FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION FILE NO. 333-66500
PROSPECTUS
$10,000,000
COMMON STOCK
$3,000,000
WARRANTS AND UNDERLYING COMMON STOCK
[LOGO]
INCARA PHARMACEUTICALS CORPORATION
We are offering shares of our common stock and warrants to purchase our common
stock continuously over time. This means:
. we are offering our shares and the warrants hereunder directly to
anyone who wants to buy them;
. we are also offering shares and the warrants through the placement
agent named below;
. we may issue shares and the warrants offered in this prospectus at any
time;
. we will provide a prospectus supplement or amendment, if necessary, to
add, update or change the information contained in this prospectus;
. you should read this prospectus and any prospectus supplement or
amendment carefully before you invest.
Our common stock is traded on the Nasdaq National Market under the symbol
"INCR." On August 7, 2001, the last sale price of our common stock on the Nasdaq
National Market was $1.65 per share. There is no market for the warrants.
While we are offering our shares and the warrants directly to anyone who
wants to buy them, we also have engaged Petkevich & Partners, LLC as placement
agent to assist in this offering on a best efforts basis.
We are offering our common stock at a price per share equal to the closing
sale price as reported by Nasdaq on the day before any sale. Each purchaser will
receive a five-year warrant to purchase common stock for a number of shares
equal to (1) 30% of the dollar amount of common stock purchased divided by (2)
the warrant exercise price. The warrant exercise price will be equal to 125% of
the common stock purchase price. There is no separate purchase price for the
warrants.
Investing in our securities involves risks. See "Risk Factors" beginning
on page 2.
Neither the SEC nor any state securities commission has approved or
disapproved our securities or determined that this prospectus is truthful or
complete. It is illegal for anyone to tell you otherwise.
Petkevich & Partners, LLC
The date of this prospectus is August 8, 2001.
TABLE OF CONTENTS
Page
Prospectus Summary..................................................................... 1
Risk Factors........................................................................... 2
Forward-Looking Statements............................................................. 11
Use of Proceeds........................................................................ 11
Dividend Policy........................................................................ 11
Capitalization......................................................................... 12
Market for Securities.................................................................. 13
Selected Financial Data................................................................ 13
Unaudited Pro Forma Consolidated Financial Information................................. 16
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 17
Business............................................................................... 22
Management............................................................................. 35
Certain Relationships and Related Transactions......................................... 39
Principal Stockholders................................................................. 41
Description of Capital Stock........................................................... 43
Plan of Distribution................................................................... 45
Securities Offered..................................................................... 47
Legal Matters.......................................................................... 47
Experts................................................................................ 47
Where You Can Find More Information.................................................... 47
Index to Consolidated Financial Statements............................................. F-1
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PROSPECTUS SUMMARY
Because this is a summary, it does not contain all the information that may
be important to you. You should read carefully the entire prospectus, including
"Risk Factors" and the financial statements, before you decide whether to invest
in our common stock.
Incara Pharmaceuticals Corporation
Our Business
Incara Pharmaceuticals Corporation is developing therapies focused on
tissue protection, repair and regeneration. In particular, we are focused on
developing adult liver stem cell therapy, referred to as liver progenitor cell
therapy, for the treatment of liver failure. We are also conducting research on
and development of a series of catalytic antioxidant molecules that we believe
will provide strategic opportunities for collaboration with larger
pharmaceutical companies in areas such as stroke and the prevention of side
effects induced by radiation in cancer therapy. We are actively pursuing such
collaborations. We are also developing catalytic antioxidants for applications
in our liver cell therapy program and other uses of cell therapy. In
collaboration with Elan Corporation, plc and its subsidiaries, we are conducting
a Phase 2/3 clinical trial of an ultra-low molecular weight heparin for the
treatment of ulcerative colitis. A summary of our current research and
development programs is set forth below.
Liver progenitor cell transplant. Liver progenitor cells are young cells
found in the human liver that can grow and divide many times. Our process
purifies human liver progenitor cells from the livers of organ donors. Based on
animal models, we believe that following transplantation into patients our cells
will be able to grow and expand to create new functioning liver tissue.
Currently, chronic liver disease leads to approximately 330,000 hospitalizations
and 30,000 deaths each year in the United States. There are, however, only
approximately 4,900 donor livers available annually in the United States and
over 17,500 people on the liver transplant waiting list. The number of patients
with such severe cirrhosis that they could become candidates for a transplant
exceeds 100,000. We plan to file in late 2001 an Investigational New Drug, or
IND, application with the Food and Drug Administration, or FDA, in order to
initiate clinical trials. We intend to conduct these clinical trials to
determine the efficacy of our liver progenitor cell therapy for treatment of
liver failure and some inherited liver diseases in infants and young children.
Small molecule catalytic antioxidants. We intend to investigate small
molecule catalytic antioxidants as a treatment for stroke and prevention of
radiation-induced side effects from cancer therapy. An estimated 600,000
individuals suffer strokes in the United States each year, with estimated direct
costs of treating stroke exceeding $28 billion annually. Our lead catalytic
antioxidant molecule significantly reduced damaged brain tissue when
administered as late as 7.5 hours after obstruction of blood flow in animal
models of stroke. An estimated 400,000 cancer patients in the U.S. each year
develop mucositis caused by chemotherapy or radiation. Mucositis is
characterized by painful oral ulcers which may limit or delay therapy. Incara's
catalytic antioxidants have reduced the severity of mucositis and lung damage
induced by radiation in animal models.
We believe compounds from our catalytic antioxidant program will also have
application in the developing adult stem cell transplant industry. Antioxidants
destroy free radicals, which damage cells within the human body. In cell
culture experiments, these catalytic antioxidant compounds have been shown to
improve the ability of liver cells to survive freezing and thawing. They have
also been shown to protect neurons in culture from oxygen deprivation and
pancreatic islet cells in culture from various toxins. In animals, one of our
compounds has been shown to protect pancreatic islet cells against autoimmune
attack in a model of juvenile onset diabetes. In addition, we are exploring the
possibility that these compounds may enhance the viability of transplanted
pancreatic islet cells and we intend to explore their effect on transplanted
liver progenitor cells.
OP2000, an ultra-low molecular weight heparin. We are exploring the use of
OP2000 as a treatment for inflammatory bowel disease. Heparin is a naturally
occurring mixture of substances produced by the human body with anti-clotting
and anti-inflammatory properties. OP2000 is derived from heparin by breaking it
down into smaller molecules. Lower weight, or smaller, molecules of heparin may
prove to have advantages over heparin itself, including better safety, efficacy
and convenience. OP2000 is being tested in a multicenter phase 2/3 clinical
trial as a treatment for ulcerative colitis, a form of inflammatory bowel
disease. Approximately 1,000,000 patients suffer from ulcerative colitis in the
United States and Europe combined.
Our History
Our company was incorporated in Delaware as Intercardia, Inc. in 1994. In
July 1999 our company changed its name to Incara Pharmaceuticals Corporation.
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Corporate Information
We have two wholly owned subsidiaries, Aeolus Pharmaceuticals, Inc., a
Delaware corporation, and Incara Cell Technologies, Inc., a Delaware
corporation. We own 80.1% of Incara Development, Ltd., a Bermuda corporation,
and 35% of CPEC, LLC, a Delaware limited liability company. Unless otherwise
stated, "Incara" and "we" refer collectively to Incara Pharmaceuticals
Corporation and its subsidiaries.
Our offices are located at 79 T.W. Alexander Drive, 4401 Research Commons,
Suite 200, P.O. Box 14287, Research Triangle Park, North Carolina 27709, and our
telephone number is (919) 558-8688. Our Web site is located at www.incara.com.
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Information on our Web site is not part of this prospectus.
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RISK FACTORS
You should be aware that there are various risks to an investment in our
common stock, including those described below. You should carefully consider
these risk factors, together with all of the other information included in this
prospectus, before you decide to invest in shares of our common stock.
If any of the following risks, or other risks not known to us or that we
currently believe to not be significant, develop into actual events, then our
business, financial condition, results of operations or prospects could be
materially adversely affected. If that happens, the market price of our common
stock could decline, and you may lose all or part of your investment.
If we do not raise significant additional capital, we will be unable to fund all
of our research and development activities and will need to eliminate or curtail
these programs.
One of the most significant issues we face is adequate funding of our
existing projects. As of March 31, 2001, we had cash and investments of
$4,954,000. While we believe our existing financial resources are adequate to
fund operations through September 30, 2001, which is the end of our fiscal year,
we will need the capital raised in this offering and from other sales of our
stock, or through collaborations with third parties, to support operations after
fiscal 2001.
Our financial requirements will depend upon the success of our research and
development programs. In addition, our ability to enter into new collaborations
that provide fees and research and development funding depends on the successful
results of our research programs. If some or all of our programs show
scientific progress, we will need significant additional funds to move therapies
through the preclinical stages and into clinical trials. If we are unable to
raise the amount of capital necessary to complete development and reach
commercialization of any of our therapeutic products, we will need to delay or
cease development of one or more of our products.
We are not required to sell all of the common stock we are offering, and we may
not raise enough capital from the sale of our common stock to adequately fund
our planned research and development activities.
There is no minimum amount of our common stock we must sell in this
offering. Accordingly, investors will bear the risk that we will accept
subscriptions for less than $10,000,000 worth of common stock and then be unable
to successfully complete all of the anticipated uses of the proceeds of this
offering. If less than $10,000,000 is raised, we might be unable to develop our
programs as planned and our business, financial condition, and results of
operations could be adversely affected.
The placement agent, Petkevich & Partners, LLC, is not obligated to
purchase any number or dollar amount of our shares at any time. While Petkevich
& Partners has agreed to use its best efforts to identify prospective purchasers
of the common stock offered, there can be no assurance that any or all of the
shares offered will be sold. Our inability to obtain adequate financing may
impede our research and development activities and thus negatively affect the
return on your investment in our common stock.
We will continue to incur substantial losses and we might never achieve a
profit.
As of March 31, 2001, we had an accumulated deficit of $93,685,000 from our
research, development and other activities. We have not generated any revenues
from product sales and do not expect to do so for at least several more years.
In the past, most of our revenues have come from collaborators who reimbursed us
for research and development activities.
2
Our research and development programs are at an early stage and therefore might
never result in viable products.
Our programs to develop products are in the early stages of development,
involve unproven technology, require significant further research and
development and regulatory approvals, and are subject to the risks of failure
inherent in the development of products or therapeutic procedures based on
innovative technologies. These risks include the possibilities that any or all
of these proposed products or procedures are found to be unsafe or ineffective,
or otherwise fail to receive necessary regulatory approvals; that the proposed
products or procedures are uneconomical to market or do not achieve broad market
acceptance; that third parties hold proprietary rights that preclude us from
marketing them; or that third parties market a superior or equivalent product.
Further, the timeframes for commercialization of any products are long and
uncertain, because of the extended testing and regulatory review process
required before marketing approval can be obtained. As evidence of the
difficulty in commercializing new products, in 1999, we terminated one product
we were developing. We might have to terminate the development of current or
future products and our results of operations could be adversely affected.
We expect to remain dependent on collaborations with third parties for the
development of new products.
Our current business strategy is to enter into agreements with third
parties both to license rights to our potential products and to develop and
commercialize new products. We cannot assure that we will be able to enter into
or maintain these agreements on terms favorable to us. We currently license
from third parties, and do not own, rights under patents and certain related
intellectual property for our current development programs. If any of these
licenses were to expire, our business could be adversely affected.
The development of OP2000 depends on our collaboration with Elan Corporation,
plc, which is outside of our control.
We are developing OP2000 through a collaboration with Elan. Incara
Development, Ltd. is a company that we formed and jointly own with Elan to
develop OP2000. We own 80.1% and Elan owns 19.9% of Incara Development.
Despite our majority ownership of Incara Development, we have no control over
the development activities regarding OP2000, because we control only 50% of the
votes on the joint management committee of Incara Development. As a result, any
revenue we earn on OP2000 will depend entirely on our ability to negotiate with
Elan.
Elan has the right to exchange the Series C convertible exchangeable
preferred stock of Incara it owns for all of the preferred securities we own of
Incara Development at any time until December 21, 2006, which would give Elan a
50% ownership interest in Incara Development. If Elan exercises this right, our
ownership in Incara Development will be substantially diluted, which would
reduce the return to which we would be entitled if OP2000 is successful.
Our liver progenitor cell program and product depends on a constant, available
source of livers from organ donors.
We must maintain current or develop new sources of livers or liver tissues
from which progenitor cells can be isolated. There are a limited number of
suppliers and we face competition in obtaining livers from them. We have
historically relied on several suppliers of liver tissues for research, but
entering into the clinical trial stage of development will increase our needs.
For clinical trials and ultimately for commercialization, we need to obtain,
from traditional organ transplant donor programs, livers which are not suitable
for full liver transplant. We might not be able to obtain these livers. If we
are unable to maintain a supply of livers, our development of the liver
progenitor cell program will be adversely affected.
Our research and development programs rely on technology licensed from third
parties, and termination of any of those licenses would result in loss of
significant rights to develop and market our products, which would impair our
business.
We have exclusive worldwide rights to our antioxidant small molecule
technology through a license agreement with Duke University. We also have the
worldwide exclusive rights to patents licensed from Albert Einstein College of
Medicine and patent applications and rights to license future technology arising
out of research sponsored at the University of North Carolina at Chapel Hill
(related to the liver progenitor cell program) and National Jewish Medical
Center (related to antioxidant small molecules). Key financial and other terms,
such as royalty payments, for the licensing of this future technology would
still need to be negotiated with the research institutions, and it might not be
possible to obtain any such license on terms that are satisfactory to us.
3
Our licenses generally may be terminated by the licensor if we fail to
perform our obligations, including obligations to develop the compounds and
technologies under license. If terminated, we would lose the right to develop
the products, which could adversely affect our business. The license agreements
also generally require us to meet specified milestones or show reasonable
diligence in development of the technology. If disputes arise over the
definition of these requirements or whether we have satisfied the requirements
in a timely manner, or if any other obligations in the license agreements are
disputed by the other party, the other party could terminate the agreement and
we could lose our rights to develop the licensed technology.
We need to obtain collaborative arrangements for manufacturing and marketing of
our potential products, or we will have to develop the expertise, obtain the
additional capital and spend the resources to perform those functions.
We do not have the staff or facilities to manufacture or market any
products being developed in our programs. We need to enter into collaborative
arrangements in the future to develop, commercialize, manufacture and market
products emerging from our catalytic antioxidant program. We also might rely on
a third party to manufacture the liver progenitor cell therapy being developed
by us. We intend to seek a company to work with us on development of a liver
assist device, and we intend to seek a company or companies to work with us on
development of gene therapy and genomics applications of the liver progenitor
cell program. Incara Development also will need third parties to manufacture
and market OP2000, if it reaches commercialization.
A large number of small biotechnology companies are seeking collaborators,
some of whom compete in the same therapeutic areas as our programs, and
obtaining and maintaining new collaborative arrangements will be difficult. We
might not be successful in entering into third party arrangements on acceptable
terms, if at all. If we are unable to obtain or retain third-party
manufacturing or marketing on acceptable terms, we might be delayed in our
ability to commercialize products. Substantial additional funds and personnel
would be required if we needed to establish our own manufacturing or marketing
operations. We might not be able to obtain adequate funding or establish such
capabilities at all or in a cost-effective manner.
Even if we do succeed in obtaining a collaborator for any of our programs,
the product might not be commercialized profitably, if at all. The compensation
owed to our manufacturers and marketers will reduce our profit margins and might
delay or limit our ability to develop, deliver and sell products on a timely and
competitive basis. Furthermore, one of these companies could pursue alternative
technologies or develop alternative compounds either on its own or in
collaboration with others, targeted at the same diseases as those involved in
our programs.
The manufacturers of any of our products, if they reach commercialization, must
comply with applicable regulations.
A manufacturer must conform to FDA and any applicable foreign regulations
for the production and packaging of products. If any of our manufacturers
cannot meet our needs or applicable regulatory standards with respect to the
timing, quantity or quality of products, our development programs would be
delayed.
A failure to obtain or maintain patent and other intellectual property rights
would allow others to develop and sell products similar to ours, which could
impair our business.
The success of our business depends, in part, on our ability to establish
and maintain adequate protection for our intellectual property, whether owned by
us or licensed from third parties. We rely primarily on patents in the United
States and in other key markets to protect our intellectual property. If we do
not have adequate patent protection, other companies could sell products that
compete directly with ours, without incurring any liability to us. Patent
prosecution, maintenance and enforcement on a global basis is expensive, and
many of these costs must be incurred before we know whether a product covered by
the claims can be successfully developed or marketed.
4
Even if we expend considerable time and money on prosecution, a patent
application might never issue as a patent. We can never be certain that we were
the first to invent the particular technology or that we were the first to file
a patent application for the technology, because a majority of U.S. patent
applications are maintained in secrecy until a patent issues. Publications in
the scientific or patent literature generally do not identify the date of an
invention, so it is possible that a competitor could be pursuing the patenting
of the same invention in the United States and have an earlier invention date.
Outside the United States, priority of invention is determined by the earliest
effective filing date, not the date of invention. Consequently, if another
person or company pursues the same invention and has an earlier filing date,
patent protection outside the United States would be unavailable to us. Also,
outside the United States, an earlier date of invention cannot overcome a date
of publication that precedes the earliest effective filing date. Accordingly,
the patenting of our proposed products would be precluded outside the United
States if a prior publication anticipates the claims of a pending application,
even if the date of publication is within a year of the filing of the pending
application.
Even if patents issue, the claims allowed might not be sufficiently broad
to offer adequate protection for our technology against competitive products.
Patent protection differs from country to country, giving rise to increased
competition from other products in countries where patent coverage is either
unavailable, weak, or not adequately enforced, if at all. Once a patent issues,
we still face the risk that others will try to design around our patent or will
try to challenge the validity of the patent. If a patent were invalidated, we
could be subject to unfettered competition from late comers. The cost of
litigation can be substantial, even if we prevail and there can be no assurance
for recovery of damages.
If a third party were to bring an infringement claim against us, we would incur
significant costs in our defense; if the claim were successful, we would need to
develop non-infringing technology or obtain a license from the successful patent
holder, if available.
Our business also depends on our ability to develop and market products
without infringing on the proprietary rights of others or being in breach of our
license agreements. The pharmaceutical industry is subject to frequent and
protracted litigation regarding patent and other intellectual property rights.
Most companies have numerous patents that protect their intellectual property
rights. These third parties might assert claims against us with respect to our
product candidates and future products. If litigation were required to
determine the validity of a third party's claims, we could spend significant
resources and be distracted from our core business activities, regardless of the
outcome. If we did not prevail in the litigation, we could be required to
license a third party's technology, which might not be possible on satisfactory
terms, or discontinue our own activities and develop non-infringing technology,
any of which could prevent or delay pursuit of our development programs.
Incara Development has rights under an exclusive license from Opocrin
S.p.A., until 2013 in all countries other than Japan and Korea, to develop and
market OP2000. This license is based on an issued patent held by Opocrin
claiming a heparin derivative with a specified range of molecular weight.
Incara Development also has rights to a non-exclusive license from Opocrin to
practice certain related patents, to the extent required for our activities
related to OP2000. We are aware of a recently issued patent claiming the use of
specified fractions of heparin for the treatment of inflammatory bowel disease.
We do not believe the development of OP2000 will require the licensing of this
patent. If OP2000 were to be determined to fall within the scope of this patent
and if the patent's claims were found to be valid, Incara Development would have
to license this patent in order to commercialize OP2000. Incara Development
might not be able to license this patent at a reasonable cost which would result
in Incara Development not being able to market OP2000. Uncertainty regarding
the scope or validity of this patent might deter Elan from continuing
development of OP2000 or deter other companies from collaborating with Incara
Development for the development and commercialization of OP2000.
Protection of trade secret and confidential information is difficult, and loss
of confidentiality could eliminate our competitive advantage.
In addition to patent protection, we rely on trade secrets, proprietary
know-how and confidential information to protect our technological advances. We
use confidentiality agreements with our employees, consultants and collaborative
partners to maintain the proprietary nature of this technology. However,
confidentiality agreements can be breached by the other party, which would make
our trade secrets and proprietary know-how available for use by others. There
is generally no adequate remedy for breach of confidentiality obligations. In
addition, the competitive advantage afforded by trade secrets is limited because
a third party can independently discover or develop something identical to our
own trade secrets or know-how, without liability to us.
If our employees, consultants or collaborators were to use information
improperly obtained from others (even if unintentional), disputes could arise as
to ownership and rights in any resulting know-how or inventions.
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If we do not reach the market with our products before our competitors offer
products for the same use, or if we do not compete effectively in marketing our
products, the revenues from product sales, if any, will be reduced.
We face intense competition in all of our development programs. The
markets for therapeutic products that address liver disease, stroke, cancer and
inflammatory bowel disease is large and competition is increasing. Our most
significant competitors are fully integrated pharmaceutical companies and more
established biotechnology companies, which have substantially greater financial,
technical, sales and marketing, and human resources than us. These companies
might succeed in obtaining regulatory approval for competitive products more
rapidly than we can for our products. In addition, competitors might develop
technologies and products that are cheaper, safer or more effective than those
being developed by us or that would render our technology obsolete.
The ownership interest of our stockholders will be substantially diluted by the
common stock issued in this offering and by future issuances of stock, including
new offerings, conversion of currently outstanding preferred stock, exercises
of currently outstanding options and warrants and the exercise of warrants to be
issued in this offering.
As of July 31, 2001, Incara had 8,380,320 shares of common stock
outstanding. We are offering up to $10,000,000 worth of shares of our common
stock and warrants to purchase up to $3,000,000 worth of shares of common stock
pursuant to this prospectus. This could result in up to 6,666,667 shares of our
common stock, and warrants to purchase 1,600,000 shares of our common stock,
assuming an exercise price of $1.875, being issued in this offering, based on
the closing price of $1.50 of our common stock on July 31, 2001, which
represents, assuming the exercise of the warrants, 49.7% of the total number of
our shares of common stock which would then be outstanding, based on shares
outstanding as of July 31, 2001. In addition, under our compensation arrangement
with Petkevich & Partners, we will issue a warrant for up to 80,000 shares of
our common stock, depending on the amount of our common stock sold in this
offering, which would further dilute our stockholders.
We may grant to our employees, directors and consultants options to
purchase our common stock under the 1994 Stock Option Plan. As of July 31,
2001, options to purchase 2,141,148 shares at exercise prices ranging from $0.04
to $20.50, with a weighted average exercise price of $2.95 were outstanding and
1,141,565 shares were reserved for issuance under the 1994 Stock Option Plan.
In addition, warrants to purchase 17,783 shares of common stock at an exercise
price of $13.49 were outstanding, and we have reserved 36,208 shares of common
stock for issuance pursuant to our Employee Stock Purchase Plan.
In connection with a collaboration and financing transaction, we have issued
preferred stock and warrants to purchase preferred stock to Elan. This
preferred stock is convertible into common stock, as discussed below.
In the event that the capital raised in this offering is insufficient to
fund operations, we will need to sell additional shares of our common stock,
preferred stock or other securities, or enter into collaborations with third
parties during our next fiscal year to meet our capital requirements, including
the issuance of shares of our stock to Elan and Torneaux Fund Ltd., as discussed
below. We might not be able to complete these transactions when needed. If
these sales of stock occur, these issuances of stock will dilute the ownership
interests of our stockholders. The possibility of dilution posed by shares
available for future sale could reduce the market price of our common stock and
could make it more difficult for us to raise funds through equity offerings in
the future.
Stockholders might experience significant dilution from the conversion of
outstanding preferred stock, warrants and a convertible promissory note held by
Elan Corporation which are convertible into shares of our common stock.
In January 2001, in connection with a collaboration and financing
transaction, we sold to Elan 28,457 shares of our Series B convertible non-
voting preferred stock, 12,015 shares of our Series C convertible exchangeable
non-voting preferred stock and a warrant to purchase 22,191 shares of our Series
B preferred stock. Each share of our Series B preferred stock is convertible
into ten shares of our common stock. The Series C preferred stock has a face
value of $1,000 per share and bears a 7% dividend payable in Series C preferred
stock, which compounds annually, and is convertible by Elan into shares of
Series B preferred stock at the rate of $64.90 per share. Accordingly, a total
of 2,357,789 shares of our common stock could be issued to Elan, assuming the
exercise of all warrants currently outstanding and the conversion into common
stock of all shares of Series B and Series C preferred stock currently
outstanding, but not including any dividends to be issued on the Series C
preferred stock. This amount of shares represents 22.0% of the total shares of
our common stock that would be outstanding after such conversion and exercise
based on shares of common stock outstanding on July 31, 2001; however, pursuant
to provisions in our Certificate of Incorporation, Elan may not own more than
9.9% of our common stock at any time.
In addition, upon the later of the completion of enrollment of a Phase 2/3
clinical trial for OP2000 or December 21, 2001, Elan will purchase an additional
$1,000,000 of our Series B preferred stock, at a per share price equal to ten
times the greater of the average per share daily price of our common stock on
the day before the purchase or a 25% premium to the
6
average daily price per share of our common stock for the 60 trading day period
immediately before the purchase. On that day, Elan also will receive a warrant
to purchase an amount of Series B preferred stock equal to 20% of the shares of
Series B preferred stock it purchases at that time. Accordingly, assuming the
purchase price for the later purchased Series B preferred stock is the same as
ten times the greater of the average per share daily price of our common stock
on July 31, 2001 or a 25% premium to the average daily for the 60 trading day
period prior to August 1, 2001, an additional 516,129 shares of our common stock
could be issued to Elan. However, if the purchase price of the Series B
preferred stock is less than $8.00 per share, the purchase of this stock will be
limited to 150,000 shares of Series B preferred stock and will be at Elan's
option.
Further, we have issued to Elan a promissory note under which we can,
subject to Elan's consent, borrow up to $4,806,000 for the development of
OP2000. The note bears interest at 10%, compounded semi-annually on the amount
outstanding under the note, and the principal and interest is convertible at
Elan's option into shares of our Series B preferred stock at $43.27 per share.
As of July 31, 2001, we had not borrowed any funds pursuant to this note.
However, assuming the full amount is borrowed under the note, and assuming the
conversion of the principal, but not any interest on the note, an additional
1,110,700 shares of our common stock could be issued to Elan.
If Elan does not exchange its Series C preferred stock for either increased
ownership of Incara Development or for Series B preferred stock by December 21,
2006, Incara will exchange the Series C preferred stock and accrued dividends,
at its option, for either cash or shares of Series B preferred stock and
warrants of Incara having a then fair market value of the amount due. Any
issuance of equity securities or warrants to purchase equity securities in this
situation would be dilutive to our common stockholders.
If Elan does not exchange all or part of the note for either increased
ownership of Incara Development or for Series B preferred stock by December 21,
2006, Incara will exchange the note and accrued interest, at its option, for
either cash or shares of Series B preferred stock and warrants of Incara having
a then fair market value of the amount due. Any issuance of equity securities
or warrants to purchase equity securities in this situation would be dilutive to
our common stockholders.
The perceived risk of dilution by the convertible securities held by Elan
might cause our stockholders to sell their shares, which would decrease the
market price of our common stock. Further, any subsequent sale of our common
stock by Elan would increase the number of our publicly traded shares, which
could also lower the market price of our common stock.
Stockholders might experience significant dilution from our issuance to Torneaux
Fund Ltd. of up to 1,530,166 shares of common stock, or 15.4% of the total
number of shares of our common stock which would then be outstanding, based on
shares outstanding as of July 31, 2001.
In August 2000, we entered into a financing arrangement with Torneaux Fund
Ltd. under which we may sell our common stock to Torneaux and also issue to
Torneaux warrants which are convertible into our common stock. As of July 31,
2001, we had not sold any shares or issued any warrants to Torneaux. The
maximum number of shares that we could issue to Torneaux during the remaining
term of the arrangement is 1,530,166 shares of our common stock (including
shares covered by warrants). The issuance of shares to Torneaux under this
financing arrangement will have a dilutive effect on our stockholders of as much
as 15.4% of the total number of shares which would then be outstanding, based on
the 8,380,320 shares of common stock outstanding on July 31, 2001. However, if
the trading volume of our stock does not exceed an average of 200,000 shares per
day during the purchase periods, the maximum number of shares that we could
issue to Torneaux would be 1,040,111 shares and warrants, or 11.0% of the shares
which would then be outstanding. The number of shares that we issue to Torneaux
under the agreement is based upon a discount to the daily weighted average
market price of our stock over a 20-day trading period. If we sell shares to
Torneaux at a time when our stock price is low, our stockholders would be
significantly diluted. In addition, the perceived risk of dilution might cause
stockholders to sell their shares, which could further decrease the market price
of our shares. Torneaux's resale of our common stock will increase the number
of our publicly traded shares, which could also lower the market price of our
common stock.
A return on your investment in our common stock will be dependent on an increase
in the price of our common stock.
There is no set yield on our common stock. In addition, we do not
currently anticipate paying cash dividends on our common stock because we have
had no earnings to date and intend to retain all future earnings, if any, for
the foreseeable future to fund our business operations. As a result, anyone
investing in our common stock must look to an increase in its price to derive
any value on their investment.
7
Our common stock is not actively traded and the price of our common stock has
fluctuated from $0.50 to $11.00 during the last two years.
Our common stock is listed on the Nasdaq National Market System under the
symbol "INCR." The public market for our common stock has been characterized by
low and/or erratic trading volume, often resulting in price volatility. An
active public market for our common stock might be limited because of the small
number of shares outstanding, the limited number of investors and the small
market capitalization (which is less than that authorized for investment by many
institutional investors).
All shares issued in this offering and all shares issued upon the exercise
of warrants issued in this offering will be freely tradable. In addition, shares
of our common stock that we might issue to Torneaux have been registered for
resale with the SEC and will be freely tradable and we have agreed to register
shares of common stock that might be issued to Elan, as well as the shares
underlying a warrant to be issued to Petkevich & Partners. The sale of a
significant amount of shares sold to Torneaux or shares issued in this offering
or to Elan at any given time could cause the trading price of our common stock
to decline and to be highly volatile.
The market price of our common stock also is subject to wide fluctuations
due to factors that we cannot control, including the results of preclinical and
clinical testing of our products under development, decisions by collaborators
regarding product development, regulatory developments, market conditions in the
pharmaceutical and biotechnology industries, future announcements concerning our
competitors, adverse developments concerning proprietary rights, public concern
as to the safety or commercial value of any products, and general economic
conditions.
Furthermore, the stock market has experienced significant price and volume
fluctuation unrelated to the operating performance of particular companies.
These market fluctuations can adversely affect the market price and volatility
of our common stock.
If we fail to meet Nasdaq National Market listing requirements, our common stock
will be delisted and become illiquid.
Our common stock is currently listed on the Nasdaq National Market. Nasdaq
has requirements that a company must meet in order to remain listed on the
Nasdaq National Market. If we are unable to raise additional funds while we
continue to experience losses from our operations, we might not be able to
maintain the standards for continued quotation on the Nasdaq National Market,
including a minimum bid price requirement of $1.00 per share and a minimum net
tangible assets value of $4,000,000. In February 2001, Nasdaq notified us that
our December 31, 2000 net tangible assets did not meet its listing requirements.
Elan's investment in Incara in January 2001 satisfied this requirement and
Nasdaq closed the matter. Nasdaq has proposed amendments to replace its minimum
net tangible assets requirement with a stockholders' equity requirement that
would require companies to have a minimum of $10,000,000 of stockholders' equity
in order to remain listed on the Nasdaq National Market after October 31, 2002.
At March 31, 2001, our stockholders' equity was $5,192,000, which was below the
proposed requirement.
If as a result of the application of these current or proposed listing
requirements, our common stock were delisted from the Nasdaq National Market,
our stock would become harder to buy and sell. Further, our stock could be
subject to what are known as the "penny stock" rules. The penny stock rules
place additional requirements on broker-dealers who sell or make a market in
such securities. Consequently, if we were removed from the Nasdaq National
Market, the ability or willingness of broker-dealers to sell or make a market in
our common stock might decline. As a result, your ability to resell your shares
of our common stock could be adversely affected.
Our operating results are likely to fluctuate from quarter to quarter, which
could cause the price of our common stock to decline.
Our revenues and expenses have fluctuated in the past. This fluctuation has
in turn caused our operating results to vary 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, possibly significantly.
These fluctuations might be due to a variety of factors, including:
. the timing and amount of sales of our products;
. the timing and realization of milestone and other payments from any
future collaborations with third parties;
. the timing and amount of expenses relating to our research and
development, product development, and collaborative activities;
and
8
. the extent and timing of costs related to our activities to obtain
patents for our products and to extend, enforce and/or defend our
rights to patents and other 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
decline.
If we cannot retain or hire qualified personnel, our programs could be delayed.
As of July 31, 2001, we had only 24 employees and we are highly dependent
on the principal members of the management and scientific staff, including in
particular Clayton I. Duncan, our Chairman, President and Chief Executive
Officer. We also are highly dependent on the academic collaborators for each of
our programs. The loss of key employees or academic collaborators could delay
progress in our programs or result in termination of them in their entirety.
We believe that our future success will depend in large part upon our
ability to attract and retain highly skilled scientific and managerial
personnel. We face intense competition for the kinds of personnel from other
companies, research and academic institutions, government entities and other
organizations. We might not be successful in hiring or retaining the personnel
needed for success.
If we do not obtain and maintain government authorizations to manufacture and
market products, our business will be significantly harmed.
Our research and development activities and the manufacturing and marketing
of our products are subject to extensive regulation by governmental authorities
in the United States and other countries. Clinical trials and the manufacturing
and marketing of products are subject to the testing and approval processes of
the FDA and foreign regulatory authorities. The process of obtaining required
regulatory approvals for our products from the FDA and other regulatory
authorities takes many years and is expensive. Data obtained from preclinical
and clinical activities are susceptible to varying interpretations, and if
regulatory authorities do not agree with our analyses of data, our product
programs could be delayed or regulatory approval could be withheld. Additional
government regulations might be promulgated which could delay or prevent
regulatory approval of our products. Even if these approvals are obtained,
post-marketing, adverse events or other monitoring of the products could result
in suspension or limitation of the approvals.
Product liability claims, if asserted against us in the future, could exceed our
insurance coverage and use our cash resources.
The pharmaceutical and biotechnology business exposes us to the risk of
product liability claims alleging that use of our products caused an injury or
harm. These claims can arise at any point in the development, testing,
manufacture, marketing or sale of pharmaceutical products, and might be made
directly by patients involved in clinical trials of our products, by consumers
or healthcare providers or by organizations selling such products. Product
liability claims can be expensive to defend even if the product did not actually
cause the injury or harm.
Insurance covering product liability claims becomes increasingly expensive
as a product moves through the development pipeline to commercialization.
Incara Pharmaceuticals has limited product liability insurance coverage for the
clinical trials for OP2000. However, the available insurance coverage might not
be sufficient to cover us against all potential losses due to liability, if any,
or to the expenses associated with defending liability claims. A product
liability claim successfully asserted against us could exceed our coverage and
require us to use our own cash resources, which would then not be available for
our own products.
In addition, some of our licensing agreements with third parties require us
to maintain product liability insurance. If we cannot maintain acceptable
amounts of coverage on commercially reasonable terms, the corresponding
agreements would be subject to termination.
The costs of compliance with environmental, safety and similar laws could
increase our cost of doing business or subject us to liability in the event of
noncompliance.
Our business is subject to regulation under state and federal laws
regarding occupational safety, laboratory practices, environmental protection
and the use, generation, manufacture, storage and disposal of hazardous
substances. We might be required to incur significant costs in the future to
comply with existing or future environmental and health and safety
regulations.
9
Our research activities involve the use of hazardous materials, chemicals and
radioactive compounds. Although we believe that our procedures for handling
such materials comply with applicable state and federal regulations, we cannot
eliminate the risk of contamination or injury from these materials. In the
event of contamination, we could be liable for any resulting damages.
Provisions of our charter documents and Delaware law could lead to entrenchment
of our management which could discourage or delay offers to acquire Incara,
which might reduce the market price of our common stock and the voting rights of
the holders of common stock.
Provisions of our charter documents and Delaware law make it more difficult
for our stockholders to change the directors of Incara or for a third party to
acquire Incara, and might discourage a third party from offering to acquire
Incara, even if a change in control or in management would be beneficial to our
stockholders. These provisions also could limit the price that certain
investors might be willing to pay in the future for shares of common stock.
The Board of Directors of Incara has the authority to issue up to 3,000,000
shares of preferred stock in one or more series, and to determine the prices,
rights, preferences, privileges and restrictions, including voting rights, of
the shares within each series without any further vote or action by the
stockholders. The rights of the holders of Incara common stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock with
voting rights could make it more difficult for a third party to acquire a
majority of the outstanding voting stock.
Further, some provisions of Delaware law could delay or make more difficult
a merger, tender offer or proxy contest involving Incara. Incara is subject to
the antitakeover provisions of Section 203 of the Delaware General Corporation
Law. In general, the statute prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested stockholder for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. While such provisions are intended to enable the Incara
Board of Directors to maximize stockholder value, they might have the effect of
discouraging takeovers that could be in the best interest of some stockholders.
Such provisions could reduce the market value of Incara's common stock in the
future.
We remain contingently liable for IRL obligations.
In connection with the sale of Incara Research Laboratories, or IRL, in
December 1999 to a private pharmaceutical company, we agreed to remain
contingently liable through May 2007 on debt and lease obligations assumed by
the purchaser, including primarily the IRL facility lease in Cranbury, New
Jersey. If the purchaser were to default, or the lender or landlord otherwise
collect from us, our financial condition would be materially adversely affected.
This contingent liability was approximately $7,000,000 in June 2001 and should
decline on an approximately straight-line basis to zero in May 2007.
10
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. You can identify forward-looking
statements by terminology such as "may," "might," "will," "could," "should,"
"would," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"intend," "potential" or "continue" or the negative of these terms or other
comparable terminology. Our actual results might differ materially from any
forward-looking statement due to various risks, uncertainties and contingencies,
including:
. the success or failure of our efforts to implement our business
strategy;
. the early stage of the products we are developing;
. uncertainties relating to clinical trials and regulatory reviews;
. the need for additional funds;
. competition and dependence on collaborative partners;
. our ability to obtain adequate patent protection and to enforce these
rights;
. our ability to avoid infringement of the patent rights of others; and
. the other factors discussed in the "Risk Factors" section and
elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
USE OF PROCEEDS
Unless otherwise specified in a prospectus supplement or amendment
accompanying this prospectus, we will add the net proceeds from the sale of the
securities to which this prospectus and any prospectus supplement or amendment
relate to our general funds which we will use for financing our operations.
DIVIDEND POLICY
We have never paid a cash dividend on our common stock and we do not
anticipate paying cash dividends in the foreseeable future. In addition, we
cannot pay any cash dividends on our common stock unless we are current on the
mandatory dividend payable on our Series C preferred stock. Further, if we pay
a cash dividend on our common stock we also must pay the same dividend on an as
converted basis on the Series B preferred stock and the Series C preferred
stock. Moreover, any additional preferred stock to be issued and any future
credit facilities might contain restrictions on our ability to declare and pay
dividends on our common stock. We plan to retain all earnings, if any, for the
foreseeable future for use in the operation of our business and to fund future
growth.
11
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2001. Our
capitalization is presented on an actual basis and on a modified pro forma basis
to reflect the issuance of $5,000,000 and $10,000,000 of our common stock in
this offering at $1.50 per share, which was the closing price of our stock on
July 31, 2001, after deduction of an estimated $530,000 and $880,000,
respectively, in commissions and expenses expected to be incurred in this
offering. The pro forma figures are given as an example only, and there is no
requirement in this offering that any minimum number of shares be sold. The
outstanding share information shown in the table excludes 2,141,148 shares of
common stock issuable upon exercise of stock options, 1,141,565 shares of common
stock reserved for issuance under our 1994 Stock Option Plan, 17,783 shares
issuable upon exercise of warrants for common stock, 22,191 shares issuable
upon exercise of warrants for Series B preferred stock as of July 31, 2001, and
any shares of common stock issuable upon exercise of warrants to be issued in
this offering.
March 31, 2001
----------------------------------------------------
As Adjusted As Adjusted
$5,000,000 $10,000,000
of Common of Common
Actual Stock Sold Stock Sold
--------------- ----------------- ------------------
(in thousands)
Capital lease obligations................................................... $ 54 $ 54 $ 54
Stockholders' equity:
Preferred stock, $.01 par value per share, 3,000,000 shares authorized
Series C convertible exchangeable preferred stock, 20,000 shares
authorized; 12,015 issued and outstanding (liquidation value of
$18,031,000)................................................... 1 1 1
Series B convertible preferred stock, 600,000 shares authorized;
28,457 issued and outstanding.................................. 1 1 1
Common stock, $.001 par value per share, 40,000,000 shares authorized;
8,385,171 shares issued and outstanding, actual; 11,718,504 and
15,051,838 shares issued and outstanding, as adjusted,
respectively....................................................... 8 12 15
Additional paid-in capital............................................. 99,046 103,512 108,159
Restricted stock....................................................... (179) (179) (179)
Accumulated deficit.................................................... (93,685) (93,685) (93,685)
--------------------------------- ------------------
Total stockholders' equity......................................... 5,192 9,662 14,312
--------------------------------- ------------------
Total capitalization........................................... $ 5,246 $ 9,716 $ 14,366
================================= ==================
12
MARKET FOR SECURITIES
Our common stock trades on the Nasdaq National Market under the symbol
"INCR". The following sets forth the quarterly high and low sales prices as
reported by Nasdaq for the periods indicated, which prices do not reflect retail
mark-up, markdown or commissions.
High Low
-------- --------
Fiscal Year Ended September 30, 1999
October 1, 1998 through December 31, 1998.. $ 10 1/8 $ 3 3/8
January 1, 1999 through March 31, 1999..... 15 1/2 5
April 1, 1999 through June 30, 1999........ 8 1/4 4 1/16
July 1, 1999 through September 30, 1999.... 5 5/8 1/2
Fiscal Year Ended September 30, 2000
October 1, 1999 through December 31, 1999.. 1 13/16 1/2
January 1, 2000 through March 31, 2000..... 11 1 17/32
April 1, 2000 through June 30, 2000........ 6 1/8 1 1/2
July 1, 2000 through September 30, 2000.... 4 3/4 1 11/16
Fiscal Year Ending September 30, 2001
October 1, 2000 through December 31, 2000.. 3 3/4 1 13/16
January 1, 2001 through March 31, 2001..... 3 1/4 1 1/2
April 1, 2001 through June 30, 2001........ 2 1/4 1
July 1, 2001 through August 7, 2001........ 1.95 1.15
On August 7, 2001, the high and low sales prices of our common stock, as
reported by Nasdaq, were $1.65 and $1.60, respectively. As of July 31, 2001,
the number of record holders of our common stock was 151 and we estimate that
the number of beneficial owners was approximately 5,000.
There is no market for the warrants to be issued in this offering and no
market is expected to develop.
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our consolidated financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. We derived the consolidated
statements of operations data for the fiscal years ended September 30, 1996,
1997, 1998, 1999 and 2000 and the consolidated balance sheet data at September
30, 1996, 1997, 1998, 1999 and 2000 from our consolidated financial statements
which have been audited by PricewaterhouseCoopers LLP, independent accountants,
and, except for the consolidated statements of operations for the fiscal years
ended September 30, 1996 and 1997 and the consolidated balance sheet data at
September 30, 1996, 1997 and 1998, are included elsewhere in this prospectus.
The unaudited six-month financial information is derived from our financial
records and includes all adjustments (consisting only of normal recurring
adjustments) necessary to present our consolidated financial position for the
respective periods.
Please be advised that historical results are not necessarily indicative of
the results to be expected in the future, particularly given our acquisition and
disposition history. Our historical cash expenditures prior to December 31,
1999 were significantly higher than our current cash spending rate. This lower
level of expenditures has resulted from the discontinuance of the IRL and BEXTRA
programs. For more information on our discontinued programs see "Business -
Discontinued Programs".
13
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
Six Months Ended March 31, Year Ended September 30,
-------------------------- ------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
(Unaudited)
Revenue:
Contract and license fee revenue..... $ - $ 100 $ 100 $ 2,088 $ 6,121 $ 5,360 $ 5,348
Cell processing revenue.............. 3 - - - - - -
------------ ------------- ---------- ------------ ----------- ----------- -----------
Total revenue.................... 3 100 100 2,088 6,121 5,360 5,348
------------ ------------- ---------- ------------ ----------- ----------- -----------
Costs and expenses:
Research and development............. 3,375 3,625 7,645 18,996 16,799 19,972 5,276
Purchase of in-process research and
development.......................... - 6,664 6,664 - 5,343 411 350
General and administrative........... 1,446 1,252 2,613 3,045 3,509 4,179 3,396
------------ ------------- ---------- ------------ ----------- ----------- -----------
Total costs and expenses......... 4,821 11,541 16,922 22,041 25,651 24,562 9,022
------------ ------------- ---------- ------------ ----------- ----------- -----------
Loss from operations....................... (4,818) (11,441) (16,822) (19,953) (19,530) (19,202) (3,674)
Gain on sale of division................... - 9,751 9,751 - - - -
Gain on settlement of accrued liability.... 767 - - - - - -
Equity in loss of Incara Development....... (5,669) - - - - - -
Investment income, net..................... 156 153 406 355 384 831 719
Income taxes............................... - - - - - - (37)
Minority interest.......................... - - - - - 568 (568)
------------ ------------- ---------- ------------ ----------- ----------- -----------
Net loss................................... (9,564) (1,537) (6,665) (19,598) (19,146) (17,803) (3,560)
Preferred stock dividend accreted.......... (214) - - - - - -
------------ ------------- ---------- ------------ ----------- ----------- -----------
Net loss attributable to common
stockholders $ (9,778) $ (1,537) (6,665) $ (19,598) $ (19,146) $ (17,803) $ (3,560)
============ ============= ========== ============ =========== =========== ===========
Net loss per weighted share attributable
to common stockholders:
Basic and diluted.................... $ (1.33) $ (0.35) $ (1.21) $ (2.98) $ (2.69) $ (2.55) $ (0.59)
============ ============= ========== ============ =========== =========== ===========
Weighted average common shares outstanding:
Basic and diluted.................... 7,339 4,364 5,522 6,583 7,113 6,982 6,062
============ ============= ========== ============ =========== =========== ===========
BALANCE SHEET DATA:
(in thousands)
March 31, September 30,
-------------------------- ------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
(Unaudited)
Cash and cash equivalents and
marketable securities.................... $ 4,954 $ 10,522 $ 6,555 $ 4,960 $ 23,562 $ 37,580 $ 37,391
Working capital............................ $ 4,529 $ 8,867 $ 4,662 $ 2,207 $ 14,607 $ 9,855 $ 28,870
Total assets............................... $ 6,615 $ 11,151 $ 7,348 $ 8,044 $ 27,836 $ 42,623 $ 40,650
Long-term portion of capital lease
obligations and notes payable............ $ 31 $ 27 $ 43 $ 981 $ 1,593 $ 2,128 $ 896
Total liabilities.......................... $ 1,423 $ 2,150 $ 2,536 $ 4,253 $ 8,160 $ 29,167 $ 9,401
Total stockholders' equity................. $ 5,192 $ 9,001 $ 4,812 $ 3,791 $ 19,676 $ 13,456 $ 30,680
14
QUARTERLY FINANCIAL DATA:
(Unaudited)
(in thousands, except per share amounts)
First Second Third Fourth Total
Fiscal 2001 (1) Quarter Quarter Quarter Quarter Year
----------- --------- --------- --------- --------- ---------
Total revenue............................................. $ - $ 3
Net loss.................................................. $(1,639) $(7,925)
Net loss attributable to common stockholders.............. $(1,639) $(8,139)
Net loss per weighted share attributable to common
stockholders
Basic................................................ $ (0.24) $ (1.05)
Diluted.............................................. $ (0.24) $ (1.05)
Fiscal 2000 (1)
-----------
Total revenue............................................. $ 100 $ - $ - $ - $ 100
Net income (loss)......................................... $ 6,923 $(8,460) $(2,944) $(2,184) $ (6,665)
Net income (loss) per common share
Basic................................................ $ 1.72 $ (1.80) $ (0.44) $ (0.33) $ (1.21)
Diluted.............................................. $ 1.39 $ (1.80) $ (0.44) $ (0.33) $ (1.21)
Fiscal 1999
-----------
Total revenue............................................. $ 191 $ 209 $ 188 $ 1,500 $ 2,088
Net loss.................................................. $(6,121) $(6,176) $(4,119) $(3,182) $(19,598)
Net loss per common share
Basic................................................ $ (0.84) $ (0.85) $ (0.56) $ (0.73) $ (2.98)
Diluted.............................................. $ (0.84) $ (0.85) $ (0.56) $ (0.73) $ (2.98)
(1) In July 2001, the Company determined its earnings per share calculation
required revision as the Company had included certain restricted common shares
in the earnings per share calculation which shares should only be considered in
calculating diluted earnings per share during periods in which the Company had
income. The above table reflects income (loss) per common share as revised for
fiscal 2001 and 2000. Basic and diluted loss per common share as reported for
the first and second quarters of fiscal 2001 was $0.22 and $1.00, respectively.
For fiscal 2000 first quarter, the basic and diluted income per share as
reported was $1.33 and $1.26, respectively. For the second through fourth
quarters and total year for fiscal 2000, the basic and diluted loss per share as
reported was $1.53, $0.41, $0.30 and $1.06, respectively.
15
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial statements of Incara are included elsewhere in
this prospectus. You should read the unaudited pro forma consolidated financial
information presented herein in conjunction with those financial statements and
related notes.
The unaudited pro forma consolidated financial information of Incara for
the year ended September 30, 2000 include adjustments to give effect in the
unaudited pro forma condensed consolidated statement of operations for the
disposition of IRL as if it had occurred on October 1, 1999.
The unaudited pro forma condensed consolidated statements of operations are
provided for informational purposes and are not necessarily indicative of the
results of operations that would have been achieved had the transactions been in
effect as of the beginning of the period presented and are not necessarily
indicative of future results of operations.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Fiscal Year Ended September 30, 2000
----------------------------------------------
Pro Forma
Consolidated Adjustments Pro Forma
Actual - IRL As Adjusted
------------ ----------- -----------
Revenue:
Contract and license fee revenue........ $ 100 $ 100 $ -
-------- ------- ---------
Costs and expenses:
Research and development................ 7,645 1,339 6,306
Purchase of in-process research
and development.................... 6,664 - 6,664
General and administrative.............. 2,613 - 2,613
-------- ------- --------
Total costs and expenses...... 16,922 1,339 (15,583)
-------- ------- --------
Loss from operations......................... (16,822) (1,239) (15,583)
Gain on sale of division..................... 9,751 9,751 -
Interest income, net......................... 406 (37) 443
-------- ------- --------
Net income (loss)............................ $ (6,665) $ 8,475 $(15,140)
======== ======= ========
Net loss per common share:
Basic................................... $ (1.21) $ (2.74)
======== ========
Diluted................................. $ (1.21) $ (2.74)
======== ========
Weighted average common shares
outstanding............................. 5,522 5,522
======== ========
The pro forma adjustments reflect the elimination of revenue and expenses
related to IRL for the fiscal year ended September 30, 2000 as if the IRL sale
had occurred at the beginning of the fiscal year. The pro forma adjustments
also reflect the elimination of the gain recognized on the sale of IRL.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the notes appearing elsewhere in this
prospectus. The following discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of various
factors, including those discussed in "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
Incara is focused on the development of potential therapies for protection
and regeneration of tissue damaged by injury and disease. We currently have
programs in three areas: liver stem and progenitor cell therapy as a treatment
for liver failure; catalytic antioxidants as treatment for stroke and other
tissue damage; and OP2000, an ultra-low molecular weight heparin being developed
with Elan Corporation and its subsidiaries, for treatment of ulcerative colitis.
On January 22, 2001, we closed on a collaborative and financing transaction
with Elan. As part of the transaction, Elan and Incara formed a Bermuda
corporation, Incara Development, Ltd., to develop OP2000. We own all of the
common stock and 60.2% of the non-voting preferred shares of Incara Development
and Elan owns 39.8% of the non-voting preferred shares of Incara Development.
Of the outstanding combined common and non-voting preferred shares of Incara
Development, we own 80.1% and Elan owns 19.9%. As part of the transaction, Elan
and Incara entered into license agreements under which we licensed to Incara
Development the OP2000 compound and Elan licensed to Incara Development a
proprietary drug delivery technology.
As part of the transaction, Elan purchased 825,000 shares of Incara's
common stock, 28,457 shares of Incara Series B non-voting convertible preferred
stock and a five-year warrant to purchase 22,191 shares of Series B preferred
stock at an exercise price of $72.12 per share for an aggregate purchase price
of $4,000,000. Each share of Series B preferred stock is convertible into ten
shares of our common stock.
Elan also purchased 12,015 shares of Incara Series C convertible
exchangeable non-voting preferred stock with a face value of $1,000 per share,
or a total of $12,015,000. Incara contributed to Incara Development the
proceeds from the issuance of the Series C preferred stock to Elan in exchange
for its securities of Incara Development. Elan also contributed $2,985,000 to
Incara Development for its shares of preferred stock of Incara Development. In
addition, Elan granted Incara Development a license to Elan's proprietary drug
delivery technology for a license fee of $15,000,000.
The Series C preferred stock bears a mandatory stock dividend of 7%,
compounded annually. The Series C preferred stock is exchangeable at the option
of Elan at any time for all of the preferred stock of Incara Development held by
Incara which, if exchanged, would give Elan ownership of 50% of the initial
amount of combined common and preferred stock of Incara Development. After
December 20, 2002, the Series C preferred stock is convertible by Elan into
shares of our Series B preferred stock at the rate of $64.90 per share. If the
Series C preferred stock is outstanding as of December 21, 2006, we will
exchange the Series C preferred stock and accrued dividends, at our option, for
either cash or shares of our stock and warrants having a then fair market value
of the amount due.
Upon the later of the completion of enrollment of a Phase 2/3 clinical
trial for OP2000 or December 21, 2001, Elan will purchase $1,000,000 of our
Series B preferred stock at a per share price that will be ten times the greater
of (1) the average per share price of Incara common stock for the day prior to
the purchase, or (2) a 25% premium to the average daily price per share of
Incara common stock for the 60 trading day period immediately prior to the
purchase. In addition, as part of the payment, we will issue to Elan a five-year
warrant for 20% of the shares of Series B preferred stock purchased by Elan at
that time. The exercise price of the Series B preferred stock under this warrant
will be equal to twice the per share purchase price of the Series B preferred
stock purchased on the same date. However, if the purchase price of the Series B
preferred stock is less than $8.00 per share, the purchase of this stock will be
limited to 150,000 shares of Series B preferred stock and will be at Elan's
option.
Elan and Incara intend to fund Incara Development pro rata, based on their
respective percentage ownership of the combined outstanding common and preferred
stock of Incara Development. Subject to mutual agreement, Elan will lend us up
to $4,806,000 to fund our pro rata share of development funding for Incara
Development. In return, we issued a convertible promissory note that bears
interest at 10% compounded semi-annually on the amount outstanding thereunder.
After December 20, 2002, the note is convertible at the option of Elan into
shares of Series B preferred stock at $43.27 per share. The note will mature on
December 21, 2006, when the outstanding principal plus accrued interest will be
due and payable. We have the option to repay the note either in cash or in
shares of Series B preferred stock and warrants having a then fair market value
of the amount due. As of July 31, 2001, we had not borrowed any funds pursuant
to this note.
17
For financial reporting purposes, the value initially recorded as Incara's
investment in Incara Development is the same as the fair value of the Series C
preferred stock issued, which was approximately $5,496,000. This value is the
estimated fair market value of Incara's common stock into which the Series C
preferred stock could have converted, calculated as of the closing date. The
technology obtained by Incara Development from Elan was expensed at inception
because the feasibility of using the contributed technology in conjunction with
OP2000 had not been established and Incara Development had no alternative future
use for the contributed technology. We immediately expensed as "Equity in loss
of Incara Development" our investment in Incara Development, reflective of our
pro rata interest in Incara Development. From the date of issue up to December
21, 2006, we will accrete the Series C preferred stock from its recorded value
up to its face value plus the 7% dividend.
While we own 80.1% of the outstanding stock of Incara Development, Elan has
retained significant minority investor rights, including 50% control of the
management committee which oversees the OP2000 program, that are considered
"participating rights" as defined in the Emerging Issues Task Force Consensus
No. 96-16. Accordingly, Incara does not consolidate the financial statements of
Incara Development, but instead accounts for its investment in Incara
Development under the equity method of accounting. Net losses of Incara
Development will be recognized by Incara at its 80.1% interest to the extent of
Incara's investments, advances and commitments to make future investments in or
advances to Incara Development. Further, because Elan can exchange its
investment in Incara's Series C preferred stock for Incara's 30.1% preferred
interest in Incara Development, Incara will only recognize 50% of any
accumulated net earnings of Incara Development. During the six months ended
March 31, 2001, Incara's equity in loss of Incara Development was $5,669,000,
which included $5,496,000 for Incara's interest in the immediate write-off at
inception of the contributed technology by Elan to Incara Development and
$173,000 for net losses.
On March 31, 2000, Incara acquired all of the minority interests of Aeolus
Pharmaceuticals, Inc. and Renaissance Cell Technologies, Inc., which has since
changed its name to Incara Cell Technologies, Inc. Prior to this acquisition,
Incara owned 78.0% of Incara Cell Technologies and 65.8% of Aeolus. Incara
issued 1,220,041 shares of its common stock for the subsidiaries' minority
ownership. We accounted for the acquisition using the purchase method of
accounting with a total purchase price of $6,664,000. We allocated the total
purchase price to purchase of in-process research and development and
immediately charged it to operations because at the date of the acquisition the
in-process research purchased was in preclinical stages, feasibility had not
been established and we deemed it to have no alternative future use. We
estimated at the acquisition date that Incara Cell Technologies and Aeolus would
need to spend in excess of an additional $50,000,000 to complete the research
and development and that it would be at least 2006 before the research and
development is completed. We might share the cost to complete research and
development for these programs with collaborative partners in the future. The
acquisition of these minority interests should not have a significant impact on
future operating results because we previously recognized all losses of Incara
Cell Technologies and Aeolus due to our majority interest in the subsidiaries.
On December 29, 1999, we sold our anti-infectives division, known as Incara
Research Laboratories, or IRL, to a private pharmaceutical company for
$11,000,000. The transaction involved the sale of assets associated with IRL,
including rights under the collaboration with Merck & Co., Inc. and the
assumption of related liabilities by the purchaser. We remain contingently
liable through May 2007 on debt and lease obligations of approximately
$7,000,000 assumed by the purchaser, including primarily the IRL facility lease
in Cranbury, New Jersey. We recognized a gain of $9,751,000 on the sale of IRL
in the first quarter of fiscal 2000. The effect of the IRL transaction on
Incara's financial statements for the fiscal year ended September 30, 2000 is
shown in "Pro Forma Consolidated Financial Information."
In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc., a majority-owned subsidiary of Interneuron Pharmaceuticals,
Inc., through a merger with Transcell in exchange for Incara common stock, stock
options and stock warrants. We refer to the former Transcell operation as Incara
Research Laboratories, or IRL. We accounted for the purchase of Interneuron's
77.9% interest in Transcell by Incara in a manner similar to a "pooling-of-
interests," because it represented a transfer of stock between entities under
common control, as Interneuron also owned a majority of our stock at the time.
We accounted for the acquisition of the non-Interneuron ownership interest by
using the purchase method of accounting. We have combined all of Transcell's
past results of operations with our consolidated results of operations. We
issued stock in the Transcell merger in three installments. We issued the first
installment upon the closing of the merger in May 1998. In lieu of the second
installment payment due to Interneuron in connection with the merger,
Interneuron retained 281,703 shares of Incara common stock as part of a
corporate restructuring between Interneuron and Incara. In August 1999, Incara
issued 867,583 shares of Incara common stock to the other former Transcell
stockholders as payment for their second installment of the merger. We issued
the third and final installment of 856,861 shares of Incara common stock to the
former Transcell stockholders, including Interneuron, in February 2000. We
calculated the number of shares issued using a formula based on the market price
of Incara common stock prior to the stock issuance date. The issuance of these
additional shares did not impact our operating results because we included the
value of these shares in the determination of the purchase price of Transcell in
fiscal 1998.
18
We had net losses attributable to common stockholders of $6,665,000 and
$9,778,000 for the fiscal year ended September 30, 2000 and for the six months
ended March 31, 2001, respectively. We had an accumulated deficit of
$93,685,000 at March 31, 2001. We have not yet generated any revenue from
product sales and do not expect to receive any product revenue in the
foreseeable future, if at all.
RESULTS OF OPERATIONS
Six Months Ended March 31, 2001 Compared to Six Months Ended March 31, 2000
We incurred net losses attributable to common stockholders of $9,778,000
and $1,537,000 for the six months ended March 31, 2001 and 2000, respectively.
The net loss for the six months ended March 31, 2001 includes equity losses in
Incara Development of $5,669,000 related to operating losses for Incara
Development's initial quarter and the immediate write-off of the contributed
technology. The net loss for the six months ended March 31, 2001 was reduced by
a $767,000 gain recognized on the settlement of a disputed accrued liability for
a discontinued program and the net loss for the six months ended March 31, 2000
was reduced by the $9,751,000 gain on the sale of IRL.
We had cell processing revenue of $3,000 for the six months ended March 31,
2001. This revenue resulted from fees we earned for processing liver cells that
are used for research purposes by other companies. Contract revenue of $100,000
for the six months ended March 31, 2000 resulted from a collaboration that we
sold with our IRL division in December 1999.
Our research and development, or R&D, expenses decreased $250,000, or 7%,
to $3,375,000 for the six months ended March 31, 2001 from $3,625,000 for the
six months ended March 31, 2000. R&D expenses for the six months ended March
31, 2000 included $1,376,000 of expenses for IRL, which was sold in December
1999.
R&D expenses for our liver cell program increased $511,000, or 104%, to
$1,004,000 for the six months ended March 31, 2001 from $493,000 for the six
months ended March 31, 2000. Expenses were higher this fiscal year due to
increased activity in the program, including increases in consultants, sponsored
research, headcount and patent fees.
R&D expenses for our antioxidant program increased $740,000, or 129%, to
$1,314,000 for the six months ended March 31, 2001 from $574,000 for the six
months ended March 31, 2000. In February 2001, we announced the selection of a
catalytic antioxidant compound for late-stage preclinical development to support
an Investigational New Drug, or IND, application for the treatment of ischemic
stroke. R&D expenses were higher this fiscal year due to increased activity in
the program, including the costs of process improvement and scale-up of the IND
compound.
In January 2001, Incara transferred the rights to its OP2000 compound being
developed for inflammatory bowel disease to Incara Development. R&D expenses
incurred prior to December 21, 2000 were on behalf of Incara, while R&D expenses
incurred after December 20, 2000 were on behalf of Incara Development. Expenses
for OP2000 of $733,000 for the six months ended March 31, 2000 were included in
R&D expenses. Concurrent with Incara's investment in Incara Development, R&D
work by Incara for OP2000 is performed on behalf of Incara Development. Amounts
billable to Incara Development for OP2000 for expenses incurred and work
performed by Incara are netted against R&D expenses. Subsequent to our
investment in Incara Development, our expenses associated with OP2000
development are shown as "Equity in loss of Incara Development." While Incara
owns 80.1% of the outstanding stock of Incara Development, Elan has retained
significant minority investor rights that are considered "participating rights"
as defined in the Emerging Issues Task Force Consensus No. 96-16. Accordingly,
Incara does not consolidate the financial statements of Incara Development, but
instead accounts for its investment in Incara Development under the equity
method of accounting. Net losses of Incara Development will be recognized by
Incara at its 80.1% interest to the extent of Incara's investments, advances and
commitments to make future investments in or advances to Incara Development.
Further, since Elan can exchange its investment in Incara's Series C preferred
stock for Incara's 30.1% preferred interest in Incara Development, Incara will
only recognize 50% of any accumulated net earnings of Incara Development.
During the six months ended March 31, 2001, our equity in loss of Incara
Development was $5,669,000, which included $5,496,000 for Incara's interest in
the immediate write-off at inception of the contributed technology by Elan to
Incara Development and $173,000 for net losses.
Purchase of in-process research and development expenses for the six months
ended March 31, 2000 resulted from the acquisition of the minority interests of
Aeolus and Incara Cell Technologies in March 2000. The acquisition was
accounted for using the purchase method of accounting. The total purchase price
of $6,664,000 was allocated to purchase of in-process research and development
and immediately charged to operations because the in-process research purchased
was in preclinical stages and feasibility had not been established at the date
of the acquisition. At that time, we deemed the in-process research to have no
alternative future use.
General and administrative, or G&A, expenses increased $194,000, or 15%, to
$1,446,000 for the six months ended March 31, 2001 from $1,252,000 for the six
months ended March 31, 2000.
19
Incara accreted $214,000 of dividends on its Series C preferred stock
during the six months ended March 31, 2001. From the date of issue until the
earlier of December 21, 2006 or the date the Series C preferred stock is
exchanged or converted, Incara will accrete the Series C preferred stock from
its recorded value up to its face value plus the 7% dividend, compounded
annually.
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended
September 30, 1999
Our net loss of $6,665,000 for fiscal 2000 was $12,933,000 less than the
$19,598,000 net loss for fiscal 1999. The net loss for fiscal 2000 resulted
from the net effect of recognizing a $9,751,000 gain on the sale of IRL, offset
by fiscal 2000 operating expenses and the write-off of $6,664,000 for purchased
in-process research and development in connection with the acquisition of
minority interests of Aeolus and Incara Cell Technologies.
Contract and license fee revenue for fiscal 2000 was $100,000, as compared
to $2,088,000 for fiscal 1999. All of this revenue resulted from an IRL
collaboration with Merck. We will not receive any additional revenue from this
collaboration, because it was sold with the other IRL assets.
Our research and development expenses decreased $11,351,000, or 60%, to
$7,645,000 in fiscal 2000 from $18,996,000 in fiscal 1999. The lower expenses
were primarily due to the result of discontinuing our bucindolol development
program in the fourth quarter of fiscal 1999 and to the sale of our IRL
operation in December 1999.
During the last quarter of fiscal 1999, we discontinued our bucindolol
development program and, therefore, we did not incur any bucindolol-related
expenses for fiscal 2000. During fiscal 1999, we incurred $6,469,000 of
bucindolol-related R&D expenses.
Because we sold IRL at the end of December 1999, we did not incur any
significant R&D expenses for IRL after December 1999. R&D expenses for IRL were
$1,339,000 for fiscal 2000 and $8,245,000 for fiscal 1999.
We incurred $1,712,000 of R&D expenses for OP2000 during fiscal 2000,
versus $228,000 during fiscal 1999. The higher expenses in fiscal 2000 were
primarily due to costs incurred in connection with our Phase 1 clinical trials
that began in October 1999 and were completed in April 2000, as well as
preparation for a Phase 2/3 clinical trial.
R&D expenses for our liver cell program increased $369,000, or 44%, to
$1,201,000 for fiscal 2000 from $832,000 for fiscal 1999. The higher expenses
in fiscal 2000 resulted primarily from more R&D staff time being devoted to the
program.
R&D expenses for our antioxidant program decreased $418,000, or 20%, to
$1,694,000 for fiscal 2000 from $2,112,000 for fiscal 1999. The decrease in
expenses from fiscal 1999 to fiscal 2000 was primarily due to the reduction of
outside contract services and sponsored research costs.
General and administrative expenses decreased $432,000, or 14%, to
$2,613,000 for fiscal 2000 from $3,045,000 for fiscal 1999. The higher G&A
expenses in fiscal 1999 were primarily for expenses related to the bucindolol
program, which we terminated in the last quarter of fiscal 1999, and the IRL
operation, which we sold in December 1999.
In January 2000, our Board of Directors authorized the repurchase of up to
$2,000,000 of our common stock during the following two months through purchases
on the stock market. During fiscal 2000, we repurchased a total of 140,100
shares of our common stock at a total cost of $412,000.
Fiscal Year Ended September 30, 1999 Compared To Fiscal Year Ended
September 30, 1998
Our net loss of $19,598,000 for fiscal 1999 was $452,000, or 2%, greater
than the $19,146,000 net loss for fiscal 1998.
Contract and license fee revenue for fiscal 1999 was $2,088,000, as
compared to $6,121,000 for fiscal 1998. Contract and license fee revenue for
fiscal 1999 primarily resulted from our collaboration with Merck. During fiscal
1999, we received a $1,500,000 milestone payment from Merck for compounds that
demonstrated specific activity in laboratory tests using both resistant and
sensitive bacterial strains. Merck also funded $563,000 of research and
development costs at IRL during fiscal 1999.
Contract and license fee revenue for fiscal 1998 included (1) a $4,000,000
payment from Astra Pharmaceuticals, L.P. received pursuant to the termination of
a collaboration with Astra Merck Inc. for the development, manufacturing and
marketing of bucindolol in the United States, (2) $833,000 of U.S. bucindolol
development support from Astra Merck prior to the termination of the Astra Merck
collaboration, and (3) $1,138,000 of revenue recognized in conjunction with the
Merck
20
collaboration.
Our research and development expenses increased $2,197,000, or 13%, to
$18,996,000 in fiscal 1999 from $16,799,000 in fiscal 1998.
Expenses for the development of bucindolol and general R&D expenses
increased $2,885,000, or 59%, to $7,807,000 for fiscal 1999 from $4,922,000 for
fiscal 1998. Our expenses increased after funding from the Astra Merck
collaboration ended in September 1998 and also increased as a result of the
costs of expanded European clinical trials for bucindolol during fiscal 1999.
Pursuant to the Astra Merck collaboration, during fiscal 1998 Astra Merck paid
for most expenses related to the development of the twice-daily formulation of
bucindolol for the United States, including liabilities assumed by Astra Merck
on our behalf of approximately $6,065,000. This additional amount did not flow
through our statements of operations, because it was offset against related
expenses. Because we terminated the Astra Merck collaboration in September
1998, we absorbed all of the U.S. development expenses for bucindolol in fiscal
1999. In addition, we expanded the European bucindolol clinical program with
BASF Pharma/Knoll AG during fiscal 1999, resulting in expense of approximately
$2,326,000 in fiscal 1999 versus approximately $1,309,000 in fiscal 1998. We
terminated the development of bucindolol in the last quarter of fiscal 1999 and
all estimated costs of termination were accrued as of September 30, 1999.
R&D expenses for IRL remained relatively constant, increasing by only
$44,000, or 1%, to $8,245,000 for fiscal 1999 from $8,201,000 for fiscal 1998.
During fiscal 1999 IRL incurred increased expenses for license fees paid to
Princeton University and patent preparation fees. These increased expenses were
offset by lower depreciation costs, because in fiscal 1998 we expensed $856,000
of Transcell property and equipment that did not meet our capitalization
criteria.
R&D expenses for our antioxidant program increased by $96,000, or 5%, to
$2,112,000 for fiscal 1999 from $2,016,000 for fiscal 1998, primarily due to an
increase in contract services for research and preclinical studies.
R&D expenses for our liver cell program increased by $172,000, or 26%, to
$832,000 for fiscal 1999 from $660,000 for fiscal 1998, primarily due to
increased fees for patent preparation and a fee to the University of North
Carolina for the license of technology developed under the research agreement
with UNC.
During fiscal 1998, we paid and expensed a $1,000,000 license fee for a
development compound licensed from Opocrin S.p.A.
In conjunction with the Transcell merger, we incurred a charge of
$5,343,000 for the purchase of in-process research and development during fiscal
1998, because feasibility of the in-process research and development acquired
was not yet established and we had no alternative future use for the technology.
This charge represents the market value of the shares of Incara stock issued to
the former minority interest owners of Transcell.
General and administrative expenses decreased by $464,000, or 13%, to
$3,045,000 for fiscal 1999 from $3,509,000 for fiscal 1998, primarily due to the
elimination of IRL administrative personnel and functions at IRL in conjunction
with the Transcell merger.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, we had cash and cash equivalents and marketable
securities of $4,954,000, a decrease of $1,601,000 from September 30, 2000.
Cash decreased primarily due to operating expenses of $4,821,000 for the six
months, offset by $4,000,000 received from the net effect of investment
transactions with Elan. We believe that this $4,954,000 of cash, along with
anticipated borrowings of cash under an existing note arrangement that we have
with Elan, will only be adequate to fund our operations through September 30,
2001, the end of our fiscal year.
During the past 18 months, which is the period in which we have operated
without ongoing expenses for the development of bucindolol and IRL operations,
we have incurred average operational expenses of approximately $10,000,000 per
year, on an annualized basis, including expenses of our R&D programs, but
excluding non-cash charges for the purchase of in-process research and
development. We anticipate our annual net operational costs to remain at
approximately this level in our next fiscal year and for the foreseeable future
although our ongoing cash requirements will depend on numerous factors,
particularly the progress of our R&D programs and our ability to negotiate and
complete collaborative agreements. In order to fund these cash requirements, we
will need to raise significant additional funds during our next fiscal year and
beyond.
To meet our operating cash requirements for our next fiscal year we intend
to
o sell up to $10,000,000 of our common stock through this offering;
o to the extent possible, sell shares of our common stock under an
equity financing line we currently have with Torneaux Fund Ltd.;
o establish new collaborations for our current research programs that
include initial cash payments and on-going research support; and
o borrow cash from Elan under the terms of an existing note
arrangement that we have with Elan to meet our obligations for
Incara Development.
To meet our operating cash requirements after September 30, 2002, we intend
to
o receive additional research support, milestone and other cash
payments from collaborations;
o sell additional shares of our stock through equity offerings; and
o continue to borrow cash from Elan under the existing note to meet
our obligations for Incara Development.
There are uncertainties as to all of these potential sources of capital.
Due to market conditions and other limitations on the stock offerings, we might
not be able to sell securities under these arrangements, or raise other funds on
terms acceptable or favorable to us. At times it is difficult for biotechnology
companies to raise funds in the equity markets. Any additional equity
financing, if available, would likely result in substantial dilution to Incara's
stockholders.
Similarly, our access to capital might be restricted because we might not
be able to enter into collaborations for any of our programs or to enter into
any collaborations on terms acceptable or favorable to us due to conditions in
the pharmaceutical industry or in the economy in general or based on the
prospects of any of our programs. Even if we are successful in obtaining
collaborations for any of our programs, we might have to relinquish rights to
technologies, product candidates or markets that we might otherwise develop
ourselves.
We may borrow up to $4,806,000 through December 21, 2003 under the note
arrangement with Elan to fund our 80.1% pro rata interest in the operating costs
of Incara Development. However, advances under the note are subject to the
mutual consent of Elan and Incara. The note matures on December 21, 2006.
The Torneaux equity line is available to us until February 28, 2002. Under
the equity line, we can require Torneaux to purchase our common stock
approximately once a month. However, in order to sell stock to Torneaux, the
price of our common stock must not be less than $2.00. On July 31, 2001, the
closing price of our common stock was $1.50. Assuming our stock price were
$2.00, we could sell up to $1,500,000 of our common stock to Torneaux. However,
assuming the price of our stock does not increase to $3.00 or higher, we are
limited to selling a maximum of $250,000 worth of our stock to Torneaux at any
one time. Consequently, assuming our stock price were $2.00, the amount of stock
we could sell to Torneaux at July 31, 2001 would decrease by approximately
$214,000 each month.
If we are unable to enter into new collaborations or raise additional
capital to support our operations after September 30, 2001, we might be required
to scale back, delay or discontinue one or more of our programs, or obtain funds
on terms that are not favorable to us, which could have a material adverse
affect on our business. Reduction or discontinuation of programs could result
in additional charges, which would be reflected in the period of the reduction
or discontinuation.
21
BUSINESS
General
Incara is developing therapies focused on tissue protection, repair and
regeneration. In particular, we are focused on developing liver progenitor cell
therapy for the treatment of liver failure. We are also conducting research on
and development of a series of catalytic antioxidant molecules that we believe
will provide strategic opportunities for collaboration with larger
pharmaceutical companies in areas such as stroke and the prevention of side
effects induced by radiation in cancer therapy. We are actively pursuing such
collaborations. We are also developing catalytic antioxidants for applications
in our liver cell therapy program and other areas of cell therapy. In
collaboration with Elan, we are conducting a Phase 2/3 clinical trial of an
ultra-low molecular weight heparin for the treatment of ulcerative colitis.
Human Liver Progenitor Cell Transplant
Hepatic progenitor cells are cells in the liver that can differentiate into
a variety of daughter cells that provide liver function. These are the early
cells in the maturation of the liver and include the liver stem cells and their
early descendants. We are developing human liver progenitor cells as a
potential treatment for liver failure.
Incara established its liver progenitor cell program with the acquisition
of a majority ownership interest in Incara Cell Technologies, Inc., formerly
Renaissance Cell Technologies, Inc., in September 1997. Renaissance was founded
in 1995 to commercialize applications from research on human liver progenitor
cells from the laboratory of Dr. Lola Reid, previously at the Albert Einstein
College of Medicine and now a Professor in the Department of Cell and Molecular
Physiology, Program in Molecular Biology and Biotechnology, at the University of
North Carolina at Chapel Hill School of Medicine. In March 2000, Incara
acquired the remaining minority interest of Incara Cell Technologies, which is
now a wholly owned subsidiary of Incara.
Liver Disease
The liver is one of the largest and most complex organs in the body,
serving many critical metabolic functions. More than most other internal
organs, the liver has the ability to regenerate itself by repairing or replacing
injured tissue. Despite this protection, once a critical mass of liver cells
has died through disease or damage, the liver can fail, leading to illness and
death. Liver failure is a serious health problem. According to the National
Center for Health Statistics, each year there are approximately 330,000
hospitalizations and 30,000 deaths in the United States due to chronic liver
diseases, including viral hepatitis.
Currently, the only cure for many of these liver diseases is a liver
transplant. However, only about 4,900 transplantable donor livers become
available each year in the United States and the total cost of transplantation
and first year follow-up is estimated to average over $300,000. Over 17,500
patients are on the liver transplant waiting list, an increase of more than 100%
over the last four years and up from 1,500 ten years ago. Furthermore, there
are a total of approximately 100,000 adults with severe cirrhosis and other
forms of chronic liver failure in the United States who could become candidates
for a transplant. Not all of these people will get transplants, or even get
onto the transplant waiting list. The incidence of chronic liver failure is
expected to increase in the next ten years as a result of the "silent epidemic"
of hepatitis C. Up to 4,000,000 people in the United States have been
infected with the hepatitis C virus. Researchers estimate that 15% of these
persons will develop cirrhosis, a disease that typically develops over a period
of 10 to 20 years.
As a result of the shortage of donor organs, potential liver transplant
patients must wait, often for years, for a donor liver to become available. The
vast majority of patients with liver diseases therefore cannot rely on organ
transplantation as a solution. We believe that transplanting cells that have
the capacity to reproduce and function in an impaired liver could reduce the
need for whole organ transplants and provide treatment for thousands of
patients.
Liver Cell Transplantation
Positive results from liver cell transplants in rodents, both with mature
liver cells and progenitor liver cells, have prompted physicians outside of
Incara to transplant unfractionated human hepatocytes, which are liver cells not
separated by their stage of maturity or other parameters, in a number of human
patients. Unfractionated human hepatocytes, obtained from livers rejected for
transplant use, have been introduced into approximately 40 patients, with
beneficial results observed in some patients. In this procedure, a physician
injects a suspension of donor liver cells, or hepatocytes, into blood vessels
leading to the patient's liver or spleen. In patients where benefit occurred,
the transplanted cells took up residence in the recipient's body and provided
liver functions, including detoxification and protein synthesis. These patients
included individuals with cirrhosis and severe liver failure and patients with
inherited metabolic disorders. Some patients whose liver failure resulted in
coma, awoke after receiving liver cell transplant, coincident with other
measures reflecting improved liver function such as decreased ammonia levels,
improved cerebral blood flow and reduction of intracranial pressure. In one
patient, a 10-year-old girl, the transplanted liver cells survived and partially
corrected a metabolic disorder for over two years. These procedures were
performed with a cell
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population different from that which we plan to use in our liver progenitor cell
therapy and the studies were not blinded and were usually uncontrolled. These
treatments included only a relatively small number of patients, primarily
because of the lack of available organs from which viable liver cells can be
obtained. The beneficial results observed in these treatments might not be seen
in larger populations.
Human Liver Progenitor Cells
Incara proposes to use a more selective population of liver cells for
transplantation. We intend to isolate the liver progenitor cells from whole
donor organs not suitable for transplant. Human liver progenitor cells, unlike
mature liver cells, potentially can divide many times, greatly expanding the
utility of a single donor liver such that one liver might supply the needs of
many patients. Moreover, progenitor cells might provide a much longer
functional life, potentially surviving the lifetime of the recipient. These
cells also can survive freezing and thawing better than mature cells,
potentially permitting progenitors to be stored until the need for them arises.
The progenitor cells may have the capability to differentiate into the entire
lineage of liver cells, providing the functions of early cells that may be
missing and unable to be regenerated by injection of unfractionated hepatocytes.
The progenitor cells also might require a smaller injection volume than that of
unfractionated cells. The human liver progenitors might also avoid some of the
medical and scientific challenges associated with strategies involving pig
livers, pig liver cells and human cells derived from tumors such as immune
reactions and reduced function. However, because we have not tested these cells
in human patients, these proposed advantages of liver progenitor cells might not
be observed in human patients.
[DIAGRAM APPEARS HERE]
Selection of liver stem and progenitor cells may allow one donor liver
to supply the needs of many recipients.
Use of Alternative Sources of Donor Livers
Currently, most whole organ liver transplantation procedures require a
donor who has undergone brain death, but whose heart is still beating. This
occurs only in approximately one to two percent of hospital deaths, severely
limiting the potential donor pool.
We believe a major advantage of liver progenitor cells is their ability to
survive periods with limited oxygen. Incara and Dr. Reid have demonstrated that
viable liver progenitor cells can be isolated after death from the livers of
non-beating-heart donors, whose livers cannot be used for whole organ
transplant. The window of time that viable liver progenitors can be isolated
after the heart has stopped beating is now under investigation, along with the
useful age range of donors. Because liver progenitor cells can be purified from
livers inappropriate for transplant, our program will not compete for organs
with existing liver transplant programs. We have established an arrangement
with nine traditional organ donor programs for procurement of livers and are
pursuing relationships with over 30 others. Preliminary, preclinical
experiments suggest that one donor liver might provide enough liver stem and
progenitor cells for many recipients.
While we currently believe we have access to enough donor liver organs to
conduct clinical trials, there is no assurance that this will continue. If we
are not able to obtain a consistent supply of donor liver organs, or if one
donor liver does not provide enough liver progenitor cells for multiple
recipients, commercialization of our program will be adversely affected.
Development Strategy
We have successfully demonstrated scale-up of the liver progenitor cell
isolation and selection process. This step includes establishing isolation and
processing procedures needed for a 1,500-gram to 3,000-gram whole human liver
instead of the 100-gram portions of liver used in the basic research stage of
the program. The scaled-up procedures are being adapted for a sterile good
manufacturing practices, or cGMP, environment. We are working with a contract
cell processor to develop the liver progenitor cell processing procedure in a
facility compliant with cGMP.
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Clinical Trials
Incara is exploring two patient populations for the initial clinical trials
of progenitor cell transplantation. The first group consists of infants and
young children who have life-threatening inherited genetic diseases but are
unable to receive a liver transplant. This patient population represents a
group with limited treatment alternatives where improvement in patient condition
and production of the missing gene products would demonstrate the function of
the transplanted cells. The other series of clinical trials being planned
targets the approximately 100,000 adults in the United States with such severe
cirrhosis and chronic liver failure that they could become candidates for a
whole liver transplant. The goal of therapy would be to avoid or delay the need
for whole liver transplant and to reduce hospitalization and treatments required
for the complications of liver failure. Initially, these patients would receive
the same immunosuppression as liver transplant patients to prevent rejection of
the transplanted cells. Incara plans to file in late 2001 an IND to begin these
initial Phase 1 clinical trials. Clinical investigators from several leading
research hospitals have expressed interest in participating in our clinical
trials. Some of these investigators have experience with cell transplants using
unfractionated human liver cells.
Gene Therapy
We believe that logical target disorders for liver progenitor cell gene
therapy are diseases resulting from the inability of the patient's liver cells
to properly make an important protein, such as occurs in genetic disease
including hemophilia and a hereditary form of severe high cholesterol. Many
scientists believe gene therapy clinical trial results have often been
disappointing because of the inability of the treatment to provide the patient
with sustained expression of the inserted gene. Progenitor cells, because of
their extensive expansion potential, may be suitable to produce continued gene
expression. Incara's gene therapy strategy will be to obtain progenitor liver
cells from a patient and insert into the cells a correct copy of the gene
deficient in that patient and transplant these cells back into the patient. We
have not demonstrated the viability of this approach in the laboratory and in
order to explore this approach, we must seek academic or corporate partners with
expertise in this area, or develop additional expertise internally. We might
not be able to develop this technology, either internally or through
collaboration.
Genomics
The liver progenitor cell technology developed by Incara has a potential
application as a tool for identifying new drugs. Determining gene expression
patterns at various stages of the liver lineage could provide genomic
information for drug discovery. For example, this information could be used to
identify new targets for drug discovery programs or to identify proteins
performing biological functions that may have applications in therapy. To
successfully commercialize this technology, we must seek academic or corporate
partners with expertise in the area of genomics, or develop additional expertise
internally. We might not be able to develop this technology, either internally
or through collaboration.
Cells for Research Program
Currently, pharmaceutical companies have difficulty obtaining a consistent
supply of human liver cells for toxicity testing. As a result of our supply of
human livers, we collect non-progenitor liver cells as a byproduct of our stem
cell isolation procedure. This allows us to supply human liver cells for a
processing fee to pharmaceutical companies for use in toxicology testing of the
drugs they are developing. We have recently established material transfer
agreements with several major pharmaceutical companies which allow them, but do
not require them, to receive human liver cells from us for a processing fee.
The liver progenitor cells and their daughter cells could also be used to
assess changes in gene expression patterns caused by drugs being developed by
the pharmaceutical industry. The changes in gene expression pattern resulting
from potential drugs could be compared with those caused by drugs known to
damage the liver. This would allow a pharmaceutical company to screen compounds
for their effect on the liver earlier in the development process, saving time
and money. The full lineage of liver cells, from progenitors to mature cells,
could also be used to test drugs for toxicity to the liver and to study how the
drug is metabolized. We have not demonstrated, and might not demonstrate, the
successful use of our liver progenitor cells for research applications for the
pharmaceutical industry. Even if our research cells program is successfully
commercialized, it might not provide us with significant revenue.
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Liver Assist Device
Incara's liver progenitor cell technology has potential application in the
development of a liver assist device, or LAD. LADs are designed to provide
liver function to a patient for a few days, providing time for a patient's own
liver to recover from failure or function until a transplant liver is available.
Attempts at clinically useful LADs by others have utilized pig hepatocytes or
human liver cells derived from tumors in a wide variety of bioreactor types.
These devices have shown promise, but all use cells with limitations. The pig
hepatocytes, while easily obtained, have limitations such as potential immune
reactions to secreted pig proteins, limited lifetime and non-human viruses. The
liver cells derived from tumor cells are easy to grow, but retain only a subset
of the functions of normal liver cells and involve safety concerns. Functioning
human liver cells from donor organs have not been a viable alternative due to
the scarcity of donor livers.
We believe that a LAD using our human liver progenitor cells could overcome
some of the problems experienced to date. Proteins secreted by these cells will
be of human origin, so immune reactions may be minimized. The progenitor cells
can divide extensively in culture, so that cells from one donor liver may be
able to supply cells for many LADs. Most importantly, these cells should
display the wide range of liver functions necessary for clinical utility. We
are currently developing a prototype cartridge that could be used for expansion
of our liver progenitor cells to produce the volume of human liver cells needed
for a LAD. Our design is still under development and has not been tested in
patients and might not prove to be superior to LADs using pig or other cell
types, or even be feasible for human therapy at all.
Commercialization
There are approximately 120 liver transplant programs in hospitals in the
United States. We believe that marketing to these hospitals could be
accomplished by an internal sales force of approximately 15 trained specialists.
If we establish the safety and efficacy of the program in clinical trials and
receive required regulatory approval, we intend to maintain rights to market the
liver progenitor cell transplantation therapy in the United States and develop a
focused marketing effort. Outside of the United States, we will attempt to
enter into an arrangement with another pharmaceutical or biotechnology company
for commercialization of the liver progenitor cell therapy program. We also
intend to seek collaborations with other companies for the development of our
liver progenitor cells in gene therapy, drug research and genomic applications
and for use in a liver assist device. We might not successfully commercialize
any of these applications.
Catalytic Antioxidant Program
Incara established its catalytic antioxidant program with the acquisition
of a majority interest in Aeolus Pharmaceuticals in July 1995. In March 2000,
Incara acquired the remaining minority interest in Aeolus, which is now a wholly
owned subsidiary of Incara. The scientific founders of Aeolus, James D. Crapo,
M.D., and Irwin Fridovich, Ph.D., in collaboration with colleagues at Duke
University, the National Jewish Medical and Research Center and Incara, are
working to develop small molecules as therapeutics that act in the same manner
as naturally occurring antioxidant enzymes. Antioxidant enzymes such as
superoxide dismutase normally protect the body from harmful free radicals.
Antioxidants and Disease
Oxygen plays a pivotal role in supporting life by enabling energy stored in
food to be converted to energy that living organisms can use. The ability of
oxygen to participate in key metabolic processes derives from its highly
reactive nature. This reactivity is necessary for life, but also creates
different forms of oxygen which can react harmfully with living organisms. In
the body, a small amount of oxygen is converted to various free radicals, which
can damage DNA, proteins and lipids. If too many free radicals are produced for
the body's normal antioxidants to metabolize, the cumulative result is reduced
cellular function and, ultimately, disease. Free radicals are thought to play a
role in a variety of conditions that result in damage, including, for example,
organ and cell transplant rejection, stroke and damage to normal tissue from
cancer radiation therapy.
Incara has synthesized a group of small molecules that in laboratory
experiments have multiple potent catalytic antioxidant activities, destroy free
radicals and protect cells from damage initiated by free radicals. Catalytic
antioxidants, unlike other antioxidants, function like enzymes and are not
consumed by their reaction with free radicals. Therefore, each catalytic
antioxidant molecule can destroy many free radicals. In laboratory experiments
some of these compounds have shown antioxidant activities greater than the
natural antioxidant enzymes on a weight basis. The lead compounds in this
series, AEOL 10113 and AEOL 10150, have shown activity in preclinical models of
organ or cell transplant, stroke and protection of normal tissue from radiation
damage in cancer therapy. We also have a number of related compounds which have
not undergone as much laboratory testing.
Our catalytic antioxidant compounds have been tested in multiple animal
models at multiple institutions but have not entered clinical trials in humans
and are in an early stage of development. Animal models may not be predictive of
how a compound will act in human beings. There can be no assurance that
compounds from our catalytic antioxidant program will
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demonstrate the efficacy and safety needed to gain product approval by the FDA
or foreign authorities, and even if approval is given, such products might not
become commercially successful.
Catalytic Antioxidants and Cell Therapy
Laboratory experiments have shown that our catalytic antioxidants protect a
number of cell types. In these experiments, AEOL 10112 improved the ability of
liver cells to survive freezing and thawing. Related compounds, AEOL 10113 and
AEOL 10150, protected cultured neurons from toxicity due to oxygen and glucose
deprivation. AEOL 10113 also protected cultured pancreatic beta cells from
certain toxins.
Recently, an independent researcher has shown that AEOL 10113 exerts a
protective effect in an animal model of human juvenile-onset diabetes. In this
model, 100% of control mice became diabetic by 13 days after the injection of T
lymphocytes directed against pancreatic beta cells. In contrast, AEOL 10113
prevented diabetes in 50% of the mice and significantly delayed the onset of
diabetes in the others.
We are currently exploring the ability of our catalytic antioxidants to
improve the survival of pancreatic beta islet cells after transplant in animals
and intend to explore in the near term whether these compounds can improve the
survival and growth of liver cells after transplant in animals. If the results
of these experiments are positive, which might not happen, we intend to pursue
the development of catalytic antioxidants as agents to improve the outcome of
liver progenitor cell transplantation in humans.
Stroke
An estimated 600,000 people in the United States annually suffer strokes.
In the United States, strokes kill approximately 158,000 people annually and
have left more than 1,000,000 people disabled to some extent, according to the
American Heart Association. The estimated direct cost of stroke is over $28
billion annually, much of which is attributable to the high expense of
rehabilitating and caring for victims.
Stroke is an injury to the brain caused by the blockage of blood flow. The
reestablishment of blood flow after blockage can cause further damage, which is
called reperfusion injury. Many scientists believe that the damage from stroke
and reperfusion injury is caused, at least in part, by free radicals. In a
model of stroke, in which the middle cerebral artery of a rat is blocked for 90
minutes and then unblocked, AEOL 10113 significantly reduced damaged brain
tissue when introduced as late as 7.5 hours after the start of the stroke. AEOL
10150 significantly reduced damaged brain tissue in a mouse model of severe
stroke in which blood flow to a portion of the brain was permanently blocked.
We have chosen to develop AEOL 10150 as a potential treatment for stroke
because it is easier to make and analyze and has an improved safety profile when
compared to AEOL 10113. Assuming we can enter into a corporate partnership for
development of AEOL 10150 and satisfactorily complete the preclinical studies,
neither of which might occur, we intend to initiate Phase 1 clinical trials in
the first half of 2002.
Protection of Normal Tissue in Cancer Radiation Therapy
It has been recognized for many years that radiation therapy produces
oxygen free radicals in the body that react with cellular components to kill
cancer cells. These free radicals also harm normal healthy tissue, limiting the
dose of radiation that can be given in cancer therapy and causing toxicities
such as oral mucositis and lung inflammation and fibrosis.
Radiation-Induced Mucositis. Oral ulcerative mucositis is characterized by
formation of painful ulcers in the mouth and is a common dose-limiting side
effect of drug and radiation therapy for cancer. Approximately one third of
cancer patients, or more than 400,000 patients in the United States, develop
mucositis. Ulcerative mucositis leads to interruption of cancer therapy and
increases the risk of infection and death, as well as the cost of care. Standard
therapy for mucositis is only for pain relief and infection, and includes the
application of topical pain-killers and/or systemic administration of narcotics
and antibiotics. However, there is currently no approved treatment that limits
the extent or duration of mucositis.
The catalytic antioxidant AEOL 10150 reduced the extent and duration of
severe radiation-induced mucositis in a preclinical animal model. The compound
was effective both when given topically as an oral rinse, or injected into the
abdominal cavity.
Radiation-Induced Lung Toxicity. The ability of radiation therapy to treat
tumors involving the chest such as lung or breast cancer is significantly
limited by injury to the lung caused by radiation. Lung damage leading to
impaired lung function is one of the dose limiting toxicities of chest radiation
treatment, restricting the ability to deliver optimal doses of radiation to
patients with lung cancer. Currently, radiation related pulmonary symptoms
occur in up to 30% of patients irradiated for lung
26
cancer, breast cancer, lymphoma or thymoma. In laboratory experiments, our
catalytic antioxidant AEOL 10113 significantly protected the normal lung tissue
of rats against damage caused by radiation.
Antitumor Effect of Catalytic Antioxidant. A drug to protect normal cells
will not be useful if it also protects tumor cells. In a model in which breast
cancer cells were transplanted into rats, AEOL 10113 did not protect the tumor
cells from radiation. Instead, the antitumor effect of radiation was enhanced
by administration of the compound. Both AEOL 10113 and the related compound
AEOL 10150 have shown some degree of antitumor activity in the absence of
radiation therapy in rat models of breast and skin cancers.
Commercialization
Because of the large numbers of patients suffering from stroke and cancer,
effectively marketing a pharmaceutical for treatment of these indications
requires the resources of a large sales organization. We intend to seek
development, marketing or licensing arrangements for the stroke and adjunctive
cancer therapy uses of our antioxidant compounds with pharmaceutical companies
with an established marketing presence in the target indications. In the area of
our catalytic antioxidants use in cell therapy, we may choose to commercialize a
potential product internally. If our liver progenitor cell therapy program is
successful in establishing a marketing effort to transplant centers, a catalytic
antioxidant for use in cell therapy might make a complementary product.
To successfully commercialize our catalytic antioxidant programs, we must
seek academic or corporate partners with expertise in areas outside our own or
develop this expertise internally. We might not be able to develop this
technology, either internally or through collaboration.
OP2000
Our program for inflammatory bowel disease, or IBD, centers on OP2000, a
polysaccharide, or carbohydrate, product derived from heparin. Heparin is a
naturally occurring substance with anti-clotting and anti-inflammatory
properties. Heparin, as a pharmaceutical product (including the starting
material for OP2000), is derived and purified from domestic mammals, primarily
pigs. In July 1998 we obtained an exclusive 15-year license to develop OP2000
from its manufacturer, Opocrin S.p.A. of Modena, Italy. Clinical evidence of
the successful treatment of IBD with heparin and the known anti-clotting effects
of OP2000 provide the rationale for evaluating OP2000 in treating IBD. We have
completed two Phase 1 clinical trials in normal volunteers to determine blood
levels and anti-clotting effects following once daily injections of OP2000. In
January 2001, we initiated a pivotal Phase 2/3 clinical trial in patients with
ulcerative colitis. In January 2001, we also closed on a collaborative
transaction for the joint development of OP2000 with Elan. As part of the
transaction, we transferred the rights to our license for OP2000 to Incara
Development. For information on the three sequential phases of clinical trials,
see "Government Regulation" below.
Inflammatory Bowel Disease
Inflammatory bowel disease describes a group of chronic inflammatory
disorders of the intestine of unknown cause, often causing recurrent abdominal
pain, cramps, diarrhea with or without bleeding, fever and fatigue. According
to the Crohn's & Colitis Foundation of America, Inc., approximately 1,000,000
people in the United States have IBD. Two forms of IBD are Crohn's disease and
ulcerative colitis. Crohn's disease typically affects the full thickness of the
intestinal wall, most commonly in the lowest portion of the small intestine, but
may involve any portion of the gastrointestinal tract. Ulcerative colitis
results in the large intestine becoming inflamed with open sores and bleeding.
Current treatments of IBD, such as steroids and other anti-inflammatory drugs,
are designed to reduce inflammation and relieve symptoms. However patients
frequently develop flare-ups of disease in spite of therapy, and side effects,
particularly of steroids, can be severe. In serious cases, surgery is required.
Ulcerative colitis can be so debilitating that up to 20% of patients opt for
removal of their colon as a cure.
Heparins and IBD
A large number of case reports and a recent double blind placebo-controlled
clinical trial of heparin in ulcerative colitis support the idea that heparin
can safely induce remission in IBD patients. A review (Korzenik, IBD 1997) of
the clinical use of heparin in IBD (primarily ulcerative colitis) found benefit
in 51 out of 60 reported cases, with increased bleeding in only three cases. In
a recent U.S. double blind placebo-controlled trial of heparin in 68 patients
with active ulcerative colitis receiving treatment with standard therapies, 42%
of patients who were given additional heparin therapy had clinical remission or
improvement, compared with 20% on placebo.
Clinical observations suggest that IBD may result from increased clotting
activity. Investigators have observed evidence of increased clotting in the
bowel and other organs during flares of IBD. Clotting is activated and the
breakdown of clots is reduced during flares. Patients with inherited clotting
deficiencies, such as von Willebrand's disease and hemophilia, have a
27
much lower incidence of IBD than expected. The clinical results and other
supporting studies discussed above provide a rationale for the use of an ultra-
low molecular weight heparin such as OP2000 in the treatment of flares of IBD.
OP2000 is a product of the chemical cleavage of heparin, and has the
comparatively low molecular weight of 2,500 daltons, compared with full-length
heparin's molecular weight of about 14,000 daltons and other low molecular
weight heparin's molecular weight of 4,000 to 6,000 daltons. Lower molecular
weight, or smaller molecules of heparin, might prove to have advantages over
heparin itself, including better safety, efficacy and convenience. OP2000 has
been shown to be a potent anti-clotting agent. Like low molecular weight
heparins, and unlike heparin, routine monitoring of clotting factors during
treatment should not be necessary, providing an advantage over heparin. OP2000
has a longer lifetime in the body than heparin or low molecular weight heparins
and initial results indicate that OP2000 can be given in once-daily injections
under the skin. A key objective of Incara is to have OP2000 be the first
heparin-related product to obtain regulatory approval to treat ulcerative
colitis in the United States. We might not achieve this objective. The
composition of OP2000 is covered by claims of patents issued to Opocrin in the
United States and Europe. Incara Development has rights to a license for OP2000
from Opocrin for all uses worldwide, except in Japan and Korea.
Clinical Development Program
We completed two Phase 1 clinical trials for OP2000 with no significant
unexpected side effects. The most recent was completed in April 2000. These
trials looked at single and multiple dose administrations of the drug, and
preliminary results indicate that, should it be successfully commercialized, we
will be able to give OP2000 on a once-a-day basis. OP2000 has been studied for
another indication in over 150 healthy subjects and patients in Europe with no
significant unexpected side effects.
In January 2001, Incara Development began a Phase 2/3 pivotal clinical
study of OP2000 in patients with ulcerative colitis, a form of inflammatory
bowel disease. The study will examine the effects of OP2000 in patients
receiving standard treatment with aminosalicylates who have developed symptoms
of active ulcerative colitis. The study is designed to enroll approximately 270
patients. Patients will be treated with aminosalicylates plus OP2000 or placebo
once a day for six weeks. This initial study will utilize prefilled syringes to
deliver OP2000 by subcutaneous injection. The objective of treatment will be to
cause complete remission or significantly improve the signs and symptoms of
ulcerative colitis.
If the results of the Phase 2/3 trial are positive, Incara Development
plans to conduct a confirmatory Phase 3 safety and efficacy trial in ulcerative
colitis. In addition, Incara Development would plan to conduct two or three
small studies to assess the effect of disease states on OP2000 blood levels and
anticlotting effects. A pilot study in Crohn's disease would also be
considered. Our clinical scientists will manage the trials, including all data
collection and analysis activities.
Commercialization
If efficacy is demonstrated in clinical trials, Incara Development will
determine the appropriate marketing arrangement for OP2000. Elan has a first
option to negotiate an agreement for commercialization of OP2000. If Incara
Development and Elan are not able to reach a mutually acceptable
commercialization agreement, Incara Development will be free to negotiate with
third parties for commercialization of OP2000 on terms no more favorable to
those offered Elan.
Collaborative and Licensing Arrangements
Incara Development, Ltd.
In January 2001, we closed on a collaborative and financing transaction
with Elan. As part of the transaction, Incara and Elan formed Incara
Development to develop OP2000. Incara owns 80.1% of the outstanding shares of
Incara Development and Elan owns 19.9%. As part of the transaction, Elan and we
entered into license agreements under which we licensed to Incara Development
the OP2000 compound and Elan licensed to Incara Development drug delivery
technology.
Also as part of the transaction, Elan purchased shares of our common stock,
shares of our Series B non-voting convertible preferred stock and a warrant for
Series B preferred stock. Elan also purchased shares of our Series C
convertible exchangeable non-voting preferred stock. The Series C preferred
stock is exchangeable at the option of Elan at any time for the preferred stock
of Incara Development held by us which, if exchanged, would give Elan ownership
of 50% of the initial amount of stock of Incara Development. After December 20,
2002, the Series C preferred stock is convertible by Elan into shares of our
Series B preferred stock. If the Series C preferred stock is outstanding as of
December 21, 2006, we will exchange the Series C preferred stock and accrued
dividends, at our option, for either cash or shares of our stock and warrants
having a then fair market value of the amount due. The proceeds from the
issuance of the Series C preferred stock were contributed by us to Incara
Development.
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Elan and we intend to fund Incara Development pro rata, based on our
respective percentage ownership of the stock of Incara Development. Subject to
mutual agreement, Elan will lend us up to $4,806,000 to fund our pro rata share
of development funding for Incara Development. In return, we issued a
convertible promissory note that bears interest at 10% compounded semi-annually
on the amount outstanding thereunder. For additional details on the Elan
transaction see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
Opocrin License
In July 1998, we signed a 15-year agreement with Opocrin to obtain the
exclusive rights to OP2000 on a worldwide basis, except for Japan and Korea. We
transferred the license rights to Incara Development in January 2001. We paid
$1,000,000 to Opocrin as a license fee upon execution of the agreement.
Additional compensation will be payable to Opocrin by us or Incara Development
upon initiation of specified clinical trials, upon filing for specified
regulatory approval, upon obtaining specified regulatory approval, and upon
achieving specified aggregate annual sales. Incara Development also is to pay
Opocrin royalties on net sales and is responsible for the costs of conducting
clinical trials for OP2000. Incara and Opocrin have agreed to diligently pursue
the negotiation and execution of a manufacturing supply agreement, under which
Opocrin would manufacture OP2000 for commercial purposes. We might not reach an
agreement with Opocrin for the manufacture of OP2000.
University of North Carolina License
Through our subsidiary, Incara Cell Technologies, we have a sponsored
research agreement which covers research at the University of North Carolina by
scientists in the area of hepatic stem cells. This agreement grants us the first
option to obtain an exclusive license to inventions resulting from the research
during the term of the research agreement, or during the one-year period
following termination of the agreement. We have obtained an exclusive worldwide
license from UNC to make, use and sell products using proprietary information
and technology developed under this sponsored research agreement. The UNC
license includes rights to five U.S. patent applications filed during 1999, 2000
and 2001, including patent applications for isolating and purifying human liver
progenitor cells. We are pursuing international patent protection, as we deem
appropriate. We will make milestone payments to UNC upon the occurrence of
development milestones and pay royalties on net sales. We are also obligated to
pay patent filing, prosecution, maintenance and defense costs. The UNC license
is terminable in the event of breach and expires when the last licensed patent
expires.
Albert Einstein College of Medicine
Through Incara Cell Technologies, we have obtained exclusive worldwide
rights from Albert Einstein College of Medicine for patents resulting from
research conducted on liver stem and precursor cells by Dr. Reid and other
scientists, while Dr. Reid was at Einstein. The U.S. component of this patent
portfolio includes five issued patents, and three pending patent applications.
We also have six pending patent applications internationally . We must pay
royalties to Einstein on net product sales during the term of the licenses and
must pay minimum royalties beginning in 2004. We also must pay patent
prosecution, maintenance and defense costs. The Einstein licenses are terminable
in the event of breach, and otherwise expire when the last licensed patent
expires.
Duke Licenses
Through our subsidiary, Aeolus, we have obtained exclusive worldwide rights
from Duke University to products using antioxidant technology and compounds
developed by Dr. Irwin Fridovich and other scientists at Duke. These scientists
provide research support and advice in the field of free radical and antioxidant
research. Further discoveries in the field of antioxidant research from these
scientists' laboratories at Duke also are covered by the licenses from Duke. We
must pay royalties to Duke on net product sales during the term of the Duke
licenses, and must make payments upon the occurrence of development milestones.
In addition, we are obligated under the Duke license to pay patent prosecution,
maintenance and defense costs. The Duke licenses are terminable in the event of
breach and otherwise expire when the last licensed patent expires.
National Jewish License
In September 1997, we executed a Sponsored Research Agreement with National
Jewish Medical and Research Center. The National Jewish Agreement grants Aeolus
an option to negotiate a royalty-bearing exclusive license for technology,
patents and inventions resulting from research at National Jewish within the
field of antioxidant compounds and related discoveries. We have agreed to
support National Jewish's costs incurred in performance of the research. In
November 2000, we obtained an exclusive worldwide license from National Jewish
to develop, make, use and sell products using proprietary information and
technology developed under this sponsored research agreement. We will make
milestone payments to National Jewish upon the occurrence of development
milestones and pay royalties on net sales. We are also obligated to pay patent
filing, prosecution, maintenance and defense costs. The National Jewish license
is terminable in the event of breach and otherwise expires when the last
licensed patent expires.
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Manufacturing
Our strategy is to contract with third parties for manufacturing
capabilities.
The bulk drug substance for OP2000 is being provided for drug development
activities by the licensor, Opocrin, on a cost-plus basis. Incara and Opocrin
have agreed to diligently pursue the negotiations and execution of a
manufacturing supply agreement, under which Opocrin would manufacture OP2000 for
commercial purposes. The formulated drug product is being manufactured for
clinical trials in prefilled syringes by a contract manufacturer. The
commercial supplier for the final drug product will be selected by Incara
Development and Elan based on the final delivery system chosen for OP2000.
We have selected the Center for Cell and Gene Therapy at Baylor College of
Medicine, Houston, Texas, for our liver cell program as the cGMP facility to
manufacture clinical trial material. Our scientists are currently working with
Baylor on our process for the isolation and enrichment of liver progenitor
cells. Once the process has been successfully performed and validated at
Baylor, Incara will attempt to contract with Baylor to manufacture the clinical
trial material for Phase 1/2 clinical trials. The source of livers for this
process has historically been, and will continue to be, livers that are not
suitable for transplantation (for reasons other than serology) from traditional
organ transplant donor programs. Incara has successfully established a working
relationship with a number of organ procurement organizations and expects to
expand and maintain these relationships.
Pharm-Eco Laboratories is developing the chemical process for the
commercial manufacture of the catalytic antioxidants. Pharm-Eco currently has
the capability to manufacture clinical grade material in accordance with cGMPs
for clinical as well as commercial purposes; however, we have not selected the
manufacturer for the final clinical material, which will depend, in part, on the
dosage form and the indication.
Marketing
We intend to establish our own marketing capabilities for the liver
progenitor cell therapy program in the United States if we are successful in
treating patients in clinical trials. We believe a targeted marketing effort
directed toward the 120 liver transplant centers in the country is an
appropriate strategy for Incara in this area. Establishing our own marketing
capabilities will require substantial funds and we might not successfully
establish our own marketing capabilities on a cost-effective basis or at all.
Outside the United States we plan to collaborate with an established
pharmaceutical or biotechnology company for the liver progenitor cell therapy
program.
We are seeking to collaborate with one of the companies currently
developing a liver assist device for the development of such a device that
utilizes our human liver progenitor cells.
Several of our potential catalytic antioxidant products are being developed
for large therapeutic markets, such as stroke and cancer therapy adjunct. We
believe these markets are best approached by partnering with established
biotechnology or pharmaceutical companies that have broad sales and marketing
capabilities. We are pursuing collaborations of this type.
The rights to market OP2000 are licensed to Incara Development. At the
time that Incara Development determines it intends to commercialize OP2000, Elan
will have a first option to negotiate an agreement for commercialization of
OP2000. If Incara Development and Elan are not able to reach a mutually
acceptable commercialization agreement, Incara Development will be free to
negotiate with third parties for commercialization of OP2000 on terms no more
favorable to those offered Elan.
We might not be able to enter into any marketing arrangements for any of
our products on satisfactory terms.
Competition
General
Competition in the pharmaceutical industry is intense and we expect it to
increase. Technological developments in our fields of research and development
occur at a rapid rate and we expect competition to intensify as advances in
these fields are made. We will be required to continue to devote substantial
resources and efforts to research and development activities. Our most
significant competitors, among others, are fully integrated pharmaceutical
companies and more established biotechnology companies, which have substantially
greater financial, technical, sales and marketing, and human resources than us.
These companies might succeed in obtaining regulatory approval for competitive
products more rapidly than we can for our products. In addition, competitors
might develop technologies and products that are cheaper, safer or more
effective than those being developed by us or that would render our technology
obsolete.
30
We expect that important competitive factors in our potential product
markets will be the relative speed with which we and other companies can develop
products, complete the clinical testing and approval processes, and supply
commercial quantities of competitive product(s) to the market. With respect to
clinical testing, competition might result in a scarcity of clinical
investigators and patients available to test our potential products, which could
delay development.
As described below, we are aware of products in research or development by
our competitors that address the diseases being targeted by us. In addition to
the competitors and products discussed below, there might be other competitors
of whom we are unaware with products which might be more effective or have fewer
side effects than our products and those of our known competitors.
Inflammatory Bowel Disease
The two major forms of inflammatory bowel disease, ulcerative colitis and
Crohn's disease, are treated by antidiarrheals, steroids, other anti-
inflammatory drugs and immunosuppressants. Crohn's disease also is being
treated by off-label use of metronidazole, an antibiotic that acts as an anti-
inflammatory through an unknown mechanism. Some of the drugs used to treat
these diseases are available in generic form and are being marketed at a price
that could be less than the price of OP2000, if it were successfully developed
and approved. Low molecular weight heparins are approved for non-IBD
indications and marketed by others, who might try to develop their low molecular
weight heparins for IBD. We believe there are planned or ongoing trails of low
molecular weight heparins for the treatment of IBD in Europe.
Remicade(R) was approved by the FDA in 1998 for use in treating moderately
to severely active Crohn's disease. Remicade is an antibody to TNF alpha
indicated for the reduction of the signs and symptoms of Crohn's disease in
patients who have an inadequate response to conventional therapy. The drug is
being marketed in the United States by Centocor, Inc. Its cost and the concern
over possible allergic reaction to the protein, however, have limited its use in
this indication. We are aware of other drugs that inhibit TNF alpha that are
being studied preclinically or in patients in IBD, which may have a better side
effect profile.
Hepatic Diseases
We are aware of competitive efforts in academic, research and commercial
institutions using human hepatic cells in treatment of liver disease. Tissue
Transformation Technologies, Inc. and Diacrin, Inc. are conducting Phase 1
clinical trials for treatment of cirrhosis using human liver cell transplants.
In addition, other companies and academic laboratories are investigating the use
of pig livers in transplantation as a substitute for human liver and the use of
hepatocytes prepared from pig livers as a form of cell therapy. Several other
companies have conducted research and development on a bioartificial liver
device to treat acute liver failure that could be competitive with our
technology under development. In particular, Circe Biomedical, Inc. has
conducted clinical trials with a bioartificial liver that uses pig liver cells
and VitaGen Incorporated is conducting a clinical trial with a bioartificial
livers that utilizes human liver cells derived from tumors. At least one company
is pursuing the growth of mini-organs, including livers. StemCells, Inc.,
formerly Cytotherapeutics, Inc., and other companies and academic institutions
are conducting research in the area of liver and other organ stem and progenitor
cells. Stem cell research in general is being conducted by a number of
companies, including Geron Corporation, which has announced that it has isolated
embryonic stem cells. In theory, embryonic stem cells could have the capacity to
differentiate into all human systems, including the liver.
Antioxidants
Several companies have explored the therapeutic potential of antioxidant
compounds in numerous indications. Historically, most of these companies have
focused on engineered versions of naturally occurring antioxidant enzymes, but
with limited success, perhaps because the large size of these molecules makes
delivery into the cells difficult. Antioxidant drug research continues at a
rapid pace despite previous clinical setbacks. In October 1998, Metaphore
Pharmaceuticals Inc. reported results from preclinical studies of a small
molecule that performs the same chemical reactions as the antioxidant enzyme
superoxide dismutase, or SOD. Metaphore reported that this compound
substantially reduced tissue damage due to inflammation and reperfusion in
animal models. Eukarion, Inc. is also developing similar compounds, which are
in preclinical development for conditions associated with damage caused by free
radicals. AstraZeneca is developing a nitrone compound with free radical
trapping properties for stroke. The compound, licensed from Centaur
Pharmaceuticals, Inc., is currently in Phase 2 development.
Patents and Proprietary Rights
We currently license rights to all of our potential products from third
parties. We generally seek patent protection in the United States and other
jurisdictions for the potential products and proprietary technology licensed
from these third parties. The process for preparing and prosecuting patents is
lengthy, uncertain and costly. Patents might not issue on any of the pending
patent applications owned or licensed by us from third parties. Even if patents
issue, the claims allowed might not be sufficiently broad to protect our
technology or provide us protection against competitive products or otherwise be
commercially valuable.
31
Patents issued to or licensed by us could be challenged, invalidated, infringed,
circumvented or held unenforceable. Even if we successfully defend our patents
for our products, the costs of defense can be significant.
Incara Development has rights to an exclusive license from Opocrin, in all
countries other than Japan and Korea, for an issued patent to develop and
commercialize OP2000. Incara Development also has rights to a non-exclusive
license from Opocrin to practice related patents, to the extent required for our
activities related to OP2000. We are aware of a recently issued patent claiming
the use of fractions of heparin for the treatment of inflammatory bowel disease.
We do not believe the development of OP2000 will require the licensing of this
patent. If OP2000 were to be determined to fall within the scope of this patent
and if the patent's claims were found to be valid, Incara Development would have
to license this patent in order to commercialize OP2000. Incara Development
might not be able to license this patent at a reasonable cost which would result
in Incara Development not being able to market OP2000. Uncertainty regarding
the scope or validity of this patent might deter Elan from continuing
development of OP2000 or deter other companies from collaborating with Incara
Development for the development and commercialization of OP2000.
In the liver progenitor cell program, we have an exclusive license for five
issued U.S. patents and three pending patent applications from Albert Einstein
College of Medicine. Claims included in these issued patents include an isolated
hepatocyte precursor capable of differentiating into a hepatocyte and a
population of genetically engineered hepatocyte precursor cells. We also have
six related pending patent applications internationally. Our UNC sponsored
research agreement allows us to obtain an exclusive worldwide license to make,
use and sell products using proprietary information and technology developed
under the UNC sponsored research agreement. Rights to five U.S. patent
applications filed during 1999, 2000 and 2001 are currently included in the UNC
license, along with international applications as we deem appropriate. Pending
claims on the UNC patents include those directed to human liver progenitor cell
composition and process for their isolation, expansion and cryopreservation and
the use of non-beating-heart donors as a source for progenitor cells.
Our catalytic antioxidant small molecule technology base is described in
four issued U.S. patents and six patent applications that are pending. These
patents and patent applications belong in whole or in part to Duke or National
Jewish and are licensed to us. These patents and patent applications cover
soluble manganic porphyrins as antioxidant molecules as well as targeted
compounds obtained by coupling such antioxidant compounds to molecules that bind
to specific extracellular elements. The pending U.S. applications include
composition of matter claims for several series of compounds. Corresponding
international patent applications have been filed as we deem appropriate, two of
which have issued.
In addition to patent protection, we rely upon trade secrets, proprietary
know-how and technological advances that we seek to protect in part through
confidentiality agreements with our collaborative partners, employees and
consultants. Our employees and consultants are required to enter into
agreements providing for confidentiality and the assignment of rights to
inventions made by them while in our service. We also enter into non-disclosure
agreements to protect our confidential information furnished to third parties
for research and other purposes. These types of agreements can be difficult to
enforce and for some types of breach there is no satisfactory remedy for
unauthorized disclosures. It is possible that our trade secrets and proprietary
know-how will become known or will be independently discovered by others despite
our efforts.
Our commercial success will also depend in part on our ability to
commercialize products without infringing patents or other proprietary rights of
others or breaching the licenses granted to us. If we are not able to obtain a
license to any third-party technology needed for our business at a reasonable
cost, we might have to stop developing the product.
As with any pharmaceutical company, our patent and other proprietary rights
are uncertain. The patent rights related to our products might conflict with
current or future proprietary rights of others. For the same reasons the
products of others could infringe our patent or proprietary rights. Litigation
or patent interference proceedings, either of which could result in substantial
cost, might be necessary to enforce any patents or other proprietary rights
issued to us or to determine the scope and validity or enforceability of other
parties' proprietary rights. The defense and prosecution of patent and
intellectual property claims are both costly and time consuming, even if the
outcome is favorable to us. Any adverse outcome could make us pay damages to
third parties, require disputed rights to be licensed from third parties, or
require us to cease selling our products.
Government Regulation
Our research and development activities and the manufacturing and marketing
of our future products are subject to regulation by numerous governmental
agencies in the United States and in other countries. The FDA and comparable
agencies in other countries impose mandatory procedures and standards for the
conduct of clinical trials and the production and marketing of products for
diagnostic and human therapeutic use. Before obtaining regulatory approvals for
the commercial sale of any of our products under development, we must
demonstrate through preclinical studies and clinical trials that the product is
safe and efficacious for use in each target indication. The results from
preclinical studies and early clinical trials might not be predictive of results
that will be obtained in large-scale testing. Our clinical trials may not
successfully demonstrate the safety and efficacy of any products or result in
marketable products.
32
The steps required by the FDA before new drug or cell therapy products may
be marketed in the United States include:
. preclinical studies;
. the submission to the FDA of a request for authorization to conduct
clinical trials on an investigational new drug or cell therapy, which
must become effective before human clinical trials may commence;
. adequate and well-controlled Phase 1, 2 and 3 human clinical trials to
establish the safety and efficacy of the drug or cell therapy for its
intended use;
. submission to the FDA of a New Drug Application, or NDA, for a drug, or
submission to the FDA of a Biological License Application, or BLA, in
the case of a cell therapy; and
. review and approval of the NDA or BLA by the FDA before the product may
be shipped or sold commercially.
In addition to obtaining FDA approval for each product, each manufacturing
and cell processing establishment must be registered with the FDA and undergo an
inspection prior to the approval of an NDA or BLA. Each manufacturing facility,
and its quality control and manufacturing procedures must also conform and
adhere at all times to the FDA's cGMP regulations. In addition to preapproval
inspections, the FDA and other government agencies regularly inspect
manufacturing facilities for compliance with these requirements. Manufacturers
must expend time, money and effort in the area of production and quality control
to ensure full technical compliance with these standards.
Preclinical testing includes laboratory evaluation and characterization of
the safety and efficacy of a drug or cell therapy and its formulation.
Preclinical testing results are submitted to the FDA as a part of an
Investigational New Drug Application, or IND, which must become effective prior
to commencement of human clinical trials. Clinical trials are typically
conducted in three sequential phases following submission of an IND. Phase 1
represents the initial administration of the drug or cell therapy to a small
group of humans, either patients or healthy volunteers, typically to test for
safety (adverse effects), dosage tolerance, absorption, distribution,
metabolism, excretion and clinical pharmacology, and, if possible, to gain early
evidence of effectiveness. Phase 2 involves studies in a small sample of the
actual intended patient population to assess the efficacy of the drug or cell
therapy for a specific indication, to determine dose tolerance and the optimal
dose range and to gather additional information relating to safety and potential
adverse effects. Once an investigational drug or cell therapy is found to have
some efficacy and an acceptable safety profile in the targeted patient
population, Phase 3 studies are initiated to further establish clinical safety
and efficacy of the therapy in a broader sample of the general patient
population, in order to determine the overall risk-benefit ratio of the drug or
cell therapy and to provide an adequate basis for any physician labeling. During
all clinical studies, we must take care to adhere to good clinical practice, or
GCP, standards. The results of the research and product development,
manufacturing, preclinical studies, clinical studies and related information are
submitted in an NDA or BLA to the FDA.
The process of completing clinical testing and obtaining FDA approval for a
new drug or cell therapy product is likely to take a number of years and require
the expenditure of substantial resources. If an application is submitted, there
can be no assurance that the FDA will review and approve the NDA or BLA. Even
after initial FDA approval has been obtained, further studies, including post-
market studies, may be required to provide additional data on safety and will be
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested. Also,
the FDA will require post-market reporting and may require surveillance programs
to monitor the side effects of the drug or cell therapy. Results of post-
marketing programs may limit or expand the further marketing of the products.
Further, if there are any modifications to the drug or cell therapy, including
changes in indication, manufacturing process, labeling or a change in
manufacturing facility, an NDA or BLA supplement may be required to be submitted
to the FDA.
The rate of completion of our clinical trials will be dependent upon, among
other factors, the rate of patient enrollment. Patient enrollment is a function
of many factors, including the size of the patient population, the nature of the
trial, the availability of alternative therapies and drugs, the proximity of
patients to clinical sites and the eligibility criteria for the study. Delays
in planned patient enrollment may result in increased costs and delays, which
could have a material adverse effect on us.
Failure to comply with applicable FDA requirements may result in a number
of consequences that could materially and adversely affect us. Failure to
adhere to approved trial standards and GCPs in conducting clinical trials could
cause the FDA to place a clinical hold on one or more studies which would delay
research and data collection necessary for product approval. Noncompliance with
GCPs could also have a negative impact on FDA's evaluation of an NDA or BLA.
Failure to adhere to GMPs and other applicable requirements could result in FDA
enforcement action and in civil and criminal sanctions, including but not
limited to fines, seizure of product, refusal of the FDA to approve product
approval applications, withdrawal of approved applications, and
prosecution.
33
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of marketing of the product in such countries. The requirements
governing the conduct of clinical trials and product approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval. Although there are some procedures for
unified filings for certain European countries, in general, each country at this
time has its own procedures and requirements. There can be no assurance that
any foreign approvals will be obtained.
In addition to the regulatory framework for product approvals, we and our
collaborative partners must comply with laws and regulations regarding
occupational safety, laboratory practices, the use, handling and disposition of
radioactive materials, environmental protection and hazardous substance control,
and other local, state, federal and foreign regulation. The impact of such
regulation upon us cannot be predicted and could be material and adverse.
Employees
We had 24 employees as of July 31, 2001. None of our employees is
represented by a labor union. We consider our employee relations to be good. We
are highly dependent on the principal members of our management and scientific
staff. The loss of certain key employees could have a material adverse effect on
us. In addition, we believe that our future success will depend in large part
upon our ability to attract and retain highly skilled scientific and managerial
personnel. We face intense competition for such personnel from other companies,
research and academic institutions, government entities and other organizations.
We might not be successful in hiring or retaining the personnel we require.
Properties
Incara currently leases 15,915 square feet of office and laboratory space
in Research Triangle Park, North Carolina, which is leased through April 2006.
The laboratory space is currently under construction and is expected to be
completed in August 2001. We believe that these leased facilities are adequate
to meet our current and future needs.
Legal Proceedings
We are not a party to any material legal proceedings.
Discontinued Programs
Our historical cash expenditures prior to December 31, 1999 were
significantly higher than our current cash spending rate. This lower level of
expenditures has resulted from the discontinuation of the IRL and BEXTRA
programs.
IRL
On December 29, 1999, we completed the sale of Incara Research
Laboratories, or IRL, our anti-infectives drug discovery division, to a private
pharmaceutical company, for a cash payment of $11,000,000. The transaction
involved the sale of assets associated with Incara's anti-infective division,
including rights under the collaboration agreement with Merck, and the
assumption of related liabilities by the purchaser. Expenses for IRL were
$1,339,000 and $8,245,000 for the fiscal years ended September 30, 2000 and
1999, respectively. As a result of the sale of IRL, we remain contingently
liable through May 2007 on debt and lease obligations assumed by the purchaser,
including the IRL facility lease in Cranbury, New Jersey. This contingent
liability was approximately $7,000,000 in June 2001 and should decline on an
approximately straight-line basis to zero in May 2007.
BEXTRA
Until July 1999, our most advanced product was BEXTRA (bucindolol HCl), a
beta-blocker that was being evaluated in a Phase 3 clinical trial conducted by
the National Institutes of Health and the United States Department of Veterans
Affairs for use in treating congestive heart failure patients. The study was
terminated in July 1999 prior to its scheduled termination date based on an
interim analysis by the Data and Safety Monitoring Board that showed that
treatment with bucindolol did not demonstrate a statistically significant
improvement in survival in the patient population as a whole. Based on this
result, we agreed to end our collaboration with BASF Pharma/Knoll AG for BEXTRA
for countries outside the United States and Japan, and we terminated the
European trial of BEXTRA. The compound was being developed with Interneuron
Pharmaceuticals, Inc. through a jointly owned company named CPEC LLC. BEXTRA
related expenses were $6,469,000 for fiscal 1999.
34
MANAGEMENT
Directors and Executive Officers
Our executive officers and directors and their ages as of July 31, 2001
are as follows:
Age Position
--- --------
Clayton I. Duncan 52 Director, President and Chief Executive Officer
David B. Sharrock 65 Director
Edgar H. Schollmaier 67 Director
Stephen M. Prescott, M.D. 53 Director
Eugene J. McDonald 69 Director
David P. Ward, M.D. 55 Executive Vice President, Research and Development
Richard W. Reichow 50 Executive Vice President and Chief Financial Officer
John P. Richert 51 Vice President, Market Development
W. Bennett Love 46 Vice President, Corporate Planning/Communications
Clayton I. Duncan has been President, Chief Executive Officer and a
director of Incara since January 1995. From 1989 until December 1993, Mr.
Duncan was President and Chief Executive Officer of Sphinx Pharmaceuticals
Corporation, a biopharmaceutical company which was acquired by Eli Lilly and
Company in September 1994. From December 1993 until September 1994, he served
as an independent consultant to Sphinx with regard to the sale of Sphinx to
Lilly. From 1987 to 1989, Mr. Duncan was a General Partner of Intersouth
Partners, a venture capital firm. From 1979 to 1987, he was an executive with
Carolina Securities Corporation, a regional investment banking firm, serving as
Executive Vice President and a director from 1984 to 1987. Mr. Duncan was
founder and Chairman of the Board of CRX Medical, Inc., a medical products
company that conducted research and development in wound management, ophthalmic
disorders and interventional radiology. Mr. Duncan is also a director of Aeolus
Pharmaceuticals, Inc., Incara Development, Ltd., CPEC LLC, and Incara Cell
Technologies, Inc., all of which are subsidiaries of Incara. Mr. Duncan
received an M.B.A. from the University of North Carolina at Chapel Hill. In
addition, Mr. Duncan is a director of The Forest at Duke, a continuing care
retirement community, and Chairman of the Board of Directors of the Carolina
Ballet, a professional ballet company.
David B. Sharrock has been a director of Incara since October 1995. Mr.
Sharrock was associated with Marion Merrell Dow, Inc., a multi-national
pharmaceutical company, and its predecessor companies for over 35 years until
his retirement in December 1993. Most recently, since December 1989, he served
as Executive Vice President, Chief Operating Officer and a director, and in
1988, he was named President and Chief Operating Officer of Merrell Dow
Pharmaceuticals Inc. Mr. Sharrock is also a director of four public companies,
Interneuron Pharmaceuticals, Inc., Broadwing Inc., Praecis Pharmaceuticals,
Incorporated and MGI Pharma, Inc.
Edgar H. Schollmaier has been a director of Incara since May 1998. Mr.
Schollmaier is Chairman of Alcon Laboratories, Inc., a wholly owned subsidiary
of Nestle SA. He served as President of Alcon from 1972 to 1997 and was Chief
Executive Officer for the last 20 years of that term. He is a graduate of the
University of Cincinnati and the Harvard Graduate School of Business
Administration. Mr. Schollmaier is a director of two public companies, DENTSPLY
International, Inc., a dental products company, and Stevens International Inc.,
a printing and packaging company. In addition, he is a Regent of Texas
Christian University and a director of the University of Cincinnati Foundation,
the Cook Children's Hospital, Research to Prevent Blindness and the Foundation
of the American Academy of Ophthalmology.
Stephen M. Prescott, M.D. has been a director of Incara since April 2000.
Dr. Prescott is the Executive Director of the Huntsman Cancer Institute at the
University of Utah in Salt Lake City. Dr. Prescott received his M.D. degree
from Baylor College of Medicine in 1973 and then completed training in Internal
Medicine at the University of Utah. Dr. Prescott subsequently undertook
advanced research training in biochemistry and molecular biology at Washington
University School of Medicine. He joined the faculty at the University of Utah
in 1982, and is currently a Professor of Internal Medicine at the University of
Utah and holds the H.A. & Edna Benning Presidential Endowed Chair in Human
Molecular Biology and Genetics. From 1998 until 1999, Dr. Prescott was Director
of the Program in Human Molecular Biology & Genetics in the Eccles Institute at
the University of Utah.
Eugene J. McDonald was elected to the Board in March 2001. Mr. McDonald is
Executive Vice President, Office of Investment Counsel at Duke University and
has served at Duke University for more than two decades. Mr. McDonald founded
and was the first president and CEO of Duke Management Company, the investment
management affiliate of Duke University. He was Duke's Chief
Financial/Administrative Officer from 1984 to 1990, and, prior to this, served
as Vice President and University Counsel. He began his career as professor of
law at Georgetown Law School, and as an attorney in the corporate/business
practice of Brobeck, Phleger and Harrison in San Francisco. Mr. McDonald is the
lead director of the Deutsche Bank/Alex Brown Fund Family, and also serves on
the boards of directors of two public companies, Red Hat, Inc. and
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National Commerce Bancorporation. He has also served on a number of advisory
boards, including those of the New York Stock Exchange's PMAC Committee and T.
Rowe Price Strategic Partners. Mr. McDonald received his undergraduate and law
degrees from the University of San Francisco.
David P. Ward, M.D. has been Executive Vice President, Research and
Development of Incara since July 1998, and was Senior Vice President, Research &
Development from March 1995 to July 1998. Dr. Ward was Group Vice President,
Medical, Regulatory Affairs and Clinical Operations of Quintiles Transnational
Corporation, a contract research organization, from October 1994 to March 1995.
Dr. Ward was Vice President of Clinical Development and Regulatory Affairs of
Sphinx from January 1992 to September 1994. Prior to that time, Dr. Ward was
employed by SmithKline Beecham, a multinational pharmaceutical company, for more
than six years, serving as a Vice President in various clinical areas. Dr. Ward
received his M.D. degree from Case Western Reserve University Medical School.
Richard W. Reichow has been Executive Vice President since July 1998,
Secretary since October 1995, and Senior Vice President, Chief Financial Officer
and Treasurer since March 1995. Mr. Reichow was employed by Sphinx as President
and Chief Executive Officer from December 1993 to September 1994, as Vice
President, Finance & Administration from August 1991 to September 1994, and as
Chief Financial Officer and Treasurer from March 1990 to September 1994. Between
September 1994 and March 1995, he was an independent financial consultant. Mr.
Reichow was Vice President, Chief Financial Officer and Treasurer of CRX Medical
from 1987 to 1990. Mr. Reichow is a Certified Public Accountant.
John P. Richert has been employed by Incara since 1995, and has been Vice
President, Market Development since December 1996. Mr. Richert served as
Director, Market Development with Sphinx from 1991 to 1994. Mr. Richert was
employed by Schering-Plough Corporation, a major pharmaceutical manufacturer,
from 1981 to 1990 where he held positions of increasing responsibility in
marketing. Mr. Richert received an M.B.A. in Pharmaceutical Marketing from
Fairleigh-Dickinson University.
W. Bennett Love has been employed by Incara since 1995, and has been Vice
President, Corporate Planning/Communications since June 1997. From 1990 to
1994, Mr. Love was employed at Sphinx as Director, Corporate Planning/
Communications. From 1983 through 1989, he was an investment banker with a
regional securities firm. Mr. Love received an M.B.A. from the University of
North Carolina at Chapel Hill.
36
Executive Compensation
Summary Compensation
The following table sets forth all compensation earned for services
rendered to it in all capacities for the fiscal years ended September 30, 2000,
1999 and 1998, by Incara's Chief Executive Officer and by the four most highly
compensated executive officers who earned at least $100,000 in the respective
fiscal year (collectively, the "Named Officers").
Summary Compensation Table
Annual Compensation Long Term Compensation Awards
----------------------- -----------------------------
Name and Fiscal Stock Options Restricted Stock All Other
Principal Position Year Salary Bonus (Shares) (Shares) (2) Compensation (1)
----------------------------- ------- ------------- -------------- ----------------- ----------------- --------------------
Clayton I. Duncan 2000 $322,500 $ 30,000 --- --- $2,823
President and Chief 1999 $300,000 $ 84,000 --- 188,375 $2,934
Executive Officer 1998 $295,225 $ 78,652 235,877 --- $2,791
David P. Ward, M.D. 2000 $252,625 $ 30,844 --- --- $3,340
Executive Vice President, 1999 $235,000 $ 51,994 --- 120,000 $3,993
Research & Development 1998 $221,250 $ 44,520 140,000 --- $3,657
Richard W. Reichow 2000 $252,625 $ 31,844 --- --- $2,762
Executive Vice President, 1999 $235,000 $ 54,637 --- 120,000 $3,044
Chief Financial Officer, 1998 $212,250 $ 46,825 140,000 --- $2,811
Treasurer and Secretary
W. Bennett Love 2000 $131,150 $ 13,344 --- --- $1,664
Vice President, Corporate 1999 $122,000 $ 23,028 --- 44,000 $1,608
Planning/Communications 1998 $117,333 $ 17,480 54,000 --- $1,554
John P. Richert 2000 $131,150 $ 9,531 --- --- $1,159
Vice President, 1999 $122,000 $ 22,341 --- 49,000 $1,200
Market Development 1998 $119,083 $ 18,262 59,000 --- $1,126
________________
(1) Consists of Life and Long-term disability insurance premiums and health
club fees reimbursed or paid on behalf of the Named Officers.
(2) As of September 23, 1999, the Named Officer purchased the number of
shares of restricted stock indicated at par value ($0.001 per share)
and cancelled stock options to purchase an equal number of shares of
common stock. The shares of restricted stock vest over three years from
the date of grant and vesting could be accelerated pursuant to a change
of control or an involuntary termination of employment. As of September
30, 2000 a total of 66,884 shares had vested for Mr. Duncan, 40,494
shares for Dr. Ward, 40,494 shares for Mr. Reichow, 12,696 shares for
Mr. Love and 14,570 shares for Mr. Richert. The value of the restricted
stock received by the Named Officer, based on the closing price of
Incara's stock on September 23, 1999 ($0.625), was as follows: for Mr.
Duncan $117,546; for Dr. Ward $74,880; for Mr. Reichow $74,880; for Mr.
Love $27,456; and for Mr. Richert $30,625.
Management Incentive Plan
The Compensation Committee and the Board of Directors have approved a
Management Incentive Plan, or MLP, for the executive officers of Incara. The MIP
provides for cash payments to the executive officers upon the achievement of
certain corporate and individual objectives. The MIP is intended to be an annual
compensation program. For the calendar year ended December 31, 2000, the
corporate objectives related to financing and our three research and development
programs. For the calendar years ended December 31, 1999 and 1998, the corporate
objectives related primarily to the development and commercialization of
bucindolol and the identification and advancement of other potential products or
programs. The corporate and individual objectives for calendar 2000 have been
evaluated and measured, and cash payments were made to the Named Officers in
January 2001.
37
Option Grants, Exercises and Holdings and Fiscal Year-End Option Values
No stock option grants were made to any of the Named Officers during the
fiscal year ended September 30, 2000.
The following table sets forth certain information concerning all stock
options exercised during the fiscal year ended September 30, 2000 by the Name
Officers, and the number and value of unexercised options held by the Named
Officers as of September 30, 2000:
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of Value of
Securities Underlying Unexercised
Shares Unexercised Options In-the-Money Options
Acquired Value at September 30, 2000 at September 30, 2000 (2)
--------------------------------- --------------------------------
Name on Exercise Realized (1) Exercisable Unexerciseable Exercisable Unexerciseable
---------------------- ------------- ------------- ------------- ----------------- -------------- ---------------
Clayton I. Duncan 100,000 $232,750 151,557 - $ 420,267 $ -
David P. Ward, M.D. - - 116,500 - $ 338,448 $ -
Richard W. Reichow 40,000 $ 93,100 75,800 - $ 215,737 $ -
W. Bennett Love - - 36,000 - $ 85,500 $ -
John P. Richert - - 36,000 - $ 97,500 $ -
__________________
(1) Market value of underlying securities on the date of exercise, minus the
exercise price.
(2) Value based on the difference between the fair market value of the shares
of common stock at September 30, 2000 ($3.375), as quoted on the Nasdaq
Stock Market, and the exercise price of the options.
Employment Agreements
In December 2000, Incara entered into a three-year employment agreement
with Mr. Duncan. The agreement provides for an annual base salary of $360,000
and annual bonuses based on the achievememt of performance milestones to be
mutually agreed upon by Mr. Duncan and the Board or its Compensation Committee.
The agreement with Mr. Duncan also provides that during the term of the
agreement and, unless Mr. Duncan terminates his employment for cause, for a
period of one year thereafter, Mr. Duncan will not compete with Incara, directly
or indirectly. In the event Mr. Duncan's employment is terminated by the Board,
Other than in a change in control and without just cause, Incara shall continue
to pay, in a lump sum or for a period of one year, Mr. Duncan's base salary plus
a percentage of his salary equal to the average annual bonus percentage earned
for the two years prior to the date of termination.
Incara has entered into employment agreements that expire in April 2002
with each of Dr. Ward and Mr. Reichow. The agreements provide for base salaries
and annual bonuses based upon the achievement of performance milestones to be
mutually agreed upon by the officer and the Chief Executive Officer, the Board
or the Compensation Committee. Each agreement also provides that during its term
and, unless the employee terminates his employment for a period of nine months
thereafter, the employee will not compete with Incara, directly. In the event
that the employment of Dr. Ward or Mr. reichow is terminated by the Board, other
than in a change in control and without just cause, Incara shall continue to
pay, in a lump sum or for a period of nine months, Dr. Ward or Mr. Reichow, as
the case may be, his base salary plus a percentage of his salary equal to the
average annual bonus percentage earned for the two years prior to the date of
termination.
Incara has entered into employment agreements that expire in April 2002
with Mr. Love and Mr. Richert. The agreements provide for base salary and annual
bonus based upon the achievement of performance milestones to be mutually agreed
upon by the officer and the Chief Executive Officer, the Board or the
Compensation Committee. Each agreement also provides that during its term and,
unless the officer terminates his employment for cause, for a period of six
months thereafter, the officer will not compete with Incara, directly or
indirectly. In the event that the employment of the officer is terminated by the
Board, other than in a change in control and without just cause, Incara shall
continue to pay the officer his base salary in a lump sum or for a period of six
months.
In September 1999, Incara entered into individual severance agreements
with Mr. Duncan, Dr. Ward, Mr. Reichow, Mr. Love and Mr. Richert. The severance
agreements provide that if the officer's employment with Incara is terminated,
without just cause, subsequent to a change in control as defined in the
severance agreements, such officer shall receive a severance benefit of two and
one-half times his annual base salary and average bonus.
38
Compensation of Directors
All directors are reimbursed for expenses incurred in connection with each
board or committee meeting attended. From October 1, 1999 and through January
17, 2000, each director who was not an employee of Incara received a fee of
$2,000 per Board meeting attended in person. In addition, the 1994 Stock Option
Plan provided for the grant of nonstatutory options to non-employee directors of
Incara pursuant to a non-discretionary, automatic grant mechanism (the
"Automatic Grant Program"). Each non-employee director of Incara ("Eligible
Director") was granted a stock option to purchase 5,000 shares of Incara common
stock on the date each such person first became an Eligible Director. Each
Eligible Director thereafter was granted automatically each year upon re-
election (except in the year his or her initial director stock option was
granted) an option to purchase 3,000 shares of Incara common stock as long as
such director was a member of the Board. The exercise price of options granted
under the Automatic Grant Program was the fair market value of Incara's common
stock on the date of grant. Such options became exercisable ratably over 36
months commencing one month from the date of grant and expire the earlier of 10
years after the date of grant or 90 days after termination of the director's
service on the Board.
After a review of director compensation programs of other companies in its
industry, on January 18, 2000, the Compensation Committee and the Board adopted
a new compensation program for Eligible Directors. Each Eligible Director will
receive an annual retainer of $13,000 and will receive a fee of $500 for each
Board meeting attended in person. The annual retainer will be due on the date
that the Eligible Director is elected or re-elected to the Board of Directors.
Directors may elect to receive all or a portion of their annual retainer as an
option to purchase common stock. Any remainder will be paid in cash. Any
option elected will enable the director to purchase a number of shares equal to
three times the number of shares that could have been purchased with the portion
of the annual retainer elected to be received as option. The exercise price per
share for the option will be the fair market value of the common stock on the
date of the grant. The date of grant will be the date the annual retainer is
granted to the director. These options will be fully vested upon grant and will
be exercisable for ten years from the date of the grant. This director
compensation program was adopted on January 18, 2000, subject to the transition
policy that the date of the annual retainer and the grant date was January 18,
2000 for each Eligible Director who was a director on the date the program was
adopted and the director did not receive any additional retainer at the
following Annual Meeting. In addition, the Automatic Grant Program was revised
to increase the initial stock option grant for new Eligible Directors from 5,000
shares to 10,000 shares and the annual automatic stock option grant was
increased from 3,000 shares to 6,000 shares. The options will become
exercisable ratably over 36 months commencing one month from the date of grant
and will expire 10 years after the date of grant.
Compensation Committee Interlocks and Insider Participation
During fiscal 2000, Joseph J. Ruvane, Jr., Mr. Sharrock, Mr. Schollmaier
and Dr. Prescott served on the Compensation Committee. Mr. Ruvane, Mr.
Sharrock, Mr. Schollmaier and Dr. Prescott were not at any time during fiscal
2000 or at any other time an officer or employee of Incara. No executive
officer of Incara serves as a member of the board of directors or compensation
committee of any entity which has one or more executive officers serving as a
member of the Board of Directors of Incara or the Compensation Committee. Dr.
Prescott was appointed to the Compensation Committee in April 2000 and Mr.
Ruvane died in June 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 26, 2000, we purchased from each of Lola M. Reid and James D.
Crapo, both of whom are consultants to Incara, 18,000 shares of our common stock
at a per share price of $2.25, the closing price as listed on Nasdaq on July 26,
2000. Incara repurchased these shares in order to comply with Nasdaq Rule 4350,
which limits the amount of our common stock we can issue under certain
circumstances without stockholder approval. The shares repurchased were issued
to Drs. Reid and Crapo in the acquisitions of Incara Cell Technologies and
Aeolus on March 31, 2000.
On March 31, 2000, we purchased all of the minority interests of Incara
Cell Technologies and Aeolus. Prior to the acquisition, we owned 78.0% of
Incara Cell Technologies and 65.8% of Aeolus. Incara issued 1,220,041 shares of
its common stock in exchange for the subsidiaries' minority ownership. The
acquisition has been accounted for using the purchase method of accounting. The
total purchase price of $6,664,000 consisted of 1,220,041 shares of our common
stock with a fair market value of $5.46 per share, based on the price of our
common stock at the date of acquisition. The total purchase price was allocated
to purchase of in-process research and development and immediately charged to
operations because the in-process research purchased was in preclinical stages
and feasibility had not been established at the date of the acquisition and was
deemed to have no alternative future use. Additionally, Incara Cell
Technologies and Aeolus had no workforce or other tangible fixed assets.
In January 2000, our Board of Directors authorized the repurchase of up to
$2,000,000 of our common stock during the following two months through purchases
on the stock market. During that period, we repurchased 104,100 shares of
common stock at a cost of $331,000.
39
On July 15, 1999, we restructured our corporate relationship with
Interneuron Pharmaceuticals, Inc. to reduce Interneuron's majority ownership of
Incara in exchange for an increased ownership by Interneuron of CPEC, Inc.
Prior to the restructuring, CPEC, Inc. was owned 80.1% by Incara and 19.9% by
Interneuron. As a preliminary step in the restructuring, we acquired
Interneuron's 19.9% interest in CPEC, Inc., which was then merged into CPEC LLC,
a Delaware limited liability company. We redeemed 4,229,381 of the 4,511,084
shares of our common stock owned by Interneuron, in exchange for a 65.0%
ownership of CPEC LLC and cancellation of certain liabilities owed to
Interneuron by Incara and CPEC, Inc. which totalled $2,421,000. We retained a
35% minority ownership interest in CPEC, which currently is inactive.
In May 1998, we acquired all of the outstanding stock of Transcell
Technologies, Inc. in a merger of Transcell with and into Incara and also
acquired certain related technology rights held by Interneuron in exchange for
shares of our common stock with an aggregate market value of $14,200,000. In
addition, we issued replacement stock options and warrants to purchase 241,705
shares and 17,783 shares, respectively, of our common stock to Transcell
employees, consultants and warrant holders, with a total estimated value of
$1,507,000. Prior to the Transcell merger, Transcell and we were both majority-
owned subsidiaries of Interneuron. Under the terms of the Agreement and Plan of
Merger between Incara, Transcell and Interneuron dated March 2, 1998, Transcell
stockholders received shares of our common stock in three installments. The
first installment of 320,151 shares was issued upon closing the transaction on
May 8, 1998. In exchange for certain license and technology rights held by
Interneuron, and for Interneuron's continuing guarantee of certain of
Transcell's lease obligations, Incara issued to Interneuron 174,672 shares of
our common stock at the closing with a value of $3,000,000 and agreed to pay
Interneuron a royalty on net sales of certain products that might result from a
Research Collaboration and Licensing Agreement originally entered into among
Transcell, Interneuron and Merck & Co., Inc. In lieu of the second installment
payment due to Interneuron, Interneuron retained 281,703 shares of our common
stock as part of the restructuring. On August 9, 1999, Incara issued 867,583
shares of our common stock, valued at approximately $1.38 per share, to the
other former Transcell stockholders as payment for their second installment in
the principal amount of $1,202,000. On February 8, 2000, we issued 856,861
shares of our common stock, valued at approximately $3.36 per share, to
Interneuron and the other former Transcell stockholders as payment for the third
and final installment in the principal amount of $2,881,000. We refer to the
former Transcell operation as Incara Research Laboratories, or IRL. In December
1999, we sold IRL to an unrelated third party.
We have adopted a policy that all transactions between us and our executive
officers, directors and other affiliates must be approved by a majority of the
members of our Board of Directors and by a majority of the disinterested members
of the Board, and must be on terms no less favorable to us than could be
obtained from unaffiliated third parties. In addition, the policy requires that
any loans by us to our executive officers, directors or other affiliates be for
bona fide business purposes only.
40
PRINCIPAL STOCKHOLDERS
Principal Stockholders
The following tables set forth certain information regarding the ownership
of shares of our stock as of July 31, 2001 by:
. each person known by us to beneficially own more that 5% of the
outstanding shares of each class of stock,
. each director of Incara,
. each executive officer of Incara, and
. all directors and executive officers of Incara as a group.
Series B Convertible Preferred Stock
As of July 31, 2001, we had 28,457 shares of Series B convertible
preferred stock and warrants for 22,191 shares of Series B preferred stock
outstanding. The Series B preferred stock is non-voting except for matters
relating to the rights of Series B preferred stock.
Shares Percentage of
Beneficially Class Owned
Owned
Elan International Services, Ltd...................................... 50,648 (1) 100.0%
102 St. James Court
Flatts, Smiths Parish
Bermuda FL 04
(1) Includes 28,457 shares owned and 22,191 shares issuable upon exercise of
warrants to purchase Series B preferred stock.
Series C Convertible Exchangeable Preferred Stock
As of July 31, 2001, we had 12,015 shares of Series C convertible
exchangeable preferred stock outstanding. The Series C preferred stock is non-
voting except for matters relating to the rights of Series C preferred
stock.
Shares Percentage of
Beneficially Class Owned
Owned
Elan International Services, Ltd...................................... 12,015 100.0%
102 St. James Court
Flatts, Smiths Parish
Bermuda FL 04
41
Common Stock
As of July 31, 2001, we had 8,380,320 shares of common stock outstanding.
Share ownership in each case includes shares issuable upon exercise of options
that may be exercised within 60 days after July 31, 2001 for purposes of
computing the percentage of common stock owned by such person but not for
purposes of computing percentage owned by any other person. Except as indicated
in footnotes to this table, the persons named in this table have sole voting and
investment power with respect to all shares of common stock indicated below.
Beneficially Percentage
Owned Owned
------------ -----------
Clayton I. Duncan (1)............................................. 711,860 8.3%
79 T.W. Alexander Drive, 4401 Research Commons, Suite 200
Research Triangle Park, North Carolina 27709
David B. Sharrock (2)............................................. 70,747 *
Edgar H. Schollmaier (3).......................................... 58,747 *
Stephen M. Prescott, M.D. (3)..................................... 39,506 *
Eugene J. McDonald (3)............................................ 21,795 *
David P. Ward, M.D. (4)........................................... 260,069 3.0%
Richard W. Reichow (5)............................................ 333,865 3.9%
W. Bennett Love (6)............................................... 129,348 1.5%
John P. Richert (7)............................................... 129,062 1.5%
Elan International Services, Ltd.................................. 825,000 9.8%
102 St. James Court
Flatts, Smiths Parish
Bermuda FL 04
Lola M. Reid (8).................................................. 562,140 6.6%
3621 Sweeten Creek Road
Chapel Hill, North Carolina 27514
James D. Crapo (9)................................................ 525,951 6.2%
4650 South Forest St.
Englewood, Colorado 80110
Interneuron Pharmaceuticals, Inc.................................. 482,011 5.7%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02421
All directors and executive officers as a group (9 persons) (10).. 1,754,999 19.3%
* Less than one percent
(1) Includes 322,470 shares owned (of which, 67,495 shares are unvested
shares of restricted stock) by Mr. Duncan, 192,000 shares owned by Mr.
Duncan's children, and 197,390 shares issuable upon exercise of options
held by Mr. Duncan. Mr. Duncan disclaims beneficial ownership of the
shares held by his children.
(2) Includes 1,000 shares owned and 69,747 shares issuable upon exercise of
options held by Mr. Sharrock.
(3) Consists of shares issuable upon exercise of options held by the named
individual.
(4) Includes 113,014 shares owned (of which, 44,170 shares are unvested
shares of restricted stock) and 147,055 shares issuable upon exercise of
options held by Dr. Ward.
(5) Includes 237,510 shares owned (of which, 44,170 shares are unvested
shares of restricted stock) and 96,355 shares issuable upon exercise of
options held by Mr. Reichow.
(6) Includes 84,182 shares owned (of which 17,391 shares are unvested shares
of restricted stock) and 45,166 shares issuable upon exercise of options
held by Mr. Love.
(7) Includes 83,896 shares owned (of which, 19,128 shares are unvested shares
of restricted stock) and 45,166 shares issuable upon exercise of options
held by Mr. Richert.
42
(8) Includes 314,286 shares owned by Dr. Reid and 131,604 shares owned by
Dr. Mark Furth, Dr. Reid's husband and 110,000 shares issuable upon
exercise of options held by Dr. Reid and 6,250 shares issuable upon
exercise of options held by Dr. Furth. Dr. Reid disclaims beneficial
ownership of the shares held by her husband.
(9) Includes 369,951 shares owned by Dr. Crapo and 156,000 shares issuable
upon exercise of options held by Dr. Crapo.
(10) See footnotes (1)-(7).
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Incara consists of 40,000,000 shares of
common stock, par value $.001 per share, and 3,000,000 shares of preferred
stock, par value $.01 per share.
Common Stock
As of July 31, 2001, there were 8,380,320 shares of common stock
outstanding, 2,141,148 shares of common stock issuable upon the exercise of
outstanding stock options and 17,783 shares of common stock issuable upon the
exercise of warrants for common stock.
Holders of shares of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders and are not entitled to
cumulate votes for the election of directors. Subject to preferences that may
be applicable to any outstanding shares of preferred stock, holders of shares of
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
Incara, the holders of shares of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
distributions rights applicable to any outstanding shares of preferred stock.
Shares of common stock have no preemptive, conversion or other subscription
rights, and there are no redemption or sinking fund provisions applicable to the
common stock.
A subsidiary of Elan owns 825,000 shares of our common stock. Until
December 20, 2004, Elan has the right to participate in any equity financing we
undertake on the same terms as any third party investor in order to allow Elan
to maintain its pro rata interest in Incara, based on its equity ownership on an
as converted to common stock basis. This preemptive right does not apply to
this or any other public offering, the Torneaux financing transaction, equity
issuances in conjunction with collaborations and other partnering arrangements
with strategic investors provided the issuance is ancillary to and not a
principal reason for the financing, and equity-based incentive plans for the
benefit of our employees, directors and consultants.
Preferred Stock
We have the authority to issue up to 3,000,000 shares of preferred stock.
Our Board of Directors has the authority to issue preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions,
including the dividend, conversion, voting, redemption (including sinking fund
provisions), and other rights, liquidation preferences, and the number of shares
constituting any series and the designations of such series, without any further
vote or action by our stockholders. Because the terms of the preferred stock
may be fixed by our Board of Directors without stockholder action, the preferred
stock could be issued quickly with terms calculated to defeat a proposed take-
over of Incara or to make the removal of management of Incara more difficult.
Under certain circumstances this could have the effect of decreasing the market
price of the common stock. Management of Incara is not aware of any threatened
transaction to obtain control of Incara.
As of July 31, 2001, we had issued and outstanding 28,457 shares of Series
B preferred stock, 22,191 shares of Series B preferred stock issuable upon the
exercise of warrants for Series B preferred stock and 12,015 shares of Series C
preferred stock. All shares of Series B preferred stock and Series C preferred
stock are owned by Elan. The Series B preferred stock is non-voting stock.
Each share of Series B preferred stock is convertible into ten shares of our
common stock. The Series C preferred stock also is non-voting stock. The
Series C preferred stock has a face value of $1,000 per share and bears a
mandatory stock dividend of 7%, compounded annually, payable in shares of Series
C preferred stock. In addition, the Series C preferred stock is exchangeable at
the option of Elan at any time for all of the preferred stock we hold in Incara
Development, our indirect subsidiary which is partly owned by Elan. After
December 20, 2002, the Series C preferred stock also is convertible by Elan into
shares of Series B preferred stock at the rate of $64.90 per share. If the
Series C preferred stock is outstanding on December 21, 2006, we will exchange
it and any accrued dividends, at our option, for either cash or shares of stock
and warrants having a then fair market value of the amount due.
43
Warrants
As of July 31, 2001, warrants to purchase 17,783 shares of common stock
were outstanding, which are exercisable at an exercise price of $13.49 per share
and which expire in May 2003. As of July 31, 2001, we had also issued to Elan
a warrant that expires on December 20, 2005 to purchase up to 22,191 shares of
our Series B preferred stock at an exercise price of $72.12 per share. Each
warrant contains provisions for the adjustment of the exercise price under
certain circumstances, including sales of stock at less than the exercise price,
stock dividends, stock splits, reorganizations, reclassifications or
mergers.
Section 203 of the Delaware Corporation Law
Section 203 of the General Corporation Law of the State of Delaware (the
"DGCL") prevents an "interested stockholder" (defined in Section 203 of the
DGCL, generally, as a person owning 15% or more of a corporation's outstanding
voting stock), from engaging in a "business combination" (as defined in Section
203 of the DGCL) with a publicly-held Delaware corporation for three years
following the date such person became an interested stockholder, unless:
. before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved
the business combination;
. upon consummation of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock
held by directors who are also officers of the corporation and by
employee stock plans that do not provide employees with the rights to
determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or
. following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the
interested stockholder.
The statute could prohibit or delay a merger, takeover or other change in
control of Incara and therefore could discourage attempts to acquire Incara.
Limitation of Liability
Section 145 ("Section 145") of the DGCL provides a detailed statutory
framework covering indemnification of officers and directors against liabilities
and expenses arising out of legal proceedings brought against them by reason of
their being or having been directors or officers. Section 145 generally
provides that a director or officer of a corporation:
. shall be indemnified by the corporation for all expenses of such legal
proceedings when he is successful on the merits;
. may be indemnified by the corporation for the expenses, judgments, fines
and amounts paid in settlement of such proceedings (other than a
derivative suit), even if he is not successful on the merits, if he
acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful; and
. may be indemnified by the corporation for the expenses of a derivative
suit (a suit by a stockholder alleging a breach by a director or officer
of a duty owed to the corporation), even if he is not successful on the
merits, if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation.
The indemnification discussed in clauses two and three above may be made
only upon a determination that indemnification is proper because the applicable
standard of conduct has been met. Such a determination may be made by a
majority of a quorum of disinterested directors, independent legal counsel, the
stockholders or a court of competent jurisdiction. The indemnification
discussed in clause three above may be made, however, if the director or officer
is adjudged liable for negligence or misconduct in the performance of his duties
to the corporation, unless a corporation determines that despite such
adjudication, but in view of all the circumstances, he is entitled to
indemnification.
44
Article Seventh of Incara's Certificate of Incorporation provides in
substance that, to the fullest extent permitted by the DGCL as it now exists or
as amended, each director and officer shall be indemnified against reasonable
costs and expenses, including attorney's fees, and any liabilities which he may
incur in connection with any action to which he may be made a party by reason of
his being or having been a director or officer of Incara. The indemnification
provided by Incara's Certificate of Incorporation is not deemed exclusive of or
intended in any way to limit any other rights to which any person seeking
indemnification may be entitled.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
Certificate of Incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability
. for any breach of the director's duty of loyalty to the corporation or
its stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. under Section 174 of the DGCL, or
. for any transaction from which the director derived an improper personal
benefit.
Article Ninth of Incara's Certificate of Incorporation provides for the
elimination of personal liability of a director for breach of fiduciary duty, as
permitted by Section 102(b)(7) of the DGCL.
We maintain liability insurance on our officers and directors against
liabilities that they may incur in such capacities.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is American Stock
Transfer and Trust Company.
PLAN OF DISTRIBUTION
We are offering shares of our common stock and warrants to purchase our
common stock under this prospectus continuously over time. We are offering our
shares and the warrants directly to anyone who wants to buy them. The offering
will terminate on December 31, 2001 unless terminated by us earlier due to the
sale of all of the common stock offered hereby or for any other reason.
In keeping with the Nasdaq qualitative listing requirements and as approved
by our stockholders, the purchase price per share of our common stock will be
equal to the closing sale price as reported on Nasdaq on the day before any sale
of the stock.
Each purchaser will receive a warrant to purchase common stock for a number
of share equal to (1) 30% of the dollar amount of common stock purchased
divided by (2) the warrant exercise price. The warrant exercise price will be
equal to 125% of the common stock purchase price. There is no separate purchase
price for the warrants. Each warrant will terminate five years from the date of
issuance. We have the option to redeem each warrant at a price of $.01 per share
underlying the warrant at any time that the closing price of our common stock,
as reported on Nasdaq, is three times the warrant exercise price for a period of
30 consecutive trading days.
A sale of our stock and warrants occurs when we have received a
subscription agreement signed by a purchaser in the form to be provided by us.
The price per share will be the closing sale price per share on the day prior to
our receipt of the subscription agreement. A prospective purchaser should
contact us in advance of any intended purchase to request the form of
subscription agreement. For this purpose, please contact Bennett Love, Vice
President, Corporate Planning/Communications, at (919) 558-1907.
A prospective purchaser must deliver a subscription agreement to us by 4:00
p.m. Eastern time on the day of sale. A prospective purchaser may contact us
prior to submitting a subscription agreement to confirm the closing price on the
previous day. The purchaser must deliver to us full payment for the shares
purchased either simultaneously with the delivery of the subscription agreement
or within three days thereafter. We will deliver the shares to the purchaser
within three business days after we have received full payment.
In addition to our direct and continuous selling efforts, we have engaged
Petkevich & Partners, LLC as placement agent to assist in this offering on a
reasonable best efforts basis. Petkevich & Partners has agreed with us that it
will seek to identify institutional investors who wish to purchase our common
stock. Petkevich & Partners, as placement agent, may engage other broker-dealer
members of the NASD to participate as selected placement agents in this offering
of our common stock. Petkevich & Partners is an underwriter within the meaning
of the Securities Act in connection with the sale of the common stock offered
hereby.
We have engaged Petkevich & Partners as placement agent on a reasonable
best efforts basis and there is no minimum number of shares of our stock that
must be sold in the offering.
We have entered into an agency agreement with Petkevich & Partners which
details, among other things, the scope of their duty to us and our payment
obligations to them. Our engagement with Petkevich & Partners will terminate on
the earliest of the following events:
. 120 days after the date of engagement, which is September 28, 2001;
. 30 days after either we or Petkevich & Partners give written notice of
termination for any reason;
. mutual agreement by Petkevich & Partners and us;
. immediately upon notice of termination by Petkevich & Partners to us if
it then reasonably believes that there has occurred any material
adverse change in our consolidated condition, financial or otherwise,
earnings, operations, business or business prospects from that set
forth in this prospectus; or
. the sale of all of the common stock offered by this prospectus.
45
We have agreed to pay Petkevich & Partners a cash placement fee equal to 7%
of the gross proceeds to us from the sale of any common stock plus a five-year
common stock purchase warrant for up to 80,000 shares. The number of shares
underlying the warrant shall be such number that is equal to the same proportion
of 80,000 that the gross proceeds from the sale of the shares sold in this
offering bears to the total offering price of $10,000,000. The exercise price
of the warrant will be 125% of the price per share paid in the offering, subject
to adjustment for stock splits, recapitalizations and the like.
We have also given Petkevich & Partners a $30,000 non-accountable expense
allowance and agreed to reimburse additional out of pocket expenses it may incur
in connection with meetings with potential investors and the review of the
agency arrangements by the NASD. We have also agreed to give Petkevich &
Partners, and Petkevich & Partners has agreed to give us, customary
indemnification against liabilities under the Securities Act.
Any variance from these placement terms will be disclosed in an amended
prospectus, which we will file with the SEC as part of an amendment to the
registration statement. In addition, we have been advised by the NASD that the
maximum commission or discount to be received by any NASD member or independent
broker-dealer participating in this offering must not be greater than 8% of the
shares sold in the offering.
Petkevich & Partners, LLC was organized and registered as a broker-dealer
and became a member of the NASD in December 2000. Petkevich & Partners'
business is generally limited to private placements of securities for
institutional or high net worth customer accounts. Petkevich & Partners is
focused on providing advisory services to companies in the healthcare and
technology industries, such services include acting as a financial advisor for
mergers and acquisitions and private placements. Prior to this offering, we
engaged Petkevich & Partners to advise us concerning potential corporate
partnering transactions relating to our progenitor cell therapy and catalytic
antioxidant programs for an advisory fee of $50,000.
We estimate that the total expenses of this offering, including
registration, filing and listing fees, printing fees and legal and accounting
expenses, but excluding the cash placement fee and expense allowance of
Petkevich & Partners, will be approximately $180,000.
Neither we nor Petkevich & Partners nor any of our or their respective
affiliates, or any other party involved in marketing our common stock have
reserved the right, or have any obligation, to purchase any of the common stock
offered hereby.
46
SECURITIES OFFERED
Using this prospectus, we are offering to sell shares of our common stock
and warrants to purchase our common stock. We registered these securities with
the SEC using a "continuous offering" registration statement. We must provide an
amended prospectus that describes the specific terms of any sale of our common
stock and warrants that differ from the terms set forth in this prospectus. If
an amended prospectus is necessary, we must file an amendment to the
registration statement. The amended prospectus or a prospectus supplement may
also provide new information or update the information in the prospectus.
LEGAL MATTERS
The validity of the issuance of the shares of common stock and warrants
offered hereby will be passed upon for us by Wyrick Robbins Yates & Ponton LLP,
Raleigh, North Carolina.
EXPERTS
The financial statements as of September 30, 2000 and 1999 and for each of
the three years in the period ended September 30, 2000 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments, under the
Securities Act with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all the information included in the
registration statement. For further information about us and the shares of our
common stock to be sold in this offering, please refer to this registration
statement.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy our registration statement or
any other document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. You should call the SEC at 1-
800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public at the SEC's web site at
"http:/www.sec.gov."
You may request a copy of our filings, at no cost, by writing or
telephoning us at the following address:
Incara Pharmaceuticals Corporation
Investor Relations
Post Office Box 14287
79 T.W. Alexander Drive, 4401 Research Commons, Suite 200
Research Triangle Park, North Carolina 27709
(919) 558-8688
You should rely only on the information or representations provided in this
prospectus. We have authorized no one to provide you with different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.
47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended September 30, 2000, 1999, 1998 and 1997
Report of Independent Accountants................................................................................ F-2
Consolidated Balance Sheets - As of September 30, 2000 and 1999.................................................. F-3
Consolidated Statements of Operations - For the fiscal years ended September 30, 2000, 1999 and 1998............. F-4
Consolidated Statements of Stockholders' Equity - For the fiscal years ended September 30, 2000, 1999 and 1998... F-5
Consolidated Statements of Cash Flows - For the fiscal years ended September 30, 2000, 1999 and 1998............. F-6
Notes to Consolidated Financial Statements....................................................................... F-7
Six Months Ended March 31, 2001 and 2000
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and September 30, 2000.............................. F-18
Consolidated Statements of Operations for the Six Months ended March 31, 2001 and 2000 (unaudited)............... F-19
Consolidated Statements of Cash Flows for the Six Months ended March 31, 2001 and 2000 (unaudited)............... F-20
Notes to Consolidated Financial Statements....................................................................... F-21
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
INCARA PHARMACEUTICALS CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Incara
Pharmaceuticals Corporation and its subsidiaries (the "Company") at September
30, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note M, the Company has revised its earnings per share
calculation.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
November 15, 2000, except with regard to Note M, for which the date is July 27,
2001
F-2
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30,
------------------------
2000 1999
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 1,877 $ 2,407
Marketable securities 4,678 2,553
Accounts receivable 197 282
Prepaids and other current assets 403 237
-------- --------
Total current assets 7,155 5,479
Property and equipment, net 193 2,483
Other assets - 82
-------- --------
$ 7,348 $ 8,044
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 637 $ 654
Accrued expenses 1,807 1,933
Current portion of capital lease obligations 22 488
Current portion of notes payable 27 197
-------- --------
Total current liabilities 2,493 3,272
Long-term portion of capital lease obligations 43 399
Long-term portion of notes payable - 582
Stockholders' equity:
Common stock, $.001 par value per share, 40,000,000 shares
authorized, 7,365,849 and 5,226,969 shares issued and
outstanding at September 30, 2000 and 1999, respectively 7 5
Additional paid-in capital 88,951 81,772
Restricted stock (239) (744)
Accumulated deficit (83,907) (77,242)
-------- --------
Total stockholders' equity 4,812 3,791
-------- --------
$ 7,348 $ 8,044
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Year Ended September 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenue:
Contract and license fee revenue....... $ 100 $ 2,088 $ 6,121
---------- ---------- ----------
Costs and expenses:
Research and development............... 7,645 18,996 16,799
Purchase of in-process research
and development....................... 6,664 - 5,343
General and administrative............. 2,613 3,045 3,509
---------- ---------- ----------
Total costs and expenses............. 16,922 22,041 25,651
---------- ---------- ----------
Loss from operations..................... (16,822) (19,953) (19,530)
Gain on sale of division................. 9,751 - -
Investment income, net................... 406 355 384
---------- ---------- ----------
Net loss................................. $ (6,665) $ (19,598) $ (19,146)
========== ========== ==========
Net loss per common share:
Basic.................................. $ (1.21) $ (2.98) $ (2.69)
========== ========== ==========
Diluted................................ $ (1.21) $ (2.98) $ (2.69)
========== ========== ==========
Weighted average common shares
outstanding............................. 5,522 6,583 7,113
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Common Stock Additional
-----------------
Number Par Paid-in Restricted Deferred Accumulated
of Shares Value Capital Stock Compensation Deficit
---------- ----- -------- ---------- ------------ -----------
Balance at September 30, 1997.................................. 6,956,545 $ 7 $ 52,243 $ - $ (296) $(38,498)
Exercise of common stock options............................. 15,576 - 59 - - -
Grants of common stock options at below fair value........... - - 1,450 - (1,450) -
Stock-based compensation..................................... - - 464 - - -
Amortization of deferred compensation........................ - - - - 660 -
Proceeds from offerings of Employee Stock Purchase Plan...... 13,592 - 142 - - -
Contribution to Transcell capital by Interneuron............. - - 18,698 - - -
Common stock issued to unrelated parties in conjunction with
Transcell Merger........................................... 303,440 - 5,343 - - -
Net loss for the fiscal year ended September 30, 1998........ - - - - - (19,146)
--------- ---- -------- ----- ------- --------
Balance at September 30, 1998.................................. 7,289,153 7 78,399 - (1,086) (57,644)
Exercise of common stock options............................. 21,851 - 53 - - -
Amortization of deferred compensation........................ - - - - 827 -
Proceeds from offerings of Employee Stock Purchase Plan...... 67,851 - 134 - - -
Contribution of payables to capital by Interneuron........... - - 2,421 - - -
Cancellation of common stock returned by Interneuron......... (4,229,381) (4) 4 - - -
Common stock issued to unrelated parties in conjunction with
Transcell Merger........................................... 867,583 1 (1) - - -
Write-off of deferred compensation related to common
stock options cancelled.................................... - - (259) - 259 -
Restricted common stock sold to employees and consultants.... 1,209,912 1 755 (755) - -
Stock-based compensation and amortization of Restricted Stock - - 266 11 - -
Net loss for the fiscal year ended September 30, 1999........ - - - - - (19,598)
--------- ---- -------- ----- ------- --------
Balance at September 30, 1999.................................. 5,226,969 5 81,772 (744) - (77,242)
Exercise of common stock options............................. 140,000 - 50 - - -
Proceeds from offerings of Employee Stock Purchase Plan...... 208,744 - 122 - - -
Common stock issued in conjunction with Transcell Merger..... 856,861 1 (1) - - -
Common stock issued in conjunction with Aeolus and
Renaissance mergers........................................ 1,220,041 1 6,663 - - -
Stock-based compensation and amortization of Restricted Stock - - 838 424 - -
Restricted Stock forfeited................................... (146,666) - (81) 81 - -
Common stock repurchased..................................... (140,100) - (412) - - -
Net loss for the fiscal year ended September 30, 2000........ - - - - - (6,665)
--------- ---- -------- ----- ------- --------
Balance at September 30, 2000.................................. 7,365,849 $ 7 $ 88,951 $(239) $ - $(83,907)
========= === ======== ===== ======= ========
Total
Stockholders'
Equity
-----------
Balance at September 30, 1997.................................. $ 13,456
Exercise of common stock options............................. 59
Grants of common stock options at below fair value........... -
Stock-based compensation..................................... 464
Amortization of deferred compensation........................ 660
Proceeds from offerings of Employee Stock Purchase Plan...... 142
Contribution to Transcell capital by Interneuron............. 18,698
Common stock issued to unrelated parties in conjunction with
Transcell Merger........................................... 5,343
Net loss for the fiscal year ended September 30, 1998........ (19,146)
--------
Balance at September 30, 1998.................................. 19,676
Exercise of common stock options............................. 53
Amortization of deferred compensation........................ 827
Proceeds from offerings of Employee Stock Purchase Plan...... 134
Contribution of payables to capital by Interneuron........... 2,421
Cancellation of common stock returned by Interneuron......... -
Common stock issued to unrelated parties in conjunction with
Transcell Merger........................................... -
Write-off of deferred compensation related to common
stock options cancelled.................................... -
Restricted common stock sold to employees and consultants.... 1
Stock-based compensation and amortization of Restricted Stock 277
Net loss for the fiscal year ended September 30, 1999........ (19,598)
--------
Balance at September 30, 1999.................................. 3,791
Exercise of common stock options............................. 50
Proceeds from offerings of Employee Stock Purchase Plan...... 122
Common stock issued in conjunction with Transcell Merger..... -
Common stock issued in conjunction with Aeolus and
Renaissance mergers........................................ 6,664
Stock-based compensation and amortization of Restricted Stock
Restricted Stock forfeited................................... 1,262
Common stock repurchased..................................... (412)
Net loss for the fiscal year ended September 30, 2000........ (6,665)
-------
Balance at September 30, 2000.................................. $ 4,812
=======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended September 30,
-------------------------------------
2000 1999 1998
-------- --------- ----------
Cash flows from operating activities:
Net loss.......................................................................... $ (6,665) $ (19,598) $ (19,146)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 260 771 1,837
Noncash compensation........................................................ 1,262 1,105 1,125
Purchase of in-process research and development............................. 6,664 - 5,343
Gain on sale of division.................................................... (9,751) - -
Loss on disposal of property and equipment.................................. 36 - -
Interest expense on notes to Interneuron.................................... - - 918
Change in assets and liabilities:
Accounts receivable....................................................... 85 814 31
Prepaids and other assets................................................. (170) (117) 120
Accounts payable and accrued expenses..................................... (653) (1,356) (10,054)
Deferred revenue.......................................................... - - (500)
--------- --------- ---------
Net cash used in operating activities............................. (8,932) (18,381) (20,326)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of division.................................................... 11,000 - -
Proceeds from sales and maturities of marketable securities....................... 6,468 11,406 20,400
Purchases of marketable securities................................................ (8,593) (1,044) (13,920)
Purchases of property and equipment............................................... (114) (278) (1,110)
--------- --------- ---------
Net cash provided by investing activities......................... 8,761 10,084 5,370
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock and warrants.................................. 172 187 201
Proceeds from capital leases...................................................... 38 - -
Repurchase of common stock........................................................ (412) - -
Proceeds from notes payable....................................................... 2 2 460
Principal payments on notes payable............................................... (58) (194) (117)
Principal payments on capital lease obligations................................... (101) (494) (345)
Advances from Interneuron, net.................................................... - 556 7,219
--------- --------- ---------
Net cash provided by (used by) financing activities............... (359) 57 7,418
--------- --------- ---------
Net decrease in cash and cash equivalents......................... (530) (8,240) (7,538)
Cash and cash equivalents at beginning of period...................................... 2,407 10,647 18,185
--------- --------- ---------
Cash and cash equivalents at end of period............................................ $ 1,877 $ 2,407 $ 10,647
========= ========= =========
Supplemental disclosure of investing and financing activities:
Cash payments of interest......................................................... $ 37 $ 251 $ 222
========= ========= =========
Contribution of payables to capital by Interneuron................................ $ - $ 2,421 $ -
========= ========= =========
Property and equipment acquired through financing arrangements.................... $ 38 $ - $ 110
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
INCARA PHARMACETICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF THE BUSINESS
The Company conducts discovery and development programs in three areas:
(1) inflammatory bowel disease, using an ultra-low molecular weight heparin; (2)
liver disorders, using a novel form of hepatic progenitor cell therapy; and (3)
novel small molecule catalytic antioxidants for disorders such as stroke and
heart attack.
The "Company" refers collectively to Incara Pharmaceuticals Corporation
("Incara") and its wholly owned subsidiaries, Aeolus Pharmaceuticals, Inc., a
Delaware corporation ("Aeolus"), and Renaissance Cell Technologies, Inc., a
Delaware corporation ("Renaissance"). At September 30, 2000, the Company also
owned a 35.0% interest in CPEC LLC, a Delaware limited liability company
("CPEC").
Until July 15, 1999, Incara was a majority-owned subsidiary of Interneuron
Pharmaceuticals, Inc. ("Interneuron"). On July 15, 1999, Incara restructured
its corporate relationship with Interneuron to reduce Interneuron's majority
ownership of Incara in exchange for an increased ownership by Interneuron of
CPEC (the "Restructuring"). Prior to the Restructuring, CPEC was owned 80.1% by
Incara and 19.9% by Interneuron. Subsequent to the Restructuring, CPEC became
owned 35.0% by Incara and 65.0% by Interneuron (see Note I).
Until July 1999, the Company's most advanced product was BEXTRA(R)
(bucindolol HCl), a beta-blocker that was being evaluated in a Phase 3 clinical
trial conducted by the National Institutes of Health and the U.S. Department of
Veterans Affairs for use in treating congestive heart failure patients. The
agencies terminated the study in July 1999, prior to its scheduled termination
date, because an interim data analysis indicated there was no significant
survival advantage of treatment with bucindolol for the patient population as a
whole. In August 1999, the Company agreed to end the collaboration (the "Knoll
Collaboration") with BASF Pharma/Knoll AG ("Knoll") for BEXTRA for countries
outside the United States and Japan (the "Knoll Territory"), and terminated the
European trial of BEXTRA. The Company does not expect to pursue the compound
further for this or any other indication.
In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc. ("Transcell"), a majority-owned subsidiary of Interneuron, in
a merger of Transcell with and into Incara and also acquired certain related
technology rights held by Interneuron in exchange for Incara common stock, stock
options and stock warrants (the "Transcell Merger"). The purchase of
Interneuron's 77.9% interest in Transcell by Incara was treated in a manner
similar to a "pooling-of-interests," because it represented a transfer of stock
between entities under common control, and the acquisition of the non-
Interneuron ownership interest was accounted for by using the "purchase" method
of accounting. All of Transcell's past results of operations have been combined
with the results of operations for the Company, and the Company's financial
statements for all prior periods presented have been restated to reflect the
Transcell Merger.
On December 29, 1999, the Company sold the former Transcell operation,
which is referred to as Incara Research Laboratories ("IRL"), to a private
pharmaceutical company for $11,000,000 and the right to receive up to an
additional $4,000,000 in the event a compound originating from the Research
Collaboration and Licensing Agreement (the "Merck Collaboration"), originally
entered into among Transcell, Interneuron and Merck & Co., Inc. ("Merck"),
reaches certain preclinical and clinical trial milestones. The Company
currently does not expect to receive any additional payments from the purchaser.
The transaction involved the sale of assets associated with IRL, including
rights under the Merck Collaboration and the assumption of certain related
liabilities by the purchaser. The Company remains contingently liable through
May 2007 on debt and lease obligations of approximately $8,328,000 assumed by
the purchaser, including the IRL facility lease in Cranbury, New Jersey.
On March 31, 2000, Incara purchased all of the minority interests of
Renaissance and Aeolus. Prior to the acquisitions, Incara owned 78.0% of
Renaissance and 65.8% of Aeolus. Incara issued 1,220,041 shares of its common
stock in exchange for the subsidiaries' minority ownership. The acquisitions
have been accounted for using the purchase method of accounting. The total
purchase price of $6,664,000 consisted of 1,220,041 shares of Incara's common
stock with a fair value of $5.46 per share, based on the price of the Company's
common stock at the date of acquisition. The total purchase price was allocated
to purchased in-process research and development and immediately charged to
operations because at the date of the acquisition the in-process research
purchased was in preclinical stages, feasibility had not been established and it
was deemed to have no alternative future use.
F-7
INCARA PHARMACETICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of Incara and its wholly owned subsidiaries. The Company uses the
equity method to account for its 35.0% ownership interest in CPEC. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: The Company invests available cash in short-term
bank deposits, money market funds, commercial paper and U.S. Government
securities. Cash and cash equivalents include investments with maturities of
three months or less at the date of purchase. The carrying value of cash and
cash equivalents approximate their fair market value at September 30, 2000 and
1999 due to their short-term nature.
Marketable Securities: The Company considers its investment portfolio
available-for-sale. Debt and equity securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of related income taxes. Premiums are
amortized and discounts accreted using the interest method over the remaining
terms of the related securities. Gains and losses on the sale of securities are
determined using the specific identification method. The amortized cost of
marketable securities approximates their market value, yielding no unrealized
holding gains or losses at September 30, 2000 and 1999. At September 30, 2000,
the Company owned $4,678,000 of bank certificates of deposit due within one
year. At September 30, 1999 the Company owned $2,553,000 of corporate notes due
within one year.
Accounts Receivable: The accounts receivable balances at September 30, 2000
and 1999 are primarily comprised of amounts due from Interneuron for a portion
of the amount payable by the Company to Knoll for bucindolol-related
liabilities.
Property and Equipment: Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method based
on estimated useful lives or, in the case of leasehold improvements and
equipment under capital leases, over the lesser of the estimated useful lives or
the lease terms. The estimated useful lives are two years for computers and
five years for equipment. No impairments of property and equipment were
required to be recognized during the fiscal years ended September 30, 2000 and
1999. Subsequent to the Transcell Merger in May 1998, the Company wrote off
$856,000 of property and equipment acquired from Transcell because certain items
did not meet the Company's minimum cost per item capitalization criteria. The
majority of the Company's property and equipment at September 30, 1999 related
to the IRL operations, which was sold in December 1999.
Expenses for repairs and maintenance are charged to operations as incurred.
Upon retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is credited or charged to operations.
Revenue Recognition: Revenue is recognized under collaboration or research
and development agreements when services are performed or when contractual
obligations are met. Cash received in advance of revenue recognition is
recorded as deferred revenue.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101, as
amended by SAB 101A and SAB101B, outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Adoption is required by the Company no later than the
quarter ending September 30, 2001. The Company does not expect SAB 101 to have
a significant impact on the Company's revenue recognition policies.
Research and Development: Research and development costs are expensed in the
period incurred. Payments related to the acquisition of in-process research and
development are either capitalized or expensed based upon the stage of
development of the acquired compound or technology at the date of acquisition.
F-8
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes: Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce net deferred tax assets to the amounts
expected to be realized.
Net Loss Per Common Share: Basic net loss per common share is computed
using the weighted average number of shares of common stock outstanding during
the period. Diluted net loss per common share is computed using the weighted
average number of shares of common and dilutive potential common shares
outstanding during the period. Potential common shares consist of stock options,
restricted common stock, warrants and convertible preferred stock using the
treasury stock method and are excluded if their effect is antidilutive. At
September 30, 2000, diluted weighted average common shares excluded incremental
shares of approximately 1,876,000 related to stock options, unvested shares of
restricted common stock and warrants to purchase common stock.
Accounting for Stock Based Compensation: The Company accounts for
stock based compensation based on the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), which
states that no compensation expense is recorded for stock options or other
stock based awards to employees that are granted with an exercise price equal to
or above the estimated fair value per share of the Company's common stock on the
grant date. The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), which requires compensation expense to be disclosed
based on the fair value of the options granted at the date of the grant.
Segment Reporting: The Company currently operates in only one segment.
Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 138 was issued in June 2000 and provides certain amendments
to SFAS 133 and must be implemented at the same time as SFAS 133. SFAS 133 and
SFAS 138 establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
As issued, SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier application encouraged. In May 1999,
the FASB delayed the effective date of SFAS 133 for one year, to fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company does not
currently use, nor does it intend in the future to use, derivative instruments
and, therefore, does not expect that the adoption of SAFS 133 and SFAS 138 will
have any impact on its financial position or results of operations.
C. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2000
and 1999 (in thousands):
2000 1999
---- ----
Office equipment............................................ $ 428 $ 735
Laboratory equipment........................................ 341 1,411
Leasehold improvements...................................... 58 1,774
------- -------
827 3,920
Less: accumulated depreciation and amortization... (634) (1,437)
------- -------
$ 193 $ 2,483
======= =======
The above amounts included equipment under capital lease obligations
with a cost of $268,000 and $930,000 at September 30, 2000 and 1999,
respectively, and a net book value of $57,000 and $394,000 at September 30, 2000
and 1999, respectively. Depreciation expense was $260,000 and $771,000 for the
fiscal years ended September 30, 2000 and 1999, respectively.
F-9
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
D. ACCRUED EXPENSES
At September 30, 2000 and 1999, accrued expenses consisted of the
following (in thousands):
2000 1999
---- ----
Payroll related liabilities.................. $ 446 $ 305
Bucindolol development costs................. 1,350 1,619
Other........................................ 11 9
------ ------
$1,807 $1,933
====== ======
E. COMMITMENTS
The Company leases office and laboratory space under non cancelable
operating leases. Rent expense under non cancelable operating leases was
$423,000, $1,147,000 and $1,154,000 for the fiscal years ended September 30,
2000, 1999 and 1998, respectively. The Company also leases equipment under
capital leases.
At September 30, 2000, the Company's non cancelable future minimum
payments under lease arrangements were as follows (in thousands):
Operating Capital
Leases Leases
------ ------
2001................................................. $ 116 $ 28
2002................................................. - 28
2003................................................. - 19
------ ------
Total minimum lease payments......................... $ 116 75
======
Less: amount representing interest.................. (10)
Present value of future minimum lease payments....... $ 65
======
The Company remains contingently liable through May 2007 on debt and
lease obligations of approximately $8,328,000 assumed by the purchaser of IRL,
including the IRL facility lease in Cranbury, New Jersey.
F. NOTES PAYABLE
Notes payable at September 30, 2000 and 1999 consisted of the
following (in thousands):
2000 1999
---- ----
Note payable to North Carolina Biotechnology Center, including accrued
interest at 8.75%, principal and interest due in December 2000.. $ 27 $ 25
Note payable to minority stockholder of Renaissance, including accrued
interest at 5.79% - 29
Note payable to a financial institution, including accrued interest at 13.4%.. - 297
Note payable to IRL facility landlord, including accrued interest at 11.5%.... - 428
------- -------
Notes payable, including current maturities 27 779
Less: current maturities (27) (197)
------- -------
Long term notes payable $ - $ 582
======= =======
F-10
INCARA PHARMACETICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
G. STOCKHOLDERS' EQUITY
Preferred Stock: The Certificate of Incorporation of Incara authorizes the
issuance of up to 3,000,000 shares of Preferred Stock, at a par value of $.01
per share. The Board of Directors has the authority to issue Preferred Stock in
one or more series, to fix the designation and number of shares of each such
series, and to determine or change the designation, relative rights,
preferences, and limitations of any series of Preferred Stock, without any
further vote or action by the stockholders of the Company. No shares of
Preferred Stock were outstanding at September 30, 2000 and 1999.
Common Stock: In May 1998, Incara issued 494,823 shares of common stock as
the first installment of the Transcell Merger (see Note J). In lieu of the
second installment payment due to Interneuron, Interneuron retained 281,703
shares of Incara common stock as part of the Restructuring (see Note I). On
August 9, 1999, Incara issued 867,583 shares of Incara common stock, valued at
approximately $1.38 per share, to the other former Transcell stockholders as
payment for their second installment of the Transcell Merger in the principal
amount of $1,202,000. Incara issued the third and final installment of the
purchase price of 856,861 shares of Incara common stock, valued at approximately
$3.36 per share, to the former stockholders of Transcell on February 8, 2000.
The issuance of these additional shares did not impact the Company's operating
results, because the value of these shares was included in the determination of
the purchase price of Transcell in fiscal 1998.
In January and February 2000, Incara repurchased 104,100 shares of its
common stock at a cost of $331,000 through purchases on the stock market. In
July 2000, Incara purchased from each of Lola M. Reid, Ph.D. and James D. Crapo,
M.D., both of whom are consultants to Incara, 18,000 shares of Incara's common
stock at a per share price of $2.25, the closing price as listed on Nasdaq on
July 26, 2000. The shares repurchased had been issued to Drs. Reid and Crapo in
the acquisitions of Renaissance and Aeolus on March 31, 2000.
Restricted Stock: As an integral component of a management and employee
retention program designed to motivate, retain and provide incentive to the
Company's management, employees and key consultants, the Company's Board of
Directors adopted the 1999 Equity Incentive Plan (the "1999 Plan") in September
1999. The 1999 Plan provides for the grant of restricted stock ("Restricted
Stock") awards which entitle employees and consultants to receive up to an
aggregate of 1,400,000 shares of common stock upon satisfaction of specified
vesting periods. During September 1999, an aggregate of 1,209,912 shares of
Restricted Stock were granted to employees and key consultants of the Company
(the "Participants") in consideration of services rendered by the Participants
to the Company, the cancellation of options for an equal number of shares of
common stock and payment of the par value of the shares. A total of 520,600
shares of Restricted Stock were unvested at September 30, 2000. These remaining
shares of Restricted Stock vest in equal quarterly installments through October
2002.
The Company has incurred and will continue to incur compensation expense
through the vesting period of the Restricted Stock. The value of the Restricted
Stock awards of 1,209,912 shares at the date of the grant totaled $755,000,
based on the trading price of the Company's common stock of $0.625 per share.
The value of the Restricted Stock is amortized on a straight-line basis over the
vesting period. The Company recognized $424,000 and $11,000 of expenses related
to these awards during fiscal 2000 and 1999, respectively.
Employee Stock Purchase Plan: In October 1995, Incara adopted the Employee
Stock Purchase Plan (the "ESPP"). In April 2000, the stockholders approved an
amendment to increase the common stock reserved for issuance under the ESPP to
400,000 shares. Offerings are for one-year periods beginning on October 1 of
each year (an "Offering") and are divided into two six-month Purchase Periods
(the "Purchase Periods"). Employees may contribute up to ten percent (10%) of
gross wages, with certain limitations, via payroll deduction, to the ESPP.
Common stock is purchased at the end of each Purchase Period with employee
contributions at the lower of 85% of the closing price of Incara's common stock
on the first day of an Offering or the last day of the related Purchase Period.
As of September 30, 2000, Incara had sold 319,072 shares of common stock
pursuant to the ESPP and 80,928 shares were reserved for future issuances.
Stock Option Plan: Under Incara's 1994 Stock Option Plan (the "1994 Plan"),
incentive stock options ("ISOs") or non-qualified stock options to purchase
2,500,000 shares of Incara's common stock may be granted to employees, directors
and consultants of the Company. The exercise price of the ISOs granted under
the 1994 Plan must not be less than the fair market value of the common stock as
determined on the date of the grant. The options may have a term up to 10
years. Options typically vest over three to four years following the date of
the grant.
F-11
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock option activity under the 1994 Plan was as follows:
Weighted Average
Shares Exercise Price
-------- ---------------
Outstanding at September 30, 1997...................... 1,416,710 $ 9.89
Granted...................................... 1,901,886 $ 9.61
Exercised.................................... (15,629) $ 3.77
Cancelled.................................... (1,032,835) $19.18
---------------
Outstanding at September 30, 1998...................... 2,270,132 $ 5.47
Granted...................................... 95,500 $ 5.66
Exercised.................................... (21,851) $ 2.45
Cancelled.................................... (1,359,220) $ 7.53
---------------
Outstanding at September 30, 1999...................... 984,561 $ 2.70
Granted...................................... 781,540 $ 3.93
Exercised.................................... (140,000) $ 0.36
Cancelled.................................... (288,941) $ 5.57
---------------
Outstanding at September 30, 2000...................... 1,337,160 $ 3.05
===============
In August 1998, Incara's Board of Directors approved a resolution
whereby current employees and consultants were granted the right to amend the
terms of stock options with an exercise price greater than $11.00 per share. The
amended options reduced the exercise price to $8.00 per share, which was the
trading value of Incara's stock on the date of the repricing, and extended the
vesting period of the stock options.
The details of stock options outstanding at September 30, 2000 were as
follows:
Options Outstanding Options Exercisable
------------------------------------------- -----------------------------------
Number Weighted Weighted Number
Range of Outstanding at Average Average Exercisable at Weighted
Exercise September 30, Exercise Remaining September 30, Average
Prices 2000 Price Contractual Life 2000 Exercise Price
------ ---- ----- ---------------- ---- ---------------
$ 0.04 17,029 $ 0.04 6.1 years - -
$ 0.36 283,048 $ 0.36 4.4 years 283,048 $ 0.36
$ 0.60 - $ 0.81 90,500 $ 0.63 5.7 years 83,832 $ 0.63
$ 1.00 162,809 $ 1.00 4.9 years 162,809 $ 1.00
$ 1.75 - $ 2.00 141,855 $ 1.88 9.5 years 66,855 $ 1.75
$ 2.37 - $ 5.09 106,517 $ 3.38 9.4 years 17,571 $ 4.39
$ 5.12 458,000 $ 5.12 9.5 years 426,998 $ 5.12
$ 7.12 - $ 8.00 50,026 $ 7.62 7.7 years 42,497 $ 7.64
$11.03 - $20.50 27,376 $14.42 5.6 years 27,376 $ 14.42
--------- ---------
1,337,160 $ 3.05 7.4 years 1,110,986 $ 3.08
========= =========
Under the principles of APB No. 25, the Company does not recognize
compensation expense associated with the grant of stock options to employees
unless an option is granted with an exercise price at less than fair market
value. SFAS 123 requires the use of option valuation models to recognize as
expense stock option grants to consultants and to provide supplemental
information regarding options granted to employees after September 30, 1995.
The Company's pro forma information utilizing the Black-Scholes option
valuation model for the fiscal years ended September 30, 2000, 1999 and 1998 is
as follows:
2000 1999 1998
---- ---- ----
Net loss (in thousands):
As reported................................. $6,665 $19,598 $19,146
Pro forma................................... $6,965 $20,889 $22,353
Basic and diluted net loss per share:
As reported................................. $1.21 $2.98 $2.69
Pro forma................................... $1.26 $3.17 $3.14
F-12
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro forma information regarding net loss was determined as if the Company
had accounted for its employee stock options and shares sold under the ESPP
under the fair value method of SFAS 123. The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes option valuation
model with the following weighted-average assumptions used for grants:
2000 1999 1998
---- ---- ----
Dividend yield...................................... 0% 0% 0%
Expected volatility................................. 133% 85% 70%
Risk-free interest rate............................. 6.0% - 6.3% 4.8% - 5.3% 5.3% - 5.6%
Expected option life after shares are vested........ 2 years 3 years 2 years
For the fiscal years ended September 30, 2000, 1999 and 1998, all stock
options issued were either issued at fair market value or were replacement stock
options issued pursuant to the Transcell Merger. During fiscal 1998, Transcell
granted stock options to consultants with an exercise price below fair market
value on the date of the grant.
Warrants: In May 1998, Incara issued replacement stock warrants to purchase
17,783 shares of Incara common stock at an exercise price of $13.49 in
connection with the Transcell Merger. As of September 30, 2000, warrants to
purchase 66,816 shares were outstanding, 49,033 of which are exercisable at an
exercise price of $8.25 per share until February 2001, and 17,783 of which are
exercisable at an exercise price of $13.49 per share until May 2003.
H. INCOME TAXES
As of September 30, 2000 and 1999, the Company had federal net operating
loss carryforwards of $57,359,000 and $56,375,000, respectively, and state
operating loss carryforwards of $18,493,000 and $17,509,000, respectively. The
use of these federal net operating loss carryforwards might be subject to
limitation under the rules regarding a change in stock ownership as determined
by the Internal Revenue Code. The federal net operating losses will begin to
expire in 2010. The state net operating losses will begin to expire in 2001.
Significant components of the Company's deferred tax assets at September
30, 2000 and 1999 consisted of the following (in thousands):
2000 1999
---- ----
Net operating loss carryforwards.................... $ 20,448 $ 20,063
AMT credit carryforwards............................ 37 37
Research and development credit carryforwards....... 1,195 1,195
Accrued payroll related liabilities................. 1,204 1,521
Charitable contribution carryforwards............... 637 441
Other............................................... 495 533
------------ ------------
Total deferred tax assets........................ 24,016 23,790
Valuation allowance for deferred assets............. (24,016) (23,790)
------------ ------------
Net deferred tax asset........................... $ - $ -
============ ============
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, all of the deferred tax assets have been fully
offset by a valuation allowance. The change in the valuation allowance is
primarily a result of the net operating loss carryforwards.
F-13
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows (dollars in thousands):
2000 1999 1998
---- ---- ----
Effective tax rate........................... 0% 0% 0%
== == ==
United States Federal statutory rate......... $(2,266) $(6,663) $(6,510)
State taxes (net of federal benefit)......... 1 (273) 853
Change in valuation reserves................. 226 4,909 4,394
Gain on sale of subsidiary................... - 2,371 -
Pipeline research and development............ 2,273 - 1,464
Other........................................ (234) (344) (201)
------- ------- -------
Provision for income taxes............... $ - $ - $ -
======= ======= =======
I. BUCINDOLOL TRANSACTIONS
In September 1994, Incara acquired 80.0% of the outstanding stock of CPEC.
CPEC held the exclusive, worldwide license from Bristol-Myers Squibb Company to
develop bucindolol for congestive heart failure and left ventricular
dysfunction.
In December 1995, the Company entered into a collaboration with Astra Merck
Inc. ("Astra Merck") for the development of bucindolol in the United States (the
"Astra Merck Collaboration"). During the fiscal year ended September 30, 1998,
the Company recognized contract revenue of $834,000 from payments made by Astra
Merck to the Company, exclusive of a termination fee of $4,000,000 received in
September 1998 discussed below. During the fiscal year ended September 30, 1998,
Astra Merck funded $6,065,000 of the Company's research and development
expenses. These additional amounts did not flow through the Company's statements
of operations, because they were offset against related expenses. Pursuant to
the terms of the Astra Merck Collaboration, the Company paid Astra Merck
$10,000,000 in December 1997, which had been accrued as a liability at September
30, 1997. In July 1998, Astra Merck's business was restructured to combine it
with Astra AB's wholly-owned subsidiary, Astra USA Inc., in a new limited
partnership in which Astra AB had management control as the general partner. The
new company, Astra Pharmaceuticals, had an expanded product line that included a
beta-blocker (metoprolol succinate). Because metoprolol and bucindolol were both
beta-blockers being investigated for heart failure, Astra Pharmaceuticals and
the Company agreed in September 1998 to terminate the Astra Merck Collaboration.
Pursuant to the Termination and Settlement Agreement, Astra Pharmaceuticals
returned to the Company all rights, material and information relating to
bucindolol and paid it a termination fee in the amount of $4,000,000. This
payment was immediately recognized as contract and license fee revenue because
the Company had no ongoing obligations.
In December 1996, the Company entered into the Knoll Collaboration with
Knoll to develop bucindolol for the Knoll Territory. Knoll and the Company had
agreed to share the development costs of bucindolol for the Knoll Territory. In
general, Knoll was to pay approximately 60% of certain development and marketing
costs and the Company was to pay approximately 40% of such costs, subject to
certain maximum dollar limitations. The Company recognized contract and license
fee revenue from the Knoll Collaboration of $26,000 and $149,000 for the fiscal
years ended September 30, 1999 and 1998, respectively.
On July 15, 1999, Incara restructured its corporate relationship with
Interneuron to reduce Interneuron's majority ownership of Incara in exchange for
an increased ownership by Interneuron of CPEC. Prior to the Restructuring, CPEC
was owned 80.1% by Incara and 19.9% by Interneuron. As a preliminary step in the
Restructuring, Incara acquired Interneuron's 19.9% interest in CPEC. Incara
redeemed 4,229,381 of the 4,511,084 shares of Incara Common stock owned by
Interneuron, in exchange for a 65.0% ownership of CPEC and cancellation of
liabilities owed to Interneuron by Incara and CPEC which totalled $2,421,000.
This cancellation was treated as a contribution to capital by Interneuron to
Incara. The Company's net investment in CPEC of $332,000 at September 30, 2000
is included in Prepaids and other current assets in the accompanying
consolidated balance sheet. The Company's share of CPEC's net operating expenses
since the date of the Restructuring are included in research and development
expenses in the accompanying consolidated statements of operations.
Before the Restructuring, Incara had funded approximately 80.1% of the net
worldwide expenses related to bucindolol and Interneuron funded approximately
19.9%, in proportion to their respective ownership interests in CPEC. After the
Restructuring, Incara and Interneuron are responsible for funding 35.0% and
65.0%, respectively, of CPEC's expenses related to the development of bucindolol
in the United States and Japan (the "CPEC Territory"). As part of the
Restructuring, Incara received an exclusive license of CPEC's rights in the
Knoll Territory and is responsible for all bucindolol expenses in the Knoll
Territory.
F-14
INCARA PHARMACETICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On July 29, 1999, the double-blind, placebo-controlled, Phase 3 study of
bucindolol known as BEST (Beta-blocker Evaluation of Survival Trial) was
terminated earlier than scheduled, based on an interim analysis by the Data and
Safety Monitoring Board that treatment with bucindolol did not demonstrate a
statistically significant improvement in survival in the patient population as a
whole. Based on the information, the Company does not expect to pursue the
compound further for this or any other indication. All estimated BEST
termination costs were accrued as of September 30, 1999.
On August 3, 1999, Knoll terminated the Knoll Collaboration. Knoll and
Incara also terminated the Phase 3 clinical study of bucindolol being conducted
in Europe, which was known as BEAT (Bucindolol Evaluation after Acute myocardial
infarction Trial). All estimated BEAT termination costs were accrued as of
September 30, 1999.
J. ACQUISITIONS AND DISPOSITION
Renaissance Cell Technologies, Inc. and Aeolus Pharmaceuticals, Inc.
On March 31, 2000, Incara purchased all of the minority interests of
Renaissance and Aeolus. Prior to the acquisitions, Incara owned 78.0% of
Renaissance and 65.8% of Aeolus. Incara issued 1,220,041 shares of its common
stock in exchange for the subsidiaries' minority ownership. The acquisitions
have been accounted for using the purchase method of accounting. The total
purchase price of $6,664,000 consisted of 1,220,041 shares of Incara's common
stock with a fair value of $5.46 per share, based on the price of the Company's
common stock at the date of acquisition. The total purchase price was allocated
to purchased in-process research and development and immediately charged to
operations because at the date of the acquisition the in-process research
purchased was in preclinical stages, feasibility had not been established and it
was deemed to have no alternative future use.
Additionally, Renaissance and Aeolus had no workforce or other tangible
fixed assets. Renaissance and Aeolus had incurred approximately $10,000,000 in
research and development costs prior to the acquisition of the minority
interests by Incara. Incara expects that it will take until at least 2006 to
complete development of all aspects of the research and that Renaissance and
Aeolus will need to spend in excess of an additional $50,000,000 to do so.
Transcell Technologies, Inc.
In May 1998, Incara acquired all of the outstanding stock of Transcell in a
merger of Transcell with and into Incara, and also acquired related technology
rights held by Interneuron in exchange for Incara common stock with an aggregate
market value of $14,200,000. In addition, Incara issued replacement stock
options and warrants to purchase 241,705 shares and 17,783 shares, respectively,
of Incara common stock to Transcell employees, consultants and warrant holders,
with a total estimated value of $1,507,000. Prior to the Transcell Merger,
Incara and Transcell were both majority-owned subsidiaries of Interneuron.
Under the terms of the Agreement and Plan of Merger between Incara, Transcell
and Interneuron dated March 2, 1998, Transcell stockholders received Incara
common stock in three installments. The first installment of 320,151 shares was
issued upon closing the transaction on May 8, 1998 (the "Closing"). In exchange
for certain license and technology rights held by Interneuron, and for
Interneuron's continuing guarantee of certain of Transcell's lease obligations,
Incara issued to Interneuron 174,672 shares of Incara common stock at Closing
with a value of $3,000,000 at the date of issuance and will pay Interneuron a
royalty on net sales of certain products that may result from the Merck
Collaboration. In lieu of the second installment payment due to Interneuron,
Interneuron retained 281,703 shares of Incara common stock as part of the
Restructuring. On August 9, 1999, Incara issued 867,583 shares of Incara common
stock, valued at approximately $1.38 per share, to the other former Transcell
stockholders as payment for their second installment of the Transcell Merger in
the principal amount of $1,202,000. On February 8, 2000, Incara issued 856,861
shares of Incara common stock, valued at approximately $3.36 per share, to
Interneuron and the other former Transcell stockholders as payment for the third
and final installment. The acquisition of Interneuron's 77.9% ownership
interest in Transcell by Incara was treated in a manner similar to a "pooling-
of-interests", because it represented a transfer of stock between entities under
common control. The acquisition of the non-Interneuron ownership interest was
accounted for using the "purchase" method of accounting. The Company incurred a
charge to operations of $5,343,000 in fiscal 1998 for the purchase of the non-
Interneuron interest in Transcell, because feasibility of the in-process
research and development was not yet established and the technology had no
alternative future use at the date of the acquisition. All of Transcell's prior
results of operations were combined with the results of operations of the
Company, because Transcell's minority interest owners had no responsibility to
fund their share of the losses of Transcell.
F-15
INCARA PHARMACETICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On December 29, 1999, the Company sold the former Transcell operation,
known as IRL, to a private pharmaceutical company for $11,000,000 in cash and
the right to receive up to an additional $4,000,000 if a compound originating
from the Merck Collaboration reaches preclinical and clinical trial milestones.
The Company currently does not expect to receive any additional payments from
the purchaser. The transaction involved the sale of assets associated with IRL,
including rights under the Merck Collaboration and the assumption of related
liabilities by the purchaser. The Company recognized a gain of $9,751,000 on
the sale of IRL. The Company remains contingently liable through May 2007 on
debt and lease obligations of approximately $8,328,000 assumed by the purchaser,
including the IRL facility lease in Cranbury, New Jersey.
K. AGREEMENTS
UNC License
Renaissance has a sponsored research agreement (the "UNC Agreement") with
the University of North Carolina at Chapel Hill ("UNC") which covers research at
UNC by scientists in the area of hepatic stem cells and which grants Renaissance
a first option to obtain an exclusive license to inventions resulting from the
agreement with UNC. Renaissance has agreed to reimburse UNC for certain costs
incurred in connection with the research, of which $338,000 remained to be paid
as of September 30, 2000. In August 1999, Renaissance obtained an exclusive
worldwide license (the "UNC License") from UNC to make, use and sell products
using proprietary information and technology developed under the UNC Agreement.
Renaissance paid license fees of $75,000 to UNC and will also pay milestones on
certain development events and royalties on net sales. Renaissance is also
obligated to pay patent filing, prosecution, maintenance and defense costs.
Unless terminated earlier, the UNC License continues until the last underlying
patent expires.
Opocrin License
In July 1998, Incara licensed a development compound ("OP2000") from
Opocrin S.p.A., of Modena, Italy ("Opocrin"). Incara is investigating the use
of OP2000 as a drug for the treatment of inflammatory bowl disease. The license
is worldwide except for Japan and Korea. During fiscal 1998, Incara made a
$1,000,000 license fee payment to Opocrin, which was expensed by the Company
because the compound was in the early clinical stage of development. Incara is
responsible for conducting clinical trials for OP2000 and is required to make
additional milestone payments to Opocrin upon initiation of Phase 3 clinical
trials, upon filing for regulatory approval, upon obtaining regulatory approval
and upon achieving specified annual sales.
Merck Collaboration
In July 1997, Transcell and Interneuron entered into the Merck
Collaboration to discover and commercialize certain novel antibacterial agents.
The agreement provided for Merck to make initial payments totaling $2,500,000
which included a non-refundable commitment fee of $1,500,000 and a non-
refundable option payment of $1,000,000 plus research support during the first
two years of the agreement. Based upon estimated relative value of such
licenses and rights, the commitment fee and option payment was shared two-thirds
by the Company and one-third by Interneuron. The Company's share of revenue in
conjunction with this agreement was $100,000, $2,063,000 and $1,138,000 for the
fiscal years ended September 30, 2000, 1999 and 1998, respectively, including a
$1,500,000 milestone payment received from Merck in August 1999. In conjunction
with the sale of IRL, the Company has transferred its rights and obligations
under the Merck Collaboration and its licenses with Princeton University to the
purchaser.
Duke Licenses
Aeolus has obtained exclusive worldwide licenses (the "Duke Licenses") from
Duke University ("Duke") to develop, make, have made, use and sell products
using certain technology in the field of free radical and antioxidant research,
developed by certain scientists at Duke. Future discoveries in the field of
antioxidant research from these scientists' laboratories at Duke are also
covered by the Duke Licenses. The Duke Licenses require Aeolus to use its best
efforts to pursue development of products using the licensed technology and
compounds. These efforts are to include the manufacture or production of
products for testing, development and sale. Aeolus is also obligated to use its
best efforts to have the licensed technology cleared for marketing in the United
States by the U.S. Food and Drug Administration and in other countries in which
Aeolus intends to sell products using the licensed technology. Aeolus will pay
royalties to Duke on net product sales during the term of the Duke Licenses, and
milestone payments upon certain regulatory approvals and annual sales levels.
In addition, Aeolus is obligated under the Duke Licenses to pay all or a portion
of patent prosecution, maintenance and defense costs. Unless earlier
terminated, the Duke Licenses continue until the expiration of the last to
expire issued patent on the licensed technology.
F-16
INCARA PHARMACETICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
National Jewish Medical and Research Center Agreement
Aeolus has a sponsored research agreement with National Jewish Medical and
Research Center ("NJC") which grants Aeolus an option to negotiate a royalty-
bearing exclusive license for certain technology, patents and inventions
resulting from research by certain individuals at NJC within the field of
antioxidant, nitrosylating and related areas. Aeolus has agreed to support
certain of NJC's costs incurred in performance of the research, of which $75,000
remained to be paid as of September 30, 2000.
L. EQUITY FINANCING
In August 2000, Incara entered into a definitive agreement with Torneaux
Fund Ltd. ("Torneaux"), an institutional investor, for an equity financing
facility covering the purchase of Incara's common stock over 15 months. Under
this facility, Incara will control the amount and timing of stock sold to
Torneaux, with the amount of the investment being dependent, in part, on
Incara's stock price. Assuming Incara's stock price maintains a minimum
threshold, the cumulative potential investment is anticipated to exceed
$3,000,000 and is capped at $18,900,000. The agreement includes the issuance of
warrants to purchase an amount of common stock equal to 15% of the common stock
shares purchased and is subject to a number of conditions. Incara's
stockholders approved this financing transaction in October 2000.
M. REVISION OF LOSS PER SHARE
In July 2001, the Company determined its earnings per share calculation
required revision as the Company had included certain restricted common shares
in the earnings per share calculation which shares should only be considered in
calculating earnings per share during periods in which the Company had income.
As a result, the basic and diluted loss per share for the fiscal year ended
September 30, 2001 as reported was $1.06 and as revised was $1.21.
F-17
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, September 30,
2001 2000
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,954 $ 1,877
Marketable securities - 4,678
Accounts receivable from Incara Development 385 -
Other accounts receivable - 197
Prepaids and other current assets 582 403
------------ ------------
Total current assets 5,921 7,155
Property and equipment, net 338 193
Other assets 356 -
------------ ------------
$ 6,615 $ 7,348
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 843 $ 637
Accrued expenses 218 1,807
Accumulated losses of Incara Development in excess of
investment 308 -
Current portion of capital lease obligations 23 22
Current portion of note payable - 27
------------ ------------
Total current liabilities 1,392 2,493
Long-term portion of capital lease obligations 31 43
Stockholders' equity:
Preferred stock, $.01 par value per share, 3,000,000 shares authorized
Series C convertible exchangeable preferred stock, 20,000 shares
authorized; 12,015 and no shares issued and outstanding as
of March 31, 2001 and September 30, 2000, respectively
(liquidation value of $18,031) 1 -
Series B convertible preferred stock, 600,000 shares authorized;
28,457 and no shares issued and outstanding as of March 31,
2001 and September 30, 2000, respectively 1 -
Common stock, $.001 par value per share, 40,000,000 shares
authorized; 8,385,171 and 7,365,849 shares issued and outstanding
at March 31, 2001 and September 30, 2000, respectively 8 7
Additional paid-in capital 99,046 88,951
Restricted stock (179) (239)
Accumulated deficit (93,685) (83,907)
------------ ------------
Total stockholders' equity 5,192 4,812
------------ ------------
$ 6,615 $ 7,348
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Six Months Ended
March 31,
---------------------------------
2001 2000
-------------- ---------------
Revenue:
Cell processing revenue $ 3 $ -
Contract revenue - 100
-------------- ---------------
Total revenue 3 100
-------------- ---------------
Costs and expenses:
Research and development 3,375 3,625
Purchase of in-process research and development - 6,664
General and administrative 1,446 1,252
-------------- ---------------
Total costs and expenses 4,821 11,541
-------------- ---------------
Loss from operations (4,818) (11,441)
Gain on sale of division - 9,751
Gain on settlement of accrued liability 767 -
Equity in loss of Incara Development (5,669) -
Investment income, net 156 153
-------------- ---------------
Net loss (9,564) (1,537)
Preferred stock dividend accreted (214) -
-------------- ---------------
Net loss attributable to common stockholders $ (9,778) $ (1,537)
============== ===============
Net loss per weighted share attributable to common stockholders:
Basic and diluted $ (1.33) $ (0.35)
============== ===============
Weighted average common shares outstanding 7,339 4,364
============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
F-19
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
March 31,
---------------------------------
2001 2000
-------------- ---------------
Cash flows from operating activities:
Net loss $ (9,564) $ (1,537)
Adjustments to reconcile net loss available to common
stockholders to net cash used in operating activities:
Depreciation and amortization 55 210
Noncash compensation 63 363
Purchase of in-process research and development - 6,664
Gain on sale of division - (9,751)
Equity in loss of Incara Development 5,804 -
Loss on disposal of property and equipment - 35
Gain on settlement of accrued liability (767) -
Change in assets and liabilities:
Accounts receivable (382) 69
Prepaids and other current assets (179) (22)
Other assets (356) -
Accounts payable and accrued expenses (89) (1,010)
------------ -------------
Net cash used in operating activities (5,415) (4,979)
------------ -------------
Cash flows from investing activities:
Proceeds from sale of division - 11,000
Proceeds from sales of marketable securities 4,678 2,553
Purchases of property and equipment (200) (31)
------------ -------------
Net cash provided by investing activities 4,478 13,522
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,638 52
Proceeds from issuance of Series B preferred stock and warrants 1,414 -
Repurchase of Incara common stock - (332)
Principal payments on notes payable (27) (56)
Principal payments on capital lease obligations (11) (92)
------------ -------------
Net cash provided by (used in) financing activities 4,014 (428)
------------ -------------
Net increase in cash and cash equivalents 3,077 8,115
Cash and cash equivalents at beginning of period 1,877 2,407
------------ -------------
Cash and cash equivalents at end of period $ 4,954 $ 10,522
============ =============
Supplemental disclosure of financing activities:
Common stock issued in settlement of accrued liability $ 416 $ -
============ =============
Retirement of common stock in connection with settlement
of accrued liability $ 83 $ -
============ =============
Series C preferred stock issued for investment in Incara
Development $ 5,496 $ -
============ =============
Preferred stock dividend accreted $ 214 $ -
============ =============
The accompanying notes are integral part of these unaudited consolidated
financial statements.
F-20
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
---------------------
The "Company" refers collectively to Incara Pharmaceuticals Corporation, a
Delaware corporation ("Incara"), its wholly owned subsidiaries, Aeolus
Pharmaceuticals, Inc., a Delaware corporation, and Incara Cell Technologies,
Inc., a Delaware corporation, formerly Renaissance Cell Technologies, Inc., and
its equity investee, Incara Development, Ltd., a Bermuda corporation ("Incara
Development"). As of March 31, 2001, Incara owned 80.1% of Incara Development.
Incara is developing therapies focused on tissue protection, repair and
regeneration. In particular, the Company is focused on developing adult stem
cell therapy for the treatment of liver failure. The Company is also conducting
research and development of a series of catalytic antioxidant molecules and, in
collaboration with Elan Corporation, plc, is conducting a Phase 2/3 clinical
trial of an ultra-low molecular weight heparin for the treatment of ulcerative
colitis.
All significant intercompany activity has been eliminated in the
preparation of the consolidated financial statements. The unaudited
consolidated financial statements have been prepared in accordance with the
requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Some information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations. In the opinion of management,
the accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position, results of operations and
cash flows of the Company. The consolidated balance sheet at September 30, 2000
was derived from the Company's audited financial statements included in the
Company's Annual Report on Form 10-K. The unaudited consolidated financial
statements included herein should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2000 and in the Company's other Securities and Exchange Commission ("SEC")
filings. Results for the interim period are not necessarily indicative of the
results for any other interim period or for the full fiscal year.
B. Recent Accounting Pronouncements
--------------------------------
The Company adopted Statement of Financial Accounting Standards No. 133, as
amended, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), in October 2000. SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. The Company does not currently use nor does it intend in the future
to use derivative instruments, and, therefore, the adoption of SFAS 133 did not
have any impact on the Company's financial position or results of operations.
C. Net Loss Per Weighted Share Attributable to Common Stockholders
---------------------------------------------------------------
The Company computes basic net loss per weighted share attributable to
common stockholders using the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per weighted share attributable
to common stockholders is computed using the weighted average number of shares
of common and dilutive potential common shares outstanding during the period.
Potential common shares consist of stock options, restricted common stock,
warrants and convertible preferred stock using the treasury stock method and are
excluded if their effect is antidilutive. As of March 31, 2001, diluted weighted
average common shares excludes incremental shares of approximately 4,854,000
related to stock options, restricted common stock, convertible preferred stock,
and warrants to purchase common and preferred stock. These shares are excluded
due to their antidilutive effect as a result of the Company's loss from
operations during the three and six months ended March 31, 2001.
D. Commitments and Contingencies
-----------------------------
In December 1999, Incara sold IRL, its anti-infectives division, to a
private pharmaceutical company. Incara remains contingently liable through May
2007 on remaining debt and lease obligations of approximately $7,400,000 assumed
by the purchaser, including the IRL facility lease in Cranbury, New Jersey.
In January 2001, Incara entered into a five-year non-cancelable operating
lease for additional office and laboratory facilities, with future minimum
payments under the new lease totaling $1,926,000.
F-21
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
E. Knoll Settlement
----------------
On December 20, 2000, Incara entered into a Settlement Agreement and
Release with Knoll AG ("Knoll") to resolve a dispute regarding a payable owed by
Incara to Knoll for a discontinued program. As of the settlement date, the
accrued liability, net of related receivables, was $1,250,000. Incara paid
Knoll $70,000 and issued to Knoll 175,000 shares of common stock (with a fair
value of approximately $416,000) in exchange for a full release of all amounts
owed to Knoll. This settlement eliminated the accrued liability owed to Knoll
and reduced Incara's net loss by $767,000 in the first quarter of fiscal 2001.
F. Elan Transaction
----------------
On January 22, 2001, Incara closed on a collaborative transaction with Elan
Corporation, plc, an Irish company ("Elan"), Elan International Services, Ltd.,
a Bermuda company ("Elan International"), and Elan Pharma International Limited,
an Irish company ("Elan Pharma"). As part of the transaction, Elan
International and Incara formed a Bermuda corporation, Incara Development, Ltd.,
to develop OP2000. Incara owns all of the common stock and 60.2% of the non-
voting preferred shares of Incara Development and Elan International owns 39.8%
of the non-voting preferred shares of Incara Development. Of the outstanding
combined common and non-voting preferred shares of Incara Development, Incara
owns 80.1% and Elan International owns 19.9%. As part of the transaction, Elan,
Elan Pharma and Incara entered into license agreements under which Incara
licensed to Incara Development the OP2000 compound and Elan Pharma licensed to
Incara Development proprietary drug delivery technology.
As part of the transaction, Elan International also purchased 825,000
shares of Incara's common stock, 28,457 shares of Incara Series B non-voting
convertible preferred stock ("Series B Stock") and a five-year warrant to
purchase 22,191 shares of Series B Stock at an exercise price of $72.12 per
share for an aggregate purchase price of $4,000,000. Each share of Series B
Stock is convertible into ten shares of common stock. Elan International also
purchased shares of Incara Series C convertible exchangeable non-voting
preferred stock ("Series C Stock"). The Series C Stock has a face value of
$12,015,000 and bears a mandatory stock dividend of 7%, compounded annually.
The Series C Stock is exchangeable at the option of Elan International at any
time for all of the preferred stock of Incara Development held by Incara which,
if exchanged, would give Elan International ownership of 50% of the initial
amount of combined common and preferred stock of Incara Development. After
December 20, 2002, the Series C Stock is convertible by Elan International into
shares of Incara's Series B Stock at the rate of $64.90 per share. If the
Series C Stock is outstanding as of December 21, 2006, Incara will exchange the
Series C Stock and accrued dividends, at its option, for either cash or shares
of stock and warrants of Incara having a then fair market value of the amount
due. The proceeds from the issuance of the Series C Stock were contributed by
Incara to Incara Development. Consequently, the value initially recorded as
Incara's investment in Incara Development is the same as the fair value of the
Series C Stock issued, which was approximately $5,496,000. This value is the
estimated fair market value of Incara's common stock into which the Series C
Stock could have converted, calculated as of the closing date. The technology
obtained by Incara Development from Elan and Elan Pharma was expensed at
inception because the feasibility of using the contributed technology in
conjunction with OP2000 had not been established and Incara Development had no
alternative future use for the contributed technology. Incara immediately
expensed as equity in loss of Incara Development its investment in Incara
Development, reflective of Incara's pro rata interest in Incara Development.
From the date of issue up to December 21, 2006, Incara will accrete the Series C
Stock from its recorded value up to its face value plus the 7% dividend.
Upon the later of the completion of enrollment of a Phase 2/3 clinical
trial for OP2000 or December 21, 2001, Elan International will purchase
$1,000,000 of Incara's Series B Stock at a per share price that will be ten
times the greater of (a) the average per share price of Incara common stock for
the day prior to the purchase, or (b) a 25% premium to the average daily price
per share of Incara common stock for the 60 trading day period immediately prior
to the purchase. In addition, as part of the $1,000,000 payment, Incara will
issue to Elan International a five-year warrant for 20% of the shares of Series
B Stock purchased by Elan International. The exercise price of the Series B
Stock under this warrant will be equal to twice the per share purchase price of
the Series B Stock purchased on the same date.
Elan International and Incara intend to fund Incara Development pro rata,
based on their respective percentage ownership of the combined outstanding
common and preferred stock of Incara Development. Subject to mutual agreement,
Elan Pharma will lend Incara up to $4,806,000 to fund Incara's pro rata share of
development funding for Incara Development. In return, Incara issued a
convertible promissory note that bears interest at 10% compounded semi-annually
on the amount outstanding thereunder. After December 20, 2002, the note is
convertible at the option of Elan Pharma into shares of Series B Stock at $43.27
per share. The note will mature on December 21, 2006, when the outstanding
principal plus accrued interest will be due and payable. Incara has the option
to repay the note either in cash or in shares of Series B Stock and warrants
having a then fair market value of the amount due. As of March 31, 2001, Incara
had not borrowed any funds pursuant to this note.
F-22
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
While Incara owns 80.1% of the outstanding stock of Incara Development,
Elan and its subsidiaries have retained significant minority investor rights
that are considered "participating rights" as defined in the Emerging Issues
Task Force Consensus No. 96-16. Accordingly, Incara does not consolidate the
financial statements of Incara Development, but instead accounts for its
investment in Incara Development under the equity method of accounting. Net
losses of Incara Development will be recognized by Incara at its 80.1% interest
to the extent of Incara's investments, advances and commitments to make future
investments in or advances to Incara Development. Further, because Elan can
exchange its investment in Incara's Series C Stock for Incara's 30.1% preferred
interest in Incara Development, Incara will only recognize 50% of any
accumulated net earnings of Incara Development. During the six months ended
March 31, 2001, Incara's equity in loss of Incara Development was $5,669,000,
which included $5,496,000 for Incara's interest in the immediate write-off at
inception of the contributed technology by Elan and Elan Pharma to Incara
Development and $173,000 for net losses.
G. REVISION OF LOSS PER SHARE
In July 2001, the Company determined its earnings per share calculation
required revision as the Company had included certain restricted common shares
in the earnings per share calculation which shares should only be considered in
calculating diluted earnings per share during periods in which the Company had
income. As a result, the basic and diluted loss per share for the six months
ended March 31, 2001 and 2000 as reported was $1.26 and $0.29, respectively, and
as revised was $1.33 and $0.35, respectively.
F-23