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, 2003
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 by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). YES NO X
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
As of July 17, 2003, 18,082,449 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, 2002 and June 30, 2003.......3
Statements of Operations for each of the three and six month periods
ended June 30, 2002 and 2003...................................4
Statements of Cash Flows for each of the six month periods
ended June 30, 2002 and 2003...................................5
Notes to Financial Statements..................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................11
Item 3. Quantitative and Qualitative Disclosure About Market Risk......22
Item 4. Controls and Procedures........................................22
PART II. - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................23
Item 6. Exhibits and Reports on Form 8-K...............................23
SIGNATURES...............................................................23
CERTIFICATIONS...........................................................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 planned timetables for the initiation and
completion of clinical trials and the expected closing of our merger into
GenVec, Inc. 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,"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this Quarterly Report on Form 10-Q.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other "forward-
looking" information. You should be aware that the occurrence of any of the
events described in these 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.
Diacrin, Inc.
Balance Sheets
(Unaudited)
December 31, June 30,
2002 2003
ASSETS
Current assets:
Cash and cash equivalents $ 4,189,700 $ 4,210,262
Short-term investments 33,484,274 34,884,765
Interest receivable and other current assets 683,473 709,488
------------ -----------
Total current assets 38,357,447 39,804,515
------------ -----------
Property and equipment, at cost:
Laboratory and manufacturing equipment 1,679,436 1,004,277
Furniture and office equipment 327,382 327,382
Leasehold improvements 86,597 88,968
------------ -----------
2,093,415 1,420,627
Less- Accumulated depreciation and amortization 1,985,364 1,349,111
------------ -----------
108,051 71,516
------------ -----------
Long-term investments 7,282,169 3,465,542
------------ -----------
Total assets $ 45,747,667 $ 43,341,573
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 147,633 83,597
Accrued expenses 726,168 1,784,043
Deferred revenue - related party 32,483 4,258
Deferred revenue - other 1,755,000 1,608,750
------------ -----------
Total current liabilities 2,661,284 3,480,648
------------ -----------
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-- 17,937,204
and 18,082,449 shares at December 31, 2002
and June 30, 2003, respectively 179,372 180,824
Additional paid-in capital 101,401,822 101,685,893
Accumulated deficit (58,494,811) (62,005,792)
------------ -----------
Total stockholders' equity 43,086,383 39,860,925
------------ -----------
Total liabilities and stockholders' equity $ 45,747,667 $ 43,341,573
============ ===========
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,
2002 2003 2002 2003
REVENUES:
Research and development - related party $ 46,853 $ 9,600 $ 79,441 $ 16,959
Research and development - other - 73,250 - 146,250
--------- -------- --------- --------
Total research and development revenue 46,853 82,850 79,441 163,209
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 1,699,769 1,153,716 3,322,105 2,256,113
General and administrative 433,603 1,298,412 790,798 1,852,377
--------- -------- --------- -------
Total operating expenses 2,133,372 2,452,128 4,112,903 4,108,490
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Equity in operations of joint venture (39,175) (12,174) (70,585) (53,794)
Investment income 346,126 201,962 802,739 446,291
Interest expense (866) - (2,130) -
Gain on sale of fixed assets - 41,803 - 41,803
--------- -------- -------- --------
Total other income 306,085 231,590 730,024 434,300
--------- -------- -------- --------
NET LOSS $ (1,780,434) $(2,137,687) $(3,303,438) $(3,510,981)
========== ========= ========= =========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (.10) $ (.12) $ (.18) $ (.20)
========= ======== ======== =======
SHARES USED IN COMPUTING BASIC
AND DILUTED NET LOSS PER
COMMON SHARE 17,937,204 17,995,653 17,937,204 17,966,590
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements
-4-
Diacrin, Inc.
Statements of Cash Flows
(Unaudited)
Six Months
Ended June 30,
2002 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,303,438) $ (3,510,981)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 96,443 22,238
Equity in operations of joint venture 70,585 53,794
Gain on sale of fixed assets - (41,803)
Stock option compensation expense - 17,804
Changes in assets and liabilities-
Interest receivable and other current assets (55,343) (1,015)
Accounts payable (5,500) (64,036)
Accrued expenses (200,279) 998,428
Deferred revenue 4,079 (174,475)
---------- ---------
Net cash used in operating activities (3,393,453) (2,700,046)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (10,278,651) (19,422,782)
Maturities of investments 21,719,253 21,838,918
Purchases of property and equipment (12,810) (3,900)
Proceeds from the sale of fixed assets - 35,000
Return of capital for services provided on behalf of joint venture 26,480 5,653
---------- ---------
Net cash provided by investing activities 11,454,272 2,452,889
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (65,000) -
Proceeds from the exercise of stock options - 267,719
---------- ---------
Net cash (used in) provided by financing activities (65,000) 267,719
---------- ---------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 7,995,819 20,562
CASH AND CASH EQUIVALENTS, beginning of period 8,534,426 4,189,700
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $16,530,245 $ 4,210,262
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 2,130 $ -
======= =========
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) Terumo Agreement
In September 2002, the Company entered into a development and
license agreement with Terumo Corporation ("Terumo"). Under the terms of
the agreement, Diacrin licensed to Terumo its human muscle cell
transplantation technology for cardiac disease in Japan. Terumo will fund all
development in Japan while Diacrin continues to independently develop its
cardiac repair technology for commercialization in the U.S. and elsewhere.
On October 1, 2002, the Company received an upfront non-refundable
license fee of $2.0 million. The agreement also includes payments by Terumo
to Diacrin for development milestones and a royalty on product sales. The
Company recorded this fee as deferred revenue and recognizes revenue over
the development period of the agreement in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB
101 requires companies to recognize certain upfront non-refundable fees over
the period in which the Company completes its performance obligations
under the related agreement when such fees are received in conjunction with
an agreement which includes performance obligations. Determination of the
length of the development period requires management's judgment. Any
significant changes in the assumptions underlying our estimates used while
applying SAB 101 could impact our revenue recognition. Included in
research and development revenue for the three and six months ended June
30, 2003 is $73,000 and $146,000, respectively, in revenue related to this
collaboration.
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
Revenue from milestone payments under which we have continuing
performance obligations are recognized as revenue upon the achievement of
the milestone only if all of the following conditions are met: the milestone
payments are non-refundable; achievement of the milestone was not
reasonably assured at the inception of the arrangement; substantive effort is
involved in achieving the milestone; and the amount of the milestone is
reasonable in relation to the effort expended or the risk associated with
achievement of the milestone. If any of these conditions are not met, the
milestone payments are deferred and recognized as revenue over the term of
the arrangement as we complete our performance obligations. Payments
received under these arrangements prior to the completion of the related work
are recorded as deferred revenue.
(b) Joint Venture Agreement
In September 1996, the Company and Genzyme Corporation
("Genzyme") formed a joint venture to develop and commercialize two
product candidates. 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 advances from the joint venture. A
portion of deferred revenue at period end 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, 2003 is as follows:
2003
---------
Balance, December 31, 2002 $ (12,857)
Contributions to joint venture -
Return of capital (5,653)
Funding of operations of joint venture (53,794)
---------
Balance, June 30, 2003 $ (72,304)
=========
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 the Company is obligated to
fund.
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
A summary of the revenue and expenses from the joint venture are
as follows:
Six months ended June 30,
2002 2003
Revenue recognized $79,441 $16,959
Research and development expense $105,921 $22,612
Equity in operations of joint venture $70,585 $53,794
(b) Net Loss per Common Share
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, basic and diluted net loss per share
is calculated by dividing the net loss by the weighted average number of
common shares outstanding for all periods presented. Diluted weighted
average shares outstanding for all periods presented exclude the potential
common shares from stock options of 1,540,622 and 1,354,187 at June 30,
2002 and 2003, respectively, because to include such shares would be
antidilutive.
(c) Stock Options
The Company has several stock-based compensation plans. The
Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees" in accounting for qualifying options granted to its employees
under its plans and applies Statement of Financial Accounting Standards
No. 123 "Accounting for Stock Issued to Employees" ("SFAS 123") for
disclosure purposes only. The SFAS 123 disclosures include pro forma net
income and earnings per share as if the fair value-based method of accounting
had been used. Stock issued to non-employees is accounted for in accordance
with SFAS 123 and related interpretations.
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
The following are the pro forma net income and income per share,
as if compensation expense for the option plans had been determined based
on the fair value at the date of grant:
Three months ended June 30, Six months ended June 30,
2002 2003 2002 2003
Net loss, as reported (1,780,434) (2,137,687) (3,303,438) (3,510,981)
Less: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects (152,733) (124,783) (305,465) (249,556)
--------- --------- --------- ---------
Pro forma net loss (1,933,167) (2,262,470) (3,608,903) (3,760,537)
========= ========= ========= =========
Earnings per share:
Basic and diluted-as
reported ($.10) ($.12) ($.18) ($.20)
======== ========= ====== =======
Basic and diluted-pro
forma ($.11) ($.13) ($.20) ($.21)
========= ======== ======= ======
The fair value of options at the date of grant were estimated using
the Black-Scholes option pricing model with the following assumptions:
Three months ended June 30, Six months ended June 30,
2002 2003 2002 2003
Volatility 95% 95% 95% 95%
Expected option life-years 7.5 7.5 7.5 7.5
Interest rate (risk free) 3.0 2.5 3.0 2.5
Dividends 0 0 0 0
The effects on the three and six months ended June 30, 2002 and
2003 pro forma net income and net income per share of the estimated fair
value of stock options and shares are not necessarily representative of the
effects on results of operations in the future. In addition, the estimates made
utilize a pricing model developed for traded options with relatively short
lives; our option grants typically have a life of up to ten years and are not
transferable. Therefore, the actual fair value of a stock option grant may be
different from our estimates. We believe that our estimates incorporate all
relevant information and represent a reasonable approximation in light of the
difficulties involved in valuing non-traded stock options.
(d) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income ("SFAS 130") establishes
standards for reporting and display of comprehensive income and its
components, including net loss and equity from non-shareholder sources, in a
full set of general-purpose financial statements. There are no differences
between the Company's reported income and comprehensive income for all
periods presented.
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 three months, less than one year and
greater than one year, respectively. Cash equivalents, short-term investments
and long-term investments at December 31, 2002 and June 30, 2003
consisted of the following:
December 31, June 30,
2002 2003
Cash and cash equivalents-
Cash $ 400 $ 400
Money market mutual fund 4,189,300 4,209,862
----------- ----------
$ 4,189,700 $ 4,210,262
=========== ==========
Short-term investments-
Corporate notes (remaining avg. maturity of 4 mos. at June 30, 2003) $29,981,389 $ 34,884,765
U.S. gov't oblig. & agencies 3,502,885 -
------------ ------------
$ 33,484,274 $ 34,884,765
============ ============
Long-term investments-
Corporate notes (remaining avg. maturity of 13 mos. at June 30, 2003) $7,282,169 $ 3,465,542
=========== ===========
4. GenVec, Inc. Business Combination Transaction
On April 14, 2003, the Company entered into an Agreement and Plan of
Reorganization and related Agreement and Plan Merger with GenVec, Inc., a
publicly-traded company, providing for the Company to merge into GenVec.
Upon completion of the merger, each outstanding share of the Company's
common stock would be exchanged for 1.5292 shares of GenVec common
stock. The merger is expected to close in the third quarter of 2003,
subject to the satisfaction of closing conditions, including receipt of
Diacrin and GenVec stockholder approval.
5. New Accounting Pronouncements
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many
of those instruments were previously classified as equity. This Statement
is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS 150
is not expected to have a material effect on the Company's financial
statements.
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, we have
received funding from our collaboration with Terumo and our joint venture
with Genzyme. We do not expect to derive a material amount of revenues
from our joint venture with Genzyme in the future. 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, 2003, we had an
accumulated deficit of $62.0 million.
In September 2002, we entered into a development and license
agreement with Terumo. Under the terms of the agreement, we licensed to
Terumo our human muscle cell transplantation technology for cardiac disease
in Japan. Terumo will fund all development in Japan while we continue to
independently develop our cardiac repair technology for commercialization
in the U.S. and elsewhere. The agreement includes an upfront non-refundable
license fee of $2.0 million, milestone payments and a royalty on product
sales.
On April 14, 2003, we entered into an Agreement and Plan of
Reorganization and related Agreement and Plan Merger with GenVec, Inc., a
publicly-traded company, providing for us to merge into GenVec. Upon
completion of the merger, each outstanding share of our common stock
would be exchanged for 1.5292 shares of GenVec common stock. The
merger is expected to close in the third quarter of 2003, subject to the
satisfaction of closing conditions, including receipt of Diacrin and GenVec
stockholder approval.
Critical Accounting Policies
We believe our most critical accounting policies are those that
dictate how we account for our development and license agreement with
Terumo and joint venture with Genzyme. On October 1, 2002 we received an
upfront non-refundable license fee of $2.0 million from Terumo. We
recorded this fee as deferred revenue and recognize revenue over the
development period of the agreement in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB
101 requires companies to recognize certain upfront non-refundable fees over
the period in which the Company completes its performance obligations
under the related agreement when such fees are received in conjunction with
an agreement which includes performance obligations. Determination of the
length of the development period requires management's judgment. Any
significant changes in the assumptions underlying our estimates used while
applying SAB 101 could impact our revenue recognition. Revenue from
milestone payments under which we have continuing performance
obligations are recognized as revenue upon the achievement of the milestone
only if all of the following conditions are met: the milestone payments are
non-refundable; achievement of the milestone was not reasonably assured at
the inception of the arrangement; substantive effort is involved in achieving
the milestone; and the amount of the milestone is reasonable in relation to the
effort expended or the risk associated with achievement of the milestone. If
any of these conditions are not met, the milestone payments are deferred and
recognized as revenue over the term of the arrangement as we complete our
performance obligations. Payments received under these arrangements prior
to the completion of the related work are recorded as deferred revenue.
In 1996, we formed a joint venture with Genzyme to develop and
commercialize two product candidates. Each of Diacrin and Genzyme owns
50% of the joint venture. We record as research and development expense all
costs related to the joint venture's product candidates 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."
We are currently focused on the development of one product candidate,
human muscle cells for cardiac disease. The expenditures that will be
necessary to execute our product development plan are subject to numerous
uncertainties, which may adversely affect our liquidity and capital resources.
Completion of clinical trials may take several years or more, but the length of
time generally varies substantially according to the type, complexity, novelty
and intended use of a product candidate.
We estimate that clinical trials of the type we generally conduct are
typically completed over the following timelines:
ESTIMATED
COMPLETION
CLINICAL PHASE PERIOD
Phase I 1-2 Years
Phase II 1-3 Years
Phase III 2-4 Years
The duration and the cost of clinical trials may vary significantly
over the life of a project as a result of differences arising during the
clinical trial protocol, including, among others, the following:
- the number of patients that ultimately participate in the trial;
- the duration of patient follow-up that seems appropriate in view of
the results;
- the number of clinical sites included in the trials; and
- the length of time required to enroll suitable patient subjects.
We test potential product candidates in numerous pre-clinical studies to
identify indications for which they may be product candidates. As we obtain
results from trials, we may elect to discontinue clinical trials for certain
product candidates or for certain indications in order to focus our resources
on more promising product candidates or indications.
An element of a company's business strategy is to pursue the research and
development of a range of product candidates for a variety of indications.
This is intended to allow the company to diversify the risks associated with
its research and development expenditures. We are currently focusing our
efforts towards the development of one product candidate. As a result, our
future capital requirements and our future financial success are substantially
dependent on this product candidate.
Our product candidate has not yet received FDA regulatory approval,
which is required before we can market it as a therapeutic product. In order to
proceed to subsequent clinical trial stages and to ultimately achieve
regulatory approval, the FDA must conclude that our clinical data establish
safety and efficacy. Historically, the results from pre-clinical testing and
early clinical trials have often not been predictive of results obtained in
later clinical trials. A number of new drugs and biologies have shown promising
results in early clinical trials, but subsequently failed to establish
sufficient safety and efficacy data to obtain necessary regulatory approvals.
Furthermore, our product development strategy includes the option of
entering into collaborative arrangements with third parties to complete the
development and commercialization of our product candidates. In the event
that third parties take over the clinical trial process for our product
candidate, the estimated completion date would largely be under the control
of that third party rather than us. We cannot forecast with any degree of
certainty which proprietary products or indications, if any, will be
subject to future collaborative arrangements, in whole or in part, and how
such arrangements would affect our development plan or capital requirements.
Our programs may also benefit from subsidies, grants or government or
agency-sponsored studies that could reduce our development costs.
As a result of the uncertainties discussed above, among others, we are
unable to estimate the duration and completion costs of our research and
development projects or when, if ever, and to what extent we will receive
cash inflows from the commercialization and sale of a product. Our inability
to complete our research and development projects in a timely manner or our
failure to enter into collaborative agreements, when appropriate, could
significantly increase our capital requirements and could adversely impact
our liquidity. These uncertainties could force us to seek additional, external
sources of financing from time to time in order to continue with our business
strategy. Our inability to raise additional capital, or to do so on terms
reasonably acceptable to us, would jeopardize the future success of our
business.
Our one product candidate, human muscle cells for cardiac disease, is
currently in Phase I clinical testing. We estimate that, since 1990, we have
spent between $15 million and $20 million on the development of this
product candidate, primarily in research and development expenses, including
an allocation of corporate general and administrative expenses. We expect to
continue to expend substantial additional amounts for the development of this
product. We cannot reasonably estimate costs to complete development of
this product due to the uncertainties of the development process and the
requirements of the FDA, which could necessitate additional and unexpected
clinical trials or other development, testing and analysis. Until we obtain
further relevant clinical data, we will not be able to estimate our future
expenses related to this program or when, if ever, and to what extent we will
receive cash inflows from it. Results of any testing could result in a
decision to alter or terminate development of this product, in which case
estimated future costs could change substantially. Furthermore, this program
may benefit from subsidies, grants, partners or government or agency
sponsored studies that could reduce our development costs.
Results of Operations
Three Months Ended June 30, 2003 Versus Three Months Ended June
30, 2002
Research and development revenues were $83,000 for the three
months ended June 30, 2003 and $47,000 for the three months ended June 30,
2002. The increase in revenues was primarily a result of an increase in
revenue of $73,000 related to our collaboration with Terumo offset in part by
a decrease in revenue from our joint venture with Genzyme. We
and Genzyme have suspended the development of the product candidates
being developed by the joint venture. As a result, we are focusing on
reducing or eliminating activity we perform related to the joint venture's
product candidates. Because our revenue in connection with the joint venture
is determined by how much activity we perform on behalf of the joint
venture, the successful reduction or elimination of this activity by us has
resulted in a decrease in revenue. We do not expect to derive a material
amount of revenues from our joint venture with Genzyme in the future.
Research and development expenses were $1.2 million and $1.7
million for the three months ended June 30, 2003 and 2002, respectively. The
decrease in research and development expenses is primarily due to a decrease
in clinical and production costs related to several product candidates of
$274,000 and a decrease in personnel costs of $73,000.
General and administrative expenses were $1.3 million and
$434,000 for the three months ended June 30, 2003 and 2002, respectively.
The increase in general and administrative expenses was primarily due to an
increase in professional fees of $963,000 due to our business combination
transaction with GenVec, Inc.
For the three months ended June 30, 2003 and 2002, we recorded an
expense of $12,000 and $39,000, respectively, related to our equity in
operations of the joint venture. This expense was due to funds contributed by
us to the joint venture that were used to fund expenses incurred by Genzyme
on behalf of the joint venture. The expense amount remained relatively
unchanged between the periods.
Investment income was $202,000 and $346,000 for the three months
ended June 30, 2003 and 2002, respectively. The decrease in investment
income was due to lower cash balances available for investment in the current
year period and a lower return on investment due to the decline in interest
rates.
We incurred a net loss of approximately $2.1 million for the three
months ended June 30, 2003 versus approximately $1.8 million for the three
months ended June 30, 2002.
Six Months Ended June 30, 2003 Versus Six Months Ended June 30, 2002
Research and development revenues were $163,000 for the six
months ended June 30, 2003 and $79,000 for the six months ended June 30,
2002. The increase in revenues was primarily a result of an increase in
revenue of $146,000 related to our collaboration with Terumo offset in part
by a decrease in revenue from our joint venture with Genzyme. We and
Genzyme have suspended the development of the product candidates being
developed by the joint venture. As a result, we are focusing on reducing or
eliminating activity we perform related to the joint venture's product
candidates. Because our revenue in connection with the joint venture is
determined by how much activity we perform on behalf of the joint venture,
the successful reduction or elimination of this activity by us has resulted
in a decrease in revenue. We do not expect to derive a material amount of
revenues from our joint venture with Genzyme in the future.
Research and development expenses were $2.3 million and $3.3
million for the six months ended June 30, 2003 and 2002, respectively. The
decrease in research and development expenses is primarily due to a decrease
in clinical and production costs related to several product candidates of
$470,000 and a decrease in personnel costs of $123,000.
General and administrative expenses were $1.9 million and
$791,000 for the six months ended June 30, 2003 and 2002, respectively. The
increase in general and administrative expenses was primarily due to an
increase in professional fees of $1.2 million due to our business combination
transaction with GenVec, Inc.
For the six months ended June 30, 2003 and 2002, we recorded an
expense of $54,000 and $71,000, respectively, related to our equity in
operations of the joint venture. This expense was due to funds contributed by
us to the joint venture that were used to fund expenses incurred by Genzyme
on behalf of the joint venture. The expense amount remained relatively
unchanged between the periods.
Investment income was $446,000 and $803,000 for the three months
ended June 30, 2003 and 2002, respectively. The decrease in investment
income was due to lower cash balances available for investment in the current
year period and a lower return on investment due to the decline in interest
rates.
We incurred a net loss of approximately $3.5 million for the six months
ended June 30, 2003 versus approximately $3.3 million for the six months
ended June 30, 2002.
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 $15.3
million in revenue from our joint venture since it commenced on October 1,
1996. At June 30, 2003, we had cash and cash equivalents, short-term
investments and long-term investments aggregating approximately $42.6
million.
We believe that our existing funds 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, relationships with
current and 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.
Net cash used in operating activities was $2.7 million for the six
months ended June 30, 2003 and $3.4 million for the six months ended June
30, 2002. Cash used in operations for the six months ended June 30, 2003
was primarily attributable to our net loss, offset in part by an increase in
accrued expenses. The increase in accrued expenses was due to costs incurred
related to our business combination transaction with GenVec. Cash used in
operations for the six months ended June 30, 2002 was primarily attributable
to our net loss.
Net cash provided by investing activities was $2.5 million for the six
months ended June 30, 2003 and $11.5 million for the six months ended June
30, 2002. Net cash provided by investing activities for the six months ended
June 30, 2003 and 2002 was primarily attributable to maturities of
investments, offset in part by purchases of investments.
Net cash provided by financing activities of $268,000 for the six
months ended June 30, 2003 was due to proceeds from the exercise of stock
options. Net cash used in financing activities of $65,000 for the six months
ended June 30, 2002 was attributable to principal payments on long-term
debt.
At June 30, 2003, we had a lease for a facility which is considered a
material commitment. In October 2000, we exercised the first of two options
we have to extend this lease an additional five years. Minimum rental
payments under the lease are as follows:
Rental
Commitment
2003 $ 908,000
2004 908,000
2005 908,000
2006 681,000
-----------
$ 3,405,000
===========
We are obligated to fund 25% of the joint venture's expenditures. Due to
the curtailment of development spending by the joint venture, we do not
expect to pay more than $150,000 in 2003 or any future year to the
Diacrin/Genzyme LLC to fund operations. Upon the closing of our business
combination transaction with GenVec we will be obligated to pay our financial
advisors $400,000.
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. The forward-looking statements contained in
this Quarterly Report on Form 10-Q represent our expectations as of July 30,
2003, the date our Quarterly Report on Form 10-Q was filed with the SEC.
Subsequent events 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. See "Cautionary Note Regarding Forward-
Looking Statements."
Risks Related to Our Business, Industry and Strategy
Failure to complete the merger with GenVec could negatively impact the
market price of our common stock and our future business and operations.
If the merger with GenVec is not completed for any reason, we will be
subject to a number of material risks, including:
- under the circumstances described in the merger agreement, we could be
required to pay GenVec a termination fee in the amount of up to $1.2
million;
- the market price of our common stock may decline to the extent that the
current market price of such shares reflects a market assumption that the
merger will be completed;
- the costs related to the merger, such as legal and accounting fees and a
portion of the investment banking fees, must be paid even if the merger
is not completed; and
- the benefits that we expect to realize from the merger would not be
realized.
During the pendency of the merger agreement, we may not be able to
enter into a merger or business combination with another party at a favorable
price because of restrictions in the merger agreement. Covenants in the
merger agreement with GenVec also impede our ability to make acquisitions
or complete other transactions that are not in the ordinary course of business
but that could be favorable to us and our stockholders pending completion of
the merger. As a result, if the merger is not consummated, we may be at a
disadvantage to our competitors.
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.
We are focusing our resources on cell transplantation technology
which 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. Currently, we are focusing most of our
resources on the development of our cell transplantation technology for
cardiac disease.
Our technological approaches may not enable us to successfully develop
and commercialize any products. Our decision to focus on one technology as
opposed to multiple technologies increases the risk associated with our stock.
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.
We face substantial competition, which may result in others
discovering, developing or commercializing products before or more
successfully than we do
Cell transplantation products would compete with existing products that
are already accepted by the medical community. For example, if successfully
developed, our cardiac repair product would compete with already available
treatments, such as pharmaceuticals, cardiac catheterization and angioplasty.
These products may be more effective and/or less costly than our product
under development, which involves the surgical transplantation of living
cells. In addition, because these available products are already accepted as
effective treatments, to successfully compete with these existing treatments,
we may need to demonstrate that our product is not only safe and effective,
but safer and/or more effective than existing products.
We will also compete with products currently under development by
pharmaceutical, biopharmaceutical and biotechnology companies, as well as
universities and other research institutions. We have limited experience in
product development aid and commercialization, obtaining regulatory
approvals and product manufacturing. Many of our competitors are more
experienced in these areas and, as a result, they may develop competing
products more rapidly and at a lower cost. In addition, 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.
These competitors may discover, develop and commercialize products which
render non-competitive or obsolete the products that we seek to develop.
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;
- 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. For example,
in March 2001, we announced that we were not conducting a planned Phase III
clinical study of NeuroCell-PD because of disappointing Phase II clinical
study results. 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. For instance, in April 2000, we put on
hold, and later terminated, a Phase I clinical trial using porcine fetal neural
cells in stroke patients due to two adverse events.
The FDA recently cleared our IND for an additional clinical trial
involving the transplantation of human cells into the heart. We have only
performed Phase I clinical trials relating to this product and cannot assure
you that we will complete our most recent Phase I trial or that we will
complete any Phase II or Phase III clinical trials. Moreover, clinical trials,
if completed, may not show this or any other 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 clinical trials could be
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.
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.
There is limited regulatory precedent for the approval of cell
transplantation products. Cell transplantation, especially cell transplantation
into the heart, is a relatively new technology that has not been extensively
tested in humans. Accordingly, the regulatory requirements governing cell
transplantation products may be more rigorous than for conventional products
such as drugs and other surgical procedures. As a result, we may experience a
longer regulatory process in connection with any cell transplantation products
that we seek to develop.
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. We have
limited experience with foreign regulatory requirements and approvals.
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.
Following commercialization, the discovery of previously unknown problems
with the product, the manufacturer or the manufacturing facility may result in
restrictions on the product or manufacturer, including withdrawal of the
product from the market. Moreover, if we ever market a product and fail to
comply with applicable regulatory requirements, we may be subject to fines,
suspensions or withdrawal of regulatory approvals, product recalls, seizure of
products, operating restrictions, and criminal prosecutions. If we are subject
to any of these restrictions or penalties, the success of our products could be
materially adversely affected. We have never marketed a product and,
therefore, have no experience with, and may not be successful at conducting
post-market studies, manufacturing products and/or complying with post-
marketing regulatory requirements.
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, 2003, we had an accumulated deficit of $62.0 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 develop our
research and development programs, expand our clinical trials, apply for
regulatory approvals and begin commercialization activities.
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. Our future capital
requirements will depend on many factors, including the following:
- 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.
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, the patent positions of pharmaceutical
and biotechnology companies have recently been the subject of much
investigation and our patents may be challenged, invalidated or
circumvented. We have limited experience in bringing and/or defending
patent claims and have fewer resources than many of the parties against
which we may be forced to defend ourself or bring action. Any challenge to,
or invalidation or circumvention of, our patents or patent applications would
be costly, require significant time and attention of our management and could
have a materially adverse effect on our business.
We may not hold proprietary rights to some patents related to our
proposed products. In some cases, others may own or control these patents.
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. 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.
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.
The 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;
- 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. 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 development and license agreement with Terumo, we
have granted to Terumo sales and marketing rights to our human muscle cell
transplantation technology for cardiac disease in Japan. We may have limited
or no control over the sales, marketing and distribution activities of Terumo
in Japan or other collaborative partners. Our future revenues may be
materially dependent upon the success 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.
Delays in obtaining regulatory approval of our manufacturing facility
and disruptions in our manufacturing process may delay or disrupt our
commercialization efforts
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
replace quickly or inexpensively 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.
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.
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 any insurance we subsequently obtain will
not provide adequate coverage against all potential claims.
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 39% 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. For example, since January 2001, our stock price has fluctuated from
a high sale price of $6.50 to a low sale price of $0.99. 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.
Our board of directors has the authority to designate and issue
preferred stock without further stockholder approval. The issuance of
such stock could delay or prevent an acquisition and changes in control
in our board and management and could adversely affect the price of our
common stock
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.
Our common stock may be delisted from the NASDAQ National
Market, which could cause the price to fall further and decrease its
liquidity.
Our common stock trades on the NASDAQ National Market. In order to
continue trading on the NASDAQ National Market, we must comply with the
NASDAQ National Market's continued listing requirements, which require
that we either maintain a minimum stockholders' equity of $10.0 million and
a minimum closing bid price of $1.00 per share or, if we fall below the
minimum stockholders' equity requirement, maintain a minimum closing bid
price of $3.00 per share. At June 30, 2003, we had stockholders' equity of
approximately $51.5 million and a closing stock price of $2.85. However, our
stockholders' equity may decline. If our stockholders' equity falls below
$10.0 million, we will need to maintain a minimum closing bid price of $3.00
rather than $1.00.
If we do not satisfy NASDAQ's continued listing requirements, our
common stock may be delisted from the NASDAQ National Market. The
delisting of our common stock may result in the trading of the stock on the
NASDAQ Small Cap Market, the over-the-counter markets in the so-called
"pink sheets" or the NASD's electronic bulletin board. Consequently, a
delisting of our common stock from the NASDAQ National Market would
materially reduce the liquidity of our common stock, not only in the number
of shares that could be bought and sold, but also through delays in the timing
of the transaction and reductions in securities analysts and media coverage.
This may reduce the demand for our stock and significantly destabilize the
price our stock. In addition, a delisting would materially adversely affect our
ability to raise additional necessary capital.
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 it is 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. Our investment portfolio contains instruments that
are subject to the risk of a decline in interest rates. For example, if the
annualized interest rate on our interest bearing investments were to change
1%, investment income would have hypothetically increased or decreased by
approximately $219,000 during the six months ended June 30, 2003. This
hypothetical analysis does not take into consideration the effects of the
economic conditions that would give rise to such an interest rate change or
our response to such hypothetical conditions.
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 it has a
material exposure to interest rate risk.
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Controller
evaluated the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of June 30, 2003. Based on this
evaluation, the Company's Chief Executive Officer and
Controller have concluded that, as of June 30, 2003, the
Company's disclosure controls and procedures were (1)
designed to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made
known to the Company's Chief Executive Officer and
Controller by others within those entities, particularly
during the period in which this report was being prepared and
(2) effective, in that they provide reasonable assurance that the
information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
No change in the Company's internal control over
financial reporting (as defined in 13a-15(f) and 15d-15(f) under
the Exchange Act) occurred during the fiscal quarter ended June
30, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
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, 2003 that were not registered under the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See the Exhibit Index on the page immediately preceding the
exhibits for a list of exhibits filed or furnished as part of this Quarterly
Report, which Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K
The Company filed the following Report on Form 8-K during the
quarter ended June 30, 2003.
(1) On April 18, 2003, the Company filed a Current Report on Form
8-K to report, pursuant to Item 5, that it had entered into a definitive
merger agreement with GevVec, Inc.
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.
July 30, 2003 /s/ Thomas H. Fraser
---------------------
Thomas H. Fraser
President and
Chief Executive Officer
/s/ Kevin Kerrigan
-----------------------
Kevin Kerrigan
Controller
EXHIBIT INDEX
Exhibit Number Description
31.1 Chief Executive Officer
- Rule 13a-14(a)/15d-
14(a) Certification
31.2 Controller - Rule 13a-
14(a)/15d - 14(a)
Certification
32.1 Chief Executive Officer
- Certification pursuant
to 18 U.S.C. Section
1350, as adopted
pursuant to Section 906
of the Sarbanes-Oxley
Act of 2002.
32.2 Controller -
Certification pursuant
to 18 U.S.C. Section
1350, as adopted
pursuant to Section 906
of the Sarbanes-Oxley
Act of 2002.