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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 MARCH 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
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COMMISSION FILE NUMBER: 000-21291
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INTROGEN THERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 74-2704230
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
301 CONGRESS AVENUE, SUITE 1850
AUSTIN, TEXAS 78701
(Address of principal executive offices, including zip code)
(512) 708-9310
(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 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
--- ---
As of March 31, 2002, the Registrant had 21,454,865 shares of its common stock,
$0.001 par value, issued and outstanding.
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INTROGEN THERAPEUTICS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
------- --------------------- --------
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets - as of
December 31, 2001 and March 31, 2002 (unaudited) ..... 3
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 2001 and
March 31, 2002 (unaudited)............................ 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2001 and
March 31, 2002 (unaudited)............................ 5
Notes to Condensed Consolidated Financial
Statements (unaudited)................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................... 19
PART II. OTHER INFORMATION PAGE NO.
-------- ----------------- --------
Item 1. Legal Proceedings......................................... 20
Item 2. Changes in Securities and Use of Proceeds................. 20
Item 3. Defaults Upon Senior Securities........................... 21
Item 4. Submission of Matters to a Vote of Security Holders....... 21
Item 5. Other Information......................................... 21
Item 6. Exhibits and Reports on Form 8-K.......................... 21
SIGNATURES............................................................... 22
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
2001 2002
-------------- --------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents ............................................ $ 37,396,627 $ 30,742,282
Short-term investments ............................................... 11,427,915 10,958,212
Accounts receivable .................................................. 137,014 216,063
Other current assets ................................................. 674,407 897,343
-------------- --------------
Total current assets ............................................... 49,635,963 42,813,900
Property and equipment, net of accumulated depreciation
of $6,405,884 and $6,893,365, respectively ........................... 10,443,017 10,003,998
Other assets ............................................................ 345,477 342,133
-------------- --------------
Total assets ....................................................... $ 60,424,457 $ 53,160,031
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................................... $ 944,395 $ 919,956
Accrued liabilities .................................................. 4,029,808 4,388,285
Deferred revenue ..................................................... -- 237,450
Current portion of capital lease obligations and notes payable ....... 1,486,376 1,524,273
-------------- --------------
Total current liabilities .......................................... 6,460,579 7,069,964
Capital lease obligations, net of current portion ....................... 957,467 740,920
Notes payable, net of current portion ................................... 8,079,121 7,900,057
Deferred revenue, long-term ............................................. 361,467 425,964
Commitments and contingencies
Stockholders' Equity:
Series A non-voting convertible preferred stock, $.001 par value,
100,000 shares authorized, 100,000
shares issued and outstanding ...................................... 100 100
Common stock, $.001 par value; 50,000,000 shares
authorized, 21,446,363 and 21,454,865 shares issued
and outstanding, respectively ...................................... 21,446 21,455
Additional paid-in capital ........................................... 94,544,109 94,497,921
Deferred compensation ................................................ (2,485,220) (2,045,075)
Accumulated deficit .................................................. (47,514,612) (55,451,275)
-------------- --------------
Total stockholders' equity ......................................... 44,565,823 37,023,126
-------------- --------------
Total liabilities and stockholders' equity ......................... $ 60,424,457 $ 53,160,031
============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2001 2002
-------------- --------------
Contract manufacturing, grant and other revenue .................... $ 24,442 $ 228,782
Costs and expenses:
Research and development ........................................ 3,784,509 6,698,591
General and administrative ...................................... 1,204,479 1,755,009
-------------- --------------
Loss from operations .......................................... (4,964,546) (8,224,818)
Interest income .................................................... 106,230 191,630
Interest expense ................................................... (221,805) (219,313)
Other income ....................................................... 162,411 315,838
-------------- --------------
Net loss ........................................................... $ (4,917,710) $ (7,936,663)
============== ==============
Net loss per share, basic and diluted .............................. $ (0.23) $ (0.37)
============== ==============
Shares used in computing basic and diluted net loss per share ...... 21,268,187 21,450,085
============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2001 2002
-------------- --------------
Cash flows from operating activities:
Net loss .......................................................... $ (4,917,710) $ (7,936,663)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ...................................................... 542,200 487,481
Compensation related to issuance of stock options ................. 392,176 389,818
Adjustment to investments ......................................... 500,000 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ...................... 699,910 (79,049)
Decrease (increase) in inventory ................................ 750,000 --
Decrease (increase) in other assets ............................. 56,436 (219,592)
Increase (decrease) in accounts payable ......................... (397,021) (24,439)
Increase (decrease) in accrued liabilities ...................... 103,974 358,477
Increase (decrease) in deferred revenue ......................... (1,051,000) 301,947
-------------- --------------
Net cash used in operating activities ......................... (3,321,035) (6,722,020)
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment ............................. (459,633) (48,462)
Purchases of short-term investments ............................. (23,407,897) (6,900,000)
Maturities of short-term investments ............................ 28,417,278 7,369,703
-------------- --------------
Net cash provided by investing activities ..................... 4,549,748 421,241
-------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock .............................. 24,392 4,148
Proceeds from issuance of notes payable ......................... 1,331,231 --
Principal payments under capital lease obligations and notes
payable ...................................................... (190,114) (357,714)
-------------- --------------
Net cash provided by (used in) financing activities ........... 1,165,509 (353,566)
-------------- --------------
Net increase (decrease) in cash ...................................... 2,394,222 (6,654,345)
Cash, beginning of period ............................................ 4,699,663 37,396,627
-------------- --------------
Cash, end of period .................................................. $ 7,093,885 $ 30,742,282
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest ............................................ $ 241,553 $ 215,448
============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. FORMATION AND BUSINESS:
Introgen Therapeutics, Inc., a Delaware corporation, and its subsidiaries
(Introgen) develop gene therapy products for the treatment of cancer. Introgen's
lead product candidate, ADVEXIN(R) gene therapy, combines the naturally
occurring p53 tumor suppressor gene with Introgen's adenoviral delivery system.
Introgen is conducting Phase III clinical trials of ADVEXIN gene therapy in head
and neck cancer, has completed a Phase II clinical trial in non-small cell lung
cancer, is conducting a Phase I/II clinical trial in breast cancer, and is
conducting several Phase I clinical trials in other types of cancer. Introgen is
developing additional gene therapy product candidates, notably those based on
the mda-7 and PTEN genes, as well as associated vector technologies for
delivering the gene-based products into target cells. Introgen's INGN 241
product candidate, which combines the mda-7 gene with Introgen's gene delivery
system, is undergoing safety testing in a Phase I clinical trial. Introgen is
developing therapies for cancer and other diseases based on the use of genes as
therapeutic agents, which may offer safer and more effective treatments than are
currently available.
Introgen manufactures its own gene therapy-based products for use in
clinical trials. Introgen has not generated any significant revenues from
unaffiliated third parties, nor is there any assurance of future product
revenues. Introgen's research and development activities involve a high degree
of risk and uncertainty, and its ability to successfully develop, manufacture
and market its proprietary products is dependent upon many factors. These
factors include, but are not limited to, the need for additional financing, the
reliance on collaborative research and development arrangements with corporate
and academic affiliates, and the ability to develop manufacturing, sales and
marketing experience. Additional factors include uncertainties as to patents and
proprietary technologies, competitive technologies, technological change and
risk of obsolescence, development of products, competition, government
regulations and regulatory approval, and product liability exposure. As a result
of the aforementioned factors and the related uncertainties, there can be no
assurance of Introgen's future success.
Since its inception in 1993, Introgen has used its resources primarily to
conduct research and development activities for ADVEXIN gene therapy and, to a
lesser extent, for other product candidates. At March 31, 2002, Introgen had an
accumulated deficit of approximately $55.5 million. Introgen anticipates that it
will incur losses in the future that are likely to be greater than cumulative
losses incurred in prior years. Introgen expects that cash needed for operating
activities may increase as it continues its ADVEXIN gene therapy Phase III
clinical trials and its research and development of various gene therapy
technologies. Since inception, Introgen's only significant revenues have been
payments from Aventis Pharma (Aventis) under collaborative research and
development agreements for Introgen's early-stage development work on ADVEXIN
gene therapy and Aventis' purchases of ADVEXIN gene therapy product Introgen
manufactured for Aventis' use in the later-stage clinical trials it previously
performed. Introgen has also earned revenue from federal research grants,
contract manufacturing and process development activities and interest income on
cash placed in short-term investments.
Until June 30, 2001, Introgen developed therapeutics based on p53 and on
K-ras pathway inhibition under two collaboration agreements with Aventis
Pharmaceuticals, Inc., a wholly-owned subsidiary of Aventis. In June 2001,
Introgen and Aventis restructured this collaborative relationship. Under this
restructuring, Introgen assumed responsibility for the worldwide development of
all p53- and K-ras-based products, and acquired additional marketing and
commercialization rights with respect to those products. Introgen assumed the
control and performance of ongoing clinical trials for p53- and K-ras-based
products and is now fully responsible for all pre-clinical research and
development and clinical trials for new gene therapy products. As of March 31,
2002, Introgen had an accrued liability of approximately $1.0 million for
amounts Introgen may have to pay Aventis for costs Aventis incurred with third
parties in completing the transition of these clinical trials from Aventis to
Introgen.
In accordance with the restructured p53 and K-ras collaboration agreement,
Aventis licensed to Introgen all patents covering the manufacture, sale,
offering for sale, importation or use of ADVEXIN gene therapy, all K-ras patents
and delivery patents and all proprietary Aventis targeting technologies. Aventis
agreed not to conduct any activities directed to the development or
commercialization of any gene therapy products using the p53 or K-ras genes for
a period of seven years. Introgen now has the exclusive, worldwide right to
market and manufacture the products developed under each of the prior
collaboration agreements, as well as any new p53- or K-ras-based gene therapy
products. Aventis transferred to Introgen all trademarks and goodwill associated
with the developed p53-based gene therapy products.
6
2. BASIS OF PRESENTATION:
The accompanying condensed, consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, accordingly, do
not include all of the information and footnotes required under generally
accepted accounting principles in the United States for complete financial
statements. In the opinion of management, all accounting entries considered
necessary for a fair presentation have been made in preparing these financial
statements. Operating results for the three month period ended March 31, 2002,
are not necessarily indicative of the results that may be expected for the
entire fiscal year. For further information, refer to the consolidated financial
statements and footnotes thereto as of December 31, 2001, and for the six months
then ended, included in Introgen's Transition Report on Form 10-K, as filed with
the SEC on March 20, 2002.
On March 12, 2002, Introgen filed a report with the SEC on Form 8-K
reporting its dismissal of Arthur Andersen LLP and concurrent engagement of
Ernst & Young LLP as its independent auditors for the fiscal year ending
December 31, 2002.
3. NET LOSS PER SHARE:
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Due to losses incurred in all periods presented,
the shares associated with stock options, warrants and non-voting convertible
preferred stock are not included because they are anti-dilutive.
4. INVESTMENT IN VIRRX, INC.:
During the quarter ended March 31, 2002, Introgen entered into an agreement
with VirRx, Inc. (VirRx) to purchase shares of its Series A Preferred Stock. In
accordance with the agreement, Introgen purchased $75,000 of VirRx Series A
Preferred Stock for cash during that period. Introgen has agreed to purchase an
additional $150,000 of this stock for cash on the first day of each quarter
beginning April 1, 2002, and continuing through January 1, 2006. Introgen has
made the April 1, 2002 purchase. VirRx is required to use the proceeds from
these stock sales in accordance with the terms of a collaboration and license
agreement between Introgen and VirRx for the development of VirRx's
technologies. Introgen may unilaterally terminate this collaboration and license
agreement with 90 days prior notice at any time after March 7, 2003, which would
also terminate the requirement for Introgen to make any additional stock
purchases. Provided the collaboration and license agreement remains in place,
Introgen will make additional milestone stock purchases, either for cash or
through the issuance of Introgen common stock, upon the completion of Phase I,
Phase II and Phase III clinical trials involving technologies licensed under
this agreement and will make a $5.0 million cash milestone payment to VirRx, for
which Introgen receives no VirRx stock, upon approval by the United States Food
and Drug Administration (FDA) of a biologics license application involving these
technologies. To the extent Introgen has already made cash milestone payments,
it may receive a credit of 50% of the Phase II clinical trial milestone payments
and 25% of the Phase III clinical trial milestone payments against this $5.0
million cash milestone payment. The additional milestone stock purchases and
cash payment are not anticipated to be required in the near future. Introgen has
an option to purchase all outstanding shares of VirRx at any time until March
2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and the related notes thereto
included in this Report on Form 10-Q. The discussion and analysis contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are based on our current expectations and entail
various risks and uncertainties. Our actual results could differ materially from
those projected in the forward-looking statements as a result of various
factors, including those set forth below under "Factors Affecting Future
Operating Results."
OVERVIEW
We are a leading developer of gene therapy products for the treatment of
cancer. Our drug discovery and development programs have resulted in innovative
approaches by which physicians use genes to treat cancer and other diseases. Our
lead product candidate, ADVEXIN(R) gene therapy, combines the p53 gene, one of
the most potent members of a group of naturally occurring genes, the tumor
suppressor genes, which act to protect cells from becoming cancerous, with a
gene delivery system that we have developed and extensively tested. We are
conducting pivotal Phase III clinical trials of ADVEXIN gene therapy in head and
neck cancer. Pivotal
7
Phase III trials are typically the final trials required for FDA approval. We
have completed a Phase II clinical trial in non-small cell lung cancer, a
category that includes approximately 80% of the various types of lung cancer.
Phase II trials are efficacy trials. We are conducting a Phase I/II trial of
ADVEXIN gene therapy in breast cancer. We are also conducting several Phase I
clinical trials, or safety trials, of ADVEXIN gene therapy in other types of
cancer. To date, doctors at clinical sites in North America, Europe and Japan
have treated hundreds of patients with ADVEXIN gene therapy, establishing a
large safety database.
We are developing additional gene therapy product candidates that we believe
may be effective in treating certain cancers, notably those based on the mda-7
and PTEN genes, as well as associated vector technologies for delivering the
gene-based products into target cells. Our INGN 241 product candidate, which
combines the mda-7 gene with our gene delivery system, is undergoing safety
testing in a Phase I clinical trial.
Since our inception in 1993, we have used our resources primarily to conduct
research and development activities for ADVEXIN gene therapy and, to a lesser
extent, for other product candidates. At March 31, 2002, we had an accumulated
deficit of approximately $55.5 million. We anticipate that we will incur losses
in the future that are likely to be greater than cumulative losses incurred in
prior years. At March 31, 2002, we had cash, cash equivalents and short-term
investments of $41.7 million. During the three months ended March 31, 2002, we
used $6.7 million of cash for operating activities. This cash usage rate may
increase in future periods as we continue our ADVEXIN gene therapy Phase III
clinical trials and our research and development of various other gene therapy
technologies. Since our inception, our only significant revenues have been
payments from Aventis under collaborative research and development agreements
for our early-stage development work on ADVEXIN gene therapy and Aventis'
purchases of ADVEXIN gene therapy product we manufactured for use in the
later-stage clinical trials it previously performed. As a result of the June
2001 restructuring of our collaborative relationship with Aventis, we no longer
receive these revenues from Aventis. We have also earned interest income on cash
placed in short-term investments. We may raise additional funds through public
or private equity offerings, debt financings or additional corporate
collaboration and licensing arrangements. We do not know whether such additional
financing will be available when needed, or on terms favorable to us or our
stockholders.
Until June 30, 2001, we developed therapeutics based on p53 and on K-ras
pathway inhibition under two collaboration agreements with Aventis
Pharmaceuticals, Inc., a wholly-owned subsidiary of Aventis. In June 2001, we
restructured this collaborative relationship. Under this restructuring, we
assumed responsibility for the worldwide pre-clinical and clinical development
of all p53- and K-ras-based gene therapy products, acquired all marketing and
commercialization rights with respect to those products, sold $25.0 million of
non-voting preferred stock to Aventis (for which we received payment in July
2001), and made a one-time payment in August 2001 of $2.0 million to Aventis in
consideration for internal costs it incurred in facilitating the transition of
control and performance of these clinical trials to us. We no longer receive
collaborative research and development or product sales revenue from Aventis,
which, over the life of the collaboration, totaled $57.2 million and $7.5
million, respectively. As of March 31, 2002, we had an accrued liability of
approximately $1.0 million for amounts we may have to pay Aventis for costs
Aventis incurred with third parties in completing the transition of these
clinical trials from Aventis.
In accordance with the restructured p53 and K-ras collaboration agreement,
Aventis licensed to us all of its patents covering the manufacture, sale,
offering for sale, importation or use of ADVEXIN gene therapy and other K-ras
patents, delivery patents and targeting technologies. Aventis also agreed, for a
period of seven years, not to conduct any activities directed to the development
or commercialization of any gene therapy products using the p53 or K-ras genes.
We now have the exclusive, worldwide right to market and manufacture the
products developed under each of the prior collaboration agreements, as well as
any new p53- or K-ras-based gene therapy products. Aventis transferred to us all
trademarks and goodwill associated with ADVEXIN gene therapy.
CRITICAL ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Short-Term Investments. Short-term investments consist of investments in
short-term, investment grade securities, which consist primarily of federal and
state government obligations, commercial paper and/or corporate bonds with
various maturity dates not exceeding one year. All short-term investments have
been classified as held-to-maturity and are carried at amortized cost. At any
point in time, amortized costs may be greater or less than fair value. If
investments are sold prior to maturity, we could incur a realized gain or loss
based on the fair market value of the investments at the date of sale.
Additionally, we could incur future losses on investments if the investment
issuer becomes impaired or the investment is downgraded.
8
Research and Development Costs. In conducting our pivotal Phase III clinical
trials of ADVEXIN gene therapy, we procure services from numerous third-party
vendors. The cost of these services constitutes a significant portion of the
cost of these trials and of our research and development expenses in general.
These vendors do not necessarily provide us billings for their services on a
regular basis and, accordingly, are not a timely source of information to
determine the costs we have incurred relative to their services for any given
accounting period. As a result, we make significant accounting estimates as to
the amount of costs we have incurred relative to these vendors in each
accounting period. These estimates are based on numerous factors, including,
among others, costs set forth in our contracts with these vendors, the period of
time over which the vendor will render the services and the rate of enrollment
of patients in our clinical trials. Using these estimates, we record expenses
and accrued liabilities in each accounting period that we believe fairly
represent our obligations to these vendors. Actual results could differ from
these estimates resulting in increases or decreases in the amount of expense
recorded and the related accrual.
RESULTS OF OPERATIONS
REVENUES
Contract Manufacturing, Grant and Other Revenue. We earn contract
manufacturing revenues from third parties under agreements to provide
manufacturing process development services and to produce products for them. We
earn grant revenue under research grants from U.S. Government agencies. Contract
manufacturing, grant and other revenue was $228,782 for the quarter ended March
31, 2002, compared to $24,442 for the quarter ended March 31, 2001. This
increase was due to our having multiple contract manufacturing agreements in
place in 2002 with Biogen, Inc. and other companies, compared to limited
activity in 2001, and having in place a larger number of Federal grants in 2002
compared to 2001.
COSTS AND EXPENSES
Research and Development. Research and development expenses, excluding
amortization of deferred stock compensation of $107,000 in 2002 and $111,000 in
2001, were $6.6 million for the quarter ended March 31, 2002, compared to $3.7
million for the quarter ended March 31, 2001. As a result of the June 2001
restructuring of our collaborative relationship with Aventis, we assumed
responsibility for conducting and funding the Phase II and Phase III clinical
trials for ADVEXIN gene therapy subsequent to that date. The 78% increase in
research and development expenses in 2002 compared to 2001 is a result of our
being responsible for all expenses of those trials in 2002, whereas we incurred
no such expenses in 2001 since Aventis paid the costs of those trials during
that time.
General and Administrative. General and administrative expenses, excluding
amortization of deferred stock compensation of $282,000 in 2002 and $281,000 in
2001, were $1.5 million for the quarter ended March 31, 2002, compared to
$924,000 for the quarter ended March 31, 2001. This 62% increase was primarily
due to the additional administrative costs associated with conducting the Phase
II and Phase III clinical trials for ADVEXIN gene therapy as a result of
restructuring our collaboration with Aventis.
Amortization of Deferred Compensation. Amortization of deferred stock
compensation was $390,000 for the quarter ended March 31, 2002, compared with
$392,000 for the quarter ended March 31, 2001. This expense was relatively
constant between these periods since substantially all options to purchase
common stock issued subsequent to March 31, 2001 have had an option price equal
to the market price of our common stock on the date of issuance, such that no
additional deferred compensation has arisen since March 31, 2001. Also, there
have been no options of significance for which deferred compensation arising
prior to March 31, 2001, became fully amortized subsequent to that date. The
amount of deferred compensation expense to be recorded in future periods may
increase if additional options are issued at a price below the market price of
common stock at the date of grant and may decrease if unvested options for which
deferred compensation has been recorded are subsequently forfeited or as
previously recorded deferred compensation becomes fully amortized.
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME
Interest income was $192,000 for the quarter ended March 31, 2002, compared
with $106,000 for the quarter ended March 31, 2001, which is an increase of 81%.
Interest income for 2001 is net of a $500,000 reduction of interest income to
recognize the decline in the market value of certain commercial paper held as an
investment. After considering the effects of this reduction, our interest income
declined in 2002 compared to 2001 due to a general decrease in interest rates
between periods and our more conservative investment philosophy subsequent to
the events of September 11, 2001.
9
Interest expense was $219,000 for the quarter ended March 31, 2002, compared
with $222,000 for the quarter ended March 31, 2001. This expense was relatively
constant between these periods as there were no new borrowings of significance
subsequent to March 31, 2001, and principal reductions as a result of debt
service payments since March 31, 2001 were minimal since most of our significant
debt is still in the early stages of principal amortization.
Other income was $316,000 for the quarter ended March 31, 2002, compared to
$162,000 for the quarter ended March 31, 2001. This 95% increase in other income
was due to our sublease of space to M. D. Anderson Cancer Center that was in
place for all of the 2002 period but for only a portion of the 2001 period.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred annual operating losses since our inception, and at March
31, 2002, we had an accumulated deficit of $55.5 million. From inception
through March 31, 2002, we have financed our operations using $49.7 million of
collaborative research and development payments from Aventis, $32.2 million of
net proceeds from our initial public offering in October 2000, $39.4 million of
private equity sales to Aventis, $14.6 million of private equity sales, net of
offering costs, to others, $7.5 million of sales of ADVEXIN gene therapy product
to Aventis for use in later-stage clinical trials, $9.2 million in mortgage
financing from banks for our facilities, $4.3 million in leases from commercial
leasing companies to acquire equipment pledged as collateral for those leases
and $5.3 million from interest income earned on cash and short- and long-term
investments.
At March 31, 2002, we had cash and short-term investments of $41.7 million,
compared with $48.8 million at December 31, 2001. This decrease was primarily a
result of the use of cash to fund our operations. For at least the next two
years, we expect to focus our activities primarily on conducting Phase III
clinical trials, conducting data analysis, preparing regulatory documentation
including FDA submissions and conducting pre-marketing activities for ADVEXIN
gene therapy. We also expect to continue our research and development of various
other gene therapy technologies. The majority of our expenditures over this
period will most likely relate to the clinical trials of ADVEXIN gene therapy.
These activities may increase the rate at which we use cash in the future as
compared to the cash we used for operating activities during the three months
ended March 31, 2002. We believe our existing working capital can fund our
operations for the next eighteen to twenty-four months, although unforeseen
events could shorten that time period. Our existing resources may not be
sufficient to support the commercial introduction of any of our product
candidates. We may raise additional funds through public or private equity
offerings, debt financings or additional corporate collaboration and licensing
arrangements. We do not know whether such additional financing will be available
when needed, or on terms favorable to us or our stockholders.
Net cash used in operating activities was $6.7 million for the quarter ended
March 31, 2002, and $3.3 for the quarter ended March 31, 2001. The increase in
cash used was primarily the result of (1) a higher net loss in 2002 compared to
2001, (2) a smaller decrease in receivables and inventory attributable to
Aventis collaboration activities in 2002 compared to 2001 due to the
restructuring of the Aventis collaboration in 2001, and (3) an increase in other
assets in 2002 compared to a decrease in other assets in 2001 due to a higher
level of clinical trial activity requiring an increase in the prepayment of
certain expenses. These increases were offset by (1) a smaller decrease in
accounts payable and an increase in accrued liabilities in 2002 compared to 2001
due to the increase in operating expenses in 2002 resulting from Advexin
clinical trials activity and (2) an increase in deferred revenue in 2002
compared to a decrease in 2001. The decrease in deferred revenue in 2001 was
related to the earning of revenue on sales of inventory to Aventis, an activity
that no longer exists as a result of the Aventis collaboration restructuing in
2001. The increase in deferred revenue in 2002 was related to the deferral of
the recognition of income under the sublease of space to M. D. Anderson Cancer
Center, which was in place for all of the 2002 period but for only a portion of
the 2001 period.
Net cash provided by investing activities was $421,000 for the quarter ended
March 31, 2002, and $4.5 million for the quarter ended March 31, 2001. This
decrease is primarily due to investing activity in 2002 being focused within
cash and cash equivalents while in 2001 there was a higher level of investment
activity that resulted in the movement of funds between cash and cash
equivalents, short-term and long-term investments. This change in the nature of
investment activity was due to a more conservative investment philosophy
subsequent to the events of September 11, 2001. The costs associated with
purchases of property and equipment declined in 2002 compared to 2001 because
the 2001 period included costs related to the completion of tenant improvements
to the space subleased to M. D. Anderson Cancer Center, for which there were no
similar costs in 2002. While we have no obligations at this time to purchase
significant amounts of additional property or equipment, our needs may change.
It may be necessary for us to purchase larger amounts of property and equipment
to support our clinical programs and other research, development and
manufacturing activities. We may need to obtain debt or lease financing to
facilitate such purchases. If that financing is not available, we may need to
use our existing resources to fund those purchases, which could result in a
reduction in the cash, cash equivalents and short-term investments available to
fund operating activities.
10
Net cash used by financing activities was $354,000 for the quarter ended
March 31, 2002, and net cash provided by financing activities was $1.2 million
for the quarter ended March 31, 2001. This change between periods is due to the
2001 period including the receipt of proceeds from a note payable used to
finance tenant improvements for the sublease of space to M. D. Anderson Cancer
Center, which were completed in 2001. Meanwhile, principal payments under
capital lease obligations and notes payable were higher in 2002 compared to 2001
due to debt service requirements commencing on this note payable subsequent to
March 31, 2001.
During the quarter ended March 31, 2002, we entered into an agreement with
VirRx, Inc. (VirRx) to purchase shares of its Series A Preferred Stock. In
accordance with the agreement, we purchased $75,000 of VirRx Series A Preferred
Stock for cash during that period. We have agreed to purchase an additional
$150,000 of this stock for cash on the first day of each quarter beginning April
1, 2002, and continuing through January 1, 2006. We have made the April 1, 2002
purchase. VirRx is required to use the proceeds from these stock sales in
accordance with the terms of a collaboration and license agreement between
Introgen and VirRx for the development of VirRx's technologies. We may
unilaterally terminate this collaboration and license agreement with 90 days
prior notice after March 7, 2003, which would also terminate our requirement to
make any additional stock purchases. Provided the collaboration and license
agreement remains in place, we will make additional milestone stock purchases,
either for cash or through the issuance of our common stock, upon the completion
of Phase I, Phase II and Phase III clinical trials involving technologies
licensed under this agreement and we will make a $5.0 million cash milestone
payment to VirRx, for which we receive no VirRx stock, upon FDA approval of a
biologics license application involving these technologies. To the extent we
have already made cash milestone payments, we may receive a credit of 50% of the
Phase II clinical trial milestone payments and 25% of the Phase III clinical
trial milestone payments against this $5.0 cash milestone payment. The
additional milestone stock purchases and cash payment are not anticipated to be
required in the near future. We have an option to purchase all outstanding
shares of VirRx at any time until March 2007.
We have fixed debt service and lease payment obligations under notes payable
and capital leases for which the liability is reflected on our balance sheet. We
used the proceeds from these notes payable and leases to finance facilities and
equipment. Aggregate payments due under these obligations are as follows:
TOTAL DEBT SERVICE AND CAPITAL LEASE PAYMENTS DUE DURING
THE YEAR ENDING DECEMBER 31,
2002 ..................................................... $ 2,292,602
2003 ..................................................... 2,218,278
2004 ..................................................... 1,440,121
2005 ..................................................... 1,312,536
2006 ..................................................... 860,280
Thereafter ............................................... 9,670,332
--------------
Total debt service and capital lease payments .............. 17,794,149
Less portion representing interest ....................... (7,271,185)
--------------
Total principal balance at December 31, 2001 ............... $ 10,522,964
==============
PRINCIPAL BALANCE PRESENTED ON THE DECEMBER 31, 2001
BALANCE SHEET AS LIABILITIES IN THESE CATEGORIES:
Current portion of obligations under capital leases
and notes payable ..................................... $ 1,486,376
Capital lease obligations, net of current portion ........ 957,467
Notes payable, net of current portion .................... 8,079,121
--------------
Total principal balance at December 31, 2001 ............... $ 10,522,964
==============
We have a fixed rent obligation under a ground lease for the land on which
we built our facilities. Since this is an operating lease, there is no liability
reflected on our balance sheet for this item, which is in accordance with
generally accepted accounting principals. We make total annual rent payments of
$136,188 under this lease which will continue until the expiration of the
initial term of this lease in September 2026. We have other operating leases
expiring in 2002 with significantly smaller rent payments that we also account
for as operating leases. Future annual rental payments due under all operating
leases are as follows:
11
YEAR ENDING DECEMBER 31,
2002......................................... $ 198,230
2003......................................... 136,188
2004......................................... 136,188
2005......................................... 136,188
2006......................................... 136,188
Thereafter................................... 2,689,713
-----------
Total minimum lease payments under operating
leases....................................... $ 3,432,695
===========
In the normal course of business, we enter into various long-term agreements
with vendors to provide services to us. Some of these agreements require
up-front payment prior to services being rendered, some require periodic monthly
payments and some provide for the vendor to bill us for their services as they
are rendered. In substantially all cases, we may cancel these agreements at any
time with minimal or no penalty and pay the vendor only for services actually
rendered. Regardless of the timing of the payments under these agreements, we
record the expenses incurred in the periods in which the services are rendered.
We pay consulting fees of approximately $175,000 per annum to a company
owned by the Chairman of our Board of Directors and which formerly employed one
of our directors. We are obligated to continue paying this fee until we
terminate the services of that company at our option.
We have a consulting agreement with an individual primarily responsible for
the creation of one of our technologies, who is also one of our stockholders.
This agreement provides for payments to such individual of $165,000 per annum
until September 30, 2002, $181,500 per annum from October 1, 2002 through
September 30, 2003, and $200,000 per annum through the end of its term on
September 30, 2009, with such future payments subject to adjustment for
inflation. We may terminate this agreement at our option upon one year's advance
notice. If we had terminated this agreement as of March 31, 2002, we would have
been obligated to make final payments to this individual totaling $173,250.
FACTORS AFFECTING FUTURE OPERATING RESULTS
WE MAY ENCOUNTER DELAYS OR DIFFICULTIES IN CLINICAL TRIALS FOR OUR PRODUCT
CANDIDATES, WHICH MAY DELAY OR PRECLUDE REGULATORY APPROVAL OF SOME OR ALL OF
OUR PRODUCT CANDIDATES.
In order to commercialize our product candidates, we must obtain regulatory
approvals. Satisfaction of regulatory requirements typically takes many years,
and involves compliance with requirements covering research and development,
testing, manufacturing, quality control, labeling and promotion of drugs for
human use. To obtain regulatory approvals, we must, among other requirements,
complete clinical trials demonstrating that our product candidates are safe and
effective for a particular cancer type or other disease.
We are conducting Phase III clinical trials of our lead product candidate,
ADVEXIN(R) gene therapy, for the treatment of head and neck cancer, and are
conducting numerous Phase I and Phase II clinical trials of ADVEXIN gene therapy
for other cancer types. Current or future clinical trials may demonstrate that
ADVEXIN gene therapy is neither safe nor effective.
While we are conducting a Phase I clinical trial with INGN 241, a product
candidate based on the mda-7 gene, our most significant clinical trial activity
and experience has been with ADVEXIN gene therapy. We will need to continue
conducting significant research and animal testing, referred to as pre-clinical
testing, to support performing clinical trials for our other gene therapy
product candidates. It will take us many years to complete pre-clinical testing
and clinical trials, and failure could occur at any stage of testing. Current or
future trials may demonstrate that INGN 241 or other product candidates are
neither safe nor effective.
Any delays or difficulties we encounter in our pre-clinical research and
clinical trials, in particular the Phase III clinical trials of ADVEXIN gene
therapy for the treatment of head and neck cancer, may delay or preclude
regulatory approval. Our product development costs will increase if we
experience delays in testing or regulatory approvals or if we need to perform
more or larger clinical trials than planned. Any delay or preclusion could also
delay or preclude the commercialization of ADVEXIN gene therapy or any other
product candidates. In addition, we or the FDA might delay or halt any of our
clinical trials of a product candidate at any time for various reasons,
including:
o the failure of the product candidate to be more effective than current
therapies;
o the presence of unforeseen adverse side effects of a product candidate,
including its delivery system;
12
o the longer than expected time required to determine whether or not a
product candidate is effective;
o the death of patients during a clinical trial, even though the product
candidate may not have caused those deaths;
o the failure to enroll a sufficient number of patients in our clinical
trials; or
o the our inability to produce sufficient quantities of a product
candidate to complete the trials.
We may encounter delays or rejections in the regulatory approval process
because of additional government regulation from future legislation or
administrative action or changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review. Failure to comply with
applicable FDA or other applicable regulatory requirements may result in
criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other regulatory
action against our product candidates or us.
Outside the United States, our ability to market a product is contingent
upon receiving clearances from the appropriate regulatory authorities. This
foreign regulatory approval process includes all of the risks associated with
FDA clearance described above.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO INCUR SIGNIFICANT
ADDITIONAL OPERATING LOSSES.
We have generated operating losses since we began operations in June 1993.
As of March 31, 2002, we had an accumulated deficit of approximately $55.5
million. We expect to incur substantial additional operating expenses and losses
over the next several years as our research, development, pre-clinical testing
and clinical trial activities increase. We have no products that have generated
any commercial revenue. Presently, we earn minimal revenue from contract
manufacturing activities, grants, interest income and rent from the sublease to
others of a portion of our facilities. In the past, we earned revenue from
Aventis under collaborative agreements for research and development and sales of
ADVEXIN gene therapy for use in Aventis' clinical trials, neither of which
revenues we will receive in the future under our restructured agreements with
Aventis. We do not expect to generate revenues from the commercial sale of
products in the foreseeable future, and we may never generate revenues from the
sale of products.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN WE
ANTICIPATE AND FAIL TO OBTAIN THE CAPITAL NECESSARY TO FUND OUR OPERATIONS, WE
WILL BE UNABLE TO ADVANCE OUR DEVELOPMENT PROGRAM AND COMPLETE OUR CLINICAL
TRIALS.
Developing a new drug and conducting clinical trials for multiple disease
indications is expensive. We expect that we will fund our operations over the
next eighteen to twenty-four months with our current working capital, resulting
primarily from the net proceeds from our initial public offering in October
2000, the sale of Series A Non-Voting Convertible Preferred Stock to Aventis in
June 2001, income from contract manufacturing and research grants, debt
financing of equipment acquisitions and interest on invested funds. We may raise
additional capital sooner, however, due to a number of factors, including:
o an acceleration of the number, size or complexity of our clinical
trials;
o slower than expected progress in developing ADVEXIN gene therapy, INGN
241 or other product candidates;
o higher than expected costs to obtain regulatory approvals;
o higher than expected costs to pursue our intellectual property strategy;
o higher than expected costs to further develop our manufacturing
capability; and
o higher than expected costs to develop our sales and marketing
capability.
We do not know whether additional financing will be available when needed,
or on terms favorable to us or our stockholders. We may raise any necessary
funds through public or private equity offerings, debt financings or additional
corporate collaboration and licensing arrangements. To the extent we raise
additional capital by issuing equity securities, our stockholders will
experience dilution. If we raise funds through debt financings, we may become
subject to restrictive covenants. To the extent that we raise
13
additional funds through collaboration and licensing arrangements, we may be
required to relinquish some rights to our technologies or product candidates, or
grant licenses on terms that are not favorable to us.
AS A RESULT OF THE RESTRUCTURING OF OUR COLLABORATIVE RELATIONSHIP WITH
AVENTIS, OUR PRODUCT DEVELOPMENT MAY BE DELAYED.
In the past, we relied to a significant extent on Aventis to fund and
support the development of products based on the p53 and K-ras genes, including
ADVEXIN gene therapy. In June 2001, we restructured our collaborative
relationship with Aventis. Under this restructuring, we assumed responsibility
for the worldwide development of all p53- and K-ras-based products. Our
development and commercialization efforts for these products could be delayed if
we are unable to commit the necessary resources to fund the development of the
p53 and K-ras programs.
Historically, Aventis agreed on an annual basis whether, and to what extent,
it would continue to fund our early-stage development in North America of
products based on the p53 or K-ras genes, which includes pre-clinical research
and development and Phase I clinical trials. Since we assumed responsibility for
the development of all p53 and K-ras products under the terms of the
restructuring, if we decide to continue this development, we would have to fund
this development ourselves or obtain funding from other sources. If we are
unable to commit the necessary resources to fund this development, then our
development and commercialization effort would be delayed.
Under the terms of the prior collaboration agreements with Aventis, once we
had completed Phase I clinical trials of a product candidate based on the p53
and K-ras genes, Aventis could have elected to pursue later-stage clinical
development of that product candidate, which includes conducting Phase II and
Phase III clinical trials, commercializing the product, making all further
submissions to existing IND, applications and preparing all product license
applications. However, under the terms of the restructuring, we are responsible
for later-stage clinical development. If we are unable to commit the necessary
resources to fund this development, then our development and commercialization
effort would be delayed.
IF WE CANNOT MAINTAIN OUR OTHER CORPORATE AND ACADEMIC ARRANGEMENTS AND ENTER
INTO NEW ARRANGEMENTS, PRODUCT DEVELOPMENT COULD BE DELAYED.
Our strategy for the research, development and commercialization of our
product candidates may require us to enter into contractual arrangements with
corporate collaborators, academic institutions and others. We have entered into
sponsored research and/or collaborative arrangements with several entities,
including M. D. Anderson Cancer Center, Imperial Cancer Research Technology
Limited, the National Cancer Institute and Corixa Corporation. Our success
depends upon our collaborative partners performing their responsibilities under
these arrangements. We cannot control the amount and timing of resources our
collaborative partners devote to our research and testing programs or product
candidates, which can vary because of factors unrelated to such programs or
product candidates. These relationships may in some cases be terminated at the
discretion of our collaborative partners with only limited notice to us. We may
not be able to maintain our existing arrangements, enter into new arrangements
or negotiate current or new arrangements on acceptable terms, if at all. Some of
our collaborative partners may also be researching competing technologies
independently from us to treat the diseases targeted by our collaborative
programs.
IF WE ARE NOT ABLE TO CREATE EFFECTIVE COLLABORATIVE MARKETING RELATIONSHIPS,
WE MAY BE UNABLE TO MARKET ADVEXIN GENE THERAPY SUCCESSFULLY OR IN A
COST-EFFECTIVE MANNER.
To effectively market our products, we will need to develop sales, marketing
and distribution capabilities. In order to develop or otherwise obtain these
capabilities, we may have to enter into marketing, distribution or other similar
arrangements with third parties in order to successfully sell, market and
distribute our products. To the extent that we enter into any such arrangements
with third parties, our product revenues are likely to be lower than if we
directly marketed and sold our products, and any revenues we receive will depend
upon the efforts of such third parties. We have no experience in marketing or
selling pharmaceutical products and we currently have no sales, marketing or
distribution capability. We may be unable to develop sufficient sales, marketing
and distribution capabilities to successfully commercialize our products.
SERIOUS UNWANTED SIDE EFFECTS ATTRIBUTABLE TO GENE THERAPY MAY RESULT IN
GOVERNMENTAL AUTHORITIES IMPOSING ADDITIONAL REGULATORY REQUIREMENTS OR A
NEGATIVE PUBLIC PERCEPTION OF OUR PRODUCTS.
Serious unwanted side effects attributable to treatment, which physicians
classify as treatment-related adverse events, occurring in the field of gene
therapy may result in greater governmental regulation of our product candidates
and potential regulatory delays relating to the testing or approval of our
product candidates. The death in 1999 of a patient undergoing gene therapy using
an
14
adenoviral vector to deliver a gene for disease treatment in a clinical trial
that was unrelated to our clinical trials, was widely publicized. As a result of
this death, the United States Senate held hearings concerning the adequacy of
regulatory oversight of gene therapy clinical trials and to determine whether
additional legislation is required to protect volunteers and patients who
participate in such clinical trials. The Recombinant DNA Advisory Committee, or
RAC, which acts as an advisory body to the National Institutes of Health, or
NIH, evaluated and continues to evaluate the use of adenoviral vectors in gene
therapy clinical trials. The RAC has made recommendations to the NIH director
concerning prospective review of study designs and adverse event reporting
procedures, and the FDA has requested that sponsors of clinical trials provide
detailed procedures for supervising clinical investigators and clinical trial
conduct. In addition, the FDA has recently begun to conduct more frequent
inspections at clinical trial sites. Implementation of any additional review and
reporting procedures or other additional regulatory measures could increase the
costs of or prolong our product development efforts or clinical trials.
Following routine procedure, we report to the FDA and other regulatory
agencies serious adverse events that we believe may be reasonably related to our
gene therapy treatment. Such serious adverse events, whether treatment related
or not, could result in negative public perception of our gene therapy treatment
and additional regulatory review or measures, which could increase the cost of
or prolong our clinical trials.
To date no governmental authority has approved any gene therapy product for
sale in the United States or internationally. The commercial success of our
products will depend in part on public acceptance of the use of gene therapies,
which are a new type of disease treatment for the prevention or treatment of
human diseases. Public attitudes may be influenced by claims that gene therapy
is unsafe, and gene therapy may not gain the acceptance of the public or the
medical community. Negative public reaction to gene therapy could also result in
greater government regulation and stricter clinical trial oversight.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
COMPETITORS MAY BE ABLE TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT
EFFORTS TO DEVELOP COMPETING DRUGS.
Our commercial success will depend in part on obtaining patent protection
for our products and other technologies and successfully defending these patents
against third party challenges. Our patent position, like that of other
biotechnology and pharmaceutical companies, is highly uncertain. One uncertainty
is that the United States Patent and Trademark Office, or PTO, or the courts,
may deny or significantly narrow claims made under patents or patent
applications. This is particularly true for patent applications or patents that
concern biotechnology and pharmaceutical technologies, such as ours, since the
PTO and the courts often consider these technologies to involve unpredictable
sciences. Another uncertainty is that any patents that may be issued or licensed
to us may not provide any competitive advantage to us and they may be
successfully challenged, invalidated or circumvented in the future. In addition,
our competitors, many of which have substantial resources and have made
significant investments in competing technologies, may seek to apply for and
obtain patents that will prevent, limit or interfere with our ability to make,
use and sell our potential products either in the United States or in
international markets.
Our ability to develop and protect a competitive position based on our
biotechnological innovations, innovations involving genes, gene therapy, viruses
for delivering the genes to cells, formulations, gene therapy delivery systems
that do not involve viruses, and the like, is particularly uncertain. Due to the
unpredictability of the biotechnological sciences, the PTO, as well as patent
offices in other jurisdictions, has often required that patent applications
concerning biotechnology-related inventions be limited or narrowed substantially
to cover only the specific innovations exemplified in the patent application,
thereby limiting their scope of protection against competitive challenges.
Similarly, courts have invalidated or significantly narrowed many key patents in
the biotechnology industry. Thus, even if we are able to obtain patents that
cover commercially significant innovations, our patents may not be upheld or our
patents may be substantially narrowed.
Through our exclusive license from The University of Texas System for
technology developed at M. D. Anderson Cancer Center, we are currently seeking
patent protection for adenoviral p53, including ADVEXIN gene therapy, and its
use in cancer therapy. Further, in February 2001, we were issued a United States
patent for our adenovirus production technology. We also control, through
licensing arrangements, two issued United States patents for combination therapy
involving the p53 gene and conventional chemotherapy or radiation, and one
issued United States patent covering the use of adenoviral p53 in cancer
therapy. Our competitors may challenge the validity of one or more of our
combination therapy, our adenoviral process technology or our adenoviral p53
therapy patents in the courts or through an administrative procedure known as an
interference. The courts or the PTO may not uphold the validity of our patents,
we may not prevail in such interference proceedings regarding our patents and
none of our patents may give us a competitive advantage.
15
The PTO has notified us that one of our patent applications, which involves
the use of retrovirus, not adenovirus (which retroviral technologies do not
relate to any of our current product candidates) has been allowed, but that its
issuance is being suspended for the possible institution of interference
proceedings. An interference proceeding is instituted by the PTO to determine,
as between two or more parties claiming the same patentable invention, which
party has the right to the patent. If any of these or other patent applications
becomes involved in an interference proceeding, there is a likelihood that it
will take many years to resolve. Resolution of any such interference will
require that we expend time, effort and money. Only the application directed to
the adenoviral p53 technology is relevant to our current potential products. If
an interference is declared with respect to the adenoviral p53 application, and
if the opponent ultimately prevails in the interference, the opponent will have
a patent that could cover our potential ADVEXIN gene therapy product or its
clinical use. The patent application that is currently involved in an ongoing
interference proceeding does not relate to any of our product candidates. While
the resolution of this interference will require that we expend time, effort and
money, its outcome is not expected to affect any of our current
commercialization efforts.
THIRD-PARTY CLAIMS OF INFRINGEMENT OF INTELLECTUAL PROPERTY COULD REQUIRE US
TO SPEND TIME AND MONEY TO ADDRESS THE CLAIMS AND COULD LIMIT OUR INTELLECTUAL
PROPERTY RIGHTS.
The biotechnology and pharmaceutical industry has been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies have employed intellectual property litigation to gain a
competitive advantage. We are aware of a number of issued patents and patent
applications that relate to gene therapy, the treatment of cancer and the use of
the p53 and other tumor suppressor genes. Schering-Plough Corporation, including
its subsidiary Canji, Inc., controls various United States patent applications
and a European patent and applications, some of which are directed to therapy
using the p53 gene, and others to adenoviruses that contain the p53 gene, or
adenoviral p53, and to methods for carrying out therapy using adenoviral p53. In
addition, Canji controls an issued United States patent and its international
counterparts, including a European patent, involving a method of treating
mammalian cancer cells lacking normal p53 protein by introducing a p53 gene into
the cancer cell.
While we believe that our potential products do not infringe any valid claim
of the Canji p53 patents, Canji or Schering-Plough could assert a claim against
us. We may also become subject to infringement claims or litigation arising out
of other patents and pending applications of our competitors, if they issue, or
additional interference proceedings declared by the PTO to determine the
priority of inventions. The defense and prosecution of intellectual property
suits, PTO interference proceedings and related legal and administrative
proceedings are costly and time-consuming to pursue, and their outcome is
uncertain. Litigation may be necessary to enforce our issued patents, to protect
our trade secrets and know-how or to determine the enforceability, scope and
validity of the proprietary rights of others. An adverse determination in
litigation or interference proceedings to which we may become a party could
subject us to significant liabilities, require us to obtain licenses from third
parties, or restrict or prevent us from selling our products in certain markets.
Although patent and intellectual property disputes are often settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include ongoing royalties. Furthermore, the necessary
licenses may not be available to us on satisfactory terms, if at all. In
particular, if we were found to infringe a valid claim of the Canji p53 issued
United States patent, our business could be materially harmed.
We are currently involved in three opposition proceedings before the
European Patent Office, or EPO, in which we are seeking to have the EPO revoke
three different European patents owned or controlled by Canji. These European
patents relate to the use of a p53 gene, or the use of tumor suppressor genes,
in the preparation of therapeutic products. In one opposition involving the use
of a p53 gene, the European patent at issue was upheld following an initial
hearing. A second hearing to determine whether this patent should be revoked
will be upcoming. In another opposition, involving a European patent directed to
the use of a tumor suppressor gene, the European Patent Office revoked the
European patent in its entirety. Canji will have the opportunity to appeal this
revocation. The third opposition is in an earlier stage. If we do not ultimately
prevail in one or more of these oppositions, our competitors could seek to
assert by means of litigation any patent surviving opposition against European
commercial activities involving our potential products. If our competitors are
successful in any such litigation, it could have a significant detrimental
effect on our or our collaborators' ability to commercialize our potential
commercial products in Europe.
COMPETITION AND TECHNOLOGICAL CHANGE MAY MAKE OUR PRODUCT CANDIDATES AND
TECHNOLOGIES LESS ATTRACTIVE OR OBSOLETE.
We compete with pharmaceutical and biotechnology companies, including Canji
and Onyx Pharmaceuticals, Inc., which are pursuing other forms of treatment for
the diseases ADVEXIN gene therapy and our other product candidates target. We
also may face competition from companies that may develop internally or acquire
competing technology from universities and other research institutions. As these
companies develop their technologies, they may develop competitive positions
which may prevent or limit our product commercialization efforts.
16
Some of our competitors are established companies with greater financial and
other resources than we have. Other companies may succeed in developing products
earlier than we do, obtaining FDA approval for products more rapidly than we do
or developing products that are more effective than our product candidates.
While we will seek to expand our technological capabilities to remain
competitive, research and development by others may render our technology or
product candidates obsolete or non-competitive or result in treatments or cures
superior to any therapy developed by us.
EVEN IF WE RECEIVE REGULATORY APPROVAL TO MARKET ADVEXIN GENE THERAPY, INGN
241 OR OTHER PRODUCT CANDIDATES, WE MAY NOT BE ABLE TO COMMERCIALIZE THEM
PROFITABLY.
Our profitability will depend on the market's acceptance of ADVEXIN gene
therapy, INGN 241 and our other product candidates. The commercial success of
our product candidates will depend on whether:
o they are more effective than alternative treatments;
o their side effects are acceptable to patients and doctors;
o we produce and sell them at a profit; and
o we market ADVEXIN gene therapy, INGN 241 and other product candidates
effectively.
IF WE ARE UNABLE TO MANUFACTURE OUR PRODUCTS IN SUFFICIENT QUANTITIES OR
OBTAIN REGULATORY APPROVALS FOR OUR MANUFACTURING FACILITY, OR IF OUR
MANUFACTURING PROCESS IS FOUND TO INFRINGE A VALID PATENTED PROCESS OF ANOTHER
COMPANY, THEN WE MAY BE UNABLE TO MEET DEMAND FOR OUR PRODUCTS AND LOSE
POTENTIAL REVENUES.
The completion of our clinical trials and commercialization of our product
candidates requires access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We use a manufacturing facility in
Houston, Texas, which we constructed and own, to manufacture ADVEXIN gene
therapy for our currently planned clinical trials and eventually for the initial
commercial launch of ADVEXIN gene therapy. We manufacture INGN 241 and other
product candidates in a separate, leased facility. We have no experience
manufacturing ADVEXIN gene therapy, INGN 241 or any other product candidates in
the volumes that will be necessary to support commercial sales. If we are unable
to manufacture our product candidates in clinical or, when necessary, commercial
quantities, then we will need to rely on third-party manufacturers to
manufacture compounds for clinical and commercial purposes. These third-party
manufacturers must receive FDA approval before they can produce clinical
material or commercial product. Our products may be in competition with other
products for access to these facilities and may be subject to delays in
manufacture if third parties give other products greater priority than ours. In
addition, we may not be able to enter into any necessary third-party
manufacturing arrangements on acceptable terms. There are very few contract
manufacturers who currently have the capability to produce ADVEXIN gene therapy,
INGN 241 or our other product candidates, and the inability of any of these
contract manufacturers to deliver our required quantities of product candidates
timely and at commercially reasonable prices would negatively affect our
operations.
Before we can begin commercially manufacturing ADVEXIN gene therapy, INGN
241 or any other product candidate, we must obtain regulatory approval of our
manufacturing facility and process. Manufacturing of our product candidates for
clinical and commercial purposes must comply with the FDA's current Good
Manufacturing Practices requirements, commonly known as 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
in production, record keeping and quality control to assure that the product
meets applicable specifications and other requirements. We must also pass a
pre-approval inspection prior to FDA approval.
Our manufacturing facilities have not yet been subject to an FDA or other
regulatory inspection. Failure to pass a pre-approval inspection may
significantly delay FDA approval of our products. 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 products.
Further, the FDA and foreign regulatory authorities have the authority to
perform unannounced periodic inspections of our manufacturing facility to ensure
compliance with CGMP and foreign regulatory requirements. Our facilities in
Houston, Texas are our only manufacturing facilities. If these facilities were
to incur significant damage or destruction, then our ability to manufacture
ADVEXIN gene therapy or any other product candidates would be significantly
hampered, and we would incur delays in our pre-clinical testing, clinical trials
and commercialization efforts.
17
Canji controls a United States patent and corresponding international
applications, including a European counterpart, relating to the purification of
viral or adenoviral compositions. While we believe that our manufacturing
process does not infringe upon this patent, Canji could still assert a claim
against us. We may also become subject to infringement claims or litigation if
our manufacturing process infringes upon other patents of our competitors. The
defense and prosecution of intellectual property suits and related legal and
administrative proceedings are costly and time-consuming to pursue, and their
outcome is uncertain.
WE RELY ON ONLY ONE SUPPLIER FOR SOME OF OUR MANUFACTURING MATERIALS. ANY
PROBLEMS EXPERIENCED BY ANY SUCH SUPPLIER COULD NEGATIVELY AFFECT OUR
OPERATIONS.
We rely on third-party suppliers for some of the materials used in the
manufacturing of ADVEXIN gene therapy, INGN 241 and our other product
candidates. Some of these materials are available from only one supplier or
vendor. Any significant problem that one of our sole source suppliers
experiences could result in a delay or interruption in the supply of materials
to us until that supplier cures the problem or until we locate an alternative
source of supply. Any delay or interruption would likely lead to a delay or
interruption in our manufacturing operations, which could negatively affect our
operations.
The CellCube(TM) Module 100 bioreactor, which Corning (Acton, MA)
manufactures, and Benzonase(R), which EM Industries (Hawthorne, NY)
manufactures, are currently available only from these suppliers. Any significant
interruption in the supply of either of these items would require a material
change in our manufacturing process. We maintain inventories of these items, but
we do not have a supply agreement with either manufacturer.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY
INCUR SUBSTANTIAL DAMAGES AND DEMAND FOR THE PRODUCTS MAY BE REDUCED.
The testing and marketing of medical products is subject to an inherent risk
of product liability claims. Regardless of their merit or eventual outcome,
product liability claims may result in:
o decreased demand for our product candidates;
o injury to our reputation and significant media attention;
o withdrawal of clinical trial volunteers;
o costs of litigation; and
o substantial monetary awards to plaintiffs.
We currently maintain product liability insurance with coverage of $5.0
million per occurrence with a $15.0 million annual limit. This coverage may not
be sufficient to protect us fully against product liability claims. We intend to
expand our product liability insurance coverage to include the sale of
commercial products if we obtain marketing approval for any of our product
candidates. Our inability to obtain sufficient product liability insurance at an
acceptable cost to protect against product liability claims could prevent or
limit the commercialization of our products.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS, AND ANY CLAIMS RELATING TO
IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD HARM OUR
BUSINESS.
Our business involves the use of a broad range of hazardous chemicals and
materials. Environmental laws impose stringent civil and criminal penalties for
improper handling, disposal and storage of these materials. In addition, in the
event of an improper or unauthorized release of, or exposure of individuals to,
hazardous materials, we could be subject to civil damages due to personal injury
or property damage caused by the release or exposure. A failure to comply with
environmental laws could result in fines and the revocation of environmental
permits, which could prevent us from conducting our business.
OUR STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY.
The market price for our common stock will be affected by a number of
factors, including:
18
o the announcement of new products or services by us or our competitors;
o quarterly variations in our or our competitors' results of operations;
o failure to achieve operating results projected by securities analysts;
o changes in earnings estimates or recommendations by securities analysts;
o developments in our industry; and
o general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
In addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been unrelated
to the operating performance of such companies. Many factors may have a
significant adverse effect on the market price of our common stock, including:
o results of our pre-clinical and clinical trials;
o announcement of technological innovations or new commercial products by
us or our competitors;
o developments concerning proprietary rights, including patent and
litigation matters;
o publicity regarding actual or potential results with respect to products
under development by us or by our competitors;
o regulatory developments; and
o quarterly fluctuations in our revenues and other financial results.
ANY ACQUISITION WE MIGHT MAKE MAY BE COSTLY AND DIFFICULT TO INTEGRATE, MAY
DIVERT MANAGEMENT RESOURCES OR DILUTE STOCKHOLDER VALUE.
As part of our business strategy, we may acquire assets or businesses
principally relating to or complementary to our current operations, and we have
in the past evaluated and discussed such opportunities with interested parties.
Any acquisitions that we undertake will be accompanied by the risks commonly
encountered in business acquisitions. These risks include, among other things:
o potential exposure to unknown liabilities of acquired companies;
o the difficulty and expense of assimilating the operations and personnel
of acquired businesses;
o diversion of management time and attention and other resources;
o loss of key employees and customers as a result of changes in
management;
o the incurrence of amortization expenses; and
o possible dilution to our stockholders.
In addition, geographic distances may make the integration of businesses
more difficult. We may not be successful in overcoming these risks or any other
problems encountered in connection with any acquisitions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates primarily
to our fixed rate long-term debt and short-term investments in investment grade
securities, which consist primarily of federal and state government obligations,
commercial paper and
19
corporate bonds. Investments are classified as held-to-maturity and are carried
at amortized costs. We do not hedge interest rate exposure or invest in
derivative securities.
At March 31, 2002, the fair value of our fixed-rate debt approximated its
carrying value based upon discounted future cash flows using current market
prices.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are involved from time to time in legal proceedings relating to claims
arising out of our operation in the ordinary course of business, including
actions relating to intellectual property rights.
On January 12, 2001, we received notice that we had been named as a
defendant in a first amended complaint filed on January 11, 2001 by Canji, Inc.
in an action entitled, Canji, Inc. v. Sidney Kimmel Cancer Center, Introgen
Therapeutics, Inc., and Does 2 through 25 (Case No. GIC745643, in the California
Superior Court for the County of San Diego, Central District). Canji filed
the original complaint against the Sidney Kimmel Cancer Center, or SKCC, on
March 24, 2000. On February 9, 2001, the action was removed to the United States
District Court for the Southern District of California. On August 29, 2001, the
case was remanded to California State Superior Court in San Diego County. The
claims against us in Canji's first amended complaint arise out of SKCC's grant
of an exclusive license to us to patent rights resulting from gene therapy
technology developed by SKCC under a sponsored research agreement between SKCC
and us. Canji contends that SKCC developed the technology using materials
provided by Canji to SKCC under a Material Transfer Agreement, or MTA. Canji
also contends that under the MTA, Canji had the right of first refusal to an
exclusive license to any patent rights arising out of the technology developed
by SKCC using these materials and that SKCC was prohibited from disclosing to us
the results of any research using Canji's materials. Canji also alleges that we
wrongfully obtained rights in intellectual property derived from SKCC's use of
Canji's materials and that we knew of, or consciously disregarded, the existence
of the MTA.
In its answer, SKCC, who was a party to the MTA, stated that Canji's
representations were false and made with the intent to defraud SKCC, and that
SKCC would not have given its consent to the contract had it not been for
Canji's fraudulent action. As relief against us, Canji seeks (1) a declaratory
judgment that we are not entitled to the intellectual property rights conveyed
by SKCC to us, and that instead, those rights belong to Canji, (2) the
imposition of a constructive trust on the patent rights granted to us and (3)
injunctive relief to restore Canji to the position that it was in prior to
SKCC's grant of intellectual property rights to us. While Canji is not seeking
an award of damages, it has requested reasonable attorney fees and costs. We
believe that Canji's allegations are without merit and we intend to vigorously
defend the action. The SKCC intellectual property is not material to our
business.
We do not believe that the outcome of any present, or all litigation in the
aggregate, other than our opposition of three European patents owned by Canji,
will have a material effect on our business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Pursuant to a stock purchase agreement with Aventis executed on June 30,
2001, we issued 100,000 shares of Series A Non-Voting Convertible Preferred
Stock to Aventis in exchange for $25.0 million, the payment for which was
received on July 2, 2001. We relied on Rule 506 promulgated under Section 4(2)
of the Securities Act of 1933, as amended, as the exemption from registration,
as the sale was to a single accredited investor. Under the terms of the
Certificate of Designations filed in connection with the sale, the Series A
Non-Voting Convertible Preferred Stock is convertible into 2,343,721 shares of
our common stock at any time upon either party's election. We expect to use the
proceeds from this sale for research and development, including clinical trials,
the advancement of our process development and manufacturing capabilities, the
initiation of product marketing and commercialization programs, and for general
corporate purposes, including working capital.
We closed our initial public offering of common stock on October 17, 2000,
pursuant to a Registration Statement on Form S-1, which was declared effective
by the Securities and Exchange Commission on October 11, 2000. This sale of the
shares of common stock generated aggregate net proceeds of approximately $32.2
million. From October 17, 2000 through March 31, 2002, and for the quarter ended
March 31, 2002, we used approximately $15.5 million and $7.1 million,
respectively, of these net proceeds for operating, investing and financing
activities. Pending these uses, the remaining $16.7 million of net proceeds of
the initial public offering are invested in interest-bearing, investment grade
securities. Other than the payment of salary to our officers and the
reimbursement of certain out-of-pocket expenses of our directors,
20
we have not made any payments out of these proceeds to our directors or
officers, or any person owning ten percent or more of our equity securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
10.42+ Series A Preferred Stock Purchase Agreement, effective as of
March 7, 2002, by and among Introgen, VirRx, Inc. and certain
stockholders of VirRx, Inc.
10.43+ Collaboration and License Agreement, effective as of March 7,
2002, by and between Introgen and VirRx, Inc.
----------
+ Confidential treatment has been requested for portions of this
exhibit.
(b) REPORTS ON FORM 8-K:
In connection with the dismissal of Arthur Andersen LLP as our independent
public accountants, we filed a Current Report on Form 8-K on March 12, 2002, as
amended on March 18, 2002, March 20, 2002 and March 22, 2002.
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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.
INTROGEN THERAPEUTICS, INC.
Date: May 15, 2002 By: /s/ James W. Albrecht, Jr.
--------------------------------------------
James W. Albrecht, Jr.
On behalf of the Registrant and as Chief
Financial Officer
(Principal Financial and Accounting Officer)
22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.42+ Series A Preferred Stock Purchase Agreement, effective as of March 7, 2002, by and
among Introgen, VirRx, Inc. and certain stockholders of VirRx, Inc.
10.43+ Collaboration and License Agreement, effective as of March 7, 2002, by and between
Introgen and VirRx, Inc.
---------
+ Confidential treatment has been requested for portions of this exhibit.