencement of initial clinical trials. The clinical data, together with comprehensive manufacturing and facility information, is filed with the FDA in a Product License Application (PLA) and an Establishment License Application (ELA), or in certain cases as a Biologics License Application (BLA), on which the regulatory agencies base their approval decisions. In some instances, particularly in cases of life-threatening diseases for which there is no effective treatment, the clinical trial phases may be combined, or approval may be sought after completion of an expanded Phase II trial.
Because QS-21 is currently classified by the FDA as a constituent material used in drug preparation, the FDA does not require licensure of facilities used in its manufacture. Aquila believes that this affords flexibility on investment in commercial manufacturing facilities. Aquila has filed Biologics Master Files for QS-21 with the FDA, which its licensees can reference as part of their own PLAs as they seek FDA approval.
There can be no assurance that, at the end of the regulatory process, approval will be obtained or that product developments by competitors in the interim will not have made Aquila's products obsolete or economically unfeasible. The extent of regulation which may arise from future legislative or administrative action cannot be predicted, nor can the potential impact of such future regulation, or changes in existing regulation, be predicted with any certainty.
Product Liability
Aquila has potential liability risks that are inherent in the testing, manufacturing and marketing of medical products. The use of Aquila's products or conduct of clinical trials may expose Aquila to product liability claims and possible adverse publicity. These risks also exist with respect to Aquila's products, if any, that receive regulatory approval for commercial sale. The Company currently has limited product liability coverage for the clinical research use of its products, which management believes is customary for companies with products at this stage of clinical development. There can be no assurance that Aquila will be able to maintain its existing insurance coverage or obtain additional insurance coverage at acceptable costs, if at all, or that a product liability claim would not materially adversely affect the business or financial condition of the Company.
If and when Aquila manufactures products that are recommended for routine administration to children, it is possible that it will be required to participate in the National Vaccine Injury Compensation Program. This program compensates children having adverse reactions to certain routine childhood immunizations with funds collected through an excise tax from the manufacturers of these products.
Human Resources
As of February 10, 1998, Aquila employed 57 full-time employees. The employees are not represented by any labor unions, and the Company considers its relations with those employees to be good. Aquila's scientific staff has expertise in many relevant areas and these internal resources are augmented by consulting agreements with research scientists located at various academic institutions and commercial organizations.
Scientific Advisory Board
Aquila's Scientific Advisory Board consists of six individuals with recognized expertise in immunology and oncology. The Scientific Advisory Board meets from time to time to discuss matters relating to the Company's current and long-term scientific planning and research and development, and the individual members are available for consultation on an informal basis. All members of the Scientific Advisory Board are employed by academic institutions, and may have commitments or consulting or advisory obligations to other entities that may limit their availability to Aquila. These entities may be competitors of Aquila. In certain circumstances, the academic institutions which employ the Scientific Advisory Board members may assert ownership rights to inventions or other technology that may result from advice provided to Aquila by such members. In such circumstances, Aquila could seek to negotiate licenses to such inventions or technology, but there can be no assurance that the Company would be able to obtain such licenses on commercially reasonable terms. No members of the Scientific Board are expected to devote more than a small portion of their time to Aquila's business.
The following persons are the current members of the Scientific Advisory Board:
Mary Lou Clements-Mann, M.D., M.P.H. Professor Department of International Health Johns Hopkins University Center for Immunization Research
John R. David, M.D. Richard Pearson Strong Professor and Chairman of the Department of Tropical Public Health Professor of Medicine and Chief of the Division of Tropical Medicine Harvard Medical School
Michael J. Hawkins, M.D. Associate Professor of Medicine Division of Medical Oncology Vincent T. Lombardi Cancer Research Center Georgetown University College of Medicine
Arthur I. Hurwitz, D.V.M., Ph.D. Independent Consultant 350 Westview Ave. Leonia, NJ 07605
Takis S. Papas, Ph.D. Director, Center for Molecular and Structural Biology and Professor of Medicine CMSB/Hollings Oncology Center Medical University of South Carolina
Richard J. Whitley, M.D. Professor of Pediatrics University of Alabama at Birmingham Children's Hospital
Item 2.
Item 2. Properties
Aquila's operations are conducted in a leased manufacturing, research and office facility in Worcester, Massachusetts under a lease which has been extended until the earlier of twenty (20) days from receipt by the Company of a notice of the sale of the property or July 31, 1998. The Company expects to relocate to new leased facilities in Framingham, Massachusetts in 1998. In November 1997, the Company completed the sale of its real estate in Rockville, Maryland which had been leased to third parties.
Item 3.
Item 3. Legal Proceedings
Deloitte & Touche, LLP ("Deloitte") appealed the United States Bankruptcy Court's July 18, 1996 order confirming the Plan of Reorganization (the "Plan") of Cambridge Biotech Corporation ("CBC"), the Company's predecessor. Deloitte contests the right of counsel to Class 5 claimants to bring an action against Deloitte on behalf of CBC as provided in the Plan. The United States District Court for the District of Massachusetts (the "District Court") granted the motion of the Company (which was substituted for CBC as appellee in the appeal) to dismiss this appeal on the grounds that, among other things, the Plan has been consummated. Deloitte has brought a further appeal to the U.S. Court of Appeals for the First Circuit of the District Court's dismissal order.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the security holders of Aquila during the fourth quarter of the fiscal year ended December 31, 1997.
Item 4A. Executive Officers of the Registrant.
The following is a list of management of the Company, their ages, positions, offices and business experience, as of February 1, 1998:
Alison Taunton-Rigby, Ph.D., 53, has served as President, Chief Executive Officer and Director since March of 1996. Dr. Taunton-Rigby served as President and Chief Executive Officer and a member of the Board of Directors of the Company's predecessor, Cambridge Biotech Corporation ("CBC") from April 1995 until October of 1996. From 1993 to 1994, she served as President and Chief Executive Officer of Mitotix, Inc., a biopharmaceutical company. Prior to joining Mitotix, Dr. Taunton-Rigby was Senior Vice President, Biotherapeutics, of Genzyme Corporation, where she had overall responsibility for Genzyme's biotherapeutics business. Dr. Taunton-Rigby is a member of the Board of Directors of BIO, the national trade organization, where she is also Chair of the Emerging Companies section. She is also a member of the Board of Directors and a past President of the Massachusetts Biotech Council, the trade organization representing Massachusetts biotechnology companies. Dr. Taunton-Rigby received her doctorate in Chemistry from the University of Bristol in England, and is a graduate of the Advanced Management Program of the Harvard Business School. She is a director of the CML Group, a specialty retailer, and of Synaptic Pharmaceutical Corporation. She is also a member of the Bentley College Ethics Board.
Gerald A. Beltz, Ph.D., 46, serves as Senior Vice President of Research and Development of the Company. Dr. Beltz served as Vice President of Research and Development of CBC from 1993 to 1996. For ten years prior to assuming these positions, Dr. Beltz held various scientific positions with CBC. Dr. Beltz was responsible for the initial development of Aquila's FeLV feline leukemia vaccine and CBC's HIV-1 diagnostic assays, and is the lead inventor on the patents covering these products. Dr. Beltz received his B.S. from Beloit College, his M.A. and Ph.D. from Princeton University, and did his post-doctoral work at Harvard University.
Deborah B. Grabbe, 46, is Vice President of Manufacturing Operations of the Company. Ms. Grabbe served as Vice President of Manufacturing Operations for CBC from 1995 until 1996. She was Vice President of Regulatory Affairs and Product Quality for CBC from 1993 to 1994. Prior to joining CBC in 1993, Ms. Grabbe was Director of Regulatory and Clinical Affairs and Director of Product Support for Behring Diagnostics, Inc. From 1987 to 1988 she was Vice President of Operations at Biotechnica Diagnostics, Inc. Ms. Grabbe holds a B.A. from Oberlin College and an M.S. from John A. Burns School of Medicine, University of Hawaii.
Robert B. Kammer, M.D., 57, is Vice President of Medical Affairs for the Company. Dr. Kammer served as Vice President of Medical Affairs for CBC from 1993 until 1996. From 1988 to 1993, Dr. Kammer was employed at Schering- Plough Corporation as Director, Anti-Infective Clinical Research. Before joining Schering-Plough, Dr. Kammer worked at Lilly Research Laboratories. Dr. Kammer received his B.A. and M.D. degrees from the University of Iowa and did his internship, residency and fellowship at the Medical College of Virginia.
Thomas H. Kelly, Jr., 46 is Vice President of Administration for the Company. Mr. Kelly served as Director of Administration and Human Resources for CBC and the Company from 1995 until 1997. He was manager of Human Resources from 1991 until 1995. Prior to joining the Company, Mr. Kelly held Human Resources positions with Fidelity Investments, Serono Laboratories and Peat Marwick. Mr. Kelly holds an A.B. from Boston College and an M.B.A. from Babson College.
James L. Warren, 52, joined Aquila in January of 1998 as Vice President of Finance, Chief Financial Officer and Treasurer. From 1991 to January 1998, Mr. Warren was Vice President and Corporate Controller of Genzyme Corporation, a multinational biotechnology and health care products company. From 1984 to 1991, Mr. Warren was Vice President of Finance and Administration of Itek Graphics Corporation, Composition Systems Division, a supplier of composition software systems. Mr. Warren holds a B.S. from the University of Tennessee and an M.B.A. from Boston University.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's stock trades on the over-the-counter market and prices are quoted on the NASDAQ National Market System ("Nasdaq") under the symbol AQLA. For the last quarter of 1996 and 1997, the following table sets forth the high and low sale or bid prices for the Company's Stock as reported by Nasdaq. The prices reported through the third quarter of 1996 represent bid prices for transactions reported by brokers on the "OTC Bulletin Board" and in the so called "pink sheets", and reflect interdealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. The prices reported through the third quarter of 1996 represent transactions in the stock of CBC - restated to give effect of an exchange of CBC stock at a ratio of one share of Aquila for each 7.569 shares of CBC. Aquila's stock was deemed registered pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934 in October 1996 and began trading on Nasdaq on October 24, 1996. As of March 13, 1998, there were 4,221 holders of record of Aquila's Common Stock.
1997 1996 Quarter High Low High Low
1st $ 7.50 $ 5.00 $12.31 $ 2.81 2nd $ 6.38 $ 3.75 $ 9.44 $ 3.75 3rd $ 5.75 $ 4.63 $ 6.13 $ 2.63 4th $ 5.25 $ 4.06 $ 6.75 $ 3.25
Item 6.
Item 6. Selected Financial Data
Aquila Biopharmaceuticals, Inc. For the years ended December 31, (Dollars in thousands except per share amounts)
1997 1996 1995 1994 Total revenues $ 6,928 $ 6,573 $ 5,728 $ 5,010 Total expenses (10,564) (11,745) (12,242) (16,109) Other income 4,370 5,777 2,162 360 Total reorganization items (1) -- (1,715) (813) (869) ------ ------- ------ ------ Income/(loss) continuing operations 734 (1,110) (5,165) (11,608) Income/(loss) discontinued operations (2) 191 9,109 223 (10,668) Income/(loss) before extraordinary loss (3) 925 7,999 (4,942) (22,276) Extraordinary loss -- (2,039) -- -- ------ ------ ------ ------ Net Income/(loss) $ 925 $ 5,960 $ (4,942) $ (22,276) ====== ====== ====== ======
Net Income/(loss) per weighted average number of common shares (diluted) (4)
Continuing operations $ 0.14 $ (0.30) $ (1.50) $ (3.40)
At year end: - ----------- Cash and marketable securities (5) $ 16,897 $ 17,675 $ 7,072 $ 8,538 Working capital $ 16,029 $ 16,157 $ 7,977 $ 8,886 Total assets $ 20,667 $ 26,312 $23,045 $ 28,503 Long term notes payable $ 139 $ 4,056 $ -- $ -- Total long term obligations $ 364 $ 4,281 $12,168 $ 12,413 Stockholder's equity $ 17,887 $ 16,917 $ 3,946 $ 8,668
There were no cash dividends paid. ____________ (1) The Company recorded professional fee expense of $2.1 million, $1.2 million and $0.6 million, and interest earned on cash resulting from Chapter 11 proceedings of $0.4 million, $0.4 million and $0.1 million in 1996, 1995 and 1994 respectively. In 1994, the Company recorded $0.4 million as a provision for rejected executory contracts.
(2) In 1996, the Company sold the enterics diagnostics business for $5.7 million and the retroviral diagnostic business for $6.5 million, recording a combined gain of $7.6 million. In 1997, a gain of $0.2 million was recorded on the sale of inventory from these businesses. The Company's income from these businesses was $1.5 million and $0.2 million in 1996 and 1995, respectively. In 1994, the Company recorded a loss from operations of $3.2 million and a loss of $7.5 million on the sale of its Irish subsidiary.
(3) The Company recorded an extraordinary loss of $2.0 million in 1996 upon its reorganization and emergence from Chapter 11 bankruptcy for issuance of shares valued at $5.6 million in settlement of a shareholder class action suit offset by forgiveness of debt of $3.8 million on pre-petition liabilities.
(4) Per share amounts have been restated to reflect adoption of SFAS 128 (see note 2 to the financial statements).
(5) Cash and investments balances reflect proceeds from the sale in 1996 of the Company's diagnostic businesses for a combined $12.2 million proceeds, a paid up license fee of $3.3 million, and in 1997, net cash proceeds from the sale of the Company's Rockville, Maryland property of $2.0 million.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This discussion contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the expectations of Aquila's management as of the filing date of this Form 10-K. The Company's actual results could differ materially from those anticipated by the forward-looking statements due to risks and uncertainties such as general economic conditions; risks in product and technology development; delays in the regulatory process; difficulties in obtaining raw materials for the Company's products; failure of corporate partners to commercialize successfully products using the Company's technology; competition; the costs of acquiring additional technology; failure to obtain additional funding for planned activities; and other risks and uncertainties identified in this report on Form 10-K and in Aquila's Security and Exchange Commission filings and the exhibits thereto.
Results of Operations.
The operating results of Aquila reflect its biopharmaceutical business. The businesses operated by Aquila's predecessor, CBC, are presented as Discontinued Operations in the Statements of Operations.
1997 Compared to 1996
Revenues
Total revenues for 1997 were $6.9 million, an increase of 5% over 1996. Product revenues were $1.3 million, an increase of 48% over 1996. Revenues from research and development were $5.6 million for 1997, a decrease of 1% from 1996.
Product revenues in 1997 increased as a result of a price increase and higher unit sales of the Company's animal health product to the Company's primary marketing partner, Virbac S.A.
Revenues from research and development for 1997 decreased due to the completion of NIH contracts in 1996 offset by increased shipments of the Company's proprietary Stimulon(TM) adjuvant, QS-21, for use in clinical trials being conducted by the Company's research partners. One of the partners paid $3.5 million in each of 1997 and 1996 to maintain its license for use of QS-21. In addition, the Company received $1.1 million in contract revenues from its bovine mastitis development partner compared to $1.2 million in 1996. The Company may experience lower future license fee revenues due primarily to the completion of agreements with its partners, one of which made a final payment in January 1998 described in "Subsequent Events".
Costs and Operating Expenses
Cost of sales was 78% and 165% in 1997 and 1996, respectively, with the improvement resulting primarily from volume generated operating efficiencies and to a price increase in one product.
Research and development expenses for 1997 were $5.0 million, a decrease of 4% from 1996. The decrease was due to lower spending under contractual agreements with third parties for outside research studies in the Company's bovine mastitis program.
General and administrative spending in 1997 was $4.5 million, a decrease of 10% from 1996 due to a lower level of employment and to the reduction in legal fees incurred in connection with the Company's reorganization completed in 1996.
Other Income
Other income in 1997 was $4.4 million, a decrease of 24% from 1996. In 1997, the Company recognized a $2.3 million gain on the sale of its Rockville, Maryland real estate. In 1996, the Company received a $3.3 million license fee payment for technology subsequently sold and $0.5 million in exchange for the Company's interest in a joint venture. Royalty income, which is derived from agreements related primarily to discontinued operations, declined to $0.9 million in 1997 from $1.4 million in 1996.
1996 Compared to 1995
Revenues
Total revenues for 1996 were $6.6 million, an increase of 15% over 1995. Product revenues were $0.9 million, an increase of 61% over 1995. Revenues from research and development were $5.7 million for 1996, an increase of 10% from 1995.
Product revenues in 1996 increased as a result of higher unit sales of the Company's animal health product to the Company's marketing partner, Virbac S.A.
Revenues from research and development for 1996 increased 10% due to increased shipments of the Company's proprietary Stimulon(TM) adjuvant, QS-21, for use in clinical trials being conducted by the Company's research partners, one of which paid $3.5 million in each of 1996 and 1995 to maintain its license for use of QS- 21. In 1996 the Company received $1.2 million in contract revenues from its bovine mastitis development partner, compared to $0.4 million in 1995.
Costs and Operating Expenses
Cost of sales was 165% and 174% of product sales in 1996 and 1995, respectively, the improvement resulting primarily from improved operating efficiencies in manufacturing.
Research and development expenses for 1996 were $5.3 million compared to $5.8 million, a decrease of 10% from 1995. The decrease was attributable to expenses recognized in 1995 related to a milestone obligation on certain technology licensed by the Company.
General and administrative spending in 1996 was $5 million, a decrease of 8% from 1995 primarily due to a lower level of employment.
Other Income
Other income in 1996 was $5.8 million, an increase of 167% from 1995. The increase was due to income from a paid-up license fee of $3.3 million from a third party and a $0.5 million payment in exchange for the Company's interest in a joint venture. Both of these payments were nonrecurring transactions. Royalty income in 1996 was $1.4 million compared to $1.6 million in 1995.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" requires that all components of comprehensive income and total comprehensive income be reported on one of the following: (1) the statement of operations or (2) a separate statement of comprehensive income. Comprehensive income is comprised of net income and all changes to stockholders' equity, except those due to investments by owners (changes in paid-in capital) and distribution of owners (dividends). This statement is effective for fiscal years beginning after December 15, 1997. The implementation of SFAS No. 130 will have no impact on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosure About Segments of an Enterprise and Related Information" requires public companies to report certain information about their operating segments in their annual financial statements and quarterly reports issued to stockholders. It also requires public companies to report certain information about their products and services, the geographic areas in which they operate, and their major customers. This statement is effective for fiscal years beginning after December 15, 1997. Implementation of SFAS No. 131 will have no effect on the Company's financial position or results of operations. The Company is assessing the financial disclosure statement footnote impact of SFAS No. 131.
Liquidity and Capital Resources
At December 31, 1997 Aquila had cash, cash equivalents and marketable securities of $16.9 million compared with $17.7 million at the end of 1996.
In 1997, marketable securities increased by $1.0 million while cash and cash equivalents ("cash") declined $1.8 million. Operating activities in 1997 required $3.0 million. Investing activities generated cash from the sale of property of $6.1 million while financing activities reflected the cash payment of $4.2 million to repay the mortgage on the property sold.
In 1996, cash increased by $2.3 million. Operating activities required cash of $1.1 million. Investing activities provided $3.4 million due to the sale of the diagnostic businesses for a combined $12.2 million with investment of $8.6 million of the proceeds. Financing activities in 1996 were virtually nil.
In 1995, cash decreased by $1.7 million. Operating activities required $0.9 million due to deferred revenue of $4.1 million with working capital providing $3.2 million. Investing activities required $0.8 million of which $0.6 million was for capital expenditures for manufacturing capacity while as in 1996, financing activities were virtually nil.
Aquila currently occupies an office, research and manufacturing facility under a lease which was extended to the earlier of 20 days from receipt by the Company of a notice of the sale of the property or July 31, 1998. The Company plans to move to a new leased facility in Framingham, Massachusetts in 1998. There can be no assurance that the new facility will be ready for occupancy at the end of the existing lease or that the Company will be able to obtain another extension of the existing lease. The Company plans to make capital expenditures of $3 - $4 million to make the new facility ready for use and expects to borrow the required funds. There can be no assurance that financing will be obtained on terms acceptable to the Company, and that the Company will not have to expend its cash to pay some or all of such expenses.
The Company has conducted a review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and is implementing its plan to resolve the issue. The Year 2000 problem is a result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company presently believes that, with relatively minor modifications to existing software and conversion to new financial software in early 1998, the Year 2000 problem will not pose significant operational problems for the Company's computer systems as so modified and converted.
Aquila expects that its available cash, investments, cash flow from research contracts and product sales will be sufficient to finance its planned operations and capital requirements for the next two years. Thereafter, Aquila must raise significant additional capital in order to continue operations at current levels and to complete the commercialization of its proprietary programs. Capital requirements could differ materially from those currently anticipated by management. There can be no assurance that Aquila will be successful in raising additional capital.
Subsequent Events
In January 1998, Aquila received the final payment of $3.0 million under a license agreement for the use of the Company's proprietary Stimulon(TM) adjuvant, QS-21, in numerous vaccines.
In February 1998, Aquila completed a private placement of 769,000 shares of Common Stock receiving proceeds of approximately $3.6 million. Proceeds from the sale will be used for general corporate purposes.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements filed as part of this Annual Report on Form 10-K are listed under Item 14 below.
Item 9.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference to the Company's definitive proxy statement, "Proposal 1, Election of Directors", to be filed pursuant to Regulation 14A, in connection with the 1998 Annual Meeting of Shareholders. Information concerning executive officers of the Registrant is included in Part I of this Report as Item 4A - Executive Officers of the Registrant.
Item 11.
Item 11. Executive Compensation.
Incorporated by reference to the Company's definitive proxy statement, "Proposal 1, Election of Directors - Executive Compensation", to be filed pursuant to Regulation 14A, in connection with the 1998 Annual Meeting of Shareholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's definitive proxy statement, "Proposal 1, Election of Directors - Security Ownership of Certain Beneficial Owners and Management", to be filed pursuant to Regulation 14A in connection with the 1998 Annual Meeting of Shareholders.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the Company's definitive proxy statement, "Proposal 1, Election of Directors", to be filed pursuant to Regulation 14A in connection with the 1998 Annual Meeting of Shareholders.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements.
The following documents are filed as part of this report:
i. Report of Independent Auditors.
ii. Statements of Operations for each of the three years in the period ended December 31, 1997.
iii. Balance Sheets as of December 31, 1997 and 1996
iv. Statements of Cash Flows for each of the three years in the period ended December 31, 1997.
v. Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1997.
vi. Notes to Financial Statements.
2. Financial Statement Schedules.
None required.
3. Exhibits.
2. Confirmed Reorganization Plan (consisting of Reorganization Plan, dated May 20, 1996, and modification date of July 15, 1996) (incorporated by reference to Exhibit 2 to current report on Form 8-K, dated July 18, 1996, File No. 0-12081).
3.1 Amended and Restate Certificate of Incorporation, effective July 25, 1996 (incorporated by reference to Exhibit 2 to Form 8- K, dated July 18, 1996, File No. 0-12081).
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation, effective March 24, 1997 (incorporated by reference to Exhibit 3.2 to Annual Report on Form 10-K for fiscal year ended December 31, 1996, File No. 0- 12081).
3.3 By-laws (incorporated by reference to Exhibit 2 to Form 8-K, dated July 18, 1996, File No. 0-12081).
4.1 Specimen Certificate representing common stock of the Company Incorporated by reference to Exhibit 4.1 to From 8-K, dated October 21, 1996, File No. 0-12081).
4.5 Long Term Debt. No instrument which defines the rights of holders of long term debt of the Company is filed herewith. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request.
*10.1 Contract Research and License Agreement with Virbac Laboratories, S.A. dated July 6, 1983 (incorporated by reference to Exhibit 10.31 to Annual Report on Form 10-K for fiscal year ended December 31, 1983, File No. 0-12081).
*10.1.1 Amendment to Agreement with Virbac Laboratories, S.A. (incorporated by reference to Exhibit 10.10.1 to Annual Report on Form 10-K for fiscal year ended December 31, 1988, File No. 0- 12081).
*10.2 Lease for Worcester Massachusetts facility (incorporated by reference to Exhibit 10. 13 to Annual Report on Form 10-K for fiscal year ended December 31, 1986, File No. 0-12081).
10.2.1 Amendment to Lease Agreement for Worcester Massachusetts facility (incorporated by reference to Exhibit 10.18 to Annual Report on Form 10-K for fiscal year ended December 31, 1992, File No. 0-12801).
*10.3 License, Development and Supply Agreement with SmithKline Beecham, p.l.c., dated as of September 11, 1992, as amended by Agreement dated as of March 31, 1993 (incorporated by reference to Exhibit 10-17 to Annual Report of Form 10-K for fiscal year ended December 31, 1992, File No. 0-12081).
tm10.4 Employment Agreement with Alison Taunton-Rigby, dated April 6, 1995 (incorporated by reference to Exhibit 10.17 to Annual Report on Form 10-K for fiscal year ended December 31, 1995, File No. 01-12081).
tm10.5 Employment Agreement with Gerald A. Beltz, dated August 21, 1995 (incorporated by reference to Exhibit 10.18 to Annual Report on Form 10-K for fiscal year ended December 31, 1995, File No. 01-12081).
tm10.6 Employment Agreement with Deborah Blackburn Grabbe, dated August 21, 1995 (incorporated by reference to Exhibit 10.19 to Annual Report on Form 10-K for fiscal year ended December 31, 1995, File No. 01-12081).
tm10.7 Employment Agreement with Robert B. Kammer, dated August 21, 1995 (incorporated by reference to Exhibit 10.19 to Annual Report on Form 10-K for fiscal year ended December 31, 1995, File No. 01-12081).
tm10.8 Employment Agreement with Stephen J. DiPalma, dated March 1, 1996 (incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for fiscal year ended December 31, 1996, File No. 01-12081).
10.9 Master Acquisition Agreement by and among bioMerieux Vitek, Inc., Aquila Biopharmaceuticals, Inc. and Cambridge Biotech Corporation, dated as of April 4, 1996 (incorporated by reference to Exhibit 10.1 to quarterly report on Form 10-Q for quarter ended June 30, 1996, File No. 0-12081).
10.10 Asset Purchase Agreement between Meridian Diagnostics, Inc. and Cambridge Biotech Corporation, dated as of June 24, 1996 (incorporated by reference to Exhibit 2.1 to current report on Form 8-K, dated June 24, 1996, File No. 0-12081).
10.11 1996 Stock Award and Option Plan (incorporated by reference to Exhibit 10.12 to Annual Report on Form 10-K for fiscal year ended December 31, 1996, File No. 01-12081).
10.12 1996 Directors Stock Award and Option Plan (incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for fiscal year ended December 31, 1996, File No. 01-12081).
10.13 1996 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.14 to Annual Report on Form 10-K for fiscal year ended December 31, 1996, File No. 01-12081).
tm10.14 1996 Employee Retention Agreement (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for fiscal quarter ended September 30, 1997, File No. 01-12081).
tmo10.15 Employment Agreement with James L. Warren, dated January 17, 1998.
o11. Computation of Earnings Per Share.
o23.1 Consent of Independent Accountants.
o27. Financial Data Schedule.
(b) Reports on Form 8-K filed in the last quarter of 1996.
None. ____________________________ o Filed herewith as part of this Annual Report on Form 10-K * Confidential treatment previously granted. tm Management contract or compensatory plan.
Report of Independent Accountants
We have audited the accompanying balance sheets of Aquila Biopharmaceuticals, Inc. as of December 31, 1997 and 1996, and the related statements of operations, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Aquila Biopharmaceuticals, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand Coopers & Lybrand L.L.P. Boston, Massachusetts February 25, 1998
AQUILA BIOPHARMACEUTICALS, INC.
Statements of Operations For the Years Ended December 31,
1997 1996 1995 Revenue: Product Sales $ 1,319,260 $ 890,180 $ 553,846 Research and development 5,608,977 5,682,932 5,173,870 ------------ ------------ ----------- 6,928,237 6,573,112 5,727,716 Cost and expenses: Cost of Sales 1,023,268 1,467,820 960,943 Research and development 5,019,775 5,250,502 5,826,429 General and administrative 4,521,035 5,027,190 5,454,835 ------------ ------------ ----------- 10,564,078 11,745,512 12,242,207 ------------ ------------ ----------- Other income, net (Notes 6 and 14) 4,370,107 5,777,032 2,162,396 ------------ ------------ ----------- Income/(loss) from continuing operations before reorganization items and income tax benefit 734,266 604,632 (4,352,095)
Reorganization items (Note 1): Professional fees -- (2,109,050) (1,200,188) Interest earned on accumulated cash resulting from Chapter 11 proceedings -- 394,272 387,407 ---------- ----------- ---------- Total reorganization items -- (1,714,778) (812,781) ---------- ----------- ---------- Income/(loss) from continuing operations 734,266 (1,110,146) (5,164,876)
Discontinued operations (Note 3): Income from operations -- 1,452,810 223,330 Gain on sale 191,250 7,656,683 -- ---------- ---------- --------- Income/(loss) before extraordinary loss 925,516 7,999,347 (4,941,546)
Extraordinary loss on reorganization (Note 12) -- (2,039,816) -- ---------- ---------- --------- Net Income/(loss) $ 925,516 $ 5,959,531 $ (4,941,546) ========== ========== ========= Income/(loss) per weighted average number of common shares: Basic earnings per share: Income/(loss) from continuing operations $ .15 $ (0.30) $ (1.50) Net Income/loss) $ .18 $ 1.60 $ (1.44) Diluted earnings per share: Income/(loss) from continuing operations $ .14 $ (0.30) $ (1.50) Net Income/(loss) $ .18 $ 1.60 $ (1.44)
Weighted average number of common shares outstanding: Basic 5,003,703 3,717,441 3,442,305 Diluted 5,141,815 3,717,441 3,442,305
The accompanying notes are an integral part of these financial statements.
AQUILA BIOPHARMACEUTICALS, INC. Balance Sheets As of December 31,
1997 1996 Assets Current Assets: Cash and cash equivalents $7,352,450 $9,112,091 Marketable securities (Notes 2 and 4) 8,551,591 8,562,730 Accounts receivable - trade (less allowance for doubtful accounts of $77,698 and $178,565, respectively) 1,253,145 1,545,612 Other receivables 372,000 820,307 Inventories (Note 5) 678,591 451,074 Prepaid expenses and other current assets 237,973 778,927 ---------- ---------- Total current assets 18,445,750 21,270,741 Marketable securities (Notes 2 and 4) 993,151 -- Investments (Note 6) 394,500 394,500 Property, Plant, and Equipment, Net (Note 7) 613,730 4,308,457 Patents and Purchased Technology, Net (Note 8) 199,418 295,620 Other Assets 20,912 43,032 ----------- ----------- Total Assets $20,667,461 $26,312,350 =========== ===========
Liabilities & Shareholders' Equity Current Liabilities: Accounts Payable $ 289,952 $ 943,924 Accrued Royalties 149,572 642,959 Accrued professional fees 177,500 383,557 Other accrued expenses (Note 9) 1,730,716 2,097,326 Deferred revenue (Note 19) -- 917,600 Current maturities of long-term debt (Note 10) 69,339 129,103 --------- --------- Total current liabilities 2,417,079 5,114,469
Deferred Revenue (Note 6) 225,000 225,000 Long Term Debt (Note 10) 138,678 4,055,564 --------- --------- Total Liabilities 2,780,757 9,395,033 --------- --------- Commitments and Contingencies (Note 15)
Shareholders' Equity (Note 16): Preferred stock, authorized: 5,000,000 shares, none issued -- -- Common stock, par value: $.01 per share, authorized: 30,500,000 shares issued: 5,007,527 and 5,000,000 shares in 1997 and 1996, respectively 50,075 50,000 Additional paid in capital 127,558,019 127,514,223 Treasury stock at cost: 10,526 shares (47,367) (47,367) Accumulated deficit (109,674,023) (110,599,539) ------------- ------------- Total Shareholders' Equity 17,886,704 16,917,317 ------------- -------------
Total Liabilities and Shareholders' Equity $ 20,667,461 $ 26,312,350 ============ ============= The accompanying notes are an integral part of these financial statements.
AQUILA BIOPHARMACEUTICALS, INC. Statements of Cash Flows For the Years Ended December 31, 1997 1996 1995 Cash Flows From Operating Activities: Net Income/(loss) $ 925,516 $ 5,959,531 $(4,941,546) Adjustments to reconcile net income/(loss) to net cash used in operating activities: Depreciation and amortization 402,555 3,448,192 4,736,689 Provision (recovery) for doubtful accounts (25,000) 50,000 61,065 Non cash compensation expense 10,000 50,000 219,381 Gain on sale of property, plant and equipment (2,340,983) -- -- Gain on sale of discontinued businesses (191,250) (7,423,020) -- Loss from bankruptcy consummation -- 2,039,816 -- Issuance of common shares 15,871 -- -- Receipt of investments -- (169,500) (216,162) Loss on disposition and write down of investments -- 11,164 110,586 Changes in assets and liabilities, net of effects of businesses sold: Accounts and other receivables 765,774 347,936 143,316 Inventories (448,440) 1,262,592 (402,163) Deferred revenue (917,600) (1,780,454) (4,090,520) Prepaid and other current assets 540,954 (83,472) 140,830 Accounts payable and other accrued expenses (1,720,026) (1,033,690) 3,349,347 Settlement of liabilities subject to Chapter 11 -- (3,757,436) -- Minority interest -- (8,989) 8,989 ---------- ---------- -------- Net cash used by operating activities(2,982,629) (1,087,330) (880,188) Cash Flows From Investing Activities: Purchases of marketable securities (12,163,261) (8,562,730) -- Proceeds from sale of marketable securities -- 204,998 -- Proceeds from maturities of marketable securities 11,181,249 -- -- Other noncurrent assets 22,120 62,391 368 Purchases of property, plant and equipment (371,176) (309,627) (593,551) Proceeds from the sale of property, plant & equipment, net 6,100,583 -- -- Patents and purchased technology -- (227,968) (204,927) Proceeds from the sale of discontinued businesses 412,123 12,201,000 -- --------- ---------- -------- Net cash (used)/provided by investing activities 5,181,638 3,368,064 (798,110) Cash Flows From Financing Activities: Exercise of stock options 18,000 -- -- Proceeds from line of credit 208,017 -- -- Payment on long-term obligations (4,184,667) (24,394) (3,742) ------------ ----------- ------------ Net cash used by financing activities(3,958,650) (24,394) (3,742) ------------ ----------- ----------- Net increase/(decrease) in cash and cash equivalents (1,759,641) 2,256,340 (1,682,040) ------------ ----------- ----------- Cash and cash equivalents at the beginning of the year 9,112,091 6,855,751 8,537,791 ------------ ----------- ----------- Cash and cash equivalents at the end of the period $7,352,450 $ 9,112,091 $ 6,855,751 ========== =========== =========== Supplemental disclosures: Income taxes paid/(refunded) $ -- $ 4,231 $ -- Interest paid 397,776 98,541 -- Stock received for Unearned License Fee -- 225,000 -- Conversion of Chapter 11 liabilities into long term debt -- 4,021,220 -- Stock issued under incentive plan -- 503,055 -- Stock issued to creditors pursuant to Reorganization Plan -- 881,582 -- Stock issued in settlement of class action lawsuit -- 5,625,000 --
The accompanying notes are an integral part of these financial statements.