SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K/A

Amendment No. 1

 

(Mark One)

 

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to

 

Commission file number 000-30289

 

PRAECIS PHARMACEUTICALS INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Securities registered pursuant to Section 12(b) of the Act:

None

(Title of Class)

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of Class)

 

Preferred Stock Purchase Rights

(Title of Class)

 

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 ý No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes ý No o

 

The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant, based upon the last sale price of the common stock, par value $.01 per share, reported on The Nasdaq National Market on June 30, 2003, was $240,343,790.

 

The number of shares of common stock, par value $.01 per share, outstanding as of February 29, 2004 was 52,191,092.

 

Explanatory Note

 

This Amendment No. 1 (this “Amendment No. 1”) to the Annual Report on Form 10-K of PRAECIS PHARMACEUTICALS INCORPORATED (the “Company”) for the fiscal year ended December 31, 2003 (the “Form 10-K”) is being filed solely for the purpose of reflecting the reclassification of certain debt securities formerly presented as cash and cash equivalents to marketable securities.  This reclassification has no effect on the Company’s available financial resources or working capital and has no impact on the Company’s Consolidated Statements of Operations.  The reclassification affects the Company’s Consolidated Balance Sheets as of December 31, 2002 and 2003, Consolidated Statements of Cash Flows for the years then ended and Note 3 of the Consolidated Financial Statements.  The related discussion in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operation under Liquidity and Capital Resources has also been amended.

 

In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the complete text of Items 7 and 8 as amended are set forth herein.  In addition, in connection with the filing of this Amendment No. 1 and pursuant to Rule 12b-15, the Company is including currently dated certifications required by Rules 13a-14(a) and 13a-14(b) under the Exchange Act.  The Company is also filing an updated Consent from Ernst & Young LLP, the Company’s independent auditors.  The Company has included an amended exhibit list to list the certifications and Consent filed with this Amendment No 1.

 

The remainder of the Form 10-K is unchanged and is not reproduced in this Amendment No. 1.  The information in this Amendment No. 1 is as of the original filing date of the Form 10-K and does not reflect events occurring after such filing date, or otherwise modify the information in the Form 10-K except as set forth herein.

 

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PART II

 

ITEM 7.  MANAGEMENT’S DISCUSSON AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

General

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and notes thereto appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ substantially from those anticipated in these forward-looking statements.

 

Overview

 

Since our inception, we have been engaged in developing drugs for the treatment of a variety of human diseases.  Our lead program is the development of Plenaxis (abarelix for injectable suspension), a drug for the treatment of diseases that respond to the lowering of certain hormone levels.  In November 2003, the FDA approved Plenaxis for the treatment of the symptoms of men with advanced prostate cancer for whom other hormonal therapies are not appropriate and who have refused surgical castration.  For safety reasons, Plenaxis was approved with marketing restrictions.  Only physicians enrolled in the PLUS (PLenaxis User Safety) Program may prescribe Plenaxis.  We are promoting Plenaxis in the United States through our own dedicated marketing and sales team.

 

In June 2003, we initiated the regulatory submission process in the European Union seeking approval to market Plenaxis for the treatment of a broad population of hormonally responsive prostate cancer patients.  We submitted a marketing authorization application, or MAA, in Germany and, assuming a favorable action in Germany, plan to seek additional European Union member state approvals under the Mutual Recognition Procedure, or MRP.  We believe that the German review process will be completed during 2004.  We are in discussions with potential partners for the commercialization of Plenaxis in Europe, as well as for the development and/or commercialization of Plenaxis in Japan and other areas of the world.

 

We are conducting clinical trials of Apan, our proprietary drug candidate for the treatment of Alzheimer’s disease.  PPI-2458 is our proprietary compound in development for the potential treatment of a wide range of cancers, as well as certain autoimmune diseases.  During the fourth quarter of 2003, we initiated a phase I clinical trial to study PPI-2458 in patients with non-Hodgkin’s lymphoma.  In March 2004, the FDA placed this trial on clinical hold.  We also have other programs in the research or preclinical development stage.

 

Since our inception, we have had no revenues from product sales.  Substantially all of our expenditures to date have been for drug development and commercialization activities and for general and administrative expenses.  In the past, a significant portion of our revenues was received under collaboration agreements through which we converted the potential value underlying our Plenaxis program into a stream of upfront, milestone and expense reimbursement payments from corporate collaborators.  In 2001, we regained full ownership of our Plenaxis program and, as a result, all revenues and ongoing financial obligations under our former collaboration agreements have ended.  We had entered into collaborations with Amgen and Sanofi-Synthélabo to develop and commercialize our Plenaxis products. In September 2001, Amgen notified us that it was terminating its agreement with us. In October 2001, Sanofi-Synthélabo notified us that it was terminating its agreement with us.  Both terminations were effective in December 2001.  As a result, all of the licenses for Plenaxis granted to Amgen and Sanofi-Synthélabo under these agreements, and all rights of Amgen and Sanofi-Synthélabo in the Plenaxis program, have terminated.  In 2002, we entered into an agreement relating to the termination of these collaborations with each of Amgen and Sanofi-Synthélabo.

 

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Due primarily to the costs associated with the commercialization of Plenaxis in the United States, as well as other research and development and general and administrative expenses, and our lack of revenues, we had a net operating loss during 2003.  Our accumulated deficit as of December 31, 2003 was approximately $186.3 million.  We expect to continue to have net operating losses through 2005.  We began selling Plenaxis in the United States in January 2004.  Assuming the successful commercialization of Plenaxis, partnering of clinical programs at opportune times and continued prudent fiscal management, we believe that our existing cash and investments will be sufficient for us to execute our current operating plan and attain profitability by 2006.

 

The market for currently available hormonal therapies to treat prostate cancer is approximately $1.2 billion in the United States.  We believe that the revenue opportunity for Plenaxis, based upon its approved indication, may represent 15% or more of this market.  However, our actual revenues will depend upon the impact of our risk management program, physician and patient acceptance of Plenaxis and the overall success of our commercialization efforts.

 

At December 31, 2003, we had 146 full-time employees, 99 of whom were engaged in research and development activities, compared to 139 full-time employees at December 31, 2002, 110 of whom were engaged in research and development activities.

 

The termination of our collaboration agreement with Sanofi-Synthélabo became effective as of December 31, 2001 and we received a final reimbursement payment of approximately $1.0 million during the second quarter of 2002. Including this payment, we recognized a total of approximately $24.7 million in non-refundable fees and performance-based payments, and a total of approximately $11.7 million in reimbursement for ongoing development costs under this agreement.

 

The termination of our collaboration agreement with Amgen became effective as of December 17, 2001. Under the Amgen agreement, Amgen paid the first $175.0 million of all authorized costs and expenses associated with the research, development and commercialization of Plenaxis products in the United States. Amgen’s initial $175.0 million funding commitment was fulfilled during the third quarter of 2000. Following Amgen’s completion of this funding, we became responsible for one-half of all subsequent United States research and development costs for Plenaxis products. Additionally, the agreement provided that following Amgen’s completion of its $175.0 million funding commitment, we were required to reimburse Amgen for one-half of the costs associated with establishing a sales and marketing infrastructure for Plenaxis products in the United States. Through December 31, 2001, we recognized an aggregate of approximately $121.7 million of revenues under the Amgen agreement.

 

On August 19, 2002, we executed a termination agreement with Amgen.  In accordance with this agreement, we made a final payment to Amgen of $13.0 million. This payment represented full and complete satisfaction of our share of the expenses incurred under the collaboration agreement, as well as consideration for the receipt from Amgen of full title to, and possession of, all materials inventory purchased during the term of the collaboration.  As a result, we recognized a gain of $16.0 million during the third quarter of 2002.

 

Critical Accounting Policies

 

In December 2001, the Securities and Exchange Commission requested that all registrants discuss their most “critical accounting policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Commission indicated that a “critical accounting policy” is one which is both important to the portrayal of the Company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this report, we believe the following accounting policies to be critical:

 

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Use of Estimates.  We prepare our financial statements in accordance with accounting principles generally accepted in the United States. These principles require that we make estimates and use assumptions that affect the reporting of our assets and our liabilities as well as the disclosures that we make regarding assets and liabilities and income and expense that are contingent upon uncertain factors as of the reporting date.  The actual payments, and thus our actual results, could differ from our estimates.

 

Impairment or Disposal of Long-Lived Assets.  Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS No. 144, requires that if the sum of the undiscounted future cash flows expected to result from a company’s asset, net of interest charges, is less than the reported value of the asset, an asset impairment must be recognized in the financial statements.   We evaluate our property, plant and equipment for impairment whenever indicators of impairment exist.  The amount of the impairment to be recognized is calculated by subtracting the fair value of the asset from the reported value of the asset.

 

We believe that the application of SFAS No. 144 and the method used to determine the impairment of our property, plant and equipment involve critical accounting estimates because they are highly susceptible to change from period to period and because they require management to make assumptions about future cash flows, including residual values.  In addition, we believe that had alternative assumptions been used the impact of recognizing an impairment on the assets reported on our balance sheet, as well as our net loss, may have been material.

 

We reviewed our building for impairment as of December 31, 2003.  We have determined that the undiscounted sum of the expected future cash flows from the building exceeded the recorded value of the building.  As a result, no impairment allowance was required in accordance with SFAS No. 144.

 

Management has discussed the development, selection and disclosure of these critical accounting policies with the audit committee of our board of directors.

 

Results of Operations

 

Years Ended December 31, 2003 and 2002

 

Revenues for the year ended December 31, 2003 were zero compared to approximately $1.0 million in 2002. During 2002 our revenues were comprised of a final reimbursement payment received in connection with the termination of our agreement with Sanofi-Synthélabo.   We expect our only sources of revenues during 2004 to be from sales of Plenaxis in the United States and potential payments under foreign Plenaxis collaboration agreements, if consummated.  We have previously forecast Plenaxis product revenues to be in the $10.0 million to $20.0 million range in 2004.  We anticipate that these revenues will be heavily weighted towards the second half of 2004.  Our actual revenues will depend upon a number of factors, including the impact of our risk management program, physician and patient acceptance of Plenaxis, the timing of reimbursement coverage and the overall success of our commercialization efforts.

 

Research and development expenses for the year ended December 31, 2003 decreased 26% to approximately $41.9 million, from approximately $56.4 million in 2002. The decrease in expenses reflects reduced spending in our clinical and preclinical programs.  As a result of the resubmission of the Plenaxis NDA in February 2003, spending on the prostate cancer clinical development program was reduced significantly.  We incurred no direct expenses in connection with our endometriosis program during 2003 pending a decision regarding further development, and do not expect any additional spending on this program for the foreseeable future.  During the second quarter of 2003, we initiated a phase Ib clinical trial for Apan and expect to complete this study during the first half of 2004.  We initiated a phase I clinical trial for PPI-2458 in patients with non-Hodgkin’s lymphoma during the fourth quarter of 2003.  In March 2004, the FDA placed this trial on clinical hold.  Overall, we expect our research and development expenses to increase in 2004 and thereafter, primarily due to additional post-marketing studies for Plenaxis, preclinical and clinical studies for Apan and PPI-2458, and the expansion of our core technology platform, Direct Select.   In addition, we

 

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currently have several other ongoing research and development programs.

 

While we are generally able to forecast our overall spending on research and development, we are unable to predict the precise level of spending on individual clinical programs due to the uncertain nature of clinical development and the potential for future development partnerships.  Using industry estimates, typical drug development programs may last for ten or more years and may cost hundreds of millions of dollars to complete. As our programs progress, we will assess the possibility of entering into corporate collaborations to offset a portion of development costs. The ultimate success of our research and development programs and the impact of these programs on our operations and financial results cannot be accurately predicted and will depend, in large part, upon the outcome and timing of many variables outside of our control.

 

Members of our research and development team typically work on a number of projects concurrently. In addition, a substantial amount of our fixed costs such as facility depreciation, utilities and maintenance are shared by our various programs. Accordingly, we have not and do not plan to specifically identify all costs related to each of our research and development programs. We estimate that during 2003 and 2002, the majority of our research and development expenses were related to manufacturing costs, clinical trial costs, salaries and lab supplies related to our prostate cancer, Alzheimer’s disease and non-Hodgkin’s lymphoma programs. The remaining research and development costs consisted primarily of salaries and lab supplies for our other research programs.

 

We began our clinical program to develop Plenaxis for the treatment of prostate cancer during 1996.  In December 2000, we submitted an NDA to the FDA for Plenaxis for the treatment of hormonally responsive prostate cancer.  However, the FDA raised concerns over the occurrence of immediate-onset, systemic allergic reactions observed in approximately 1.1% of all clinical trial patients dosed with Plenaxis.  In addition, the FDA expressed concern that the effectiveness of Plenaxis in suppressing testosterone decreased with continued dosing in some patients.  In November 2003, the FDA approved Plenaxis for the palliative treatment of men with advanced symptomatic prostate cancer, in whom LHRH agonist therapy is not appropriate and who refuse surgical castration, and have one or more of the following: (1) risk of neurological compromise due to metastases, (2) ureteral or bladder outlet obstruction due to local encroachment or metastatic disease, or (3) severe bone pain from skeletal metastases persisting on narcotic analgesia.  Plenaxis is not indicated for use in women or children.  For safety reasons, Plenaxis was approved with marketing restrictions.  Only physicians enrolled in the PLUS Program may prescribe Plenaxis.

 

In June 2003, we also submitted an MAA for Plenaxis in Germany.  We believe that the German regulatory authorities will complete their review of our MAA during 2004.  Assuming a favorable action, we plan to subsequently seek further European Union approval for Plenaxis under the MRP to market Plenaxis for the treatment of a broad population of hormonally responsive prostate cancer patients.  We are in discussions with potential partners for the commercialization of Plenaxis in Europe, as well as for the development and/or commercialization of Plenaxis in Japan and other areas of the world.  However, we cannot assure investors that we will be successful in obtaining approval abroad for the commercialization of Plenaxis for the treatment of any portion of the hormonally responsive prostate cancer patient population or for any other indication, or that we will be able to enter into collaboration agreements on favorable terms, if at all.

 

In 1998, we began our clinical program to develop Plenaxis for the treatment of endometriosis. We completed a phase II study of Plenaxis for the treatment of pain associated with endometriosis in March 2002.  Analysis of the results of this study indicates that patients treated with Plenaxis experienced more bone mineral density loss than those treated with the comparator drug, and that this loss was dose-related.  In order to better understand the bone mineral density loss, during 2002 and 2003 we conducted a pharmacokinetic study of Plenaxis for the treatment of endometriosis to determine the appropriate dose and dosing schedule necessary to maximize the benefit of the therapy for patients while minimizing attendant bone mineral density loss. The results of this study will be used as guidance for potential future clinical studies.  We do not currently have any additional endometriosis studies planned and do not expect to conduct further studies without a corporate partner.  Any additional development in endometriosis would

 

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also require consultation with the FDA.

 

We began our clinical program for Apan in 2000.  We have completed a normal volunteer, phase Ia dose escalation study of Apan and have identified a maximum tolerated dose, or MTD, in healthy volunteers.  During the second quarter of 2003, we initiated a phase Ib trial of Apan in Alzheimer’s disease patients.  In this trial, a single dose of Apan is administered, with the goal of establishing the MTD in patients.  We anticipate completing this study during the first half of 2004.  Upon completion of the phase Ib study and, assuming favorable FDA review of the study’s results, we intend to initiate a phase Ic trial examining multiple administrations of a selected Apan dose in Alzheimer’s disease patients.

 

We initiated our first clinical study for PPI-2458 during the fourth quarter of 2003 in which an oral formulation of PPI-2458 is being evaluated in non-Hodgkin’s lymphoma patients who are no longer benefiting from other therapies.  In March 2004, the FDA placed this trial on clinical hold until questions relating to a neuropathological abnormality observed in some of the animals tested in a recently completed three-month animal safety study have been satisfactorily resolved.  The results of this study were not available at the time that the clinical study was initiated.  The FDA has indicated that we will need to submit a detailed plan in order to address this finding.  We intend to further explore this finding to assess its potential implications and prepare a plan for the FDA.  While we intend to work diligently with the FDA to resolve this issue, we cannot currently predict when the clinical hold will be released.  We intend to continue evaluating the potential utility of PPI-2458 for treating certain other cancers, as well as certain autoimmune diseases.

 

Sales and marketing expenses for the year ended December 31, 2003 increased by approximately $3.4 million to approximately $5.2 million, from approximately $1.8 million in 2002. During 2003, we incurred increased sales and marketing expenses in preparation for the launch of Plenaxis in the United States.  This was due to increased costs related to pre-commercialization efforts, in particular for market research, various physician and national meetings, pricing and reimbursement consulting, and sales force hiring and deployment activities.  We promote Plenaxis in the United States through our own marketing and sales team. With the recent FDA approval of Plenaxis, we expect our sales and marketing expenses will increase during 2004 and will include expenses relating to the building of a marketing infrastructure, the cost of our sales force, commissions to the sales force on Plenaxis sales, and promotional and marketing programs.

 

General and administrative expenses for the year ended December 31, 2003 increased 3% to approximately $10.0 million, from approximately $9.7 million in 2002.  We expect that general and administrative expenses will increase slightly during 2004 and thereafter based on normal hiring of additional administrative personnel to support continued growth of our commercialization initiatives and our research and development activities.

 

Net interest income for the year ended December 31, 2003 decreased 72% to approximately $1.3 million, from approximately $4.8 million in 2002. The decrease in net interest income was due primarily to lower average cash balances and reduced average interest rates.

 

The provision for income taxes for the years ended December 31, 2003 and 2002 was zero.  We anticipate that we will continue to be in a net operating loss carryforward position for the next several years. Therefore, as in 2002, no benefit from our operating losses has been recognized. We account for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, valuation allowances, in amounts equal to the net deferred tax assets as of December 31, 2003 and 2002, have been established in each period to reflect these uncertainties.

 

At December 31, 2003, we had federal net operating loss carryforwards of $170.3 million that will expire in varying amounts through 2023, if not utilized. Utilization of net operating loss and tax credit carryforwards will be subject to substantial annual limitations under the Internal Revenue Code of 1986, as amended. The annual limitations may result in the expiration of the net operating loss and tax credit

 

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carryforwards before full utilization.

 

Years Ended December 31, 2002 and 2001

 

Revenues for the year ended December 31, 2002 decreased to approximately $1.0 million, from approximately $9.9 million in 2001. The decrease in revenues was the result of the termination during the fourth quarter of 2001 of our collaboration agreements with Amgen and Sanofi-Synthélabo.  During 2001 our revenues were comprised principally of reimbursement revenues under these agreements. During 2002 our revenues were comprised of a final reimbursement payment received in connection with the termination of our agreement with Sanofi-Synthélabo.   We will not receive any additional revenues under these agreements.

 

Research and development expenses for the year ended December 31, 2002 decreased 5% to approximately $56.4 million, from approximately $59.4 million in 2001. The slight decrease in expenses primarily reflects reduced spending in our Plenaxis prostate cancer clinical program and, to a lesser extent, the lack of spending on our clinical program for Latranal, an in-licensed compound that was in development for the treatment of musculoskeletal pain. Development of Latranal was discontinued during the third quarter of 2001. These decreases were partially offset by increased spending on preclinical studies related to our experimental drug candidate PPI-2458.

 

Sales and marketing expenses for the year ended December 31, 2002 decreased 79% to approximately $1.8 million, from approximately $8.7 million in 2001. During 2001, we incurred increased sales and marketing expenses in preparation for the potential launch of Plenaxis for the treatment of hormonally responsive advanced prostate cancer. The subsequent decrease in sales and marketing expenses was due to the temporary suspension of the majority of marketing efforts resulting from the repositioning of our prostate cancer program in response to issues raised by the FDA.

 

General and administrative expenses for the year ended December 31, 2002 increased 39% to approximately $9.7 million, from approximately $7.0 million in 2001.  This increase was due primarily to higher facility-related expenses.  In May 2001, we occupied our new, larger facility and began incurring depreciation expense and increased utilities, maintenance and tax expenses.  In addition, higher personnel-related operating costs and increased professional services expenses contributed to the increase in general and administrative expenses.  General and administrative expenses for 2002 and going forward fully reflect these new facility-related expenses.

 

Net interest income for the year ended December 31, 2002 decreased 48% to approximately $4.8 million, from approximately $9.1 million in 2001. The decrease in net interest income was due primarily to lower average cash balances and reduced average interest rates.

 

The provision for income taxes for the years ended December 31, 2002 and 2001 was zero.  We anticipate that we will continue to be in a net operating loss carryforward position for the next several years. Therefore, no benefit from our operating losses in these years has been recognized.

 

Selected Quarterly Operating Results

 

The following table sets forth our unaudited statement of operations data for each of the eight quarters ended December 31, 2003. This information has been derived from our unaudited financial statements. The unaudited financial statements have been prepared on the same basis as the audited financial statements appearing in this report and include all adjustments, consisting only of normal recurring accruals, that we consider necessary for a fair presentation of such information when read in conjunction with our annual audited financial statements and notes thereto appearing elsewhere in this report. You should not draw any conclusions from the operating results for any quarter.

 

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		Quarter Ended
		Mar. 31, 2002			June 30, 2002			Sept. 30, 2002(1)			Dec. 31, 2002			Mar. 31, 2003			June 30, 2003			Sept. 30, 2003			Dec. 31, 2003
		(in thousands, except per share data)
Total revenues		$	—		$	1,029		$	—		$	—		$	—		$	—		$	—		$	—
Operating loss		(13,890		)	(15,506		)	(22,585		)	(14,886		)	(11,831		)	(15,928		)	(13,093		)	(16,295		)
Net loss		(12,686		)	(14,215		)	(5,568		)	(13,606		)	(11,415		)	(15,550		)	(12,785		)	(16,048		)
Basic and diluted net loss per share		$	(0.25	)	$	(0.27	)	$	(0.11	)	$	(0.26	)	$	(0.22	)	$	(0.30	)	$	(0.25	)	$	(0.31	)

 

(1)           In August 2002, we executed a termination agreement with Amgen and recognized a gain on termination of $16.0 million.

 

We expect to experience significant fluctuations in our quarterly operating results in the future, and, therefore, we will continue to have difficulty providing an accurate forecast of our quarterly revenues and operating results. We believe that period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as any indication of future performance.  Operating results in one or more future quarters may be different from the expectations of securities analysts and investors. In the event that our operating results are lower than expectations, the trading price of our common stock would likely decline.

 

Liquidity and Capital Resources

 

To date, our operations and capital requirements have been financed primarily with the proceeds of public and private sales of common stock and preferred stock, payments under research and development partnerships and collaborative agreements, and investment income.

 

At December 31, 2003, we had cash, cash equivalents and marketable securities of approximately $143.2 million and working capital of approximately $133.0 million, compared to approximately $195.0 million and $185.5 million, respectively, at December 31, 2002.  We expect our cash, cash equivalents and marketable securities at December 31, 2004 to range from approximately $60.0 million to $70.0 million.  We believe that our existing cash and investments will be sufficient to meet our working capital and capital expenditure needs through approximately the end of 2005.  Assuming the successful commercialization of Plenaxis in the United States, partnering of clinical programs at opportune times and continued prudent fiscal management, we believe that we should have sufficient financial resources to execute our operating plan and attain profitability by 2006.

 

For the year ended December 31, 2003, net cash of approximately $50.9 million was used in operating activities, compared to approximately $69.9 million used in operating activities during 2002. During the year ended December 31, 2003, our use of cash in operations was due principally to our net loss of approximately $55.8 million, partially offset by depreciation and amortization. During the year ended December 31, 2002, our use of cash in operations was due principally to our net loss of approximately $46.1 million, and our payment of $13.0 million in connection with the Amgen termination agreement, partially offset by depreciation and amortization.  We expect our cash utilization to increase during 2004 as a result of an overall increase in operating expenses as we continue launch-related activities for Plenaxis, continue with clinical trials for Apan, continue preclinical and clinical trials for PPI-2458, and expand our research and development initiatives.  We also expect a significant use of cash in relation to the production of inventory and buildup of accounts receivable related to Plenaxis.  We expect to continue to utilize cash to increase the amount of inventory on hand through the end of fiscal year 2005 to support commercial sales of Plenaxis. The actual amount of these expenditures will depend on numerous factors, including the timing of expenses and the timing and progress of our research, development, marketing and sales efforts.

 

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Net cash provided by investing activities of approximately $25.5 million in 2003 consisted of net sales of marketable securities of approximately $26.6 million and purchases of property and equipment of approximately $1.0 million.  This compares to net cash used in investing activities of approximately $10.9 million during 2002.  Net cash used in investing activities in 2002 consisted of purchases of property and equipment of approximately $1.8 million, and net purchases of marketable securities of approximately $33.2 million.

 

Our financing activities for the year ended December 31, 2003 consisted of approximately $0.6 million of proceeds received from the exercise of common stock options and approximately $0.4 million in principal repayments under our acquisition and construction loan agreement described below. Our financing activities for the year ended December 31, 2002 consisted of approximately $1.0 million of proceeds received from the exercise of common stock options.

 

In July 2000, in connection with the purchase, through our wholly owned real estate subsidiary, of our corporate headquarters and research facility in Waltham, Massachusetts, the subsidiary entered into an acquisition and construction loan agreement providing for up to $33.0 million in financing for the acquisition of, and improvements to, the facility.  The loan is secured by the facility, together with all fixtures, equipment, improvements and other related items, and by all rents, income or profits received by our real estate subsidiary, and is unconditionally guaranteed by us.  As of December 31, 2003, approximately $32.6 million was outstanding under the loan agreement. Advances bear interest at a rate equal to the 30-day LIBOR plus 2.0% (3.12% at December 31, 2003). Principal and interest are payable monthly in arrears. In July, we exercised the first of two one-year extension options, extending the maturity date of the loan until July 30, 2004.  As a result of this extension, in August 2003 we started making monthly principal payments on the loan of approximately $62,000, in addition to interest payments.  In connection with this extension, we also entered into an interest rate cap agreement in order to reduce the potential impact of interest rate increases on future income.  During 2004, we expect to either exercise the second one-year extension option available to us or refinance the debt instrument for a longer term.

 

In addition to our long-term debt, we have fixed purchase obligations under various supply agreements. As of December 31, 2003, our long-term debt and fixed purchase obligations were as follows:

 

					Payments Due By Period
Contractual Obligations		Total			Less Than 1 Year			1-3 Years			3-5 Years			After 5 Years
		(in thousands)
Long-term debt obligations		$	32,627		$	747		$	31,880		$	—		$	—
Unconditional purchase obligations (1)		3,117			1,167			1,300			650			—
Total		$	35,744		$	1,914		$	33,180		$	650		$	—

 

(1)   In January 2004, we agreed with Cambrex Charles City, Inc. to a minimum purchase commitment of $792,000 for 2004.  In addition, based upon the first commercial shipment of Plenaxis made in January 2004, our minimum annual purchase commitment from Baxter Pharmaceutical Solutions LLC will increase to $650,000 in 2005.  These amounts are reflected in the table above.

 

At December 31, 2003, we had provided a valuation allowance of $86.5 million for our deferred tax assets. The valuation allowance represents the value of the deferred tax assets.  Due to anticipated operating losses in the future, we believe that it is more likely than not that we will not realize the net deferred tax assets in the future and we have provided an appropriate valuation allowance.

 

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Recent Accounting Pronouncements

 

On December 31, 2002, the Financial Accounting  Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, or SFAS No. 148.  SFAS No. 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation.  SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Principles Board Opinion No. 28, Interim Financial Reporting, to include increased pro-forma disclosure of the effects of stock-based employee compensation on the results of operations.  SFAS No. 148 became effective for fiscal years ending after December 15, 2002.  The Company has elected to continue to account for employee stock-based compensation using the intrinsic value method as described in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and therefore, the adoption of SFAS No. 148 did not have a material impact on our consolidated results of operations in 2003.

 

In January 2003, the Financial Accounting Standards Board issued Financial Accounting  Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, or FIN No. 46.  FIN No. 46 sets forth the criteria used in determining whether an investment in a variable interest entity, or VIE, should be consolidated and is based on the general premise that companies that control another entity through interests other than voting interests should consolidate the controlled entity.  We do not have any VIE’s.  Accordingly, the implementation of FIN No. 46 will not have any impact on our consolidated financial statements.

 

In May 2003, the Financial Accounting  Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, or SFAS No. 150.  SFAS No. 150 establishes how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, including redeemable convertible preferred stock. This statement is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the interim period commencing July 1, 2003, except for mandatory redeemable financial instruments of nonpublic companies. The Financial Accounting Standards Board has indefinitely deferred implementation of some provisions of SFAS No. 150. We believe that the adoption of SFAS No. 150 will not have a material impact on our consolidated financial statements.

 

Risk Factors that May Affect Future Results

 

The risks and uncertainties described below are not the only ones we face.  Additional risks and uncertainties not presently known to us or that are currently deemed immaterial may also impair our business, financial condition and results of operations.  If any of these risks actually occur, our business, financial condition and results of operations could be materially adversely affected.

 

We have a history of losses and anticipate significant increases in our operating expenses over the next several years, and we may not be profitable in the future.

 

We cannot assure you that we will be profitable in the future or, if we attain profitability, that it will be sustainable.  In November 2003, we received FDA approval to market Plenaxis for the treatment of the symptoms of men with advanced prostate cancer for whom other hormonal therapies are not appropriate and who have refused surgical castration.  All of our other product candidates are in the research or development stage.  Sales of Plenaxis began in January 2004.  Prior to the launch of Plenaxis, we had never marketed or sold any products, and we may not succeed in marketing or selling Plenaxis, or developing and marketing any product in the future. To date, we have derived substantially all of our revenues from payments under corporate collaboration and license agreements.  We expect to continue to spend significant amounts to further develop our commercial sales and marketing capabilities, continue clinical studies and seek regulatory approval for our other product candidates. We also intend to spend substantial amounts to fund additional research and development for other potential products, enhance our core technologies, and for general and administrative purposes.  As of December 31, 2003, we had an accumulated deficit of

 

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approximately $186.3 million.  We expect that our operating expenses will increase significantly due primarily to increased expenses related to continued commercialization activities for Plenaxis, as well as the initiation and continuation of studies as part of our other clinical programs, resulting in significant operating losses at least through 2005.  We currently do not expect to achieve profitability until 2006 at the earliest.  Moreover, our ability to attain profitability by 2006 is dependent on numerous factors, including our ability to successfully commercialize Plenaxis in the United States, partnering of clinical programs at opportune times and continued prudent fiscal management.  Even if we do become profitable, we cannot assure you that we would be able to sustain or increase profitability on a quarterly or annual basis.

 

Our business is dependent on the commercial success of Plenaxis.  If Plenaxis fails to achieve market acceptance, it may never be commercially successful and we may be unable to continue our operations as planned.

 

The success of our business is dependent on the successful commercialization of Plenaxis.  Plenaxis is new to the market and may be unfamiliar to members of the medical community and to patients. Market acceptance will depend largely on our ability to demonstrate, to the oncology and urology communities in particular, the efficacy and safety of Plenaxis as an alternative to currently marketed therapies or surgical options. We cannot be certain that Plenaxis will provide benefits considered adequate by providers of oncology and urology services or that enough providers will use the product to ensure its commercial success.  Many factors may affect its market acceptance and commercial success of Plenaxis, including:

 

•              the scope of the patient population and the indication for which Plenaxis was approved;

•              the terms of the risk management program required by the FDA in connection with the approval of Plenaxis;

•              the product labeling and product insert required by the FDA;

•              the effectiveness of Plenaxis and the potential side effects, including the risk of immediate-onset systemic allergic reactions, as compared to alternative treatment methods;

•              the extent and success of our marketing and sales efforts;

•              the cost-effectiveness of Plenaxis and the availability of insurance or other third-party reimbursement, in particular Medicare, for patients, and the rate of such reimbursement;

•              the competitive features of Plenaxis as compared to other products or treatment options, including the frequency of administration of Plenaxis as compared to other products, and doctor and patient acceptance of these features; and

•              unfavorable publicity concerning Plenaxis or any similar products.

 

In addition, we must continually submit any labeling, advertising and promotional material to the FDA for review and pre-approval.  There is risk that the FDA will prohibit use of the marketing material in the form we desire. Unfavorable outcomes resulting from factors such as those identified above could limit sales of Plenaxis or cause sales of Plenaxis to decline.  In those circumstances, we may have to find additional sources of funding or scale back or cease operations. If Plenaxis is not commercially successful, we may be unable to continue our operations as planned.

 

We may be unable to establish marketing and sales capabilities necessary to successfully commercialize Plenaxis or our other potential products.

 

We have no experience in marketing or selling pharmaceutical products and have limited marketing and sales resources. To achieve commercial success for Plenaxis, or any other approved product, we must either develop a marketing and sales force, as well as the infrastructure to support it, or enter into arrangements with others to market and sell our products.  We have determined to promote Plenaxis in the United States through our own dedicated marketing and sales team.  Recruiting and retaining qualified sales personnel is therefore critical to our success.  Competition for skilled personnel is intense, and we cannot assure you that we will be able to attract and retain a sufficient number of qualified individuals to successfully launch Plenaxis.  Accordingly, we may be unable to establish marketing, sales and distribution

 

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capabilities necessary to commercialize and gain market acceptance for Plenaxis.

 

In addition, establishing the expertise necessary to successfully market and sell Plenaxis, or any other product, will require a substantial capital investment.  Our ability to make that investment and also execute our current operating plan and attain profitability by 2006 is dependent on numerous factors, including, as described above, partnering of clinical programs at opportune times and continued prudent fiscal management.  Accordingly, we cannot assure investors that we will have the funds to successfully commercialize Plenaxis or any other potential product in the United States or elsewhere.

 

Moreover, Plenaxis competes, and our product candidates in development are likely to compete, with products of other companies that currently have extensive and well-funded marketing and sales operations.  Because these companies are capable of devoting significantly greater resources to their marketing and sales efforts, our marketing and sales efforts may not compete successfully against the efforts of these other companies.

 

We have also announced our intention to market and sell Plenaxis outside of the United States through one or more marketing partners upon receipt of approval abroad.  We have not entered into any such arrangements and we cannot assure you that we will be able to enter into agreements with third parties on acceptable terms, if at all. In addition, co-promotion or other marketing arrangements with third parties to commercialize Plenaxis or any other potential products could significantly limit the revenues we derive from these products, and these third parties may fail to commercialize Plenaxis or our other potential products successfully. To the extent we enter into any such agreements, the parties to those agreements may also market products that compete with our products, further limiting our potential revenue from product sales.

 

Alternative treatment options exist and may be more readily available or acceptable to physicians and patients, which may impair our ability to capture or maintain market share for Plenaxis.

 

Alternative products and medical treatments exist or are under development to treat advanced symptomatic prostate cancer.  For example, the FDA has approved several drugs for the treatment of prostate cancer that respond to changes in hormone levels, and there are other treatment alternatives available, including radiation therapy and surgery.  The FDA’s approval of Plenaxis is limited to use in a subset of advanced symptomatic prostate cancer patients, and distribution of Plenaxis will only be made in accordance with our risk management program, which includes physician enrollment in a prescribing program and a signed patient consent form regarding the risks and benefits of the therapy.  Due to the potential risk of immediate-onset systemic allergic reactions, physicians must also monitor patients for 30 minutes following the injection of Plenaxis.  Prescribing physicians and patients may view these requirements as burdensome or may recommend or choose to use alternative treatments that are more readily available or more acceptable to the doctor and/or the patient.  If, due to these factors, Plenaxis does not achieve broad market acceptance as a drug for the treatment of the symptoms of men with advanced prostate cancer for whom other hormonal therapies are not appropriate and who have refused surgical castration, we may be unable to continue our operations as planned.

 

Our potential revenues will diminish if we fail to obtain adequate reimbursement coverage for Plenaxis or our other product candidates from third-party payors.

 

The continuing efforts of government and third-party payors to contain or reduce the costs of health care may limit our commercial opportunity. If government and other third-party payors do not provide appropriate coverage and adequate reimbursement for Plenaxis or our other product candidates, physicians may not prescribe them.  Additionally, physicians may not prescribe Plenaxis if we fail to provide adequate education about its benefits and uses.  In some foreign markets, pricing and profitability of prescription pharmaceuticals are subject to government control. In the United States, we expect that there will continue to be federal and state proposals for similar controls. In addition, managed care initiatives in the United States will continue to put pressure on the pricing of pharmaceutical products.

 

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Our ability to earn revenues from Plenaxis, or any other potential product, alone or with collaborators, may depend in part on the availability and levels of reimbursement from:

 

•              government and health administration authorities, including Medicare and Medicaid;

•              private health insurers; and

•              other third-party payors.

 

We cannot predict the availability of coverage or reimbursement for newly approved drugs such as Plenaxis by Medicare or any other payor.  Third-party payors, including Medicare, are increasingly challenging the prices charged for medical products and services. Government and other third-party payors increasingly are limiting both coverage and the level of reimbursement for new drugs and, in some cases, refusing to provide coverage for a patient’s use of an approved drug for purposes not approved by the FDA. Third-party insurance coverage may not be available to patients for Plenaxis or any of our other products.

 

We may experience pressure to lower the price of Plenaxis or our other potential products because of new and/or proposed federal legislation.

 

New federal legislation, enacted in December 2003, has altered the way in which physician-administered drugs covered by Medicare are reimbursed, generally leading to lower reimbursement levels.  The new legislation has also added an outpatient prescription drug benefit to Medicare, effective January 2006.  In the interim, Congress has established a discount drug card program for Medicare beneficiaries.  Both benefits will be provided primarily through private entities, which will attempt to negotiate price concessions from pharmaceutical manufacturers.  These negotiations may increase pressures to lower prices.  While the new law specifically prohibits the United States government from interfering in price negotiations between manufacturers and Medicare drug plan sponsors, some members of Congress are pursuing legislation that would permit the United States government to use its enormous purchasing power to demand discounts from pharmaceutical companies, thereby creating de facto price controls on prescription drugs.  In addition, the new law contains triggers for Congressional consideration of cost containment measures for Medicare in the event Medicare cost increases exceed a certain level.  These cost containment measures could include some sorts of limitations on prescription drug prices.

 

As Plenaxis is used commercially, unintended side effects or adverse reactions could occur that could result in additional regulatory controls and reduced sales.

 

During research and development, the use of pharmaceutical products, such as Plenaxis, is limited principally to clinical trial patients under controlled conditions and under the care of expert physicians. The widespread commercial use of Plenaxis could produce undesirable or unintended side effects that have not been evident in our clinical trials.  In addition, in patients who take multiple medications, drug interactions could occur that can be difficult to predict.  These events, among others, could result in the imposition of additional regulatory controls that could limit the circumstances under which Plenaxis is prescribed or even lead to the withdrawal of the product from the market.  Due to the occurrence of immediate-onset systemic allergic reactions in patients treated with Plenaxis during clinical trials, Plenaxis has been approved under regulations concerning drugs with certain safety profiles, under which the FDA has established special restrictions to ensure safe use.  Post-marketing phase IV studies are also required to evaluate the incidence of and further characterize such allergic reactions to the extent they occur.  Any violation of these special restrictions or unfavorable findings in the phase IV studies could lead to the imposition of further restrictions or withdrawal of Plenaxis from the market.

 

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If we fail to develop and maintain our relationships with third-party manufacturers, or if these manufacturers fail to perform adequately, we may be unable to commercialize Plenaxis or any of our product candidates.

 

Our ability to conduct, or continue to conduct, clinical trials and commercialize Plenaxis or other product candidates, will depend in part on our ability to manufacture, or arrange for third-party manufacture of, our products on a large scale, at a competitive cost and in accordance with regulatory requirements. We must establish and maintain a commercial scale formulation and manufacturing process for each of our potential products for which we seek marketing approval. We or third-party manufacturers may encounter difficulties with these processes at any time that could result in delays in clinical trials, regulatory submissions or in the commercialization of potential products.

 

We have no experience in large-scale product manufacturing, nor do we have the resources or facilities to manufacture products on a commercial scale. We will continue to rely upon contract manufacturers to produce Plenaxis and other compounds for later-stage preclinical, clinical and commercial purposes for a significant period of time. Third-party manufacturers may not be able to meet our needs as to timing, quantity or quality of materials. If we are unable to contract for a sufficient supply of needed materials on acceptable terms, or if we encounter delays or difficulties in our relationships with manufacturers, our clinical trials may be delayed, thereby preventing or delaying the submission of product candidates for, or the granting of, regulatory approval and the commercialization of our potential products. Any such delays may lower our revenues and delay or prevent our attaining or maintaining profitability.

 

If the third-party manufacturers upon which we rely fail to meet our needs for clinical or commercial supply, we may be required to supplement our manufacturing capacity by building our own manufacturing facilities. This would require substantial expenditures.  Also, we would need to hire and train significant numbers of employees to staff a new facility. If we are required to build our own facility, we may not be able to develop sufficient manufacturing capacity to produce drug materials for clinical trials or commercial use.

 

In addition, we and the third-party manufacturers that we use must continually adhere to current good manufacturing practice requirements enforced by the FDA through its facilities inspection program. If our facilities or the facilities of third-party manufacturers cannot pass a pre-approval plant inspection, the FDA pre-market approval of our product candidates will not be granted. In complying with these regulations and foreign regulatory requirements, we and any of our third-party manufacturers will be obligated to expend time, money and effort in production, record-keeping and quality control to assure that our potential products meet applicable specifications and other requirements. If we or any of our third-party manufacturers fail to comply with these requirements, we may be subject to regulatory sanctions, and the facilities could be shut down.

 

Any of these factors could prevent, or cause delays in, obtaining regulatory approvals for our potential products, and the manufacturing, marketing or selling of Plenaxis, and could also result in significantly higher operating expenses.

 

The loss or failure of any of our third-party manufacturers could substantially delay or impair our sale or continued sale of Plenaxis.

 

For each stage of Plenaxis production we have relied, and expect in the near term to continue to rely, on a single third-party manufacturer, and we currently have not contracted, and in the near term do not expect to contract, with a second supplier for any of these production stages. Accordingly, the loss of one or more of these suppliers for any reason, including as a result of fire, terrorism, acts of God or insolvency or bankruptcy, could result in substantial delays in, or substantially impair our ability to complete, clinical trials and regulatory submissions or reviews, and could delay or impair substantially our sale or continued sale of Plenaxis. Such delays or impairment, and the associated costs and expenses, may lower our potential revenues and delay or prevent our attaining profitability. While we are evaluating the possibility of a second

 

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source of supply at certain stages of Plenaxis production, the number of qualified alternative suppliers is limited, and we cannot assure investors that we will be able to locate alternative suppliers or negotiate second supply agreements on reasonable terms. Furthermore, the process of engineering a new supplier’s facility for the production of Plenaxis and obtaining the necessary FDA approval of the facility would require substantial lead-time and could be extremely costly. We cannot assure investors that we will not lose one or more of our suppliers, or that in such event we would be readily able to continue the commercialization of Plenaxis without substantial and costly delays.

 

We are subject to extensive government regulation that increases our costs and could prevent us from selling Plenaxis or our other potential products.

 

The development and sale of Plenaxis, and our product candidates, is subject to extensive regulation by governmental authorities. Obtaining and maintaining regulatory approval typically is costly and takes many years. Regulatory authorities, most importantly, the FDA, have substantial discretion to place on clinical hold or terminate clinical trials, delay, withhold or withdraw registration and marketing approval in the United States, and effectively mandate product recalls. Failure to comply with 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 actions as to Plenaxis, our other potential products or against us. Outside the United States, we can market a product only if we receive marketing authorization from the appropriate regulatory authorities. This foreign regulatory approval process includes all of the risks associated with the FDA approval process, and may include additional risks.

 

To gain regulatory approval from the FDA and foreign regulatory authorities for the commercial sale of any product, we must demonstrate in clinical trials, and satisfy the FDA and foreign regulatory authorities as to, the safety and efficacy of the product.  If we develop a product to treat a long-lasting disease, such as cancer or Alzheimer’s disease, we must gather data over an extended period of time. There are many risks associated with our clinical trials. For example, we may be unable to achieve the same level of success in later trials as we did in earlier ones. Additionally, data we obtain from preclinical and clinical activities are susceptible to varying interpretations that could impede regulatory approval. Further, some patients in our prostate cancer, Alzheimer’s disease and non-Hodgkin’s lymphoma programs have a high risk of death, age-related disease or other adverse medical events that may not be related to our products.  These events may affect the statistical analysis of the safety and efficacy of our products. If we obtain regulatory approval for a product, the approval will be limited to those diseases for which our clinical trials demonstrate the product is safe and effective.

 

In addition, many factors could delay or result in termination of our ongoing or future clinical trials. For example, results from ongoing preclinical studies or analyses could raise concerns over the safety or efficacy of a product candidate.  The FDA recently placed our phase I clinical trial of PPI-2458 on clinical hold due to a neuropathological abnormality observed in some of the animals tested in a recently completed three-month animal safety study.  The FDA has indicated that we will need to submit a detailed plan in order to address this finding.  We intend to further explore this finding to assess its potential implications and prepare a plan for the FDA.  While we intend to work diligently with the FDA to resolve this issue, we cannot currently predict when the clinical hold will be released.  A clinical trial may also experience slow patient enrollment or lack of sufficient drug supplies. Patients may experience adverse medical events or side effects, and there may be a real or perceived lack of effectiveness of, or of safety issues associated with, the drug we are testing. Future governmental action or existing or changes in FDA policies or precedents, may also result in delays or rejection of an application for marketing approval.  The FDA has considerable discretion in determining whether to grant marketing approval for a drug, and may delay or deny approval even in circumstances where the applicant’s clinical trials have proceeded in compliance with FDA procedures and regulations and have met the established end-points of the trials. Challenges to FDA determinations are generally time-consuming and costly, and rarely, if ever succeed.  In November 2003, we received FDA approval to market Plenaxis in the United States.  We can give no assurance that we will obtain marketing approval for any of our other product candidates.

 

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Any regulatory approval may be conditioned upon significant labeling requirements and, as in the case of the FDA approval of Plenaxis, marketing restrictions and post-marketing study commitments.  Such labeling and marketing restrictions could materially adversely affect the marketability or value of a product, including Plenaxis, resulting in decreased sales.  In such a case, we may have insufficient funds to continue operations as currently planned.

 

In addition, even after regulatory approval is obtained, our Company, product and the manufacturing facilities for our product will be subject to continual review and periodic inspection. Later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on the product, the manufacturer or us, including withdrawal of the product from the market. The FDA stringently applies regulatory standards. Our manufacturing facilities will also be subject to FDA inspections for adherence to good manufacturing practices prior to marketing clearance and periodically during the manufacturing process. Failure to comply can, among other things, result in fines, denial or withdrawal of regulatory approvals, product recalls or seizures, operating restrictions, injunctions and criminal prosecution.  If there are any modifications to a product, further regulatory approval will be required.

 

For safety reasons, Plenaxis was approved by the FDA with a comprehensive risk management program.  This program includes educational outreach to patients and physicians regarding the risks and benefits of Plenaxis, restricted distribution of the product only to physicians enrolled in a prescribing registry, a system for collecting and reporting adverse events to the FDA and auditing requirements to evaluate the effectiveness of the program.  We are also required to conduct several phase IV studies to evaluate the risk management program and the appropriate use of the drug in the indicated population.  Under the regulations under which Plenaxis was approved, the FDA has the authority to pre-approve all promotional materials and has available to it an expedited market withdrawal procedure if issues arise regarding the safe use of Plenaxis.  If approval for Plenaxis is withdrawn, we will not be able to sell Plenaxis and may have insufficient funds to continue operations as currently planned.

 

If we are unable to maintain FDA approval, or to obtain any foreign regulatory approval for Plenaxis, or to obtain or maintain regulatory approval to market our other potential products, we may exhaust our available resources significantly sooner than we had planned.  If this were to happen, we would need to either raise additional funds or seek partners to continue our currently planned research and development programs. We cannot assure you that we would be able to raise the necessary funds or negotiate additional corporate collaborations on acceptable terms, if at all.

 

We rely upon a limited number of pharmaceutical specialty distributors that could impact the ability to sell Plenaxis.

 

In the United States, we rely upon a limited number of specialty distributors to deliver Plenaxis to physicians and hospital pharmacies. There are a relatively small number of specialty distributors and wholesalers who provide such services. These distributors must also distribute Plenaxis only to physicians and hospital pharmacists enrolled in our risk management program.  There can be no assurances that these distributors will adequately provide their services to either the end users or to the Company.

 

Because we depend on third parties to conduct laboratory testing and human clinical studies and assist us with regulatory compliance, we may encounter delays in product development and commercialization.

 

We have contracts with a limited number of research organizations to design and conduct our laboratory testing and human clinical studies. If we cannot contract for testing activities on acceptable terms, or at all, we may not complete our product development efforts in a timely manner. To the extent we rely on third parties for laboratory testing and human clinical studies, we may lose some control over these activities. For example, third parties may not complete testing activities on schedule or when we request them to do so. In addition, these third parties may conduct our clinical trials in a manner inconsistent with

 

17

 

regulatory requirements or otherwise in a manner that yields misleading or unreliable data. This, or other failures of these third parties to carry out their duties, could result in significant additional costs and expenses and could delay or prevent the development and commercialization of our product candidates.

 

Many of our competitors have substantially greater resources than we do and may be able to develop and commercialize products that make our potential products and technologies obsolete or non-competitive.

 

A biopharmaceutical company such as ours must keep pace with rapid technological change and faces intense competition. We compete with biotechnology and pharmaceutical companies for funding, access to new technology, research personnel and in product research and development. Many of these companies have greater financial resources and more experience than we do in developing drugs, obtaining regulatory approvals, manufacturing, marketing and sales. We also face competition from academic and research institutions and government agencies pursuing alternatives to our products and technologies. We expect that Plenaxis, and all of our products under development, will face intense competition from existing or future drugs and other medical treatments. In addition, for each of our product candidates, we may face increasing competition from generic formulations or existing drugs whose active components are no longer covered by patents.

 

Our competitors may:

 

•              successfully identify drug candidates or develop products earlier than we do;

•              obtain approvals from the FDA or foreign regulatory bodies more rapidly than we do;

•              develop products that are more effective, have fewer side effects or cost less than our products; or

•              successfully market and sell products that compete with our products.

 

The success of our competitors in any of these efforts would adversely affect our ability to promote Plenaxis and to develop and commercialize our product candidates, and to ultimately attain and maintain profitability.

 

If we are unable to obtain and enforce valid patents, we could lose any competitive advantage we may have.

 

Our success will depend in part on our ability to obtain patents and maintain adequate protection of our technologies and potential products. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode any competitive advantage we may have. For example, if we lose our patent protection for Plenaxis, another party could produce and market the compound in direct competition with us. Some foreign countries lack rules and methods for defending intellectual property rights and do not protect proprietary rights to the same extent as the United States. Many companies have had difficulty protecting their proprietary rights in foreign countries.

 

Patent positions are sometimes uncertain and usually involve complex legal and factual questions. We can protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We currently own or have exclusively licensed 27 issued United States patents. We have applied, and will continue to apply, for patents covering both our technologies and products as we deem appropriate. Others may challenge our patent applications or our patent applications may not result in issued patents. Moreover, any issued patents on our own inventions, or those licensed from third parties, may not provide us with adequate protection, or others may challenge the validity of, or seek to narrow or circumvent, these patents. Third-party patents may impair or block our ability to conduct our business. Additionally, third parties may independently develop products similar to our products, duplicate our unpatented products, or design around any patented products we develop.

 

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If we are unable to protect our trade secrets and proprietary information, we could lose any competitive advantage we may have.

 

In addition to patents, we rely on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions, and security measures to protect our confidential and proprietary information. These measures may not adequately protect our trade secrets or other proprietary information. If these measures do not adequately protect our rights, third parties could use our technology, and we could lose any competitive advantage we may have. In addition, others may independently develop similar proprietary information or techniques, which could impair any competitive advantage we may have.

 

If our technologies, processes or products conflict with the patents or other intellectual property rights of competitors, universities or others, we could have to engage in costly litigation and be unable to commercialize those products.

 

Our technologies, processes, product or product candidates may give rise to claims that they infringe patents or other intellectual property rights of third parties.  A third party could force us to pay damages, stop our use of these technologies or processes, or stop our manufacturing or marketing of the affected products by bringing a legal action against us for infringement. In addition, we could be required to obtain a license to continue to use the technologies or processes or to manufacture or market the affected products, and we may not be able to do so on acceptable terms or at all. We believe that significant litigation will continue in our industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our resources. Even if legal actions were meritless, defending a lawsuit could take significant time, be expensive and divert management’s attention from other business concerns.

 

If third parties terminate our licenses, we could experience delays or be unable to complete the development and commercialization of our potential products.

 

We license some of our technology from third parties. Termination of our licenses could force us to delay or discontinue some of our development and commercialization programs. For example, if Advanced Research and Technology Institute, Inc., the assignee of Indiana University Foundation, terminated our license with them, we could have to discontinue the commercialization of Plenaxis. We cannot assure you that we would be able to license substitute technology in the future. Our inability to do so could impair our ability to conduct our business because we may lack the technology, or the necessary rights to technology, required to develop and commercialize our potential products.

 

We may have substantial exposure to product liability claims and may not have adequate insurance to cover those claims.

 

The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims whether or not the drugs are actually at fault for causing an injury.  As Plenaxis is used more widely, the likelihood of an adverse drug reaction (both expected or unexpected) or unintended side effect will increase.  Furthermore, Plenaxis or our product candidates may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug has been administered to patients for some time.

 

Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative effect on our financial performance. The costs of product liability insurance have increased dramatically in recent years, and the availability of coverage has decreased.  Although the Company carries insurance that it regards as reasonably adequate to protect it from potential claims, there can be no assurance that the Company will be able to maintain its current product liability insurance at a reasonable cost, or at all.  Our collaboration agreements with Amgen and Sanofi-Synthélabo included, and the agreements with them regarding the termination of those collaborations also include, an indemnification of them for liabilities associated with the development and commercialization of

 

19

 

Plenaxis.  If a third party, including a former collaborator, successfully sues us for any injury, or for indemnification for losses, there is no guarantee that the amount of the claim would not exceed the limit of the Company’s insurance coverage.  Further, a successful claim could result in the recall of Plenaxis, or could reduce revenues from sales of Plenaxis.  Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business.

 

Pharmaceutical companies have been the target of lawsuits and investigations and there is no assurance that if we were to be involved in any such lawsuits or investigation, that our defense would be successful.

 

Pharmaceutical companies have been the target of lawsuits and investigations including, in particular, claims asserting violations of the Federal False Claim Act, Anti-Kickback Act, the Prescription Drug Marketing Act or other violations in connection with Medicare and/or Medicaid reimbursement, and claims under state laws, including state anti-kickback and fraud laws. Public companies may also be the subject of certain other types of claims, including those asserting violations of securities laws or related to environmental matters. There is no assurance that if we were to be involved in any such lawsuits or investigation, that we would be successful in defending ourselves or in asserting our rights.

 

If we lose our key personnel or are unable to attract and retain additional skilled personnel, we may be unable to pursue our product development and commercialization efforts.

 

We depend substantially on the principal members of our management and scientific staff, including Malcolm L. Gefter, Ph.D., our Chief Executive Officer and Chairman of the Board, and William K. Heiden, our President and Chief Operating Officer. We do not have employment agreements with any of our executive officers. Any officer or employee can terminate his or her relationship with us at any time and work for one of our competitors. The loss of these key individuals could result in competitive harm because we could experience delays in our product research, development and commercialization efforts without their expertise.

 

Recruiting and retaining qualified scientific personnel to perform future research and development work also will be critical to our success. Competition for skilled personnel is intense and the turnover rate can be high. We compete with numerous companies and academic and other research institutions for experienced scientists. This competition may limit our ability to recruit and retain qualified personnel on acceptable terms. Failure to attract and retain qualified personnel would prevent us from continuing to develop our potential products, enhancing our technologies and launching our products commercially. Our planned activities will require the addition of new personnel, including management and marketing and sales personnel, and the development of additional expertise by existing management personnel, in particular in the area of product marketing and sales. The inability to attract and retain these people or to develop this expertise could prevent, or result in delays in, the marketing and sale of Plenaxis or the research, development and commercialization of our product candidates.

 

We use hazardous chemicals and radioactive and biological materials in our business and any claims relating to the handling, storage or disposal of these materials could be time consuming and costly.

 

Our research and development processes involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials, which may pose health risks. For example, the health risks associated with accidental exposure to Plenaxis include temporary impotence or infertility and harmful effects on pregnant women. Our operations also produce hazardous waste products. We cannot completely eliminate the risk of accidental contamination or discharge from hazardous materials and any resultant injury. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. Compliance with health and safety and environmental laws and regulations is necessary and expensive. Current or future health and safety and environmental regulations may impair our research, development or production efforts. We may be required to pay fines, penalties or damages in the event of noncompliance or the exposure of individuals to hazardous materials.

 

20

 

From time to time, third-parties have also worked with hazardous materials in connection with our agreements with them. We have agreed to indemnify our present and former collaborators in some circumstances against damages and other liabilities arising out of development activities or products produced in connection with these collaborations.

 

The market price of our common stock may experience extreme price and volume fluctuations.

 

The market price of our common stock may fluctuate substantially due to a variety of factors, including, but not limited to:

 

•              our ability to successfully commercialize Plenaxis in the United States;

•              failure or delay by third-party manufacturers in performing their supply obligations or disputes or litigation regarding those obligations;

•              the availability of reimbursement coverage for Plenaxis and changes in the reimbursement policies of third-party insurance companies or government agencies;

•              our ability to enter into foreign corporate collaborations for Plenaxis, or United States or foreign corporate collaborations for our other product candidates, and the timing and terms of such collaborations;

•              the success rate of our discovery efforts and clinical trials;

•              announcement of FDA approval or disapproval of any of our product candidates, or of associated labeling requirements;

•              announcements of technological innovations or new products by us or our competitors;

•              developments or disputes concerning patents or proprietary rights, including claims of infringement, interference or litigation against us or our licensors;

•              announcements concerning our competitors, or the biotechnology or pharmaceutical industry in general;

•              public concerns as to the safety of Plenaxis or our competitors’ products;

•              changes in government regulation of the pharmaceutical or medical industry;

•              actual or anticipated fluctuations in our operating results;

•              changes in financial estimates or recommendations by securities analysts;

•              sales of large blocks of our common stock;

•              changes in accounting principles; and

•              the loss of any of our key scientific or management personnel.

 

In addition, the stock market has experienced extreme price and volume fluctuations. The market prices of the securities of biotechnology companies, particularly companies like ours without current product revenues and earnings, have been highly volatile, and may continue to be highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. In the past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Whether or not meritorious, litigation brought against us could result in substantial costs and a diversion of management’s attention and resources.

 

We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline.

 

Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to decline. Some of the factors that could cause our operating results to fluctuate include:

 

•              expected or unexpected fluctuations in Plenaxis revenues;

•              the timing and level of expenses related to the commercialization of Plenaxis;

•              the timing and level of expenses related to our other research and clinical development programs; and

 

21

 

•              the timing of our commercialization of other products resulting in revenues.

 

Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance.

 

If we engage in an acquisition, we will incur a variety of costs and may never realize the anticipated benefits of the acquisition.

 

If appropriate opportunities become available, we may attempt to acquire businesses, or acquire or in-license products or technologies, that we believe are a strategic fit with our business. We currently have no commitments or agreements for any acquisitions.  If we do undertake any transaction of this sort, the process of integrating an acquired business, or an acquired or in-licensed product or technology, may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for the ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of any transaction of this sort. To the extent we issue stock in a transaction, the ownership interest of our stockholders will be diluted. Transactions of this kind could also cause us to incur debt, expose us to future liabilities and result in expenses related to goodwill and other intangible assets.

 

Anti-takeover provisions in our charter and by-laws, our rights agreement and certain provisions of Delaware law may make an acquisition of us more difficult, even if an acquisition would be beneficial to our stockholders.

 

Provisions in our certificate of incorporation and by-laws may delay or prevent an acquisition of us or a change in our management. Also, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit or delay large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. In addition, the rights issued under our rights agreement may be a substantial deterrent to a person acquiring 10% or more of our common stock without the approval of our board of directors. These provisions in our charter and by-laws, rights agreement and under Delaware law could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

The financial statements required by this Item are included on pages F-1 through F-16 of this report. The supplementary financial information required by this Item is included in the section of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Selected Quarterly Operating Results.”

 

22

 

PART III

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

 

(a) 1.      Financial Statements

 

The financials statements filed as part of this report are listed on the Index to Consolidated Financial Statements located on page F-1, which immediately follows the signature page of this report.

 

2.             Financial Statement Schedules

 

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

 

3.             Exhibits

 

Exhibit No.		Exhibit
3.1		Amended and Restated Certificate of Incorporation (2)
3.2		Third Amended and Restated By-Laws (11)
4.1		Specimen certificate representing shares of common stock (1)
4.2		Specimen certificate representing shares of common stock (including Rights Agreement Legend) (5)
4.3		Rights Agreement between PRAECIS and American Stock Transfer & Trust Company, as Rights Agent (6)
4.4		Form of Certificate of Designations of Series A Junior Participating Preferred Stock (attached as Exhibit A to the Rights Agreement filed as Exhibit 4.3 hereto) (6)
4.5		Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.3 hereto) (6)
10.1*		Second Amended and Restated 1995 Stock Plan (3)
10.2*		Amendment No. 1 to the Second Amended and Restated 1995 Stock Plan (8)
10.3*		Executive Management Bonus Plan, as amended and restated as of September 12, 2002 (10)
10.4*		Amended and Restated Employee Stock Purchase Plan (12)
10.5*		Management Incentive Program (11)
10.6*		Amended and Restated Stockholders Agreement dated as of April 30, 1998 by and among PRAECIS and certain stockholders referred to therein, as amended by Amendment No. 1 dated as of May 14, 1998, Amendment No. 2 dated as of July 21, 1998 and Amendment No. 3 dated as of January 31, 2000 (1)
10.7*		Amendment No. 4 dated as of September 1, 2000 to Amended and Restated Stockholders Agreement dated as of April 30, 1998 by and among PRAECIS and certain stockholders referred to therein, as amended (4)
10.8*		Letter Agreement dated as of May 9, 2002 between PRAECIS and William K. Heiden (9)
10.9*		Promissory Note dated May 16, 2002 executed by William K. Heiden in favor of PRAECIS (9)
10.10*		Letter Agreement dated as of May 9, 2002 between PRAECIS and Malcolm L. Gefter, Ph.D. (9)
10.11*		Letter Agreement dated as of May 9, 2002 between PRAECIS and Kevin F. McLaughlin (9)
10.12*		Letter Agreement dated as of May 9, 2002 between PRAECIS and Marc B. Garnick, M.D. (9)
10.13†		License Agreement effective as of October 17, 1996 by and between PRAECIS and Indiana University Foundation, as amended as of June 3, 1998 (1)
10.14†		Supply Agreement dated as of July 23, 1998 by and between PRAECIS and Salsbury Chemicals, Inc. (1)
10.15†		Development and Supply Agreement effective as of June 21, 2000 by and between UCB S.A. and

 

23

 

		Amgen Inc., as amended by Amendment No. 1 thereto dated as of March 26, 2002 (together with the Assignment of Development and Supply Agreement entered into January 18, 2002 and effective as of December 17, 2001 by and between Amgen Inc. and PRAECIS) (7)
10.16†		Commercial Supply Agreement dated December 4, 2002 and effective as of June 1, 2002 by and between Baxter Pharmaceutical Solutions LLC and PRAECIS (11)
10.17		Termination Agreement dated as of August 19, 2002 by and between PRAECIS and Amgen Inc. (10)
10.18		Contract of Sale dated as of January 14, 2000 by and between Best Property Fund, L.P. and PRAECIS, as amended as of February 7, 2000 (1)
10.19		Acquisition and Construction Loan Agreement dated as of July 11, 2000 between 830 Winter Street LLC and Anglo Irish Bank Corporation plc and related Loan and Security Agreements (3)
10.20		Guaranty of Costs and Completion dated as of July 11, 2000 (3)
10.21		Guaranty of Non-Recourse Exceptions dated as of July 11, 2000 (3)
10.22		Environmental Compliance and Indemnity Agreement dated as of July 11, 2000 executed by 830 Winter Street LLC and PRAECIS (3)
10.23		Lease Agreement dated as of July 11, 2000 between 830 Winter Street LLC, as landlord, and PRAECIS, as tenant (3)
21.1		List of Subsidiaries of PRAECIS (13)
23.1		Consent of Ernst & Young LLP, Independent Auditors
24.1		Power of Attorney (13)
31.1		Certification of Chief Executive Officer
31.2		Certification of Chief Financial Officer
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

*              Represents a management contract or compensatory plan or arrangement.

 

(1)           Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-96351) initially filed with the Securities and Exchange Commission on February 8, 2000 and declared effective on April 26, 2000.

 

(2)           Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 filed with the Securities and Exchange Commission on June 7, 2000.

 

(3)           Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 filed with the Securities and Exchange Commission on August 14, 2000.

 

(4)           Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 filed with the Securities and Exchange Commission on November 13, 2000.

 

(5)           Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-54342) initially filed with the Securities and Exchange Commission on January 26, 2001 and declared effective on February 14, 2001.

 

(6)           Incorporated by reference to Registration Statement on Form 8-A filed with the Securities and Exchange Commission on January 26, 2001.

 

(7)           Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 filed with the Securities and Exchange Commission on May 8, 2002.

 

(8)           Incorporated by reference to Registration Statement on Form S-8 (Registration No. 333-90734) filed with the Securities and Exchange Commission on June 18, 2002.

 

24

 

(9)           Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed with the Securities and Exchange Commission on August 12, 2002.

 

(10)         Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 filed with the Securities and Exchange Commission on November 13, 2002.

 

(11)         Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 19, 2003.

 

(12)         Incorporated by reference to Registration Statement on Form S-8 (Registration No. 333-106012) filed with the Securities and Exchange Commission on June 11, 2003.

 

(13)         Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 15, 2004.

 

†              Confidential treatment has been granted for certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

 

(b)          Reports on Form 8-K.

 

On October 24, 2003, we furnished a Current Report on Form 8-K to furnish under Item 12 (Results of Operations and Financial Condition) a copy of our Press Release dated October 24, 2003.

 

On November 19, 2003, we furnished a Current Report on Form 8-K to furnish under Item 9 (Regulation FD Disclosure) a copy of our Press Release dated November 19, 2003.

 

On November 26, 2003, we furnished a Current Report on Form 8-K to furnish under Item 9 (Regulation FD Disclosure) a copy of our Press Release dated November 26, 2003.

 

On December 10, 2003, we furnished a Current Report on Form 8-K to furnish under Item 9 (Regulation FD Disclosure) a copy of our Press Release dated December 10, 2003.

 

25

 

SIGNATURE

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	PRAECIS PHARMACEUTICALS INCORPORATED
Date  May 7, 2004	By:	/s/ Kevin F. McLaughlin
	Kevin F. McLaughlin
	Chief Financial Officer, Executive Vice President,
	Treasurer and Secretary

 

26

 

PRAECIS PHARMACEUTICALS INCORPORATED

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

 

 

F-1

 

Report of Independent Auditors

 

Board of Directors and Stockholders

PRAECIS PHARMACEUTICALS INCORPORATED

 

We have audited the accompanying consolidated balance sheets of PRAECIS PHARMACEUTICALS INCORPORATED as of December 31, 2002 and 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PRAECIS PHARMACEUTICALS INCORPORATED at December 31, 2002 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

 

		/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 23, 2004

 

F-2

 

PRAECIS PHARMACEUTICALS INCORPORATED

Consolidated Balance Sheets

(In thousands, except share data)

 

		December 31,
		2002			2003
Assets
Current assets:
Cash and cash equivalents		$	40,847		$	15,687
Marketable securities		154,188			127,505
Prepaid expenses and other assets		848			726
Total current assets		195,883			143,918
Property and equipment, net		71,252			67,713
Due from officer		933			833
Other assets		182			14
Total assets		$	268,250		$	212,478
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	3,285		$	2,483
Accrued expenses		7,075			7,707
Current portion of long-term debt		—			747
Total current liabilities		10,360			10,937
Long-term debt		33,000			31,880
Commitments and contingencies
Stockholders’ equity:
Common Stock, $0.01 par value; 200,000,000 shares authorized; 51,801,423 shares in 2002 and 52,011,002 shares in 2003 issued and outstanding		518			520
Additional paid-in capital		354,676			355,373
Accumulated other comprehensive income		203			73
Accumulated deficit		(130,507		)	(186,305		)
Total stockholders’ equity		224,890			169,661
Total liabilities and stockholders’ equity		$	268,250		$	212,478

 

See accompanying notes.

 

F-3

 

PRAECIS PHARMACEUTICALS INCORPORATED

Consolidated Statements of Operations

(In thousands, except per share data)

 

		Year Ended December 31,
		2001			2002			2003
Corporate collaboration revenue		$	9,907		$	1,029		$	—
Costs and expenses:
Research and development		59,416			56,383			41,907
Sales and marketing		8,737			1,837			5,234
General and administrative		6,961			9,676			10,006
Total costs and expenses		75,114			67,896			57,147
Operating loss		(65,207		)	(66,867		)	(57,147		)
Interest income		10,503			6,113			2,508
Interest expense		(1,398		)	(1,341		)	(1,159		)
Gain on assignment of leasehold improvements		1,499			—			—
Gain on termination of collaboration agreement		—			16,020			—
Net loss		$	(54,603	)	$	(46,075	)	$	(55,798	)
Net loss per share:
Basic and diluted		$	(1.10	)	$	(0.89	)	$	(1.08	)
Weighted average number of common shares:
Basic and diluted		49,777			51,678			51,869

 

See accompanying notes.

 

F-4

 

PRAECIS PHARMACEUTICALS INCORPORATED

Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

 

		Common Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Total Stockholders’ Equity
		Shares		Amount
Balance at December 31, 2000		42,284,199		$	423		$	175,937					$	(29,829	)	$	146,531
Net loss													(54,603		)	(54,603		)
Unrealized gain on marketable securities										$	730					730
Total comprehensive loss																(53,873		)
Common Stock issued upon follow-on public offering (net of $10,476 in offering costs)		7,587,500		76			175,816									175,892
Stock compensation							(265		)							(265		)
Repurchase of Common Stock		(200,000	)	(2		)	(51		)							(53		)
Issuance of Common Stock		1,444,436		14			2,450									2,464
Balance at December 31, 2001		51,116,135		511			353,887			730			(84,432		)	270,696
Net loss													(46,075		)	(46,075		)
Unrealized loss on marketable securities										(527		)				(527		)
Total comprehensive loss																(46,602		)
Stock compensation							(185		)							(185		)
Issuance of Common Stock		685,288		7			974									981
Balance at December 31, 2002		51,801,423		518			354,676			203			(130,507		)	224,890
Net loss													(55,798		)	(55,798		)
Unrealized loss on marketable securities										(130		)				(130		)
Total comprehensive loss																(55,928		)
Stock compensation							148									148
Issuance of Common Stock		209,579		2			549									551
Balance at December 31, 2003		52,011,002		$	520		$	355,373		$	73		$	(186,305	)	$	169,661

 

See accompanying notes.

 

F-5

 

PRAECIS PHARMACEUTICALS INCORPORATED

Consolidated Statements of Cash Flows

(In thousands)

 

 

		Year Ended December 31,
		2001			2002			2003
Operating activities:
Net loss		$	(54,603	)	$	(46,075	)	$	(55,798	)
Adjustments to reconcile net loss to cash used in  operating activities:
Depreciation and amortization		3,500			4,704			4,551
Gain on assignment of leasehold improvements		(1,499		)	—			—
Gain on termination of collaboration agreement		—			(16,020		)	—
Stock compensation		(265		)	(185		)	148
Changes in operating assets and liabilities:
Accounts receivable		621			458			—
Refundable income taxes		4,853			—			—
Unbilled revenues		1,493			—			—
Prepaid expenses and other assets		867			221			290
Due from officer		—			(933		)	100
Accounts payable		17,887			(11,416		)	(802		)
Accrued expenses		566			(633		)	632
Deferred revenue		(5,064		)	—			—
Net cash used in operating activities		(31,644		)	(69,879		)	(50,879		)
Investing activities:
Purchase of available-for-sale securities		(177,110		)	(161,286		)	(88,786		)
Sales and maturities of available-for-sale securities		56,309			128,102			115,339
Proceeds from disposition of property and equipment		1,499			—			—
Purchase of property and equipment		(23,879		)	(1,756		)	(1,012		)
Net cash (used in) provided by investing activities		(143,181		)	(34,940		)	25,541
Financing activities:
Follow-on public offering proceeds		175,892			—			—
Proceeds from debt issuance		9,000			—			—
Repayments of debt		—			—			(373		)
Proceeds from the issuance of Common Stock, options and warrants		2,464			981			551
Repurchase of Common Stock		(53		)	—			—
Net cash provided by financing activities		187,303			981			178
Increase (decrease) in cash and cash equivalents		12,478			(103,838		)	(25,160		)
Cash and cash equivalents at beginning of year		132,207			144,685			40,847
Cash and cash equivalents at end of year		$	144,685		$	40,847		$	15,687

 

See accompanying notes.

 

F-6

 

PRAECIS PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements

 

1.             Basis of Presentation

 

The Company

 

PRAECIS PHARMACEUTICALS INCORPORATED (the “Company”) was incorporated in July 1993 under the laws of the State of Delaware. The Company is a drug discovery and development company engaged in the development of drugs for the treatment of human diseases.

 

Use of Estimates

 

The preparation of financial statements in accordance 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 income and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the Company’s accounts and the accounts of its wholly owned subsidiaries, 830 Winter Street LLC and PRAECIS Europe Limited. All significant intercompany account balances and transactions between the companies have been eliminated.

 

2.             Significant Accounting Policies

 

Cash Equivalents

 

Cash equivalents consist principally of money market funds and other investments with original maturities of three months or less at the date of purchase.

 

Marketable Securities

 

The Company invests in marketable securities of highly rated financial institutions and investment-grade debt instruments and limits the amount of credit exposure with any one entity. The Company has classified its marketable securities as “available-for-sale” and, accordingly, carries such securities at aggregate fair value. Unrealized gains and losses, if any, are reported as other comprehensive income in stockholders’ equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses on available-for-sale securities are included in interest income and expense. The cost of securities sold is based on the specific identification method. Interest and dividends are included in interest income. At December 31, 2003, the Company’s cash, cash equivalents and marketable securities had a maximum estimated life of less than three years with an average estimated life of approximately three months.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents and marketable securities. The Company places its cash, cash equivalents and marketable securities with high credit quality financial institutions and, by policy, limits its credit exposure to any one financial instrument, sovereignty or issuer.

 

Derivatives and Hedging

 

In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), and its amendments SFAS No. 137 and No. 138, in June 1999 and June 2000,

 

F-7

 

respectively. SFAS No. 133 requires the Company to recognize all derivatives on the balance sheet at fair value.   Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of the asset as follows:

 

Building		30 years
Building improvements		30 years or the remaining life of the building, whichever is shorter
Laboratory and office equipment		3-7 years or term of lease, whichever is shorter

 

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. No revision to the estimated useful life or recorded amount of property and equipment was required.

 

Interest capitalized in connection with facilities is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. Interest capitalized into construction in progress during 2001 was approximately $0.6 million.

 

Revenue Recognition

 

Revenue is deemed earned when all of the following have occurred: all obligations of the Company relating to the revenue have been met and the earning process is complete; the monies received or receivable are not refundable irrespective of research results; and there are neither future obligations nor future milestones to be met by the Company with respect to such revenue.

 

Corporate collaborations.  Revenues are earned based upon research expenses incurred and milestones achieved. Non-refundable payments upon initiation of contracts are deferred and amortized over the period in which the Company is obligated to participate on a continuing and substantial basis in the research and development activities outlined in each contract. Amounts received in advance of reimbursable expenses are recorded as deferred revenue until the related expenses are incurred. Milestone payments are recognized as revenue in the period in which the parties agree that the milestone has been achieved and it is deemed that no further obligations exist.

 

Income Taxes

 

The Company provides for income taxes under SFAS No. 109, Accounting for Income Taxes. Under this method, deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes based on when and how they are expected to affect the tax return.

 

Research and Development

 

Research and development costs, including those associated with technology, licenses and patents, are expensed as incurred. Research and development costs include primarily costs related to ongoing clinical programs, manufacturing and materials inventory costs, salaries, lab supplies and other fixed facility costs used in the Company’s research and development operations.

 

F-8

 

Stock-Based Compensation

 

The Company has elected to follow Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), in accounting for its stock-based employee compensation plans using the intrinsic value method, rather than the alternative fair value accounting method provided for under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), as SFAS No. 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, when the exercise price of options granted to employees under these plans equals the market price of the underlying stock on the date of grant, no compensation expense is required.

 

The reconciliation of net loss and net loss per share, as reported, to pro forma net loss and net loss per share giving effect to employee stock-based compensation accounted for using the fair value accounting method, is as follows:

 

 

		Year Ended December 31,
		2001			2002			2003
		(in thousands)
Net loss, as reported Building		$	(54,603	)	$	(46,075	)	$	(55,798	)
Deduct/(add): Stock compensation cost as computed under APB No. 25		(265		)	(185		)	148
Deduct: Stock based employee compensation cost, net of related tax effects, that would have been included in the determination of net loss as reported if the fair value method had been applied to all awards		(7,847		)	(10,792		)	(10,136		)
Pro forma net loss		$	(62,715	)	$	(57,052	)	$	(65,786	)
Diluted net loss per share, as reported		$	(1.10	)	$	(0.89	)	$	(1.08	)
Diluted net loss per share, pro forma		$	(1.26	)	$	(1.10	)	$	(1.27	)

 

The fair value of the stock options at the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

		2001		2002		2003
Risk-free interest rate		4.0	%	4.0	%	4.0	%
Expected life (years)		5		6		6
Volatility		84	%	103	%	84	%

 

The Company has never declared or paid any cash dividends on any of its capital stock and does not expect to do so in the foreseeable future.

 

Accounting Pronouncements

 

On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS No. 148”).  SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation.  SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting (“APB No. 28”), to include increased pro-forma disclosure of the effects of stock-based employee compensation on the results of operations.  SFAS No. 148 became effective for fiscal years ending after December 15, 2002.  The Company has elected to continue to account for employee stock-based compensation using the intrinsic value method as described in APB No. 25 and therefore, the adoption of SFAS No. 148 did not have a material impact on the Company’s consolidated results of operations in 2003.

 

F-9

 

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN No. 46”).  FIN No. 46 sets forth the criteria used in determining whether an investment in a variable interest entity (“VIE”), should be consolidated and is based on the general premise that companies that control another entity through interests other than voting interests should consolidate the controlled entity.  The Company does not have any VIE’s.  Accordingly, the implementation of FIN No. 46 will not have any impact on the Company’s consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity  (“SFAS No. 150”). SFAS No. 150 establishes how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, including redeemable convertible preferred stock. This statement is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the interim period commencing July 1, 2003, except for mandatory redeemable financial instruments of nonpublic companies. The FASB has indefinitely deferred implementation of some provisions of SFAS No. 150. The Company believes that the adoption of SFAS No. 150 will not have a material impact on the Company’s consolidated financial statements.

 

Comprehensive Loss

 

Comprehensive loss consists of net loss and unrealized gains or losses on marketable securities and is reflected in the consolidated statements of stockholders’ equity.

 

Net Loss Per Share

 

Basic net loss per share is based on the weighted average number of shares of common stock, par value $.01 per share (“Common Stock”) outstanding. For all years presented, diluted net loss per common share is the same as basic net loss per common share as the inclusion of Common Stock equivalents, including the effect of stock options and warrants, would be antidilutive due to the Company’s net loss position for all periods presented.

 

3.             Marketable Securities

 

In connection with the filing of this Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2003, the Company has reclassified all auction rate debt securities formerly presented as cash and cash equivalents to marketable securities.  The Company’s marketable securities, which are classified as available-for-sale, are as follows (in thousands):

 

		December 31, 2003
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
U.S. government agencies:
Estimated life of one year or less		$	5,126		$	14		$	—		$	5,140
Estimated life of one to three years		10,068			17			—			10,085
U.S. auction rate debt securities:
Estimated life of one to three years		71,843			—			—			71,843
U.S. corporate securities:
Estimated life of one year or less		8,766			—			(9		)	8,757
Estimated life of one to three years		31,629			77			(26		)	31,680
Total marketable securities		$	127,432		$	108		$	(35	)	$	127,505

 

F-10

 

		December 31, 2002
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
U.S. government agencies:
Estimated life of one year or less		$	3,089		$	10		$	—		$	3,099
Estimated life of one to three years		33,999			140			(2		)	34,137
U.S. auction rate debt securities:
Estimated life of one to three years		54,036			—			—			54,036
U.S. corporate securities:
Estimated life of one year or less		31,153			158			(109		)	31,202
Estimated life of one to three years		31,708			54			(48		)	31,714
Total marketable securities		$	153,985		$	362		$	(159	)	$	154,188

 

4.             Due from Officer

 

In May 2002, the Company extended a $1.0 million loan to an officer in connection with the officer’s acceptance of employment with the Company. The loan is full recourse, uncollateralized, bears no interest and becomes due and payable in May of 2012. Under the terms of the promissory note (the “Note”) executed in connection with the loan, 10% of the original loan principal will be forgiven annually on each anniversary date of the Note, provided that the officer remains an employee of the Company. The Company is not responsible for the personal income tax implications related to the forgiveness of this Note. Upon the officer’s voluntary termination of employment with the Company, with certain exceptions, and upon termination by the Company of the officer’s employment for cause, the Note becomes immediately due and payable.

 

5.             Property and Equipment

 

Property and equipment consist of the following:

 

		December 31,
		2002			2003
		(in thousands)
Building		$	56,784		$	57,010
Land		10,500			10,500
Laboratory and office equipment		15,306			16,384
Construction in progress		292			—
		82,882			83,894
Less: accumulated depreciation and amortization		11,630			16,181
		$	71,252		$	67,713

 

6.             Accrued Expenses

 

Accrued expenses consist of the following:

 

		December 31,
		2002			2003
		(in thousands)
Clinical trial costs		$	2,644		$	2,642
Accrued compensation		1,357			1,833
Unvouchered invoices		683			1,054
Other		2,391			2,178
		$	7,075		$	7,707

 

F-11

 

7.             Stockholders’ Equity

 

Public Offerings

 

In February 2001, the Company completed a follow-on public offering of its Common Stock. The Company sold 7,587,500 shares of Common Stock resulting in net proceeds to the Company of approximately $175.9 million.

 

Convertible Preferred Stock

 

Under the Company’s amended and restated certificate of incorporation, the Company is authorized to issue 200,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par value $.01 per share (“Preferred Stock”). The Preferred Stock is issuable in one or more classes or series, each of such classes or series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as may be determined by the Board of Directors. No shares of Preferred Stock have been issued.

 

Rights Plan

 

In January 2001, the Company adopted a Rights Agreement (the “Rights Agreement”), commonly known as a “poison pill.” Under the Rights Agreement, the Company distributed certain rights to acquire shares of the Company’s Series A junior participating preferred stock (the “Rights”) as a dividend for each share of Common Stock held of record as of February 5, 2001. Each share of Common Stock issued after the February 5, 2001 record date has an attached Right. Under certain conditions involving an acquisition by any person or group of 10% or more of the Common Stock, each Right permits the holder (other than the 10% holder) to purchase Common Stock having a value equal to twice the exercise price of the Right, upon payment of the exercise price of the Right. In addition, in the event of certain business combinations after an acquisition by a person or group of 10% or more of the Common Stock, each Right entitles the holder (other than the 10% holder) to receive, upon payment of the exercise price, Common Stock having a value equal to twice the exercise price of the Right. The Rights have no voting privileges and, unless and until they become exercisable, are attached to, and automatically trade with, the Company’s Common Stock. The Rights will terminate upon the earlier of the date of their redemption or ten years from the date of issuance.

 

Employee Stock Purchase Plan

 

Under the Company’s Amended and Restated Employee Stock Purchase Plan (the “ESPP”) eligible employees may purchase shares of Common Stock at a price per share equal to 85% of the lower of the fair market value per share of the Common Stock at the beginning or the end of each six month period during the term of the ESPP.  Participation is limited to the lesser of 10% of the employee’s compensation or $25,000 in any calendar year.  On March 13, 2003, the Board of Directors approved an amendment to the ESPP extending the term of this plan through 2005 and increasing the number of shares authorized for issuance from 160,000 to 400,000, subject to stockholder approval.  In May 2003, the stockholders of the Company approved this amendment.  During 2001, 2002 and 2003, the Company issued 35,532, 53,571 and 55,866 shares of Common Stock, respectively, under the ESPP.

 

Stock Option Plan

 

The Second Amended and Restated 1995 Stock Plan, as amended (the “Plan”), allows for the granting of incentive and nonqualified options and awards to purchase shares of Common Stock.  Incentive options granted to employees under the Plan generally vest at 20% on the first anniversary of the date of grant, with the remaining shares vesting equally over four years following such anniversary date. Nonqualified options issued to consultants under the Plan generally vest over the period of service with the Company.  At December 31, 2003, a total of 14,375,000 shares of Common Stock were approved for issuance under the Plan.

 

F-12

 

Information regarding options under the Plan is summarized below (in thousands, except per share data):

 

		2001					2002					2003
		Shares		Weighted Average Exercise Price			Shares		Weighted Average Exercise Price			Shares		Weighted Average Exercise Price
Options outstanding at January 1,		8,235		$	6.74		6,659		$	8.54		7,061		$	7.82
Granted		1,087		11.75			1,779		3.30			1,596		5.15
Exercised		(1,209	)	1.74			(632	)	1.31			(154	)	2.39
Cancelled		(1,454	)	6.38			(745	)	9.07			(146	)	9.14
Options outstanding at December 31,		6,659		$	8.54		7,061		$	7.82		8,357		$	7.33
Options exercisable at December 31,		3,274		$	4.73		3,330		$	6.70		4,632		$	6.82

 

The weighted average per share fair value of options granted was $10.05 in 2001, $2.75 in 2002, and $3.70 in 2003. At December 31, 2003, there were 10,090,370 shares of Common Stock reserved for the exercise of stock options and for issuances under the ESPP, including 1,487,759 options available for future grant under the Plan.

 

The following table presents weighted average exercise price and weighted average remaining contractual life information about significant option groups outstanding at December 31, 2003 (option amounts in thousands):

 

Exercise Price		Options Outstanding		Weighted- Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price			Options Exercisable		Weighted- Average Exercise Price
$0.13-$1.60		1,150		2.6		$	0.54		968		$	0.59
$1.61-$6.38		4,699		6.9		$	4.41		2,547		$	4.64
$6.39-$16.25		1,562		7.7		$	9.66		672		$	11.40
$16.26-$42.00		947		6.9		$	26.23		445		$	25.94
		8,357							4,632

 

On October 3, 2001, an executive officer of the Company exercised an option to purchase 200,000 shares of Common Stock at an exercise price of $0.27 per share. On November 30, 2001, this option exercise was rescinded, and accordingly, the officer returned to the Company the 200,000 shares of Common Stock acquired upon the exercise of the option, the Company returned to the officer the option exercise price and the option to purchase 200,000 shares of Common Stock was restored. During 2001, the Company recognized approximately $256,000 in compensation expense related to this transaction.

 

8.             Income Taxes

 

The Company has reported no income tax provision or benefit in 2001, 2002 or 2003 due to the significant net operating losses in these years as well as limitations on the recognition of deferred tax assets for financial reporting purposes.

 

F-13

 

A reconciliation of the Company’s income tax provision to the statutory federal provision is as follows:

 

		Year Ended December 31,
		2001			2002			2003
		(in thousands)
Statutory federal income tax benefit		$	(18,565	)	$	(15,614	)	$	(18,971	)
Increase in valuation allowance		18,565			15,570			18,921
Other		—			44			50
Income tax provision		$	—		$	—		$	—

 

Significant components of the Company’s deferred tax assets are as follows:

 

		December 31,
		2002			2003
		(in thousands)
Deferred tax assets:
Net operating losses		$	51,943		$	69,531
Property and equipment		2,651			9,793
Accrued expenses		1,813			1,066
Research and development tax credits		7,640			5,953
Other		74			113
Total deferred tax assets		64,121			86,456
Valuation allowance		(64,121		)	(86,456		)
		$	—		$	—

 

At December 31, 2002 and 2003, the Company has provided a valuation allowance for the value of the deferred tax assets.  The valuation allowance increased by $21.6 million in 2002 and $22.3 million in 2003 due primarily to the increase in net operating losses and tax credit carryforwards. The Company has federal net operating loss carryforwards in the amount of approximately $170.3 million, which expire through 2023. Due to anticipated operating losses in the future, the Company believes that it is more likely than not that it will not realize the net deferred tax assets in the future and has provided an appropriate valuation allowance.

 

Any subsequent recognized tax benefits relating to a reduction in the valuation allowance for deferred tax assets as of December 31, 2003 would be allocated as follows (in thousands):

 

Reported in the statement of operations		$	81,688
Reported in additional paid-in capital		4,768
		$	86,456

 

9.             Corporate Collaborations

 

Sanofi-Synthélabo Agreement

 

In May 1997, the Company entered into a license agreement with Synthélabo S.A., which subsequently merged with Sanofi S.A. forming Sanofi-Synthélabo S.A. (“Sanofi-Synthélabo”), for the development and commercialization of the Company’s Plenaxis products. Upon initiation, the Company received a one-time, non-refundable payment of $4.7 million. This initiation fee was recognized into revenue through 2001, which was the period during which the Company was obligated under the agreement to participate on a continuing and substantial basis in the research, development and manufacturing process development activities.

 

In October 2001, Sanofi-Synthélabo notified the Company that it was terminating the Sanofi-Synthélabo agreement effective December 31, 2001. As a result of the termination of the Sanofi-Synthélabo agreement, all licenses for Plenaxis granted to Sanofi-Synthélabo under the agreement,

 

F-14

 

and all rights of Sanofi-Synthélabo in the Plenaxis program, have terminated.  In addition, in connection with the termination of the Sanofi-Synthélabo agreement, the Company received in 2002 a final reimbursement payment from Sanofi-Synthélabo of approximately $1.0 million for collaboration expenses incurred by the Company.

 

The Company recognized revenues in 2001, 2002 and 2003 of approximately $2.1 million, $1.0 million and zero, respectively, under the Sanofi-Synthélabo agreement.

 

Amgen Agreement

 

In March 1999, the Company entered into a binding agreement in principle (the “License Agreement”) with Amgen Inc. (“Amgen”) for the development and commercialization of the Company’s Plenaxis products. In accordance with the License Agreement, the Company received from Amgen a $10.0 million, one-time, non-refundable payment upon initiation. This initiation fee was recognized into revenue through 2001, which was the period during which the Company was obligated under the License Agreement to participate on a continuing and substantial basis in the research, development and manufacturing process development activities. In addition to the signing payment, Amgen paid the first $175.0 million of all authorized costs and expenses associated with the development and commercialization of Plenaxis products, including the cost of materials, in the United States.  Following Amgen’s completion of this funding during the third quarter of 2000, the Company became responsible for one-half of all subsequent United States research and development costs for Plenaxis products through the launch period. Additionally, the Company was to reimburse Amgen for one-half of the costs associated with establishing a sales and marketing infrastructure for Plenaxis products in the United States.

 

In September 2001, Amgen notified the Company that it was terminating the License Agreement effective December 17, 2001. As a result of the termination of the License Agreement, all licenses for Plenaxis granted to Amgen under the License Agreement, and all rights of Amgen in the Plenaxis program, have terminated.  At that time, the Company accrued an estimate of its potential liability of approximately $29.1 million under the License Agreement.

 

In 2002, the Company assumed all of Amgen’s rights and obligations under the Development and Supply Agreement with UCB S.A. (“UCB”) and finalized a termination agreement with respect to the termination by Amgen of the License Agreement (the “Termination Agreement”).  Under the terms of the Termination Agreement, the Company paid to Amgen $13.0 million in full and complete satisfaction of all amounts payable under the License Agreement and in consideration of the transfer from Amgen to the Company of title to, and possession of, any existing materials inventory.  As a result, the Company recognized a gain of $16.0 million during the third quarter of 2002.

 

The Company recognized revenues in 2001, 2002 and 2003 of approximately $7.8 million, zero and zero, respectively, under the Amgen agreement.

 

10.          Building and Related Mortgage Financing

 

In July 2000, in connection with the purchase of the Company’s corporate headquarters and research facility in Waltham, Massachusetts for approximately $41.3 million, the Company’s wholly owned real estate subsidiary entered into an acquisition and construction loan agreement providing for up to $33.0 million in financing for the acquisition of, and improvements to, the facility. Advances bear interest at a rate equal to the 30-day LIBOR plus 2.0% (3.12% at December 31, 2003).  Principal and interest are payable monthly in arrears.  In July 2003, the Company exercised the first of two one-year extension options, extending the maturity date of the loan until July 30, 2004.  As a result of this extension, in 2003 the Company started making monthly principal payments on the loan of approximately $62,000, in addition to interest payments.  Principal payments are being amortized over a 25-year term.  Principal is due and payable in full on July 30, 2004, subject to a one-year extension option, exercisable at the Company’s option. Since the Company has the ability and intent to exercise the extension option to extend the maturity date until July 30, 2005, the loan has been classified as long-term debt in the accompanying consolidated balance sheet. The loan is secured by the facility, together with all fixtures, equipment, improvements and other related items, and by all rents, income or profits received by the Company’s real estate subsidiary and is unconditionally guaranteed by the Company.  The Company

 

F-15

 

occupied this facility during May 2001 and may sublease a portion of the facility.

 

The Company has entered into an interest rate cap agreement (the “Interest Rate Cap Agreement”) in order to reduce the potential impact of interest rate increases on future income. At December 31, 2003, the notional amount and fair market value under the Interest Rate Cap Agreement were $32.6 million and zero, respectively.  Interest paid under the loan agreement approximated interest expense in 2001, 2002 and 2003.

 

During September 2001, the Company terminated the lease for, and all future obligations with respect to, its Cambridge, Massachusetts facility and recorded a gain.  In October 2001, the Company assigned to a third party the Company’s right, title and interest in and to the Company’s lease for its New Jersey facility and the third party has assumed all obligations thereunder.

 

11.          Commitments

 

Indiana University Foundation (“IUF”) License Agreement

 

The Company has a license agreement with IUF, which was assigned by IUF to IUF’s Advanced Research and Technology Institute, Inc., with respect to rights to Plenaxis and certain related technology. In exchange for the license, the Company agreed to pay (a) fees of $0.3 million, (b) up to an additional $4.3 million upon achievement of specific milestones and (c) a royalty percentage of net sales of licensed products, if any. The Company made milestone payments of $1.0 million in 2003 under the IUF agreement.  As of December 31, 2003, $2.5 million in milestones remained subject to future achievement.

 

Baxter Pharmaceutical Solutions LLC (“Baxter”)

 

On December 4, 2002, the Company signed a five-year commercial supply agreement (the “Baxter Agreement”) with Baxter related to the fill and finish steps of the manufacturing process for Plenaxis.  Under the terms of the Baxter Agreement, the Company is required to purchase a minimum of $375,000 of product from Baxter during 2004.  In January 2005, the first anniversary of the first commercial shipment of Plenaxis, the minimum annual purchase commitment will increase to $650,000.  The Company made payments of approximately $1.8 million in 2003 under the Baxter Agreement.

 

Cambrex Charles City, Inc. (“Cambrex”)

 

In July 1998, the Company entered into a seven-year supply agreement with Cambrex (formerly Salsbury Chemicals, Inc.).  Under this agreement, Cambrex has agreed to manufacture for us the commercial depot formulations of Plenaxis. The Company contributed approximately $6.0 million toward Cambrex’s construction and outfitting of a dedicated manufacturing facility.  The Company retains all rights in manufacturing technology developed in connection with this agreement.  During 2003, the Company paid Cambrex approximately $632,000 toward minimum purchase commitments and facility maintenance and its minimum purchase commitment for 2004 is $792,000.

 

F-16

 

Exhibit Index

 

Exhibit No.		Exhibit
3.1		Amended and Restated Certificate of Incorporation (2)
3.2		Third Amended and Restated By-Laws (11)
4.1		Specimen certificate representing shares of common stock (1)
4.2		Specimen certificate representing shares of common stock (including Rights Agreement Legend) (5)
4.3		Rights Agreement between PRAECIS and American Stock Transfer & Trust Company, as Rights Agent (6)
4.4		Form of Certificate of Designations of Series A Junior Participating Preferred Stock (attached as Exhibit A to the Rights Agreement filed as Exhibit 4.3 hereto) (6)
4.5		Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.3 hereto) (6)
10.1*		Second Amended and Restated 1995 Stock Plan (3)
10.2*		Amendment No. 1 to the Second Amended and Restated 1995 Stock Plan (8)
10.3*		Executive Management Bonus Plan, as amended and restated as of September 12, 2002 (10)
10.4*		Amended and Restated Employee Stock Purchase Plan (12)
10.5*		Management Incentive Program (11)
10.6*		Amended and Restated Stockholders Agreement dated as of April 30, 1998 by and among PRAECIS and certain stockholders referred to therein, as amended by Amendment No. 1 dated as of May 14, 1998, Amendment No. 2 dated as of July 21, 1998 and Amendment No. 3 dated as of January 31, 2000 (1)
10.7*		Amendment No. 4 dated as of September 1, 2000 to Amended and Restated Stockholders Agreement dated as of April 30, 1998 by and among PRAECIS and certain stockholders referred to therein, as amended (4)
10.8*		Letter Agreement dated as of May 9, 2002 between PRAECIS and William K. Heiden (9)
10.9*		Promissory Note dated May 16, 2002 executed by William K. Heiden in favor of PRAECIS (9)
10.10*		Letter Agreement dated as of May 9, 2002 between PRAECIS and Malcolm L. Gefter, Ph.D. (9)
10.11*		Letter Agreement dated as of May 9, 2002 between PRAECIS and Kevin F. McLaughlin (9)
10.12*		Letter Agreement dated as of May 9, 2002 between PRAECIS and Marc B. Garnick, M.D. (9)
10.13†		License Agreement effective as of October 17, 1996 by and between PRAECIS and Indiana University Foundation, as amended as of June 3, 1998 (1)
10.14†		Supply Agreement dated as of July 23, 1998 by and between PRAECIS and Salsbury Chemicals, Inc. (1)
10.15†		Development and Supply Agreement effective as of June 21, 2000 by and between UCB S.A. and Amgen Inc., as amended by Amendment No. 1 thereto dated as of March 26, 2002 (together with the Assignment of Development and Supply Agreement entered into January 18, 2002 and effective as of December 17, 2001 by and between Amgen Inc. and PRAECIS) (7)
10.16†		Commercial Supply Agreement dated December 4, 2002 and effective as of June 1, 2002 by and between Baxter Pharmaceutical Solutions LLC and PRAECIS (11)
10.17		Termination Agreement dated as of August 19, 2002 by and between PRAECIS and Amgen Inc. (10)
10.18		Contract of Sale dated as of January 14, 2000 by and between Best Property Fund, L.P. and PRAECIS, as amended as of February 7, 2000 (1)
10.19		Acquisition and Construction Loan Agreement dated as of July 11, 2000 between 830 Winter Street LLC and Anglo Irish Bank Corporation plc and related Loan and Security Agreements (3)
10.20		Guaranty of Costs and Completion dated as of July 11, 2000 (3)
10.21		Guaranty of Non-Recourse Exceptions dated as of July 11, 2000 (3)
10.22		Environmental Compliance and Indemnity Agreement dated as of July 11, 2000 executed by 830 Winter Street LLC and PRAECIS (3)
10.23		Lease Agreement dated as of July 11, 2000 between 830 Winter Street LLC, as landlord, and PRAECIS, as tenant (3)
21.1		List of Subsidiaries of PRAECIS (13)
23.1		Consent of Ernst & Young LLP, Independent Auditors
24.1		Power of Attorney (13)

 

43

 

31.1		Certification of Chief Executive Officer
31.2		Certification of Chief Financial Officer
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

*              Represents a management contract or compensatory plan or arrangement.

 

(1)           Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-96351) initially filed with the Securities and Exchange Commission on February 8, 2000 and declared effective on April 26, 2000.

 

(2)           Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 filed with the Securities and Exchange Commission on June 7, 2000.

 

(3)           Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 filed with the Securities and Exchange Commission on August 14, 2000.

 

(4)           Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 filed with the Securities and Exchange Commission on November 13, 2000.

 

(5)           Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-54342) initially filed with the Securities and Exchange Commission on January 26, 2001 and declared effective on February 14, 2001.

 

(6)           Incorporated by reference to Registration Statement on Form 8-A filed with the Securities and Exchange Commission on January 26, 2001.

 

(7)           Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 filed with the Securities and Exchange Commission on May 8, 2002.

 

(8)           Incorporated by reference to Registration Statement on Form S-8 (Registration No. 333-90734) filed with the Securities and Exchange Commission on June 18, 2002.

 

(9)           Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed with the Securities and Exchange Commission on August 12, 2002.

 

(10)         Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 filed with the Securities and Exchange Commission on November 13, 2002.

 

(11)         Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 19, 2003.

 

(12)         Incorporated by reference to Registration Statement on Form S-8 (Registration No. 333-106012) filed with the Securities and Exchange Commission on June 11, 2003.

 

(13)         Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 15, 2004.

 

 †             Confidential treatment has been granted for certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

 

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