Item 1. Business.
Overview
We are a fully integrated pharmaceutical company engaged in the research, development and commercialization of products that target the hospital and neurology markets.
We were incorporated in Delaware in July 1993. Our principal executive offices are located at 6611 Tributary Street, Baltimore, MD 21224. Our telephone number is (410) 631-6300, and our website address is http://www.guilfordpharm.com. We make our electronic filings with the Securities and Exchange Commission (SEC), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, available on our website free of charge as soon as practicable after we file or furnish them with the SEC.
Financial information prepared in accordance with accounting principles generally accepted in the United States of America, including information about revenues from customers, measures of profit and loss and total assets, can be found in our consolidated statements included elsewhere in this report.
Products and Product Candidates
The following tables summarize the status of GLIADEL® Wafer, our marketed product, and our other research and development programs:
Marketed Product(1)
Indication/Condition
Status
GLIADEL® Wafer
Recurrent glioblastoma multiforme
Currently approved for sale in the United States and in 25 other countries throughout the world.
Newly diagnosed malignant glioma
Currently approved for sale in the United States and Canada.(2)
Clinical Development
Programs(1)
Indication/Condition
Status
GPI 1485 (our lead neuroimmunophilin ligand)
Parkinson’s disease
Phase II
AQUAVANTM Injection
Conscious sedation
Phase II
Sedation, anesthesia induction and maintenance for patients undergoing coronary artery bypass graft surgery.
Phase II
DOPASCAN® Injection
Imaging agent to diagnose and monitor Parkinson’s disease
Phase III(3)
Pre-clinical and Research
Programs(1)
Indications
Status
GPI 16072 (NAALADase inhibitor compound)
Neuropathic pain and disease modification for diabetic neuropathy and other neuroprotective indications (such as ALS, glaucoma and stroke)
Pre-clinical
Other NAALADase inhibitor compounds
Neuropathic pain and disease modification for diabetic neuropathy and other neuroprotective indications (such as ALS, glaucoma and stroke)
Research
Other, neuroimmunophilin ligands, including Cyclophilin ligands
Cerebral ischemia, heart ischemia, Alzheimer’s disease, traumatic spinal cord injury, multiple sclerosis,vascular degeneration and Huntingdon’s diseases
Research
Other neurotrophic and cytoprotective small molecules
Alzheimer’s disease, traumatic spinal cord injury, multiple sclerosis, neuropathy, stroke and other ischemic damage
Research
(1)
“Marketed” means that a product is currently being sold. “Clinical Development” means that the product is being used in clinical trials. “Pre-clinical” means testing in vitro and in animal models, pharmacology and toxicology testing, product formulation and process development. “Research” means
initial research related to specific molecular targets, synthesis of new chemical entities and assay development for the identification of lead compounds.
(2)
In November 2002, we withdrew an application submitted to the European Agency for the Evaluation of Medicinal Products, or the EMEA, to approve GLIADEL® Wafer for ‘first-line’ therapy in Europe. We plan to resubmit this application to the EMEA during the second half of 2003.
(3)
MAP Medical Technologies Oy, or MAP, our corporate partner in Europe for this technology, has informed us that it submitted an application to receive regulatory approval in Finland for DOPASCAN® Injection in April 2002. It expects the Finnish regulatory authorities to respond to this application by April 2003. Daiichi Radioisotope Laboratories, Ltd., or DRL, our corporate partner in Japan for this technology, has informed us that it completed a Phase III clinical trial with the product in July 2002, and expects to file an application for marketing approval in Japan with the Japanese Health Authority in the first half of 2003.
Marketed Product - GLIADEL® Wafer
General
GLIADEL® Wafer is a proprietary biodegradable polymer product that contains BCNU (carmustine), a cancer chemotherapeutic drug. Up to eight wafers are implanted in the cavity created when a neurosurgeon removes a brain tumor. The wafers gradually erode and deliver BCNU directly to the tumor site for an extended period of time. By inserting the wafer directly at the site of the tumor, the rest of the patient’s body is not exposed to the toxic side effects of BCNU.
In 1996, the U.S. Food and Drug Administration (FDA) approved GLIADEL® Wafer for use as an adjunct to surgery to prolong survival in patients with recurrent glioblastoma multiforme, or GBM, for whom surgery is indicated. Also in 1996, we entered into agreements with Aventis (then Rhône-Poulenc Rorer) granting it marketing rights to GLIADEL® Wafer in the U.S. and clinical development and marketing rights in the rest of the world (excluding Scandinavia, where the product is distributed and marketed by Orion Pharma under an agreement with us entered into in 1995, and later, Japan). Under these agreements, Aventis paid us $7.5 million as a one time, non-refundable rights payment, $26.5 million as non-refundable milestone payments, and purchased $7.5 million of our common stock. Aventis also paid us a combined transfer price and royalty of approximately 35% on its purchases of the product from us during the term of the agreements. Between 1996 and October 2000, Aventis obtained regulatory approval for GLIADEL® Wafer for the recurrent indication in over 21 countries, including France, Germany, the United Kingdom, Spain, Canada, South Korea and Israel.
In October 2000, we reacquired Aventis’ marketing rights to GLIADEL® Wafer for 300,000 shares of our common stock then valued at approximately $8 million. Aventis continued to market GLIADEL® Wafer for a transition period ending December 31, 2000, after which, we have been solely responsible for the marketing, sale and distribution of GLIADEL® Wafer except in Scandinavia, where the product continues to be sold by Orion Pharma. Since the reacquisition of Aventis’ rights in GLIADEL® Wafer, we have built a commercial operations function, consisting of approximately 10 internal marketing and sales management, reimbursement and managed care specialists, medical affairs, professional services and customer service personnel, and an approximately 28-person field sales force.
In April 2001, we submitted a supplemental New Drug Application, or sNDA, for GLIADEL® Wafer, seeking to expand the label for the product to include use in initial surgery for malignant glioma. In March 2002, the FDA sent us a not approvable letter indicating concerns regarding the survival benefit associated with GLIADEL® Wafer treatment during initial surgery. In response to the FDA’s letter, we proposed that we obtain an additional one to two years of follow-up data on patients enrolled in the GLIADEL® Wafer Phase III clinical trial on which the sNDA was based, under the assumption that the additional data might address the FDA’s concerns. We agreed with the FDA on the protocol and methods for collecting and analyzing this additional long-term follow up data. On September 19, 2002, we presented the results of this analysis to FDA. After completing an informal review of these data, the FDA advised us that the submission of an amendment to the Company’s sNDA containing the long-term follow up data would receive a formal FDA review and
reconsideration of the requested new labeling for the product. On February 25, 2003, the FDA approved our amended sNDA.
We pay a royalty to Massachusetts Institute of Technology, or MIT, on sales of GLIADEL® Wafer pursuant to the license agreement under which the Company acquired the underlying technology for the product. During 2002, we recognized approximately $0.6 million in royalty expense to MIT.
Manufacturing and Raw Materials
We currently manufacture GLIADEL® Wafer using a proprietary process at our 18,000 square foot manufacturing facility in Baltimore, Maryland, which includes areas designated for packaging, quality assurance, laboratory and warehousing. The manufacturing facility has been in operation since April 1995. It was initially inspected by the FDA in October 1995, and was re-inspected by the FDA in February 1999 and in September 2002. Also, in October 1999, we were inspected by the Medicines Control Agency, the United Kingdom’s regulatory authority. The facilities we are currently using for manufacturing enable us to produce up to 8,000 GLIADEL® Wafer treatments (each consisting of eight wafers) annually.
In January 1998, we expanded our manufacturing facilities to allow for the additional synthesis of the polyanhydride co-polymer used in the manufacture of GLIADEL® Wafer. Also in 1998, we completed construction of a second clean room facility, which we expect would allow us to increase our GLIADEL® Wafer manufacturing capacity to 20,000 treatments annually.
We believe that the various materials used in GLIADEL® Wafer are readily available and will continue to be available at reasonable prices. Nevertheless, while we believe that we have an adequate supply of BCNU, the active chemotherapeutic ingredient in GLIADEL® Wafer, to meet current demand, any interruption in the ability of our two current suppliers to deliver this ingredient could prevent us from delivering the product on a timely basis. Failure of any supplier to provide sufficient quantities of raw material for GLIADEL® Wafer in accordance with the FDA’s current Good Manufacturing Practice, or cGMP, regulations could cause delays in our ability to sell the product.
Marketing, Sales and Distribution
Prior to 2000, our strategy had been to establish collaborations with larger pharmaceutical companies where possible, to develop and promote products that require extensive development, sales and marketing resources. However, in connection with our reacquisition of commercialization rights to GLIADEL® Wafer, during the fourth quarter of 2000 and the first quarter of 2001, we established our commercial operations capabilities in the United States, including marketing, sales management, medical affairs, reimbursement and other relevant functions to support a 28-member field sales force. When we established our sales force, it was initially on a contract basis through Cardinal Health Sales and Marketing Services, a division of Cardinal Health Inc., or Cardinal. During October 2002, we brought our sales force in-house, and now members of our sales force are directly employed by us. In order to assist in the distribution of GLIADEL® Wafer, we engaged Cord Logistics Inc., in November 2000, to handle fulfillment of customer orders.
Also in 2001, we established a Canadian subsidiary that is responsible for all aspects of the sales and marketing of GLIADEL® Wafer in Canada, including receiving pricing and reimbursement approvals from the Canadian National Healthcare System. GLIADEL® Wafer will be supplied to our Canadian customers through a third-party logistical distributor. In Europe, we have an agreement with IDIS Limited, based in the U.K., for the distribution of GLIADEL® Wafer to our network of European distributors and on a named hospital basis in countries where we have not engaged a third-party distributor. To date, we have entered into agreements for the marketing, sale and distribution of GLIADEL® Wafer in Italy, Portugal, Spain, the United Kingdom, Greece, South Africa, Australia, Israel, Hong Kong and the People’s Republic of China, as well as in other international markets.
The establishment of commercial operations provides us with the opportunity and flexibility to market and sell other products we are developing, or products that we may in-license or otherwise acquire.
In 2002, 2001 and 2000, sales of GLIADEL® Wafer generated revenues of $14.5, $20.4 and $1.5, respectively, which represented 99%, 99%, and 8%, of our total revenues, respectively.
Clinical Development Programs
GPI
Our neuroimmunophilin ligand program, originated from observations first made in the laboratory of Dr. Solomon Snyder, Director of the Department of Neuroscience at Johns Hopkins and one of our directors and founders, that certain proteins that exist within a cell, known as “immunophilins,” are enriched 10-40 fold in certain areas of the central nervous system. The Johns Hopkins scientists went on to discover that commonly used immunosuppressive drugs can promote nerve growth. We have exclusively licensed rights to patent applications relating to this research from Johns Hopkins. Our scientists, together with their academic collaborators, further demonstrated that the pathway leading to nerve regeneration could be separated from the immunosuppressant pathway. As a result of this basic research, Guilford scientists discovered GPI 1485 and many other proprietary small molecules, called neuroimmunophilin ligands, which are neurotrophic, i.e., regenerate nerves, in animal models of various disease states without being immunosuppressive, are orally-bioavailable and are able to cross the blood-brain barrier.
In August 1997, we entered into a collaboration with Amgen Inc. to develop and commercialize a broad class of neuroimmunophilin ligands, referred to as FKBP neuroimmunophilin ligands, as well as any other compounds that may have resulted from the collaboration, for all human therapeutic and diagnostic applications. During 1998, Amgen nominated GPI 1485, which it called “NIL-A,” as the lead compound in the program, initially targeting Parkinson’s disease. During 1999, Amgen filed an Investigational New Drug, or IND, application with the FDA and commenced human trials with NIL-A, focusing on safety, tolerability and pharmacokinetic study in healthy subjects. NIL-A entered Phase II testing in patients with Parkinson’s disease during 2000. In July 2001, we announced results of this six-month Phase II, randomized, double blind, placebo-controlled evaluation of the safety, pharmacokinetics and efficacy of NIL-A in patients with mild to moderate Parkinson’s disease. The results of the evaluation suggest that NIL-A at doses of up to 1,000 mg taken orally four times a day for six months is well tolerated, but does not produce a significant reversal of the motor symptoms of Parkinson’s disease.
In September 2001, Amgen terminated the collaboration and, thereafter, returned all rights to the neuroimmunophilin technology to us, including certain clinical trial supplies for which we paid $0.2 million.
We have since renamed NIL-A as GPI 1485 and in November 2002, initiated a Phase II clinical trial of GPI 1485, for the treatment of Parkinson’s disease. This Phase II trial will provide an assessment of the long-term (two-year) treatment effect of GPI 1485 in patients with mild to moderate Parkinson’s disease. We have designed this trial to follow-up on the initial findings from the Phase II study completed [by Amgen] of NIL-A. In particular, the current Phase II trial will look more thoroughly at the ability of GPI 1485 to reduce the requirement for conventional symptomatic therapy for Parkinson’s disease, as well as further assess the imaging results that indicate GPI 1485 may reduce the rate of progression of this disabling disease. The Phase II clinical trial is a multicenter, randomized, double-blind, placebo-controlled evaluation of the safety, pharmacokinetics and efficacy of GPI 1485 in patients with mild to moderate Parkinson’s disease. A total of 200 patients will be enrolled and randomly assigned to receive either placebo or GPI 1485 orally four times a day. We expect the study to be completed in 2005.
We have more than 60 U.S. patents protecting our Neuroimmunophilin ligand technology.
AQUAVAN™ Injection
In the first quarter of 2000, we licensed from ProQuest Pharmaceuticals Inc., or ProQuest, rights relating to a novel prodrug of a widely-used anesthetic, propofol. A prodrug is a compound that is converted in the body into an active drug. The prodrug, which we have named AQUAVAN™ Injection, is water-soluble and converts to propofol upon intravenous administration. In contrast, propofol, which has been approved for use by the FDA, is itself administered in a lipid emulsion, which can cause complications. AQUAVAN™
Injection may offer clinical benefit to patients in a number of settings, including as an ICU sedating agent, an anesthesia-induction drug and for conscious sedation in outpatient procedures, such as colonoscopy.
Since we licensed AQUAVAN™ Injection from ProQuest, we have conducted four Phase I clinical studies in Europe in healthy volunteers and one Phase I clinical study in the United States. In July 2002, we announced the commencement of a Phase II clinical trial of AQUAVAN™ Injection in patients undergoing coronary artery surgery. This study, taking place in Europe, is the first use of AQUAVAN™ Injection in surgical patients. The purpose of the study was to evaluate the safety, tolerability and efficacy of AQUAVAN™ Injection, compared to DIPRIVAN® Injectable Emulsion (i.e., the branded formulation of propofol), for use in pre-operative sedation, anesthesia induction and maintenance, and post-operative ICU sedation in patients undergoing coronary artery bypass surgery.
In February 2003, we announced the commencement of a Phase II clinical trial of AQUAVAN™ Injection in the United States in patients undergoing conscious sedation during elective colonoscopy. The first part of the Phase II trial is a dose ranging pilot study to determine the optimal sedative dose of AQUAVAN™ Injection for use in achieving conscious sedation in patients. Once identified, the second phase of the trial will investigate and compare the effects of AQUAVAN™ Injection to Midazolam HCI in patients undergoing colonoscopy.
We have exclusive rights in the U.S. to a composition of matter patent covering AQUAVAN™ Injection.
DOPASCAN® Injection
DOPASCAN® Injection was invented by scientists at the Research Triangle Institute, or RTI, in Research Triangle Park, North Carolina. In 1994, we obtained exclusive rights to patents covering DOPASCAN® Injection from RTI.
DOPASCAN® Injection is our product candidate for the diagnosis and monitoring of Parkinson’s disease. It is administered intravenously in trace quantities and allows physicians to obtain images and measure the degeneration of dopamine neurons in the brain. Dopamine neurons are highly concentrated in a specialized area of the brain. They degenerate in patients with Parkinson’s disease. Parkinson’s disease affects more than 900,000 patients in the United States.
In its early stages, Parkinson’s disease can be very difficult to distinguish clinically from other diseases with similar symptoms but which do not respond well or at all to specific therapy for Parkinson’s disease. There are no diagnostic tests in the United States currently marketed or commercially available that can reliably detect the degeneration of dopamine neurons, and the typical delay between the onset of symptoms of Parkinson’s disease and clinical diagnosis is more than two years. The primary way to establish the diagnosis at present is through repeated physician visits and the use of therapeutic trials of drugs such as L-Dopa, which carry with them the risk of unnecessary and sometimes severe side effects.
Following intravenous injections with DOPASCAN® Injection, images of a subject’s brain are obtained with a SPECT camera and may identify the loss of dopamine neurons in the brain. To date, over 2,000 patients have been imaged in the United States and Europe using DOPASCAN® Injection. In a multi-center Phase IIb clinical trial conducted by the Parkinson’s Study Group in the United States and completed in 1997, DOPASCAN® Injection accurately differentiated patients clinically diagnosed with a Parkinsonian disorder (i.e., Parkinson’s disease and progressive supranuclear palsy) from subjects without a Parkinsonian disorder (e.g., essential tremor and healthy controls) with a high sensitivity (98%) and specificity (97%). In addition, no serious adverse events were attributed to DOPASCAN® Injection in this study.
There can be no assurance, however, that similar results will be seen in any other clinical trials for DOPASCAN® Injection that may be conducted in the future or that the FDA will approve DOPASCAN® Injection as a safe and effective diagnostic.
We have entered into an agreement with DRL, a leading Japanese radiopharmaceutical company, to develop and commercialize DOPASCAN® Injection in Japan, Korea and Taiwan. DRL has informed us that
it completed a Phase III clinical trial with the product in July 2002, and expects to file an application for marketing approval in Japan with the Japanese Health Authority in the first half of 2003.
In January 2002, we announced that we sublicensed European rights for the development and commercialization of DOPASCAN® Injection to MAP, a division of Schering AG located in Finland. Under the terms of the agreement, MAP and its affiliated companies received exclusive development, marketing, sales and distribution rights to DOPASCAN® Injection for all European Union member states and other select European markets. Under the agreement, MAP will be responsible for seeking regulatory approvals, and for manufacturing, marketing and selling DOPASCAN® Injection in these countries. MAP has informed us that it submitted an application to receive regulatory approval in Finland for DOPASCAN® Injection in April 2002. It expects the Finnish regulatory authorities to respond to this application by April 2003.
In May 2002, we sublicensed DOPASCAN® Injection to Molecular Neuroimaging LLC, or MNI, a privately held company based in New Haven, Connecticut that specializes in the use of brain imaging technologies for, among other purposes, the analysis of clinical trials of pharmaceutical product candidates targeting neurodegenerative diseases. Under the terms of our agreement with MNI, except under limited circumstances, MNI pays us a royalty for each administration of DOPASCAN® Injection. During the term of our agreement, MNI has also agreed to provide us with favorable pricing for its services (including the administration of DOPASCAN® Injection) for any clinical trials for our product candidates. Presently, we have engaged MNI to provide its services for our clinical trial of GPI 1485 for Parkinson’s disease. MNI’s sublicense to DOPASCAN® Injection terminates upon the FDA’s approval of the product candidate for marketing and sale in the United States.
Pre-Clinical and Research Programs
GPI 16072 and Other NAALADase Inhibitor Compounds
NAALADase, or N-Acetylated-Alpha-Linked-Acid-Dipeptidase, is a membrane-bound enzyme found principally in the central and peripheral nervous system. NAALADase is believed to play a role in modulating the release of glutamate in the nervous system. Glutamate is one of the brain’s most common chemical messengers. Under normal conditions, glutamate is released into a microscopic space - called the synapse - that exists between neurons in the brain. There, it stimulates post-synaptic glutamate receptors, an action that is critical to such functions as learning, memory and motor control. However, during conditions of acute injury or chronic disease, there may be a large increase in glutamate release that incites a cascade of biochemical events, ultimately leading to cell injury and death.
Our NAALADase inhibitor program is aimed at developing a commercial drug to block excessive glutamate release. Our initial target is diabetic neuropathy, a debilitating and progressive disorder involving increased pain sensitivity, tingling, weakness and numbness in a patient’s extremities. It is believed to affect about one million people in the United States, yet there are no approved drugs to treat this disabling condition.
We are additionally evaluating the use of NAALADase inhibitors as potential protective therapies for a range of chronic neurodegenerative disorders. We have created several unique classes of NAALADase inhibitors as a way to diversify our research and maximize potential therapeutic applications in peripheral neuropathy, chronic pain, schizophrenia, Lou Gehrig’s Disease (ALS), epilepsy, head and spinal cord trauma, stroke, Alzheimer’s and Parkinson’s disease.
In several animal models of diabetic neuropathy and neuropathic pain, our NAALADase inhibitors appear to normalize pain sensitivity, increase nerve conduction velocity and prevent nerve degeneration. Initially, we selected GPI 5693 as a lead NAALADase inhibitor compound and commenced Phase I clinical studies with this compound in early 2001 for the treatment of neuropathic pain and the underlying disease process associated with diabetic peripheral neuropathy. This Phase I Study, conducted in Europe, evaluated the safety, tolerability and pharmacokinetics of the compound in healthy subjects and suggested that it may be well tolerated at dose levels up to 750mg per day. During 2001 and 2002, our scientists identified GPI 16072 and other second-generation NAALADase inhibitor compounds, which appear to be up to 100 times more potent than GPI 5693 in pre-clinical studies. The increased potency of GPI 16072 may permit a lower dose of
the compound to provide the same or greater therapeutic effect than higher dosages of less potent compounds, thereby reducing the potential for side effects. We have completed extensive pre-clinical work with GPI 16072 and have determined that it could be advanced into clinical trials with the assistance of a future corporate partner for this program.
We have 35 U.S. patents and corresponding foreign counterparts protecting our NAALADase technology.
Other Neuroimmunophilin ligands and other neurotrophic and cytoprotective small molecules
Our scientists have also developed potent, novel, orally-active small molecule ligands of cyclophilin that may be neuroprotective and neuroregenerative. These compounds have shown neuroprotection and neurite outgrowth in animal models of neurodegeneration. These activities may be mediated by the actions of cyclophilin ligands on maintaining mitochondrial viability and function. Cyclophilin ligands might be useful in the treatment of cerebral ischemia, heart ischemia, Huntington’s Disease, age-related macular degeneration, traumatic brain injury, spinal cord injury and peripheral neuropathy.
Reorganization
On July 30, 2002, we announced a reorganization of our research and development programs, which included a workforce reduction of 58 employees, most of whom worked in the areas of research and development. In connection with this reorganization, we suspended further development of our polyphosphoester biopolymer drug delivery program, or PPE Program, and our PARP inhibitor research program. The PPE Program included our PACLIMER® Microspheres and LIDOCAINE-PE Microspheres (formerly known as LIDOMER Microspheres) development programs. PACLIMER® Microspheres is a product candidate for investigating controlled, site-specific administration and release of paclitaxel (brand name TAXOL®) for ovarian cancer and non-small cell lung cancer. LIDOCAINE-PE Microspheres is a product candidate for controlled, site-specific administration and release of LIDOCAINE, a commonly used analgesic, for post-operative pain. Our PARP inhibitor research program investigated the inhibition of the PARP enzyme for the prevention of cell necrosis in connection with the occurrence of conditions such as stroke and heart attack.
In order to further develop the programs that were affected by this reorganization, we are pursuing corporate partnerships and other similar licensing transactions.
Government Regulation and Product Testing
All domestic prescription pharmaceutical manufacturers are subject to extensive regulation by the federal government, principally the FDA and, to a lesser extent, by state and local governments as well as foreign governments if products are marketed abroad. Biologics and controlled drug products, such as vaccines and narcotics, and radiolabeled drugs, are often regulated more stringently than are other drugs. The Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations govern or influence the development, testing, manufacture, labeling, storage, approval, advertising, promotion, sale and distribution of prescription pharmaceutical products. Pharmaceutical manufacturers are also subject to certain inspection, registration, recordkeeping and reporting requirements. Noncompliance with applicable requirements can result in warning letters, fines, recall or seizure of products, total or partial suspension of production and/or distribution, refusal of the government to enter into supply contracts or to approve marketing applications and criminal prosecution.
Upon FDA approval, a drug may only be marketed in the United States for the approved indications in the approved dosage forms and at the approved dosage levels. The FDA also may require post-approval testing and surveillance to monitor a drug in larger and more diverse patient populations. Manufacturers of approved drug products are subject to ongoing compliance with FDA regulations. For example, the FDA mandates that drugs be manufactured in conformity with the FDA’s applicable cGMP regulations. In complying with the cGMP regulations, manufacturers must continue to spend time, money and effort in production, recordkeeping and quality control to ensure that the product meets applicable specifications and other requirements. The FDA periodically inspects drug manufacturing facilities to ensure compliance with its cGMP regulations. Adverse experiences with the commercialized product must be reported to the FDA. The FDA also may require the submission of any lot of the product for inspection and may restrict the release of any lot that does not comply with FDA regulations, or may otherwise order the suspension of manufacture, voluntary recall or seizure. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.
Full Clinical Testing Requirements
The steps required before a drug may be commercially distributed in the United States include: (i) conducting appropriate pre-clinical laboratory and animal tests; (ii) submitting to the FDA an application for an IND, which must become effective before clinical trials may commence; (iii) conducting well-controlled human clinical trials that establish the safety and efficacy of the drug product; (iv) filing with the FDA a New Drug Application (NDA) for non-biological drugs; and (v) obtaining FDA approval of the NDA prior to any commercial sale or shipment of the non-biological drug. NDA’s also must include a description of the manufacturing processes, including quality control procedures and validation requirements.
With respect to a drug product with an active ingredient not previously approved by the FDA, the manufacturer must usually submit a full NDA, including complete reports of pre-clinical, clinical and laboratory studies, to prove that the product is safe and effective. A full NDA may also need to be submitted for a drug product with a previously approved active ingredient if studies are required to demonstrate safety and efficacy, such as when the drug will be used to treat an indication for which the drug was not previously approved, or where the dose or method of drug delivery is changed. In addition, the manufacturer of an approved drug may be required to submit for the FDA’s review and approval a supplemental NDA, including reports of appropriate clinical testing, prior to marketing the drug with additional indications or making other significant changes to the product or its manufacture. A manufacturer intending to conduct clinical trials ordinarily will be required first to submit an IND to the FDA containing information relating to previously conducted pre-clinical studies.
Pre-clinical testing includes formulation development, laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product formulation. Pre-clinical tests to support an FDA application must be conducted in accordance with the FDA regulations concerning Good Laboratory Practices (GLPs). The results of the pre-clinical tests are submitted to the FDA as part of the IND and are reviewed by the FDA prior to authorizing the sponsor to conduct clinical trials in human subjects. Unless the FDA issues a clinical hold on an IND, the IND becomes effective 30 days following its receipt by the FDA. There is no certainty that submission of an IND will result in the commencement of clinical trials or that the commencement of one phase of a clinical trial will result in commencement of other phases or that the performance of any clinical trials will result in FDA approval.
Clinical trials for new drugs typically are conducted in three phases, are subject to detailed protocols and must be conducted in accordance with the FDA’s regulations concerning good clinical practices (GCPs). Clinical trials involve the administration of the investigational drug product to human subjects. Each protocol indicating how the clinical trial will be conducted in the United States must be submitted for review to the FDA as part of the IND. The FDA’s review of a study protocol does not necessarily mean that, if the study is successful, it will constitute proof of efficacy or safety. Further, each clinical study must be conducted under the auspices of an independent institutional review board (IRB) established pursuant to FDA regulations. The IRB considers, among other factors, ethical concerns and informed consent requirements. The FDA or the IRB may require changes in a protocol both prior to and after the commencement of a trial. There is no
assurance that the IRB or the FDA will permit a study to go forward or, once started, to be completed. Clinical trials may be placed on hold at any time for a variety of reasons, particularly if safety concerns arise, or regulatory requirements are not met.
The three phases of clinical trials are generally conducted sequentially, but they may overlap. In Phase I, the initial introduction of the drug into humans, the drug is tested for safety, side effects, dosage tolerance, metabolism and clinical pharmacology. Phase II involves controlled tests in a larger but still limited patient population to determine the efficacy of the drug for specific indications, to determine optimal dosage and to identify possible side effects and safety risks. Phase II testing for an indication typically takes at least from one and one-half to two and one-half years to complete. If preliminary evidence suggesting effectiveness has been obtained during Phase II evaluations, expanded Phase III trials are undertaken to gather additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. Phase III studies for a specific indication generally take from two and one-half to five years to complete. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specified time period, if at all, with respect to any of our product candidates.
Reports of results of the pre-clinical studies and clinical trials for non-biological drugs are submitted to the FDA in the form of an NDA for approval of marketing and commercial shipment. The NDA typically includes information pertaining to the preparation of drug substances, analytical methods, drug product formulation, and details on the manufacture of finished product as well as proposed product packaging and labeling. Submission of an NDA does not assure FDA approval for marketing. Approval of a non-biological drug is dependent on a variety of factors, particularly on evidence consisting of adequate and well-controlled investigations. FDA will often use advisory committees to help decide whether a new product or new uses should be approved. Committee recommendations are purely advisory, and the FDA does not have to follow them, but frequently does.
User fee legislation now requires the submission in federal fiscal year 2003 of $313,320, to cover the costs of FDA review of a full NDA. Annual fees are also required for certain approved prescription drugs and for their manufacturers. The current user fee legislation expires at the end of September 2007. The failure to reauthorize PDUFA could have a serious impact on the review times and approval rates for all drugs, including Guilford’s candidate drugs.
The median FDA approval time is currently about 15 months for new drugs subject to user fee legislation, although clinical development, reviews, or approvals of treatments for cancer and other serious or life-threatening diseases may be accelerated, expedited or fast-tracked. In addition, approval times can vary widely among the various reviewing branches of the FDA. The approval process may take substantially longer if, among other things, the FDA has questions or concerns about the safety and/or efficacy of a product. In general, the FDA requires at least two properly conducted, adequate and well-controlled clinical studies demonstrating safety and efficacy with sufficient levels of statistical assurance. In certain limited cases the FDA may consider one clinical study sufficient. The FDA also may request long-term toxicity studies or other studies relating to product safety or efficacy. For example, the FDA may require additional clinical tests following NDA approval to confirm product safety and efficacy (Phase IV clinical tests) or require other conditions for approval. Notwithstanding the submission of such data, the FDA ultimately may decide that the application does not satisfy its regulatory criteria for approval.
Confirmatory studies similar to Phase III clinical studies may be conducted after, rather than before, FDA approval under certain circumstances. The FDA may determine under its expedited, accelerated, or fast-track provisions that previous limited studies establish an adequate basis for drug product approval, provided that the sponsor agrees to conduct additional studies after approval to verify safety and effectiveness. Treatment of patients not in clinical trials with an experimental drug may also be allowed under a Treatment IND before general marketing begins. Charging for an investigational drug also may be allowed under a Treatment IND to recover certain costs of development if various requirements are met. These cost-recovery, Treatment IND, and expedited, accelerated or fast-track approval provisions are limited, for example, to drug products (i) intended to treat AIDS or other serious severely debilitating or life-threatening diseases,
especially and that provide meaningful therapeutic benefit to patients over existing treatments, (ii) that are for diseases for which no satisfactory alternative therapy exists, or (iii) that address an unmet medical need. No assurances exist that our product candidates will qualify for cost-recovery, expedited, accelerated, or fast-track approvals or for treatment use under the FDA’s regulations or the current statutory provisions.
The full NDA process for newly marketed non-biological drugs, such as those being developed by us, including neuroimmunophilin ligand products and inhibitors of NAALADase, can take a number of years and involves the expenditure of substantial resources. There can be no assurance that any approval will be granted on a timely basis, or at all, or that we will have sufficient resources to carry such potential products through the regulatory approval process.
Abbreviated Testing Requirements
The Drug Price Competition and Patent Term Restoration Act of 1984 (“DPC-PTR Act”) established abbreviated procedures for obtaining FDA approval for many non-biological drugs which are off-patent and whose marketing exclusivity has expired. Applicability of the DPC-PTR Act means that a full NDA is not required for approval of a competitive product. Abbreviated requirements are applicable to drugs which are, for example, either bioequivalent to brand-name drugs, or otherwise similar to brand-name drugs, such that all the safety and efficacy studies previously done on the innovator product need not be repeated for approval. Changes in approved drug products, such as in the delivery system, dosage form, or strength, can be the subject of abbreviated application requirements. There can be no assurance that abbreviated applications will be available or suitable for our non-biological drug products.
A five-year period of market exclusivity is provided for newly marketed active ingredients of drug products not previously approved and a three-year period of market exclusivity is provided for certain changes in approved drug products for which reports of new clinical investigations are essential for approval (other than bioequivalence studies). A period of three years is available for changes in approved products, such as in delivery systems of previously approved products. These periods of marketing exclusivity mean that products that are the subject of abbreviated applications, which generally rely to some degree on approvals or on some data submitted by previous applicants for comparable innovator drug products, cannot be marketed during the period of exclusivity. The market exclusivity provisions of the DPC-PTR Act bar only the marketing of competitive products that are the subject of abbreviated applications, not products that are the subject of full NDAs. The DPC-PTR Act also may provide a maximum time of five years to be restored to the life of any one patent for the period it takes to obtain FDA approval of a drug product, including biological drugs. No assurances exist that the exclusivity or patent restoration benefits of the DPC-PTR Act will apply to any of our product candidates.
Other Regulation
Products marketed outside the United States, which are manufactured in the United States are subject to certain FDA export regulations, as well as regulation by the country in which the products are to be sold. U.S. law can prohibit the export of unapproved drugs to certain countries abroad. We also would be subject to foreign regulatory requirements governing clinical trials and pharmaceutical sales, if products are marketed abroad. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must usually be obtained prior to the commencement of marketing of the product in those countries. The approval process varies from country to country and the time required may be longer or shorter than that required for FDA approval.
In addition to the requirements for product approval, before a pharmaceutical product may be marketed and sold in certain foreign countries the proposed pricing for the product must be approved as well. Products may be subject to price controls and/or limits on reimbursement. The requirements governing product pricing and reimbursement vary widely from country to country and can be implemented disparately at the national level. The European Union generally provides options for its fifteen Member States to restrict the range of medicinal products for which their national health insurance systems provide reimbursement. Member States in the European Union can opt to have a “positive” or a “negative” list. A positive list is a listing of all
medicinal products covered under the national health insurance system, whereas a negative list designates which medicinal products are excluded from coverage. In the European Union, the United Kingdom and Spain use a negative list approach, while France uses a positive list approach. In Canada, each province decides on reimbursement measures.
The European Union also generally provides options for its Member States to control the prices of medicinal products for human use. A Member State may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. For example, the regulation of prices of pharmaceuticals in the United Kingdom (U.K.) is generally designed to provide controls on the overall profits that pharmaceutical companies may derive from their sales to the U.K. National Health Service. The U.K. system is generally based on profitability targets or limits for individual companies which are normally assessed as a return on capital employed by the company in servicing the National Health Service market, comparing capital employed and profits.
In comparison, Italy generally establishes prices for pharmaceuticals based on a price monitoring system. The reference price is the European average price calculated on the basis of the prices in four reference markets: France, Spain, Germany and the U.K. Italy typically establishes the price of medicines belonging to the same therapeutic class on the lowest price for a medicine belonging to that category (i.e., same active principle, same pharmaceutical form, same route of administration). Spain generally establishes the selling price for new pharmaceuticals based on the prime cost, plus a profit margin within a range established each year by the Spanish Commission for Economic Affairs. Promotional and advertising costs are limited.
In Canada, prices for most new drugs are generally limited such that the cost of therapy for the new drug is in the range of the cost of therapy for existing drugs used to treat the same disease in Canada. Prices of breakthrough drugs and those which bring a substantial improvement are generally limited to the median of the prices charged for those drugs in other industrialized countries, such as France, Germany, Italy, Sweden, Switzerland, the U.K. and the United States.
There can be no assurance that any country which has price controls or reimbursement limitations for pharmaceuticals will allow favorable reimbursement and pricing arrangements for GLIADEL® Wafer, or if approved, our product candidates.
We are also governed by other federal, state and local laws. These laws include, but are not limited to, those regulating working conditions enforced by the Occupational Safety and Health Administration and regulating environmental hazards under such statutes as the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other environmental laws enforced by the United States Environmental Protection Agency (“USEPA”). The Drug Enforcement Agency (DEA) regulates controlled substances, such as narcotics. A precursor compound to DOPASCAN® Injection is a tropane-derivative similar to cocaine and thus is subject to DEA regulations. Establishments handling controlled substances must, for example, be registered and inspected by the DEA, and may be subject to export, import, security and production quota requirements. Radiolabeled products, including drugs, are also subject to regulation by the Department of Transportation and to state and federal licensing requirements. Various states often have comparable health and environmental laws, such as those governing the use and disposal of controlled and radiolabeled products.
Intellectual Property Rights
As of December 31, 2002, we owned or had licensed rights to more than 130 U.S. patents and more than 100 foreign patents. In addition, we owned or had licensed more than 750 pending applications worldwide. We also own registered trademarks to DOPASCAN®, PACLIMER®, and GLIADEL® and have an allowed trademark application to AQUAVAN™ in the United States.
The value of our intellectual property rights is subject to various uncertainties and contingencies. The scope of intellectual property protection afforded to pharmaceutical and biotechnological inventions is uncertain, and our product candidates are subject to this uncertainty. We cannot be certain that any of our patent applications will be granted, that additional products or processes we develop will be patentable, or that
any of our patents will provide us with any competitive advantages. In addition, any existing or future patents or intellectual property owned by us may be challenged, invalidated or circumvented by others.
Further, other companies have been issued patents and have filed patent applications relating to our key technologies. While we do not believe that we are infringing any valid patents of which we are aware, we cannot be certain that our products or product candidates will not infringe or be dominated by patents that have issued or may issue to third parties.
We control the disclosure and use of our proprietary information through confidentiality agreements with employees, consultants and other third parties. However, our confidentiality agreements may not be honored, disclosure of our proprietary information may occur, and disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality obligations.
We support and collaborate in research conducted by other companies, universities and governmental research organizations. We may not be able to acquire exclusive rights to the intellectual property derived from such collaborations and disputes may arise as to rights in derivative or related research programs that we conduct. To the extent that consultants or other research collaborators use third parties’ intellectual property in their work with us, disputes may also arise as to the rights to resulting intellectual property. In addition, in the event we breach any of our collaborative research contracts, such a breach may cause us to lose certain licensed intellectual property rights.
If we are required to defend against charges of infringement of intellectual property rights of third parties or assert our own intellectual property rights against third parties, we may incur substantial costs and could be enjoined from commercializing certain products. We may also be required to pay monetary damages. To avoid or settle litigation, we may seek licenses from third parties or attempt to redesign our products or processes to avoid infringement. However, we may not be successful in obtaining licenses or successfully redesigning our products or processes.
We could also be required to participate in U.S. interference proceedings or international patent oppositions. In fact, in order to protect our intellectual property position with respect to our neuroimmunophilin ligands, we filed a European opposition in 1998 to revoke another company’s European patent. In 2000, we won this opposition, and the subject patent was revoked. However, the patentee has appealed the initial determination, and the patent could be reinstated. If the patent is reinstated, litigation could ultimately result.
Technology Licensing Agreements
In March 1994, we entered into an agreement (the “GLIADEL® Wafer Agreement”) with Scios Inc. pursuant to which we licensed from Scios exclusive worldwide rights to numerous U.S. patents and patent applications and corresponding international patents and patent applications for polyanhydride biodegradable polymer technology for use in the field of tumors of the central nervous system and cerebral edema. GLIADEL® Wafer is covered under this license by two U.S. patents and certain related international patents and patent applications. The patent rights in the U.S. will expire in 2006. In April 1994, Scios assigned all of its rights and obligations under the GLIADEL® Wafer Agreement to MIT.
Under the GLIADEL® Wafer Agreement, we are obligated to pay a royalty on all net sales of products incorporating the technology covered by the Agreement, as well as a percentage of all royalties received by us from sublicensees and certain advance and minimum annual royalty payments. We have exclusive worldwide rights to the technology for brain cancer therapeutics, subject to certain conditions, including a requirement to perform appropriate preclinical tests and file an IND with the FDA within 24 months of the identification of a drug-polymer product having greater efficacy than GLIADEL® Wafer. In addition, we are obligated to meet certain development milestones. Although we believe that we can comply with such obligations, our failure to perform these obligations could result in losing our rights to new polymer-based products.
In June 1996, we entered into a license agreement with MIT and Johns Hopkins regarding a patent application covering biodegradable polymers for use in connection with the controlled local delivery of certain chemotherapeutic agents (including paclitaxel (TAXOL®) and camptothecin). Under this agreement, we are
obligated to make certain annual and milestone payments to MIT and to pay royalties based on any sales of products incorporating the technology licensed to us. Furthermore, under the terms of the agreement, we have committed to spend minimum amounts to develop the technology and to meet certain development milestones, including filing a New Drug Application for this technology by June 25, 2006. Our failure to perform these obligations could result in losing our rights to such technology. In addition, the underlying patents are subject to march-in rights of the U.S. government.
In July 1996, we entered into a license agreement with Johns Hopkins that currently covers several U.S. patents respecting certain PPEs developed at Johns Hopkins and patent applications for additional PPEs. This agreement, among other things, requires us to pay certain processing, maintenance and/or up-front fees, milestone payments and royalties, a portion of proceeds from sublicenses, and fees and costs related to patent prosecution and maintenance and to spend minimum yearly amounts for, and meet deadlines regarding development of this technology, including filing a New Drug Application for this technology by July 18, 2006. If we fail to meet these requirements, the agreement could be terminated. In the event of termination of these licenses, we would lose our rights to the use of the licensed technology. In addition, the underlying patents are subject to march-in rights of the U.S. government.
We have entered into exclusive license agreements with Johns Hopkins, to patents covering the neurotrophic use of neuroimmunophilin ligands. We have also entered into exclusive license agreements with Johns Hopkins regarding the rights to the inhibition of PARP and other technologies for neuroprotective uses. These agreements require us to pay, among other things, certain processing, maintenance, and/or up-front fees, milestone payments and royalties, a portion of proceeds from sublicenses, and fees and costs related to patent prosecution and maintenance and to spend minimum amounts for, and meet deadlines regarding, development of the technologies. In the event of termination of these licenses, we would lose our rights to use the licensed technology.
We obtained exclusive worldwide rights to DOPASCAN® Injection pursuant to a March 1994 license agreement (the RTI Agreement) with Research Triangle Institute (RTI), which grants us rights to various U.S. and international patents and patent applications relating to binding ligands for certain receptors in the brain which are or may be useful as dopamine neuron imaging agents. DOPASCAN® Injection and certain related precursors and analogues are covered by U.S. patents, which expire in 2009, as well as certain related international patents and patent applications.
Under the RTI Agreement, we reimbursed RTI for certain past patent-related expenses and agreed to make annual payments to RTI to support mutually agreed-upon research that was conducted at RTI through March 1999. In addition, we are obligated to pay RTI a royalty on gross revenues we receive from products derived from the licensed technology and from sublicensee proceeds and to make certain minimum royalty payments following the first commercial sale of such products. We must use commercially reasonable efforts to develop products related to the licensed technology and to meet certain performance milestones. Our failure to perform our obligations under the RTI Agreement in the future could result in termination of the license, and loss of our right to use this technology.
In March 2000, we entered into a license agreement with ProQuest Pharmaceuticals Inc., or ProQuest, which granted us exclusive worldwide development and commercialization rights to a prodrug of propofol, which we later named AQUAVAN™ Injection. Under the terms of the license agreement, we made an upfront payment to ProQuest in exchange for an equity position in the company and we are required to make additional payments to ProQuest based on the achievement of certain development milestones. We are also required to pay ProQuest royalties on AQUAVAN™ Injection sales.
United States Government Rights
Aspects of the technology licensed by us under agreements with third party licensors may be subject to certain government rights. Government rights in inventions conceived or reduced to practice under a government-funded program (“subject inventions”) may include a non-exclusive, royalty-free worldwide license to practice or have practiced such inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant licenses which shall be exclusive under any of such inventions
to a third party if they determine that: (i) adequate steps have not been taken to commercialize such inventions; (ii) such action is necessary to meet public health or safety needs; or (iii) such action is necessary to meet requirements for public use under federal regulations. The U.S. government also has the right to take title to a subject invention if there is a failure to disclose the invention and elect title within specified time limits. In addition, the U.S. government may acquire title in any country in which a patent application is not filed within specified time limits. Federal law requires any licensor of an invention that was partially funded by the federal government to obtain a covenant from any exclusive licensee to manufacture products using the invention substantially in the United States. Further, the government rights include the right to use and disclose, without limitation, technical data relating to licensed technology that was developed in whole or in part at government expense. Some of our principal technology license agreements contain provisions recognizing these government rights.
Competition
We are involved in technological fields in which developments are expected to continue at a rapid pace. Our success depends upon our ability to compete effectively in the research, development and commercialization of products and technologies in our areas of focus. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutes is intense and expected to increase. Many of these competitors have substantially greater research and development capabilities and experience and greater manufacturing, marketing, financial and managerial resources than we do and represent significant competition for us. Acquisitions of competing companies by large pharmaceutical or other companies could enhance the financial, marketing and other resources available to these competitors. These competitors may develop products which are superior to those that we have under development.
We are aware of several competing approaches for the treatment of malignant glioma, including using radioactive seeds for interstitial radiotherapy, increasing the permeability of the blood-brain barrier to chemotherapeutic agents, sensitizing cancer cells to chemotherapeutic agents using gene therapy and developing chemotherapeutics directed to specific receptors in brain tumors. Furthermore, our patent protection for GLIADEL® Wafer ends in 2006. At that time, others may try to copy the wafer and enter the market as a generic drug through applicable FDA procedures.
A number of companies have shown interest in trying to develop neurotrophic agents to promote nerve growth and repair in neurodegenerative disorders and traumatic central nervous system injuries. Most of these activities have focused on naturally occurring growth factors. These factors contain large molecules that generally cannot cross the blood-brain barrier and thus present problems in administration and delivery. We are aware of several companies that are investigating small molecule neurotrophic compounds for peripheral neuropathy in the clinic.
There is intense competition to develop an effective and safe neuroprotective drug or biological agent. Calcium channel antagonists, calpain inhibitors, adenosine receptor antagonists, free radical scavengers, superoxide dismutase inducers, proteoloytic enzyme inhibitors, phospholipase inhibitors and a variety of other agents are under active development by others. Glutamate or NMDA receptor antagonists are under development by several other companies.
The anesthesia/sedation field is concentrated in the United States mainly among four major companies, with several other companies doing research in the field. There are numerous products currently on the market that are accepted as relatively safe and effective anesthetic agents and sedation agents. In addition, we are aware of several companies that are seeking to develop water soluble formulations of propofol. We cannot be sure that we can successfully develop AQUAVAN™ Injection into a safe and effective drug or that it will be cleared for marketing. Even if we are able to market AQUAVAN™ Injection, the commercial prospects for it will depend heavily on its safety and efficacy profile relative to alternatives then available in the market.
Although our PACLIMER® Microspheres and Lidocaine-PE Microspheres are based on a proprietary polymer system, this technology could compete with other developing and existing drug delivery technologies. We are aware of several other companies that are seeking to develop sustained release injectable products for
pain, including post-surgical pain. Additionally, other companies are engaged in the development of improved formulations of paclitaxel.
We believe that at least two other companies are clinically evaluating imaging agents for dopamine neurons. In addition, a variety of radiolabeled compounds for use with Positron Emission Tomography (PET) scanners have been used to image dopamine neurons successfully in patients with Parkinson’s disease. PET scanning is currently only available in a limited number of hospitals in the United States and Europe.
Any product candidate that we develop and for which we gain regulatory approval, including GLIADEL® Wafer, must then compete for market acceptance and market share. For certain of our product candidates, an important factor will be the timing of market introduction of competitive products. Accordingly, the relative speed with which we and competing companies can develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market is expected to be an important determinant of market success. Other competitive factors include the capabilities of our collaborators, product efficacy and safety, timing and scope of regulatory approval, product availability, marketing and sales capabilities, reimbursement coverage, the amount of clinical benefit of our product candidates relative to their cost, method of administration, price and patent protection. Our competitors may develop more effective or more affordable products or achieve earlier product development completion, patent protection, regulatory approval or product commercialization than us. The achievement of any of these goals by our competitors could have a material adverse effect on our business, financial condition and results of operations.
Research and Development Expenses
Our research and development expenses were $46.1 million, $54.3 million and $46.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. These expenses were divided between our research and development platforms in the following manner:
Pharmaceutical Technologies
Our pharmaceutical technology research and development expenses decreased in 2002, compared to 2001, primarily due to a decrease in expenses in our NAALADase inhibitor program resulting from the completion of our Phase I clinical trials of GPI 5693 (a lead NAALADase inhibitor compound). The decrease in spending on our NAALADase inhibitors was partially offset by an increase in spending on our neuroimmunophilin ligand technology and our AQUAVAN™ Injection program. For 2003, we expect research and development expenses for our pharmaceutical technologies to be incurred primarily in connection with further clinical development of AQUAVAN™ Injection, the preparation for, and initiation of, one or more Phase II clinical trials of GPI 1485, our lead neuroimmunophilin ligand compound and additional NAALADase inhibitor program research.
Research and development expenses related to our pharmaceutical and related technologies increased in 2001 compared to 2000. This increase is the result of advancing AQUAVAN™ Injection and GPI 5693 into clinical trials and was offset by a reduction in expenses associated with our neuroimmunophilin program, as Amgen Inc., our former corporate partner, completed its research funding to us.
Biopolymer Technologies
Our biopolymer technology research and development expenses decreased in 2002, compared to 2001, due to a decrease in expenses incurred in connection with the clinical development of both PACLIMER®
Microspheres and Lidocaine-PE (formerly LIDOMERTM Microspheres). The decrease in clinical development expenses resulted from the completion of our clinical trials for PACLIMER® Microspheres (ovarian cancer) and Lidocaine-PE (post-operative pain) during the first quarter of 2002. In connection with our corporate restructuring in the third quarter of 2002, we terminated the clinical trial for PACLIMER® Microspheres (lung cancer). We, therefore, expect research and development expenses related to our biopolymer technology to further decrease during the remainder of 2003, compared to 2002. Currently, we do not plan to conduct additional research or clinical testing of our biopolymer technologies. Instead, we plan to pursue a corporate partnership, divestiture or similar strategic transaction to further develop these technologies.
With respect to our biopolymer technologies, the modest decrease in 2001 compared to 2000 reflects less development expenses incurred related to PACLIMER® Microspheres offset by an increase in expenses related to Lidocaine-PE as it advanced into the clinical trial.
Indirect Expenses
Our indirect research and development expenses decreased for the year ended 2002 compared to 2001, in part due to decreased overhead and a reduction in force in the second half of 2002. The increase from the year ended 2000 to 2001 was caused by increased costs to operate our facilities as well as increased general research and development management activity. These expenses include the costs of operating and maintaining our facilities, property and equipment, to the extent used in connection with the research and development of our technologies, as well as the costs of our general management of research and development projects.
Product Liability and Insurance
Product liability risk is inherent in the testing, manufacture, marketing and sale of GLIADEL® Wafer and our product candidates, and there can be no assurance that we will be able to avoid significant product liability exposure. While we currently maintain product liability insurance covering clinical trials and product sales, there can be no assurance that this or any future insurance coverage obtained by us will be adequate or that claims will be covered by our insurance. Our insurance policies provide coverage on a claims-made basis and are subject to annual renewal. Product liability insurance varies in cost, can be difficult to obtain and may not be available to us in the future on acceptable terms, or at all.
Employees
At December 31, 2002, we employed 235 individuals. Of these 235 employees, 134 were employed in the areas of research and product development and in the manufacturing and quality control of GLIADEL® Wafer. The remaining 101 employees performed selling, general and administrative functions, including sales and marketing, executive, finance and administration, legal and business development. None of our employees are currently represented by a labor union. To date, we have not experienced work stoppages related to labor issues and we believe our relations with our employees are good.
Hiring and retaining qualified personnel are important factors for our future success. There can be no assurance that we will be able to continue to hire qualified personnel and, if hired, that we will be able to retain these individuals.
Item 1A.
Item 1A. Executive Officers and Other Significant Employees of Registrant
Craig R. Smith, M.D., Chairman of the Board of Directors, President and Chief Executive Officer, age 57, joined the Company as a Director when the Company was founded in July 1993. Dr. Smith was elected President and Chief Executive Officer in August 1993 and Chairman of the Board in January 1994. Prior to joining the Company, Dr. Smith was Senior Vice President for Business and Market Development at Centocor, Inc., a biotechnology company. Before joining Centocor, Dr. Smith served on the Faculty of the Department of Medicine at Johns Hopkins Medical School. Dr. Smith received his M.D. from the State University of New York at Buffalo in 1972 and received training in Internal Medicine at Johns Hopkins Hospital from 1972 to 1975.
Andrew R. Jordan, Executive Vice President, Finance and Administration, Chief Financial Officer and Treasurer, age 55, joined the Company as Vice President, Secretary, Treasurer and Chief Financial Officer in September 1993. In January 1997, he became Senior Vice President, Finance and Administration, Chief Financial Officer and Treasurer and in February 2003, he was promoted to Executive Vice President. Prior to joining the Company, Mr. Jordan held various positions with KPMG LLP, a public accounting firm, including partner since 1983. Mr. Jordan’s experience at KPMG LLP included advising early-stage and emerging technology companies and initial and secondary public equity and debt offerings. He received his B.A. from Rutgers College in 1969 and his MBA from Rutgers Graduate School of Business in 1973 and is a Certified Public Accountant.
John P. Brennan, Senior Vice President, Technical Operations, age 60, joined the Company as Vice President, Operations in January 1994 and became Senior Vice President, Technical Operations in January 1997. From 1980 to 1993, he was Vice President, Technical Operations and Manufacturing for G.D. Searle and Co., where he was responsible for the operation of manufacturing plants in North America, Latin America and Europe and the worldwide pharmaceutical and process technology. Mr. Brennan received his B.S. in Chemistry from the Philadelphia College of Pharmacy and Science in 1968 and attended the Wharton Graduate Management Program in 1976.
Thomas C. Seoh, Senior Vice President, Corporate and Commercial Development and Strategic Planning, age 45, joined the Company in April 1995, as Vice President, General Counsel and Secretary. In August 1999, he was promoted to Senior Vice President. In February 2001, he became Senior Vice President, Corporate Development, General Counsel and Secretary and in February 2002 he became Senior Vice President, Corporate and Commercial Development and Strategic Planning. Mr. Seoh previously held legal management positions with ICN Pharmaceuticals, Inc., including Vice President and Associate General Counsel, and with Consolidated Press U.S., Inc., and was associated with the New York and London offices of Lord Day & Lord, Barrett Smith. Mr. Seoh received his J.D. and A.B. from Harvard University.
Nancy J. Linck, Ph.D., J.D., Senior Vice President and General Counsel, age 61, joined the Company as Vice President, Intellectual Property in November 1998. In February 2001, Dr. Linck was promoted to Senior Vice President, Intellectual Property and Deputy General Counsel. Dr. Linck became Senior Vice President, General Counsel and Secretary in February 2002. From 1994 to 1998, Dr. Linck was Solicitor for the U.S. Patent and Trademark Office, where she acted as general counsel for the Commissioner of Patents and Trademarks. From 1987 to 1994, Dr. Linck worked as a patent and trademark litigator at the intellectual property law firm of Cushman, Darby & Cushman, first as an associate from 1987 to 1990, and later as a partner from 1991 to 1994. Since 1995, Dr. Linck has served as an Adjunct Professor of Law, first at George Washington University School of Law and presently at Georgetown University Law Center. Dr. Linck received her B.S. in Chemistry from the University of California, Berkeley, her M.S. and Ph.D. in Inorganic Chemistry from the University of California, San Diego, and her J.D. from Western New England College School of Law.
William C. Vincek, Ph.D., Senior Vice President, Pharmaceutical and Chemical Development, age 55, joined the Company as Vice President, Corporate Quality in August 1997. In August 1999, he became Vice President, Pharmaceutical & Chemical Development. In February 2002, Dr. Vincek was promoted to Senior Vice President, Pharmaceutical and Chemical Development. From November 1993 until Dr. Vincek joined the Company, he was Group Director, CMC & Pre-clinical Regulatory Affairs and Global Research and Development GMP Quality Assurance at Glaxo Wellcome, Inc. Prior to that time, Dr. Vincek held various positions at SmithKline Beecham Pharmaceuticals and related entities. Dr. Vincek received his Ph.D. and M.S. in Medicinal Chemistry from the University of Kansas. Dr. Vincek received a B.S. in Chemistry from Colorado State University.
Margaret M. Contessa, Senior Vice President, Human Resources, age 54, joined Guilford as Vice President, Human Resources in November 2000. In February 2002, Ms. Contessa was promoted to Senior Vice President, Human Resources. Prior to joining Guilford, from March 1998 to January 1999, Ms. Contessa was Vice President, Human Resources of Witco Corporation, a manufacturer of specialty chemicals located in Greenwich, Connecticut. From 1986 through 1998, she was employed by Engelhard Corporation as Director,
Human Resources, and prior to that held various human resources positions with Schering Plough and BASF. Ms. Contessa received her B.S. in Management Science at Fairleigh Dickinson University in 1977 and received training at Harvard and Columbia University.
Barbara S. Slusher, Ph.D., Senior Vice President, Research, Animals, & Toxicology, age 38, joined Guilford in January 1995 as Principal Scientist and Group Leader in Research and Development. Dr. Slusher was promoted to Senior Vice President, Research, Animals & Toxicology in August 2002 after being named Vice President, Biology in February 2000. From April 1992 until Dr. Slusher joined Guilford, she was Senior Research Pharmacologist for Zeneca Pharmaceuticals Inc. Dr. Slusher received her Ph.D. in Pharmacology and Molecular Sciences from the Johns Hopkins School of Medicine in 1991 and her Master’s degree in Management from the Johns Hopkins School of Continuing Studies in 1991. Dr. Slusher received her B.S. degree in Chemistry from Dickinson College in 1986.
Denise D. Battles, Vice President, Corporate Quality, age 47, joined Guilford in August 1994 as Director of Quality Assurance and became Senior Director of Product Compliance in August 1997. Ms. Battles was promoted to Vice President of Corporate Quality in August 1999. Prior to joining the Company, Ms. Battles was employed by Pharmaceutical Systems, Incorporated as the Director of Quality Assurance and held various positions with Quality Control and Quality Assurance at Baxter Healthcare Corporation. Ms. Battles received her B.S. in Biology from Fisk University in 1977 and received training at the Lake Forest Graduate School of Management.
Valerie D. Riddle, M.D., Vice President, Clinical Affairs, age 42, joined Guilford in January 2001, as Vice President, Medical Affairs. In August 2002, she was promoted to Vice President, Clinical Affairs. Prior to joining Guilford, Dr. Riddle was Senior Director, Medical Sciences at MedImmune, Inc. since 1998. From 1990 to 1998, Dr. Riddle held various positions with the Washington Hospital Center, most recently as Director, HIV/ AIDS Service, Section of Infectious Diseases. Dr. Riddle received her M.D. and B.A. in Chemistry from the University of South Florida in 1989 and 1984, respectively.
Francesca M. Cook, Vice President, Policy and Reimbursement Services, age 38, joined Guilford in March 2001. Prior to joining the Company, Ms. Cook held various positions since 1996 with Covance Health Economics and Outcomes Services, most recently as Vice President. Before joining Covance Health Economics and Outcomes Services, Ms. Cook was a Legislative Assistant for the Office of Senator Carol Moseley-Braun, United States Senate in Washington, D.C. Ms. Cook received her Master of Public Health degree in 1988 from Yale University School of Medicine, Department of Epidemiology and Public Health. She received her Bachelor of Arts degree in Biology in 1986 from Mount Holyoke College.
Jean-Marie Vallet, Vice President, Business Development, age 47, joined Guilford in May 2002. From 2000 to 2001, Dr. Vallet was Corporate Vice President and President Human Healthcare for Valigen, a functional genomics company. From 1996 to 2000, he held several positions with Bristol-Myers Squibb, including, Vice President, Business Development for the European region. Dr. Vallet holds a Master’s Degree in Biochemistry and Genetics from the University of Paris XI. He received his Ph.D. in Molecular Biology from the University of Geneva and an MBA from IMD in Lausanne, Switzerland.
Michael Kelly, Vice President, Sales and Marketing, age 38, joined the Company in December 2002. Prior to joining the Company he held various positions with Viropharma Incorporated, most recently as Vice President of Sales from January 2001 through December 2002, and before that as Vice President of Marketing from January 2000 through December 2000. In 1997, Mr. Kelly joined Viropharma as Executive Director of Marketing. From 1991 until 1997, Mr. Kelly held various positions at TAP Pharmaceuticals, a pharmaceutical company, the latest being Manager of Hospital Account Executives within the Mid-Atlantic Region. Mr. Kelly received his B.S. in Marketing from the Trenton State College and his M.B.A. from Rider College.
Asher M. Rubin, Vice President, Deputy General Counsel and Secretary, age 32, joined the Company in October 2000, as Senior Corporate Counsel and Assistant Secretary. He was promoted to Associate General Counsel and Assistant Secretary in August 2001, to Deputy General Counsel and Assistant Secretary in February 2002, and to Vice President, Deputy General Counsel and Secretary in February 2003. Prior to joining the Company, Mr. Rubin was an associate with the law firm of Miles & Stockbridge P.C., in
Baltimore, Maryland from February 1997 through October 2000. Mr. Rubin received his A.B. in Policy Sciences and Public Affairs from Duke University in 1992 and his J.D. from the University of Maryland School of Law in 1995.
Item 2.
Item 2. Properties
In August 1994, we entered into a lease for an approximately 83,000 square foot building in Baltimore, Maryland that currently serves as our headquarters, which we expanded in 1998 to approximately 90,000 square feet. We currently occupy 23,000 square feet for office space, 18,000 square feet for manufacturing space for GLIADEL® Wafer, and 49,000 square feet of research and development laboratories. The initial term of the lease expires in June 2005. Thereafter, we may exercise two five-year renewal options, or we may exercise a purchase option any time after the ninth year of the lease for the then-current fair market value.
In February 1998, we entered into an operating lease with a trust affiliated with First Union National Bank for the construction and occupancy of a new laboratory and office facility, consisting of approximately 77,000 square feet. We took possession of this facility in June 1999. The lease expires in February 2005, at which time we have an option (i) to purchase the property or (ii) to sell the property on behalf of the trust (subject to certain limitations and related obligations). In addition, we may, with the consent of First Union, enter into a new lease arrangement for the facility.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for a more complete description of the Company’s arrangements with First Union. In addition, see Leases footnote 11 in the Notes to the Consolidated Financial Statements.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company’s security holders during the last quarter of its fiscal year ended December 31, 2002.
Item 4A. Risk Factors
An investment in our stock is very speculative and involves a high degree of risk. You should carefully consider the following important factors, as well as the other information in this report and our other SEC filings, before purchasing our stock.
We have a history of losses and our future profitability is uncertain.
We may not be able to achieve or sustain significant revenues or earn a profit in the future. Since we were founded in July 1993, with the sole exception of 1996, we have not earned a profit in any year. Our losses result mainly from the significant amount of money that we have spent on research, development and clinical trial activities. As of December 31, 2002, we had an accumulated deficit of approximately $249.6 million. We expect to have significant additional losses over the next several years due to expenses associated with our product candidates related to research, development and clinical trial activities, applying for and obtaining meaningful patent protection and establishing freedom to commercialize and applying for and receiving regulatory approval for our drug product candidates.
Our product candidates are in research or various stages of pre-clinical and clinical development. Except for GLIADEL® Wafer, none of our products or product candidates may be sold to the public. Nearly all of our past revenues have come from:
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payments from Aventis and Amgen under now terminated agreements with each of them, supporting the research, development and commercialization of our product candidates;
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royalty payments from Aventis’ sale and distribution of GLIADEL® Wafer; and
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our sale and distribution of GLIADEL® Wafer.
Presently, we receive significant revenue only from the sale of GLIADEL® Wafer and we do not expect that revenue to be sufficient to support all our anticipated future activities. We do not expect to generate revenue from the sale of our product candidates for the next several years, if ever, because of the significant risks associated with pharmaceutical product development.
Many factors will dictate our ability to achieve sustained profitability in the future, including:
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the successful development of and our ability to successfully market, sell and distribute our products, including GLIADEL® Wafer;
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the successful development of our product candidates either on our own, or together with future corporate partners with whom we enter into collaborative or license agreements; and
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the ability to in-license or acquire additional products in our targeted markets.
We depend on a single product, GLIADEL® Wafer, for revenues.
Our short-term prospects depend heavily on sales of GLIADEL® Wafer, our only commercial product. We commercially launched GLIADEL® Wafer in the United States in February 1997. We do not know whether the product will ever gain broad market acceptance. If GLIADEL® Wafer fails to gain broad market acceptance, the revenues we receive from sales of GLIADEL® Wafer would be unlikely to increase.
Until February 25, 2003, we only had approval from the FDA to market GLIADEL® Wafer in the United States for only a limited subset of patients who suffer from brain cancer. Our approval is for those patients who have a brain tumor surgically removed and have “recurrent” forms of a type of brain cancer called glioblastoma multiforme, or GBM. A “recurrent” GBM is one in which the cancer has returned after initial surgery to remove a brain tumor. The number of patients undergoing recurrent surgery for GBM is very limited, and we believe the total number of patients on an annual basis who have GBM in the United States is approximately 3,000 to 4,000.
On February 25, 2003, we received FDA approval to market GLIADEL® Wafer for patients undergoing initial surgery for malignant glioma in conjunction with surgery and radiation. The number of patients undergoing initial surgery is estimated to be 8,000 per year.
In addition, in January 2002 we submitted applications for approval to market GLIADEL® Wafer in Europe for patients undergoing initial surgery for malignant glioma. In November 2002, we withdrew those applications and plan to resubmit them now that the FDA has approved our amended sNDA. Presently, GLIADEL® Wafer is approved for recurrent GBM market in only 21 countries, including France, Spain, Germany and the U.K. GLIADEL® Wafer is currently approved for first-line therapy only in the United States and Canada. If we are not able to obtain additional approvals, the market for GLIADEL® Wafer would remain limited, which reduces the likelihood of increasing the revenues that we receive from sales of GLIADEL® Wafer. Regardless of the number of foreign regulatory approvals that we have received, international sales to date comprise a small percentage of worldwide sales of GLIADEL® Wafer.
GLIADEL® Wafer is a very fragile product and can easily break into many pieces if it is not handled with great care. Product recalls or returns due to excessive breakage of the GLIADEL® Wafers or for other reasons could also have a negative effect on our business, financial condition and results of operations.
We have limited sales experience and we expect to incur significant expense in marketing, selling and distributing GLIADEL® Wafer.
When we began selling GLIADEL® Wafer ourselves in January 2001, it was the first time that we had undertaken direct sales and marketing activities. We, therefore, have limited experience in engaging in sales and marketing efforts. This limited experience may limit our success. Additionally, our sales and marketing efforts may use resources and require attention from management that would otherwise be provided to our drug development programs.
Our operating results are likely to fluctuate from quarter to quarter, which could cause the price of our common stock to fluctuate.
Our revenues and expenses have fluctuated significantly in the past. This fluctuation has in turn caused our operating results to vary significantly from quarter to quarter and year to year. We expect the fluctuations in our revenues and expenses to continue and thus our operating results should also continue to vary significantly. These fluctuations may be due to a variety of factors, including:
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the timing and amount of sales of GLIADEL® Wafer;
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the timing and realization of milestone and other payments from future corporate partners;
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the timing and amount of expenses relating to our research and development, product development, and manufacturing activities; and
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the extent and timing of costs related to our activities to obtain patents on our inventions and to extend, enforce and/or defend our patent and other rights to our intellectual property.
Because of these fluctuations, it is possible that our operating results for a particular quarter or quarters will not meet the expectations of public market analysts and investors, causing the market price of our common stock to fluctuate.
The market price of our stock may be negatively affected by market volatility.
The market price of our stock has been and is likely to continue to be highly volatile. Furthermore, the stock market generally and the market for stocks of companies with lower market capitalizations and small biopharmaceutical companies, like us, have from time to time experienced and likely will again experience significant price and volume fluctuations that are unrelated to the operating performance of a particular company.
From time to time, stock market professionals publish research reports covering our business and our future prospects. For a number of reasons, we may be unable to meet the expectations of these professionals and our stock price may decline. These expectations may include:
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announcements by us or our competitors of clinical results, technological innovations, product sales, new products or product candidates;
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developments or disputes concerning patent or proprietary rights;
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regulatory developments affecting our products;
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period-to-period fluctuations in the results of our operations;
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market conditions for emerging growth companies and biopharmaceutical companies;
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revenues received from GLIADEL® Wafer; and
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our expenditures.
In the past, following periods of volatility in the market price of the securities of companies in our industry, securities class action litigation has often been instituted against those companies. If we face such litigation, it would result in substantial costs and divert management’s attention and resources, which would negatively impact our business.
Our manufacturing capabilities are limited by the size of our facilities, our inexperience in manufacturing large quantities of product and the potential inability to locate a third party manufacturer for our product candidates.
To commercialize GLIADEL® Wafer, we must be able to manufacture it in sufficient quantities, in compliance with regulatory requirements, and at acceptable costs. We manufacture GLIADEL®Wafer at one of our two manufacturing facilities in Baltimore, Maryland, which consists of production laboratories and
redundant cleanrooms. We estimate that the facility currently being used has the capacity to manufacture approximately 20,000 GLIADEL® Wafer treatments per year, although to date, we have manufactured only limited quantities of GLIADEL® Wafer in our facilities.
Additionally, we cannot be sure that we will be able to continue to satisfy applicable regulatory standards, including FDA requirements, and other requirements relating to the manufacture of GLIADEL® Wafer in our facilities.
We also face risks inherent in the operation of a facility for manufacturing pharmaceutical products, including:
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unforeseen plant shutdowns due to personnel, equipment or other factors; and
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the possible inability of the facilities to produce GLIADEL® Wafer in quantities sufficient to meet demand.
Any delay in the manufacture of GLIADEL® Wafer could result in delays in product shipment. Delays in product shipment would have a negative effect on our business and operating results.
Currently, we have no manufacturing capabilities for commercial quantities of any of our product candidates. Consequently, in order to complete the commercialization process of any of our product candidates, we must either (1) acquire, build or expand our internal manufacturing capabilities, or (2) rely on third parties to manufacture these product candidates. We cannot be sure that we will be able to accomplish either of these tasks. If we are not able to do so, it would impede our efforts to bring our product candidates to market, which would adversely affect our business. Moreover, if we decide to manufacture one or more of our product candidates ourselves (rather than engage a contract manufacturer), we would incur substantial start-up expenses and would need to expand our facilities and hire additional personnel.
Third-party manufacturers must also comply with FDA, Drug Enforcement Administration, and other regulatory requirements for their facilities. In addition, the manufacture of product candidates on a limited basis for investigational use in animal studies or human clinical trials does not guarantee that large-scale, commercial production is viable. Small changes in methods of manufacture can affect the safety, efficacy, controlled release or other characteristics of a product. Changes in methods of manufacture, including commercial scale-up, may, among other things, require the performance of new clinical studies.
Revenues from GLIADEL® Wafer and future products, if any, depend in part on reimbursement from health care payors, which is uncertain.
The efforts of government and insurance companies, health maintenance organizations and other payors of health care costs to contain or reduce costs of health care may affect our future revenues and profitability. These efforts may also affect the future revenues and profitability of our potential customers, suppliers and collaborative partners, in turn affecting demand for our products. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could have a negative effect on our business and operating results.
Our ability to commercialize our products successfully will depend in part on the extent to which private health insurers, organizations such as HMOs and governmental authorities reimburse the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for or rejection of our products. The cost containment
measures that health care payors and providers are instituting and the effect of any health care reform could materially and adversely affect our ability to operate profitably.
Furthermore, even if reimbursement is available for our products, we cannot be sure that it will be available at price levels sufficient to cover the cost of our products to customers. This may have the effect of reducing the demand for our products, or may prohibit us from charging customers a price for our products that would result in an appropriate return on our investment in those products.
A significant portion of our sales are to a specialty pharmaceutical distributor.
Approximately 69% of our sales of GLIADEL® Wafer in 2002 were made to a specialty pharmaceutical distributor. We have an agreement with this distributor regarding its purchase of the product that permits either us or the distributor to terminate the agreement upon 60 days prior written notice. We have no assurance that this distributor will not exercise its rights to terminate its agreement with us at any time. If this distributor does terminate the agreement, there can be no assurance that we will be able to enter into an arrangement with another specialty distributor for the purchase and sale of GLIADEL® Wafer. Additionally, under the terms of our agreement with this distributor, if the agreement is terminated, we have an obligation to repurchase any remaining treatments of GLIADEL® Wafer that the distributor may have in its inventory. As of December 31, 2002, we believe that our specialty distributor had approximately $1.9 million of GLIADEL® Wafer in its inventory.
Our sales to a specialty pharmaceutical distributor depend on its sales to hospital pharmacies and desired level of inventory.
This distributor orders treatments of the product based upon, among other things, its estimation of our ability and its ability to successfully sell GLIADEL® Wafer to hospital pharmacies and its desired level of inventory. If the demand for GLIADEL® Wafer from hospital pharmacies decreases, or this distributor decreases the amount it keeps in its inventory, this distributor may decrease or stop making additional purchases of the product from us. The result of such a decrease would be reflected in lower reported sales for Guilford.
We face technological uncertainties in connection with the research, development and commercialization of new products.
The research, development and commercialization of pharmaceutical drugs involve significant risk. Before a drug can be commercialized, we, or a future corporate partner will have to:
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expend substantial capital and effort to develop our product candidates further, which includes conducting extensive and expensive pre-clinical animal studies and human clinical trials;
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apply for and obtain regulatory clearance to develop, market and sell such product candidates; and
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conduct other costly activities related to preparation for product launch.
In some of our research programs, we are using compounds that we consider to be “prototype” compounds in the research phase of our work. By prototype compounds we mean compounds that we are using primarily to establish that a relevant scientific mechanism of biological or chemical action could have commercial application in diagnosing, treating or preventing disease. We generally do not consider our prototype compounds to be lead compounds acceptable for further development into a product because of factors that make them unsuitable as drug candidates. These factors may include the ability for the compound to be absorbed, metabolized, distributed and excreted from the body. In order to develop commercial products, we will need to conduct research using other compounds that share the key aspects of the prototype compounds but do not have the unsuitable characteristics. Identifying other compounds that have suitable characteristics may not always be possible.
In addition, our product candidates are subject to the risks of failure inherent in the development of products based on new and unsubstantiated technologies. These risks include the possibility that:
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our new approaches will not result in any products that gain market acceptance;
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a product candidate will prove to be unsafe or ineffective, or will otherwise fail to receive and maintain regulatory clearances necessary for development and marketing;
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a product, even if found to be safe and effective, could still be difficult to manufacture on the large scale necessary for commercialization or otherwise not be economical to market;
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a product will unfavorably interact with other types of commonly used medications, thus restricting the circumstances in which it may be used;
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third parties may successfully challenge our proprietary rights protecting a product;
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proprietary rights of third parties will preclude us from manufacturing or marketing a new product; or
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third parties will market superior or more cost-effective products.
As a result, our activities, either directly or through future corporate partners, may not result in any commercially viable products.
We will depend on collaborations with third parties for the development and commercialization of our products.
Our resources are limited; and therefore, our business strategy requires us to enter into various arrangements with:
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corporate partners;
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academic investigators;
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licensors of technologies; and
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licensees of our technologies.
In trying to attract corporate partners, we face serious competition from other small pharmaceutical companies and the in-house research and development staffs of larger pharmaceutical companies. If we are unable to enter into such arrangements with corporate partners, our ability to proceed with the research, development, manufacture and/or sale of product candidates may be severely limited. For example, we are actively seeking corporate partners to assist in the development of our NAALADase and neuroimmunophilin ligand programs, but we may not find suitable corporate partners for these programs. It is common practice in many corporate partnerships in our industry for the larger partner to have responsibility for conducting pre-clinical studies and human clinical trials and/or preparing and submitting applications for regulatory approval of potential pharmaceutical products. It is possible that this will be the case with future arrangements of ours. If one of our collaborative partners fails to develop or commercialize successfully any of our product candidates, we may not be able to remedy this failure and it could negatively affect our business.
Furthermore, larger pharmaceutical companies often explore multiple technologies and products for the same medical conditions. Therefore, they are likely to enter into collaborations with our competitors for products addressing the same medical conditions targeted by our technologies. Our collaborators may, therefore, be pursuing alternative technologies or product candidates in order to develop treatments for the diseases or disorders targeted by our collaborative arrangements. Depending on how other product candidates advance, a corporate partner may slow down or abandon its work on our product candidates or terminate its collaborative arrangement with us in order to focus on these other prospects.
We may be unable to obtain the additional capital needed to operate and grow our business.
We will require substantial funds in order to cover the costs related to our commercial operations function, continue our research and development programs and pre-clinical and clinical testing, and to
manufacture our products. We may be unable to obtain any future funds that we may require on acceptable terms, or at all.
Under our operating lease with a trust affiliated with a commercial bank for our research and development facility completed in 1999 and other financial obligations, we are required to hold, in the aggregate, unrestricted cash, cash equivalents and investments of $40.0 million at all times. In addition, we are required to maintain specified amounts of cash or investments as collateral under certain financial obligations. As of December 31, 2002, we maintained $18.6 million in restricted investments pursuant to these financial obligations. In total, our banking covenants require us to maintain approximately $58.6 million in restricted and unrestricted cash, cash equivalents and investments. If we do not maintain this amount, or these covenants are not removed or changed, we may be in breach of these covenants.
Our capital requirements depend on numerous factors, including:
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the progress of our research and development programs;
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the progress of pre-clinical and clinical testing;
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the time and costs involved in obtaining regulatory approvals;
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the extent of intellectual property protection obtained for our products and product candidates;
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the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
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competing technological and market developments;
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the cost of product in-licensing;
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our ability to establish collaborative arrangements with large pharmaceutical companies and others; and
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the progress of efforts to scale-up manufacturing processes.
We may use our existing resources before we expect to because of changes in our research and development and commercialization plans or other factors affecting our operating expenses or capital expenditures.
Our ability to raise future capital on acceptable terms depends on conditions in the public and private equity markets and our performance, as well as the overall performance of other companies in the pharmaceutical and biotechnology sectors.
We may be unable to obtain proprietary rights to protect our products and services, permitting competitors to duplicate them.
Any success that we have will depend in large part on our ability to:
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obtain, maintain and enforce intellectual property protection for our products and processes;
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license patent rights from third parties;
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maintain trade secret protection; and
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operate without infringing upon the proprietary rights of others.
Intellectual property for our technologies and products will be a crucial factor in our ability to develop and commercialize our products. Large pharmaceutical companies consider a strong patent estate critical when they evaluate whether to enter into a collaborative arrangement to support the research, development and commercialization of a technology. Without the prospect of reasonable intellectual property protection, it would be difficult for a corporate partner to justify the time and money that is necessary to complete the development of a product.
The rules and criteria for receiving and enforcing a patent for pharmaceutical and biotechnological inventions are in flux and are unclear in many respects. The range of protection given these types of patents is uncertain, and a number of our product candidates are subject to this uncertainty.
Many others, including companies, universities and other research organizations, work in our business areas, and we cannot be sure that the claims contained in our issued patents will be interpreted as broadly as we would like in light of the inventions of these other parties. In addition, we cannot be sure that the claims set forth in our pending patent applications will issue in the form submitted. These claims may be narrowed or stricken, and the applications may not ever ultimately result in valid and enforceable patents. Thus, we cannot be sure that our patents and patent applications will adequately protect our product candidates.
We are aware of at least one company, which has asserted publicly that it has submitted patent applications claiming the use of certain of its immunosuppressive compounds and multi-drug resistance compounds for nerve growth applications. That company also stated that it has issued U.S. patents and pending U.S. applications which claim compounds that may be useful in nerve growth applications. We cannot give any assurance as to the ability of our patents and patent applications to adequately protect our neurotrophic product candidates. Also, our neurotrophic product candidates may infringe or be dominated by patents that have issued or may issue in the future to third parties.
In order to protect our intellectual property position with respect to our neuroimmunophilin ligands, we filed an opposition in 1998 in an effort to prevent the final issuance of a European patent to the company we discuss in the above paragraph. In 2000, we won the opposition and the subject patent was revoked. However, the patentee has appealed the initial determination and the patent could be reinstated. If the patent is reinstated, litigation could ultimately result.
Furthermore, any or all of the patent applications assigned or licensed to us from third parties may not be granted. We may not develop additional products or processes that are patentable. Any patents issued to us, or licensed by us, may not provide us with any competitive advantages or adequate protection for our products. Others may successfully challenge, circumvent or invalidate any of our existing or future patents or intellectual property.
Our policy is to control the disclosure and use of our know-how and trade secrets by entering into confidentiality agreements with our employees, consultants and third parties. There is a risk, however, that:
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these parties will not honor our confidentiality agreements;
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disputes will arise concerning the ownership of intellectual property or the applicability of confidentiality obligations; or
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disclosure of our trade secrets will occur regardless of these contractual protections.
In our business, we often work with consultants and research collaborators at universities and other research organizations. If any of these consultants or research collaborators use intellectual property owned by others as part of their work with us, disputes may arise between us and these other parties as to which one of us has the rights to intellectual property related to or resulting from the work done.
We support and collaborate in research conducted in universities, such as Johns Hopkins, and in governmental research organizations, such as the National Institutes of Health. We may not be able to acquire exclusive rights to the inventions or technical information that result from work performed by personnel at these organizations. Also, disputes may arise as to which party should have rights in research programs that we conduct on our own or in collaboration with others that are derived from or related to the work performed at a university or governmental research organization. In addition, in the event of a contractual breach by us, some of our collaborative research contracts provide that we must return the technology rights, including any patents or patent applications, to the contracting university or governmental research organization.
Questions of infringement of intellectual property rights, including patent rights, may involve highly technical and subjective analyses. Some or all of our existing or future products or technologies may now or in
the future infringe the rights of other parties. These other parties might initiate legal action against us to enforce their claims, and our defense of the claims might not be successful.
We may incur substantial costs if we must defend against charges of infringement of patent or proprietary rights of third parties. We may also incur substantial costs if we find it necessary to protect our own patent or proprietary rights by bringing suit against third parties. We could also lose rights to develop or market products or be required to pay monetary damages or royalties to license proprietary rights from third parties. In response to actual or threatened litigation, we may seek licenses from third parties or attempt to redesign our products or processes to avoid infringement. We may not be able to obtain licenses on acceptable terms, or at all, or successfully redesign our products or processes.
In addition to the risk that we could be a party to patent infringement litigation, the U.S. Patent and Trademark Office could require us to participate in patent interference proceedings, or we may find it necessary to provoke an interference with a third party. These proceedings are often expensive and time-consuming, even if we were to prevail in such proceedings.
We rely on licensed intellectual property for GLIADEL® Wafer and our other product candidates, the agreements for which impose requirements on us.
We have licensed intellectual property, including patents, patent applications and know-how, from universities and others, including intellectual property underlying GLIADEL® Wafer, DOPASCAN® Injection, AQUAVAN™ Injection and the neuroimmunophilin ligand technology. Some of our product development programs depend on our ability to maintain rights under these licenses. Under the terms of our license agreements, we are generally obligated to:
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exercise diligence in the research and development of these technologies;
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achieve specified development and regulatory milestones;
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expend minimum amounts of resources in bringing potential products to market;
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make specified royalty and milestone payments to the party from which we have licensed the technology; and
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reimburse patent costs to these parties.
In addition, these license agreements require us to abide by record-keeping and periodic reporting obligations. Each licensor has the power to terminate its agreement if we fail to meet our obligations. If we cannot meet our obligations under these license agreements, we may lose access to our key technology.
Losing our proprietary rights to our licensed technology would have a significant negative effect on our business, financial condition and results of operations.
Our license agreements for GLIADEL® Wafer require us to pay a royalty to MIT on sales of GLIADEL® Wafer. Similarly, we will have to pay milestone and/or royalty payments in connection with the successful development and commercialization of DOPASCAN® Injection, AQUAVAN™ Injection and any products that result from the neuroimmunophilin ligand technology.
In addition, our U.S. patent protection for GLIADEL® Wafer expires in 2006. From and after that time, there can be no assurance that others will not enter the market with a generic copy of GLIADEL® Wafer.
We depend on a single source of supply for several of our key product components.
Currently, we can only purchase some of the key components for GLIADEL® Wafer and our product candidates from single source suppliers. These vendors are subject to many regulatory requirements regarding the supply of these components. We cannot be sure that these suppliers will comply, or have complied, with applicable regulatory requirements or that they will otherwise continue to supply us with the key components we require. If suppliers are unable or refuse to supply us, or will supply us only at a prohibitive cost, we may not be able to access additional sources at acceptable prices on a timely basis, if ever.
The current formulation of GLIADEL® Wafer utilizes the chemotherapeutic agent BCNU, which is also known as carmustine. Currently, we have the option to procure BCNU from only two sources in the United States, and we are not aware of any supplier outside of the United States. We currently obtain BCNU from one of these two U.S. suppliers on a purchase order basis and not through any long-term supply agreement. If we fail to receive on a timely basis key supplies necessary to manufacture GLIADEL® Wafer, delays in product shipment could result. Delays of this type would have a negative effect on our business.
The manufacture of DOPASCAN® Injection requires that the precursor compound be labeled with a radioactive isotope of iodine, Iodine-123, to produce DOPASCAN® Injection. Worldwide, a limited number of companies are capable of performing both the necessary transformation of the precursor into DOPASCAN® Injection and of distributing it to diagnostic centers.
Based on our assessment of companies in the United States that are capable of manufacturing and distributing DOPASCAN® Injection, we believe a significant risk exists in our ability to produce DOPASCAN® Injection in sufficient quantities and at an acceptable cost to conduct Phase III clinical trials in the United States that would be necessary to support NDA submission for the product. Our inability to locate a suitable domestic third-party manufacturer and distributor of DOPASCAN® Injection on acceptable terms will prevent us from further development of this product candidate in the United States. Instead, in order to further develop DOPASCAN® Injection, we are relying upon our international corporate partners, DRL and MAP.
The U.S. government holds rights, which may permit it to license to third parties technology we currently hold the exclusive right to use.
The U.S. government holds rights that govern aspects of specific technologies licensed to us by third party licensors. These government rights in inventions conceived or reduced to practice under a government-funded program may include a non-exclusive, royalty-free, worldwide license for the government to use resulting inventions for any governmental purpose. In addition, the U.S. government has the right to grant to others licenses under any of these non-exclusive licenses if the government determines that:
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adequate steps have not been taken to commercialize such inventions;
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the grant is necessary to meet public health or safety needs; or
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the grant is necessary to meet requirements for public use under federal regulations.
The U.S. government also has the right to take title to a subject invention if we fail to disclose the invention within specified time limits. The U.S. government may acquire title in any country in which we do not file a patent application within specified time limits.
Federal law requires any licensor of an invention partially funded by the federal government to obtain a commitment from any exclusive licensee, such as us, to manufacture products using the invention substantially in the United States. Further, these rights include the right of the government to use and disclose technical data relating to licensed technology that was developed in whole or in part at government expense. Several of our principal technology license agreements contain provisions recognizing these rights.
Pre-clinical and clinical trial results for our products may not be favorable.
In order to obtain regulatory approval for the commercial sale of any of our product candidates, we must conduct both pre-clinical studies and human clinical trials. These studies and trials must demonstrate that the product is safe and effective for the clinical use for which we are seeking approval. The results of clinical trials we conduct may not be successful. Adverse results from any clinical trials could have a negative effect on our business.
We also face the risk that we will not be permitted to undertake or continue clinical trials for any of our product candidates in the future. Even if we are able to conduct such trials, we may not be able to demonstrate satisfactorily that the products are safe and effective and thus qualify for the regulatory approvals needed to
market and sell them. Results from pre-clinical studies and early clinical trials are often not accurate indicators of results of later-stage clinical trials that involve larger human populations.
We are subject to extensive governmental regulation, which may change and harm our business.
Our research, pre-clinical development and clinical trials, and the manufacturing and marketing of our product candidates, are subject to extensive regulation by numerous governmental authorities in the United States and other countries, including the FDA and the DEA. Except for GLIADEL® Wafer for recurrent GBM, none of our product candidates has received marketing clearance from the FDA or any foreign regulatory authority.
As a condition to approval of our product candidates under development, the FDA could require additional pre-clinical, clinical or other studies. Any requirement that we perform additional studies could delay, or increase the expense of our product candidates regulatory approval. This delay or increased expense could have a negative effect on our business. Additionally, to receive regulatory approval, we must also demonstrate that the product is capable of being manufactured in accordance with applicable regulatory standards.
When trying to obtain regulatory approval, significant risk exists that:
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we will not be able to satisfy the FDA’s requirements with respect to any of our drug product candidates, or
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even if the FDA does approve our product candidates, the FDA will approve less than the full scope of uses or labeling that we seek.
Failure to obtain regulatory drug approvals on a timely basis could have a material adverse effect on our business.
Even if we are able to obtain necessary FDA approval, the FDA may nevertheless require post-marketing testing and surveillance to monitor the approved product and continued compliance with regulatory requirements. The FDA may withdraw product approvals if we do not maintain compliance with regulatory requirements. The FDA may also withdraw product approvals if problems concerning safety or efficacy of the product occur following approval.
The process of obtaining FDA and other required approvals or licenses and of meeting other regulatory requirements to test and market drugs is rigorous and lengthy. We have expended, and will continue to expend, substantial resources in order to do this. We will need to conduct clinical trials and other studies on all of our product candidates before we are in a position to file a new drug application for marketing and sales approval. Unsatisfactory clinical trial results and other delays in obtaining regulatory approvals or licenses could prevent the marketing of the products we are developing. Until we receive the necessary approvals or licenses and meet other regulatory requirements, we will not receive revenues or royalties related to product sales.
In addition to the requirements for product approval, before a pharmaceutical product may be marketed and sold in some foreign countries, the proposed pricing for the product must be approved as well. Products may be subject to price controls or limits on reimbursement. The requirements governing product pricing and reimbursement vary widely from country to country and can be implemented disparately at the national level. We cannot guarantee that any country, which has price controls or reimbursement limitations for pharmaceuticals, will allow favorable reimbursement and pricing arrangements for our products.
Because controlled drug products and radio-labeled drugs are subject to special regulations in addition to those applicable to other drugs, the DEA and the Nuclear Regulatory Commission (NRC) may regulate some of our products and product candidates, including DOPASCAN® Injection, as controlled substances and as radio-labeled drugs. The NRC licenses persons who use nuclear materials and establishes standards for radiological health and safety. The DEA is responsible for compliance activities for companies engaged in the manufacture, distribution and dispensing of controlled substances, including the equipment and raw materials used in their manufacture and packaging in order to prevent such substances from being diverted into illicit
channels of commerce. Registration is required and other activities involving controlled substances are subject to a variety of record-keeping and security requirements, and to permits and authorizations and other requirements. States often have requirements for controlled substances as well. The DEA grants certain exceptions from the requirements for permits and authorizations to export or import materials related to or involving controlled substances. Our potential future inability to obtain exceptions from the DEA for shipment abroad or other activities could have a negative effect on us.
We cannot be sure that we will be able to meet applicable requirements to test, manufacture and market controlled substances or radio-labeled drugs, or that we will be able to obtain additional necessary approvals, permits, authorizations, registrations or licenses to meet state, federal and international regulatory requirements to manufacture and distribute such products.
Our competitors are pursuing alternative approaches to the same conditions we are working on. Our products use novel alternative technologies and therapeutic approaches, which have not been widely studied.
Many of our product development efforts focus on novel alternative therapeutic approaches and new technologies that have not been widely studied. Applications for these approaches and technologies include, among other things, the treatment of brain cancer, the diagnosis and monitoring of Parkinson’s disease, the promotion of nerve growth and the prevention of neuronal damage. These approaches and technologies may not be successful. We are applying these approaches and technologies in our attempt to discover new treatments for conditions that are also the subject of research and development efforts of many other companies. Our competitors may succeed in developing technologies or products that are more effective or economical than those we are developing, or they may introduce a competitive product before we are able to do so. Rapid technological change or developments by others may result in our technology or product candidates becoming obsolete or noncompetitive.
Our business is dependent on our ability to keep pace with the latest technological changes.
The technological areas in which we work continue to evolve at a rapid pace. Our future success depends upon maintaining our ability to compete in the research, development and commercialization of products and technologies in our areas of focus. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutions is intense and expected to increase. Many of these competitors have substantially greater research and development capabilities and experience and manufacturing, marketing, financial and managerial resources than we do.
Acquisitions of competing companies by large pharmaceutical companies or other companies could enhance the financial, marketing and other resources available to these competitors. These competitors may develop products that are superior to those we are developing. We are aware of the development by other companies and research scientists of alternative approaches to:
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the treatment of malignant glioma,
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the diagnosis of Parkinson’s disease,
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the promotion of nerve growth and repair, and
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the treatment and prevention of neuronal damage.
Our competitors may develop products that make our products or technologies noncompetitive or obsolete. In addition, we may not be able to keep pace with technological developments.
Our products must compete with others to gain market acceptance.
Any product candidate that we develop and for which we gain regulatory approval, including GLIADEL® Wafer, must then compete for market acceptance and market share. An important factor will be the timing of market introduction of competitive products. Accordingly, the relative speed with which we and competing companies can develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market will be an important element of market success.
Significant competitive factors include:
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capabilities of our collaborators;
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product efficacy and safety;
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timing and scope of regulatory approval;
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product availability;
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marketing and sale capabilities;
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reimbursement coverage from insurance companies and others;
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the amount of clinical benefit of our product candidates relative to their cost;
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the method of administering a product;
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price; and
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exclusivity, through patent protection, or FDA regulations.
Our competitors may develop more effective or more affordable products or achieve earlier product development completion, patent protection, regulatory approval or product commercialization than we do, which could have a material adverse effect on our business.
We are subject to risks of product liability both because of our product line and our limited insurance coverage.
We may potentially become subject to large liability claims and significant defense costs as a result of the design, manufacture or marketing of our products, including GLIADEL® Wafer, or the conduct of clinical trials involving our products. We currently maintain only $10 million of product liability insurance covering clinical trials and product sales. This existing coverage or any future insurance coverage we obtain may not be adequate. Furthermore, our insurance may not cover a claim made against us. Product liability insurance varies in cost. It can be difficult to obtain, and we may not be able to purchase it in the future on terms acceptable to us, or at all. We also may not be able to otherwise protect against potential product liability claims. Product liability claims and/or the failure to obtain adequate product liability insurance could prevent or inhibit the clinical development and/or commercialization of any products we are developing.
We depend on qualified personnel and consultants, especially Craig R. Smith, M.D. and Solomon H. Snyder, M.D.
We depend heavily on the principal members of our management and scientific staff, including Craig R. Smith, M.D., our Chairman, President and Chief Executive Officer, and Solomon H. Snyder, M.D., who is a member of our Board of Directors and a consultant to our company. Drs. Smith and Snyder have extensive experience in the pharmaceutical industry and provide us with unique access to their contacts in the scientific community. The loss of the services of either of these individuals or other members of our senior management team could have a negative effect on our business.
We have entered into a consulting agreement with Dr. Snyder and an employment agreement with Dr. Smith, each of which provides protection for our proprietary rights. Nevertheless, either of them may terminate his relationship with us at any time. Accordingly, we cannot be sure that either of these individuals or any of our other employees or consultants will remain with us. In the future they may take jobs or consulting positions with our competitors. These employees or consultants may also choose to organize competing companies or ventures.
Our planned activities will require individuals with expertise in many areas including:
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medicinal chemistry and other research specialties,
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pre-clinical testing,
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clinical trial management,
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regulatory affairs,
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intellectual property,
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sales and marketing,
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manufacturing, and
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business development.
Recruiting and retaining qualified personnel, collaborators, advisors and consultants will be critical to our activities. We may not be able to attract and retain the personnel necessary for the development of our business. Furthermore, many pharmaceutical, biotechnology and health care companies and academic and other research institutions compete intensely for experienced scientists. If we are not able to hire the necessary experienced scientists or develop the necessary expertise, it could have a negative effect on us. In addition, we also depend on the support of our collaborators at research institutions and our consultants.
Our business involves using hazardous and radioactive materials and animal testing, all of which may result in environmental liability.
Our research and development processes involve the controlled use of hazardous and radioactive materials. We (and our partners) are subject to extensive laws governing the use, manufacture, storage, handling and disposal of hazardous and radioactive materials. There is a risk of accidental contamination or injury from these materials. Also, we cannot control whether our collaborative partners comply with the governing standards. If we (or our partners) do not comply with the governing laws and regulations, we could face significant fines and penalties that could have a negative effect on our business, operations or finances. In addition, we and/or our collaborative partners could be held liable for damages, fines or other liabilities, which could exceed our resources.
We may also have to incur significant costs to comply with environmental laws and regulations in the future. In addition, future environmental laws or regulations may have a negative effect on our operations, business or assets.
Many of the research and development efforts we sponsor involve the use of laboratory animals. Changes in laws, regulations or accepted clinical procedures may adversely affect these research and development efforts. Social pressures that would restrict the use of animals in testing or actions against us (or our collaborators) by groups or individuals opposed to testing using animals could also adversely affect these research and development efforts.
Effecting a change of control of Guilford would be difficult, which may discourage offers for shares of our common stock.
Our certificate of incorporation and the Delaware General Corporation Law contain provisions that may delay or prevent an attempt by a third party to acquire control of us. These provisions include the requirements of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits designated types of business combinations, including mergers, for a period of three years between us and any third party who owns 15% or more of our common stock. This provision does not apply if:
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our Board of Directors approves of the transaction before the third party acquires 15% of our stock,
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the third party acquires at least 85% of our stock at the time its ownership goes past the 15% level, or
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our Board of Directors and two-thirds of the shares of our common stock not held by the third party vote in favor of the transaction.
We have also adopted a stockholder rights plan intended to deter hostile or coercive attempts to acquire us. Under the plan, if any person or group acquires more than 20% of our common stock without approval of the Board of Directors under specified circumstances, our other stockholders have the right to purchase shares
of our common stock, or shares of the acquiring company, at a substantial discount to the public market price. The plan makes an acquisition much more costly to a potential acquirer.
Our certificate of incorporation also authorizes us to issue up to 4,700,000 shares of preferred stock in one or more different series with terms fixed by the Board of Directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult for a person or group to acquire control of us. No shares of our preferred stock are currently outstanding. While our Board of Directors has no current intentions or plans to issue any preferred stock, issuance of these shares could also be used as an anti-takeover device.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Our common stock trades on The NASDAQ® National Market under the symbol GLFD. As of March 19, 2003, there were approximately 182 holders of record of our common stock and more than 8,670 beneficial holders. We have never declared or paid any cash dividends and do not intend to do so for the foreseeable future. Under our various loan and lease agreements with certain financial institutions, we may not declare, during the term of those agreements, any cash dividends on our common stock without the prior written consent of these financial institutions and, in certain cases, the Maryland Industrial Development Financing Authority.
The following table sets forth, for the fiscal periods indicated, the range of high and low closing sales prices of our common stock as quoted on The NASDAQ® National Market:
Recent Sales of Unregistered Securities
On November 19, and December 16, 2002, we issued 4,736 shares and 1,461 shares of our common stock, respectively, to Burns McClellan Inc. (“Burns McClellan”), in consideration for Burns McClellan providing us with investor relations/public relations services. In connection with these issuances, we relied on the exemption from registration under the Securities Act of 1933 provided in Section 4(2) of the Act.
Item 6.
Item 6.
Selected Consolidated Financial Data
The following selected consolidated financial data for each of the years in the five-year period ended December 31, 2002 have been derived from our consolidated financial statements, which have been audited by KPMG LLP, our independent auditors. Our consolidated financial statements as of December 31, 2002 and 2001, and for each of the years in the three-year period ended December 31, 2002, including the footnotes to these financial statements, are included elsewhere in this annual report, beginning on page. The information set forth below should be read in conjunction with our consolidated financial statements and the
related footnotes, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 36 of this annual report.
(1)
For information concerning the calculation of loss per share, see Note 19, to the footnotes to our consolidated financial statements.
(2)
Includes restricted investments of $16.5 million, $21.4 million, $18.3 million, $16.5 million and $18.6 million at December 31, 1998, 1999, 2000, 2001 and 2002, respectively. See Notes 8 and 11, to the footnotes to our consolidated financial statements. In addition to these restricted investments, we are required to maintain, in the aggregate, unrestricted cash, cash equivalents, and investments of $40.0 million at all times under the terms of certain of our financial obligations.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Management’s Discussion and Analysis”), explains the general financial condition and the results of operations for us and our subsidiaries, including:
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where our revenues came from;
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what our revenues and expenses were in 2002, 2001 and 2000;
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why revenues and expenses changed from the year before;
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what significant factors affect our business;
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how all of the foregoing affect our overall financial condition; and
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what our expenditures for capital projects were in 2002, 2001 and 2000 and a description of our capital requirements.
As you read this Management’s Discussion and Analysis, you may find it helpful to refer to our consolidated financial statements beginning on page of this annual report. These consolidated financial statements present the results of our operations for 2002, 2001 and 2000 as well as our financial position at December 31, 2002 and 2001. We analyze and explain the annual changes in the specific line items set forth in our consolidated statements of operations. This analysis may be important to you in making decisions about your investment in Guilford.
Results of Operations - Revenue
Revenues
During 2002, 2001, and 2000, we recognized revenues of $14.7 million, $20.5 million, and $18.1 million, respectively. These revenues consisted of the following:
GLIADEL® Wafer
In June 1996, we entered into a Marketing, Sales and Distribution Agreement, together with related agreements with Rhone-Poulenc Rorer, predecessor-in-interest to Aventis Pharmaceuticals Products Inc., or Aventis. Under these agreements (the “Aventis Agreements”) we granted Aventis the worldwide (other than Scandinavian, and later Japanese) marketing rights to GLIADEL® Wafer, a biodegradable polymer used for the treatment of brain cancer. At the time that we entered into the Aventis Agreements, we received
$15.0 million from Aventis ($7.5 million as an equity investment and $7.5 million as a one-time non-refundable rights payment). In September 1996, the FDA approved GLIADEL® Wafer to be marketed for use in connection with surgery for recurrent glioblastoma multiforme, a certain type of primary brain cancer. From the commercial launch of GLIADEL® Wafer in February 1997, until December 31, 2000, we manufactured the product for marketing, sale and distribution by Aventis and Orion Corporation Pharma (our Scandinavian marketing partner for the product). In exchange we received milestone payments from Aventis upon the occurrence of certain events, such as the receipt of marketing approval both in the United States and internationally, and royalties and manufacturing fees in respect of Aventis’ sales. In October 2000, we reacquired Aventis’ rights in GLIADEL® Wafer for 300,000 shares of our common stock at an approximate value of $8.0 million and the assumption of obligations for product returns occurring after December 31, 2000. After a transition period, which ended on December 31, 2000, we began marketing, selling and distributing GLIADEL® Wafer ourselves on January 1, 2001.
Revenues from GLIADEL Wafer - Net Product Sales
For the years ended December 31, 2002 and 2001, we recognized GLIADEL® Wafer net sales of approximately $14.5 million and $20.4 million respectively. During this time, we sold GLIADEL® Wafer (i) directly to hospitals, (ii) by drop shipment to hospitals pursuant to purchase orders from wholesalers, and (iii) to specialty distributors. Sales in 2001 were higher than sales in 2002, due to sales to our distributors in 2001, as a result of the anticipation that we would receive approval from the FDA to expand the label for GLIADEL® Wafer to include use at the time of first surgery for malignant glioma. In March 2002, the FDA informed us that the expanded label was not approvable. Consequently, physician demand for the product did not increase, resulting in an imbalance between units in the distribution channel and pull through demand. Because the supply of the product in the distribution channel had increased in excess of demand, we chose, during the second half of 2002 to reduce the sale of product to our specialty distributor in order to more closely align the number of units in the distribution channel with demand under the more limited product label for recurrent surgery. As a result, we made no further shipments to our specialty distributor in the fourth quarter of 2002.
In response to the FDA’s decision and concerns, we submitted an amendment to our sNDA application, which included an additional two years of survival data from the Phase III clinical trial of GLIADEL® Wafer. We agreed with the FDA on the protocol and methods for collecting and analyzing this additional long-term follow-up data. On September 19, 2002, we presented the results of this analysis to the FDA. After completing an informal review of these data, the FDA advised us that the submission of an amendment to the Company’s sNDA containing the long-term follow-up data would receive a formal FDA review and reconsideration of the requested new labeling for the product. On February 25, 2003, the FDA notified us that our amended sNDA was approved; and therefore, we could commence marketing GLIADEL® Wafer for use at the time of initial surgery for malignant glioma as an adjunct to surgery and radiation.
For the year ended December 31, 2000, we recognized revenue of $1.5 million on our sale of GLIADEL® Wafer to Aventis in accordance with our contractual arrangements, at approximately 20% of the net product sales price established by Aventis.
GLIADEL® Wafer net sales to customers within the United States were approximately $ 14.1 million (97%) and $ 20.1 million (99%) for the years ended December 31, 2002 and 2001, respectively. The remaining units were sold outside the United States, including Europe, Canada, South America, Israel and Australia, either through distributors or direct to hospitals.
Approximately $10.1 million (985 units) or 69% and $4.2 million (430 units) or 21% of GLIADEL® Wafer treatments sold during the years ended December 31, 2002 and 2001, respectively, were sold to specialty distributors. During the third quarter of 2001 we decided to sell GLIADEL® Wafer through specialty distributors in preparation for the expected increase in demand that would have been associated with an expanded label. At the time of the specialty distributors’ initial orders in 2001, we provided extended payment terms of up to 120 days. For the years ended 2002 and 2001, one specialty distributor accounted for approximately $10.1 million and $2.5 million respectively, of net product sales. This distributor has nationwide
marketing and distribution capabilities that complement our sales and marketing efforts. Additionally, when we make sales to this distributor, they are responsible for shipping the product that they purchase to hospital pharmacies, thereby reducing our overall distribution costs. Without this distributor, we would incur separate shipping costs from our logistical distributor for each shipment of the product to hospital pharmacies and other end-users. This specialty distributor charges discounts on its purchases of GLIADEL® Wafer based on its expected sales to end-users and the amount of capital it has committed to the product as of the date of its purchases. We have the ability to accept or reject purchase orders from the specialty distributor at our sole discretion. For the years ended December 31, 2002 and 2001, our specialty distributors sold 1,015 and 214 units, respectively, to hospitals and wholesalers. It is our general practice to have our sales representatives direct hospital pharmacies to this distributor for purchases of the product, except for purchases under our GLIADEL® Advantage Program (formerly known as the Ensured Availability Program), a special sales and marketing program described below. We are currently engaged in a dispute with an affiliate of this specialty distributor, which is described in the section below, entitled “Liquidity and Capital Resources.” The outcome of this dispute may affect our business relationship with this specialty distributor, which may in turn negatively affect our sales of GLIADEL® Wafer. For additional risks associated with our sale of GLIADEL® Wafer to this specialty distributor, see the risk factors discussed above in Item 4.A., under the headings “A significant portion of our sales are to a specialty pharmaceutical distributor,” and “Our sales to a specialty pharmaceutical distributor depend on its sales to hospital pharmacies and desired level of inventory.”
Additionally, for the first six months of 2002, we engaged in an enhanced marketing initiative with the specialty distributor that ended on June 30, 2002. Of the treatments sold to this specialty distributor during the six month period ended June 30, 2002, 94% (650 units) were sold in connection with this marketing initiative. This marketing initiative included mailing information about GLIADEL® Wafer to prospective customers, telemarketing activity and working with our sales representatives to set up customer accounts. This marketing initiative cost approximately $201,000 for the six-month period ended June 30, 2002. We did not operate a similar marketing initiative in 2001.
During the years ended December 31, 2002 and 2001, we sold treatments of GLIADEL® Wafer pursuant to our GLIADEL® Advantage Program, which is designed to increase neurosurgeons’ awareness of GLIADEL® Wafer and to ensure its availability when the neurosurgeon requires it. Under this program, customers are provided 180-day payment terms. During the years ended December 31, 2002 and 2001, we recognized net revenue of approximately $0.7 million and $2.8 million, respectively, under this program. Effective January 23, 2003, we are no longer offering this program.
For the years ended December 31, 2002 and 2001, approximately $3.7 million, or 25% and $13.4 million, or 66% of GLIADEL® Wafer net sales, respectively, resulted from sales directly to hospitals or drop shipments to hospitals pursuant to purchase orders from wholesalers. Substantially all of these sales to hospitals and wholesalers included our normal payment terms including discounts for early payment.
Royalties from GLIADEL® Wafer - Royalties on Sales by Aventis
Prior to our reacquisition of the rights to market, sell and distribute GLIADEL® Wafer effective January 1, 2001, in addition to recognizing net product sales revenue on our sale of GLIADEL® Wafer to Aventis, we also recognized royalty revenue based on Aventis’ sales of the product to third parties, such as hospitals. For the year ended December 31, 2000, royalty revenue on Aventis’ sales of GLIADEL® Wafer to third parties was $2.4 million.
Contract Revenues
As a result of the reacquisition of GLIADEL® Wafer from Aventis and the termination of our collaboration with Amgen, no contract revenues were recognized from these or any other partners during the years ended December 31, 2002 and 2001. Prior to the reacquisition of GLIADEL® Wafer, we received certain non-refundable upfront fees and milestone payments from Aventis. We earned non-refundable milestone payments from Aventis of $2.0 million during the year ended December 31, 2000 upon receipt of approval to market and sell GLIADEL® Wafer in certain countries.
The remaining contract revenue in 2000 is the result of our adoption of SAB 101, in the fourth quarter of 2000, effective January 1, 2000. Our previous accounting policy was to recognize as revenue certain non-refundable upfront fees at the inception of the arrangement. Under SAB 101, collaborative arrangements that include a non-refundable upfront fee and contain an element of continuing involvement must be deferred and recognized as revenue over the period of continuing involvement. For the year ended December 31, 2000, we recognized $8.6 million of contract revenues upon adoption of SAB 101.
Revenues Under Collaborative Agreements
As part of our collaboration with Amgen, Amgen agreed to fund up to a total of $13.5 million to support our research relating to the FKBP neuroimmunophilin ligand technology. The research funding began October 1, 1997 and was payable quarterly over three years. The last quarterly payment was made on July 1, 2000.
Cost of Sales and Gross Margin
Our cost of sales for the years ended December 31, 2002, 2001 and 2000, were $2.8 million, $2.8 million and $1.4 million, respectively. Cost of sales includes the cost of materials, labor and overhead. Gross profit percentage (net product sales less cost of sales as a percent of net product sales) for the years ended December 31, 2002 and 2001 was 80% and 86%, respectively. Gross profit percentage for the year ended December 31, 2002 was reduced due to decreased production volumes in 2002 compared to 2001, when volumes were increased to support expected higher demand driven by an anticipated first surgery approval for GLIADEL® Wafer. Gross profit percentage comparisons to 2000 are not meaningful as the company recognized revenue on our sale of GLIADEL® Wafer to Aventis in accordance with our contractual arrangements, at approximately 20% of the net product sales price established by Aventis.
The cost to manufacture GLIADEL® Wafer at current market levels can vary materially with production volume. To the extent that production levels increase or decrease in the future, we anticipate that the unit cost to manufacture GLIADEL® Wafer may decrease or increase, respectively. As a result, we would expect the cost of product sales of GLIADEL® Wafer, and accordingly, gross profit percentage, to fluctuate from year to year.
Research and Development Expenses
Our research and development projects are currently focused on pharmaceutical research and development. For our biopolymer technologies and our PARP Inhibitors, we have chosen to pursue potential corporate partnerships or other strategic alternatives in order to further their research and development, rather
than develop these projects ourselves. The following chart sets forth our projects in each of these areas and the stage to which each has been developed:
For each of our research and development projects, we incur both direct and indirect expenses. Direct expenses include salaries and other costs of personnel, raw materials and supplies. We may also incur third party costs related to these projects, such as contract research, consulting and clinical development costs. Indirect expenses, such as facility and equipment costs, utilities, general research and development management and other administrative overhead are allocated to research and development generally based on, among other things, the extent to which our general research and development efforts make use of facilities, non-project personnel and other resources.
Our research and development expenses were $46.1 million, $54.3 million and $46.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. These expenses were divided between our research and development platforms in the following manner:
Pharmaceutical Technologies
Our pharmaceutical technology research and development expenses decreased in 2002, compared to 2001, primarily due to a decrease in expenses in our NAALADase inhibitor program resulting from the completion of our Phase I clinical trials of GPI 5693 (a lead NAALADase inhibitor compound). The decrease in spending on our NAALADase inhibitors was partially offset by an increase in spending on our FKBP neuroimmunophilin ligand technology and our AQUAVAN™ Injection program. For 2003, we expect research and development expenses for our pharmaceutical technologies to be incurred primarily in connection with further clinical development of AQUAVAN™ Injection, the preparation for, and initiation of, one or more Phase II clinical trials of GPI 1485, our lead neuroimmunophilin ligand compound and additional NAALADase inhibitor program research.
Research and development expenses related to our pharmaceutical and related technologies increased in 2001 compared to 2000. This increase is the result of advancing AQUAVAN™ Injection and GPI 5693 into clinical trials and was offset by a reduction in expenses associated with our neuroimmunophilin program.
Biopolymer Technologies
Our biopolymer technology research and development expenses decreased in 2002, compared to 2001, due to a decrease in expenses incurred in connection with the clinical development of both PACLIMER® Microspheres and Lidocaine-PE (formerly LIDOMER™ Microspheres). The decrease in clinical development expenses resulted from the completion of our clinical trials for PACLIMER® Microspheres (ovarian cancer) and Lidocaine-PE (post surgical pain) during the first quarter of 2002. In connection with our corporate restructuring in the third quarter of 2002, we terminated the clinical trial for PACLIMER® Microspheres (lung cancer). We, therefore, expect research and development expenses related to our biopolymer technology to further decrease during the remainder of 2003, compared to 2002. Currently, we do not plan to conduct additional research or clinical testing of our biopolymer technologies. Instead, we plan to pursue a corporate partnership, divestiture or similar strategic transaction to further develop these technologies.
With respect to our biopolymer technologies, the modest decrease in 2001 compared to 2000 reflects less development expenses incurred related to PACLIMER® Microspheres offset by an increase in expenses related to Lidocaine-PE as it advanced into clinic.
Indirect Expenses
Our indirect research and development expenses decreased for the year ended 2002 compared to 2001, in part due to decreased overhead and a reduction in force in the second half of 2002. The increase from the year ended 2000 to 2001 was caused by increased costs to operate our facilities, as well as increased general research and development management activity.
Selling, General and Administrative Expenses
Our selling, general and administrative (“SG&A”) expenses were $29.8 million, $30.1 million and $14.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. For the year ended December 31, 2002, the costs incurred to market, sell and distribute GLIADEL® Wafer were $14.6 million compared to $16.1 million for the year ended December 31, 2001. The decrease in expense is largely attributable to GLIADEL® Wafer sales and marketing start up costs incurred in 2001 that did not recur in 2002. We incurred $1.8 million in costs associated with the reacquisition and re-launch of GLIADEL® Wafer during the fourth quarter of 2000. Prior to the fourth quarter of 2000, we did not have a marketing, sales and distribution function.
During October 2000, the Company entered into a three-year agreement (the “Cardinal Agreement”) with Cardinal Health Sales and Marketing Services (“Cardinal”) to provide Guilford with sales representatives for its GLIADEL® Wafer product. Included in our costs to market, sell and distribute GLIADEL® Wafer is $3.4 million, $4.5 million and $0.9 million for the years ended December 31, 2002, 2001 and 2000, respectively, for services provided by Cardinal under the Cardinal Agreement. On July 9, 2002, we notified Cardinal that under the terms of the Cardinal Agreement, we were exercising our option to transition the contract sales force to us. As a result, on October 1, 2002 the sales representatives became Guilford employees, and pursuant to the terms of the Cardinal Agreement, we paid Cardinal a $0.2 million transition fee.
Costs and expenses associated with our general and administrative functions were $15.2 million, $14.0 million and $12.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. The increase for the year ended December 31, 2002 to 2001 is largely attributable to a restructuring charge of $1.3 million, which consisted of employee severance costs, including severance pay, related payroll taxes and insurance and outplacement services. The increase from 2001 to 2000 was attributable to the expansion of our overall corporate development activities as well as overall general and administrative spend. Our general and administrative functions include the areas of executive management, finance and administration, investor and public relations, corporate development, human resources and legal. Additionally, we include the costs to prepare, file and prosecute domestic and international patent applications and for other activities to establish and preserve our intellectual property rights in our general and administrative expenses. For each function, we
may incur direct expenses such as salaries, supplies and third-party consulting and other external costs. Indirect costs such as facilities, utilities and other administrative overhead are also allocated to selling, general and administrative expenses.
Merger Costs
On August 28, 2000, we terminated the Agreement and Plan of Merger previously entered into on May 29, 2000 with Gliatech, Inc. We incurred costs related to this proposed merger transaction of $1.4 million for the year ended December 31, 2000.
Other Income and Expense
Other income and expense consists primarily of income on our investments and interest expense on our debt and other financial obligations. Our investment income was $5.4 million, $6.9 million and $7.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in investment income in 2002 compared to 2001 was primarily due to lower interest rates and investment balances maintained during those periods. The decrease in investment income in 2001 compared to 2000 was primarily due to lower interest rates in 2001 on modestly larger average investment balances maintained during that year.
We incurred interest expense of $0.5 million for each of the years ended December 31, 2002, 2001 and 2000. These expenses resulted primarily from (i) loans from a commercial bank that helped fund the construction of our manufacturing, administrative, and research and development facilities and the purchase of certain furniture and equipment, (ii) capital leases entered into for the purchase of computer equipment, and (iii) a note payable to a commercial bank primarily used to repay a $2.4 million note payable to Cardinal pursuant to the Cardinal Agreement.
Cumulative Effect of a Change in Accounting Principle
We recorded a non-cash charge to 2000 earnings of $8.6 million as the cumulative effect of a change in accounting principle for the implementation of SAB 101. Our previous accounting policy was to recognize as revenue certain non-refundable upfront fees at the inception of a collaborative arrangement. Under SAB 101, non-refundable upfront fee arrangements that contain an element of continuing involvement must be deferred and recognized as revenue over the period of involvement. As of December 31, 2000, the Company has recognized as revenue the full amount of non-refundable upfront fee payments subject to deferral under SAB 101.
Liquidity and Capital Resources
We have financed our operations since inception primarily through the issuance of equity securities, revenues from the sales of GLIADEL® Wafer, funding pursuant to collaborative agreements and proceeds from loans or other borrowings. For the year ended 2002, cash, cash equivalents and investments were reduced by $52.9 million to primarily fund net operating activities.
Our cash, cash equivalents and investments were $101.8 million at December 31, 2002. Of this amount, we pledged $18.6 million as collateral for certain of our loans and other financial lease obligations. In addition to these restricted investments, we are required to maintain, in the aggregate, unrestricted cash, cash equivalents, and investments of $40.0 million at all times under the terms of certain of our financial obligations. In total, our banking covenants require us to maintain approximately $58.6 million in restricted and unrestricted investments pursuant to these financial obligations. We believe we will be able to stay in compliance with our covenants and restrictions for the year ended December 31, 2003, by either maintaining the necessary cash requirements or restructuring the covenants and restrictions. We are currently examining opportunities to reduce these collateral and liquidity requirements; however, there can be no assurances that we will be successful in our attempts to modify these obligations.
Our total long-term debt decreased a net $1.8 million to $6.9 million at December 31, 2002, compared to $8.8 million at December 31, 2001. This decrease is primarily due to repayments of $6.7 million offset by borrowings of $3.0 million from a commercial bank combined with additional financings in the amount of $1.9 million for insurance and capital leases.
On May 2, 2002, the Company borrowed $3.0 million from a commercial bank, in order to repay the note payable to Cardinal. This new indebtedness bears interest at the rate of one-month LIBOR plus 0.625% and is payable in four equal annual installments of principal beginning April 30, 2003, with the final payment due on April 30, 2006. Interest payments are due quarterly. In connection with this indebtedness, we are required to maintain with the commercial bank, restricted cash, cash equivalents and investments in the amount of the unpaid principal balance of this indebtedness.
The Company funds capital additions through either lease arrangements or direct purchases utilizing our existing cash. To the extent possible, we finance property and equipment requirements by obtaining capital and operating leases. We funded capital expenditures of $3.1 million, $2.4 million and $3.5 million for the years ended December 31, 2002, 2001, and 2000, respectively. Of the capital expenditures funded during the year ended December 31, 2002, $1.5 million were funded pursuant to capital equipment lease arrangements, $1.3 million through operating leases, and $0.3 million were acquired through the use of our cash. In connection with this indebtedness, we are required to maintain restricted cash, cash equivalents and investments in the amount of $1.1 million.
In October 2002, the Company entered into a new master lease agreement to provide up to $1.0 million for computer and equipment financing. The Company’s previous master lease agreement, entered into in August 2001 expired on June 2002. The term of each operating lease varies from 24 to 48 months based upon the type of equipment being leased. As of December 31, 2002, the Company had leased approximately $0.3 million in equipment under this master lease agreement.
In February 1998, we entered into a real estate development agreement and operating lease with a special purpose entity sponsored by a commercial bank, to design, construct and lease a research and development facility. The entity is not consolidated in our consolidated financial statements and we have accounted for this arrangement as an operating lease in accordance with SFAS No. 13, Accounting for Leases, as amended. None of our officers or directors are affiliated with this special purpose entity. This facility, which was substantially completed in June 1999 for a total cost of approximately $19.5 million, was constructed adjacent to our current headquarters in Baltimore, Maryland and provides approximately 73,000 square feet of research and development capacity. The initial lease term is for a period of 84 months (including the construction period) and expires in February 2005. We have the option to either purchase the facility on the remaining anniversary dates during the initial lease term, or sell the facility to a third party at the expiration of the initial lease term. In the event the facility is sold to a third party, we will be obligated to pay the lessor any shortfall between the sales price and 83% of the lessor’s net investment in the facility. The lessor’s net investment in the facility was approximately $18.8 million at December 31, 2002 and we anticipate that it will be further reduced to approximately $18.2 million by the expiration of the initial lease term in February 2005. The Company’s maximum exposure to loss as a result of the SPE is the residual guarantee ($13.8 million). We are required to maintain collateral equal to approximately 74% (after certain guarantees) of the remaining balance of the lessor’s net investment in the facility. We were required to maintain cash collateral of $13.8 million as of December 31, 2002, which is included in the accompanying consolidated balance sheets as Investments-restricted. In addition to this cash collateral requirement, we are subject to various other affirmative and negative covenants, the most restrictive of which requires us to maintain unrestricted cash, cash equivalents, and investments in the aggregate equal to $40 million relative to this Agreement.
Pursuant to the terms of the operating lease agreement, we are obligated to make monthly lease payments equal to the interest, based on monthly LIBOR plus 0.625%, calculated on the lessor’s net investment in the facility plus principal of $20,000. As a result of the interest rate swap agreements entered into during 1998 and 1999 with a commercial bank, we effectively fixed the interest rates on these variable interest rate-based lease payments at approximately 6% in the aggregate. These interest rate swap agreements provide the commercial
bank with a call provision exercisable during 2003. Assuming the commercial bank exercises its call provision, we would be exposed to market risk related to the underlying interest rates of the operating lease.
In addition to the interest rate swap agreements covering the underlying debt for our research and development facility, we entered into a series of interest rate swap transactions in 1998 and 1999, with a commercial bank covering at that time $10 million of our bond and term loans. As a result, we fixed the interest rates on our debt at approximately 6% in the aggregate. The notional amounts of these interest rate swap agreements amortize at the same rate as the underlying bond and term loans.
During 2002, the Company terminated its agreement with Cardinal to provide a contract sales force. The termination has led to a dispute regarding amounts owed to Cardinal at the termination date. The Company does not believe it has any remaining obligations to Cardinal at December 31, 2002 relative to the agreement; however, Cardinal has asserted that it may be owed $0.8 million. On March 13, 2003, we received notice from the parent of Cardinal that National Speciality Services Inc. (NSS), an affiliate of Cardinal and a subsidiary of its Parent, was going to offset the amount Cardinal claims we owe it against an account payable in the amount of approximately $1.8 million that NSS owes us, in addition to taking certain unearned prompt payment discounts, also in payment of the amounts that Cardinal claims we owe it. NSS is the specialty distributor to whom we sell GLIADEL® Wafer. We do not believe that Cardinal or NSS has the right to make an offset under our agreement with NSS for amounts that Cardinal claims we owe it. The Company does not believe the resolution of this matter will have a material adverse effect on the Company’s consolidated financial condition, result of operations or liquidity.
We have an agreement with the specialty distributor to whom we sell GLIADEL® Wafer that permits either us or the specialty distributor to terminate the agreement upon 60 days prior written notice. Under the terms of our agreement with this distributor, if the agreement is terminated, we have an obligation to repurchase any remaining treatments of GLIADEL® Wafer that the distributor may have in its inventory. As of December 31, 2002, we believe that our specialty distributor had approximately $1.9 million of GLIADEL® Wafer in its inventory.
We expect to need significantly greater capital to continue our research and development programs and pre-clinical and clinical testing and to manufacture and market, sell and distribute our products. Our future capital requirements will depend on many factors, including but not limited to, revenues from the sale of GLIADEL® Wafer, progress of our research and development programs, progress of pre-clinical and clinical testing, time and cost involved in obtaining regulatory approval, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, changes in our existing research relationships, competing technological and marketing developments, ability to establish collaborative arrangements, ability to enter into licensing agreements and contractual arrangements with others, and the cost of product in-licensing. As a result, we may need significant additional funding in the future. The source, timing and availability of this funding will depend on market conditions, interest rates and other factors. This funding may be sought through various sources, including debt and equity offerings, corporate collaborations, bank borrowings, lease arrangements relating to fixed assets or other financing methods. There can be no assurances that additional funds will be available on favorable terms, if at all.
We believe that our existing resources will be sufficient to fund our activities through at least December 31, 2003. However, we may need significantly greater capital in the near future to increase pre-clinical and clinical development activities for product candidates, such as:
•
GPI 1485 (our lead neuroimmunophilin ligand);
•
AQUAVAN™ Injection;
•
NAALADase Inhibitors;
•
other neuroimmunophilin ligands; and
•
other research projects
Additionally, in order to leverage the capabilities of our commercial operations group, we are investigating the possibility of in-licensing additional hospital based products in our targeted markets. In order to acquire one or more of these products, we may require significant additional capital.
The following are contractual commitments at December 31, 2002, associated with debt obligations, lease obligations and our research and development projects (in thousands):
(1)
This table does not include any milestone payments under agreements we have entered into in relation to our in-licensed technology, as the timing and likelihood of such payments are not known. Also, minimum annual research expenditures pursuant to such license agreements have been excluded from this table as we expect to spend those amounts as we progress the development of the underlying technologies. In the aggregate these minimum annual research expenditures are approximately $1.0 million and typically apply to all years prior to regulatory approval of a product incorporating the licensed technology.
(2)
In February 1998, we entered into a real estate development agreement and operating lease with a special purpose entity sponsored by a commercial bank (which we will refer to as “lessor” in this note) to acquire, construct and lease a research and development facility. Construction was completed in 1999 at a total cost of approximately $19.5 million. We account for this lease as an operating lease and, as a result, record neither an asset nor a liability on our balance sheet. The amounts included in the table above include only our annual lease payments of approximately $1.3 million for the remainder of the initial lease term ending February 2005. Our lease payments represent variable-rate interest payments (indexed to the London interbank offered rate, also known as LIBOR) on the lessor’s net investment in the facility plus principal of $20,000 per month. As a result of certain interest rate swap agreements entered into by us, we have effectively fixed the interest rate on this variable interest-rate based lease at approximately 6%. At the expiration of the initial lease term, we may either purchase the facility or sell the facility to a third party. The lease provides a residual value guarantee from us to the lessor in the event the facility is sold to a third party for less than 83% of the lessor’s investment in the facility. We do not believe that our facility has experienced a property value decline below the residual value guarantee. However, we have no assurance that the property value will not decline between now and the termination of the initial lease on or before February 2005.
(3)
Research and development arrangements include commitments that we have entered into at December 31, 2002, to engage third parties to perform various aspects of our research and development efforts subsequent to December 31, 2002.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from our estimates and assumptions. We believe the following critical accounting policies, among others, affect our more significant estimates and assumptions and require the use of complex judgment in their application.
Revenue Recognition. Revenue from sales of GLIADEL® Wafer, our only marketed product, is recognized when, pursuant to Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” all four of the following criteria are met: (i) we have persuasive evidence that an arrangement exists, (ii) the price is fixed and determinable, (iii) title has passed and (iv) collection is reasonably assured. Our primary customer is National Specialty Services, Inc. (or NSS), a large specialty pharmaceutical distributor who sells directly into the retail channel. Product demand by this distributor during a given period may not correlate with prescription demand for the product in that period. As a result, we periodically evaluate NSS’ inventory position. If we believe these levels are too high based on prescription demand, we will not accept purchase orders from or ship additional product to NSS until these levels are reduced. Provisions for sales discounts, and estimates for chargebacks, rebates, damaged product returns, and exchanges for expired product are established as a reduction of product sales revenues at the time such revenues are recognized. These revenue reductions are established by us as our best estimate at the time of sale based on historical experience, adjusted to reflect known changes in the factors that impact such reserves.
Research and Development Expenses. For each of our research and development projects, we incur both direct and indirect expenses. Direct expenses include salaries and other costs of personnel, raw materials and supplies. We may also incur third party costs related to these projects, such as contract research, consulting and clinical development costs. Indirect expenses, such as facility and equipment costs, utilities, general research and development management and other administrative overhead are allocated to research and development generally based on, among other things, the extent to which our general research and development efforts make use of facilities, non-project personnel and other resources. We review and accrue clinical trials expenses based on estimates of work performed and completion of certain events. We believe that this method best aligns the expenses we record with the efforts we expend. Accrued clinical costs are subject to revisions as trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known.
Special Purpose Entity. In February 1998, we entered into a real estate development agreement and operating lease with a special purpose entity sponsored by a commercial bank, to design, construct and lease a research and development facility. The entity is not consolidated in our consolidated financial statements and we have accounted for this arrangement as an operating lease in accordance with SFAS No. 13, Accounting for Leases, as amended. None of our officers or directors is affiliated with this special purpose entity. This facility, which was substantially completed in June 1999 for a total cost of approximately $19.5 million, was constructed adjacent to our current headquarters in Baltimore, Maryland and provides approximately 73,000 square feet of research and development capacity. The initial lease term is for a period of 84 months (including the construction period) and expires in February 2005. We have the option to either purchase the facility on the remaining anniversary dates during the initial lease term, or sell the facility to a third party at the expiration of the initial lease term. In the event the facility is sold to a third party, we will be obligated to pay the lessor any shortfall between the sales price and 83% of the lessor’s net investment in the facility. The lessor’s net investment in the facility was approximately $18.8 million at December 31, 2002 and we anticipate that it will be further reduced to approximately $18.2 million by the expiration of the initial lease term in February 2005. We do not believe that our facility has experienced a property value decline below the residual value guarantee. However, we have no assurance that the property value will not decline between now and the termination of the initial lease on or before February 2005. The Company’s maximum exposure to loss as a result of the SPE is the residual guarantee ($13.8 million).
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation). The Interpretation will significantly change current practice in the accounting for, and disclosure of, guarantees. The Interpretation requires certain guarantees to be recorded at fair value as those terms are defined in SFAS 5, Accounting for Contingencies. The Company does not expect the adoption of the Interpretation to have a significant financial impact on its Consolidated Financial Statements.
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure‘(SFAS 148) which amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires more prominent and more frequent disclosures in the financial statements of the effects of stock-based compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002 and the interim disclosure provisions are effective for interim periods beginning after December 15, 2002. The Company will provide the required interim disclosures beginning in the quarter ended March 31, 2003. The Company has elected to continue accounting for stock options in accordance with APB 25. As such, no compensation expense for stock options has been recognized under the fair value basis of accounting on the consolidated statements of operations.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” with the objective of improving financial reporting by companies involved with variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Historically, entities generally were not consolidated unless the entity was controlled through voting interests. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A company that consolidates a variable interest entity is called the “primary beneficiary” of that entity. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements of FIN 46 apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Also, certain disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established.
The Company is in the process of assessing the impact of FIN 46 on the Company and specifically as it relates to the operating lease for its research and development facility with a special purpose entity (SPE) sponsored by a commercial bank. If it is determined to apply, the application of FIN 46 may result in the Company consolidating the SPE for the quarter ended September 30, 2003 in the Company’s consolidated financial statements, or alternatively, it may result in the Company exploring alternatives such as selling or restructuring its interest in the facility. See note 11 of our consolidated financial statements for the pro forma impact of consolidating the SPE on certain categories of our consolidated balance sheet at December 31, 2002, and on our net loss for the year ended December 31, 2002.
Outlook
For the year ending December 31, 2003, we expect sales of GLIADEL® Wafer to be between $20.0 million and $25.0 million, with a point estimate of $23.0 million.
Additionally, we are actively looking to acquire another product to market and sell. Although this is a competitive market, we remain committed to finding an acceptable opportunity through in-licensing, co-promotion, or other potential avenues.
We anticipate that cost of goods sold, as a percentage of net sales, will decrease as our production volume increases. For 2003, we estimate cost of goods sold as a percentage of net sales will be between 15% and 20%.
We expect research and development expenditures in 2003 to be approximately $35.0 million to $40.0 million. We anticipate that selling, general and administrative costs will remain constant in 2003, reflecting normal adjustments for recurring salary, benefits and similar costs. Accordingly, we would expect selling, general and administrative expenditures to be in the range of $29.0 to $32.0 million.
Our current budgets and plans include cash proceeds from potential corporate collaborations and/or strategic financings of approximately $10.0 million to $15.0 million. If we can achieve these objectives, we will expect to have cash at the end of 2003 of not less than approximately $65.0 to $70.0 million. To increase cash flow, we also continue to focus on out-licensing or selling product candidates or technologies we do not intend to pursue the development of ourselves.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
A substantial portion of our assets are investment grade debt instruments such as direct obligations of the U.S. Treasury, securities of federal agencies which carry the direct or implied guarantee of the U.S. government, bank certificates of deposit and corporate securities, including commercial paper and corporate debt instruments. The market value of such investments fluctuates with current market interest rates. In general, as rates increase, the market value of a debt instrument would be expected to decrease. The opposite is also true. To minimize such market risk, we have in the past and, to the extent possible, will continue in the future to hold such debt instruments to maturity at which time the debt instrument will be redeemed at its stated or face value. Due to the short duration and nature of these instruments, we do not believe that we have a material exposure to interest rate risk related to our investment portfolio. The investment portfolio at December 31, 2002 was $100.7 million and yield to maturity was approximately 3.0%. The weighted-average return on our investments during the year ended December 31, 2002 was approximately 4.5%.
Substantially all of our financial obligations were established with interest rates, which fluctuate with market conditions. As a hedge against such fluctuations in interest rates, we have entered into certain interest rate swap agreements with a commercial bank (“counter party”), to exchange substantially all of our variable rates of interest on certain financial obligations for fixed rates. Our borrowings under our bond and term loans and financial obligations under certain lease arrangements are approximately $21.1 million. Pursuant to these borrowing arrangements, we are obligated to pay variable interest rates on substantially all of these obligations of LIBOR plus between 5/8% and 3/4%. The interest rate swap agreements have a total notional principal amount of approximately $22.3 million as of December 31, 2002. Pursuant to these interest rate swap agreements, we pay a fixed rate of interest to the counter party of approximately 6% and receive from the counter party a variable rate of interest of LIBOR plus 5/8%. The differential to be paid or received as interest rates change is charged or credited, as appropriate, to operations. Accordingly, we have effectively “swapped” or exchanged floating interest rates for “fixed” interest rates on our financial obligations at a blended annual rate of approximately 6% in the aggregate. These interest rate swap agreements have approximately the same maturity dates as the financial obligations and expire on various dates through February 2005. The commercial bank has the right to terminate certain of the agreements having a total notional principal amount of $20.0 million during February 2003. We do not speculate on the future direction of interest rates nor do we use these derivative financial instruments for trading purposes. In the event of non-performance by the counter party, we could be exposed to market risk related to interest rates.
The aggregate fair value of these interest rate swap agreements was a liability of approximately $1.6 million at December 31, 2002. Current market pricing models were used to estimate these fair values.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The information required by this item is incorporated by reference to the financial statements listed in Items 14(a) of Part IV of this Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Directors and Executive Officers of the Registrant
Information concerning our directors is incorporated by reference from the information to be contained under the captions “Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” in our 2003 Proxy Statement, which will be filed no later than 120 days following December 31, 2002. Information concerning our executive officers is contained in Item 1.A. of Part I.
Item 11.
Executive Compensation
The information required by this item is hereby incorporated by reference from the information to be contained under the caption “Executive Compensation” in our 2003 Proxy Statement, which will be filed no later than 120 days following December 31, 2002.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
Except for the Equity Compensation Plan information set forth below, the information required by this item is hereby incorporated by reference from the information to be contained under the caption “Beneficial Ownership of Common Stock” in our 2003 Proxy Statement, which will be filed no later than 120 days following December 31, 2002.
Securities Authorized for Issuance Under Equity Compensation Plans
(1)
Consists of shares to be issued upon exercise of outstanding options granted under the Guilford Pharmaceuticals Inc. 1993 Employee Share Option and Restricted Share Plan, as amended, the Guilford Pharmaceuticals Inc. Directors’ Stock Option Plan, and the Guilford Pharmaceuticals Inc. 2002 Plan (the “2002 Plan”). Of these plans, the only plan under which options may be granted in the future is the 2002 Plan.
(2)
Consists of shares to be issued upon exercise of outstanding options granted under the Guilford Pharmaceuticals Inc. 1998 Employee Share Option and Restricted Share Plan (the “1998 Plan”), and shares issuable to the following consultants, in the amounts set forth beside each of their names (collectively, the “Consultant’s Option Arrangements”): Henry Brem (70,000 shares); Robert Langer (142,800 shares); Richard Casey (55,000 shares); Kam Leong (30,000 shares); John Newman (35,000 shares); Solomon Snyder (90,000 shares); and Susan Smith (8,000 shares).
Equity Compensation Plans Not Approved by Security Holders
The disclosure required by paragraph (d)(3) of Item 201 of Regulation S-K for the 1998 Plan and the Consultant’s Option Arrangements is incorporated herein by reference from Note 15 to our Notes To Consolidated Financial Statements set forth on pages through of this annual report, under the headings, “Employee Share Option and Restricted Share Plans,” and, “Consultants,” respectively.
Item 13.
Certain Relationships and Related Transactions
The information required by this item is hereby incorporated by reference from the information to be contained under the caption “Beneficial Ownership of Common Stock” and “Certain Relationships and Related Party Transactions” in our 2003 Proxy Statement, which will be filed no later than 120 days following December 31, 2002.
Item 14.
Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Chief Executive Officer and the Chief Financial Officer have reviewed our disclosure controls and procedures as of a date within the 90-day period prior to the filing of this annual report (the “Evaluation Date”). Based on that review, they have concluded that, as of the Evaluation Date, these controls and procedures were, in design and operation, effective to assure that the information required to be included in this report has been properly collected, processed, and timely communicated to those responsible in order that it may be included in this report.
b) Changes in Internal Controls. Subsequent to the Evaluation Date, there have been no significant changes, including corrective actions, in our internal controls or in other factors that could significantly affect the disclosure controls and procedures.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following Financial Statements are included in this report:
(a)(2) Financial Statements Schedules
The following Schedules are filed as part of this report:
(a)(3) Exhibits
The following exhibits are filed as part of this report:
 Confidential treatment of certain portions of these agreements has been granted by the Securities and Exchange Commission.
(b) Reports on 8-K:
On December 5, 2002, the Company filed a current report on Form 8-K disclosing under Item 5 certain management changes.
On November 14, 2002, the Company filed a current report on Form 8-K for the purpose of furnishing under Item 9 a