UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission File No. 000-20139
Diacrin, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3016912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Building 96 13th Street, Charlestown Navy Yard,
Charlestown, MA 02129 (Address of principal
executive offices, including zip code)
(617) 242-9100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of August 13, 2001, 17,914,704 shares of the registrant's Common
Stock were outstanding.
- 1 -
Diacrin, Inc.
Index
Page
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of
December 31, 2000 and June 30, 2001............................. 3
Statements of Operations for each of the three and six month
periods ended June 30, 2000 and 2001............................ 4
Statements of Cash Flows for each of the six month periods
ended June 30, 2000 and 2001.................................... 5
Notes to Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................... 21
PART II. - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................... 22
Item 4. Submission of Matters to a Vote of Security Holders............... 22
Item 6. Exhibits and Reports on Form 8-K.................................. 22
SIGNATURES................................................................... 23
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
concerning our business, operations and financial condition, including
statements with respect to development funding expected to be received in
connection with our joint venture, the importance of cell transplantation and
the availability of sufficient funds to continue our research and development
efforts. All statements, other than statements of historical facts included in
this Quarterly Report on Form 10-Q regarding our strategy, future operations,
timetables for product testing, financial position, costs, prospects, plans and
objectives of management are forward-looking statements. When used in this
Quarterly Report on Form 10-Q, the words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate" and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. Because these forward-looking statements
involve risks and uncertainties, actual results could differ materially from
those expressed or implied by these forward-looking statements for a number of
important reasons, including those discussed under "Certain Factors That May
Affect Future Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." You should be aware that the occurrence of
any of the events described in the risk factors and elsewhere in this Quarterly
Report on Form 10-Q could substantially harm our business, results of operations
and financial condition and that upon the occurrence of any of these events, the
trading price of our common stock could decline.
We cannot guarantee any future results, levels of activity,
performance or achievements. The forward-looking statements contained in this
Quarterly Report on Form 10-Q represent our expectations as of the date this
Quarterly Report on Form 10-Q was first filed with the Securities and Exchange
Commission and should not be relied upon as representing our expectation as of
any other date. Subsequent events and developments will cause our expectations
to change. However, while we may elect to update these forward-looking
statements, we specifically disclaim any obligation to do so even if our
expectations change.
- 2 -
Diacrin, Inc.
Balance Sheets
(Unaudited)
December 31, June 30,
2000 2001
ASSETS
Current assets:
Cash and cash equivalents $ 11,143,116 $ 7,018,870
Short-term investments 22,485,675 37,728,080
Interest receivable and other current assets 780,406 919,289
------------------ ------------------
Total current assets 34,409,197 45,666,239
---------------- ----------------
Property and equipment, at cost:
Laboratory and manufacturing equipment 1,655,064 1,656,043
Furniture and office equipment 320,106 323,641
Leasehold improvements 77,529 77,529
------------------- -------------------
2,052,699 2,057,213
Less- Accumulated depreciation and amortization 1,651,618 1,758,449
---------------- -----------------
401,081 298,764
----------------- ------------------
Long-term investments 20,977,940 7,588,925
Investment in joint venture 4,785 25,924
------------------- -----------------
Total other assets 20,982,725 7,614,849
--------------- ---------------
Total assets $ 55,793,003 $ 53,579,852
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 130,000 $ 130,000
Accounts payable 109,307 191,312
Accrued expenses 1,323,786 1,278,160
Deferred revenue from joint venture 344,468 305,002
------------------ ------------------
Total current liabilities 1,907,561 1,904,474
----------------- -----------------
Long-term debt, net of current portion 119,167 54,167
------------------ -------------------
Stockholders' equity:
Preferred stock, $.01 par value, authorized--
5,000,000 shares; none issued and outstanding - -
Common stock, $.01 par value; authorized-- 30,000,000
shares; issued and outstanding--17,914,704 shares
at December 31, 2000 and June 30, 2001 179,147 179,147
Additional paid-in capital 101,373,922 101,373,922
Accumulated deficit (47,786,794) (49,931,858)
---------------- ----------------
Total stockholders' equity 53,766,275 51,621,211
----------------- ----------------
Total liabilities and stockholders' equity $ 55,793,003 $ 53,579,852
================ ===============
The accompanying notes are an integral part of these financial statements.
- 3 -
Diacrin, Inc.
Statements of Operations
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2000 2001 2000 2001
---------- --------- --------- ---------
REVENUES:
Research and development $ 506,587 $ 157,545 $ 1,042,626 $ 540,607
Interest income 897,207 832,875 1,223,984 1,741,733
---------- ---------- --------- ---------
Total revenues 1,403,794 990,420 2,266,610 2,282,340
---------- ---------- --------- ---------
OPERATING EXPENSES:
Research and development 1,560,868 1,698,341 2,943,461 3,148,408
General and administrative 310,316 461,811 676,789 887,314
Interest expense 8,155 3,859 16,697 9,043
---------- ---------- --------- ----------
Total operating expenses 1,879,339 2,164,011 3,636,947 4,044,765
---------- ---------- --------- ----------
EQUITY IN OPERATIONS
OF JOINT VENTURE (332,038) (160,210) (686,225) (382,639)
---------- ---------- --------- ----------
NET LOSS $ (807,583) $ (1,333,801) $ (2,056,562) $ (2,145,064)
=========== ================ ============= =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (.05) $ (.07) $ (.13) $ (.12)
============== =============== ============ ===========
SHARES USED IN COMPUTING BASIC
AND DILUTED NET LOSS PER
COMMON SHARE 17,907,890 17,914,704 16,225,528 17,914,704
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
- 4 -
Diacrin, Inc.
Statements of Cash Flows
(Unaudited)
Six Months
Ended June 30,
2000 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,056,562) $ (2,145,064)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 106,090 106,831
Equity in operations of joint venture 686,225 382,639
Changes in assets and liabilities-
Interest receivable and other current assets (129,223) (138,883)
Accounts payable 5,967 82,005
Accrued expenses (219,180) 95,591
Deferred revenue (422,800) (39,466)
----------- -----------
Net cash used in operating activities (2,029,483) (1,656,347)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments 3,507,207 (15,242,405)
Purchases of property and equipment, net (79,112) (4,514)
(Increase) decrease in long-term investments (13,755,768) 13,389,015
Investment in joint venture (789,645) (597,510)
Return of capital for services provided on behalf of joint venture 347,542 52,515
----------- -----------
Net cash used in investing activities (10,769,776) (2,402,899)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 37,137,247 -
Principal payments on long-term debt (77,525) (65,000)
----------- -----------
Net cash provided by (used in) financing activities 37,059,722 (65,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 24,260,463 (4,124,246)
CASH AND CASH EQUIVALENTS, beginning of period 2,194,001 11,143,116
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 26,454,464 $ 7,018,870
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 16,697 $ 9,043
=========== ============
The accompanying notes are an integral part of these financial statements.
- 5 -
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
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 which are
characterized by cell dysfunction or cell death and for which current therapies
are either inadequate or nonexistent.
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and include, in the opinion of management, all
adjustments, consisting of normal, recurring adjustments, necessary for a fair
presentation of interim period results. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that its
disclosures are adequate to make the information presented not misleading. The
results for the interim periods presented are not necessarily indicative of
results to be expected for the full fiscal year or any future periods. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's latest Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
2. Summary of Significant Accounting Policies
(a) Joint Venture Agreement
In September 1996, the Company and Genzyme Corporation ("Genzyme")
formed a joint venture (the "Joint Venture") to develop and commercialize
NeuroCell(TM)-PD for Parkinson's disease and NeuroCell(TM)-HD for Huntington's
disease (the "Joint Venture Products"). The Joint Venture is funded by Genzyme
and the Company in accordance with the terms of the joint venture agreement.
Collaborative revenue under the joint venture agreement with Genzyme is
recognized as revenue to the extent that the Company's research and development
costs are funded by Genzyme through the Joint Venture. The Company receives
non-refundable monthly advances from the Joint Venture. Deferred revenue
represents amounts received prior to recognition of revenue. Research and
development costs are expensed as incurred.
The detail of the Company's investment in the Joint Venture for the six
months ended June 30, 2001 is as follows:
2001
Balance, December 31, 2000 $ 4,785
Contributions to joint venture 691,841
Return of capital (180,202)
Funding of operations of joint venture (490,500)
--------------------
Balance, June 30, 2001 $ 25,924
====================
- 6 -
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
Contributions to the joint venture represent cash contributions. The
return of capital represents cash payments made to the Company by the Joint
Venture for research and development costs that are funded by the Company.
Funding of operations of the Joint Venture represents costs incurred by Genzyme
on behalf of the Joint Venture, which are funded by the Company.
A summary of the revenue and expenses from the joint venture are as
follows:
Six months ended June 30,
2000 2001
Revenue recognized $1,042,626 $540,067
Research and development expense $1,390,168 $720,089
Equity in operations of joint venture $686,225 $382,639
(b) Net Loss per Common Share
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, basic and diluted net loss per share is
calculated by dividing the net loss by the weighted average number of common
shares outstanding for all periods presented. Diluted weighted average shares
outstanding for all periods presented exclude the potential common shares from
stock options and warrants of 4,038,047 and 1,258,247 at June 30, 2000 and 2001,
respectively, because to include such shares would be antidilutive.
(c) New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 141, Business Combinations. This statement addresses financial accounting
and reporting for business combinations and supercedes APB Opinion No. 16,
Business Combinations and SFAS 38, Accounting for Preacquisition Contingencies
of Purchased Enterprises. All business combinations in the scope of this
Statement are to be accounted for using one method, the purchase method. The
provisions of this Statement apply to all business combinations initiated after
June 30, 2001.
Also in June 2001, the FASB issued SFAS 142, Goodwill and Other
Intangible Assets. This Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supercedes APB Opinion No.
17, Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. The Company does not expect adoption of this Statement to
have a material impact on the Company's financial statements.
- 7 -
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
3. 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 fair
market value. Cash equivalents, short-term investments and long-term investments
have maturities of less than ninety days, less than one year and greater than
one year, respectively. Cash equivalents, short-term investments and long-term
investments at December 31, 2000 and June 30, 2001 consisted of the following:
December 31, June 30,
Cash and cash equivalents-
Cash $ 806 $ 809
Corporate note 1,006,519 -
Money market mutual fund 10,135,791 7,018,061
------------- ----------------
$ 11,143,116 $ 7,018,870
============= ================
Short-term investments-
Corporate notes (remaining avg. mat. of 5 mos. at June 30, 2001) 22,485,675 35,486,835
Commercial paper (remaining mat. of 1 month at June 30, 2001) - 2,241,245
------------- ----------------
$ 22,485,675 $ 37,728,080
============= ================
Long-term investments-
Corporate notes (remaining avg. mat. of 14 mos. at June 30, 2001) $ 20,977,940 $ 7,588,925
============= ================
- 8 -
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Since our inception, we have principally focused our efforts and
resources on research and development of cell transplantation technology for
treating human diseases that are characterized by cell dysfunction or cell death
and for which current therapies are either inadequate or nonexistent. Our
primary source of working capital to fund those activities has been proceeds
from the sale of equity and debt securities. In addition, commencing October 1,
1996, we have received funding from our joint venture with Genzyme in support of
the NeuroCell(TM)-PD and NeuroCell(TM)-HD product development programs. We have
not received any revenues from the sale of products to date and do not expect to
generate product revenues for the next several years. We have experienced
fluctuating operating losses since inception and expect that the additional
activities required to develop and commercialize our products will result in
increasing operating losses for the next several years. At June 30, 2001, we had
an accumulated deficit of $49.9 million.
In September 1996, we formed a joint venture with Genzyme to develop
and commercialize NeuroCell(TM)-PD and NeuroCell(TM)-HD. Under the joint venture
agreement, Genzyme agreed to fund 100% of the first $10 million of development
and commercialization costs incurred after October 1, 1996, 75% of the next $40
million and 50% of all development and commercialization costs in excess of $50
million. After Genzyme funds the first $10 million, we are responsible for
funding 25% of the next $40 million and 50% of all development and
commercialization costs in excess of $50 million.
Through December 31, 1997, Genzyme made 100% of the total cash
contributions to the joint venture. During the first quarter of 1998, we began
making cash contributions to the joint venture equal to 25% of the Joint
Venture's funding requirements. As of June 30, 2001, Genzyme had contributed
approximately $31.8 million to the joint venture and we had contributed
approximately $7.2 million.
We record as research and development expense all costs related to the
joint venture incurred by us on behalf of the Joint Venture. We then recognize
research and development revenue equal to the amount of reimbursement received
by us from the joint venture out of funds contributed by Genzyme. We do not
recognize research and development revenue for amounts we receive from the Joint
Venture out of funds contributed by us. As Genzyme incurs costs on behalf of the
Joint Venture that we are obligated to fund, we recognize an expense in our
statement of operations captioned "Equity in operations of joint venture."
Results of Operations
Three Months Ended June 30, 2001 Versus Three Months Ended June 30, 2000
Research and development revenues of approximately $158,000
for the three months ended June 30, 2001 and $507,000 for the three months ended
June 30, 2000 were derived exclusively from the Joint Venture. The decrease in
revenues was primarily a result of a decrease in clinical production activity
related to the Joint Venture Products.
Interest income was $833,000 and $897,000 for the three months ended
June 30, 2001 and 2000, respectively. The decrease in interest income was due to
lower average cash balances available for investment in the current year period.
- 9 -
Research and development expenses were $1.7 million and $1.6 million
for the three months ended June 30, 2001 and 2000, respectively. The increase in
research and development expenses is primarily due to an increase in costs
associated with sponsoring and managing the Company's clinical trials.
General and administrative expenses were $462,000 and $310,000 for the
three months ended June 30, 2001 and 2000, respectively. The increase in general
and administrative expenses is primarily due to an increase in professional fees
incurred as the Company evaluated strategic relationships.
For the three months ended June 30, 2001 and 2000, the Company recorded
an expense of $160,000 and $332,000, respectively, related to its equity in
operations of the joint venture. This expense was 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. The decreased charge in the current year
period was primarily due to a decrease in clinical activity performed by Genzyme
on behalf of the Joint Venture.
The Company incurred a net loss of approximately $1.3 million for the
three months ended June 30, 2001 versus approximately $808,000 for the three
months ended June 30, 2000.
Six Months Ended June 30, 2001 Versus Six Months Ended June 30, 2000
Research and development revenues were approximately $541,000 for the six
months ended June 30, 2001 versus $1.0 million for the six months ended June 30,
2000 and were derived exclusively from the Joint Venture. The decrease in
revenues was primarily a result of a decrease in clinical production activity
related to the Joint Venture Products.
Interest income was $1.7 million and $1.2 million for the six months
ended June 30, 2001 and 2000, respectively. The increase in interest income was
due to greater average cash balances available for investment in the current
year period as a result of the Company's public stock offering completed in
March 2000.
Research and development expenses were $3.1 million for the six months
ended June 30, 2001 and $2.9 million for the six months ended June 30, 2000. The
increase in research and development costs is primarily due to an increase in
costs associated with sponsoring and managing the Company's clinical trials.
General and administrative expenses were $887,000 and $677,000 for the
six months ended June 30, 2001 and 2000, respectively. The increase in general
and administrative expenses is primarily due to an increase in professional fees
incurred as the Company evaluated strategic relationsips.
For the six months ended June 30, 2001 and 2000, the Company recorded
an expense of $383,000 and $686,000, respectively, related to its equity in
operations of the joint venture. This expense was 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. The decreased charge in the current year
period was primarily due to a decrease in clinical activity performed by Genzyme
on behalf of the Joint Venture
The Company incurred a net loss of approximately $2.1 million for the
six months ended June 30, 2001 and for the six months ended June 30, 2000.
- 10 -
Liquidity and Capital Resources
We have financed our activities primarily with the net proceeds from
the sale of equity and debt securities aggregating $102 million and with the
interest earned thereon. In addition, we have recorded approximately $15.0
million in revenue from our joint venture since it commenced on October 1, 1996.
At June 30, 2001, we had cash and cash equivalents, short-term investments and
long-term investments aggregating approximately $52.3 million.
We have purchased approximately $2.4 million of capital equipment since
inception. In November 1997, we borrowed $650,000 at the prime rate plus 0.5%
(7.25% at June 30, 2001) under an unsecured five-year term loan with a bank to
finance our biomedical animal facility acquired during 1997. At June 30, 2001,
we had $184,167 outstanding under the borrowing. We had no material commitments
for capital expenditures as of June 30, 2001.
We believe that our existing funds, together with expected future
funding under the joint venture agreement with Genzyme, will be sufficient to
fund our operating expenses and capital requirements as currently planned for
the foreseeable future. However, our cash requirements may vary materially from
those now planned because of results of research and development, the scope and
results of preclinical and clinical testing, any termination of the joint
venture, relationships with future strategic partners, changes in the focus and
direction of our research and development programs, competitive and
technological advances, the FDA's regulatory process, the market acceptance of
any approved products and other factors.
We expect to incur substantial additional costs, including costs
related to ongoing research and development activities, preclinical studies,
clinical trials, expanding our cell production capabilities and the expansion of
our laboratory and administrative activities. Therefore, in order to achieve
commercialization of our potential products, we may need substantial additional
funds. We cannot assure you that we will be able to obtain the additional
funding that we may require on acceptable terms, if at all.
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 Quarterly Report on Form 10-Q or presented elsewhere by management from
time to time. See "Cautionary Note Regarding Forward-Looking Statements."
Risks Related to Our Business, Industry and Strategy
We have not successfully commercialized any products to date and, if we do
not successfully commercialize any products, we will not be profitable
Neither we nor any other company has received regulatory approval to market
the types of products we are developing. The products that we are developing
will require additional research and development, clinical trials and regulatory
approval prior to any commercial sale. Our product candidates are currently in
early phase clinical trials or in the preclinical stage of development. Our
products may not be effective in treating any of our targeted disorders or may
prove to have undesirable or unintended side effects, toxicities or other
characteristics that may prevent or limit their commercial use.
We currently have no products for sale and do not expect to have any
products available for sale for several years. If we are not successful in
developing and commercializing any products, we will never become profitable.
- 11 -
The evaluation of the unblinded data from our recently completed Phase 2/3
clinical trial of NeuroCell-PD may not support further development
In March 2001, we unblinded our Phase 2/3 clinical trial of NeuroCell-PD
and announced a preliminary analysis of the results. We did not see a
statistically significant difference between the treated patients and the
patients in the control group and, therefore, did not meet the primary endpoint
in the trial. While we are still evaluating the data from this clinical trial,
it is possible that further clinical development of NeuroCell-PD will not be
supported by Genzyme, or that we may choose to discontinue development or modify
the clinical trial protocols, which could result in the termination of or
significant delay in the progress of the NeuroCell-PD development program.
We are dependent on Genzyme Corporation to fund, develop and market
NeuroCell-PD, and if our joint venture with Genzyme terminates, we may not be
able to complete development or commercialization of NeuroCell-PD
We have entered into a joint venture agreement with Genzyme relating to the
development and commercialization of NeuroCell-PD to treat Parkinson's disease.
This agreement also covers our NeuroCell-HD product candidate. Under this
agreement, Genzyme has agreed to provide significant funding toward the
development and commercialization of these products and to market and sell the
products on behalf of the joint venture. Genzyme has the right to terminate the
agreement at any time upon 180 days notice to us. We cannot assure you that
Genzyme will not terminate this agreement because of the results of the Phase
2/3 clinical trial or for any other reason. In addition, there can be no
assurance that our economic and other interests will coincide with those of
Genzyme during the term of the agreement. If Genzyme were to terminate this
agreement, we:
- would lose a significant source of funding for the NeuroCell-PD and
NeuroCell-HD product development programs;
- would lose access to Genzyme's experienced development, sales and
marketing organizations and manufacturing facilities;
- would need to establish clinical production facilities for the production
of NeuroCell-PD and NeuroCell-HD; and
- may be unable to complete development or commercialization of
NeuroCell-PD and NeuroCell-HD.
In addition, Genzyme has the right to terminate the joint venture agreement
following an unremedied breach of any material term of the agreement by us. If
Genzyme terminates the agreement, Genzyme has the option to obtain an exclusive,
worldwide, royalty bearing license to some of our technology which is required
to manufacture and market NeuroCell-PD and NeuroCell-HD. If Genzyme exercises
this option, we would only be entitled to receive a royalty on the net sales of
NeuroCell-PD and NeuroCell-HD and this royalty would be significantly less than
the amounts we would be entitled to receive under the joint venture agreement.
Our cell transplantation technology is complex and novel and there are
uncertainties as to its effectiveness
We have concentrated our efforts and therapeutic product research on cell
transplantation technology, and our future success depends on the successful
development of this technology. Our principal approach is based upon
xenotransplantation, or the transplantation of cells, tissues or organs from one
species to another. Our product candidates generally involve the transplantation
of porcine (pig) neural cells into humans. Xenotransplantation is an emerging
technology with limited clinical experience. Neither the FDA nor any foreign
regulatory body has approved any xenotransplantation-based therapeutic product
for humans.
- 12 -
Our technological approaches may not enable us to successfully develop and
commercialize any products. If our approaches are not successful, we may be
required to change the scope and direction of our product development
activities. In that case, we may not be able to identify and implement
successfully an alternative product development strategy.
Xenotransplantation involves risks which have resulted in additional FDA
oversight and which in the future may result in additional regulation
Xenotransplantation poses a risk that viruses or other animal pathogens may
be unintentionally transmitted to a human patient. The FDA requires us to
perform tests to determine whether infectious agents, including porcine
endogenous retroviruses, referred to as PERV, are present in patients who have
received porcine cells. While PERV has not been shown to cause any disease in
pigs, it is not known what effect, if any, PERV may have on humans. We have
performed tests on patients who have received our porcine cells. No PERV has
been detected to date, but we cannot assure you that we will not detect PERV or
another infectious agent in the future.
The FDA requires lifelong monitoring of porcine cell transplant recipients.
If PERV or any other virus or infectious agent is detected in tests or samples,
the FDA may require us to halt our clinical trials and perform additional tests
to assess the risk to patients of infection. This could result in additional
costs to us and delays in the trials of our porcine cell products. Furthermore,
even if patients who have received our porcine cells remain PERV-free, we could
be adversely affected if PERV is detected in patients who receive porcine cells
provided by others.
In January 2001, the FDA issued definitive regulatory guidelines for
xenotransplantation titled "PHS Guideline on Infectious Disease Issues in
Xenotransplantation." We cannot assure you that we will be able to comply with
these guidelines.
We face substantial competition, which may result in others discovering,
developing or commercializing products before or more successfully than we do
The products we are developing compete with existing and new products being
developed by pharmaceutical, biopharmaceutical and biotechnology companies, as
well as universities and other research institutions. Many of our competitors
are substantially larger than we are and have substantially greater capital
resources, research and development staffs and facilities than we have. Efforts
by other biotechnology or pharmaceutical companies could render our products
uneconomical or result in therapies for the disorders we are targeting that are
superior to any therapy we develop. Furthermore, many of our competitors are
more experienced in product development and commercialization, obtaining
regulatory approvals and product manufacturing. As a result, they may develop
competing products more rapidly and at a lower cost. These competitors may
discover, develop and commercialize products which render non-competitive or
obsolete the products that we are seeking to develop and commercialize.
If the market is not receptive to our products upon introduction, our
products may not achieve commercial success
The commercial success of any of our products will depend upon their
acceptance by patients, the medical community and third-party payors. Among the
factors that we believe will materially affect acceptance of our products are:
- the timing of receipt of marketing approvals and the countries in which
those approvals are obtained;
- the safety and efficacy of our products;
- the need for surgical administration of our products;
- 13 -
- problems encountered in the field of xenotransplantation;
- the success of physician education programs;
- the cost of our products which may be higher than conventional
therapeutic products because our products involve surgical
transplantation of living cells; and
- the availability of government and third-party payor reimbursement of our
products.
Risks Relating to Clinical and Regulatory Matters
If our clinical trials are not successful for any reason, we will not be
able to develop and commercialize any related products
In order to obtain regulatory approvals for the commercial sale of our
product candidates, we will be required to complete extensive clinical trials in
humans to demonstrate the safety and efficacy of the products. We have limited
experience in conducting clinical trials.
The submission of an investigational new drug application, or IND, may not
result in FDA authorization to commence clinical trials. If clinical trials
begin, we may not complete testing successfully within any specific time period,
if at all, with respect to any of our product candidates. Furthermore, we or the
FDA may suspend clinical trials at any time on various grounds, including a
finding that the patients are being exposed to unacceptable health risks.
Clinical trials, if completed, may not show any potential product to be safe or
effective. Thus, the FDA and other regulatory authorities may not approve any of
our product candidates for any disease indication.
The rate of completion of clinical trials depends in part upon the rate of
enrollment of patients. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, the existence of
competitive clinical trials and the availability of alternative treatments. In
particular, the patient population for some of our potential products is small.
Delays in planned patient enrollment may result in increased costs and program
delays.
We rely on third-party clinical investigators to conduct our clinical
trials. As a result, we may encounter delays outside of our control.
We may not be able to reinitiate a clinical trial that has been suspended
by the FDA
Clinical trials are subject to ongoing review by the FDA. The FDA has the
authority to suspend a clinical trial for various reasons, as they did in April
2000 with respect to our clinical trial using porcine neural cells to treat
stroke patients. Because our products are novel and complex, getting the FDA to
lift a suspension could result in significant program delays and additional
costs to us. It is possible that we may not be able to obtain permission from
the FDA to continue a clinical trial that has been suspended. Cost increases and
ongoing delays as a result of an FDA suspension could result in our decision to
postpone pursuing certain product candidates.
- 14 -
The regulatory approval process is costly and lengthy and we may not be
able to successfully obtain all required regulatory approvals
We must obtain regulatory approval for each of our product candidates
before we can market or sell it. We may not receive regulatory approvals to
conduct clinical trials of our products or to manufacture or market our
products. In addition, regulatory agencies may not grant approvals on a timely
basis or may revoke previously granted approvals. Any delay in obtaining, or
failure to obtain, approvals could adversely affect the marketing of our
products and our ability to generate product revenue.
The process of obtaining FDA and other required regulatory approvals is
lengthy and expensive. The time required for FDA and other clearances or
approvals is uncertain and typically takes a number of years, depending on the
complexity and novelty of the product. We have only limited experience in filing
and prosecuting applications necessary to gain regulatory approvals.
Our analysis of data obtained from preclinical and clinical activities is
subject to confirmation and interpretation by regulatory authorities which could
delay, limit or prevent regulatory approval. Any regulatory approval to market a
product may be subject to limitations on the indicated uses for which we may
market the product. These limitations may limit the size of the market for the
product.
We also are subject to numerous foreign regulatory requirements governing
the design and conduct of the clinical trials and the manufacturing and
marketing of our future products. The approval procedure varies among countries.
The time required to obtain foreign approvals often differs from that required
to obtain FDA approvals. Moreover, approval by the FDA does not ensure approval
by regulatory authorities in other countries.
Even if we obtain marketing approval, our products will be subject to
ongoing regulatory oversight which may affect the success of our products
Any regulatory approvals that we receive for a product may be subject to
limitations on the indicated uses for which the product may be marketed or
contain requirements for costly post-marketing follow-up studies. After we
obtain marketing approval for any product, the manufacturer and the
manufacturing facilities for that product will be subject to continual review
and periodic inspections by the FDA and other regulatory authorities. The
subsequent discovery of previously unknown problems with the product, such as
the presence of PERV, or with the manufacturer or facility, may result in
restrictions on the product or manufacturer, including withdrawal of the product
from the market.
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions, and criminal prosecution.
Risks Relating to Financing Our Business
We have incurred substantial losses, we expect to continue to incur losses
and we may never achieve profitability
We have incurred losses in each year since our founding in 1989. At June
30, 2001, we had an accumulated deficit of $49.9 million. We expect to incur
substantial operating losses for the foreseeable future. We have no material
sources of revenue from product sales or license fees. We anticipate that it
will be a number of years, if ever, before we develop significant revenue
sources or become profitable, even if we are able to commercialize products.
We expect to increase our spending significantly as we continue to expand
our research and development programs, expand our clinical trials, apply for
regulatory approvals and begin commercialization activities. In particular, we
may devote significant economic resources to funding our joint venture with
Genzyme and to its product development plans. Under the joint venture agreement,
we are currently required to provide 25% of the funding required for the
development and commercialization of NeuroCell-PD and NeuroCell-HD and in the
future will be required to provide 50% of the required funding.
- 15 -
We may require additional financing, which may be difficult to obtain and
may dilute your ownership interest
We will require substantial funds to conduct research and development,
including clinical trials of our product candidates, and to manufacture and
market any products that are approved for commercial sale. We believe that our
existing funds, together with expected future funding under the joint venture
agreement with Genzyme will be sufficient to fund our operating expenses and
capital requirements as currently planned for the foreseeable future. However,
our future capital requirements will depend on many factors, including the
following:
- the analysis of the data from the Phase 2/3 clinical trial of
NeuroCell-PD which could result in the termination of our joint venture
with Genzyme;
- continued progress in our research and development programs, as well as
the magnitude of these programs;
- the resources required to successfully complete our clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the cost of manufacturing and commercialization activities;
- the cost of any additional facilities requirements;
- the timing, receipt and amount of milestone and other payments from
future collaborative partners;
- the timing, receipt and amount of sales and royalties from our potential
products in the market; and
- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs and the costs of obtaining any required licenses to
technologies.
We may seek additional funding through collaborative arrangements and
public or private financings. Additional financing may not be available to us on
acceptable terms or at all.
If we raise additional funds by issuing equity securities further dilution
to our then existing stockholders may result. In addition, the terms of the
financing may adversely affect the holdings or the rights of our stockholders.
If we are unable to obtain funding on a timely basis, we may be required to
significantly curtail one or more of our research or development programs.
We also could be required to seek funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates, or products which we would
otherwise pursue independently.
- 16 -
Risks Relating to Intellectual Property
We may not be able to obtain patent protection for our discoveries and we
may infringe patent rights of others
The patent positions of pharmaceutical and biotechnology companies,
including us, are generally uncertain and involve complex legal, scientific and
factual issues.
Our success depends significantly on our ability to:
- obtain patents;
- protect trade secrets;
- operate without infringing upon the proprietary rights of others; and
- prevent others from infringing on our proprietary rights.
Patents may not issue from any patent applications that we own or license.
If patents do issue, the claims allowed may not be sufficiently broad to protect
our technology. In addition, issued patents that we own or license may be
challenged, invalidated or circumvented. Our patents also may not afford us
protection against competitors with similar technology. Because patent
applications in the United States may be maintained in secrecy until patents
issue, others may have filed or maintained patent applications for technology
used by us or covered by our pending patent applications without our being aware
of these applications.
We may not hold proprietary rights to some patents related to our proposed
products. In some cases, others may own or control these patents. As a result,
we or our collaborative partners may be required to obtain licenses under
third-party patents to market some of our proposed products. If licenses are not
available to us on acceptable terms, we will not be able to market these
affected products.
If we are not able to keep our trade secrets confidential, our technology
and information may be used by others to compete against us
We rely significantly upon unpatented proprietary technology, information,
processes and know how. We seek to protect this information by confidentiality
agreements with our employees, consultants and other third-party contractors as
well as through other security measures. These confidentiality agreements may be
breached, and we may not have adequate remedies for any such breach. In
addition, our trade secrets may otherwise become known or be independently
developed by competitors.
We may become involved in expensive patent litigation or other intellectual
property proceedings which could result in liability for damages or stop our
development and commercialization efforts
There has been substantial litigation and other proceedings regarding the
complex patent and other intellectual property rights in the pharmaceutical and
biotechnology industries. We may become a party to patent litigation or other
proceedings regarding intellectual property rights.
Other types of situations in which we may become involved in patent
litigation or other intellectual property proceedings include:
- we may initiate litigation or other proceedings against third parties to
enforce our patent rights;
- we may initiate litigation or other proceedings against third parties to
seek to invalidate the patents held by these third parties or to obtain a
judgment that our products or services do not infringe the third parties'
patents;
- 17 -
- if our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition
proceedings to determine the priority of invention; and
- if third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we
will need to defend against such claims.
The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be able
to sustain the cost of such litigation or proceedings more effectively than we
can because of their substantially greater financial resources. If a patent
litigation or other intellectual property proceeding is resolved unfavorably to
us, we may be enjoined from manufacturing or selling our products and services
without a license from the other party and be held liable for significant
damages. We may not be able to obtain any required license on commercially
acceptable terms or at all.
Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse effect on our
ability to compete in the marketplace. Patent litigation and other proceedings
may also absorb significant management time.
If we breach any of the agreements under which we license technology from
others we could lose license rights that are important to our business
We are a party to technology in-licenses that are important to our business
and expect to enter into additional licenses in the future. In particular, our
immunomodulation technology and some of our product candidates are covered by
patents licensed from Massachusetts General Hospital, commonly referred to as
MGH. These licenses impose commercialization, sublicensing, royalty, insurance
and other obligations on us. If we fail to comply with these requirements, the
licensor will have the right to terminate the license.
Risks Relating to Product Manufacturing, Marketing and Sales
Since we have no sales and marketing experience or infrastructure, we must
rely on third parties
We have no sales, marketing and distribution experience or infrastructure.
We plan to rely significantly on sales, marketing and distribution arrangements
with third parties for the products that we are developing. For example, under
our joint venture agreement, we have granted to Genzyme (on behalf of the joint
venture) exclusive worldwide marketing rights to NeuroCell-PD and NeuroCell-HD.
We may have limited or no control over the sales, marketing and distribution
activities of Genzyme, the joint venture or any future collaborative partners.
Our future revenues will be materially dependent upon the success of the efforts
of these third parties.
If in the future we determine to perform sales, marketing and distribution
functions ourselves, we would face a number of additional risks, including:
- we may not be able to attract and build a significant marketing or sales
force;
- the cost of establishing a marketing or sales force may not be
justifiable in light of any product revenues; and
- our direct sales and marketing efforts may not be successful.
- 18 -
Delays in obtaining regulatory approval of our manufacturing facility and
disruptions in our manufacturing process may delay or disrupt our
commercialization efforts
Before we can begin commercially manufacturing our product candidates, we
must obtain regulatory approval of our manufacturing facility and process.
Manufacturing of our product candidates must comply with cGMP, and foreign
regulatory requirements. The cGMP requirements govern quality control and
documentation policies and procedures. In complying with cGMP and foreign
regulatory requirements, we will be obligated to expend time, money and effort
on production, recordkeeping and quality control to ensure that the product
meets applicable specifications and other requirements. If we fail to comply
with these requirements, we would be subject to possible regulatory action and
may be limited in the jurisdictions in which we are permitted to sell our
product candidates.
We are the only manufacturers of our product candidates. For the next
several years, we expect that we will conduct all of our manufacturing in our
facility in Charlestown, Massachusetts. If this facility or the equipment in
this facility is significantly damaged or destroyed, we will not be able to
quickly or inexpensively replace our manufacturing capacity.
We have no experience manufacturing our product candidates in the volumes
that will be necessary to support large clinical trials or commercial sales. Our
present manufacturing process may not meet our initial expectations as to
scheduling, reproducibility, yield, purity, cost, potency or quality.
The manufacture of our products would be delayed by disruptions in our
supply of porcine tissue
The manufacture of our products requires the continuous availability of
porcine tissue harvested from pigs tested to be free of infectious agents and
quarantined in a qualified animal facility. Our main sources of these facilities
and services are Tufts University School of Veterinary Medicine and
PharmServices, Inc., a division of Charles River Laboratories, Inc. A disease
epidemic or other catastrophe in either of these facilities could destroy all or
a portion of our pig supply, which would interrupt or significantly delay the
research, development and commercialization of our products.
Risks Related to Ongoing Operations
If we fail to obtain an adequate level of reimbursement for our future
products by third party payors, there may be no commercially viable markets for
our products
Our products may be more expensive than conventional treatments because
they involve the surgical transplantation of living cells. The availability of
reimbursement by governmental and other third-party payors affects the market
for any pharmaceutical product. These third-party payors continually attempt to
contain or reduce the costs of health care by challenging the prices charged for
medical products. In some foreign countries, particularly the countries of the
European Union, the pricing of prescription pharmaceuticals is subject to
governmental control. We may not be able to sell our products profitably if
reimbursement is unavailable or limited in scope or amount.
In both the United States and some foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the health care system.
Further proposals are likely. The potential for adoption of these proposals may
affect our ability to raise capital, obtain additional collaborative partners
and market our products.
If we obtain marketing approval for our products, we expect to experience
pricing pressure due to the trend toward managed health care, the increasing
influence of health maintenance organizations and additional legislative
proposals.
- 19 -
We could be exposed to significant liability claims if we are unable to
obtain insurance at acceptable costs or otherwise to protect us against
potential product liability claims
We may be subjected to product liability claims that are inherent in the
testing, manufacturing, marketing and sale of human health care products. These
claims could expose us to significant liabilities that could prevent or
interfere with the development or commercialization of our products. Product
liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Product liability insurance is
generally expensive for biopharmaceutical companies such as ours. Although we
maintain limited product liability insurance coverage for the clinical trials of
our products, it is possible that we will not be able to obtain further product
liability insurance on acceptable terms, if at all, and that our present
insurance levels and insurance subsequently obtained will not provide adequate
coverage against all potential claims.
Our growth could be limited if we are unable to attract and retain key
personnel and consultants
Our success depends substantially on our ability to attract and retain
qualified scientific and technical personnel for the research and development
activities we conduct or sponsor. If we lose one or more of the members of our
senior management or other key employees or consultants, our business and
operating results could be seriously harmed.
Our anticipated growth and expansion into areas and activities requiring
additional expertise, such as regulatory compliance, manufacturing and
marketing, will require the addition of new management personnel. The pool of
personnel with the skills that we require is limited. Competition to hire from
this limited pool is intense, and we may be unable to hire, train, retain or
motivate such additional personnel.
Risks Relating to our Common Stock
Our officers and directors may be able to control the outcome of most
corporate actions requiring stockholder approval
Our directors and officers and entities with which they are affiliated
control approximately 40% of our outstanding common stock. Due to this
concentration of ownership, this group may be able to prevail on all matters
requiring a stockholder vote, including:
- the election of directors;
- the amendment of our organizational documents; or
- the approval of a merger, sale of assets or other major corporate
transaction.
Our stock price could be volatile, which could cause you to lose part or
all of your investment
The market price of our common stock, like that of the common stock of many
other development stage biotechnology companies, may be highly volatile. In
addition, the stock market has experienced extreme price and volume
fluctuations. This volatility has significantly affected the market prices of
securities of many biotechnology and pharmaceutical companies for reasons
frequently unrelated to or disproportionate to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our common stock. Prices for our common stock will be determined
in the market place and may be influenced by many factors, including variations
in our financial results and investors' perceptions of us, changes in
recommendations by securities analysts as well as their perceptions of general
economic, industry and market conditions.
- 20 -
We have antitakeover defenses that could delay or prevent an acquisition
and could adversely affect the price of our common stock
Provisions of our certificate of incorporation, our bylaws, and Delaware
law may have the effect of deterring unsolicited takeovers or delaying or
preventing changes in control of our management, including transactions in which
our stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interest.
Our certificate of incorporation permits our board of directors to issue
preferred stock without shareholder approval upon such terms as the board of
directors may determine. The rights of the holders of our common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of our outstanding common stock. The issuance of a
substantial number of preferred shares could adversely affect the price of our
common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We own financial instruments that are sensitive to market risks as part
of our investment portfolio. The investment portfolio is used to preserve our
capital until we are required to fund operations, including our research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. We do not own derivative financial instruments in our
investment portfolio. The investment portfolio contains instruments that are
subject to the risk of decline in interest rates.
Our investment portfolio includes investment grade debt instruments.
These bonds are subject to interest rate risk, and could decline in value if
interest rates fluctuate. Due to the short duration and conservative nature of
these instruments, we do not believe that we have a material exposure to
interest rate risk.
- 21 -
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) The Company did not sell any equity securities during the quarter
ended June 30, 2001 that were not registered under the Securities Act.
(d) 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 June 30,
2001, the Company has used approximately $20,818,000 of the total net proceeds
from its initial public offering of $20,911,755. Of the $20,818,000 used,
approximately $400,000 was used for the purchase of machinery and equipment;
approximately $1,070,000 was used for repayment of indebtedness; and
approximately $19,348,000 was used for working capital. The unused proceeds of
approximately $94,000 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 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on July 31, 2001,
the following proposals were adopted by the vote specified below:
Proposal For Against
1. Election of Directors:
Thomas H. Fraser 15,338,310 144,353
Zola P. Horovitz 15,438,310 44,353
John W. Littlechild 15,438,310 44,353
Stelios Papadopoulos 15,438,310 44,353
Joshua Ruch 15,438,310 44,353
Henri Termeer 12,449,845 3,032,818
For Against Abstain
2. To ratify the selection of Arthur
Andersen LLP as the Company's
Independent auditors for fiscal 2001: 15,463,485 17,428 1,750
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On June 29, 2001, the Company furnished a Current Report on Form 8-K
under Item 9 furnishing a copy of the Letter to Shareholders being mailed to all
shareholders as part of the Company's Annual Report.
- 22 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Diacrin, Inc.
August 13, 2001 /s/ Thomas H. Fraser
--------------------------
Thomas H. Fraser
President and
Chief Executive Officer
/s/ Kevin Kerrigan
-------------------------
Kevin Kerrigan
Controller
- 23 -