Item 1. Business
Diacrin is developing transplantable cells for the treatment of human diseases which are characterized by cell dysfunction or cell death and for which current therapies are either inadequate or nonexistent. Products under development for the treatment of neurological disorders include: NeuroCell(TM)-PD for Parkinson's disease and NeuroCell(TM)-HD for Huntington's disease, both of which are being developed in a joint venture with Genzyme Corporation ("Genzyme"), NeuroCell(TM)-FE for focal epilepsy, porcine neural cells for stroke and intractable pain and spinal cord cells for spinal cord injury. Also under development are hepatocytes for acute liver failure and for cirrhosis, myoblasts for cardiac disease and retinal epithelial cells for macular degeneration.
In 1995, the United States Food and Drug Administration ("FDA") cleared the Company to conduct the first ever clinical trial of transplanted porcine cells in humans and the Company initiated a Phase 1 clinical trial to evaluate NeuroCell(TM)-PD for the treatment of Parkinson's disease. Enrollment in this 12-patient Phase 1 clinical trial was completed in 1996. Also in 1996, the Company initiated a Phase 1 clinical trial to evaluate NeuroCell(TM)-HD for the treatment of Huntington's disease and enrollment of all 12 patients in the trial was completed in 1997. In 1998, the Company initiated a Phase 1 clinical trial to evaluate NeuroCell(TM)-FE for the treatment of complex partial epileptic seizures in patients whose disease is not well-controlled with drug therapy. Based on encouraging results from the Neurocell(TM)-PD Phase 1 clinical trial, the joint venture initiated a Phase 2 clinical trial in 1998. In 1999, the Company initiated Phase 1 clinical trials to test neural cell transplantation for stroke and hepatocyte transplantation for cirrhosis.
While the feasibility of cell transplantation has been demonstrated clinically, widespread use of cell transplantation in clinical applications has been hampered by the lack of an adequate supply of human donor cells. To overcome this constraint, Diacrin has pioneered the use of porcine cells for clinical transplantation. The Company believes that pigs will be a reliable
source of a wide range of cell types suitable for transplantation into humans. The Company has shown in preclinical studies and early clinical trials that, under standard immunosuppressive regimens, transplanted porcine cells appear capable of addressing the functional deficits caused by cell damage or cell death.
In addition, Diacrin is developing a proprietary immunomodulation technology which is exclusively licensed to the Company from the Massachusetts General Hospital ("MGH"). This technology involves the selective treatment of major histocompatibility complex ("MHC") class I antigens on cell populations prior to transplantation to prevent the patient's immune system from rejecting the transplanted cells. The Company's approach would obviate the need for standard immunosuppressive regimens, which may leave the patient vulnerable to a wide range of undesirable side effects, including susceptibility to infectious agents and cancer. Preclinical studies in animal models, including primates, have demonstrated the ability of the Company's immunomodulation technology to prevent rejection of transplanted porcine cells without compromising the ability of the immune system to protect the recipient in its normal fashion. Neurons, hepatocytes and cardiac myocytes treated with Diacrin's proprietary immunomodulation technology have been successfully transplanted into animals without immunosuppression. This technology is presently being evaluated in Parkinson's disease, Huntington's disease and focal epilepsy patients as part of Phase 1 clinical trials of NeuroCell(TM)-PD, NeuroCell(TM)-HD and NeuroCell(TM)-FE, respectively. Phase 1 clinical trial results suggest that NeuroCell(TM)-PD treated with the Company's immunomodulation technology may be effective without the use of standard immunosuppression.
The FDA has granted orphan drug designation for NeuroCell(TM)-PD for advanced Parkinson's disease and NeuroCell(TM)-HD for Huntington's disease. Each received a designation for use of the product with Diacrin's immunomodulation technology to prevent rejection and a designation for use without this technology. Under current law, the first developer to receive FDA marketing approval for a designated orphan drug is generally entitled to a seven-year exclusive marketing period in the United States.
In September 1996, the Company and Genzyme formed Diacrin/Genzyme LLC (the "Joint Venture"), a joint venture to develop and commercialize NeuroCell(TM)-PD and NeuroCell(TM)-HD (the "Joint Venture Products"). Under the terms, and subject to certain conditions, of the joint venture agreement, which was effective October 1, 1996, Genzyme has agreed to provide 100% of the first $10 million in funding and 75% of the following $40 million in funding for the development and commercialization of the Joint Venture Products. The Company agreed to provide the remaining 25% of the following $40 million in funding. All costs incurred in excess of $50 million are to be shared equally between Genzyme and the Company in accordance with the terms of the agreement. Any profits of the Joint Venture are to be shared equally by the two parties. The Joint Venture plans that Diacrin and Genzyme will perform, on behalf of the Joint Venture, the development activities in connection with the Joint Venture Products and that Genzyme will market and sell the Joint Venture Products on a cost reimbursement basis on behalf of the Joint Venture.
In addition to NeuroCell(TM)-PD, NeuroCell(TM)-HD and NeuroCell(TM)-FE, Diacrin has seven other products in various stages of development: (i) porcine hepatocytes for acute liver failure; (ii) human hepatocytes for cirrhosis; (iii) human myoblasts for cardiac disease; (iv) porcine neural cells for stroke; (v) porcine neural cells for intractable pain; (vi) porcine spinal
cord cells for spinal cord injury and (vii) retinal epithelial cells for macular degeneration.
Diacrin's Transplantation Technology
While the feasibility of cell transplantation has been demonstrated clinically, widespread use of cell transplantation in clinical applications has been hampered by the lack of an adequate supply of human donor cells. To overcome this constraint, Diacrin has pioneered the use of porcine cells for clinical transplantation and in March 1995 received the first FDA clearance to transplant porcine cells into humans. Each step of Diacrin's production process has been carefully designed and is tightly controlled in order to obtain cells suitable for human transplantation. The Company has developed procedures to screen pigs thoroughly for infectious agents and then isolate donor pigs in specially-filtered rooms. In the case of NeuroCell(TM)-PD, NeuroCell(TM)-HD and NeuroCell(TM)-FE, where fetal cells are required, Diacrin harvests tissue of appropriate fetal age and type under current good manufacturing practices ("cGMPs"). Specific cell populations from the harvested tissue are then isolated and prepared at either Diacrin's or the Joint Venture's facilities. The Company has filed patent applications to protect its proprietary donor pig qualification and cell harvesting processes and related products.
Diacrin's screening procedures are performed in accordance with proposed FDA guidelines covering xenotransplantation. The Company has worked closely with the FDA to provide input in the development of these guidelines. The implementation of these guidelines is necessary to avoid contamination of transplanted cellular products with infectious agents. The Company is aware of recent scientific publications by others which demonstrate, under laboratory conditions, that porcine endogenous retroviruses ("PERV") have the potential to infect human cells. In response to these findings, the FDA in October 1997 instructed all sponsors of human clinical trials involving porcine tissue, including the Company, to test for the presence of infectious PERV in porcine cells and for evidence of PERV in patient blood samples prior to the transplantation of any additional patients in clinical trials. The Company, together with an outside contractor, tested porcine cells and patients for PERV. Given the satisfactory results of those tests, the FDA cleared the Company to proceed with its planned clinical trials in NeuroCell(TM)-PD and NeuroCell(TM)-FE in December 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Factors That May Affect Future Results - Reliance on Cell Transplantation Technology; No Currently Approved Xenotransplantation-Based Product; PERV Testing."
Current transplantation technology generally requires the recipient to be immunosuppressed in order to avoid graft rejection. T cells, the main cells involved in directing the body's immune response, recognize and bind to MHC class I antigens. Binding of foreign MHC class I antigens triggers a cascade of events which results in destruction of the engrafted cells that display these antigens. Cyclosporine, a standard immunosuppressive agent, prevents this rejection process. Using cyclosporine, Diacrin has demonstrated survival of transplanted porcine cells in a variety of preclinical animal models and has histologically documented survival of transplanted porcine neurons in a deceased patient who had received NeuroCell(TM)-PD.
Diacrin is also developing proprietary immunomodulation technology which involves the treatment of isolated cell populations prior to transplantation with antibody fragments directed
against MHC class I antigens in order to obviate the need for generalized immunosuppression using agents such as cyclosporine. Chronic generalized immunosuppression may result in complications such as increased susceptibility to infectious diseases and cancer. Preclinical studies performed by Diacrin scientists and academic collaborators have shown that neural cells, hepatocytes and cardiac myocytes that have been pretreated using Diacrin's immunomodulation technology prior to transplantation survived in several animal models without immunosuppression. Since the antibody fragments would not be expected to remain permanently bound to the engrafted cells, the long-term survival of the engrafted cells seen in these studies suggests that the graft recipient's immune system has "learned" to accept the graft. Thus, the Company believes that treatment of cells with antibody fragments prior to transplantation will induce a state of graft-specific immunological tolerance, which would allow continued survival of the transplanted cells.
In connection with its Phase 1 clinical trials, six Parkinson's disease patients, six Huntington's disease patients and three focal epilepsy patients have been transplanted with antibody pretreated NeuroCell(TM)-PD, NeuroCell(TM)-HD and NeuroCell(TM)-FE, respectively, using no immunosuppression. Preliminary indications from the Phase 1 NeuroCell(TM)-PD clinical trial suggest that improvement in Parkinson's disease symptoms have occurred in patients transplanted with pre-treated NeuroCell(TM)-PD. However, the Company believes that, given the severity of advanced Parkinson's disease and Huntington's disease, both NeuroCell(TM)-PD and NeuroCell(TM)-HD could be useful products even if they require the use of chronic immunosuppression.
Product Development Programs
Diacrin is focusing its research and development activities on the production and transplantation of cells for use in the treatment of human diseases characterized by cell dysfunction or cell death. The Company is developing products to address important medical needs which represent a broad-based application of Diacrin's technologies for cell production and transplantation. The following table illustrates Diacrin's product development programs in cell transplantation and each product's stage of development:
NeuroCell(TM)-PD for Parkinson's Disease
Parkinson's disease is a neurodegenerative disease that results from the loss of dopamine-producing neurons within an area of the brain called the substantia nigra, causing the loss of coordinated muscular activity. The disease is generally characterized by progressively worsening physical conditions including difficulty in movement, muscular rigidity, tremors and postural instability. The majority of Parkinson's disease patients are first diagnosed between the ages of 45 and 65. In addition to a decreased quality of life, Parkinson's disease may also result in premature death. In the United States, there are approximately 500,000 people afflicted with Parkinson's disease. These patients can be classified according to the severity of their disease by Hoehn and Yahr staging, from stage 1 early in the disease process to stage 5 when the disease has progressed to result in the patient being bedridden or wheelchair-bound. NeuroCell(TM)-PD will be directed to the treatment of patients in stage 4 and stage 5, which the Company estimates to be between 115,000 and 155,000 patients in the United States. With the increasing average age of the population, the prevalence of Parkinson's disease is expected to increase. The Company has received orphan drug designation for NeuroCell(TM)-PD. See "Government Regulation."
Current therapies consist of administration of levodopa ("L-dopa"), a precursor of
dopamine, and dopamine analogues. However, L-dopa is only effective for a limited period of time, with most patients experiencing a progressive reduction in drug efficacy over a 10 to 15 year period, due to the cumulative loss of viable neurons and tolerance to L-dopa. In addition, L-dopa therapy can result in severe side-effects including dyskinesias and hallucinations. No currently available therapy prevents progression of the neurological deficits caused by Parkinson's disease.
Clinical researchers have shown that transplantation of human fetal neural cells into Parkinsonian patients is effective in treating the disease. For example, Swedish researchers have demonstrated survival and function of transplanted human fetal cells in Parkinson's disease patients in an ongoing study commenced in 1989. This study has shown cells surviving for at least eight years and improvements in the patients' condition. However, widespread clinical application is limited by the lack of availability of human fetal neural cells and ethical concerns regarding the use of human fetal tissue. Moreover, even when available, the quality of human fetal cells is variable, which may limit the clinical effectiveness of such treatment.
Diacrin's approach to the treatment of Parkinson's disease is to produce and transplant NeuroCell(TM)-PD to replace the function of those neurons damaged by the disease. The Company and its collaborators have shown in animal models that these transplanted cells become integrated into the surrounding brain tissue and correct functional defects. While NeuroCell(TM)-PD is not a cure for Parkinson's disease, the goal of this treatment is to significantly improve the clinical condition of patients with severe Parkinson's disease sufficiently to allow them to function independently.
Diacrin harvests fetal porcine midbrain cells under cGMPs for transplantation. These cells are functionally indistinguishable from human fetal neural cells. The porcine tissue source has been developed by Diacrin in conjunction with Tufts University School of Veterinary Medicine ("Tufts"). The cell isolation and testing has been done in conjunction with the Company's academic collaborators at Harvard Medical School. Company scientists, in conjunction with academic collaborators, have shown reversal of functional deficits in a rodent model of Parkinson's disease transplanted with NeuroCell(TM)-PD. Under a Diacrin-sponsored research program, a non-human primate model for Parkinson's disease was transplanted with NeuroCell(TM)-PD. Results confirmed the presence of viable cells in the transplantation site at the conclusion of this 17-month study.
In October 1996, enrollment in a Phase 1 clinical trial of NeuroCell(TM)-PD in patients with severe Parkinson's disease was completed. This trial, which was initiated by the Company in April 1995 and, since October 1996, has been conducted by Diacrin on behalf of the Joint Venture, was the first FDA-authorized trial involving transplantation of porcine cells into humans. Although the study was designed to evaluate the safety of NeuroCell(TM)-PD, its effects on the Parkinson's disease symptoms of the transplant recipients are also being evaluated. The NeuroCell(TM)-PD clinical trial is being conducted at the Lahey Hitchcock Clinic in Burlington, Massachusetts and at Boston University School of Medicine under an IND application.
All twelve patients were transplanted unilaterally (one side of the brain) with approximately 12 million cells using standard stereotactic surgical techniques. Eleven patients continue to be evaluated as part of the clinical trial. In January 1996, the twelfth patient, a 69-year old male who had undergone NeuroCell(TM)-PD transplant surgery in May 1995, died of a
pulmonary embolism. An autopsy determined that this patient's death was unrelated to the transplant. A histological study of this patient published in the March 1997 issue of Nature Medicine demonstrated that fetal pig neural cells survived and matured in his brain. This study marked the first published documentation of survival of cells transplanted from another species into the human brain and the appropriate growth of the non-human neurons in a Parkinsonian brain.
It is expected that any clinical improvement of Parkinson's disease patients after transplantation will occur gradually as the fetal pig neurons mature. All eleven Parkinson's disease patients in the Phase 1 clinical study have been evaluated at twelve months post-transplantation. The patients continue to demonstrate statistically significant clinical improvement one year after transplantation (p-value of 0.01) as measured by the Unified Parkinson's Disease Rating Scale.
In 1999, the Joint Venture plans to continue to accrue patients into a Phase 2 clinical trial involving the transplantation of NeuroCell(TM)-PD in conjunction with cyclosporine immunosuppression versus a control group. A planned second Phase 2 clinical trial, that the Joint Venture expects to be initiated in the second quarter of 1999, will involve the transplantation of NeuroCell(TM)-PD using the Company's proprietary immunomodulation technology. It is anticipated that all transplanted patients in these trials will receive approximately 48 million cells transplanted bilaterally (both sides of the brain). Assuming successful completion of these trials, the Joint Venture plans to conduct two Phase 3 clinical trials beginning in early 2000.
NeuroCell(TM)-HD for Huntington's Disease
Huntington's disease is a genetically transmitted disease which is caused by a loss of the specific type of neurons which produce the neurotransmitter gamma aminobutyric acid ("GABA"). The loss of these GABAergic cells results in a progressive deterioration marked by discordant movement, intellectual impairment and a spectrum of psychiatric and behavioral disturbances. The majority of cases of Huntington's disease first present between 40 and 50 years of age. There are approximately 25,000 people diagnosed with Huntington's disease in the United States. Currently there is no effective therapy for Huntington's disease. Treatment is palliative with tranquilizers and anti-psychotic drugs being the only options. The Company has received orphan drug designation for NeuroCell(TM)-HD. See "Government Regulation."
Diacrin's approach to treating this disease consists of producing and transplanting NeuroCell(TM)-HD to replace the function of neurons damaged by Huntington's disease. Fetal porcine neurons from an area of the brain called the lateral ganglionic eminence are harvested under cGMPs for transplantation into the striatum of the graft recipient's brain. Diacrin and its scientific collaborators have tested NeuroCell(TM)-HD in a non-human primate model of Huntington's disease. Results indicate that NeuroCell(TM)-HD has significantly improved the behavioral defect in this model. This study demonstrated that the transplanted neural cells become integrated into the brain tissue and assumed the function of GABAergic neurons which have been destroyed in this model.
The Company, on behalf of the Joint Venture, has completed enrollment in a 12-patient Phase 1 clinical trial with NeuroCell(TM)-HD transplanted unilaterally. The Company is not aware of
any other potential treatment of Huntington's disease cleared by the FDA for clinical trials in the United States. The Phase 1 clinical trial is being conducted at the Boston University School of Medicine, Lahey Hitchcock Clinic, and Brigham and Women's Hospital in Massachusetts and at Rush-Presbyterian-St. Luke's Medical Center in Chicago. As with neural cell transplantation for Parkinson's disease, it is expected that any clinical improvement would occur gradually over a period of months. As of October 1998, all 12 patients treated have been evaluated at least eighteen months post-transplantation. The Huntington's disease patients that have been transplanted with NeuroCell(TM)-HD have tolerated the procedure well and the preliminary clinical data suggests that the product is safe. Efficacy data is currently being evaluated. Assuming satisfactory results, the Joint Venture plans to initiate a Phase 2 clinical trial in 1999 to determine the effect of NeuroCell(TM)-HD transplanted bilaterally.
NeuroCell(TM)-FE for Focal Epilepsy
Epilepsy is a chronic, recurrent disorder characterized by excessive neuronal discharge in the brain, causing muscle spasms or convulsions. Epileptic seizures are usually associated with some alteration of consciousness. The seizures are of many different types and arise as a result of diverse pathologies. Epilepsy is one of the most common neurological disorders and is estimated to affect 1.8 million people in the United States.
Epileptic seizure classification is important clinically since it determines the drug therapy used for seizure control. Clinical diagnosis of seizures includes differentiation by onset and whether or not consciousness is lost. Seizures can be classified into three broad categories based on onset: generalized seizures, partial seizures and unclassified seizures. Generalized seizures exhibit no focus of onset, cause loss of consciousness and may or may not cause convulsions. They comprise approximately 40% of all epileptic seizures. Partial seizures have a focal onset and may cause loss of consciousness (complex partial seizures) or may not cause loss of consciousness (simple partial seizures). Partial seizures comprise approximately 57% of all epileptic seizures. The remaining 3% of seizures are unclassified.
The anti-epileptic drugs currently used fail to control seizure activity in a significant number of patients and frequently cause side effects that range in severity from minimal impairment of the central nervous system to death from aplastic anemia or hepatic failure. In 1993, the market for anti-epileptic agents was approximately $525 million in the United States.
Diacrin's initial therapeutic focus in this area is in the treatment of patients with complex partial seizures. By several estimates, approximately 200,000 patients with complex partial epilepsy have seizures that are not well-controlled with currently available drug therapy. The only other therapy available to these refractory patients is surgical removal of portions of the temporal lobe, amygdala and hippocampus. However, the Company believes that transplantation of cells will be preferable to removal of brain tissue if NeuroCell(TM)-FE is shown to be safe and efficacious.
Because focal epilepsy is characterized by excessive electrical activity in a localized area and the spread of this activity through the brain, Diacrin's approach to therapy is to apply its proprietary technology to the production and transplantation of NeuroCell(TM)-FE in order to exert an inhibitory effect on the hyperexcitable brain region. The source of inhibitory neurons being evaluated for NeuroCell(TM)-FE is the lateral ganglionic eminence ("LGE") within the fetal
porcine striatum. Diacrin has demonstrated survival and safety of transplanted NeuroCell(TM)-FE in a preclinical animal model when transplanted into the hippocampus.
In 1998, the Company initiated a Phase 1 clinical trial of NeuroCell(TM)-FE at Beth Israel Deaconess Medical Center in Boston. The Company has transplanted three patients to date and anticipates transplanting a total of six patients previously scheduled for surgical removal of the portion of the brain causing the seizure activity. Upon surgical removal of that portion of the brain at six months post-transplant, the Company will be afforded the opportunity to histologically analyze the graft and graft site for the presence of viable pre-treated GABAergic porcine neural cells. In addition, the trial will generate safety data necessary to determine whether to initiate a Phase 2 clinical trial of NeuroCell(TM)-FE.
Porcine Neural Cells for Stroke
Stroke is the third leading cause of death in the United States, ranking behind coronary artery disease and cancer. It is also the leading cause of long-term disability in the U.S. Approximately 500,000 people suffer a stroke each year in the U.S.
Thrombolytic stroke (cerebral infarction) represents nearly 80% of all cases of stroke each year and is caused primarily by thrombus formation in a blood vessel which effectively blocks blood flow to a region of the brain, causing neuronal cell death.
Current therapies include surgical management to remove a clearly defined clot or anticoagulant therapy to "break up" the clot formation. While such therapies increase the likelihood of surviving a stroke, the neuronal damage caused by the initial trauma remains.
The Company believes disabled patients who have survived thrombolytic stroke may benefit from porcine fetal neural cell transplantation for the repair of the damaged neuronal circuitry caused by stroke. Several animal studies conducted by others utilizing allografts have demonstrated the feasibility of repairing and restoring function to the stroke damaged brain. This cell population is expected to be most useful in treating striatal and cortical thrombolytic strokes, which occur at a rate of over 160,000 annually in the U.S. The Company has completed preclinical animal studies and an IND has been filed and cleared by the FDA. In 1999, the Company initiated a six patient Phase 1 clinical trial at Beth Israel Deaconess Medical Center in Boston.
Porcine Neural Cells for Chronic Intractable Pain
Chronic pain can be caused by neuropathologic processes in tissues and organs, or by prolonged dysfunction of peripheral or central nervous system pathways. Peripheral neuropathies including diabetic neuropathy, cervical radiculopathy, neuralgic amyotrophy, HIV neuropathy and post herpetic neuralgia can result in persistent intractable pain. It is estimated that 400,000 individuals suffer from unrelieved chronic pain as a result of these peripheral neuropathies in the United States. Moreover, intractable chronic pain is a common component of many end-stage disease syndromes. Pain affects most patients with malignant disease and the prevalence of severe pain in cancer patients increases as the disease progresses to the advanced stages. There are an estimated 1.6 million cancer patients that experience chronic intractable pain in the United States.
The severity of pain can be debilitating and significantly interfere with an individual's productivity and quality of life. Existing therapies for chronic pain are often inadequate and characterized by the tendency to become ineffective with time. Potent opiates are part of analgesic regimens, however, dose-limiting side effects, tolerance and potential for dependence limit their widespread use.
The persistence of pain following damage to or prolonged dysfunction of the nervous system involves a cascade of pathological neurochemical events that lead to abnormal sensory hyperexcitability and excitotoxicity. The altered spinal neurochemical environment results in an impairment of neural inhibitory function. Specifically, inhibitory GABAergic interneurons are susceptible to excessive excitatory amino acid release.
Diacrin's therapeutic approach for the management of chronic pathological pain is to inhibit the hyperexcitability cascade by transplanting fetal neural GABA-releasing cells in the spinal dorsal horn (the section of the spine mediating pain perception). By using this approach, alleviation of chronic pain may be achieved by repopulating inhibitory interneurons to recover appropriate neurotransmission in the spinal cord. Preclinical animal studies have demonstrated a favorable safety profile and survival of fetal porcine LGE (GABA-releasing) cells transplanted into the dorsal horn of the spinal cord. The Company has filed an IND and plans to initiate a Phase 1 clinical trial in 1999.
Porcine Spinal Cord Cells for Spinal Cord Injury
The U.S. prevalence of Spinal Cord Injury ("SCI") is approximately 200,000 with 13,000 additional SCI's annually. Nearly 80% of the injured patients are males in their late twenties to early thirties. Greater than 95% of these SCI's are compression injuries, the remainder are cases in which the cord is severed. The cervical spine is vulnerable to injury because of its extreme mobility. Approximately 20% of SCI occur in the thoracic region which is more stable due to extra support supplied by the ribs. Loss of sensorimotor neuron function due to injury requires lengthy hospitalization after the initial accident as well as extensive rehabilitative care. Further, all victims of SCI face a lifelong series of acute and chronic non-neurological complications that can be life-threatening.
The primary objective of current therapies available for SCI is to prevent further injury by physically stabilizing the spine and by pharmacologically attenuating the endogenous injury response. These strategies attempt to establish optimal conditions for functional recovery and improve patients' rehabilitative potential. Surgery is designed to protect the patient from further injury through immobilization, spinal cord realignment and stabilization, and decompression. To date there is no pharmacotherapy available for spinal cord injury except palliative therapies employing methylprednisolone (corticosteroid) therapy to reduce inflammation of the initial traumatized area, and standard medical practice for complications arising from chronic denervation, (for example, pneumonia, pulmonary embolism, decubitus ulcers, urinary tract infections, renal failure, deep vein thrombosis and heterotopic ossification of bone) and, if required, medical therapy for psychiatric disorders.
Diacrin believes that its porcine spinal cord cell product candidate transplanted into the site of injury of a human severed spinal cord may have the potential to partially reestablish
sensorimotor neuronal pathways. The transplantation of this product into a recently injured cord may prevent secondary neuronal and muscular atrophy known to occur in these patients. Partial or full recovery of limb movement, and other motor neuron pathways may reduce the overall time spent in the hospital, decrease the secondary equipment required for care, and reduce severe and life threatening complications arising from the injury. Further, the ability to deliver fetal neurons to a site of injury in a severed spinal cord may have broader technical and clinical applications. Once proof of principle is realized in the severed SCI, the fetal porcine cell product will be delivered to sites in the spinal cord where compression fractures have occurred. The Company has initiated studies in animal models of spinal cord injury to determine whether fetal porcine spinal cord cells transplanted into the damaged spinal cord region will engraft and repair the damage, leading to improved mobility and function. Assuming successful completion of the Company's ongoing studies, the Company plans to seek FDA clearance to initiate human clinical trials.
Porcine Hepatocytes for Acute Liver Failure
Acute liver failure is a severe life-threatenting disease that can result from alcohol consumption, viral infections (hepatitis B and C) and hepatotoxic drugs or toxins. The clinical spectrum of acute liver disease can vary from an asymptomatic patient with hepatomegaly to the manifestations of severe liver failure (ascites, jaundice and encephalopathy). The mortality from acute liver failure can be as high as 70%, with patients dying from infection GI bleeding, and hepatorenal or multi-organ failure. Acute liver failure results in approximately 63,000 deaths annually in the U.S.
There is currently no universal therapy that is beneficial for all patients with acute liver failure. The best available therapy for acute liver failure is orthotopic liver transplantation. However, many patients are unable to be listed as candidates for liver transplantation due to multi-organ failure or active alcohol consumption. Current therapy attempts to treat complications arising from the acute condition, i.e. cerebral edema, infections, and circulatory collapse. Treatment of the acute phase of liver failure with hepatic support can result in partial normalization of clinical parameters and limited restoration of a functional liver, but the likelihood of survival remains low.
An alternative approach to the treatment of acute liver failure is to support the patient by hepatocyte transplantation in order to provide liver function while allowing the patient's own liver to recover.
In extensive studies of hepatocyte transplantation for the treatment of metabolic disease in animal models, Diacrin scientists have shown that porcine hepatocytes can be isolated and infused into the recipient liver where they lodge and continue to function. Long-term survival and function of these cells has been demonstrated. Hepatocytes are able to pass through the lining of liver capillaries and integrate into the liver where they can function alongside the host cells. Therefore, the Company believes hepatocyte transplantation could become a viable alternative to whole liver transplantation for the treatment of acute liver disease. This approach would be preferable to transplantation of a whole liver due to the difficulty of obtaining livers for transplantation (currently over 5,000 individuals await liver transplants in the United States and about 4,000 liver transplants are performed per year for all indications) as well as the expense and invasiveness of the procedure.
The Company's IND application to the FDA for a Phase 1 clinical trial to test transplantation of porcine hepatocytes for the treatment of liver failure has been cleared. Patients in this planned trial will not be candidates for orthotopic liver transplantation and will have been diagnosed with acute liver failure. The patients selected for this trial, which is planned to commence at Massachusetts General Hospital in the first half of 1999, will have failed all other available medical therapy. This subgroup of patients would have an expected in-hospital mortality of approximately 70% and is thus an appropriate group for the evaluation of liver function after hepatocyte transplantation. Porcine hepatocytes will be infused into the spleen or liver of these patients by interventional radiology, thus avoiding a surgical procedure for these critically ill patients. In addition to the high level of quality control that can be maintained over the production of porcine hepatocytes, these cells also have the advantage of being resistant to infection by human hepatitis B and C viruses. Since many of the patients enrolled in this study are likely to carry these viruses, the Company believes the resistance of the porcine cells to infection may prevent infection of the transplanted hepatocytes providing a further advantage over human liver transplantation in which hepatitis B and C reinfect donor livers.
Human Hepatocytes for Cirrhosis
Cirrhosis of the liver is a common affliction in the United States, affecting an estimated 1.5 million individuals and leading to approximately 50,000 deaths annually. In cirrhosis, liver tissue is progressively lost to accumulation of fibrous tissue and scarring, and liver function is compromised due to the degenerative changes. The most common causes of cirrhosis are viral hepatitis B and C infections and alcoholic liver disease. In the initial stages of the disease the patient may experience jaundice and disorientation as the detoxifying functions of the liver are lost. With more serious disease, the patient will develop ascites and will be hospitalized with increasing central nervous system effects (encephalopathy) that lead to coma. The tremendous reserve of liver tissue allows the continued function of the organ despite loss of up to 90% of the normal complement of hepatocytes. In advanced cirrhosis, little normal liver tissue remains.
The only known therapy for advanced cirrhosis is liver transplantation. However, the United Network of Organ Sharing has documented a national lack of donor livers for transplantation, resulting in a waiting period of over 2 years for the average patient requiring liver transplantation. Recently, artificial extra-corporeal liver assist devices ("ELAD") using porcine hepatocytes or human hepatoma cell lines attached to a dialysis cartridge have been used in an attempt to treat liver failure in advanced cirrhosis. Studies to date suggest that ELAD may improve some biochemical parameters such as ammonia levels but the devices have not resulted in increased survival. Allogeneic human hepatocyte transplantation has also been used in both acute and chronic liver failure. Both transplantation into the liver via the portal vein and ectopic transplantation into the spleen have been used in these studies. In pilot studies by others, liver and splenic hepatocyte transplantation has been shown to be both safe and potentially effective in humans as a bridge to orthotopic transplantation. Immunosuppression is required in all patients receiving allogeneic human hepatocyte transplantation.
For chronic liver disease, Diacrin and others have shown in animal models that hepatocyte integration is possible when hepatocytes are injected into the liver via the portal vein or into the splenic pulp. The spleen appears to be the preferred site due to the fibrosis and loss of blood supply to the liver. In animal models, hepatization of the spleen is a well described
phenomenon and results in replacement of the splenic pulp with cords of functioning hepatocytes that perform hepatic functions including synthesis of albumin and clotting factors, detoxification of ammonia and oxidative metabolism.
In 1999, the Company initiated a Phase 1 clinical trial of human hepatocyte transplantation for the treatment of cirrhosis in a group of patients that have been listed for organ transplantation but are likely to wait at least one year before receiving a transplant. The Company believes these patients may benefit from the growth of transplanted hepatocytes in their spleen leading to an increase in liver function. In addition, expansion of the cells may allow sufficient improvement to render a liver transplant unnecessary unlike the case of an ELAD which is used only as a bridge to transplantation. As part of the planned trial, conventional immunosuppression will be compared to the use of Diacrin's immunomodulation technology to determine whether graft protection is achieved by this technique. This study is being conducted in collaboration with Massachusetts General Hospital.
Additional Hepatocyte Applications
Successful delivery of hepatocytes to patients with alcoholic hepatitis or cirrhosis may open the possibility of applying this technology to a variety of other diseases. The preparation of the cells and their delivery by radiologic procedures should be the same in each of these applications, thus providing a platform that may be used in multiple applications.
Additional applications include the use of hepatocytes for the treatment of metabolic diseases resulting from genetic mutations. Familial hypercholesterolemia is a disease caused by a defective receptor gene for low density lipoprotein ("LDL") that leads to elevated levels of LDL cholesterol and coronary disease at an early age. By transplantation of hepatocytes into a rabbit model of this disease, Diacrin scientists have shown that porcine cells provide the animal with functional receptors that reduce serum LDL levels. Familial hypercholesterolemia afflicts approximately 500,000 patients in the United States. Currently available drugs do not sufficiently lower circulating LDL cholesterol levels in approximately 20% of these patients, who may thus benefit from hepatocyte transplantation. Additional metabolic disorders that may be candidates for treatment by hepatocyte transplantation include hemophilia, phenylketonuria, carbamoyl phosphate synthetase deficiency, ornithine transcarbamolyase deficiency, Crigler-Najjar syndrome, and disorders of glycogen metabolism. Approximately 30,000 patients in the United States suffer from these metabolic disorders.
Human Myoblasts for Cardiac Disease
Coronary heart disease is the leading cause of death in the United States, responsible for 1 of every 4.8 deaths or close to 500,000 deaths each year. The disease is caused by the accumulation of atherosclerotic plaque, consisting of lipid deposits, macrophages and fibrous tissue, on the walls of vessels supplying heart muscle. Rupture of unstable plaques exposes substances that promote platelet aggregation and thrombus formation. The thrombus is composed of platelets, blood cells and fibrin that can block one or more of the coronary vessels, resulting in an inadequate supply of oxygen to the heart muscle. This highly active muscle is quickly damaged and the lesions are irreversible because cardiomyocytes, the specialized muscle cells of the heart, are not capable of cell division. The end result is an infarct, a damaged area of heart muscle in which necrotic cardiomyocytes are replaced by scar tissue and fibrosis,
weakening the contractility and function of the heart. According to the American Heart Association, approximately 1,000,000 heart attacks occur annually in the U.S. Of the 800,000 patients who survive, approximately 200,000 will die within a year.
Treatments to prevent ischemic damage after a myocardial infarction include thrombolytic drugs that break down fibrin clots and open up occluded arteries. These drugs have greatly influenced morbidity and mortality from occlusive events, but must be administered within a short interval after a myocardial infarction to be effective. Even with current medical management, over one third of acute myocardial infarctions are fatal. Cardiac catheterization and angioplasty to dislodge the thrombus and open the occluded vessel has proved effective in restoring perfusion but cannot reverse preexisting ischemic damage.
While cardiac myocytes do not have the capacity to divide and repair damaged myocardium, skeletal muscle contains cells called myoblasts that divide when called upon to repair damaged muscle. Diacrin scientists have isolated and expanded myoblasts from human tissue and are studying the use of these cells for transplantation into damaged heart muscle. The Company believes that patients suffering from myocardial infarctions would benefit greatly if these myoblasts could repair their damaged myocardium. These cells would be isolated from a muscle biopsy of a patient who had suffered a myocardial infarction and would thus allow transplantation of a patient's own myoblasts into their heart, thereby avoiding any immunological barriers. Preclinical studies conducted by Diacrin have demonstrated that myoblasts integrate into rodent heart muscle. In a large animal model of myocardial infarction, Diacrin has demonstrated that myoblasts can be delivered to the site of an infarct by infusion via the coronary vessels (allowing use of the radiological procedures currently practiced for angioplasty). These cells survive and infiltrate the myocardium in and around the infarct zone. These studies are now being extended to determine whether the myoblasts infused into infarcted myocardium repair the damaged, ischemic tissue. Any improvement will be measured by increased myocardial contractility and cardiac output. Assuming successful completion of these animal studies, the Company plans to seek FDA clearance to initiate human clinical trials.
Retinal Epithelial Cells for Macular Degeneration
Age related macular degeneration ("AMD") is a disease of the retina characterized by the loss of vision due to the atrophy of photoreceptors in the central part of the retina, the macula lutea. The macula is the most important part of the eye for central vision and for high resolution vision such as that used in reading and driving. Retinal pigment epithelial (RPE) cells that lie beneath the light-sensing cells responsible for vision provide support for the retinal photoreceptors and digest the discarded outer segments of the neural retina.
In AMD, abnormal accumulation of metabolic debris results from reduced activity of the RPE and leads to gradual loss of photoreceptors. The RPE cells become dysfunctional and metabolic by-products damage photoreceptors, thus compromising visual acuity. As this layer of cells does not readily replicate in the adult, damage to the RPE can be irreversible and lead to loss of photoreceptors with concomitant decreased visual acuity. Macular degeneration is a common disease, affecting 13 million people in the United States. It is primarily a disease of the elderly, with 19.4% of 65-74 year olds and 36.8% of individuals over 75 having vision loss. Approximately 85%-90% of AMD patients have the "dry " form
of the disease in which the RPE layer degenerates without new blood vessel growth and 10-15% have the "wet" form. Effective therapies for AMD are not currently available.
Diacrin's approach is to repopulate the dysfunctional RPE cell layer by transplanting RPE cells into the correct anatomical space below the retinal photoreceptors. This therapeutic approach has the potential to reestablish function in the macula, prevent further loss of vision and to improve visual acuity in patients presenting with the dry form of the disease. In patients with the wet form of AMD, this therapy could be used in conjunction with surgery to remove choroidal neovascular membranes. Because of its key role in maintaining the integrity of the photoreceptors and its lack of regenerative capacity, the idea of replacing defective RPE by transplantation is an attractive one. Recently, RPE transplantation has been performed by others in the clinic using human fetal RPE cells. The Company plans to use porcine fetal tissue, thus avoiding the ethical and practical problems of obtaining aborted human tissue. Preclinical studies are in progress to demonstrate the efficacy of fetal porcine RPE cells for the repair of damaged RPE in animal models. The Company will also test its proprietary immunomodulation technology to prevent rejection of the graft. Assuming successful completion of preclinical studies, the Company plans to seek FDA clearance to initiate human clinical trials.
Manufacturing
The manufacture of the Company's products will require the continuous availability of porcine tissue harvested under cGMPs from pigs tested to be free of infectious agents. The Company's current source of pig facilities and services is obtained under contracts from Tufts and Charles River Pharmservices, Inc. The Company has also qualified several pig producers to provide pigs for the Company's production processes. The Company's current long-range plan is to establish contractual relationships with pig producers for the supply of qualified pigs.
For the Phase 1 clinical trials of the Joint Venture Products, the Company isolated and prepared populations of porcine tissue in its own clinical production facilities. The Joint Venture has finalized a three-year sublease agreement with Genzyme's Tissue Repair Division for approximately 12,000 square feet of clinical production and support space for the production of the Joint Venture Products needed in conjunction with planned clinical trials. This facility is also believed to be capable of satisfying projected initial demand for commercial quantities of the Joint Venture Products. This arrangement will enable the Company to utilize its existing clinical production facilities for the clinical supply of other product candidates and to postpone the need for significant additional investment in such facilities.
The antibody fragment used in Diacrin's immunomodulation technology is currently obtained from a contract manufacturer. The Company will evaluate on an ongoing basis the cost effectiveness and other relevant factors necessary to determine whether the Company should continue to obtain the antibody fragment from a contract manufacturer or produce the antibody fragment on its own.
The Company's long-range plan is to establish certain of its own internal manufacturing capabilities, including the facilities necessary to test, isolate and package an adequate supply of finished cell products in order to meet its long-term clinical and commercial manufacturing needs.
Patents and Licenses
The Company intends to aggressively seek patent protection for any products it develops. The Company also intends to seek patent protection or rely upon trade secrets to protect certain of its technologies which will be used in discovering and evaluating new products. The Company has 7 issued U.S. patents and 22 patent applications pending with the United States Patent and Trademark Office. Foreign counterparts have also been filed in a number of selected countries. These applications seek composition-of-matter and use protection for the various products the Company has in development. Applications are on file for neurons, hepatocytes, cardiac myocytes and expansions of the Company's technology base.
MGH has been awarded two patents in the United States covering the basic immunomodulation technology used by Diacrin. Foreign counterparts of these patents have been filed. Under an agreement with MGH, the Company has an exclusive, worldwide license to the technology and the inventions described in the patent, and all foreign counterparts, including any continuations, reissues or substitutions as well as any patents and equivalents which may mature from such patent, subject to the payment of royalties. Unless sooner terminated, the Company's rights will continue, on a country by country basis, until the last to expire of the patents, at which time the Company will have a fully paid-up license. Either party may terminate the agreement, upon notice, in the event the other party defaults in its material obligations and has failed to cure such default within 60 days of receipt of such notice.
In September 1996, the Company and Genzyme entered into an agreement to form a joint venture to develop and commercialize the Joint Venture Products. In connection with that agreement, the Company granted to the Joint Venture the exclusive, worldwide, irrevocable (during the term of the Joint Venture agreement), royalty-free right and license under the Company's existing patent rights and technology to develop, make, have made, use, offer for sale, sell, have sold, import and export the Joint Venture Products. The license granted by the Company is limited to the treatment of Parkinson's disease and Huntington's disease in humans using porcine fetal cells (the "Field"). In the event that either the Company or Genzyme develops or acquires additional technology or patent rights that are useful in the Field, the party owning such technology or patent rights is obligated to offer a license to the Joint Venture, as described above, to such technology or patent rights. The immunomodulation technology licensed to the Company from MGH has been non-exclusively sublicensed to the Joint Venture for use exclusively in the Field.
To protect its trade secrets and other proprietary information, the Company requires all employees, consultants, advisors and collaborators to enter into confidentiality agreements with Diacrin.
Sales and Marketing
Under the terms of the Joint Venture agreement, Genzyme, which has an established sales force, experienced in the sales and marketing of biopharmaceutical and surgical products, is authorized to market and sell the Joint Venture Products on an exclusive basis as agent for and on behalf of the Joint Venture.
With regard to the Company's other product candidates, the Company has not yet developed sales and marketing capabilities. The Company may form strategic alliances with established pharmaceutical or biotechnology companies in order to finance the development of certain of its products and, assuming successful development, to market such products. Such alliances may enable the Company to expand or accelerate its product development efforts and also may provide the Company with access to established marketing organizations.
Government Regulation
Regulation by governmental authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of the Company's product candidates and in its ongoing research and product development activities. All of the Company's products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous testing and approval procedures by the FDA and similar authorities in foreign countries. Various federal statutes and regulations govern the preclinical and clinical testing, manufacturing, labeling, distribution, advertising and sale of such products. The process of obtaining these approvals and the subsequent compliance with applicable federal statutes and regulations require the expenditure of substantial time and financial and other resources.
Preclinical testing is generally conducted in the laboratory on animals to evaluate the potential efficacy and the safety of a product. The results of these studies are submitted to the FDA as part of an IND application, which must become effective before human clinical testing can begin. Typically, clinical evaluation involves a three-phase process. In Phase 1, clinical trials are conducted with a small number of human subjects to determine the early safety profile. In Phase 2, clinical trials are conducted with groups of patients afflicted with the specific disease in order to determine preliminary efficacy, optimal treatment regimens and expanded evidence of safety. In Phase 3, large scale, multi-center, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of safety and efficacy as required by the FDA and others. In addition, the FDA may request post-marketing (Phase 4) monitoring of the approved product, during which clinical data are collected on selected groups of patients to monitor longer-term safety.
Upon completion of Phase 3, for products regulated by the FDA's Center for Biologic Evaluation and Research ("CBER"), the results of preclinical and clinical testing are submitted to the FDA in the form of an Establishment License Application ("ELA") and a Product License Application ("PLA") or Biologics License Application ("BLA") (an integration of the PLA and ELA) for approval to manufacture and commence commercial sales. In responding to these applications, the FDA may grant marketing approval, request additional information or deny the application if the FDA determines that the application does not satisfy its regulatory approval
criteria. The Joint Venture Products and all of the Company's other products are expected to be regulated by CBER. The Company will also be subject to widely varying foreign regulations governing clinical trials and sales of its products. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that necessary for FDA approval. The Company may rely on licensees to obtain regulatory approval for marketing certain of its products in certain foreign countries.
The Company intends to take advantage of the regulatory pathways which may provide accelerated marketing approval of its cell transplantation products and allow limited cost recovery during the clinical research phase. These include: (i) marketing exclusivity for products which qualify for orphan drug status; (ii) approval for limited cost recovery during clinical testing under treatment IND status; and (iii) accelerated marketing approval for more effective or better tolerated therapies for serious conditions.
The Orphan Drug Act of 1983 generally provides incentives to manufacturers to undertake development and marketing of products to treat relatively rare diseases or diseases where fewer than 200,000 persons in the United States would be likely to receive the treatment. A drug that receives orphan drug designation by the FDA and is the first product to receive FDA marketing approval for its product claim is entitled to a seven-year exclusive marketing period in the United States for that product claim. Orphan drug designation can be terminated by the FDA for a number of reasons, including if the manufacturer of the orphan drug product cannot provide an adequate supply of the product. Furthermore, a drug that is considered by the FDA to be different than a particular orphan drug is not barred from sale in the United States during such seven-year exclusive marketing period. Legislation has previously been introduced in Congress to limit the marketing exclusivity provided for certain orphan drugs. Although the outcome of that legislation, if reintroduced, is uncertain, there remains a possibility that future legislation will limit the incentives currently afforded to the developers of orphan drugs.
Diacrin has assigned to the Joint Venture the orphan drug designation it has received from the FDA for NeuroCell(TM)-PD for the treatment of Hoehn and Yahr stage 4 and stage 5 Parkinson's disease patients and for NeuroCell(TM)-HD. Diacrin's NeuroCell(TM)-FE, and spinal cord cells for spinal cord injury are also targeted to populations of less than 200,000 and, therefore, will be pursued as orphan drugs.
Treatment IND is a mechanism established by the FDA in 1987 which allows a company to distribute promising investigational therapies to patients outside of the established clinical trials and to charge a reasonable fee for such therapy. The disease must be serious or life- threatening and there must not be satisfactory alternative treatments. Treatment IND status has been applied to a variety of diseases including cancer, AIDS, Parkinson's disease, Alzheimer's disease and multiple sclerosis and to several anti-infectives for renal transplant patients. Diacrin intends to pursue this designation, where appropriate.
In 1988, the FDA issued a rule to expedite the testing and approval process for therapies which can treat life-threatening and severely debilitating diseases. Recently, the FDA published a rule which expands this concept to patients with chronic illnesses that are generally well managed by available therapy but may have serious outcomes in some or all phases of the
disease. The Company believes that many of its potential therapies may be covered under this rule, which accelerates the FDA approval process by reducing or eliminating the need to conduct large, expanded (Phase 3) clinical studies prior to applying for a marketing license (Subpart E regulation) and allowing the use of "surrogate endpoints" in clinical trials (Subpart H regulation).
The Company is also subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds, infectious disease agents and recombinant DNA materials used in connection with the Company's research work.
Competition
The Company believes that its ability to compete successfully will be based on its ability to create and maintain scientifically advanced technology, develop proprietary products, attract and retain qualified scientific personnel, obtain adequate financing, obtain patents, orphan drug designation or other protection for its products, obtain required regulatory approvals and manufacture and successfully market its products both independently and through collaborators.
The biopharmaceutical and pharmaceutical industries are characterized by intense competition. The Company competes against numerous companies, many of which have substantially greater financial and other resources than the Company. Private and public academic and research institutions also compete with Diacrin in the research and development of human therapeutic products. In addition, many of the Company's competitors have significantly greater experience than the Company in the testing of pharmaceutical and other therapeutic products and obtaining FDA and other regulatory approvals of products for use in health care. Accordingly, the Company's competitors may succeed in obtaining FDA approval for products more rapidly than the Company. If the Company commences significant commercial sales of its products, it will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which it has limited or no experience.
The Company's products under development will compete with products and therapies which are either currently available or currently under development. Competition will be based, among other things, on efficacy, safety, reliability, price, availability of reimbursement and patent position. The Company is aware of other companies which are pursuing research and development of alternative products or technologies addressing the same disease categories as Diacrin's development programs.
Employees
As of January 31, 1999, the Company had 46 full-time employees, 36 of whom were engaged in research, development, clinical and quality assurance/quality control activities. No Company employees are represented by a labor union or covered by a collective bargaining agreement.
Item 2.
Item 2. Properties
The Company leases a facility which contains approximately 28,000 square feet of space
in Charlestown, Massachusetts. The lease has a ten-year term ending in 2001, providing for a base rental rate of approximately $60,000 per month, plus applicable property taxes and insurance. The Company's facilities are equipped with laboratory and cell culture capabilities sufficient to satisfy the Company's research and development requirements for the foreseeable future and cell isolation capabilities sufficient to satisfy the clinical production requirements of several of its product candidates. To the extent that additional similar facilities may be required, the Company will be required to secure additional facilities or seek outside contractors to provide such capabilities.
The Joint Venture has finalized a sublease agreement ending in 2001 with Genzyme's Tissue Repair Division for approximately 12,000 square feet of clinical production and support space for the production of the Joint Venture Products. The sublease agreement provides for a minimum gross rental rate of approximately $30,000 per month to be paid by the Joint Venture. These facilities are equipped with cell isolation facilities which Diacrin believes are sufficient to satisfy the clinical and initial commercial production requirements of the Joint Venture Products. To the extent that additional facilities are required for commercial production of the Joint Venture Products, the Joint Venture will be required to secure additional facilities to provide such capabilities.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company, through solicitation of proxies or otherwise, during the last quarter of the fiscal year ended December 31, 1998.
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the directors, executive officers and other key employees of the Company:
Thomas H. Fraser, Ph.D., has been President and Chief Executive Officer and a member of the Board of Directors of the Company since 1990. He was previously Executive Vice President, Corporate Development, for Repligen Corporation ("Repligen"), a biopharmaceutical company. Dr. Fraser was the founding Vice President for Research and Development at Repligen in 1981 and served as Executive Vice President from 1982 through 1990 as well as Chief Technical Officer from 1982 through 1988. Prior to joining Repligen, Dr. Fraser headed the recombinant DNA research group in Pharmaceutical Research and Development at The Upjohn Company, a pharmaceutical company. Dr. Fraser received his Ph.D. in biochemistry from the Massachusetts Institute of Technology and was a Damon Runyon-Walter Winchell Cancer Fund Postdoctoral Fellow at The University of Colorado.
E. Michael Egan has been Senior Vice President, Corporate Development, of the Company since June 1993. Mr. Egan joined Diacrin from Repligen, where he was employed from 1983 to 1993, and since 1989 had been Vice President of Business Development. He was also a member of the Board of Directors of Repligen Clinical Partners, L.P., and the Secretary/Treasurer of Repligen Sandoz Research Corporation. Mr. Egan's previous positions at Repligen include Director of Business Development and Manager of Business Development. Prior to joining Repligen in 1983, Mr. Egan was a laboratory supervisor at Dana-Farber Cancer Institute, Division of Medicine. He received a B.S. in biology from Boston College and a Certificate of Special Studies in Administration and Management from Harvard University in 1986.
Kevin Kerrigan has been Controller of the Company since November 1998. He joined the Company in 1997 as Accounting Manager. From 1993 to 1997 he was a member of the professional staff of Price Waterhouse LLP. Mr. Kerrigan received a B.S. degree in accounting from Merrimack College and was awarded a CPA certificate from the Commonwealth of Massachusetts in 1993.
Albert S.B. Edge, Ph.D., has been Senior Director of Molecular and Cellular Biology since October 1994. He joined Diacrin in 1992 as Director of Protein Chemistry and in 1993 became Director of Molecular and Cellular Biology. Dr. Edge was previously Assistant Professor of Medicine at Harvard Medical School and Investigator at the Joslin Diabetes Center. He has been Principal Investigator on several grants from the NIH and was the recipient of a Career Development Award from the Juvenile Diabetes Foundation from 1987 to 1990. He was Mary K. Iacocca Fellow of the Joslin Diabetes Center in 1984 and after appointment to the faculty was selected as Capps Scholar in Diabetes of Harvard Medical School from 1985 to 1987. While a Postdoctoral Fellow in the Department of Biological Chemistry at Harvard Medical School, Dr. Edge was awarded Fellowships from the American Cancer Society and the NIH. He received his Ph.D. in biochemistry from Albany Medical College where he was a Predoctoral Research Fellow of the United States Public Health Service.
Jonathan H. Dinsmore, Ph.D., has been Director of Cell Transplantation Research since December 1994. He joined Diacrin in 1992 as a Research Scientist and was subsequently promoted to Principal Investigator. Dr. Dinsmore was previously a Postdoctoral Fellow of the American Cancer Society in the Biology department at the Massachusetts Institute of Technology from 1988 to 1992. He received a Ph.D. in biology from Dartmouth College, where he was a Presidential Scholar and recipient of a Kramer Fellowship. Dr. Dinsmore has worked on National Science Foundation-sponsored research projects at the Marine Biological Laboratories in Woods Hole, Massachusetts and at a United States research base in Antarctica.
Roger J. Gay, Ph.D., has been Director of Process Development since November 1993. From 1986 through 1993, he was Director of Product Development at Organogenesis, Inc. Dr. Gay's previous positions were Manager of a Contract Research and Cytotoxicity Testing Laboratory and Director of Product Development at Bioassay Systems Research Corporation from 1982 to 1986. He received a B.A. in chemistry from the College of the Holy Cross in 1975 and a Ph.D. in biochemistry from the University of Rochester in 1981. From 1981 through 1983, he was a postdoctoral research fellow in the Department of Microbiology and Molecular Genetics at Harvard Medical School.
Abdellah Sentissi, Ph.D., has been Director of Quality Control and Quality Assurance since October 1995. Prior to joining Diacrin, from 1992 to 1995, he served as the Director of QC/QA and Technical Affairs at Endocon, Inc. From 1985 through 1992, he was the Chief of Quality Control at Massachusetts Biologics Laboratories. He received a pharmacy degree in 1973 and a biology degree in 1976 from the University of Paul Sabatier, Toulouse, France, and a Ph.D. in biomedical sciences from Northeastern University in 1984. From 1984 through 1985, he was a postdoctoral research fellow in the Department of Clinical Chemistry at Northeastern University. He has been a lecturer in pharmaceutical biotechnology at the School of Pharmacy at Northeastern University since 1990.
Zola P. Horovitz, Ph.D., has served as a Director of the Company since May 1994. He was Vice President, Business Development and Planning at Bristol-Myers Squibb Pharmaceutical Group from August 1991 until 1994 and was Vice President, Licensing from 1989 to August 1991. Prior to 1989, Dr. Horovitz spent 30 years as a member of the Squibb Institute for Medical Research, most recently as Vice President, Research Planning. He is also director of Avigen Inc., BioCryst Pharmaceuticals, Clinicor, Magainin Pharmaceuticals, Procept, Inc., Roberts Pharmaceuticals and Synaptic Pharmaceuticals, Inc., biotechnology companies. Dr. Horovitz received his Ph.D. from the University of Pittsburgh.
John W. Littlechild has been a Director of the Company since April 1992. Mr. Littlechild is a general partner of HealthCare Partners II, L.P. ("HCPII"), HealthCare Partners III, L.P. ("HCPIII") and HealthCare Partners IV, L.P. ("HCPIV"), the general partner, respectively, of HealthCare Ventures II, L.P. ("HCVII"), HealthCare Ventures III, L.P. ("HCVIII") and HealthCare Ventures IV, L.P. ("HCVIV"), and a Vice Chairman of HealthCare Ventures LLC ("HCV"), a venture management company that, among other things, provides management services to HCVII, HCVIII and HCVIV. HCVII, HCVIII and HCVIV are principal stockholders of the Company. From 1984 to 1991, Mr. Littlechild was a Senior Vice President of Advent International Corporation, a venture capital company ("Advent") in Boston and London. Prior to working at Advent in Boston, Mr. Littlechild was involved in establishing Advent in the United Kingdom. From 1980 to 1982, Mr. Littlechild served as Assistant Vice President for Citicorp Venture
Corporation, a venture capital company, in London, prior to which he worked with ICI Ltd., an agro-chemical company, and Rank Xerox, an office equipment company, in marketing and financial management. He holds a B.Sc. from the University of Manchester and an MBA from Manchester Business School. Mr. Littlechild serves on the boards of directors of various health care and biotechnology companies, including Orthofix International N.V., a medical devices company, and Avant Immunotherapeutics, Inc., a biotechnology company.
Stelios Papadopoulos, Ph.D., has been a Director of the Company since November 1991. He is Chairman of PaineWebber Development Corporation, a subsidiary of PaineWebber Incorporated ("PaineWebber"), which is engaged in investment banking and securities brokerage. From 1986 until joining PaineWebber in April 1987, Dr. Papadopoulos was a Vice President in equity research at Drexel Burnham Lambert Incorporated, an investment banking firm. From 1985 to 1986, Dr. Papadopoulos was a biomedical technology analyst at Donaldson, Lufkin and Jenrette Securities Corporation. Prior to that, Dr. Papadopoulos was a member of the faculty of the Department of Cell Biology at New York University Medical Center. Dr. Papadopoulos holds a Ph.D. in biophysics and an MBA in finance, both from New York University.
Joshua Ruch has been a Director of the Company since March 1998. He is the Chairman and Chief Executive Officer of Rho Management Company, Inc., an international investment management firm which he co-founded in 1981. Prior to founding Rho, Mr. Ruch was employed in investment banking at Salomon Brothers and Bache Halsey Stuart, Inc. in New York City. Mr. Ruch received a B.Sc. degree in electrical engineering from the Israel Institute of Technology (Technion) and an M.B.A. from the Harvard Business School.
Henri A. Termeer has been a Director of the Company since December 1996. He has served as President and a Director of Genzyme since October 1983, as Chief Executive Officer since December 1985 and as Chairman of the Board since May 1988. For ten years prior to joining Genzyme, Mr. Termeer held various management positions at Baxter Travenol Laboratories, Inc., a manufacturer of human health care products. Mr. Termeer also serves on the boards of directors of Abiomed, Inc., AutoImmune Inc., GelTex Pharmaceuticals Inc., Genzyme Transgenics Corporation, all biotechnology companies and is a trustee of Hambrecht & Quist Healthcare Investors and Hambrecht & Quist Life Sciences Investors.
Christopher T. Walsh, Ph.D. has been a Director of the Company since April 1997. From 1992 to 1995, he served as President of the Dana-Farber Cancer Institute. Since 1991, Dr. Walsh has served as Hamilton Kuhn Professor of Biological Chemistry and Molecular Pharmacology at Harvard Medical School. From 1987 to 1995, he was Chairman of the Harvard Medical School Biological Chemistry and Molecular Pharmacology Department. Dr. Walsh received his A.B. from Harvard University and his Ph.D. in Life Sciences from Rockefeller University. He is also director of LeukoSite, Inc., a biotechnology company.
Directors are elected annually by the stockholders of the Company and hold office until the next annual meeting of stockholders or until their resignation or removal. Executive officers of the Company are elected by the Board of Directors on an annual basis and serve at the discretion of the Board of Directors. There are no family relationships among any of the executive officers or directors of the Company.
Scientific Advisory Board
The Company's scientific advisory board (the "Scientific Advisory Board") is a multi-disciplinary assemblage of scientists and physicians in the fields of transplantation, immunology, endocrinology, neurophysiology and neuromuscular physiology, transplantation biology and surgery. The Scientific Advisory Board meets regularly to review and evaluate the Company's research programs and advise the Company with respect to technical matters. The members of the Scientific Advisory Board are as follows:
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock and Warrants have been traded on the National Market tier of The Nasdaq Stock Market under the symbols DCRN and DCRNW, respectively, since August 12, 1996. The following table sets forth for the periods indicated the high and low sale prices for the Common Stock and Warrants during 1997 and 1998 as reported on the Nasdaq National Market:
As of March 5, 1999 there were approximately 3,000 holders of record of the Company's Common Stock.
The Company has never declared or paid cash dividends on its capital stock. The Company currently intends to retain earnings, if any, for use in its business and does not anticipate declaring or paying any cash dividends in the foreseeable future.
The Company did not sell any equity securities during the quarter ended December 31, 1998 that were not registered under the Securities Act.
The following information updates and supplements the information regarding use of proceeds originally filed by Diacrin on Form SR for the period ended May 12, 1996, as amended to date and relates to securities sold by the Company pursuant to the Registration Statement on Form S-2 (Registration No: 33-80773) which was declared effective on February 12, 1996: Through December 31, 1998, the Company has used approximately $7,777,000 of the total net proceeds from its initial public offering of $20,911,755. Of the $7,777,000 used, approximately $265,000 was used for the purchase of machinery and equipment; approximately $582,000 was used for repayment of indebtedness; and approximately $6,930,000 was used for working capital. The unused proceeds of approximately $13,134,000 are in temporary investments consisting of corporate notes and a money market mutual fund. All proceeds used or invested were direct or indirect payments to others.
Item 6.
Item 6. Selected Financial Data
The selected financial data set forth below as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 are derived from the Company's financial statements which have been audited by Arthur Andersen LLP, independent public accountants, and which are included elsewhere in this Annual Report on Form 10-K. The selected financial data set forth below as of December 31, 1994, 1995 and 1996 and for the years ended December 31, 1994 and 1995 are derived from the Company's financial statements which have been audited by Arthur Andersen LLP and are not included herein. The data set forth below should be read in conjunction with the Company's financial statements, related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Since its inception, the Company has principally focused its efforts and resources on research and development of cell transplantation products to treat neurodegenerative and other human diseases. The Company's primary source of working capital to fund such activities has been proceeds from the sale of equity and debt securities. In addition, commencing October 1, 1996, the Company has received funding from the Joint Venture with Genzyme in support of the NeuroCell(TM)-PD and NeuroCell(TM)-HD product development programs. The Company has not received any revenues from the sale of products to date and does not expect to generate product revenues for at least the next several years. The Company has experienced fluctuating operating
losses since its inception and expects that the additional activities required to develop and commercialize the Company's products will result in increasing operating losses for at least the next several years. At December 31, 1998, the Company had an accumulated deficit of $39.5 million.
In September 1996, the Company and Genzyme formed the Joint Venture to develop and commercialize NeuroCell(TM)-PD and NeuroCell(TM)-HD. The Joint Venture is governed by a six-member Steering Committee comprised of Dr. Fraser, Mr. Egan and Dr. Dinsmore, two executive officers and one employee of the Company, and three employees of Genzyme. The Steering Committee meets regularly and makes all of the decisions with respect to the Joint Venture's work plans and budgets. The Steering Committee has appointed a program manager from each organization to execute the agreed upon product development work plans.
For 1996 and 1997, the Company expensed all research and development costs related to the Joint Venture Products incurred by it on behalf of the Joint Venture and recognized an equal amount of research and development revenue due to the fact that costs incurred were funded by the Joint Venture exclusively out of contributions made to it by Genzyme. Through December 31, 1997, Genzyme made 100% of the total cash contributions to the Joint Venture. During the first quarter of 1998, the Company began making cash contributions to the Joint Venture equal to 25% of the Joint Venture's funding requirements. To the extent the Company's contributed funds were used to fund expenses incurred by Genzyme on behalf of the Joint Venture, the Company has recognized an expense in its statement of operations captioned "equity in operations of Joint Venture." Furthermore, to the extent the Company's contributed funds were used to fund expenses incurred by the Company on behalf of the Joint Venture, the Company has reduced the research and development revenue recognized by it from the Joint Venture by an amount equal to the Company-funded portion of such expenses.
Results of Operations
Year Ended December 31, 1998 Versus Year Ended December 31, 1997
Research and development revenues were approximately $3.6 and $4.8 million for the years ended December 31, 1998 and 1997, respectively, and were comprised entirely of revenue from the Joint Venture. The reduction in research and development revenues is attributable to the reduction in the percentage of funding from Genzyme that took effect in the first quarter of 1998.
Interest income was $1.6 million for the year ended December 31, 1998 versus $1.3 million for the year ended December 31, 1997. The 21% increase was primarily due to additional interest income realized on higher cash balances available for investment.
Research and development expenses were $7.4 million for the year ended December 31, 1998 versus $6.9 million for the year ended December 31, 1997. The 7% increase was primarily due to the production costs of clinical grade antibody produced during the current year period for use in the Company's clinical trials and preclinical research. The increase was, to a lesser extent, due to increased costs related to the operation of clinical production facilities completed in the second half of 1997.
General and administrative expenses of $1.5 million for the years ended December 31, 1997 and 1998 were relatively unchanged.
Interest expense was $89,000 and $93,000 for the years ended December 31, 1998 and 1997, respectively. An increase in interest expense as a result of the $650,000 term loan obtained by the Company in November 1997 is offset by a decrease in capital lease debt between the periods.
For the twelve months ended December 31, 1998, the Company recorded a $1.1 million charge related to its equity in operations of the Joint Venture. This expense is due to funds contributed by the Company to the Joint Venture that were used to fund expenses incurred by Genzyme on behalf of the Joint Venture. This expense did not occur in the prior year as the Company was not required to make contributions to the Joint Venture until the quarter ended March 31, 1998.
The Company incurred a net loss of approximately $4.8 million for the year ended December 31, 1998 versus a net loss of approximately $2.4 million for the year ended December 31, 1997.
Results of Operations
Year Ended December 31, 1997 Versus Year Ended December 31, 1996
Research and development revenues were approximately $4.8 million for the year ended December 31, 1997 and were comprised entirely of revenue from the Joint Venture. Research and development revenues of $1.1 million for the year ended December 31, 1996 were comprised of $1.0 million in revenue received from the Joint Venture and $100,000 received under a research grant.
Interest income was $1.3 million for the year ended December 31, 1997 versus $1.1 million for the year ended December 31, 1996. The 18% increase was primarily due to additional interest income realized on higher cash balances available for investment.
Research and development expenses were $6.9 million for the year ended December 31, 1997 versus $5.8 million for the year ended December 31, 1996. Almost half of the 19% increase in research and development expenses was due to increases in staffing. The increase in staffing was primarily due to additional clinical affairs personnel necessary to support the Joint Venture's clinical trials and, to a lesser extent, to additional quality control/assurance personnel necessary to support expanded clinical production facilities completed during 1997. Research personnel was also increased to expand the Company's preclinical research program efforts. A smaller portion of the increase in research and development expenses between years was due to costs incurred in 1997 in the validation and operation of clinical production facilities completed during 1997. In addition, the Company expensed approximately $230,000 during 1997 for the development and conduct of PERV tests.
General and administrative expenses were $1.5 million for the year ended December 31, 1997 versus $1.3 million for the year ended December 31, 1996. The 12% increase was
primarily due to an increase in administrative personnel as well as increased costs of shareholder relations.
Interest expense was $93,000 for the year ended December 31, 1997 versus $158,000 for the year ended December 31, 1996. The decrease was primarily attributable to interest expense recognized during the 1996 period on the Company's $7.0 million of Convertible Notes which were issued in May 1995 and converted to common stock upon the closing of the Company's initial public offering.
The Company incurred a net loss of approximately $2.4 million for the year ended December 31, 1997 versus a net loss of approximately $5.0 million for the year ended December 31, 1996.
Liquidity and Capital Resources
The Company has financed its activities primarily with the net proceeds from its pre-1998 equity offerings aggregating $53.6 million, with the net proceeds of approximately $9.4 million from the Company's private placement of common stock completed in February 1998, and with interest earned thereon. In addition, the Company has recorded approximately $9.4 million in revenue from the Joint Venture since it commenced October 1, 1996. At December 31, 1998, the Company had cash and cash equivalents, short-term investments and long-term investments aggregating approximately $26.3 million.
The Company has purchased approximately $2.3 million of capital equipment since inception. In November 1997, the Company borrowed $650,000 at the Prime Rate +.5% (8.25% at December 31, 1998) under an unsecured five-year term loan with a bank to finance production equipment acquired during 1997. In December 1994, approximately $805,000 of capital equipment was sold for proceeds of $600,000 and subsequently leased back over a four-year term. In addition, approximately $227,000 of capital equipment was sold in 1995 for its original cost and subsequently leased back over a four-year term. The Company had no material commitments for capital expenditures as of December 31, 1998.
Under the joint venture agreement with Genzyme, the Company's two lead product development programs, NeuroCell(TM)-PD for the treatment of Parkinson's disease and NeuroCell(TM)-HD for the treatment of Huntington's disease, are being developed by the Joint Venture. Both Genzyme and Diacrin are responsible for funding the Joint Venture in accordance with the terms, and subject to the conditions, of the joint venture agreement. Genzyme agreed to fund 100% of the first $10 million of development and commercialization costs incurred after October 1, 1996, 75% of the next $40 million and 50% of all remaining development and commercialization costs in excess of $50 million. After Genzyme funds the first $10 million, the Company is responsible for funding 25% of the next $40 million and 50% of all development and commercialization costs in excess of $50 million. As of December 31, 1998, Genzyme has contributed approximately $15.7 million to the Joint Venture. The Company's obligation to fund 25% of the program costs commenced in the first quarter of 1998. The Company expects that the Joint Venture's 1999 product development plans, together with the Company's continued funding of the Joint Venture, will significantly increase the Company's net loss and cash and investments used in 1999 as compared with 1998.
Genzyme agreed to make financing available to Diacrin from and after the date that Genzyme provides the initial $10.0 million of funding to the Joint Venture. Genzyme agreed to make available to Diacrin an unsecured, subordinated line of credit (the "Line") of up to an aggregate amount of $10.0 million. Diacrin may draw on the Line only in the event that Diacrin's cash and cash equivalents are insufficient to fund Diacrin's budgeted operations for a specified period of time, and the funds may be used by Diacrin only to fund capital contributions to the Joint Venture. The Line will be available through the date five years after the date Diacrin first draws on the Line, and all outstanding principal and interest will be due on that fifth anniversary. Advances will be interest-bearing, evidenced by a promissory note and subject to other considerations; and the aggregate amount of draws in any calendar year may not exceed $5.0 million. Diacrin did not make any draws on the Line during the year ended December 31, 1998.
The Company believes that its existing funds, together with expected future funding under the Joint Venture agreement with Genzyme, will be sufficient to fund its operating expenses and capital requirements as currently planned through at least 2000. However, the Company's cash requirements may vary materially from those now planned because of results of research and development, the scope and results of preclinical and clinical testing, any termination of the Joint Venture, relationships with strategic partners, changes in the focus and direction of the Company's research and development programs, competitive and technological advances, the FDA's regulatory process, the market acceptance of any approved Company products and other factors.
The Company expects to incur substantial additional costs, including costs related to ongoing research and development activities, preclinical studies, clinical trials, establishing pig production capabilities and the expansion of its laboratory and administrative activities. Therefore, in order to achieve commercialization of its potential products, the Company will need substantial additional funds. There can be no assurance that the Company will be able to obtain the additional funding that it will require on acceptable terms, if at all.
Impact of the Year 2000 Issue
The Company is in the process of completing its assessment of Year 2000 issues and their potential impact on its information systems and business. Generally, the Company has potential Year 2000 exposure in four areas: (i) financial and management operating computer systems used to manage the Company's business, (ii) operating computer systems used in the Company's research and product development laboratories, (iii) microprocessors and other electronic equipment used by the Company ("embedded chips") and (iv) computer systems used by third parties, in particular financial institutions and suppliers of the Company.
At December 31, 1998, the Company had completed its assessment of its financial and management operating computer systems and has identified software that is not Year 2000 compliant. The Company estimates the cost to update this software, through the purchase of an off-the-shelf software package, together with hardware and network server software, will be approximately $8,000. At December 31, 1998, the Company had spent approximately $5,000 in this effort. The Company is substantially complete with its update of the systems that are not Year 2000 compliant.
At December 31, 1998, the Company had also completed its assessment of its Year 2000 exposure to operating computer systems used in the Company's research and development laboratories and embedded chips in its facilities and equipment used in its facilities. The Company has not identified any non-compliant systems that play a significant role in the Company's research, product development or facilities management.
The Company continues to interview financial institutions and vendors to determine their exposure to year 2000 issues, their anticipated risks and responses to those risks. To date, the Company has not obtained information suggesting any critical vendors or financial institutions will not be able to service or supply the Company on or after January 1, 2000.
If the Company is unsuccessful in completing remediation of non-compliant systems, or if any of the Company's third party suppliers and partners do not timely complete their remediation programs, additional costs may be incurred to develop alternative methods of managing the effected aspects of the Company's business. In addition, the Company's clinical and preclinical trials for all of its product candidates could be delayed. Based on the information currently available to the Company, Year 2000 issues are not expected to have a significant impact on the Company's ongoing results of operations. Accordingly, the Company has not developed a contingency plan but will do so in the future if necessary.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K or presented elsewhere by management from time to time. Note that, except where the context otherwise requires, all references to the Company's products are inclusive of the Joint Venture Products being developed in the Joint Venture.
Reliance on Joint Venture with Genzyme Corporation
The Company and Genzyme are parties to a joint venture agreement relating to the development and commercialization of NeuroCell(TM)-PD and NeuroCell(TM)-HD, the Company's most advanced product candidates. Under the agreement, Genzyme has agreed to provide the first $10 million of product development and commercialization funding required after October 1, 1996 for the Joint Venture Products, 75% of the next $40 million of funding and 50% of funding thereafter. In addition, Genzyme has agreed to market and sell the Joint Venture Products on behalf of the Joint Venture. Furthermore, the Joint Venture plans to manufacture the Joint Venture Products in facilities controlled by Genzyme.
Genzyme has the right to terminate the joint venture agreement, without cause, upon 180 days notice to Diacrin. In the event of such termination, the Company (i) would lose a significant source of funding for the NeuroCell(TM)-PD and the NeuroCell(TM)-HD product development programs, (ii) would lose access to Genzyme's experienced sales, marketing, development and manufacturing organizations, and (iii) would need to establish clinical production facilities for the production of the Joint Venture Products. There can be no assurance that the Company would be able to complete development or commercialization of NeuroCell(TM)-PD and NeuroCell(TM)-HD if Genzyme terminated the joint venture agreement.
In addition, under certain circumstances, Genzyme has the right to terminate the joint venture agreement following an unremedied breach by Diacrin of any material term of the agreement. In the event of such termination, Genzyme has the option to obtain an exclusive, worldwide, royalty-bearing license to certain Diacrin technology required to manufacture and market the Joint Venture Products. If Genzyme exercised its option, the Company would be entitled to receive a royalty on the net sales of the Joint Venture Products, which royalty may be significantly less than amounts the Company would be entitled to receive under the 50%/50% profit split agreed to as part of the joint venture agreement.
Any termination of the joint venture agreement, whether by Genzyme or Diacrin, could have a material adverse effect on the Company's business, results of operations or financial position. In addition, there can be no assurance that the economic and other interests of the Company and Genzyme will coincide during the term of the joint venture agreement or that disagreements will not occur between the Company and Genzyme during the term of the agreement, either of which could have a material adverse effect on the Company's business, results of operations or financial position. See "Dependence on Others."
Reliance on Cell Transplantation Technology; No Currently Approved Xenotransplantation-Based Products; PERV Testing
Diacrin has concentrated its efforts and therapeutic product research on its cell transplantation technology and will be dependent on the successful development of the technology. Cell transplantation technology is an emerging technology with, as yet, limited clinical applications. There can be no assurance that the Company's cell transplantation technology will result in the development of any therapeutic products. If it does not, the Company may be required to change dramatically the scope and direction of its product development activities.
The Company's approach involves xenotransplantation -- the transplantation of cells from one species into another. Although several companies are focusing on this area, xenotransplantation-based products represent a novel therapeutic approach that has not yet been subject to extensive clinical testing. Xenotransplantation also poses a risk that viruses or other animal pathogens may be unintentionally transmitted to a human patient. The Company has been required by the FDA to perform certain tests to determine whether PERV is present in patients that have received porcine cells. These tests have been performed on samples from patients who have received NeuroCell(TM)-PD, NeuroCell(TM)-HD and NeuroCell(TM)-FE and no PERV was detected in these samples. The Company has also been required by the FDA to perform additional tests on porcine neural cells to determine if infectious PERV is present. These tests have been performed and no PERV was detected. The Company has been required by the FDA to develop an additional test for the detection of PERV and has been instructed to routinely monitor patient blood samples for the presence of PERV. If PERV is detected in this test or samples, additional tests may be required to assess the risk to patients of PERV infection. If such additional tests are required, trials of the Company's porcine cell products may be delayed. While PERV has not been shown to cause any disease in pigs, it is not known what effect, if any, PERV may have on humans. The Company's porcine cell product development programs would be negatively impacted by the detection of infectious PERV in porcine cells or
clinical trial subjects. An inability to proceed with further trials or a substantial delay in the clinical trials would have a material adverse effect on the Company.
No xenotransplantation-based therapeutic product has been approved for sale by the FDA. The FDA has not yet established definitive regulatory guidelines for xenotransplantation, but has proposed guidelines in an attempt to reduce the risk of contamination of transplanted cellular products with infectious agents. Diacrin has provided the FDA with a written response to the proposed guidelines, however, there can be no assurance that such guidelines will be issued, or that Diacrin will be able to comply with final guidelines that may be issued. Furthermore, there can be no assurance that any products developed and tested by Diacrin will be approved by the FDA or regulatory authorities in other countries, or that xenotransplantation-based products, including the Company's product candidates, will be accepted by the medical community or third-party payers or that the degree of acceptance will not limit the size of the market for such products.
History of Operating Losses; No Assurance of Revenue or Operating Profit
The Company has generated no revenue from product sales to date. Diacrin has accumulated net losses from its inception in 1989 through December 31, 1998 of approximately $39.5 million, and losses are continuing. The Company expects to incur substantial operating losses for the foreseeable future. The Company expects that the Joint Venture's 1999 product development plans together with the Company's continued funding of the Joint Venture will significantly increase the Company's net loss and cash and investments used in 1999 as compared with 1998. The Company currently has no material sources of revenue from product sales or license fees, and there can be no assurance that it will be able to develop such revenue sources or that its operations will become profitable, even if it is able to commercialize any products.
Lack of Commercial Products; No Assurance of Successful Product Development
The Company has no products available for sale and does not expect to have any therapeutic products commercially available for at least the next several years, if at all. The Company's potential products will require significant additional development, preclinical and clinical testing, regulatory approval and additional investment prior to commercialization. The Company's potential therapeutic products are at early stages of research and development and the Company's growth will depend on the successful development and commercialization of its products. There can be no assurance that any such potential products will be successfully developed, prove to be safe and efficacious in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs or be successfully marketed.
Need for Substantial Additional Funds
The Company will require substantial additional funding for its research and product development programs and operating expenses, and for pursuing regulatory clearances and building production capabilities. Adequate funds for these purposes, whether obtained through equity or debt financings, collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds may require the Company to delay, scale back or eliminate certain of its product development programs or to license others to commercialize products or technologies that the Company would otherwise seek to develop and commercialize itself, any of which would have a material adverse effect on the Company.
Uncertainty Associated with Preclinical and Clinical Testing
Before obtaining regulatory approvals for the commercial sale of any of the Company's potential products, the products will be subjected to extensive preclinical and clinical testing to demonstrate their safety and efficacy in humans. To date, approximately 37 patients have been enrolled in clinical trials of NeuroCell(TM)-PD, NeuroCell(TM)-HD and NeuroCell(TM)-FE. Results of initial preclinical and clinical testing of products under development by the Company are not necessarily predictive of results that will be obtained from subsequent or more extensive preclinical and clinical testing. Furthermore, there can be no assurance that clinical trials of products under development will demonstrate the safety and efficacy of such products at all or to the extent necessary to obtain regulatory approvals. Companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a therapeutic product under development could delay or prevent regulatory approval of the product and would have a material adverse effect on the Company.
The rate of completion of clinical trials is dependent upon, among other factors, the enrollment of patients. Patient accrual is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the existence of competitive clinical trials. Delays in planned patient enrollment in the Company's current clinical trial or future clinical trials may result in increased costs, program delays or both, which could have a material adverse effect on the Company.
No Assurance of FDA Approval; Government Regulation
The FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacture and marketing of pharmaceutical products through lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or more and varies substantially based upon the type, complexity and novelty of the proposed product. The Company cannot yet accurately predict when it might first submit any PLA or BLA for FDA or other regulatory approval.
The effect of government regulation may be to delay marketing of new products for a considerable or indefinite period of time, to impose costly procedures upon the Company's activities or to diminish or eliminate any competitive advantage the Company may enjoy. There can be no assurance that FDA or other regulatory approval for any products developed by the Company will be granted on a timely basis, if at all. Any such delay in obtaining, or failure to obtain, such approvals could adversely affect the marketing of the Company's products and the ability to generate product revenue. The extent of potentially adverse government regulation which might arise from future legislation or administrative action cannot be predicted.
If regulatory approval of a product is obtained, such approval may be conditioned upon limitations and restrictions on the product use. In addition, any marketed product and its manufacturer are subject to continuing governmental review and any subsequent discovery of previously unrecognized problems could result in restrictions on the product or manufacturer, including, without limitation, withdrawal of the product from the market. Failure of the Company to comply with applicable regulatory requirements can, among other things, result in fines, suspension of regulatory approvals, product recalls, seizure of products, operating restrictions or civil or criminal prosecution.
Additionally, the Company is or may become subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research and development work. The Company is unable to predict the extent of restrictions that might arise from any governmental or administrative action. There can also be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations, or any assurance that the operations, business or assets of the Company will not be materially adversely affected by current or future environmental laws or regulations.
Rapid Technological Changes; Competition
The Company is engaged in activities in the biopharmaceutical field, which is characterized by extensive research efforts and rapid technological progress. There can be no assurance that research and discoveries by other biotechnology or pharmaceutical companies will not render the Company's programs or products uneconomical, result in therapies superior to any therapy developed by the Company or that any products developed by the Company will be preferred to any existing or newly-developed technologies.
The biotechnology and pharmaceutical industries are characterized by intense competition. The Company competes against numerous companies, many of which have substantially greater financial and other resources than the Company. Several such enterprises have initiated cell transplantation research programs and/or efforts to treat the same diseases targeted by the Company through alternate technologies. These competitive enterprises have devoted, and will continue to devote, substantial resources to the development of cell transplantation or other products to treat such diseases. Private and public academic and research institutions also compete with Diacrin in the research and development of human therapeutic products.
In addition, many of the Company's competitors have significantly greater experience than the Company in preclinical testing and human clinical trials of biotechnology and pharmaceutical products and in obtaining FDA and other regulatory approvals of products. Accordingly, the Company's competitors may succeed in obtaining FDA approval for products more rapidly or effectively than the Company. If the Company commences significant commercial sales of its products, it will also be competing with respect to manufacturing efficiency and sales and marketing capabilities, areas in which it has no experience.
Limited Regulatory, Manufacturing, Marketing and Sales Capabilities
The Company has not yet invested significantly in regulatory, manufacturing, marketing, distribution or product sales resources. To date, the Company has relied on others for the supply and production of pigs for its clinical programs. Although the Company intends to develop regulatory, manufacturing, marketing, distribution and sales resources in the future, there can be no assurance that the Company will be able to develop such resources successfully.
Uncertain Ability to Protect Proprietary Technology; Reliance Upon Licenses
The biotechnology and pharmaceutical industries place considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. The Company's success will depend, in part, on its ability to obtain patent protection for its products, preserve its trade secrets and operate without infringing the proprietary rights of others. The Company has ongoing research efforts and expects to seek additional patents covering this research in the future. There can be no assurance of its success or timeliness in obtaining any patents, or of the breadth or degree of protection that any such patents will afford the Company.
The patent position of biotechnology products is often highly uncertain and usually involves complex legal and factual questions. There can be no assurance that patent applications relating to the Company's potential products or technology will result in additional patents being issued or that, if issued, such patents will afford adequate protection to the Company or not be challenged, invalidated or infringed. Furthermore, there can be no assurance that others will not independently develop similar products and processes, duplicate any of the Company's products or, if patents are issued to the Company, design around such patents. In addition, the Company could incur substantial costs in defending itself in suits brought against it or in suits in which it may assert its patents against others. If the outcome of any such litigation is unfavorable, the Company's business could be adversely affected. To determine the priority of inventions, the Company may also have to participate in interference proceedings declared by the United States Patent and Trademark Office, which could result in substantial cost to the Company.
Much of the Company's know-how and technology is not patentable. To protect its rights, the Company requires employees, consultants, advisors and collaborators to enter into confidentiality agreements with Diacrin. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Further, in the absence of patent protection, the Company's business may be adversely affected by competitors who independently develop substantially equivalent technology.
Uncertain Availability of Third-Party Reimbursement and Product Pricing
The Company's ability to commercialize products successfully will depend substantially on reimbursement of the costs of such products and related treatments at acceptable levels from government authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). There can be no assurance that reimbursement in the United States or foreign countries will be available for any products the Company may develop or, if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, the Company's products, thereby adversely affecting the Company's business.
Third-party payers are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations, such as HMOs, which can control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may result in lower prices for therapeutic products. The cost containment measures that health care providers are instituting, including practice protocols and guidelines and clinical pathways, and the effect of any health care reform, could materially adversely affect the Company's ability to sell its products if successfully developed and approved. Moreover, the Company is unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on the Company's business.
Dependence on Key Personnel
Because of the specialized nature of its business, the Company is highly dependent on its ability to attract and retain qualified scientific and technical personnel for the research and development activities conducted or sponsored by the Company. The loss of certain key executive officers could be significantly detrimental to the Company. Recruiting and retaining qualified scientific personnel to perform research and development work is critical to the Company's success. In addition, the Company's anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical testing, regulatory compliance, manufacturing and marketing, will require the addition of new management personnel and the development of additional expertise by existing management personnel. There is intense competition for qualified personnel in the areas of the Company's activities, and there can be no assurance that the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its business. The failure to attract and retain such personnel or to develop such expertise would adversely affect the Company's business.
Dependence on Others
The Company's strategy for development and commercialization of its product candidates entails entering into arrangements with corporate partners, collaborators, licensees and others and upon the subsequent success of these third parties in performing their obligations, including, as the case may be, any or all of preclinical and clinical testing, obtaining regulatory approvals, manufacturing and marketing. There can be no assurance that the Company will be able to maintain its existing arrangements or establish additional collaborative arrangements on favorable terms, if at all. If the Company is able to enter into any additional arrangements, such arrangements may require the Company to transfer certain material rights to third parties.
There can be no assurance that any such corporate partners, collaborators, licensees or others will perform their obligations as expected or that the Company will derive any revenue or profit from any existing or future arrangements. While the Company believes its partners, collaborators, licensees and others will have an economic motivation to succeed in performing their contractual responsibilities, the amount and timing of resources to be devoted by such parties is not within the control of the Company. Furthermore, there can be no assurance that the interest of the Company will coincide with those of such other parties or that disagreements over
rights to technology or other proprietary information or other matters will not occur. In addition, it is possible that such other parties will be independently involved in the development of products that may be competitive with the products they are developing in collaboration with the Company. If any of the Company's partners, collaborators, licensees or others breaches or terminates its agreement with the Company or otherwise fails to conduct its required activities in a timely manner, the development or commercialization of the product candidate under such collaborative agreement may be delayed, the Company may be required to undertake unforeseen additional responsibilities or devote unforeseen additional resources to such development or commercialization or such development or commercialization could be terminated. Any such event could adversely effect the Company's business, results of operations or financial position.
Potential Product Liability; Limited Product Liability Insurance
The testing, marketing and sale of human health care products entail an inherent risk of product liability claims, and there can be no assurance that substantial product liability claims will not be asserted against the Company. The Company has limited product liability insurance and may need to increase its coverage as it expands human clinical trials and if and when it begins to market products. There can be no assurance that adequate insurance coverage will be available on acceptable terms, if at all, or that a product liability claim would not materially adversely affect the business or financial condition of the Company.
Item 7A.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
The Company owns financial instruments that are sensitive to market risks as part of its investment portfolio. The investment portfolio is used to preserve the Company's capital until it is required to fund operations, including the Company's research and development activities. None of these market-risk sensitive instruments are held for trading purposes. The Company does not own derivative financial instruments in its investment portfolio. The investment portfolio contains instruments that are subject to the risk of a decline in interest rates.
Interest Rate Risk--The Company's investment portfolio includes investment grade debt instruments. These bonds are subject to interest rate risk, and could decline in value if interest rates fluctuate. Due to the short duration and conservative nature of these instruments, the Company does not believe that it has a material exposure to interest rate risk.
Item 8.
Item 8. Financial Statements
The financial statements required to be filed hereunder are filed as an exhibit hereto, are listed under item 14(a)(1) and are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
There have been no disagreements on accounting and financial disclosure matters.
PART III
Item 10
Item 10 - 13.
The information required for Part III of this Annual Report on Form 10-K is hereby incorporated by reference from portions of the Company's definitive proxy statement relating to the 1999 annual meeting of stockholders of the Company, which statement will be filed with the Commission not later than 120 days after the end of the Company's 1998 fiscal year. Such information will be contained in the sections of such proxy statement captioned "Election of Directors," "Meetings of Board of Directors and Committees," "Executive Compensation," "Certain Relationships and Related Transactions," "Section 16(a) Beneficial Ownership Reporting Compliance," "Compensation Committee Interlocks and Insider Participation," and "Principal Stockholders." Information regarding executive officers of the Company is furnished in Part I of this Annual Report on Form 10-K under the heading, "Executive Officers of the Registrant."
PART IV
Item 14.
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) (1) Index to Financial Statements
The following Financial Statements are included in this Annual Report on Form 10-K.
(2) Exhibits
The following is a list of exhibits filed as part of this Annual Report on Form 10-K:
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report.
(c) Description of Exhibits.
See Item 14 (a)
(d) Description of Financial Statement Schedules.
None.
* Filed herewith
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 0-20139) for the quarter ended June 30, 1995 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10, as amended (File No. 0-20139), on April 29, 1992, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 0-20139) for the quarter ended September 30, 1994 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 0-20139) for the fiscal year ended December 31, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 0-20139), for the fiscal year ended December 31, 1994 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Registration Statement on Form S-2, as amended (Registration No. 33-80773) on December 22, 1995, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 0-20139) for the fiscal year ended December 31, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q, as amended on Form 10-Q/A (File No. 0-20139) for the quarter ended September 30, 1996 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 0-20139) for the fiscal year ended December 31, 1996 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 0-20139) for the quarter ended June 30, 1997 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 0-20139) for the fiscal year ended December 31, 1997 and incorporated herein by reference.
+ Confidential treatment granted as to certain portions of this exhibit.
++ Management contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
DIACRIN, INC.
By: /s/ Thomas H. Fraser --------------------- Thomas H. Fraser President and Chief Executive Officer
Date:
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Date Title
/s/ Thomas H. Fraser 3/31/99 - - ------------------------ President, Chief Executive Thomas H. Fraser Officer and Director (Principal Executive Officer)
/s/ Kevin Kerrigan 3/31/99 - - ------------------------ Controller Kevin Kerrigan (Principal Financial and Accounting Officer) /s/ Zola P. Horovitz 3/31/99 - - ------------------------ Director Zola P. Horovitz
/s/ John W. Littlechild 3/31/99 - - ------------------------ Director John W. Littlechild
/s/ Stelios Papadopoulos 3/31/99 - - ------------------------ Director Stelios Papadopoulos
- - ------------------------ Director Henri A. Termeer
/s/ Christopher T. Walsh 3/31/99 - - ------------------------ Director Christopher T. Walsh
/s/ Joshua Ruch 3/31/99 - - ------------------------ Director Joshua Ruch
Report of Independent Public Accountants
To Diacrin, Inc.:
We have audited the accompanying balance sheets of Diacrin, Inc. (a Delaware corporation) as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Diacrin, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts January 8, 1999
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DIACRIN, INC. Balance Sheets
See Accompanying Notes to Financial Statements
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DIACRIN, INC. Statements of Operations
See Accompanying Notes to Financial Statements
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DIACRIN, INC. Statement of Stockholders' Equity (Deficit)
See Accompanying Notes to Financial Statements
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DIACRIN, INC. Statements of Cash Flows
See Accompanying Notes to Financial Statements
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DIACRIN, INC. Notes to Financial Statements
(1) Operations and Basis of Presentation
Diacrin, Inc. (the "Company") was incorporated on October 10, 1989 and is developing transplantable cells for the treatment of human diseases that are characterized by cell dysfunction or cell death and for which current therapies are either inadequate or nonexistent.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying statement of operations and cash flows for the year ended December 31, 1996 includes the accounts of the Company and its wholly-owned subsidiary, Diacrin Securities Corporation. All material intercompany accounts and transactions were eliminated in consolidation. This subsidiary was dissolved on June 13, 1996.
(b) Depreciation and Amortization
The Company provides for depreciation using the straight-line method by charges to operations in amounts estimated to allocate the cost of these assets over a five-year life. Amortization of equipment under capital leases and leasehold improvements is computed using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
(c) Research and Development
Collaborative revenue under the Joint Venture agreement with Genzyme Corporation (see Note 5) and revenues from research grants are recognized as work is performed. Collaborative revenue under the Joint Venture agreement is recognized as revenue to the extent that the Comany's research and development costs are funded by Genzyme through the Joint Venture. The Company receives non-refundable monthly advances from the Joint Venture. Deferred revenue represents amounts received prior to recognition of revenue. Research and development costs are expensed as incurred.
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DIACRIN, INC. Notes to Financial Statements (continued)
(d) Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. At December 31, 1998, the Company has a net operating loss carryforward for federal income tax purposes of approximately $39,000,000. The difference from losses reported for financial reporting purposes relates primarily to expenses reflected in the financial statements not yet deductible for tax purposes. The net operating loss carryforwards expire commencing in the year 2005 and are subject to review and possible adjustment by the Internal Revenue Service. Net operating loss and tax credit carryforwards may be limited in the event of certain changes in the ownership interests of significant shareholders. The Company believes issuance of the convertible notes payable in May 1995, as well as the initial public offering in February 1996, caused a change in ownership, as defined by the Tax Reform Act of 1986. The Company does not believe that such ownership changes will significantly impact the Company's ability to utilize the net operating loss and tax credit carryforwards as of the date of such ownership changes. Ownership changes in future periods may limit the Company's ability to utilize net operating loss and tax credit carryforwards.
The components of the net deferred tax assets are approximately as follows:
1997 1998 ---- ---- Loss carryforwards $ 13,285,000 $ 15,546,000 Start-up costs 242,000 - Credit carryforwards 2,569,000 2,684,000 Other temporary differences 4,000 15,000 --------------- -------------- Total deferred tax assets 16,100,000 18,245,000 Less - valuation allowance (16,100,000) (18,245,000) --------------- -------------- Net deferred tax asset - - =============== ==============
A valuation allowance has been provided as it is uncertain if the Company will realize the deferred tax assets. The change in the total valuation allowance during the year ended December 31, 1998 was an increase of approximately $2,145,000 and relates to the increase in the deferred tax asset as a result of the net operating loss and tax credits generated during 1998.
(e) Net Loss per Common Share
In accordance with Statement of SFAS No. 128, Earnings per Share, basic and diluted net loss per share is calculated by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding for all periods presented. Basic and diluted net loss per share is calculated by dividing net loss by the weighted average number of vested shares of common stock and preferred stock, on an as-converted basis, outstanding during 1996. Diluted weighted average shares outstanding for all periods presented exclude the
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potential common shares from stock options and warrants of 430,832 at December 31, 1998 because to include such shares would have been antidilutive.
(f) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
(g) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
(h) New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in stockholders' equity (deficit) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The Company's comprehensive income (loss) is the same as presented for all periods.
The Company has adopted SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information, in the fiscal year ended December 31, 1998. SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise about which separate discrete financial information is evaluated regularly by the chief operating decision maker or decision making group, in deciding how to allocate resources and assess performance. Unless impracticable, companies are required to restate prior period information upon adoption. To date, the Company has viewed its operations and managed its business as principally one segment. As a result, the financial information disclosed herein, materially represents all of the financial information related to the Company's principal operating segment.
In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-5, Reporting on the Costs of Start-Up Activities, which requires that all nongovernmental entities expense the costs of start-up activities, including organizational costs, as those costs are incurred. The Company has historically recorded all such costs as expenses, in the period incurred.
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In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires certain computer software costs associated with internal-use software to be expensed as incurred until certain capitalization criteria are met. The Company will adopt SOP No. 98-1 prospectively beginning January 1, 1999. Adoption of this statement is not expected to have a material impact on the Company's consolidated financial position or results of operations.
(3) Initial Public Offering
On February 12, 1996, the Company completed an initial public offering of 2,500,000 units, each unit consisting of one share of common stock and one redeemable warrant to purchase one share of common stock for $16.00 per share, for net proceeds of approximately $18.2 million. In addition, all outstanding shares of Series A, B and C convertible preferred stock were automatically converted into an aggregate of 6,693,121 shares of common stock and the outstanding $7,000,000 of convertible notes payable were automatically converted into an aggregate of 2,799,999 shares of common stock upon the closing of the initial public offering. On March 7, 1996, the underwriters of the offering exercised their over-allotment option to purchase an additional 375,000 units, resulting in additional net proceeds of approximately $2.8 million to the Company. On August 12, 1996, the common stock and warrants underlying the units began to trade separately.
(4) Private Placement of Common Stock
In February 1998, the Company completed a private placement of 1,027,027 shares of its common stock for $9.25 per share for net proceeds of approximately $9.44 million.
(5) Joint Venture Agreement
In September 1996, the Company and Genzyme Corporation ("Genzyme") formed a joint venture to develop and commercialize the Company's NeuroCell(TM)-PD and NeuroCell(TM)-HD products for transplantation into people with advanced Parkinson's disease and Huntington's disease, respectively. Under the terms of the Joint Venture agreement, which was effective October 1, 1996, Genzyme agreed to provide 100% of the first $10 million in funding and 75% of the following $40 million in funding for the two products. All costs incurred in excess of $50 million will be shared equally between Genzyme and the Company in accordance with the terms of the agreement. Any profits of the Joint Venture will be shared equally by the two parties.
Genzyme agreed to make financing available to Diacrin from and after the date that Genzyme provides the initial $10.0 million of funding to the Joint Venture. Genzyme agreed to make available to Diacrin an unsecured, subordinated line of credit
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(the "Line") of up to an aggregate amount of $10.0 million. Diacrin may draw on the Line only in the event that Diacrin's cash and cash equivalents are insufficient to fund Diacrin's budgeted operations for a specified period of time, and the funds may be used by Diacrin only to fund capital contributions to the Joint Venture. The Line will be available through the date five years after the date Diacrin first draws on the Line, and all outstanding principal and interest will be due on that fifth anniversary. Advances will be interest-bearing, evidenced by a promissory note and subject to other considerations; and the aggregate amount of draws in any calendar year may not exceed $5.0 million. Diacrin did not make any draws on the Line during the year ended December 31, 1998.
During the year ended December 31, 1996, the Company received $1,662,631 under the agreement, of which $1,043,787 was recognized as revenue and $618,844 was deferred until the work was performed in 1997. During the year ended December 31, 1997, the Company received $4,557,252 under the agreement and $4,763,270 was recognized as revenue. In addition, $25,770 of capital equipment was acquired on behalf of the Joint Venture for which the Company was reimbursed. At December 31, 1997, $387,056 of total amounts received were recorded as deferred revenue. During the year ended December 31, 1998, the Company received $4,499,000, of which $3,623,249 was recognized as revenue, $11,110 reimbursed the Company for capital equipment acquired on behalf of the Joint Venture and $338,855 has been recorded as deferred revenue. In addition, the Company made $1,911,216 in contributions to the Joint Venture, of which $912,843 was returned to the Company for services provided on behalf of the Joint Venture, and at December 31, 1998, the Company had accrued $180,493 in costs incurred by Genzyme on behalf of the Joint Venture that will be funded in 1999.
The Company accounts for its investment in the joint venture on the equity method. Through December 31, 1997, the Company had not made any capital contributions to the Joint Venture. During 1998, the Company began recognizing an expense related to costs incurred by Genzyme on behalf of the Joint Venture that are funded by the Company. The Company has performed research and development on behalf of the Joint Venture and has recognized revenues to the extent these costs were funded by Genzyme. Genzyme's President and Chief Executive Officer is a director of the Company.
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(6) Cash Equivalents and Investments
The Company's cash equivalents and investments are classified as held-to-maturity and are carried at amortized cost, which approximates market value. Cash equivalents, short-term investments and long-term investments have maturities of less than three months, less than one year and greater than one year, respectively. Cash and cash equivalents, short-term investments and long-term investments at December 31, 1997 and 1998 consisted of the following:
(7) Accrued Expenses
Accrued expenses consisted of the following at December 31, 1997 and 1998:
(8) Long-term Debt and Obligations Under Capital Leases
(a) Term Loan
In November 1997, the Company entered into an unsecured term loan agreement with a bank whereby the bank loaned the Company $650,000 to construct a pilot manufacturing facility. Interest accrues at the Prime Rate plus one-half of one percent (8.25% at December 31, 1998) and is payable monthly in arrears. The loan is payable in sixty principal installments of $10,833 commencing December 1, 1997 and may be
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prepaid without penalty. The Company is required to maintain certain covenants, including certain financial ratios and unencumbered cash balances of not less than $1 million. As of December 31, 1998, the Company was in compliance with all covenants.
(b) Capital Leases
On December 22, 1994, the Company sold certain laboratory equipment, with an original cost of approximately $805,000, for $600,000. In connection with this transaction, the Company entered into a capital lease under a master lease agreement to lease the equipment back for payments of approximately $15,000 per month for 48 months. Upon completion of the original lease term, the Company extended the lease term for an additional six months at approximately $15,000 per month, at which time title to the equipment reverts back to the Company. On July 1 and December 22, 1995, the Company sold additional equipment at its original cost of approximately $142,000 and $85,000, respectively, and entered into capital leases under the aforementioned master lease to lease the equipment back for 48 monthly payments of approximately $3,500 commencing July 1, 1995 and $2,100 commencing January 1, 1996. Upon completion of each lease term, the Company is required to purchase all of the equipment for 15% of the amount financed or extend each lease term for an additional six months, at which times title to the equipment reverts back to the Company. The sale of the equipment in 1994 and 1995 generated gains of approximately $139,000 and $13,000, respectively, which have been offset against the cost of the assets and are being amortized over the life of the leases in accordance with SFAS No. 13 "Accounting for Leases".
The future minimum payments under all capital lease agreements as of December 31, 1998 are as follows:
1999 $ 161,310 2000 12,649 ---------------------
Total minimum lease payments 173,959 Less-Amount representing interest 10,700 ---------------------
Present value of minimum lease payments 163,259 Less-Current obligation under capital lease 150,724 --------------------- $ 12,535 =====================
(9) Stockholders' Equity (Deficit)
(a) Preferred Stock
As of December 31, 1997, the Company has an authorized class of undesignated preferred stock consisting of 5,000,000 shares. The Company's Board of Directors is authorized, subject to any limitations prescribed by law and without further stockholder approval, to issue from time to time up to 5,000,000 shares of preferred stock in one or more series. Each such series of preferred stock shall have such number of shares,
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designations, preferences, voting powers, qualifications and rights or privileges as shall be determined by the Board of Directors.
(b) Warrants
In November 1991, in connection with the sale of Series C convertible preferred stock, the Company issued warrants to purchase 465,853 shares of common stock exercisable at $7.20 per share. The warrants were exercisable commencing August 9, 1996 and expired on November 14, 1996. Warrants to purchase 427,441 shares of common stock were exercised during 1996 for net proceeds to the Company of approximately $3,071,000.
In December 1994, the Company issued a warrant for the purchase of common stock in connection with a master lease agreement as discussed in Note 7(b). The warrant is exercisable for 12,474 shares of common stock at an exercise price of $7.92 per share. The warrant expires in December 1999.
As discussed in Note 3, the Company issued redeemable warrants in connection with the Company's initial public offering to purchase 2,875,000 shares of common stock at an exercise price of $16 per share, subject to certain adjustments. The warrants may be exercised commencing August 12, 1996 and expire on the earlier to occur of redemption of the warrant by the Company, which option the Company may exercise (at a price of $.01 per warrant) if the average closing price of the common stock for any 20-consecutive-day trading period exceeds 150% of the exercise price of the warrants, or December 31, 2000. All 2,875,000 warrants were outstanding at December 31, 1998.
(10) Common Stock Options
The Company has adopted the 1990 Stock Option Plan (the "1990 Plan") under which the Board of Directors is authorized to grant incentive stock options, non-qualified stock options and stock appreciation rights to employees, directors and consultants of the Company for up to 800,000 shares of the Company's common stock. All options granted have 10-year terms, and the majority vest in equal annual installments of 25% over four years of continued service from the date of hire or grant. As of December 31, 1998, there were options to purchase 75,420 shares of common stock available for future grant under the 1990 Plan.
In December 1993, the Company granted non-qualified options, not included in the 1990 Plan, to purchase 214,105 shares of common stock at a price of $2.50 per share and 57,500 shares of common stock at a price of $4.00 per share to certain advisors to the Company. These options have 10-year terms and were fully vested upon the date of grant. In June 1994, the Company granted non-qualified options, not included in the 1990 Plan, to purchase 45,000 shares of common stock at a price of $8.50 per share to certain advisors to the Company. In April 1996, the Company granted non-qualified options, not included in the 1990 Plan, to purchase 25,000 shares of common stock at a price of $9.50 per share to an executive of the Company as an inducement to his
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employment. The options granted in 1994 and 1996 have 10-year terms and vest in equal annual installments of 25% over four years of continued service from the date of grant.
In July 1994, the stockholders approved the 1994 Directors' Stock Option Plan (the "Director Plan") which automatically grants an option to each eligible outside director of the Company for the purchase of 7,500 shares of common stock at an exercise price of the then fair market value. Each option granted under the Director Plan has a 10-year term and may be exercised on a cumulative basis as to 25% of the shares on the first anniversary of the date of grant and an additional 25% at the end of each one-year period thereafter. In December 1996, the Board of Directors amended the Director Plan to automatically grant 15,000 options to each new eligible outside director. The Company has reserved 30,000 shares for issuance under this plan. As of December 31, 1998, there were 28,125 options outstanding under the Director Plan at a weighted average exercise price of $10.38 per share. As of December 31, 1998, there were no options available for grant under the Director Plan.
In June 1997, the stockholders approved the 1997 Stock Option Plan (the "1997 Plan") under which the Board of Directors is authorized to grant incentive stock options and non-qualified stock options to employees, directors and consultants of the Company for up to 1,200,000 shares of the Company's common stock. All options granted have 10-year terms, and vest in equal annual installments of 25% over four years of continued service from the date of hire or grant. As of December 31, 1998, options to purchase 904,250 shares of common stock were available for future grant under the 1997 Plan.
The following table summarizes incentive and non-qualified stock option activity, exclusive of the warrants discussed in Note 9(b):
All options have been granted at the fair market value of the Company's common stock on the date of grant.
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The following table summarizes certain information about options outstanding and exercisable at December 31, 1998:
The Company has adopted SFAS No. 123, Accounting for Stock-Based Compensation. As permitted by SFAS No. 123, the Company has continued to account for employee stock options in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and has included the proforma disclosure required by SFAS No. 123 for all periods presented.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair-value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1996, 1997 and 1998: risk-free interest rates of 6.5%, 5.5% and 5.5%, respectively; dividend yield of 0% for all years; volatility factor of the expected market price of the Company's common stock of 70% for all years; and a weighted-average expected life of the options of 7.5 years for all years.
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For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The aggregate fair value of options granted in 1996, 1997 and 1998 was approximately $1,400,000, $1,689,000 and $886,000, respectively. The Company's pro forma information follows:
(11) Facility Lease
During 1991, the Company entered into a ten-year operating lease for a facility. Minimum rental payments under the lease are as follows:
Rental Commitment
1999 $ 710,000 2000 710,000 2001 533,000 ------------------
$ 1,953,000 ==================
Total rent expense for the years ended December 31, 1996, 1997 and 1998 was approximately $700,000, $761,000 and $771,000, respectively. The 1996 period is net of sublease revenue received from subtenants of $58,000
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Report of Independent Accountants
To the Venturers of Diacrin/Genzyme LLC (A Development Stage Enterprise):
In our opinion, the accompanying balance sheet and the related statements of operations, changes in venturers' capital (deficit) and cash flows present fairly, in all material respects, the financial position of Diacrin/Genzyme LLC (A Development Stage Enterprise) (the "Joint Venture") at December 31, 1998, and the results of its operations and its cash flows for the year ended December 31, 1998 and for the period from October 1, 1996 (date of inception) to December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Joint Venture's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
Boston, Massachusetts February 12, 1999, except as to the information presented in Note E, for which the date is March 4, 1999
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DIACRIN/GENZYME LLC (A Development Stage Enterprise)
BALANCE SHEET
December 31, 1998
ASSETS Cash $ 4,908 Prepaid to Diacrin, Inc. (Note C) 346,925 Other current assets 11,899 -----------------
Total current assets 363,732
Property and equipment, net (Note D) 220,164 -----------------
Total assets $ 583,896 =================
LIABILITIES AND VENTURERS' CAPITAL (DEFICIT)
Payable to Genzyme Tissue Repair (Note C) $ 885,161 -----------------
Total liabilities 885,161 -----------------
Commitments and contingencies (Notes C and E)
Venturers' capital (deficit) (including deficit accumulated during the development stage of $17,946,732) Genzyme Corporation (223,823) Diacrin, Inc. (77,442) -----------------
Total venturers' capital (deficit) (301,265) ----------------- Total liabilities and venturers' capital (deficit) $ 583,896 =================
The accompanying notes are an integral part of these financial statements.
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DIACRIN/GENZYME LLC (A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
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DIACRIN/GENZYME LLC (A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial
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DIACRIN/GENZYME LLC (A Development Stage Enterprise)
STATEMENT OF CHANGES IN VENTURERS' CAPITAL (DEFICIT)
for the period from October 1, 1996 (date of inception) to December 31, 1998
The accompanying notes are an integral part of these financial statements.
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DIACRIN/GENZYME LLC (A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
A. Organization:
On October 1, 1996, Diacrin/Genzyme LLC ("the Joint Venture") was established as a joint venture between Genzyme Corporation ("Genzyme") and Diacrin, Inc. ("Diacrin") (collectively, the "Venturers"), to develop and commercialize products and processes for use in the treatment of Parkinson's disease and Huntington's disease in humans using porcine fetal cells. Genzyme allocated the JV to the Genzyme Tissue Repair Division ("GTR"). Under the terms of the Collaboration Agreement among Diacrin, Genzyme and the Joint Venture (the "Collaboration Agreement"), all funding is provided by the Venturers, and all payments for work performed are made to the Venturers. GTR provided the initial $10.0 million of the funding requirements, and the next $40.0 million of the funding requirements will be provided 75% by GTR and 25% by Diacrin. After $50.0 million has been funded, additional funding will be provided equally by the Venturers. Funding is provided on a monthly basis. Losses from the Joint Venture will be shared in proportion to the capital contributions of each Venturer. Profits from the Joint Venture will be shared equally by the Venturers. The amounts funded to the Joint Venture by the Venturers are paid by the Joint Venture to the Venturers based upon the dollar amount of work, at defined cost, that each Venturer performs toward the Joint Venture. All general and administrative expenses recorded on the statements of operations are for costs incurred by and reimbursed to, the Venturers. See also Note C.
The Steering Committee of the Joint Venture is comprised of representatives of each Venturer. The Steering Committee is responsible for approving the budget of the Joint Venture and monitoring the scientific progress of the Joint Venture.
The intangible assets or technological know-how contributed by Diacrin to the Joint Venture is not included as an asset in these financial statements because generally accepted accounting principles require that assets be recorded at their book value. The book value of these assets is $0.
B. Accounting Policies:
Accounting Method
The financial statements have been prepared under the accrual method of accounting in conformity with generally accepted accounting principles.
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DIACRIN/GENZYME LLC (A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Fiscal Year-End
Genzyme and Diacrin, as Venturers, have determined that the fiscal year-end of the Joint Venture is December 31.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Property and Equipment
Depreciation expense is computed on a straight-line basis over the useful life of the property and equipment (3 to 7 years), and over the lesser of the life of the lease or the life of the leasehold improvement. When assets are retired or otherwise disposed of, the assets and the related accumulated depreciation are removed from the accounts and any resulting gains or losses are included in the results of operations.
Research and Development Expenses
Research and development costs are expensed as incurred. The research and development efforts are currently being conducted by the Venturers. The costs incurred by these related parties, which are subject to an annual budget as approved by the Joint Venture's Steering Committee, are then charged to the Joint Venture, at defined cost, or at amounts agreed to by the Venturers.
Income Taxes
The Joint Venture is organized as a pass-through entity; accordingly, the financial statements do not include a provision for income taxes. Taxes, if any, are the liability of Genzyme and Diacrin, as venturers.
Uncertainties
The Joint Venture is subject to risks common to companies in the biotechnology industry, including but not limited to, development by its competitors of new technological innovations, protection of proprietary technology, health care cost containment initiatives, product liability and compliance with government regulations, including those of the United States Department of Health and Human Services and the United States Food and Drug Administration.
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DIACRIN/GENZYME LLC (A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
C. Agreements with Venturers:
Funding
Genzyme agreed to make financing available to Diacrin from and after the date that Genzyme provides the initial $10.0 million of funding to the Joint Venture. Genzyme agreed to make available to Diacrin an unsecured, subordinated line of credit (the "Line") of up to an aggregate amount of $10.0 million. Diacrin may draw on the Line only in the event that Diacrin's cash and cash equivalents are insufficient to fund Diacrin's budgeted operations for a specified period of time, and the funds may be used by Diacrin only to fund capital contributions to the Joint Venture. The Line will be available through the date five years after the date Diacrin first draws on the Line, and all outstanding principal and interest will be due on that fifth anniversary. Advances will be interest-bearing, evidenced by a promissory note and subject to other considerations; and the aggregate amount of draws in any calendar year may not exceed $5.0 million. Diacrin did not make any draws on the Line during the year ended December 31, 1998.
During the year ended December 31, 1998, the amount of funding Genzyme provided to the Joint Venture exceeded the initial $10.0 million of funding to the Joint Venture; and, therefore, Genzyme and Diacrin funded 75% and 25%, respectively, thereafter.
Other Agreements
The amount payable to GTR for research and development will be settled by cash payment and represents costs incurred by GTR that are reimbursable under the Collaboration Agreement. The amount prepaid to Diacrin is based upon Diacrin's estimate of the work they will perform in the next month.
According to the terms of the Operating Agreement between Diacrin and Genzyme (the "Operating Agreement"), in no event shall net losses of the Joint Venture be allocated to a Venturer if such allocation would cause or increase a negative balance in such Venturer's capital account. However, both Venturers had negative capital balances at December 31, 1998 in violation of the Operating Agreement. Accordingly, these negative equity balances represent receivables from the Venturers; the Venturers provided additional funding in 1999 to pay these amounts.
The Joint Venture leases space for research and development from Genzyme. The current lease agreement is for the three-year period that commenced on July 1, 1998, and terminates on June 30, 2001, for an annual amount of $364,164.
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DIACRIN/GENZYME LLC (A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Joint Venture incurred $610,392 of rent expense for the year ended December 31, 1998, and expects to incur $364,164, $364,164 and $151,735 in the years ending December 31, 1999, 2000, and 2001, respectively.
D. Property and Equipment:
Property and equipment is stated at cost. At December 31, 1998, property and equipment consisted of the following:
Lab equipment $ 166,820 Computer equipment 71,991 Leasehold improvements 27,608 Furniture and fixtures 12,963 --------------------
279,382 Less: accumulated depreciation (59,218) --------------------
Property and equipment, net $ 220,164 ====================
Depreciation expense was $37,625 and $59,218, for the year ended December 31, 1998 and the period from October 1, 1996 (date of inception) to December 31, 1998, respectively.
E. Subsequent Event:
In March 1999, Genzyme announced plans to reallocate its interest in the Joint Venture from GTR to the Genzyme General Division. The transfer of the interest is subject to the approval of GTR shareholders.
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