-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CupDK/KkOgAQguyO6hEvELIV9Rx9ZhG0Snl+Ad/bX+pdgMtcLQheWa/qRt/UXERo 6VGKhoFV8CtYX/+VjzjLYQ== 0000940180-00-000352.txt : 20000329 0000940180-00-000352.hdr.sgml : 20000329 ACCESSION NUMBER: 0000940180-00-000352 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYTOGEN CORP CENTRAL INDEX KEY: 0000725058 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 222322400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14879 FILM NUMBER: 581422 BUSINESS ADDRESS: STREET 1: 600 COLLEGE RD EAST CN 5308 CITY: PRINCETON STATE: NJ ZIP: 08540 BUSINESS PHONE: 6099878200 MAIL ADDRESS: STREET 1: 600 COLLEGE RD EAST CN 5308 STREET 2: 600 COLLEGE RD EAST CN 5308 CITY: PRINCETON STATE: NJ ZIP: 08540 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________ to __________ Commission file number 333-02015 CYTOGEN CORPORATION (Exact name of registrant as specified in its charter) Delaware 22-2322400 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 600 College Road East, CN5308, Princeton, New Jersey 08540-5308 - ---------------------------------------------------- ------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (609) 750-8200. Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ----------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___. --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the registrant's shares of common stock held by non-affiliates of the registrant on February 14, 2000, based on $13.438 per share, the last reported sale price on the NASDAQ National Market on that date, was $823 million. The determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes. The number of shares of Common Stock outstanding as of February 14, 2000 was 70,811,959 shares. DOCUMENTS INCORPORATED BY REFERENCE Form 10K Document Part -------- -------- Portions of the definitive Proxy Statement with respect to III the 2000 Annual Meeting of Stockholders (hereinafter referred to as the "Proxy Statement") to be filed by Cytogen Corporation with the Commission, but specifically excluding the sections titled "Compensation Committee Report on Executive Compensation" and "Performance Graph", which shall not be deemed to be incorporated by reference herein. 2 PART I Item 1. Business - -------------------------------------------------------------------------------- Business OVERVIEW Cytogen is an established biopharmaceutical company with two principal lines of business, proteomics and oncology. We are extending our expertise in antibodies and molecular recognition to the development of new products and a proteomics- driven drug discovery platform. We have established a pipeline of product candidates based upon our proprietary antibody and prostate specific membrane antigen, or PSMA, technologies. We are also developing a proprietary protein pathway database as a drug discovery and development tool for the pharmaceutical and biotechnology industries. Our cancer management franchise currently comprises three marketed FDA-approved products: ProstaScint, used to image the extent and spread of prostate cancer; OncoScint CR/OV, marketed as a diagnostic imaging agent for colorectal and ovarian cancer and Quadramet, marketed for the relief of cancer-related bone pain. We are extending our cancer pipeline by exploiting PSMA, which we exclusively licensed from Memorial Sloan-Kettering Cancer Center. PSMA is a unique antigen highly expressed in prostate cancer cells and in the neovasculature of a variety of other solid tumors, including breast, lung and colon. We are developing our PSMA technology as part of our approach to offering a full range of prostate cancer management products and services throughout the progression of the disease, including gene-based immunotherapy vaccines, antibody-delivered therapeutic compounds and novel assays for detection of primary prostate cancer. We also plan to apply our PSMA technology, including therapeutics and in vitro diagnostics, toward other types of cancer based upon our experience in prostate cancer. Our in vivo immunotherapeutic development program is being conducted in collaboration with Progenics Pharmaceuticals, Inc. Proteomics is the study of the expression and interaction of proteins. Genomics is the study and identification of an organism's genetic makeup. While genomics provides important information regarding genetic makeup, it does not directly provide information regarding protein functions or protein interactions. However, genomics data can prove useful in proteomics research as a source of obtaining complete protein sequences of ligands we have identified. Public availability of this genomics information allows for effective integration in our database of public and proprietary information. We recognized in our past research that the key to understanding or developing the means to intervene in diseases was primarily based on understanding protein interactions rather than only through the use or study of genomics. We undertook this approach on our own initiative and with our own funds. Our proteomics program, under development by our subsidiary, AxCell Biosciences Corporation, is focused on the identification of protein interaction and signaling pathways within cells as relating to disease processes. We utilize our proprietary proteomics technology to map selective protein- protein interactions and to develop a database, called the Inter-Functional Proteomic Database, or IFP Database, which includes data relating to protein signaling pathways linked to a variety of other bioinformatic data. The IFP Database is designed to permit customers to integrate existing databases, both public and proprietary, with our proprietary data to create a "virtual laboratory' on the computer desktop of researchers involved in drug discovery. We believe this database has significant potential commercial value to the pharmaceutical and biotechnology industries as a means of expediting drug target identification, validation, screen development and lead compound optimization faster and cheaper than with current methodologies. These proprietary technologies are designed to provide a platform from which we can quickly and cost-effectively determine protein-protein interactions and build pathways of intracellular signaling data. Our IFP Database also offers a consolidated platform to enable statistical and mathematical modeling of complex protein pathways. PROTEOMICS We are developing a proprietary protein pathway database called the Inter- Functional Proteomic Database, or IFP Database, as a discovery and development tool for subscribers in the pharmaceutical and biotechnology industries. Our bioinformatics platform is designed to identify drug targets for optimization and development, through the application of our novel, innovative and rapid techniques for deriving intracellular protein-pathway data. We are designing the IFP Database, with our partner InforMax, Inc., to permit use of the Internet to integrate our information with a customer's proprietary data and other information, including public genomics data. - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- Our technology potentially shortens the drug discovery process by providing efficacy and potential toxicity information while utilizing existing high- throughput screening instrumentation. We believe that using the IFP Database may permit pharmaceutical and biotechnology companies to validate protein targets for drug discovery faster and cheaper than with current methodologies. In addition, we believe that the development of the database will continue to lead to the identification of novel proteins that we may develop exclusively or with partners. We plan to offer customers multi-year subscriptions to the IFP Database. We also plan to chart increasingly greater portions of the proteome and add these results to the IFP Database. Additionally, we will price our subscriptions in relation to the amount and quality of information that the IFP Database provides, thus allowing us to scale our price structure as the database grows. Drug discovery The traditional drug discovery process involves testing or screening compounds in disease models. Researchers often engage in the process with little knowledge of the intracellular processes underlying the disease or the specific drug target within the cell. Thus, companies must screen a very large number of arbitrarily selected compounds to obtain a desired change in a disease model. While this approach sometimes produces drugs successfully, we believe it has the following limitations: .inefficiency: it is capital intensive and time consuming in identifying and validating targets; .low productivity: it yields relatively few new drug candidates; .lack of information: it provides little information about the intracellular processes or targets, to guide target selection and subsequent drug development; and .risk of side effects: it often results in drug candidates with a risk of serious side effects. In an effort to overcome some of the difficulties associated with traditional drug discovery, scientists have turned to genomics as a means of better understanding the roots of disease. Scientists believed that a comprehensive knowledge of an organism's genetic makeup would lead to more efficient drug discovery. While useful, DNA sequence analysis alone does not lead efficiently to new target identification, because one cannot easily infer the functions of gene products, or proteins, and protein pathways from DNA sequence. Proteomic technologies offer significant opportunities to improve the drug discovery process. By focusing on protein activity levels, or expression levels, researchers are able to learn more about the role proteins play in causing and treating disease. Proteomics also aids in deciphering the mechanisms of disease and increasing both the opportunity to develop drugs with reduced side effects and an increased probability of clinical trial success. We believe proteomics has the potential to increase substantially the number of drug targets and thereby the number of new drugs. - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- The current environment The drive to understand basic biological mechanisms has led to two distinct, yet related, approaches to the study of molecular biology, genomics and proteomics. Genomics is the study and identification of an organism's genetic makeup. Proteomics is the study of protein expression and protein interaction within cells. [Genomics to Proteomics Flowchart] As seen above, drug discovery research has undergone a transition from emphasis on structural genomics, to functional genomics, to structural proteomics and finally to functional proteomics. The two main components of genomics research are structural and functional. The structural effort is comprised of identifying gene sequences and identifying gene variants. This research has primarily been approached through the use of DNA sequencing, gene mapping and positional cloning. Identification of gene sequence does not lead directly to targets for drug discovery but does give information that is useful to functional genomics and proteomics. Identification of gene variants can lead to targets for drug discovery, but for the most part they lead to pathways associated with disease. Some of the protein components of those pathways are the ultimate targets for drug discovery. The functional study of genomics consists primarily of gene expression. The genes expressed in normal and diseased tissue differ, and gene expression techniques can comprehensively distinguish between the two. Gene expression has been studied using gel-based and chip-based technologies. Although the genes expressed lead to potential targets in the proteins for which they code, there are several limitations to consider: .there may be no correlation between gene expression and protein production; .interactions between proteins cannot be predicted; and .gene expression cannot account for changes to the protein once the protein has been created. Due to these limitations, gene expression cannot give a full explanation of the biological function of proteins within cells. Proteomics research efforts can also be categorized as structural and functional. Structural proteomics, or protein expression, measures the number and types of proteins existent in normal and diseased cells. Two-dimensional gel electrophoresis and mass spectrometry are the primary tools used in protein expression analysis. This approach is useful in defining the structure of proteins in a cell. Some of these proteins may be targets for drug discovery. However, the role of the protein in the disease is still not defined. Functional proteomics is the study of proteins' biological activities. An important function of proteins is the transmission of signals using intricate pathways populated by proteins which interact with one another. Understanding the role proteins play in these signaling pathways allows a better understanding of their function in cellular behavior. Aberrations in the interaction of proteins with one another are at the heart of the molecular basis of many diseases. We believe analysis of protein pathways will identify those proteins that play a role in causing or preventing disease. Our proteomics business is focused upon this area. - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- The most widely used method for studying protein interactions is the yeast two- hybrid system. We believe that this method has numerous limitations. We have developed a different, and proprietary approach to the study of functional proteomics. The two-hybrid system Our system - ------------------------------------------------------------------------------- The rate of the throughput of We will be measuring 200,000 interactions the yeast two-hybrid systems has per month and anticipate charting signaling been improved; however, the pathways in the human proteome in 2 to 4 methodology does not reach the years. throughput of our technology. - ------------------------------------------------------------------------------- The results of the yeast two- Results are passed through a series of hybrid method may be misleading, bioinformatic filters, such as affinity and because the interactions tissue expression, to better determine determined using this method are biologically significant interactions. not always present in human cells. - ------------------------------------------------------------------------------- Researchers must possess Knowledge of a protein's role in a knowledge about a protein's role signaling pathway is determined through the in a signaling pathway prior to application of our system. using this system.
We believe our approach to detecting protein pathways has the following distinct advantages compared to the yeast two-hybrid system: simplicity, higher throughput data generation, direct protein interaction measurement, fewer false positives, rapid formatting of high-throughput screening assays and identification of specific ligands, which provide a starting point for rational drug design. [Graphic of Drug Discovery and Development Process] We believe that target identification may be facilitated by the use of the IFP Database. We anticipate the IFP Database will allow identification of disease- related alterations in protein pathways by comparing protein pathways in cells and tissues associated with a disease model with pathways in normal tissue. We believe that this technology will enable researchers to identify more efficiently potential targets. We are developing high-throughput screens for drug development in cases where targets are proprietary to us. Customers may license these targets and receive the components necessary for a high-throughput screen. Finally, we believe that we can accelerate lead compound optimization through the supply of related protein-component family members, or protein arrays. We believe that these protein arrays contain the proteins with which a researcher can test a lead compound for cross-protein interaction. Such cross-protein interactions may represent the side effects which the lead compound might invoke. We believe that modifications of the structure of the lead compound followed by further testing with the target array will lead to more efficient lead compound optimization. - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- Background Our founding technology was based on an understanding of the principles of the binding, or molecular recognition, of antibodies to antigens. Through a sponsored research program at the University of North Carolina at Chapel Hill, coupled with our internal research, we studied the interactions between peptide ligands and proteins. This research led to a better understanding of protein- protein interactions, and ultimately to proprietary methods for identifying and quantifying such interactions. We have an established portfolio of patents and patent applications based on inventions generated both internally and at the University of North Carolina at Chapel Hill, relating to methods for identification of proteins which interact in cellular pathways, and the compositions of such proteins. Certain patents and patent applications filed on behalf of the University of North Carolina at Chapel Hill are the subject of a worldwide, exclusive license to us. We established AxCell Biosciences Corporation as a subsidiary to exploit the commercial potential of this proprietary platform technology in the area of proteomics. Our technology We have developed several integrated, high-throughput technologies designed to determine protein pathways quickly and cost effectively. The identification of protein pathways is a critical step in drug discovery. [TECHNOLOGY FLOW CHART] As part of functional signaling pathways, protein interaction is mediated through binding of a ligand sequence on one protein and a domain on another - similar to the relationship between a lock and a key. Domains are functional portions of proteins where the actual interaction occurs with another protein. Ligands are the regions of the other proteins that interact with the domains. As seen in the above illustration, we identify domain-ligand interactions through the use of proprietary phage display libraries. The process begins with a domain from a known protein family. A library of peptides, which are short sequences of amino acids (the building blocks of proteins), is exposed to this domain to identify those peptides that act as ligands and have binding affinity to the domain. (Step 1) We then use these ligands as probes to find other proteins that contain a domain which exhibits affinity to the ligands. This technique identifies the complete family of domains that interacts with a set of ligands. (Step 2) Once a set of ligands and domains are identified, we measure the strength of affinity between each domain and ligand. (Step 3) These steps are repeated with all signaling domains and their corresponding ligands. This approach allows us to create the IFP Database of ligand-domain binding interactions and thus establish a functional relationship between the set of ligands and domains. (Step 4) Using this database and computational methods, or bioinformatics, we define the rules of interaction between domains and ligands. Using bioinformatic analyses, each interacting protein can be identified, and through ligand-domain pairing biological pathways can be constructed. (Step 5) - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- Analyses of the aberrations in the interaction of proteins with one another can then be studied to identify those proteins that play a role in causing or preventing disease and can be targeted for drug development. (Step 6) Proprietary algorithm development Through the use of our platform technologies described above and the data generated with them, we plan to develop proprietary modeling and characterization algorithms. Our IFP Database will contain comprehensive protein interaction and pathway data that we believe will allow the modeling and characterization of ligands using connections to the corresponding domains. We also plan to develop pathway models using the data in our IFP Database. These models will be made available as tools within the IFP Database to our subscription customers. Our products We use our proprietary proteomic technology to offer pharmaceutical companies the following products and services: IFP Database The Inter-Functional Proteomic Database, or IFP Database, is designed to offer customers the opportunity to evaluate many proteins at once by overlaying protein pathway data with other bioinformatic information in a user friendly format. Users will be able to visualize and correlate protein pathway data with all sequence, expression, tissue distribution, structural and bibliographic information that exists for that particular protein and pathway. The IFP Database can also be used to generate protein pathway information according to a customer's needs or interests. The end result is that companies can evaluate a large number of targets and rationally select a subset with which they can advance to experimentation. This database is also designed to allow a researcher to define the best point for intervention in a protein pathway to maximize beneficial pharmacological effects while minimizing potential toxicity. We established a collaboration with InforMax, Inc., a privately held bioinformatics provider. InforMax is a leader in the development of bioinformatics software for accelerated drug discovery and has a proven track record in software development. We are jointly designing an interface for the IFP Database that will be integrated with InforMax's GenoMax(TM) product. GenoMax is a bioinformatics system that offers high-speed analysis of both public and proprietary genetic databases within the security of a corporate firewall. This system is designed to allow the subscriber to evaluate data in the IFP Database, while accessing other public and private databases. We are also developing an application programming interface for the IFP Database, to permit integration with other bioinformatics platforms, including those developed by the customers themselves. By taking advantage of an existing bioinformatic platform, we plan to concentrate our efforts on the development of tools specific to protein pathway data. InforMax will also lead in marketing the IFP Database. We plan to chart the entire human proteome of intracellular protein signaling pathways. Our existing robotics systems are designed to permit generation of approximately 200,000 data points per month. We expect to reach this level of data generation by mid-year 2000. We believe we can map the signaling pathways in the entire human proteome in a four-year time period based upon our existing robotics systems. We also believe that with additional resources, we could accelerate computation of this project to a two-to-four-year time period. We intend to sell multi-year subscriptions to pharmaceutical and biotechnology companies, pricing the product according to the depth and breadth of information it contains. - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- Novel Protein Targets We view proteins by their modular building blocks or domains. Every signaling protein can be defined by its domain composition and this composition can be compared to known proteins to determine if a protein is a novel composition of matter. The figure below gives an example of a known protein, which consists of two domain 1s and one domain 2. Also shown are several novel proteins, such as Novel 2, which is made up of five domain Cs. Since we are measuring domain- ligand interactions, we not only define the protein but have knowledge of the protein's function. This method of defining proteins has been used by us in a successful composition of matter patent around novel WW-domain-containing proteins. [Graphic of Modular View of Proteins] In the course of identifying pathways to create the IFP Database, we are discovering and, where appropriate, filing patent applications on novel proteins. We believe that some of these proprietary proteins will be important biological targets. In these instances, we will offer those targets to our customers for licensing fees, milestone payments and royalty payments. Protein Arrays We plan to sell defined sets of known protein families, or protein arrays, for use in lead optimization. The signaling proteins in our IFP Database are organized based on their domains. Domains are interaction modules, or defined structural regions on proteins, which are the sites of specific interaction between one protein and another. These domains are the parts of signaling proteins where a drug may interact and alter a pathway. There are estimated to be 30 to 60 domain families in signaling pathways. Each family may have 100 to 300 members. Customers who identify potential targets in the IFP Database based on a specific interaction involving a particular domain will need that physical protein for screening. They will also need the other family members which have that domain in common. The relative degrees of binding to these other family members represent the toxicity and possible side effects of a drug candidate. Marketing We intend to market our IFP Database, novel protein targets and protein arrays to pharmaceutical and biotechnology companies. InforMax will take the lead in marketing our IFP Database in conjunction with their enterprise bioinformatics software, GenoMax. InforMax currently has 15,000 licenses at over 850 organizations worldwide for their desktop software and they have used this desktop software market strength to establish themselves in the bioinformatics enterprise software market. InforMax has nine current GenoMax installations and expects to double the number by the end of the calendar year. They have established relationships with major pharmaceutical and biotechnology companies as well as with leading universities conducting life science research. We plan to market the IFP Database as multi-year subscriptions allowing access to our IFP Database inside the customers' corporate firewall. This subscription delivery is facilitated using InforMax's GenoMax product. These subscriptions may include collaborative bioinformatics research projects to analyze specific pathways as requested by a customer. Such collaborations would typically provide additional revenues, and could also include milestone payments and royalty-based revenues from any products emerging from the collaborative research and developed by our partner. Initially, we plan to enroll subscribers who are interested in early access to the database. These early subscribers will have the opportunity to provide direction on both the disease areas of research and the computational aspects of the database that are relative to their internal research areas. As the amount of information in the IFP Database increases, we plan to offer subscriptions broadly and to increase the price of a subscription. - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- Our proteomics patents and proprietary rights position We will market protein targets under arrangements that we anticipate would include licensing fees, milestone payments and royalty payments as our customers develop products based on these targets. We plan to market protein arrays under a license for use structure and, where possible, obtain commitments for milestone payments and royalty-based payments if the arrays contain novel protein targets proprietary to us. We intend to pursue aggressively patent production for novel synthetic peptides and novel naturally occurring polypeptides that we identify as binding to ligands of interest, as well as for products and methods relating to the use of these polypeptides and their respective genes as possible drug targets in screening assays. We also intend to seek patent protection for methods and products relating to our data analysis procedures. Among our patents are two issued U.S. patents relating to peptides that bind to certain molecules expressed on cancer cells. We also co-own with the University of North Carolina at Chapel Hill an issued U.S. patent covering certain polypeptides that contain a WW domain. We are the exclusive licensee of certain patents and patent applications owned by the University of North Carolina at Chapel Hill, covering parts of the proteomics technology. These include seven issued U.S. patents relating to our phage display libraries, methods of using phage display libraries to identify peptides that bind to a target molecule of interest, as well as peptides that bind to certain molecules. Our strategy We intend to be a premier provider of proteomic systems and services that enable our customers to analyze genomic and proteomic data, understand biochemical pathways and elucidate the mechanisms of disease for optimal drug selection. Key elements of our proteomics strategy include: .becoming the leading company to market a comprehensive database of information relating to the human proteome; .developing an expansive and proprietary database of signaling pathways within the human proteome; .establishing a position as the leading company in providing protein-protein interaction to the pharmaceutical, and other industries; .developing a strong intellectual property position with respect to novel protein targets; and .developing target arrays to be used for lead optimization. Competition We are subject to significant and increasing competition. Many companies compete in the overall effort to understand the complex flow from gene sequence, to transcription into messenger riboneucleic acid, to protein expression and finally to biological activity. In addition, most major pharmaceutical and biotechnology companies have some level of internal activity and high interest in these areas. The technology for analyzing the functions of proteins in the disease setting, and for mapping interactions between proteins, is relatively new. This technology is evolving rapidly and developments by competitors, including potential customers, could make our technology obsolete. A number of companies compete with our approach to analyzing the proteome, and others compete with our technology for identification of novel proteins and use of proteins for possible drug targets. Of the several approaches used commercially to analyze the proteome, the main direct competitor with our technology is the yeast two-hybrid system. Two companies, Myriad Genetics, Inc. and CuraGen Corporation, use this method to perform large-scale cataloguing of protein-protein interactions. Strategic alliances InforMax, Inc. In September 1999, AxCell and InforMax, Inc. concluded an agreement to market our IFP Database as part of an enterprise bioinformatics solution to the pharmaceutical and biotechnology industries. The multi-year agreement provides for technology development by InforMax to link our database to InforMax's GenoMax, a new generation of molecular biology and genetics software. - -------------------------------------------------------------------------------- 10 - -------------------------------------------------------------------------------- Compaq Computer Corporation In December 1999, AxCell entered into a developer partnership with Compaq Computer Corporation. This development program will be facilitated by Compaq's proven Alpha architecture, high performance 64-bit systems that deliver speed and scalability advantages. Under the agreement, Compaq has provided us with hardware for the development of our proteomics database. University of North Carolina We sponsored research at, and are the exclusive licensee of certain patent and patent applications and technology owned by the University of North Carolina at Chapel Hill, covering the creation of long peptides that may fold to form three-dimensional functional structures, and of libraries composed of these peptides. The technology covered by this collaboration has been utilized, with other technology we developed, in our proteomics program. ONCOLOGY Background Cancer encompasses a large number of discrete diseases that afflict many different parts of the human body. The diversity of cancer diseases and their overall prevalence creates a large need for new and improved treatments. Cancer is the second leading cause of death in the United States. It is estimated that one in three Americans will be diagnosed with cancer. The worldwide oncology drug market was estimated at $16 billion in 1998, representing 15% growth from 1997. This market is not saturated: novel treatments often enjoy premium pricing and rapid market acceptance. Fundamentals of the oncology market that are particularly advantageous for us include: .accelerated approval procedures adopted by the US Food and Drug Administration to shorten the development process and review time for cancer drugs; .in-licensing opportunities created by a trend among large pharmaceutical companies to concentrate on products with larger market potential than most anticancer drugs; .favorable pricing and reimbursement for oncology drugs, with some novel agents commanding $6,000 to $15,000 per course of therapy; and .a highly concentrated population of oncologists, urologists and technicians which we believe allows a small sales force to be effective. We develop, commercialize and market products to improve the diagnosis and treatment of cancer. We were founded based upon our knowledge of monoclonal antibodies. Our research efforts in this area led to our marketed products. In the development of our current products, we also developed expertise in molecular recognition and in linking radioisotopes to carriers, including antibodies, for diagnostic and therapeutic purposes. We also developed expertise with nuclear imaging, including training of technicians and physicians, utilized for diagnostic purposes. We have applied this knowledge primarily in the field of prostate cancer, and for imaging/diagnostic agents for colorectal and ovarian cancers. Our historical knowledge led to research programs, both internally and in collaborations with academic and scientific institutions, in which we gained additional knowledge about antibodies, proteins, identification and synthesis of novel proteins, and antigens located by those compounds. We plan to apply our experience, coupled with our proprietary technology rights and developmental expertise, to build an oncology business utilizing innovative techniques for an integrated approach in intervention in the progression of disease. We have also established a sales force, consisting of experienced salespersons and technical representatives. We intend to use this sales force to sell current products and any products which we develop or acquire. - -------------------------------------------------------------------------------- 11 - --------------------------------------------------------------------------------
Product Indication Status Development/Marketing - ------------------------------------------------------------------------------------- ProstaScint Diagnostic imaging Approved and marketed Cytogen (US & Canada) agent for staging the in US. Regulatory spread of prostate approval pending in cancer Canada. European filing targeted for mid-2000. - ------------------------------------------------------------------------------------- OncoScint CR/OV Diagnostic imaging Approved for sale in Cytogen (US and agent for spread of eleven European Canada); CIS colorectal and countries and Canada. biointernational ovarian cancer Approved in US (Europe) - ------------------------------------------------------------------------------------- Quadramet Relief of bone pain Approved in US and Berlex (US); Cytogen from cancer spread to Canada (Canada) the bone from primary tumor Treatment of Evaluating Phase I Berlex (US); Cytogen Refractory Rheumatoid results has marketing rights Arthritis in Canada, Europe, Japan and certain other countries Treatment of disease Phase III Berlex (US); Cytogen progression by use of (Canada) Quadramet, prior to onset of pain - ------------------------------------------------------------------------------------- PSMA Development Immunotherapeutic Pre-clinical Developed by product for cancer development Progenics; Cytogen to vaccine utilizing market; Profit- gene-based therapy sharing Prostate cancer Pre-clinical Developed by antibody- based development Progenics; Cytogen to therapy market; Profit- sharing In vitro diagnostic Development of a Cytogen to market tests for prostate trial assay cancer Ex vivo dendritic Phase I/II clinical Northwest cell processing trials Biotherapeutics, Inc.
Pipeline--PSMA technology Prostate specific membrane antigen, or PSMA, is a transmembrane protein that can be used as an important marker associated with prostate cancer. PSMA has also been found to be present in new blood vessel formation associated with other major solid tumors. It is overexpressed in primary prostate cancer, but it is expressed most highly in the more aggressive forms of prostate cancer, including those that do not express prostate specific antigen, or PSA, and those that do not respond to hormone therapy. When PSMA was compared to various PSA tests, the presence of PSMA was a more accurate guide of the extent of cancer. However, there are currently no commercially available assays for PSMA. Memorial Sloan-Kettering Cancer Center identified PSMA using a monoclonal antibody supplied by us. A patent entitled "Prostate Specific Membrane Antigen" was issued to Sloan-Kettering Institute for Cancer Research, an affiliate of Memorial Sloan-Kettering Cancer Center, and we have the exclusive worldwide license covering this technology. Subsequently, the antibody for PSMA was the basis of our FDA-approved ProstaScint imaging product. We believe that technology utilizing PSMA can yield novel products for the treatment and diagnosis of cancer because of the unique characteristics of this antigen. In 1999, Cytogen entered into a joint venture with Progenics Pharmaceuticals, Inc. to develop in vivo immunotherapeutic products utilizing PSMA. The first of these product candidates is a therapeutic prostate cancer vaccine utilizing the PSMA gene and a vector delivery system as a basis of immune stimulation. Our current plans are that this approach, if successful in pre-clinical development, will proceed to human trials by early 2001. We are also developing through this venture an antibody-based immunotherapy for prostate cancer. We believe that these product candidates, if successfully developed, could play an important role in - -------------------------------------------------------------------------------- 12 - -------------------------------------------------------------------------------- the treatment of prostate cancer. We believe there are significant unmet needs for treatment and monitoring of this disease. In addition, we intend to evaluate the utility of these therapies, as an anti-angiogenesis approach, in other cancers where PSMA is expressed. The joint venture is owned equally by Progenics and us. We have exclusively licensed to the joint venture certain immunotherapeutic applications of our PSMA patents and know-how. Progenics will fund up to $3 million of development costs of the program, which we anticipate will be adequate to fund the project through the pre-clinical stage. We and Progenics will share costs of the program in excess of the initial $3 million. Progenics is responsible for pre- clinical and clinical development of product candidates. We have the exclusive North American marketing rights to products developed by the venture and anticipate marketing any products developed. We anticipate marketing these products with our own sales force and will be reimbursed by the joint venture for these costs. We will split the revenues minus marketing expenses equally with Progenics on any products developed by the venture. In connection with the licensing of the PSMA technology to the joint venture, we will receive $2 million in payments, of which $1 million was received during 1999, and the balance will be received by the end of 2001. We have exclusively licensed in vivo immunotherapy rights to PSMA to this joint venture. We licensed PSMA through our subsidiary, Prostagen, Inc., to Northwest Biotherapeutics, Inc., for development of in vitro dendritic cell processing immunotherapy to prostate cancer. That license remains in effect. Prostagen also licensed exclusive PSMA manufacturing rights for immunotherapy to Northwest Clinicals, LLC, a corporation formed and co-owned by Northwest Biotherapeutics and Prostagen. We are currently engaged in a dispute with Northwest Biotherapeutics as to the extent of these rights and whether Northwest Clinicals has complied with the terms of the license. If Northwest Clinicals holds these manufacturing rights, we would be required to purchase PSMA for immunotherapy products from this co-owned corporation. Certain rights to exclusive marketing in our Progenics venture could be affected if we do not obtain the ability to manufacture PSMA independently of Northwest Clinicals. Our joint venture agreement with Progenics requires that we reacquire our PSMA manufacturing rights by June 15, 2000, or the following will occur: .Progenics will acquire co-exclusive marketing rights with us; .we will be obligated to contribute an additional $500,000 to the joint venture to fund research and development; and .Progenics' research and development expense obligation will be reduced to $2.5 million. In addition, we have agreed to indemnify each party to the joint venture for all costs relating to our inability to require our PSMA manufacturing rights. We are in negotiations with Northwest Clinicals to terminate the license, however we cannot assure you that we will reacquire our PSMA marketing rights and avoid the provisions described above. We have also entered into a letter of intent to obtain an exclusive, world-wide license from Molecular Staging, Inc. for technology to be used in developing in vitro diagnostic tests using both PSMA and PSA. Molecular Staging's Rolling Circle Amplification Technology is a novel, patented process that creates new diagnostic opportunities. Rolling Circle Amplification Technology is a highly sensitive, quantitative and efficient amplification method that allows the user to detect the presence of target molecules in a wide array of testing formats. It offers a practical method that allows solid phase recognition and detection of target molecules either directly, on a cell or on a biochip. Our initial goal is to deploy Molecular Staging's technology in a new diagnostic kit for managing prostate cancer based on detection of PSMA. We anticipate initiating a clinical trial of the assay this year. We also plan to develop assays for diagnosis of other tumors where PSMA is found in associated neovasculature. Market potential Diagnostic Screening Tests The measurement of prostate specific antigen, or PSA, levels in the circulation is the only in vitro test approved for the diagnosis, monitoring and screening of prostate cancer in the United States. The American Cancer Society, American College of Radiology and American Urologic Association have recommended PSA for use in screening of asymptomatic men, in combination with a digital rectal examination. However, in 1997, the American College of Physicians concluded that there was no evidence of benefit from routine screening using PSA and recommended against regular screening using this test. The American Urologic Association, which supports screening tests for eligible men over 50 years of age, claims that PSA and digital - -------------------------------------------------------------------------------- 13 - -------------------------------------------------------------------------------- rectal examination screening increases the rate of early cancer diagnosis from 30% to 40% for those not screened to 70% to 85% for those screened with PSA. Even though a PSA test combined with a digital rectal exam increases the chances of detection, the method generates a high number of false positives that often lead to unnecessary biopsies. We believe new tests based on PSMA may offer higher specificity in diagnosing primary and recurrent prostate cancer. The US market for PSA tests is estimated to be approximately $170 million. This estimate is based on the 1997 figures of the government Health Care Finance Administration, where there were 7.5 million diagnostic tests performed plus 21.4 million screening PSA tests. In addition, approximately one million biopsies are performed annually in the United States to confirm the presence of prostate cancer following a screening. While normal ranges for PSA test values have been established, significant inter-test variability exists and detection of ultra-low levels of PSA which allows earlier diagnosis is not feasible with current technology. Furthermore, the correlation of PSA values and prostatic biopsy results has failed to achieve a level of predictability which avoids unnecessary biopsies. A serum test for PSMA may provide more relevant prognostic value and improve the accuracy of evaluating prostate cancer. Immunotherapy/Vaccines We are developing as part of our collaboration with Progenics, immunotherapeutics for treatment of prostate cancer. We believe immunotherapy is a particularly attractive alternative for the treatment of advanced prostate cancer and for prevention of recurrent disease by eliminating metastases because: .advanced prostate cancer is a slow growing malignancy and, therefore, is not effectively treated with high-intensity cytotoxic chemotherapy; and .PSMA has been identified as an antigen linked to prostate cancer that may serve as an excellent immunotherapy target. We believe that there are approximately 80,000 to 100,000 men in the United States who are at risk for recurrent disease or who have advanced prostate cancer. We estimate that the potential market for a vaccine or antibody-based treatment is greater than $500 million annually in the United States. Our approved products We have three marketed products, each of which have been approved by the FDA: ProstaScint, used as an imaging agent in the diagnosis of prostate cancer; OncoScint CR/OV, used as a diagnostic imaging agent of colorectal and ovarian cancer; and Quadramet, used for relief of bone pain from cancer that has spread to the bone from the primary tumor. Cancer diagnostic imaging products Our cancer diagnostic products, ProstaScint and OncoScint CR/OV, are monoclonal antibody-based imaging agents for prostate, colorectal and ovarian cancers. These products utilize our proprietary targeted delivery system, employing whole monoclonal antibodies, which directs the radioisotope Indium/111/ to malignant tumor sites. A radioisotope is an element which, because of nuclear instability, undergoes radioactive decay and emits radiation. The imaging products are supplied to hospitals, diagnostic imaging centers and radiopharmacies. During an imaging procedure, the radiolabeled monoclonal antibody product is administered intravenously into the patient. The antibody travels through the bloodstream and binds to specific antigens expressed by the tumors being studied. The radioactivity from the isotope that has been attached to the antibody can be detected from outside the body by a gamma camera. Gamma cameras are universally found in all nuclear medicine departments. The image captured by the camera identifies the existence, location and extent of the radio- labelled pharmaceutical thus identifying the sites of tumor. Based on clinical studies conducted to date by physicians on our behalf, the imaging agents may provide new and useful information not available from other diagnostic modalities regarding the existence, location and extent of a specific disease throughout the body. We believe that this information has the potential to affect the way physicians manage their patients' individual treatments. ProstaScint ProstaScint is a diagnostic monoclonal antibody linked to Indium/111/ which specifically targets PSMA. Due to the selective expression of PSMA, the ProstaScint imaging procedure can detect the extent and spread of - -------------------------------------------------------------------------------- 14 - -------------------------------------------------------------------------------- prostate cancer in the body. ProstaScint is approved by the FDA for marketing in two clinical settings: as a diagnostic imaging agent in newly diagnosed patients with biopsy-proven prostate cancer thought to be clinically localized after standard diagnostic evaluation and who are at high risk for spread of their disease to pelvic lymph nodes and for use in post-prostatectomy patients in whom there is a high suspicion that the cancer has recurred. According to the American Cancer Society, about 179,000 American men were diagnosed with prostate cancer in 1998, of whom approximately 20% are at high risk for metastatic spread of their disease. In addition, estimates indicate that in 1999, 40,000 to 60,000 patients previously treated for prostate cancer developed symptoms of recurrent cancer which had not yet progressed to the point of skeletal involvement. We believe that there are approximately 75,000 to 100,000 patients with prostate cancer in the United States who are candidates, based on current indications, to receive a ProstaScint scan each year. We believe that the potential market for ProstaScint is over $50 million in the United States. When deciding on an initial course of therapy for prostate cancer, physicians must first determine the extent of disease in the patient. The accuracy of this information is vital in deciding upon an appropriate course of therapy. Prior to the availability of ProstaScint, determining whether newly diagnosed disease was limited to the prostate or had spread beyond the gland was based upon statistical inference from the biopsy appearance of the tumor and the patient's serum level of PSA. Conventional imaging methods are all relatively insensitive because they rely on identifying significant changes to normal anatomic structure to indicate the presence of disease. The ProstaScint disease scan images are based upon expression of the PSMA molecule and, therefore, can identify disease not readily detectable with conventional procedures. In the United States, following initial therapy, prostate cancer patients are monitored to ascertain changes in the level of PSA. In this setting, a rise in PSA is evidence of recurrence of the patient's prostate cancer. Knowledge of the extent and location of disease recurrence is important in choosing the most appropriate form of treatment. The National Comprehensive Cancer Network, a consortium of leading cancer hospitals, recently included ProstaScint in its Practice Guidelines for Prostate Cancer. These guidelines are published to serve as the practice standard for the oncology community. We also believe that ProstaScint may be useful for imaging the extent of prostate cancer within the prostate gland. This information may be useful to help guide specific treatments such as prostate brachytherapy or highly targeted external beam radiation. Brachytherapy is a treatment which implants radiation sources into the site of the tumor; while external beam radiation utilizes a beam of radiation directed at the cancer from a source outside the body. We estimate that approximately half of newly diagnosed prostate cancer patients will undergo a form of radiation treatment. The current generation of imaging technologies enables physicians to view ProstaScint scans incorporated with conventional imaging modalities. We believe these technologies will create greater acceptance of ProstaScint. There are no other agents approved for the imaging and diagnosis of prostate cancer. OncoScint CR/OV OncoScint CR/OV is approved by the FDA for single use with other appropriate, commercially available diagnostic tests, to locate malignancies outside the liver in patients with known colorectal or ovarian cancer. OncoScint CR/OV is also approved for sale in eleven European countries and Canada. To date, OncoScint CR/OV has not realized substantial sales. We believe this product is effective in imaging both primary and metastatic colorectal and ovarian tumors. However, this product has not yet been widely adopted by physicians for patients with these conditions. We market OncoScint CR/OV in the United States directly through our own sales force. The market for OncoScint CR/OV for colorectal cancer diagnosis has been negatively affected by positron emission tomography, or "PET", scans. The sensitivity of the PET scan in colon cancer appears to be similar or higher than the OncoScint CR/OV scan. However, PET studies are very expensive and available only at highly specialized institutions. We are emphasizing marketing of OncoScint CR/OV for the recurrent ovarian setting as an aid in determining whether second look surgery, following initial surgery, is advisable. Cancer therapeutic product Quadramet Quadramet, a proprietary cancer therapeutic agent, is approved by the FDA for the relief of pain in patients with metastatic bone lesions that image on conventional bone scan, a routinely performed nuclear medicine - -------------------------------------------------------------------------------- 15 - -------------------------------------------------------------------------------- procedure. Quadramet consists of a radioactive isotope, Samarium/153/, which emits beta radiation, and a chelating agent, EDTMP, which targets the drug to sites of new bone formation. Once tumors have metastasized to the skeleton, they continue to grow and cause destruction of the adjacent bone. This erosion of bone stimulates new bone formation which encircles the metastatic tumor. By targeting these areas of bone formation, Quadramet delivers site-specific radiation which may result in significant pain reduction. According to American Cancer Society and National Cancer Institute statistics, approximately 600,000 new cases of cancer that typically metastasize to bone occurred in the United States in 1997. We believe that over 200,000 patients each year will suffer from bone pain that is severe enough to require intervention. Based on this information, we believe that the market for Quadramet is $80 million in the United States based on 20% of this patient population. Quadramet has many characteristics which we believe are advantageous for the treatment of cancer bone pain, including early onset of pain relief, lasting up to four months with a single injection; predictability of recovery from bone marrow toxicity; ease of administration and length of pain relief. In addition, due to its pharmacokinetic properties, the radioactive plasma half-life is only five to six hours. Quadramet is administered as a single intravenous injection on an outpatient basis and directly targets sites of new bone formation which include those areas in the skeleton that have been invaded by metastatic tumors. Quadramet exhibits high and very selective uptake in bone with little or no detectable accumulation in soft tissue. Berlex has initiated a Phase III clinical trial to evaluate the extension of the use of Quadramet to patients whose bone metastases can be visualized on conventional bone scan, but who are not yet experiencing pain from these metastases. We believe earlier use in the care of cancer patients could expand the potential market for Quadramet significantly. Our continuation of these trials will depend upon their progress and success of the trial, and on decisions by our marketing partner Berlex to continue to fund the trial. If this trial is successful, we plan to seek expansion of the FDA approved indication of Quadramet for this therapeutic use in delaying progression of the onset of pain. Current competitive treatments for severe bone cancer pain include narcotic analgesics, external beam radiation therapy, Metastron and Novantrone. The first non-cancer use of Quadramet under investigation is the treatment of patients with refractory rheumatoid arthritis. We believe Quadramet can target the diseased joints and provide a high but localized dose of radiation to the area which may relieve the symptoms of refractory rheumatoid arthritis. We are determining how to proceed with this possible use based upon analyzing the data from a Phase I dose escalation study. Our strategy Our objective is to be a leading oncology drug discovery and development company. We have and intend to continue to market, co-market or license our oncology products in the future to become an oncology-focused specialty biopharmaceutical company. We believe that we are well positioned to create a strong oncology product pipeline and we will be seeking, on an opportunistic basis, strategic acquisitions that will complement our existing products. The key elements of our oncology strategy are: .to capitalize on the unique biological characteristics of PSMA for the diagnosis and treatment of major cancers; .greater penetration of existing oncology markets by pursuing an integrated patient approach; .expansion of product sales into new geographic markets; .seeking new indications of our existing products; - -------------------------------------------------------------------------------- 16 - -------------------------------------------------------------------------------- .leveraging our oncology and urology sales force by adding complementary products through in-licensing, acquisitions or other marketing arrangements; and .reducing risk by developing a broad portfolio of products. Oncology product sales, marketing and distribution We currently employ a 24 person sales and marketing force with a targeted force of 27 persons. The primary objective of the sales force is to make sales calls to urologists and, as a secondary audience, to radiation oncologists. We also employ technical specialists who assist in the training of nuclear medicine technologists and nuclear medicine physicians, and qualify nuclear imaging centers to conduct ProstaScint imaging. We depend on our own sales force for our ProstaScint and OncoScint CR/OV products and on Berlex for US sales, marketing and distribution of Quadramet. Distribution of ProstaScint and OncoScint CR/OV is handled by outside contractors and Berlex and DuPont handle the distribution of Quadramet. Historically, ProstaScint has been marketed under a co-marketing arrangement with the urological division of CR Bard, Inc., a marketer of a broad range of urology products. In 1999, we reached an agreement with Bard to phase out the co-marketing agreement so that we could undertake direct marketing responsibility for the product. We took this step because of our view that a highly trained and dedicated internal sales force will be able to market our high technology products most effectively and to build a marketing capability for possible future products. The transition will be complete by mid-year 2000. In the meantime, Bard will continue to make sales calls for the product and will assist in transition. ProstaScint is a technique-dependent product that requires a high degree of proficiency in nuclear imaging technology in order to interpret the scan. We have established a network of accredited nuclear medicine imaging centers through our PIE, or Partners in Excellence, Program. Each PIE site receives rigorous training, undergoes proficiency testing and is subject to ongoing quality assurance protocols. As of March 1, 2000, there were over three hundred PIE sites, including a majority of the National Cancer Institute-designated Comprehensive Cancer Centers. ProstaScint may only be used at PIE sites. We plan to add PIE sites on a selective basis in order to ensure that new sites are adequately qualified and committed to a minimum number of scans for maintaining a high level of competence. At the present time, we bear partial expense of qualification of each site. In 1999, we reacquired rights to our ProstaScint and OncoScint CR/OV products in Canada, which were to be marketed by Faulding (Canada), Inc. We did not pay for the return of these rights. OncoScint CR/OV is approved by the Canadian Health Care Branch and ProstaScint is under expedited review. We believe these products may be marketed to major cancer centers in Canada and will not require a significant level of resources. However, we cannot be certain that ProstaScint will be approved in Canada, that these products will be reimbursable under the Canadian health care system or reimbursed on favorable economic terms, or that they will be accepted by physicians. We plan to file applications for regulatory approval for ProstaScint in Europe during 2000. Since May 1994, we have been the sole marketer of OncoScint CR/OV in the US. We also intend to market OncoScint CR/OV in Canada. In 1996, we entered into a distribution agreement with CIS biointernational, granting to CIS biointernational the exclusive right to distribute and sell OncoScint CR/OV worldwide, except for in the United States and Canada. In October 1998, we entered into an exclusive agreement with Berlex for the marketing of Quadramet, after terminating our previous marketing relationship with the DuPont Merck radiopharmaceutical division. Berlex re-launched Quadramet in March 1999. Berlex maintains a sales force that targets its sales efforts on the oncological community. Pursuant to our agreement with Berlex, we are entitled to royalty payments based on net sales of the Quadramet product and milestone payments based upon sales levels achieved. During the first year of launch, Quadramet was marketed principally to the nuclear medicine community, which administers the treatment to patients. However, the treatment is more typically prescribed by caregiving physicians, including medical oncologists, radiation oncologists and urologists. We believe that successful commercialization of Quadramet will depend upon marketing to these referring physicians. - -------------------------------------------------------------------------------- 17 - -------------------------------------------------------------------------------- We plan to market Quadramet in Canada. We paid no costs to obtain these marketing rights. We are evaluating whether to market Quadramet directly in Canada or through a marketing partner. We have no significant foreign revenues. Although we plan to sell our products internationally, we cannot assure you that the products will be accepted by the foreign medical community or that we will be able to sell at adequate prices. We will incur expenses if we sell our products in foreign countries, and if our products do not generate adequate revenues we may not be able to recover these expenses or a significant return. Strategic alliances Progenics Pharmaceuticals, Inc. In 1999, we entered a joint venture with Progenics Pharmaceuticals, Inc. to develop products utilizing our proprietary PSMA technology. The first of these products, currently under development, is a therapeutic prostate cancer vaccine utilizing a gene-based approach. Our current plans are that this approach, if successful in pre-clinical development, will proceed to human trials by early 2001. We are also developing through this venture antibody based immunotherapy for prostate cancer. We believe that these drugs, if successfully developed, could play an important role in the treatment or prevention of advanced prostate cancer. We believe there are significant unmet needs for treatment of this disease. The Dow Chemical Company In March 1993, we obtained an exclusive license from The Dow Chemical Company to North American rights to use Quadramet as a therapeutic radiopharmaceutical for metabolic bone disease or tumor regression for cancer caused by metastatic or primary cancer in bone in humans, and for the treatment of disease characterized by osteoblastic response in humans. In November 1998, Dow also extended our exclusive rights for use of Quadramet in treating advanced rheumatoid arthritis to Europe, Japan and other countries in addition to North America. Memorial Sloan-Kettering Cancer Center In 1993, we began a development program with Memorial Sloan-Kettering Cancer Center involving PSMA and our proprietary monoclonal antibody. In November 1996, we exercised an option for and obtained an exclusive worldwide license to this technology. Molecular Staging, Inc. We have entered into a letter of intent to obtain an exclusive, world-wide license from privately held Molecular Staging, Inc. for technology to be used in developing in vitro diagnostic tests utilizing PSMA and PSA. We anticipate that the novel technology applications in conjunction with our technology, may allow entry into the domestic market for PSA-based testing. Elan Corp. plc We entered into a license agreement granting Elan worldwide rights to a group of peptides and associated technology for orally administered drugs that are transported across the gastrointestinal epithelium, as well as rights to other orally delivered drugs derived from the research program. Elan is responsible for the further development and commercialization of this technology. We are entitled to royalties from sales of any product developed and commercialized based on this technology. PRODUCT CONTRIBUTION TO REVENUES Our currently marketed products and other sources of income constitute a single business segment. ProstaScint and Quadramet account for a significant percentage of our product-related revenues. For the year ended December 31, 1999, revenues related to ProstaScint and Quadramet accounted for approximately 79% and 13%, respectively, of our product related revenues. - -------------------------------------------------------------------------------- 18 - -------------------------------------------------------------------------------- RESEARCH AND DEVELOPMENT Our research and development expenditures include projects we conducted and payments we made to customer sponsored research programs. Our expenses for research and development activities, including customer sponsored programs, were: .1999--$3.8 million .1998--$10.0 million .1997--$17.9 million Research and development expenditures for customer sponsored programs were: .1999--$0.2 million .1998--$0.2 million .1997--$1.1 million We intend to pursue research and development activities having commercial potential and to review all of our programs to determine whether possible market opportunities, near and longer term, provide an adequate return to justify the commitment of human and economic resources to their initiation or continuation. We expect a significant increase in our research and development expenditures during 2000 for development of proteomics technology, for development of assays utilizing PSMA for diagnostics, and for our share of expenses for the development with Progenics Pharmaceuticals, Inc. of immunotherapies for prostate and other cancers. COMPETITION The biotechnology and pharmaceutical industries are subject to intense competition, including competition from large pharmaceutical companies, biotechnology companies and other companies, universities and research institutions. Our existing therapeutic products compete with a wide variety of other firms, including firms that provide products used in more traditional treatments or therapies, such as external beam radiation, chemotherapy agents and narcotic analgesics. In addition, our existing and potential competitors may be able to develop technologies that are as effective as, or more effective than those offered by us, which would render our products noncompetitive or obsolete. Moreover, many of our existing and potential competitors have substantially greater financial, marketing, sales, manufacturing, distribution and technological resources than we do, which may allow these competitors to develop new products in advance of us. Our existing and potential competitors may be in the process of seeking FDA or foreign regulatory approval for their respective products or may also enjoy substantial advantages over us in terms of research and development expertise, experience in conducting clinical trials, experience in regulatory matters, manufacturing efficiency, name recognition, sales and marketing expertise and distribution channels. We expect competition to intensify in the fields in which we are involved as technical advances in such fields are made and become more widely known. We can not assure you, however, that we or our collaborative partners will be able to develop our products successfully or that we will obtain patents to provide protection against competitors. Moreover, we cannot assure you that our competitors will not succeed in developing therapeutic products that circumvent our products, that these competitors will not succeed in developing technologies or products that are more effective than those developed by us. In addition, many of these companies may have more experience in establishing third-party reimbursement for their products. Accordingly, we cannot assure you that we will be able to compete effectively against existing or potential competitors or that competition will not have a material adverse effect on our business, financial condition and results of operations. - -------------------------------------------------------------------------------- 19 - -------------------------------------------------------------------------------- MANUFACTURING ProstaScint and OncoScint CR/OV are manufactured at a current good manufacturing practices, or cGMP, compliant manufacturing facility in Princeton, New Jersey which is operated by Bard BioPharma L.P., a subsidiary of Purdue BioPharma. We have access to the facility for continued manufacture of these products until January 2002. An Establishment License Application for the facility was approved by the FDA for the manufacture of ProstaScint in October 1996 and for OncoScint CR/OV in December 1992. Our facility is subject to routine inspections by the FDA to assure compliance with current Good Manufacturing Practices. As a result of an inspection held in April through May of 1999, we received an FDA Warning Letter which identified a number of deviations from FDA requirements and required their correction. We have adopted corrective measures for each of the concerns identified and in January 2000 we received a letter from the FDA informing us that our corrective actions appeared to be adequate. We expect that this facility will allow us to meet our projected production requirements for ProstaScint and OncoScint CR/OV for the foreseeable future. We do not anticipate that this arrangement will be continued, and are actively engaged in discussions with other third party manufacturers for these products. Any new manufacturing arrangement will be subject to FDA oversight, and qualification of a new manufacturer with the FDA could take a significant amount of time. Our products must be manufactured in compliance with regulatory requirements and at commercially acceptable costs. We believe that our manufacturing arrangements currently meet our needs. We believe that outsourcing manufacturing operations currently represents the most cost effective method of manufacturing our products. Raw materials and suppliers The active raw materials used for the manufacture of our products include antibodies. OncoScint CR/OV, uses a monoclonal antibody which is being supplied in commercial quantities by a single contract manufacturer, Lonza Biologics. We anticipate that Lonza Biologics will be able to meet our needs for commercial quantities of monoclonal antibody. We currently have arrangements necessary for the production of the monoclonal antibody for ProstaScint. Certain components of Quadramet, particularly Samarium/153/ and EDTMP, are provided to DuPont by sole source suppliers. Due to its radiochemical properties, Samarium/153/ must be produced on a weekly basis by its supplier in order to meet DuPont's manufacturing requirements. On one occasion, DuPont was unable to manufacture Quadramet on a timely basis due to the failure of the supplier to provide an adequate supply of Samarium/153/. In the event that DuPont is unable to obtain sufficient quantities of the components on commercially reasonable terms, or in a timely manner, DuPont would be unable to manufacture Quadramet on a timely and cost-competitive basis. In addition, sources for certain of these components may not be readily available. Thus, the loss by DuPont of its sources for such components could result in an interruption of supply and could have a material adverse effect on our business, financial condition and results of operations. PATENTS AND PROPRIETARY RIGHTS Consistent with industry practice, we have a policy of using patent and trade secret protection to preserve our right to exploit the results of our research and development activities and, to the extent it may be necessary or advisable, to exclude others from appropriating our proprietary technology. Our policy is to aggressively protect our proprietary technology by selectively seeking patent protection in a worldwide program. In addition to the United States, we file patent applications in Canada, major European countries, Japan and additional foreign countries on a selective basis to protect inventions important to the development of our business. We believe that the countries in which we have obtained and are seeking patent coverage for our proprietary technology represent the major focus of the pharmaceutical industry in which we and certain of our licensees will market our respective products. We hold 38 current US patents and 66 current foreign patents. We have filed and currently have pending a number of additional US and foreign patent applications, relating to certain aspects of our technology for - -------------------------------------------------------------------------------- 20 - -------------------------------------------------------------------------------- diagnostic and therapeutic products, and the methods for their production and use. We intend to file patent applications with respect to subsequent developments and improvements, when we believe such protection is in our the best interest. We are the exclusive licensee of certain patents and patent applications owned by the University of North Carolina at Chapel Hill, covering parts of the proteomics technology. These include seven issued US patents relating to our phage display libraries, methods of using phage display libraries to identify peptides that bind to a target molecule of interest, as well as peptides that bind to certain molecules. We hold an exclusive license under certain patents and patent applications held by the Memorial Sloan-Kettering Institute covering PSMA. We are the exclusive licensee of certain US patents and applications held by Dow covering Quadramet. Among our patents are two issued US patents relating to peptides that bind to certain molecules expressed on cancer cells. We also co-own with the University of North Carolina at Chapel Hill an issued US patent covering certain polypeptides that contain a WW domain. We may be entitled under certain circumstances to seek extension of the terms of our patents. We also rely upon, and intend to continue to rely upon, trade secrets, unpatented proprietary know-how and continuing technological innovation to develop and maintain our competitive position. We typically enter into confidentiality agreements with our licensees and any scientific consultants, and each of our employees has entered into agreements requiring that they forbear from disclosing confidential information, and in some cases assign to us all rights in any inventions made while in our employ. We believe that our valuable proprietary information is protected to the fullest extent practicable; however, we cannot assure you that: .additional patents will be issued to us in any or all appropriate jurisdictions; .litigation will not be commenced seeking to challenge our patent protection or that challenges will not be successful; .our processes or products do not or will not infringe upon the patents of third parties; or .the scope of patents issued will successfully prevent third parties from developing similar and competitive products. The technology applicable to our products is developing rapidly. A substantial number of patents have been issued to other biotechnology companies. In addition, competitors have filed applications for, or have been issued, patents and may obtain additional patents and proprietary rights relating to products or processes that are competitive with ours. In addition, others may have filed patent applications and may have been issued patents to products and to technologies potentially useful to us or necessary to commercialize our products or to achieve our business goals. We cannot assure you that we will be able to obtain licenses of patents on acceptable terms. We cannot predict how any patent litigation will affect our efforts to develop, manufacture or market our products. We are defendants in litigation filed against us in the United States Federal Court for the District of New Jersey by M. David Goldenberg and Immunomedics, Inc. We were served with this lawsuit on March 17, 2000. The litigation claims that our ProstaScint product infringes a patent purportedly held by the plaintiffs. We believe that the purported patent sought to be enforced in the litigation has now expired. As a result, the claim, even if successful, would not result in a bar of the continued sale of ProstaScint or affect any other of our products or technology. However, given the uncertainty associated with litigation, we cannot give any assurance that the litigation could not result in a material expenditure to us. GOVERNMENT REGULATION AND PRODUCT TESTING The development, manufacture and sale of medical products utilizing our technology are governed by a variety of statutes and regulations in the United States and by comparable laws and agency regulations in most foreign countries. - -------------------------------------------------------------------------------- 21 - -------------------------------------------------------------------------------- The Food, Drug and Cosmetic Act requires that our products be manufactured in FDA registered facilities subject to inspection. The manufacturer must be in compliance with cGMP which imposes certain procedural and documentation requirements upon us and our manufacturing partners with respect to manufacturing and quality control activities. Noncompliance with cGMP can result in, among other things, fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for drugs, withdrawal of marketing approvals and criminal prosecution. Any failure by us or our manufacturing partners to comply with the requirements of cGMP could have a material adverse effect on our business, financial condition and results of operations. Diagnostic and therapeutic products in the United States are regulated by the Food Drug and Cosmetic Act and the Public Health Service Act, and by FDA rules and regulations promulgated thereunder. These laws and regulations require carefully controlled research and testing of products, government notification, review and/or approval prior to marketing the products, inspection and/or licensing of manufacturing and production facilities, adherence to Good Manufacturing Practices, compliance with product specifications, labeling, and other applicable regulations. Medical products that we develop or intend to market are subject to substantial governmental regulation and may be classified as new drugs or biologics under the Food Drug and Cosmetic Act. The FDA and similar health authorities in most other countries must approve or license the diagnostic and therapeutic products before they can be commercially marketed. In order to obtain FDA approval, an applicant must submit, as relevant for the particular product, proof of safety, purity, potency and efficacy. In most cases this proof entails extensive pre- clinical, clinical and laboratory studies. The studies and the preparation and prosecution of those applications by the FDA is expensive and time consuming, and may take several years to complete. Difficulties or unanticipated costs may be encountered by us or our licensees in their respective efforts to secure necessary governmental approval or licenses, which could delay or preclude us or our licensees from marketing their products. Limited indications for use or other conditions could also be placed on any approvals that could restrict the commercial applications of products. With respect to patented products or technologies, delays imposed by the government approval process may materially reduce the period during which we will have the exclusive right to exploit them, because patent protection lasts only for a limited time, beginning on the date the patent is first granted in the case of US patent applications filed prior to June 6, 1995, and when the patent application is first filed in the case of patent applications filed in the United States after June 6, 1995, and applications filed in the European Economic Community. We intend to seek to maximize the useful life of our patents under the Patent Term Restoration Act of 1984 in the United States and under similar laws if available in other countries. The majority of our diagnostic and therapeutic products will likely be classified as new drugs or biologics and will be evaluated in a series of in vitro, non-clinical and human clinical testing. Typically, clinical testing is performed in three phases to further evaluate the safety and efficacy of the drug. In Phase I, a product is tested in a small number of patients primarily for safety at one or more dosages. Phase II evaluates, in addition to safety, the efficacy of the product against particular diseases in a patient population that is generally somewhat large than Phase I. Clinical trials of certain diagnostic and cancer therapeutic agents frequently combine Phase I and Phase II into a single Phase I/II study. In Phase III, the product is evaluated in a larger patient population sufficient to generate data to support a claim of safety and efficacy within the meaning of the Food Drug and Cosmetic Act. Permission by the FDA must be obtained before clinical testing can be initiated within the United States. This permission is obtained by submission of an Investigational New Drug application which typically includes the results of in vitro and non-clinical testing and any previous human testing done elsewhere. The FDA has 30 days to review the information submitted and makes a final decision whether to permit clinical testing with the drug or biologic. However, this process can take longer if the FDA raises questions or asks for additional information regarding the Investigational New Drug application. A similar procedure applies to medical device and diagnostic products. After completion of in vitro, non-clinical and clinical testing, authorization to market a drug or biologic must be granted by FDA. The FDA grants permission to market through the review and approval of either a New Drug Application for drugs or a Biologic License Application for biologics. These applications provide detailed information on the results of the safety and efficacy of the drug conducted both in animals and humans. Additionally, information is submitted describing the facilities and procedures for manufacturing the drug or biologic. - -------------------------------------------------------------------------------- 22 - -------------------------------------------------------------------------------- The Prescription Drug User Fee Act and subsequently, the Food and Drug Administration Modernization Act of 1997 have established application review times for both New Drug Applications and Biologic License Applications. For new drugs and biologics, FDA is to review and make a recommendation for approval within 12 months. For drugs and biologics designated as "priority," the review time is six months. This review process, however, can and frequently does exceed these targets. Once a drug or biologic is approved, we are required to maintain approval status of the products by providing certain safety and efficacy information at specified intervals. Additionally, we are required to meet other requirements specified by the Food Drug and Cosmetic Act including but not limited to the manufacture of products, labeling and promotional materials and the maintenance of other records and reports. Failure to comply with these requirements or the occurrence of unanticipated safety effects from the products during commercial marketing, could lead to the need for product recall, or FDA initiated action, which could delay further marketing until the products are brought into compliance. Similar laws and regulations apply in most foreign countries where these products are likely to be marketed. Orphan Drug Act The Orphan Drug Act is intended to provide incentives to manufacturers to develop and market drugs for rare diseases or conditions affecting fewer than 200,000 persons in the United States at the time of application for orphan drug designation. A drug that receives orphan drug designation and is the first product to receive FDA marketing approval for a particular indication is entitled to orphan drug status, a seven-year exclusive marketing period in the United States for that indication. Clinical testing requirements for orphan drugs are the same as those for products that have not received orphan drug designation. OncoScint CR/OV has received an orphan drug designation for the detection of ovarian carcinoma. Under the Orphan Drug Act, the FDA cannot approve any application by another party to market an identical product for treatment of an identical indication unless the party has a license from the holder of orphan drug status, or the holder of orphan drug status is unable to assure an adequate supply of the drug. However, a drug that is considered by FDA to be different from a particular orphan drug is not barred from sale in the United States during the seven-year exclusive marketing period even if it receives marketing approval for the same product claim. Other regulations In addition to regulations enforced by FDA, we are also subject to regulation under the state and local authorities and other federal statutes and agencies including the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and the Nuclear Regulatory Commission. Foreign regulatory approval The regulatory approval process in Europe has changed over the past few years. There are two regulatory approval processes in Europe for products developed by us. Beginning in 1995, the centralized procedure became mandatory for all biotechnology products. Under this regulatory scheme, the application is reviewed by two scientific project leaders referred to as the rapporteur and co-rapporteur, respectively. Their roles are to prepare assessment reports of safety and efficacy and for recommending the approval for full European Union marketing. The second regulatory scheme, referred to as the Mutual Recognition Procedure, is a process whereby a product's national registration in one member state within the European Union may be "mutually recognized" by other member states within the European Union. Substantial requirements, comparable in many respects to those imposed under the Food Drug and Cosmetic Act, will have to be met before commercial sale is permissible in most countries. There can be no assurance, however, as to whether or when governmental approvals, other than those already obtained, will be obtained or as to the terms or scope of those approvals. HEALTH CARE REIMBURSEMENT Our business, financial condition and results of operations will continue to be affected by the efforts of governments and third-party payors to contain or reduce the costs of healthcare through various means. There have been, and we expect that there will continue to be, federal and state proposals to implement government control of pricing and profitability of therapeutic and diagnostic imaging agents. In addition, an - -------------------------------------------------------------------------------- 23 - -------------------------------------------------------------------------------- increasing emphasis on managed care has and will continue to increase the pressure on pricing of these products. While we cannot predict whether legislative or regulatory proposals will be adopted or the effects proposals or managed care efforts may have on our business, the announcement of proposals and the adoption of proposals or efforts could have a material adverse effect on our business, financial condition and results of operations. Further, to the extent proposals or efforts have a material adverse effect on other companies that are our prospective corporate partners, our ability to establish strategic alliances may be materially and adversely affected. In certain foreign markets, the pricing and profitability of our products generally are subject to government controls. Sales of our products depend in part on the availability of reimbursement to the consumer from third-party payors, including Medicare, Medicaid, and private health insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. To the extent we succeed in bringing products to market, we cannot assure you that these products will be considered cost-effective and that reimbursement to consumers will be available or sufficient to allow us to sell our products on a competitive basis. Reimbursement by a third-party payor may depend on a number of factors, including the payor's determination that our products are clinically useful and cost-effective, medically necessary and not experimental or investigational. Since reimbursement approval is required from each payor individually, seeking approvals can be a time consuming and costly process which could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor separately. If we or our collaborators are unable to secure adequate third party reimbursement for our products, there would be material adverse effect on its business, financial condition and results of operations. CUSTOMERS During the year ended December 31, 1999, we received 56% of our total product related, license and contract revenues from four customers: Berlex Laboratories, Inc., Progenics Pharmaceuticals, Inc. and the radiopharmacy chains of Medi-Physics and Mallinckrodt Medical, Inc. EMPLOYEES As of March 1, 2000, we employed 68 persons full-time, of whom 14 were in our proteomics subsidiary, seven in operations and manufacturing, 12 in clinical and regulatory activities, 11 in administration and management, and 24 in marketing and sales. We believe that we have been successful in attracting skilled and experienced employees. None of our employees is covered by a collective bargaining agreement. All of our employees have executed confidentiality agreements. We consider relations with our employees to be excellent. - -------------------------------------------------------------------------------- 24 Important Factors Regarding Forward Looking Statements. - -------------------------------------------------------------------------------- This report includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties that could cause our actual results to vary materially from those reflected in the forward-looking statements. Words such as "believes," "anticipates," "plans," "estimates," "future," "could," "may," "should," "expect," "envision," "potentially," variations of such words and similar expressions are intended to identify such forward-looking statements. Factors that could cause or contribute to these differences include those discussed previously under the caption "Risk factors" and elsewhere in this report. Investors are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. We disclaim any intent or obligation to update these forward-looking statements. You should not unduly rely on forward-looking statements contained or incorporated by reference in this report. Actual results or outcomes may differ materially from those predicted in our forward-looking statements due to the risks and uncertainties inherent in our business, including among other items, risks and uncertainties in: .our ability to successfully execute our business model; .our ability to compete successfully against direct and indirect competitors; .our ability to launch our proteomics program successfully; .market acceptance of and continuing demand for our products; .our ability to develop new products; .our ability to protect our intellectual property, including patents and know- how; .our ability to obtain additional financing to support our operations; .the continuation of our corporate collaborations; and .changing market conditions and other risks detailed below. You should read and interpret any forward-looking statements together with the following documents: .this Annual Report on Form 10-K including the risk factors contained in this report under the caption "Risk factors"; and .our other filings with the Securities and Exchange Commission. Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made. - -------------------------------------------------------------------------------- 25 Item 2. Properties - -------------------------------------------------------------------------------- We currently lease approximately 20,000 square feet of administrative space in Princeton, New Jersey. The lease on this space expires in 2002. We intend to remain in Princeton, New Jersey for the foreseeable future. In addition, we have the right to access space located in a facility in Princeton, which was previously leased by us, for manufacture of our products. We also lease approximately 9,000 square feet of laboratory and office space in Newtown, Pennsylvania which is occupied by our AxCell Biosciences subsidiary, under a lease expiring in 2004. We own substantially all of the equipment used in the laboratories and offices. We believe our facilities are adequate for our operations at present. Item 3. Legal Proceedings In February 2000, we received information as to litigation filed against us in the United States Federal Court for the District of New Jersey by M. David Goldenberg and Immunomedics, Inc. We were served with this lawsuit on March 17, 2000. The litigation claims that our ProstaScint product infringes a patent purportedly held by the plaintiffs. We believe that it is invalid and unenforceable and that ProstaScint does not infringe it. In addition, we have certain rights to indemnification against litigation and litigation expenses from the inventor of technology used in ProstaScint, which may be obtained by withholding royalty payments on sales of ProstaScint. We believe, based upon advice of counsel, that we have valid defenses against the claims in this litigation, and that if it is pursued we will vigorously defend our position. We also understand that the purported patent sought to be enforced in the litigation has now expired; as a result, the claim even if successful would not result in a bar of the continued sale of ProstaScint or affect any other of our products or technology. However, given the uncertainty associated with litigation, we cannot give any assurance that the litigation could not result in a material expenditure to us. Item 4. Submission of Matters to a Vote of Security Holders --None - -------------------------------------------------------------------------------- 26 Executive Officers of the Registrant - -------------------------------------------------------------------------------- The executive officers of the Company and their respective ages and positions with the Company as of March 1, 2000 are as follows:
Name Age Title - ---------------------------------------------------------------------------------------------------- James A. Grigsby (1)...................... 57 Chairman of the Board H. Joseph Reiser, Ph.D. ................... 53 Director, President and Chief Executive Officer Nicholas Borys, M.D. ...................... 40 Vice President, Medical Affairs Donald F. Crane............................ 49 Vice President, General Counsel and Corporate Secretary Richard W. Krawiec, Ph.D. ................. 52 Vice President, Investor Relations and Corporate Communications Jane M. Maida.............................. 44 Vice President, Finance and Administration; Principal Financial and Accounting Officer John D. Rodwell, Ph.D. .................... 53 Acting President and Chief Technical Officer, AxCell Biosciences Corporation, a subsidiary
- ------ All executive officers are elected annually by Board of Directors. There is no family relationship among any of the executive officers or directors. James A. Grigsby, Chairman of our Board of Directors, has been our director since May 1996 and Chairman since June 1998. Since April, 1999, Mr. Grigsby has been affiliated with the consulting firm of Nachman, Hays & Associates. Previously, since 1994, Mr. Grigsby was president of Cancer Care Management LLC, a consulting firm providing consulting services regarding cancer disease management issues. From 1989 to 1994, Mr. Grigsby was President of CIGNA Corporation's International Life and Employee Benefits Division, which operated in over 20 countries worldwide, and during that period also served as the head of CIGNA's national health care sales force. Prior to that time, since 1978, he held a number of executive positions with CIGNA Corporation. Mr. Grigsby received a B.A. in Mathematics from Baylor University and is a Fellow of the Society of Actuaries. H. Joseph Reiser, Ph.D., joined us in August 1998 as President and Chief Executive Officer and as a member of our Board of Directors. Most recently, Dr. Reiser was Corporate Vice President and General Manager, Pharmaceuticals, for Berlex Laboratories Inc., the U.S. subsidiary of Schering AG. During his 17 year tenure at Berlex, Dr. Reiser held positions of increasing responsibility, serving as the first President of Schering Berlin's Venture Corporation, Vice President, Technology and Industry Relations, and Vice President, Drug Development and Technology. Dr. Reiser received his Ph.D. in Physiology from the Indiana University School of Medicine, where he also earned his M.S. in Physiology and B.S. in Biology. Nicholas Borys, M.D., joined us as Vice President of Medical Affairs in January, 2000. Previously, Dr. Borys was Vice President and Medical Director of Anthra Pharmaceuticals from October, 1998 to January, 2000. From December 1992 to July 1998, he was Director of Medical Affairs at Amersham Healthcare. From 1987 to 1992, he was Director of Medical and Clinical Services at Hoffmann-La Roche. Dr. Borys received his undergraduate education at Rutgers University and his M.D. from American University of the Caribbean. Donald F. Crane joined us in June 1997 as Vice President, General Counsel and Corporate Secretary. From 1993 until 1997, Mr. Crane was Senior SEC Counsel for U.S. Surgical Corporation. Previously, Mr. Crane was Assistant Secretary and Corporate Counsel at BellSouth Corporation in Atlanta, Georgia. Mr. Crane holds a B.A. in Communications from the University of Georgia and a J.D. from the University of Georgia School of Law. - -------------------------------------------------------------------------------- 27 - -------------------------------------------------------------------------------- Richard W. Krawiec, Ph.D., joined us in January 2000 as Vice President, Investor Relations and Corporate Communications. During 1999, Dr. Krawiec was Vice President, Investor Relations at La Jolla Pharmaceutical Company, a publicly held biotechnology company which develops drugs for autoimmune diseases. From 1994 to 1998, he was Director of Investor Relations at Amylin Pharmaceuticals, Inc., a publicly held biotechnology company focused on diabetes and metabolic disorders. Dr. Krawiec holds a B.S. in Biology from Boston University and a Ph.D. in Biological Sciences from the University of Rhode Island. Jane M. Maida currently serves as our Vice President--Finance and Administration. Ms. Maida joined us in March 1997 as Chief Accounting Officer, Corporate Controller and Assistant Secretary. Before joining us, Ms. Maida served as Chief Financial and Information Officer for Mustard Seed, Inc., a behavioral health care company, from 1995. Prior to that position, she was Chief Financial Officer of Morphogenesis, Inc., a biotechnology company focused on cellular immunology. From 1986 to 1994, Ms. Maida was Corporate Controller and Assistant Secretary for The Liposome Company, Inc., a biotechnology company. Ms. Maida holds a B.S. in Education from the University of Pennsylvania and a M.S. in Accounting from the State University of New York at Albany. She is also a Certified Public Accountant. Our key AxCell employees are: John D. Rodwell, Ph.D., acting President and Chief Technical Officer of AxCell Biosciences Corporation, our subsidiary, joined us in September 1981. He served as Director, Chemical Research, then as Vice President, Discovery Research from 1984 to 1989, as Vice President, Research and Development from 1989 to July 1996, and as Senior Vice President and Chief Scientific Officer from July 1996 through June 1999, at which time he assumed full time duties as Acting President and Chief Technical Officer of AxCell. From 1980 to 1981, Dr. Rodwell was a Research Assistant Professor and, from 1976 to 1980, he was a postdoctoral fellow, both in the Department of Microbiology at the University of Pennsylvania School of Medicine, where he currently is an Adjunct Associate Professor in the Department of Microbiology. He holds a B.A. in Chemistry from the University of Massachusetts, an M.S. in Organic Chemistry from Lowell Technological Institute and a Ph.D. in Biochemistry from the University of California at Los Angeles. Brian R. Bullard, 36, joined the company in January 1999 as Vice President and Chief Information Officer of AxCell. Most recently he was with Perkin-Elmer's life sciences divisions, PE Biosystems, where as Manager, Data Products, he was in charge of scientific and market evaluation of data in conjunction with Perkin-Elmer's bioinformatics software platform. Previously, Mr. Bullard was Director of Bioinformatics, Development at Gene Logic in Maryland, responsible for the biotechnology firm's information technology. Mr. Bullard has sixteen years of information technology experience and has held a number of other information technology positions with firms including Science and Technology Corporation, OptiMetrics, Inc. and The Physical Sciences Laboratory. - -------------------------------------------------------------------------------- 28 Risk Factors - -------------------------------------------------------------------------------- Risk factors You should carefully consider the risks described below together with all of the other information included in or incorporated by reference into this Form 10-K Annual Report before making an investment decision. If any of the following risks occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. We have a history of operating losses and accumulated deficit and expect to incur losses in the future. We have a history of operating losses since our inception. We had net income of $729,000 during the year ended December 31, 1999 which included certain non- operating gains. We had net losses of $13,152,000 during the year ended December 31, 1998 and $30,712,000 during the year ended December 31, 1997. We had an accumulated deficit of $301,283,000 as of December 31, 1999. In order to develop and commercialize our technologies, particularly our proteomics program and prostate specific membrane antigen, or PSMA, technology, and expand our oncology products, we expect to incur significant increases in our expenses over the next several years. As a result, we may continue to report operating losses for the near future and we may never be profitable or achieve significant revenues. Our ability to achieve significant revenues or profitability will depend upon numerous factors, including: .successful product development; .our ability to acquire, develop and commercialize complementary products and technologies; and .our ability to achieve increased sales for our existing products and sales for any new products. We are in the early stages of development and commercialization of our technology platforms and may never achieve the goals of our business plan. Early last year, we completed our restructuring to focus on development of our prostate specific membrane antigen, or PSMA, and proteomics technologies and the marketing of our existing products. We may be unable to continue to successfully develop or commercialize these technologies. Our PSMA and proteomics technology are still in the early stages of development. We have only recently begun to incorporate our proteomics technology into commercialized products. We began operations in 1980 and have been engaged primarily in research directed toward the development, commercialization and marketing of products to improve diagnosis and treatment of cancer and other disease. In December 1992, we introduced for commercial use our OncoScint imaging agent. In October 1996, we introduced for commercial use our ProstaScint imaging agent. In March 1997, we introduced for commercial use our Quadramet therapeutic product. These products have not yet achieved significant commercial success. In 1998, we began a restructuring of our company to focus on the development of our PSMA and proteomics technologies and marketing of these existing products. Our business is therefore subject to the risks inherent in the development of an early stage business enterprise, such as the need: .to obtain sufficient capital to support the expenses of developing our technology and commercializing our products; .to ensure that our products are safe and effective; .to manufacture our products in sufficient quantities and at a reasonable cost; .to develop a sufficient market for our products; and .to attract and retain qualified management, sales, technical and scientific staff. The problems frequently encountered using new technologies and operating in a competitive environment also may affect our business. If we fail to properly address these risks and attain our business objectives, our business, results of operations and financial condition will suffer. - -------------------------------------------------------------------------------- 29 - -------------------------------------------------------------------------------- Our proteomics program is at an early stage of development. We have developed and intend to continue to develop our proteomics program. This technology involves new approaches and remains commercially unproven. Our technology and development focus is primarily directed toward offering an infrastructure to companies for the development of drugs to treat a variety of complex human diseases. There is limited understanding generally relating to the role of proteins in diseases, and few products based on protein interaction discoveries have been developed and commercialized. Even if our proteomics program was successful in identifying and validating biological targets, there is no guarantee that our customers will be able to develop or commercialize products to improve human health. In addition, the success of our proteomics technology will depend upon our ability to use software tools to generate data that relates protein signaling pathways to a variety of other bioinformatic information. Because of the complexity of this data, we may not be able to detect and remedy any design defects or software errors in our existing or future technologies, including databases. Due to the specialized nature and price of our proteomics technology and services, there are a limited number of pharmaceutical and biotechnology companies that are potential customers. Additional reasons why there may not be a great demand for our proteomics technology and services include: .our potential customers may determine to conduct in-house research; .our competitors may offer similar services at competitive prices; .we may not be able to service satisfactorily the needs of our potential or actual customers; .others may publicly disclose or patent proprietary information contained in our IFP Database (including information related to protein signaling pathways or target candidates) or relating to prostate antigens or antibodies; and .technological innovations may be discovered that are more advanced than those used by or available to us. Our technology program for proteomics is still in the early stages of development. We may not be able to populate our IFP Database with information that is useful to potential customers in a timely manner. Even if we complete and develop successfully our proteomics technology, the technology may not be accepted by, or be useful to, our customers. Our PSMA product development program is novel and, consequently, inherently risky. We are subject to the risks of failure inherent in the development of product candidates based on new technologies, including our PSMA technology. These risks include the possibility that: .the technologies we use will not be effective; .our product candidates will be unsafe or otherwise fail to receive the necessary regulatory approvals; .our product candidates will be hard to manufacture on a large scale or will be uneconomical to market; and .we will not successfully overcome technological challenges presented by our products. Our objectives include developing our PSMA technology into novel cancer therapeutics, including a cancer vaccine. To our knowledge, no cancer therapeutic vaccine has been approved for marketing. Our other research and development programs involve similarly novel approaches to human therapeutics. Consequently, there is no precedent for the successful commercialization of therapeutic products based on our PSMA technologies. We cannot assure you that any of our products will be successfully developed. We are heavily dependent on market acceptance of ProstaScint and Quadramet for near-term revenues. ProstaScint and Quadramet are expected to account for a significant percentage of our product-related revenues in the near future. For the year ended December 31, 1999, revenues from ProstaScint and Quadramet accounted for approximately 92% of our product related revenues. - -------------------------------------------------------------------------------- 30 - -------------------------------------------------------------------------------- Because these products contribute the majority of our product-related revenues, our business, financial condition and results of operations depend on their acceptance as safe, effective and cost-efficient alternatives to other available treatment and diagnostic protocols by the medical community, including: .health care providers, such as hospitals and physicians; and .third-party payors, including Medicare, Medicaid, private insurance carriers and health maintenance organizations. Our customers, including technologists and physicians, must successfully complete our Partners in Excellence Program, or PIE Program, a proprietary training program designed to promote the correct acquisition and interpretation of ProstaScint images. This approach is, therefore, technique dependent and requires a learning commitment on the part of users. We cannot assure you that additional physicians will make this commitment or otherwise accept this product as part of their treatment practices. Berlex Laboratories, Inc. markets Quadramet in the United States through an agreement that we entered into in October 1998. We cannot assure you that Berlex will be able to successfully market Quadramet or that this agreement will result in significant revenues for us. We recently obtained marketing rights to Quadramet in Canada, but have not yet implemented a selling program. We cannot assure you that Quadramet can be marketed effectively in Canada, or that it will contribute significantly to our revenues. We cannot assure you that Quadramet will be approved for additional indications, due to uncertainty as to efficacy or safety for other purposes, to regulatory obstacles and to physician preferences for existing or competing practices. Accordingly, we cannot assure you that ProstaScint or Quadramet will achieve market acceptance on a timely basis, or at all. If ProstaScint or Quadramet do not achieve broad market acceptance, we may not be able to generate sufficient product revenue to become profitable. We may need to raise additional capital which may not be available. We have incurred negative cash flows from operations since inception. We have expended, and will need to continue to expend, substantial funds to complete our planned product development efforts, including our proteomics and PSMA programs. While we believe that the proceeds from this offering will be sufficient to meet our development and commercialization needs for the foreseeable future, our future capital requirements and the adequacy of our available funds depend on many factors, including: .successful commercialization of our products; .acquisition of complementary products and technologies; .magnitude, scope and results of our product development efforts; .progress of preclinical studies and clinical trials; .progress of regulatory affairs activities; .costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; .competing technological and market developments; and .expansion of strategic alliances for the sale, marketing and distribution of our products. We may raise additional capital through public or private equity offerings, debt financings or additional collaborations and licensing arrangements. Additional financing may not be available to us when we need it, or, if available, we may not be able to obtain financing on terms favorable to us or our stockholders. If we raise additional capital by issuing equity securities, the issuance will result in ownership dilution to our stockholders. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish rights to certain of our technologies or product candidates or to grant licenses on - -------------------------------------------------------------------------------- 31 - ------------------------------------------------------------------------------- unfavorable terms. If we relinquish rights or grant licenses on unfavorable terms, we may not be able to develop or market products in a manner that is profitable to us. If adequate funds are not available, we may not be able to conduct research activities, preclinical studies, clinical trials or other activities relating to the successful commercialization of our products. Competition in our field is intense and likely to increase. We face, and will continue to face, intense competition from one or more of the following entities: .pharmaceutical companies; .biotechnology companies; .bioinformatics companies; .diagnostic companies; .academic and research institutions; and .government agencies. All of our lines of business are subject to significant competition from organizations that are pursuing technologies and products that are the same as or similar to our technology and products. Many of the organizations competing with us have greater capital resources, research and development staffs and facilities and marketing capabilities. We believe that our future success will depend in large part on our ability to maintain a competitive position in proteomics and in the development of oncology products. Before we recover development expenses for our products and technologies, the products or technologies may become obsolete as a result of technological developments by us or others. Our products could also be made obsolete by new technologies which are less expensive or more effective. We may not be able to make the enhancements to our technology necessary to compete successfully with newly emerging technologies. We have experienced fluctuating results of operations. Our results of operations have fluctuated on an annual and quarterly basis and may fluctuate significantly from period to period in the future, due to, among other factors: .variations in revenue from sales of and royalties from our products; .timing of regulatory approvals and other regulatory announcements relating to our products; .variations in our marketing, manufacturing and distribution channels; .timing of the acquisition and successful integration of complementary products and technologies; .timing of new product announcements and introductions by us and our competitors; and .product obsolescence resulting from new product introductions. Many of these factors, and others not listed above, are outside our control. Due to one or more of these factors, our results of operations may fall below the expectations of securities analysts and investors in one or more future quarters. If this happens, the market price of our common stock could decline. We rely heavily on our collaborative partners. Our success depends in significant part upon the success of our collaborative partners. We have entered into the following agreements for the sales, marketing, distribution and manufacture of our products, product candidates and technologies: .sub-license and marketing agreement with Berlex Laboratories, Inc. relating to the Quadramet technology which we licensed from The Dow Chemical Company. Berlex is responsible for marketing, selling and - ------------------------------------------------------------------------------- 32 - ------------------------------------------------------------------------------- arranging for the manufacture and distribution of Quadramet in the United States. This agreement expires on the later of October 28, 2018 or upon the expiration of the patents covering Quadramet; .agreement for manufacture of Quadramet by The DuPont Pharmaceuticals Company (formerly the radiopharmaceuticals division of The DuPont Merck Company); .marketing and platform development agreement with Informax, Inc. related to our proteomics program; .a joint venture with Progenics Pharmaceuticals, Inc. for the development of PSMA for immunotherapy for prostate and other cancers; and .letter of intent for a licensing agreement with Molecular Staging, Inc. for technology to be used in developing in vitro diagnostic tests using PSMA and PSA. Because our collaborative partners are responsible for certain of our sales, marketing, manufacturing and distribution activities, these activities are outside our direct control. We cannot assure you that our partners will perform their obligations under these agreements with us. In the event that our collaborative partners do not successfully market and sell our products or breach their obligations under our agreements, our products may not be commercially successful, any success may be delayed and new product development could be inhibited. Our business could be harmed if our collaborations expire or are terminated early. We cannot assure you that we will be able to maintain our existing collaborative arrangements. If they expire or are terminated, we cannot assure you that they will be renewed or that new arrangements will be available on acceptable terms, if at all. In addition, we cannot assure you that any new arrangements or renewals of existing arrangements will be successful, that the parties to any new or renewed agreements will perform adequately or that any potential collaborators will not compete with us. We cannot assure you that our existing or future collaborations will lead to the development of product candidates or technologies with commercial potential, that we will be able to obtain proprietary rights or licenses for proprietary rights for our product candidates or technologies developed in connection with these arrangements or that we will be able to ensure the confidentiality of proprietary rights and information developed in such arrangements or prevent the public disclosure thereof. We have limited sales, marketing and distribution capabilities for our products. We recently established a sales force and have limited internal sales, marketing and distribution capabilities for our products. We depend on Berlex for the sale, marketing and distribution of Quadramet in the United States. In locations outside the United States, we have not established a selling presence. If we are unable to establish and maintain significant sales, marketing and distribution efforts, either internally or through arrangements with third parties, our business may be harmed. There are risks associated with the manufacture of our products. If we are to be successful, our products will have to be manufactured either internally or through third-party manufacturers in compliance with regulatory requirements and at costs acceptable to us. We cannot assure you that we will be able to continue to manufacture, arrange for manufacture on reasonable terms or successfully outsource the manufacturing of our products. If we are unable to successfully manufacture or arrange for the manufacture of our products and product candidates, we would not be able to successfully commercialize our products and our business may be seriously harmed. Our business may be adversely affected by the uncertainty associated with our third-party manufacturers' dependence on single source suppliers. Quadramet is manufactured by DuPont pursuant to an agreement with both Berlex and Cytogen. Some components of Quadramet, particularly Samarium/153/ and EDTMP, are provided to DuPont by outside suppliers. Due to radioactive decay, Samarium/153/ must be produced on a weekly basis. DuPont obtains its requirements for Samarium/153/ from one supplier. Alternative sources for these components may not be readily available. On one occasion, DuPont was unable to manufacture Quadramet on a timely basis due to the failure of its supplier to provide Samarium/153/. If DuPont cannot obtain sufficient quantities of the components on commercially reasonable terms, or in a timely manner, it would be unable to manufacture Quadramet on a timely and cost- effective basis which could affect our ability to generate sufficient revenues to become profitable. - ------------------------------------------------------------------------------- 33 - -------------------------------------------------------------------------------- Compliance with manufacturing regulations is critical to our business. We and our third-party manufacturers are required to adhere to US Food & Drug Administration regulations setting forth requirements for current Good Manufacturing Practices, or cGMP, and similar regulations in other countries, which include extensive testing, control and documentation requirements. Ongoing compliance with cGMP, labeling and other applicable regulatory requirements are monitored through periodic inspections and market surveillance by state and federal agencies, including the FDA, and by comparable agencies in other countries. Failure of our third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of the government to grant premarket clearance or premarket approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. Failure of consumers to obtain adequate reimbursement from third-party payors could limit market acceptance and affect pricing of our products, which would materially adversely affect our business. Our business, financial condition and results of operations will continue to be affected by the efforts of governments and other third-party payors to contain or reduce the costs of healthcare. There have been, and we expect that there will continue to be, a number of federal and state proposals to implement government control of pricing and profitability of therapeutic and diagnostic imaging agents such as our products. In addition, an emphasis on managed care increases possible pressure on pricing of these products. While we cannot predict whether these legislative or regulatory proposals will be adopted, or the effects these proposals or managed care efforts may have on our business, the announcement of these proposals and the adoption of these proposals or efforts could affect our stock price or our business. Further, to the extent these proposals or efforts have a material adverse effect on other companies that are our prospective corporate partners, our ability to establish strategic alliances may be adversely affected. Sales of our products depend in part on reimbursement to the consumer from third-party payors, including Medicare, Medicaid and private health insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. We cannot assure you that our products will be considered cost-effective and that reimbursement to consumers will continue to be available, or will be sufficient to allow us to sell our products on a competitive basis. Approval of our products for reimbursement by a third- party payor may depend on a number of factors, including the payor's determination that our products are clinically useful and cost-effective, medically necessary and not experimental or investigational. Reimbursement is determined by each payor individually and in specific cases. The reimbursement process can be time consuming. If we cannot secure adequate third-party reimbursement for our products, there would be a material adverse effect on our business, financial condition and results of operations. Our potential oncology products will be subject to the risks of failure inherent in the development of diagnostic or therapeutic products based on new technologies. Product development involves a high degree of risk. We cannot assure you that the product candidates we develop, pursue or offer will prove to be safe and effective, will receive the necessary regulatory approvals, will not be precluded by proprietary rights of third parties or will ultimately achieve market acceptance. These product candidates will require substantial additional investment, laboratory development, clinical testing and regulatory approvals prior to their commercialization. We cannot assure you that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products. If we are unable to develop and commercialize products on a timely basis or at all, our business will be harmed. Before we obtain 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 may not be predictive of results that will be obtained in large-scale testing. We cannot assure you that our clinical trials will demonstrate the safety and efficacy of any products or will result in marketable products. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Clinical trials or marketing of any potential diagnostic or therapeutic products may expose us to liability claims for the use of these diagnostic or therapeutic products. We may not be able to obtain product liability insurance or, if obtained, sufficient coverage may not be available at a reasonable cost. In addition, as we develop diagnostic or therapeutic products internally, we will have to make significant investments in diagnostic or therapeutic product development, marketing, sales and - -------------------------------------------------------------------------------- 34 - -------------------------------------------------------------------------------- regulatory compliance resources. We will also have to establish or contract for the manufacture of products, including supplies of drugs used in clinical trials, under the current Good Manufacturing Practices of the FDA. We also cannot assure you that product issues will not arise following successful clinical trials and FDA approval. The rate of completion of clinical trials also depends on the rate of patient enrollment. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, 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 harmful effect on our ability to develop the products in our pipeline. If we are unable to comply with applicable governmental regulations, we may not be able to continue our operations. Any products tested, manufactured or distributed by us or on our behalf pursuant to FDA clearances or approvals are subject to pervasive and continuing regulation by numerous regulatory authorities, including primarily the FDA. We may be slow to adapt, or we may never adapt to changes in existing requirements or adoption of new requirements or policies. Our failure to comply with regulatory requirements could subject us to enforcement action, including product seizures, recalls, withdrawal of clearances or approvals, restrictions on or injunctions against marketing our products based on our technology, and civil and criminal penalties. We cannot assure you that we will not be required to incur significant costs to comply with laws and regulations in the future or that laws or regulations will not create an unsustainable burden on our business. Numerous federal, state and local governmental authorities, principally the FDA, and similar regulatory agencies in other countries, regulate the preclinical testing, clinical trials, manufacture and promotion of any compounds or agents we or our collaborative partners develop, and the manufacturing and marketing of any resulting drugs. The drug development and regulatory approval process is lengthy, expensive, uncertain and subject to delays. The regulatory risks we face also include the following: .any compound or agent we or our collaborative partners develop must receive regulatory agency approval before it may be marketed as a drug in a particular country; .the regulatory process, which includes preclinical testing and clinical trials of each compound or agent in order to establish its safety and efficacy, varies from country to country, can take many years and requires the expenditure of substantial resources; .in all circumstances, approval of the use of previously unapproved radioisotopes in certain of our products requires approval of either the Nuclear Regulatory Commission or equivalent state regulatory agencies. A radioisotope is an unstable form of an element which undergoes radioactive decay, thereby emitting radiation which may be used, for example, to image or destroy harmful growths or tissue. We cannot assure you that such approvals will be obtained on a timely basis, or at all; .data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory agency approval; and .delays or rejections may be encountered based upon changes in regulatory agency policy during the period of drug development and/or the period of review of any application for regulatory agency approval. These delays could adversely affect the marketing of any products we or our collaborative partners develop, impose costly procedures upon our activities, diminish any competitive advantages we or collaborative partners may attain and adversely affect our ability to receive royalties. - -------------------------------------------------------------------------------- 35 - ------------------------------------------------------------------------------- We cannot assure you that, even after this time and expenditure, regulatory agency approvals will be obtained for any compound or agent developed by or in collaboration with us. Moreover, regulatory agency approval for a drug or agent may entail limitations on the indicated uses that could limit the potential market for any such drug. Furthermore, if and when such approval is obtained, the marketing, manufacture, labeling, storage and record keeping related to our products would remain subject to extensive regulatory requirements. Discovery of previously unknown problems with a drug, its manufacture or its manufacturer may result in restrictions on such drug, manufacture or manufacturer, including withdrawal of the drug from the market. Failure to comply with regulatory requirements could result in fines, suspension of regulatory approvals, operating restrictions and criminal prosecution. The U.S. Food, Drug and Cosmetics Act requires that our products be manufactured in FDA registered facilities subject to inspection. The manufacturer must be in compliance with cGMP, which imposes certain procedural and documentation requirements upon us, and our manufacturing partners with respect to manufacturing and quality assurance activities. If we or our manufacturing partners do not comply with cGMP we may be subject to sanctions, including fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for drugs, withdrawal of marketing approvals and criminal prosecution. We depend on attracting and retaining key personnel. We are highly dependent on the principal members of our management and scientific staff. The loss of their services might significantly delay or prevent the achievement of development or strategic objectives. Our success depends on our ability to retain key employees and to attract additional qualified employees. Competition for personnel is intense, and we cannot assure you that we will be able to retain existing personnel or attract and retain additional highly qualified employees in the future. We have an employee retention agreement with our President and Chief Executive Officer, H. Joseph Reiser, Ph.D., which provides for vesting of stock options for the purchase of shares of our common stock based on continued employment and on the achievement of performance objectives defined by the board of directors. We do not have similar retention agreements with our other key personnel. If we are unable to hire and retain personnel in key positions, our management and operations will suffer unless a qualified replacement can be found. Our business exposes us to potential liability claims that may exceed our financial resources, including our insurance coverage, and may lead to the curtailment or termination of our operations. Our business is subject to product liability risks inherent in the testing, manufacturing and marketing of our products. We cannot assure you that product liability claims will not be asserted against us, our collaborators or our licensees. While we currently maintain product liability insurance in amounts we believe are adequate, we cannot assure you that such coverage will be adequate to protect us against future product liability claims or that product liability insurance will be available to us in the future on commercially reasonable terms, if at all. Furthermore, we cannot assure you that we will be able to avoid significant product liability claims and adverse publicity. If liability claims against us exceed our financial resources we may have to curtail or terminate our operations. Our business involves environmental risks that may result in liability for us. We are subject to a variety of local, state and federal government regulations relating to storage, discharge, handling, emission, generation, manufacture and disposal of toxic, infectious or other hazardous substances used to manufacture our products. If we fail to comply with these regulations, we could be liable for damages, penalties or other forms of censure. If our patent applications do not result in issued patents, then our competitors may obtain rights to commercialize our discoveries. Our business and competitive positions are dependent upon our ability to protect our proprietary technology. Because of the substantial length of time and expense associated with development of new products, we, like the rest of the biopharmaceutical industry, place considerable importance on obtaining and maintaining patent and trade secret protection for new technologies, products and processes. We have filed patent applications for our technology for diagnostic and therapeutic products and the methods for their production and use. - ------------------------------------------------------------------------------- 36 - -------------------------------------------------------------------------------- The patent positions of pharmaceutical, biopharmaceutical and biotechnology companies, including us, are generally uncertain and involve complex legal and factual questions. Our patent applications may not protect our technologies and products because of the following reasons: .there is no guarantee that any of our pending patent applications will result in additional issued patents; .we may develop additional proprietary technologies that are not patentable; .there is no guarantee that any patents issued to us, our collaborators or our licensors will provide a basis for a commercially viable product; .there is no guarantee that any patents issued to us or our collaborators will provide us with any competitive advantage; .there is no guarantee that any patents issued to us or our collaborators will not be challenged, circumvented or invalidated by third parties; and .there is no guarantee that any patents previously issued to others or issued in the future will not have an adverse effect on our ability to do business. In addition, patent law in the technology fields in which we operate is uncertain and still evolving, and we cannot assure you as to the degree of protection that will be afforded any patents we are issued or license from others. Furthermore, we cannot assure you that others will not independently develop similar or alternative technologies, duplicate any of our technologies, or, if patents are issued to us, design around the patented technologies developed by us. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits by third parties or if we initiate such suits. We cannot assure you that, if challenged by others in litigation, the patents we have been issued, or which we have been assigned or have licensed from others will not be found invalid. We cannot assure you that our activities would not infringe patents owned by others. Defense and prosecution of patent matters can be expensive and time-consuming and, regardless of whether the outcome is favorable to us, can result in the diversion of substantial financial, managerial and other resources. An adverse outcome could: .subject us to significant liability to third parties; .require us to cease any related research and development activities and product sales; or .require us to obtain licenses from third parties. We cannot assure you that any licenses required under any such third-party patents or proprietary rights would be made available on commercially reasonable terms, if at all. Moreover, the laws of certain countries may not protect our proprietary rights to the same extent as U.S. law. The issuance of patents may not provide us with sufficient protection. We depend on our patents and proprietary rights. The issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate without infringing the patent rights of others. Our patents and the patents we license could be challenged by litigation and, if the outcome of such litigation was adverse, competitors could be free to use the subject matter covered by the patent, or we may license the technology to others in settlement of such litigation. Invalidation of our key patents or non-approval of pending patent applications could increase competition. In addition, any application or exploitation of our technology could infringe patents or proprietary rights of others and any licenses that we might need as a result of such infringement might not be available to us on commercially reasonable terms, if at all. We cannot predict whether our or our competitors' pending patent applications will result in the issuance of valid patents. Litigation, which could result in substantial cost to us, may also be necessary to enforce our patent and proprietary rights and/or to determine the scope and validity of others' proprietary rights. We may participate in interference proceedings that may in the future be declared by the Patent and Trademark Office to determine priority of invention, which could result in substantial cost to us. The outcome of any - -------------------------------------------------------------------------------- 37 - -------------------------------------------------------------------------------- litigation or interference proceeding might not be favorable to us, and we might not be able to obtain licenses to technology that we require at a reasonable cost, if at all. We are a defendant in litigation filed against us in the United States Federal Court for the District of New Jersey by M. David Goldenberg and Immunomedics, Inc. We were served with this lawsuit on March 17, 2000. The litigation claims that our ProstaScint product infringes a patent purportedly held by the plaintiffs. We believe that the purported patent sought to be enforced in the litigation has now expired. As a result, the claim, even if successful, would not result in a bar of the continued sale of ProstaScint or affect any other of our products or technology. However, given the uncertainty associated with litigation, we cannot give any assurance that the litigation could not result in a material expenditure to us. The termination of one or more license agreements that are important in the manufacture of our current products and new product research and development activities would harm our business. We are a party to license agreements under which we have rights to use technologies owned by other companies in the manufacture of our products and in our proprietary research, development and testing processes. We are the exclusive licensee of certain patents and patent applications held by the University of North Carolina at Chapel Hill covering part of the technology used in the proteomics program and of certain patents and patent applications held by the Memorial Sloan-Kettering Institute covering PSMA. We depend upon the enforceability of our license with The Dow Chemical Company with respect to Quadramet. If the licenses were terminated, we may not be able to find suitable alternatives to this technology on timely or reasonable terms, if at all. The loss of the right to use these technologies that we have licensed would significantly harm our business. We cannot be certain that our security measures protect our unpatented proprietary technology. We also rely upon trade secret protection for some of our confidential and proprietary information that is not subject matter for which patent protection is being sought. To help protect our rights, we require all employees, consultants, advisors and collaborators to enter into confidentiality agreements that require disclosure, and in most cases, assignment to us, of their ideas, developments, discoveries and inventions, and that prohibit the disclosure of confidential information to anyone outside Cytogen. We cannot assure you, however, that these agreements will provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. If we make any acquisitions, we will incur a variety of costs and may never realize the anticipated benefits. If appropriate opportunities become available, we may attempt to acquire businesses, technologies, services or products that we believe are a strategic fit with our business. We currently have no commitments or agreements with respect to any acquisitions other than those described in this prospectus. If we do undertake any transaction of this sort, the process of integrating an acquired business, technology, service or product may result in operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may never realize the anticipated benefits of any acquisition. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and amortization expenses related to goodwill and other intangible assets. These factors could adversely affect our results of operations and financial condition, which could cause a decline in the market price of our common stock. We may invest or spend the proceeds of this offering in ways with which you may not agree. We will retain broad discretion over the use of proceeds from this offering. You may not agree with how we spend the proceeds, and our use of the proceeds may not yield a significant return or any return at all. We intend to use a majority of the proceeds from this offering to fund our operations, including continued development, manufacturing and commercialization of our proteomics technologies, research and development of additional products, expansion of our sales and marketing capabilities, and for general corporate purposes, including working capital and capital expenditures. Because of the number and variability of factors that determine our use of the net proceeds from this offering, we cannot assure you that these uses will not vary substantially from our currently planned uses. Until we use the net proceeds of this offering for the above purposes, we intend to invest the funds in investment grade, interest bearing securities. - -------------------------------------------------------------------------------- 38 - ------------------------------------------------------------------------------- Our stock price has been and may continue to be volatile, and your investment in our stock could decline in value. The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market price of our common stock has fluctuated over a wide range and may continue to fluctuate for various reasons, including, but not limited to, announcements concerning our competitors or us regarding: .results of clinical trials; .technological innovations or new commercial products; .changes in governmental regulation or the status of our regulatory approvals or applications; .changes in earnings; .changes in health care policies and practices; .developments or disputes concerning proprietary rights; .litigation or public concern as to safety of the our potential products; and .changes in general market conditions. We have adopted various anti-takeover provisions which may affect the market price of our common stock. Our Board of Directors has the authority, without further action by the holders of common stock, to issue from time to time, up to 5,400,000 shares of preferred stock in one or more classes or series, and to fix the rights and preferences of the preferred stock. Pursuant to these provisions, we have implemented a stockholder rights plan by which one preferred stock purchase right is attached to each share of common stock, as a means to deter coercive takeover tactics and to prevent an acquirer from gaining control of us without some mechanism to secure a fair price for all of our stockholders if an acquisition was completed. These rights will be exercisable if a person or group acquires beneficial ownership of 20% or more of our common stock and can be made exercisable by action of our board of directors if a person or group commences a tender offer which would result in such person or group beneficially owning 20% or more of our common stock. Each right will entitle the holder to buy one one-thousandth of a share of a new series of our junior participating preferred stock for $20. If any person or group becomes the beneficial owner of 20% or more of our common stock (with certain limited exceptions), then each right not owned by the 20% stockholder will entitle its holder to purchase, at the right's then current exercise price, common shares having a market value of twice the exercise price. In addition, if after any person has become a 20% stockholder, we are involved in a merger or other business combination transaction with another person, each right will entitle its holder (other than the 20% stockholder) to purchase, at the right's then current exercise price, common shares of the acquiring company having a value of twice the right's then current exercise price. We are subject to provisions of Delaware corporate law which, subject to certain exceptions, will prohibit us from engaging in any "business combination" with a person who, together with affiliates and associates, owns 15% or more of our common stock for a period of three years following the date that the person came to own 15% or more of our common stock unless the business combination is approved in a prescribed manner. These provisions of the stockholder rights plan, our certificate of incorporation, and of Delaware law may have the effect of delaying, deterring or preventing a change in control of us, may discourage bids for our common stock at a premium over market price and may adversely affect the market price, and the voting and other rights of the holders, of our common stock. - ------------------------------------------------------------------------------- 39 - -------------------------------------------------------------------------------- A large number of our shares are eligible for future sale which may adversely impact the market price of our common stock. A large number of shares of common stock already outstanding, or issuable upon exercise of options and warrants, are eligible for resale, which may adversely affect the market price of the common stock. As of March 13, 2000, we had 72,649,096 shares of common stock outstanding. An additional 4,580,331 shares of common stock are issuable upon the exercise of outstanding stock options and warrants. Substantially all of such shares subject to outstanding options will, when issued upon exercise thereof, be available for immediate resale in the public market pursuant to currently effective registration statements under the Securities Act of 1933, as amended, or pursuant to Rule 701 promulgated thereunder. Berlex Laboratories, Inc. exercised its registration rights with respect to 1,000,000 shares of common stock and we are contractually obligated to register these shares. We expect to file this registration statement in the immediate future. Berlex has agreed not to sell its shares for 90 days following the date of this prospectus. Following this 90-day period, Berlex may sell these shares from time to time. - -------------------------------------------------------------------------------- 40 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Cytogen Common Stock is traded on the NASDAQ National Market tier of The NASDAQ Stock Market under the trading symbol "CYTO." The table below sets forth the high and low sale prices for Cytogen common stock for each of the calendar quarters indicated, as reported by the NASDAQ National Market.
1998 High Low - ---- ---- ----- First Quarter.................................................. 2 7/16 1 1/4 Second Quarter................................................. 2 5/8 Third Quarter.................................................. 2 9/16 3/4 Fourth Quarter................................................. 1 7/8 11/16 1999 - ---- First Quarter.................................................. 1 1/2 27/32 Second Quarter................................................. 2 7/8 Third Quarter.................................................. 2 3/8 1 3/8 Fourth Quarter................................................. 3 23/64 1 3/8
As of February 14, 2000, there were approximately 4,818 holders of record of the common stock. Cytogen has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The Company currently intends to retain any future earnings to fund the development and growth of its business. Any future determination to pay dividends will be at the discretion of the Company's board of directors. 41 Item 6. Selected Financial Data The following selected financial information has been derived from the consolidated financial statements of the Company for each of the five years in the period ended December 31, 1999, which have been audited by Arthur Andersen LLP, the Company's independent public accountants. The selected financial data set forth below should be read in conjunction with the consolidated financial statements, including the notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information provided elsewhere in this report.
Year Ended December 31, ------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------------ Statements of Operations Data: (All amounts in thousands, except per share date) Revenues: Product sales .................................... $ 6,971 $ 8,976 $ 5,252 $ 1,507 $ 1,377 Royalties ........................................ 1,060 1,664 3,282 - - License and contract ............................. 3,171 9,239 5,886 4,223 3,608 -------- -------- -------- -------- -------- Total revenues ................................. 11,202 19,879 14,420 5,730 4,985 -------- -------- -------- -------- -------- Operating Expenses: Cost of product and contract manufacturing revenues (1)...................... 4,111 12,284 5,939 - - Research and development .......................... 3,849 9,967 17,913 20,539 22,594 Acquisition of technology rights.................. 1,214 - - - 45,878 Equity loss in Targon subsidiary................... - 1,020 9,232 288 - Selling and marketing ............................. 4,210 5,103 5,492 4,143 4,493 General and administrative......................... 3,501 7,420 6,871 5,494 4,804 -------- -------- -------- -------- -------- Total operating expenses ....................... 16,885 35,794 45,447 30,464 77,769 -------- -------- -------- -------- -------- Operating loss.................................. (5,683) (15,915) (31,027) (24,734) (72,784) Gain on sale of laboratory and manufacturing facilities........................................ 3,298 - - - - Gain on sale of Targon subsidiary.................... - 2,833 - - - Other income (expense) .............................. 412 (70) 315 968 264 -------- -------- -------- -------- -------- Loss before income taxes ...................... (1,973) (13,152) (30,712) (23,766) (72,520) Income tax benefit .................................. (2,702) - - - - -------- -------- -------- -------- -------- Net income (loss).................................... 729 (13,152) (30,712) (23,766) (72,520) Dividends, including deemed dividends on preferred stock...................... - (119) (1,352) (4,571) - -------- -------- -------- -------- -------- Net income (loss) to common stockholders............. $ 729 $(13,271) $(32,064) $(28,337) $(72,520) ======== ======== ======== ======== ======== Basic and diluted net income (loss) per common share..................................... $ 0.01 $ (0.24) $ (0.63) $ (0.59) $ (2.11) ======== ======== ======== ======== ======== Weighted average common shares outstanding Basic ............................................ 67,179 56,419 51,134 48,401 34,333 ======== ======== ======== ======== ======== Diluted .......................................... 68,187 56,419 51,134 48,401 34,333 ======== ======== ======== ======== ========
42
December 31, -------------------------------------------------------------------------- Consolidated Balance Sheet Data: 1999 1998 1997 1996 1995 --------- ------------ ---------- ------------ ---------- (in thousands) Cash, short term investments and restricted cash ................................ $ 12,394 $ 3,015 $ 7,401 $ 24,765 $ 29,135 Total assets ........................................ 18,605 10,900 27,555 41,543 37,149 Long-term liabilities ............................... 2,416 2,223 10,171 1,855 3,275 Accumulated deficit ................................. (301,283) (302,012) (288,741) (256,677) (228,340) Stockholders' equity ................................ 10,549 443 9,983 32,927 25,276
(1) Prior to 1997, product sales were minimal and no revenues were derived from contract manufacturing, therefore, cost of product sales was immaterial and was included in research and development expenses. 43 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Cytogen Corporation ("Cytogen" or "The Company" which includes the Company and its subsidiaries) is an established biopharmaceutical company with two principal lines of business, proteomics and oncology. The Company is extending its expertise in antibodies and molecular recognition to the development of new products and a proteomics-driven drug discovery platform. The Company has established a pipeline of product candidates based upon its proprietary antibody and prostate specific membrane antigen, or PSMA, technologies. Cytogen is also developing a proprietary protein pathway database as a drug discovery and development tool for the pharmaceutical and biotechnology industries. Cytogen's cancer management franchise currently comprises three marketed FDA-approved products: ProstaScint, used to image the extent and spread of prostate cancer; OncoScint CR/OV, marketed as a diagnostic imaging agent for colorectal and ovarian cancer and Quadramet, marketed for the relief of cancer- related bone pain. The Company is extending its cancer pipeline by exploiting PSMA, which Cytogen exclusively licensed from Memorial Sloan-Kettering Cancer Center. PSMA is a unique antigen highly expressed in prostate cancer cells and in the neovasculature of a variety of other solid tumors, including breast, lung and colon. The Company is developing its PSMA technology as part of its approach to offering a full range of prostate cancer management products and services throughout the progression of the disease, including gene-based immunotherapy vaccines, antibody-delivered therapeutic compounds and novel assays for detection of primary prostate cancer. Cytogen also plans to apply its PSMA technology, including therapeutics and in vitro diagnostics, toward other types of cancer based upon the Company's experience in prostate cancer. The Company's in vivo immunotherapeutic development program is being conducted in collaboration with Progenics Pharmaceuticals, Inc. Proteomics is the study of the expression and interaction of proteins. Genomics is the study and identification of an organism's genetic makeup. While genomics provides important information regarding genetic makeup, it does not directly provide information regarding protein functions or protein interactions. However, genomics data can prove useful in proteomics research as a source of obtaining complete protein sequences of ligands the Company has identified. Public availability of this genomic information allows for effective integration in the Company's database of public and proprietary information. The Company recognized in its past research that the key to understanding or developing the means to intervene in diseases was primarily based on understanding protein interactions rather than only through the use or study of genomics. The Company undertook this approach on its own initiative and with its own funds. Cytogen's proteomics program, under development by its subsidiary, AxCell Biosciences Corporation, is focused on the identification of protein interaction and signaling pathways within cells as relating to disease processes. The Company utilizes its proprietary proteomics technology to map selective protein-protein interactions and to develop a database, called the Inter- Functional Proteomic Database, or IFP Database, which includes data relating to protein signaling pathways linked to a variety of other bioinformatic data. The IFP Database is designed to permit customers to integrate existing databases, both public and proprietary, with the Company's proprietary data to create a "virtual laboratory" on the computer desktop of researchers involved in drug discovery. The Company believes this database has significant potential commercial value to the pharmaceutical and biotechnology industries as a means of expediting drug target identification, validation, screen development and lead compound optimization faster and cheaper than with current methodologies. These proprietary technologies are designed to provide a platform from which the Company can quickly and cost-effectively determine protein-protein interactions and build pathways of intracellular signaling data. The Company's IFP Database also offers a consolidated platform to enable statistical and mathematical modeling of complex protein pathways. Results of Operations Years ended December 31, 1999, 1998 and 1997 Revenues. Total revenues were $11.2 million in 1999, $19.9 million in 1998 and $14.4 million in 1997. The decrease in 1999 from 1998 and 1997 was primarily due to lower product related revenues, the phasing out of contract manufacturing services and lower license and research revenues. Product related revenues, 44 including product sales and royalty revenues, accounted for 72%, 54% and 59% of revenues in 1999, 1998 and 1997, respectively. License and contract revenues accounted for the remainder of revenues. Product related revenues were $8.0 million, $10.6 million and $8.5 million in 1999, 1998 and 1997, respectively. ProstaScint accounted for 79%, 60% and 48% of the revenues in 1999, 1998 and 1997, respectively, while Quadramet royalties and sales accounted for 13%, 31% and 38% of revenues in 1999, 1998 and 1997 respectively. Sales from ProstaScint were $6.4 million, $6.4 million and $4.1 million in 1999, 1998 and 1997, respectively. In the fourth quarter of 1999, the Company began transitioning sales of ProstaScint from C.R. Bard, Inc. to Cytogen's in-house sales force. The Company cannot give any assurance as to the impact on sales by assuming the sole responsibility for marketing and sales of ProstaScint. Royalties and sales from Quadramet were $1.1 million, $3.3 million and $3.3 million in 1999, 1998 and 1997, respectively. From the time of product launch in the second quarter of 1997 through June 1998, Cytogen recorded royalty revenues for Quadramet based on minimum contractual payments, which were in excess of actual sales. Subsequent to June 1998, the minimum royalty arrangement was discontinued and Cytogen recorded product revenues from Quadramet based on actual sales. Beginning in 1999, Quadramet royalties are based on net sales of Quadramet by Berlex, Cytogen's marketing partner for Quadramet. Berlex relaunched the product in March 1999. Although Cytogen believes that Berlex is an advantageous marketing partner, there can be no assurance that Quadramet will, following the re-launch of the product, achieve market acceptance on a timely basis or result in significant revenues for Cytogen. Other product revenues, including sales from OncoScint CR/OV, were $620,000, $923,000 and $1.2 million in 1999, 1998 and 1997, respectively. Sales from OncoScint CR/OV were $620,000, $872,000 and $950,000 in 1999, 1998 and 1997, respectively. The Company sells OncoScint CR/OV for diagnostic use in ovarian and colorectal cancer. The Company is experiencing competition in the colorectal market and expects this competition to increase. In 1998 and 1997, other product revenues included $51,000 and $245,000, respectively from autologous lymphocyte therapy ("ALT") treatments for metastatic renal cell carcinoma. Due to the discontinuance of the program in September 1998, the Company received no additional revenues from ALT treatments in 1999. License and contract revenues for 1999, 1998 and 1997 were $3.2 million, $9.2 million and $5.9 million, respectively, and included up-front licensing and milestone payments, contract manufacturing and research revenues. License and contract revenues have fluctuated in the past and may fluctuate in the future. Revenues from up-front licensing and milestone payments were $2.0 million, $7.2 million and $2.1 million in 1999, 1998 and 1997, respectively. In 1999, the Company recorded $1.8 million for the licensing of certain applications of PSMA to a joint venture formed by Cytogen and Progenics Pharmaceuticals Inc. (see Note 3 to the Consolidated Financial Statements). In 1998, the Company recorded a $7.1 million up-front licensing payment from Berlex for the marketing and manufacturing rights of Quadramet. In 1997, Cytogen received a $2.0 million milestone payment from DuPont upon FDA approval of Quadramet. Revenues from contract manufacturing and research revenues were $1.2 million, $2.0 million and $3.8 million in 1999, 1998 and 1997, respectively. Revenues from contract manufacturing were $604,000, $1.7 million and $984,000 in 1999, 1998 and 1997, respectively. The Company is phasing out contract manufacturing services and expects to receive no further revenues from this service after 1999. The 1997 revenues included $1.5 million from DuPont Pharmaceutical Company ("DuPont") for the continued clinical development of Quadramet (see Note 6 of Notes to the Consolidated Financial Statements) and $924,000 from Elan Corporation, plc ("Elan") for a combined research program between Cytogen and Elan to collaboratively develop orally administered products. Operating Expenses. Total operating expenses were $16.9 million, $35.8 million and $45.4 million in 1999, 1998, and 1997, respectively. The 1999 decrease from 1998 and 1997 was the result of savings from the implementation of the Company's restructuring plan. The plan, implemented in 1998 and completed in 1999, included the sale of the manufacturing facility which eliminated excess capacity and reduced the cost of manufacturing the Company's products, closure of Cellcor, a subsidiary, corporate downsizing, the termination of product 45 development efforts through Targon, a subsidiary, and termination and curtailing of certain basic research and clinical programs. The 1999 operating expenditures included a $1.2 million non-cash charge for the acquisition of exclusive technology rights for immunotherapy to PSMA from Prostagen Inc. ("Prostagen"). The 1998 operating expenses included $1.4 million of restructuring costs associated with the closure of Cellcor and corporate downsizing, $539,000 in costs related to the implementation of the Company's turn-around plan, $4.0 million for a Quadramet manufacturing commitment and $995,000 for manufacturing and distribution of Quadramet. The 1997 operating expenses included a one-time license fee of $7.5 million for the acquisition of a product from Elan and a milestone payment of $4.0 million to The Dow Chemical Company ("Dow") upon the FDA's marketing approval of Quadramet. Costs of product and contract manufacturing revenues were $4.1 million, $12.3 million and $5.9 million in 1999, 1998 and 1997, respectively. The 1999 decrease from 1998 and 1997 was due to decreased manufacturing costs associated with decreased contract manufacturing activities in 1999 and lower manufacturing costs for Cytogen products as a result of the sale of the manufacturing facility. The 1999 decrease compared to 1998 is also due to the 1998 costs associated with a one-time charge of $4.0 million for a Quadramet manufacturing commitment and $995,000 for the manufacturing and distribution of Quadramet (see Note 6 of Notes to the Consolidated Financial Statements). Research and development expenses were $3.8 million in 1999, $10.0 million in 1998 and $17.9 million in 1997. These expenses principally reflect product development efforts and support for various ongoing clinical trials. The 1999 decrease from 1998 and 1997 is due to the curtailing of certain of the Company's product development efforts including the closure of Cellcor, the termination of basic research programs and the scale back of various clinical programs. The 1999 decrease from 1997 is also due to a $4.0 million milestone payment to Dow upon FDA's marketing approval of Quadramet in 1997. Acquisition of technology rights of $1.2 million in 1999 represents a non-cash charge related to the acquisition of Prostagen (see Note 2 to the Consolidated Financial Statements). Equity losses in Targon subsidiary were $1.0 million and $9.2 million in 1998 and 1997, respectively. The Company sold Targon in 1998. Selling and marketing expenses were $4.2 million, $5.1 million and $5.5 million in 1999, 1998 and 1997, respectively. These expenses reflect marketing efforts for the ProstaScint and expenses to establish and maintain the Partners in Excellence ("PIE") program. The 1999 decrease from 1998 and 1997 is due to open sales positions and lower commission due Bard under the Co-Marketing Agreement. The Company is phasing out this agreement to assume sole responsibility for marketing and sales of ProstaScint. The transition is expected to be concluded by mid-year 2000, with the Co-Marketing Agreement will terminate at that time. The Company is currently expanding its sales force in preparation for this change. General and administrative expenses were $3.5 million, $7.4 million and $6.9 million in 1999, 1998 and 1997, respectively. The 1999 decrease from 1998 and 1997 is due to various cost containing efforts in the Company's restructuring plan implemented in 1999 and 1998 such as the closure of Cellcor and corporate downsizing. The 1999 decrease from 1998 is also due to the 1998 restructuring costs of $1.9 million including severance and implementation of a turn-around plan. Gain on sale of laboratory and manufacturing facilities. The Company recorded a gain of $3.3 million during 1999 resulting from a sale of certain of the Company's laboratory and manufacturing facilities to Purdue Bio Pharma for net proceeds of $3.6 million in January 1999. Gain on sale of Targon subsidiary was $2.8 million in 1998 as a result of the sale of Cytogen's ownership interest in Targon to Elan (see Note 4 of Notes to the Consolidated Financial Statements). 46 Interest Income/Expense. Interest income was $441,000, $582,000 and $606,000 for 1999, 1998 and 1997, respectively. The 1999 decrease from 1998 and 1997 is due primarily to interest income realized beginning July 1997 from the $10.0 million note from Targon payable to Cytogen. The note was canceled as a result of the sale of Targon to Elan in August 1998 (see Note 4 of Notes to the Consolidated Financial Statements). Interest expense was $29,000, $652,000 and $291,000 in 1999, 1998 and 1997, respectively. The 1999 decrease from 1998 and 1997 was due to the cancellation and satisfaction of liabilities associated with Elan and Knoll Pharmaceuticals Company ("Knoll"), respectively. The $10.0 million note due to Elan was canceled as a result of the sale of Targon to Elan in August 1998. The Company paid the balance of the obligation to Knoll in December 1998. Income tax benefit. During 1999, the Company sold New Jersey State operating loss carryforwards and research and development credits which resulted in the recognition of a $2.7 million tax benefit. Under the current legislation, the Company will be able to sell at least $1.6 million of the approved $5.6 million of tax benefits in 2000. The actual amount of tax credits the Company may sell will depend upon the allocation among qualifying companies of an annual pool established by the State of New Jersey. Net Income/Loss. Net income to common stockholders was $729,000 in 1999 compared to a net loss of $13.3 million and $32.1 million in 1998 and 1997, respectively. Basic and fully diluted net income per common share in 1999 was $0.01 based on average common shares outstanding of 67.2 million for basic and 68.2 million for diluted. The net loss per common share is $0.24 and $0.63 in 1998 and 1997, respectively, based on 56.4 million and 51.1 million average common shares outstanding in each year, respectively. The 1997 net loss was increased by $1.4 million of deemed and accrued dividends on the Series B Preferred Stock. Liquidity and Capital Resources The Company's cash, cash equivalents and short-term investments were $12.4 million as of December 31, 1999, compared to $3.0 million as of December 31, 1998 and $7.4 million as of December 31, 1997. The cash used for operating activities in 1999 was $3.9 million compared to $8.0 million in the same period of 1998. The decrease in cash used for operating activities from 1998 was primarily due to lower spending in all areas as a result of the implementation of the Company's restructuring plan. Historically, the Company's primary sources of cash have been proceeds from the issuance and sale of its stock through public offerings and private placements, product related revenues, revenues from contract manufacturing and research services, fees paid under license agreements and interest earned on cash and short term investments. In February 2000, the Company received $1.0 million from Berlex for the exercise of a warrant to purchase 1,000,000 shares of Cytogen common stock at $1.002 per share. In December 1999, the Company received $2.7 million for the sale of New Jersey State tax losses and research and development credits. Under the current legislation, the Company will be able to sell at least $1.6 million of the approved $5.6 million of tax benefits in 2000. The actual amount of tax credits the Company may sell will depend upon the allocation among qualifying companies of an annual pool established by the state of New Jersey. In October 1999, the Company sold its undeveloped land in New Jersey for net proceeds of $714,000. In August 1999, the Company sold 3,105,590 shares of Cytogen common stock at an aggregate price of $5.0 million or $1.61 per share to the State of Wisconsin Investment Board. As a result of this funding, the Company terminated the remaining $11.5 million of a $12 million equity line agreement with an institutional investor that was entered into in October 1998. Previously, the Company sold $500,000 of Cytogen common stock at $1.0519 per share under this equity line agreement in January 1999. 47 In connection with the acquisition of Prostagen in June 1999, the Company received $550,000 in cash along with other assets held by Prostagen (see Note 2 to the Consolidated Financial Statements). During 1999, the Company received payments of $1.0 million related to the licensing of PSMA technology to a joint venture between Cytogen and Progenics. The remaining balance of $1.0 million will be paid in installments through December 31, 2001 (see Note 3 to the Consolidated Financial Statements). In January 1999, the Company sold its manufacturing and laboratory facilities for net proceeds of $3.6 million, of which $744,000 of the net proceeds were used to repay the outstanding balance of a term loan entered in 1998. In addition, Cytogen sold 2,666,667 shares of common stock to a subsidiary of The Hillman Company at $0.75 per share for a total of $2.0 million. The Company expects to significantly increase the funding of AxCell for the proteomics program in 2000. The operating requirement for AxCell will be funded by Cytogen's existing cash balance. The capital requirement for AxCell may be funded by a $1.4 million line-of-credit agreement entered into in February 2000 between the Company and Finova Capital Corporation ("Finova Facility"). From time to time, until November 2000, the Company will draw on the Finova Facility ("Each Loan") to finance the acquisition of computers and equipment. Each Loan will have a fixed term of 42 months at an interest rate equal to 8.65% plus the Index Rate and will be collateralized by the newly purchased equipment. The Company's capital and operating requirements may change depending upon various factors, including: (i) whether the Company and its strategic partners achieve success in manufacturing, marketing and commercialization of its products; (ii) the amount of resources which the Company devotes to clinical evaluations and the expansion of marketing and sales capabilities; (iii) results of clinical trials and research and development activities; and (iv) competitive and technological developments, in particular the Company may expend funds for development of its proteomics and PSMA technologies. The Company's financial objectives are to meet its capital and operating requirements through revenues from existing products, license and research contracts, and control of spending. To achieve its strategic objectives, the Company may enter into research and development partnerships and acquire, in- license and develop other technologies, products or services. Certain of these strategies may require payments by the Company in either cash or stock in addition to the costs associated with developing and marketing a product or technology. The Company currently has no commitments or specific plans for acquisitions or strategic alliances. However, the Company believes that, if successful, such strategies may increase long-term revenues. There can be no assurance as to the success of such strategies or that resulting funds will be sufficient to meet cash requirements until product revenues are sufficient to cover operating expenses. To fund these strategic and operating activities, the Company may sell equity and debt securities as market conditions permit or enter into credit facilities. The Company has incurred negative cash flows from operations since its inception, and has expended, and expects to continue to expend in the future, substantial funds to implement its planned product development efforts, including acquisition of products and complementary technologies, research and development, clinical studies and regulatory activities, and to further its marketing and sales programs. The Company expects that its existing capital resources as of December 31, 1999, together with the net proceeds of $1.0 million from a sale of equity to Berlex in February 2000 and decreased operating costs will be adequate to fund the Company's operations through the year 2001. No assurance can be given that the Company will not consume a significant amount of its available resources before that time. In addition, the Company expects that it will have additional requirements for debt or equity capital, irrespective of whether and when it reaches profitability, for further development of products, product and technology acquisition costs, and working capital. 48 The Company's future capital requirements and the adequacy of available funds will depend on numerous factors, including the successful commercialization of its products, the costs associated with the acquisition of complementary products and technologies, progress in its product development efforts, the magnitude and scope of such efforts, progress with clinical trials, progress with regulatory affairs activities, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, competing technological and market developments, and the expansion of strategic alliances for the sales, marketing, manufacturing and distribution of its products. To the extent that the currently available funds and revenues are insufficient to meet current or planned operating requirements, the Company will be required to obtain additional funds through equity or debt financing, strategic alliances with corporate partners and others, or through other sources. Based on the Company's historical ability to raise capital and current market conditions, the Company believes other financing alternatives are available. There can be no assurance that the financing commitments described above or other financial alternatives will be available when needed or at terms commercially acceptable to the Company or that the Company would have adequate authorized unissued shares available for issuance without stockholder approval. If adequate funds are not available, the Company may be required to delay, further scale back or eliminate certain aspects of its operations or attempt to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, products or potential markets. If adequate funds are not available, the Company's business, financial condition and results of operations will be materially and adversely affected. Year 2000 Compliance The "Year 2000 problem" describes the concern that certain computer applications, which use two digits rather than four to represent dates, will interpret the year 2000 as 1900 and malfunction on or after January 1, 2000. Cytogen's Internal Systems. The Company's programs and systems did not fail or malfunction upon the arrival of January 1, 2000. The Company internal systems were modified and replaced with fully compliant systems, prior to December 31, 1999. The Company believes that it has achieved its goals regarding year 2000 compliance on all of its critical and non-critical systems. Readiness of Third Parties. The Company worked with its processing banks, network providers and manufacturing partners to ascertain that their systems were year 2000 compliant. Risks Associated with the Year 2000. The Company is not aware, at this time, of any year 2000 non-compliance issues that were not addressed and repaired prior to December 31, 1999. Recently Enacted Accounting Pronouncements In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). The bulletin draws on existing accounting rules and provides specific guidance on how those accounting rules should be applied, and specifically addresses revenue recognition for non-refundable technology access fees in the biotechnology industry. SAB 101 is effective for fiscal years beginning after December 15, 1999. The Company is evaluating SAB 101 and the effect it may have on the Company's financial position or results of operations. 49 Item 7a. Quantitative and Qualitative Disclosures About Market Risk The Company does not have operations subject to risks of foreign currency fluctuations, nor does it use derivative financial instruments in its operations or investment portfolio. The Company does not have exposure to market risks associated with changes in interest rates, as it has no variable interest rate debt outstanding. The Company does not believe it has any other material exposure to market risks associated with interest rates. Item 8. Financial Statements and Supplementary Data The response to Item 8 is submitted as a separate section of this Form 10-K Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Information regarding the Company's Directors is incorporated by reference to the information contained under the captions "Nominees for Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement. Information regarding the Company's Executive Officers is set forth in Part I of this Form 10-K. Item 11. Executive Compensation Incorporated by reference to the information contained under the caption "Executive Compensation" in the Company's Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference to the information contained under the caption "Security Ownership of Management and Principal Stockholders" in the Company's Proxy Statement. Item 13. Certain Relationships and Related Transactions In June 1999, Cytogen entered into an agreement with S. Leslie Misrock, and others, to reacquire rights for immunotherapy to its PSMA technology by acquiring Prostagen, Inc., of which Mr. Misrock was a principal holder. Mr. Misrock was elected to the Board of Directors of the Company in August 1999. In connection with the acquisition, Mr. Misrock received shares of the Company's common stock. The Company may also issue additional shares upon completion of certain objectives, including up to 450,000 shares of Cytogen common stock upon the satisfactory termination of lease obligations assumed in the acquisition; up to 500,000 shares upon beneficial resolution of other contractual arrangements entered by Prostagen; and up to an additional $4.0 million in shares of Cytogen common stock (calculated at the time of issuance) if certain milestones are achieved in development of the PSMA technology. Mr. Misrock would receive a portion of these shares. 50 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as a part of the Report: (1) and (2) The response to this portion of Item 14 is submitted as a separate section of this Form 10-K. (3) Exhibits -- -------- Exhibit No. ----------- 1.1 - Rights Agreement, dated as of June 19, 1998, between Cytogen Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights Agent. The Rights Agreement included the Form of Certificate of Designations of Series C Junior Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights as Exhibit C. Filed as an exhibit to Form 8-K dated June 17, 1998 (Commission File No. 333-020015) and incorporated herein by reference. 1.2 - Amended and Restated Rights Agreement, dated as of October 19, 1998 between Cytogen Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights Agent. The Amended and Restated Rights Agreement includes the Form of Certificate of Designations of Series C Junior Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights as Exhibit C. Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended September 30, 1998 (Commission File No. 333-02015) and incorporated herein by reference. 3.1 - Restated Certificate of Incorporation of Cytogen Corporation, as amended. Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended June 30, 1996 (Commission File No. 0-14879) and incorporated herein by reference. 3.2 - By-Laws of Cytogen Corporation, as amended. Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended June 30, 1999 (Commission File No. 333-02015) and incorporated herein by reference. 4.1 - Specimen of Common Stock Certificate. Filed as an exhibit to Amendment No. 1 to Form S-1 Registration Statement (No. 33-5533) and incorporated herein by reference. 10.1 - Form of Registration Rights Agreement for Common Stock between Cytogen Corporation and certain persons listed on Schedule A thereto. Filed as an exhibit to Form S-4 Registration Statement (No. 33-62617) and incorporated herein by reference. 10.2.1 - Lease Agreement, dated as of March 16, 1987, by and between Peregrine Investment Partners I, as lessor, and Cytogen Corporation, as lessee. Filed as an exhibit to Form 10-K Annual Report for Year Ended January 2, 1988 (Commission File No. 0-14879) and incorporated herein by reference. 51 10.2.2 - Amendment, dated as of October 16, 1987, to Lease Agreement between Peregrine Investment Partners I and Cytogen Corporation. Filed as an exhibit to Form S-8 Registration Statement (No. 33-30595) and incorporated herein by reference. 10.3 - 1989 Employee Stock Option Plan. Filed as an exhibit to Form S-8 Registration Statement (No. 33-30595) and incorporated herein by reference.+ 10.4.1 - 1988 Stock Option Plan for Non-Employee Directors. Filed as an exhibit to Form S-8 Registration Statement (No. 33-30595) and incorporated herein by reference.+ 10.4.2 - Amendment to the Cytogen Corporation 1988 Stock Option Plan for Non-Employee Directors dated May 22, 1996. Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended June 30, 1996 (Commission File No. 0- 14879) and incorporated herein by reference.+ 10.5 - Standard Form of Indemnification Agreement entered into between Cytogen Corporation and its officers, directors, and consultants. Filed as an exhibit to Amendment No. 1 to Form S-1 Registration Statement (No. 33-31280) and incorporated herein by reference.+ 10.6 - 1989 Stock Option Policy for Outside Consultants. Filed as an exhibit to Amendment No. 1 to Form S-1 Registration Statement (No. 33-31280) and incorporated herein by reference.+ 10.7.1 - License Agreement dated as of March 31, 1993 between Cytogen Corporation and The Dow Chemical Company. Filed as an exhibit to Form 10-Q/A-1 Amendment to Quarterly Report for the quarter ended July 3, 1993 (Commission File No. 0-14879) and incorporated herein by reference.* 10.7.2 - Amendment of the License Agreement between Cytogen Corporation and The Dow Chemical Company dated September 5, 1995. Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended March 31, 1996 (Commission File No. 0-14879) and incorporated herein by reference.* 10.7.3 - Second Amendment to the License Agreement between Cytogen Corporation and The Dow Chemical Company dated May 20, 1996. Filed as an exhibit to Form 10-Q/A-1 Amendment to Quarterly Report for the quarter ended June 30, 1996 (Commission File No. 0-14879) and incorporated herein by reference.* 10.8 - 1992 Cytogen Corporation Employee Stock Option Plan II, as amended. Filed as an exhibit to Form S-4 Registration Statement (No. 33-88612) and incorporated herein by reference. + 10.9 - License Agreement, dated March 10, 1993, between Cytogen Corporation and The University of North Carolina at Chapel Hill, as amended. Filed as an exhibit to Form 10-K Annual Report for the year ended December 31, 1994 (Commission File No. 0-14879) and incorporated herein by reference.* 10.10 - Option and License Agreement, dated July 1, 1993, between Cytogen Corporation and Sloan-Kettering Institute for Cancer Research. Filed as an exhibit to Form 10-K Annual Report for the year ended December 31, 1994 (Commission File No. 0-14879) and incorporated herein by reference.* 52 10.11.1 - Cytogen Corporation 1995 Stock Option Plan. Filed as an exhibit to Form 10-K Annual Report for the year ended December 31, 1995 (Commission File No. 0-14879) and incorporated herein by reference. 10.11.2 - Amendment No. 1 to the Cytogen Corporation 1995 Stock Option Plan dated May 22, 1996. Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended June 30, 1996 (Commission File No. 0-14879) and incorporated herein by reference.+ 10.12 - Horosziewicz - Cytogen Agreement, dated April 20, 1989, between Cytogen Corporation and Julius S. Horosziewicz, M.D., DMSe. Filed as an exhibit to Form 10-K Annual Report for the year ended December 31, 1995 (Commission File No. 0-14879) and incorporated herein by reference.* 10.13 - Marketing and Co-Promotion Agreement between Cytogen Corporation and C.R. Bard, Inc. effective August 1, 1996. Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended September 30, 1996 (Commission File No. 0-14879) and incorporated herein by reference.* 10.14 - Severance Agreement effective as of March 26, 1996 between Cytogen Corporation and John D. Rodwell, Ph.D. Files as an exhibit to Form 10-K Annual Report for the year ended December 31, 1996 (Commission File No. 0-14879) and incorporated herein by reference. + 10.15 - Cytogen Corporation Employee Stock Purchase Plan. Filed as an exhibit to Form S-8 Registration Statement (No. 333-27673) and incorporated herein by reference. + 10.16 - License Agreement between Targon Corporation and Elan Corporation, plc dated July 21, 1997. Filed as an exhibit to Form 10Q Quarterly Report for the quarter ended June 30, 1997 (Commission File No. 0-14879) and incorporated herein by reference.* 10.17 - Employment Agreement effective as of December 23, 1996 between Cytogen Corporation and Dr. Graham S. May. Filed as an exhibit to Form 10-K/A-1 Amendment to Annual Report for the Year Ended December 31, 1997 (Commission File No. 333-02015) and incorporated herein by reference. + 10.18 - Convertible Promissory Note dated as of August 12, 1998 between Cytogen Corporation and Elan International Services, Ltd. Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended June 30, 1998 (Commission File No. 333-02015) and incorporated herein by reference. 10.19 - Employment agreement effective as of August 20, 1998 between Cytogen Corporation and H. Joseph Reiser. Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended September 30, 1998 (Commission File No. 333-02015) and incorporated herein by reference. + 10.21 - License Agreement by and between Berlex Laboratories, Inc. and Cytogen Corporation dated as of October 28, 1998. Filed as an exhibit to Form 10-Q/A-1 Amendment to Quarterly Report for the quarter ended September 30, 1998 (Commission File No. 333-02015) and incorporated herein by reference. 53 10.22 - Manufacturing Space Agreement between Bard BioPharma L.P. and Cytogen Corporation dated as of January 7, 1999. Filed as an exhibit to Form S-1/A-1 Amendment to Registration Statement (Commission File No. 333-67947) and incorporated herein by reference. 10.23 - Employment Agreement effective as of June 10, 1997 between Cytogen Corporation and Donald F. Crane, Jr. Filed herewith.+ 10.24 - The 1999 Cytogen Corporation Non-Employee Directors Stock Option Plan. Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended June 30, 1999 (Commission File No. 333-02015) and incorporated herein by reference.+ 10.25 - Strategic Alliance Agreement between AxCell Biosciences Corporation and InforMax, Inc. dated as of September 15, 1999. Filed herewith.** 10.26 - AxCell Biosciences Corporation Employee Stock Option Plan. Filed herewith.+ 10.27 - Master Loan and Security Agreement No. S7600 among Cytogen Corporation, AxCell Biosciences Corporation and Finova Capital Corporation dated December 30, 1999. Filed herewith. 21 - Subsidiaries of Cytogen Corporation. 23 - Consent of Arthur Andersen LLP. 27 - Financial Data Schedule (submitted to SEC only in electronic format). + Management contract or compensatory plan or arrangement. * Cytogen Corporation has received confidential treatment of certain provisions contained in this exhibit pursuant to an order issued by the Securities and Exchange Commission. The copy filed as an exhibit omits the information subject to the confidentiality grant. **Cytogen Corporation has requested confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidential request. (b) Reports on Form 8-K: None. (c) Exhibits: The Exhibits filed with this Form 10-K are listed above in response to Item 14(a)(3). (d) Financial Statement Schedules: None 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 27th day of March 2000. Cytogen Corporation By: /s/ H. Joseph Reiser ------------------------------- H. Joseph Reiser President and Chief Executive Officer 55 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ H. Joseph Reiser Chief Executive Officer and President March 28, 2000 ------------------------------- H. Joseph Reiser (Principal Executive Officer), and Director /s/ Jane M. Maida Vice President Finance & Administration March 28, 2000 ------------------------------- Jane M. Maida /s/ John E. Bagalay, Jr. Director March 28, 2000 ------------------------------- John E. Bagalay, Jr. /s/ Ronald J. Brenner Director March 28, 2000 ------------------------------- Ronald J. Brenner /s/ Stephen K. Carter Director March 28, 2000 ------------------------------- Stephen K. Carter /s/ James A. Grigsby Director and Chairman of the Board March 28, 2000 ------------------------------- James A. Grigsby /s/ Robert F. Hendrickson Director March 28, 2000 ------------------------------- Robert F. Hendrickson /s/ S. Leslie Misrock Director March 28, 2000 ------------------------------- S. Leslie Misrock
56 Annual Report on Form 10-K Year Ended December 31, 1999 Item 8, Item 14(a)(1) and (2) Cytogen Corporation Princeton, New Jersey 57 Form 10-K Item 14(a)(1) and (2) Cytogen CORPORATION AND SUBSIDIARIES (1) Consolidated Financial Statements --------------------------------- The following consolidated financial statements of Cytogen Corporation and Subsidiaries together with the related notes and report of Arthur Andersen LLP, independent public accountants.
Page in Form 10-K Report of Independent Public Accountants.............................................. 21 Consolidated Balance Sheets as of December 31, 1999 and 1998 ......................... 22 Consolidated Statements of Operations--Years Ended December 31, 1999, 1998 and 1997......................................................................... 23 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1999, 1998 and 1997.................................................................... 24 Consolidated Statements of Cash Flows--Years Ended December 31, 1999, 1998 and 1997......................................................................... 25 Notes to Consolidated Financial Statements............................................ 26
58 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Cytogen Corporation: We have audited the accompanying consolidated balance sheets of Cytogen Corporation (a Delaware Corporation) and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cytogen Corporation and Subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Philadelphia, PA January 27, 2000 59 CYTOGEN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (all amounts in thousands, except share data)
December 31, ---------------------- 1999 1998 ---------- ---------- ASSETS: Current Assets: Cash and cash equivalents.......................................... $ 10,801 $ 3,015 Short-term investments............................................. 1,593 - Receivable on common stock sold.................................... - 2,500 Accounts receivable, net........................................... 2,150 1,362 Inventories........................................................ 685 250 Other current assets............................................... 465 330 --------- --------- Total current assets............................................ 15,694 7,457 Property and Equipment, net.......................................... 1,997 2,625 Other Assets......................................................... 914 818 --------- --------- $ 18,605 $ 10,900 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Current portion of long-term liabilities........................... $ 162 $ 848 Accounts payable and accrued liabilities........................... 5,478 7,386 --------- --------- Total current liabilities....................................... 5,640 8,234 --------- --------- Long-Term Liabilities................................................ 2,416 2,223 --------- --------- Commitments and Contingencies (Notes 7 and 17) Stockholders' Equity: Preferred stock, $.01 par value, 5,400,000 shares authorized - Series C Junior Participating Preferred Stock, $.01 par value, 200,000 shares authorized, none issued and outstanding........ - - Common stock, $.01 par value, 89,600,000 shares authorized, 70,527,000 and 61,950,000 shares issued and outstanding in 1999 and 1998, respectively................................ 705 619 Additional paid-in capital......................................... 311,209 301,836 Deferred compensation.............................................. (82) - Accumulated deficit................................................ (301,283) (302,012) --------- --------- Total stockholders' equity...................................... 10,549 443 --------- --------- $ 18,605 $ 10,900 ========= =========
The accompanying notes are an integral part of these statements. 60 CONSOLIDATED STATEMENTS OF OPERATIONS (all amounts in thousands, except per share data)
Year Ended December 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Revenues: Product related: ProstaScint....................................................... $ 6,351 $ 6,378 $ 4,057 Quadramet......................................................... - 1,675 - Others............................................................ 620 923 1,195 -------- -------- -------- Total product sales......................................... 6,971 8,976 5,252 Quadramet royalties............................................... 1,060 1,664 3,282 -------- -------- -------- Total product related....................................... 8,031 10,640 8,534 License and contract.................................................. 3,171 9,239 5,886 -------- -------- -------- Total revenue............................................... 11,202 19,879 14,420 -------- -------- -------- Operating Expenses: Cost of product and contract manufacturing revenues................... 4,111 12,284 5,939 Research and development.............................................. 3,849 9,967 17,913 Acquisition of technology rights...................................... 1,214 - - Equity loss in Targon subsidiary...................................... - 1,020 9,232 Selling and marketing................................................. 4,210 5,103 5,492 General and administrative............................................ 3,501 7,420 6,871 -------- -------- -------- Total operating expenses.................................... 16,885 35,794 45,447 -------- -------- -------- Operating loss.............................................. (5,683) (15,915) (31,027) Gain on sale of laboratory and manufacturing facilities................. 3,298 - - Gain on sale of Targon subsidiary....................................... - 2,833 - Interest income......................................................... 441 582 606 Interest expense........................................................ (29) (652) (291) -------- -------- -------- Loss before income taxes.................................... (1,973) (13,152) (30,712) Income tax benefit...................................................... (2,702) - - -------- -------- -------- Net income (loss)....................................................... 729 (13,152) (30,712) Dividends, including deemed dividends on preferred stock................ - (119) (1,352) -------- -------- -------- Net income (loss) to common stockholders................................ $ 729 $(13,271) $(32,064) ======== ======== ======== Net income (loss) per common share Basic....................................................... $ 0.01 $ (0.24) $ (0.63) ======== ======== ======== Diluted..................................................... $ 0.01 $ (0.24) $ (0.63) ======== ======== ======== Weighted average common shares outstanding Basic....................................................... 67,179 56,419 51,134 ======== ======== ======== Diluted..................................................... 68,187 56,419 51,134 ======== ======== ========
The accompanying notes are an integral part of these statements. 61 CYTOGEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY (All amounts in thousands, except share data)
Unrealized Gain Additional Deferred (Loss) on Acc- Total Common Paid-in Compel- Short-Term umlauted Stockholders' Stock Capital station Investments Deficit Equity ---------- --------- --------- ------------ ----------- ------------- Balance, December 31, 1996 $511 $ 289,098 $ - $ (5) $ (256,677) $ 32,927 Sale of 750 shares of Series B preferred stock.................................... - 7,455 - - - 7,455 Sale of 100,282 shares of common stock.................................... 1 335 - - - 336 Series B preferred stock conversion discount deemed dividends......................... - 1,324 - - (1,324) - Accrued dividends on Series B preferred stock.................................... - - - - (28) (28) Unrealized gain on investments.............. - - - 5 - 5 Net loss.................................... - - - - (30,712) (30,712) ---------- --------- --------- ------------ ----------- ------------- Balance, December 31, 1997.................. 512 298,212 - - (288,741) 9,983 Sale of 3,403,011 shares of common stock.................................... 34 2,583 - - - 2,617 Dividends on Series B preferred stock.................................... - - - - (119) (119) Issuance of 7,377,054 shares of common stock Upon conversion of Series B preferred stock and accumulated dividends......... 73 55 - - - 128 Sale of warrants to purchase 1,000,000 shares of common stock................... - 855 - - - 855 Modification of existing warrants to purchase 260,000 shares of common stock........... - 131 - - - 131 Net loss.................................... - - - - (13,152) (13,152) ---------- --------- --------- ------------ ----------- ------------- Balance, December 31, 1998 619 301,836 - - (302,012) 443 Issuance of 2,050,000 shares of common stock in connection with the acquisition of Prostagen, Inc........................... 21 1,824 - - - 1,845 Sale of 6,527,002 shares of common stock.................................... 65 7,244 - - - 7,309 Issuance of options and warrants to purchase 338,778 shares of common stock........... - 221 - - - 221 Deferred compensation related to stock options.................................. - 84 (84) - - - Amortization of deferred compensation............................. - - 2 - - 2 Net income.................................. - - - - 729 729 ---------- --------- --------- ------------ ----------- ------------- Balance, December 31, 1999.................. $705 $ 311,209 $ (82) $ - $ (301,283) $ 10,549 ========== ========= ========= ============ =========== =============
The accompanying notes are an integral part of these statements. 62 CYTOGEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (All amounts in thousands)
Year Ended December 31, -------------------------------- 1999 1998 1997 -------- -------- -------- Cash Flows From Operating Activities: Net income (loss)................................................................ $ 729 $(13,152) $(30,712) -------- -------- -------- Adjustments to reconcile net income (loss) to cash used in operating activities: Acquisition of technology rights............................................... 1,214 - - Depreciation and amortization.................................................. 1,051 1,196 1,513 Imputed interest............................................................... (59) 81 261 Warrant, stock and stock option grants......................................... 221 163 45 Write down of property and equipment........................................... 79 657 384 Gain on sale of laboratory and manufacturing facilities........................ (3,298) - - Gain on sale of Targon subsidiary.............................................. - (2,833) - Gain on sale of land........................................................... (54) - - Equity loss in Targon subsidiary............................................... - 1,020 9,232 Changes in assets and liabilities Accounts receivable, net.................................................... (715) 2,702 (3,625) Inventories................................................................. (435) 193 (185) Other assets................................................................ (97) 4 (74) Accounts payable and accrued liabilities.................................... (2,659) 1,944 727 Other liabilities........................................................... 146 - - -------- -------- -------- Total adjustments...................................................... (4,606) 5,127 8,278 -------- -------- -------- Net cash used in operating activities....................................... (3,877) (8,025) (22,434) -------- -------- -------- Cash Flows From Investing Activities: Net cash acquired from Prostagen, Inc. (see Note 2).............................. 550 - - Net proceeds from sale of laboratory and manufacturing facilities................ 3,584 - - Net proceeds from the sale of land............................................... 714 - - (Increase) decrease in short-term investments.................................... (1,593) - 4,474 Purchases of property and equipment.............................................. (523) (100) (621) Investment in Targon subsidiary.................................................. - - (10,000) Proceeds from sale of Targon subsidiary.......................................... - 2,000 - -------- -------- -------- Net cash provided by (used in) investing activities......................... 2,732 1,900 (6,147) -------- -------- -------- Cash Flows From Financing Activities: Proceeds from issuance of notes payable.......................................... - 2,750 10,000 Payments of long-term liabilities................................................ (878) (1,898) (2,030) Proceeds from issuance of common stock........................................... 9,809 51 261 Proceeds from issuance of Series B preferred stock............................... - - 7,455 Dividends on Series B preferred stock............................................ - (19) - Proceeds from issuance of warrant................................................ - 855 - -------- -------- -------- Net cash provided by financing activities................................... 8,931 1,739 15,686 -------- -------- -------- Net increase (decrease) in cash and cash equivalents............................. 7,786 (4,386) (12,895) Cash and cash equivalents, beginning of year..................................... 3,015 7,401 20,296 -------- -------- -------- Cash and cash equivalents, end of year........................................... $ 10,801 $ 3,015 $ 7,401 ======== ======== ========
The accompanying notes are an integral part of these statements. 63 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Business Cytogen Corporation ("Cytogen" or "The Company" which includes the Company and its subsidiaries) is an established biopharmaceutical company with two principal lines of business, proteomics and oncology. The Company is extending its expertise in antibodies and molecular recognition to the development of new products and a proteomics-driven drug discovery platform. The Company has established a pipeline of product candidates based upon its proprietary antibody and prostate specific membrane antigen, or PSMA, technologies. Cytogen is also developing a proprietary protein pathway database as a drug discovery and development tool for the pharmaceutical and biotechnology industries. Cytogen's cancer management franchise currently comprises three marketed FDA-approved products: ProstaScint, used to image the extent and spread of prostate cancer; OncoScint CR/OV, marketed as a diagnostic imaging agent for colorectal and ovarian cancer and Quadramet, marketed for the relief of cancer- related bone pain. The Company is extending its cancer pipeline by exploiting PSMA, which Cytogen exclusively licensed from Memorial Sloan-Kettering Cancer Center. PSMA is a unique antigen highly expressed in prostate cancer cells and in the neovasculature of a variety of other solid tumors, including breast, lung and colon. The Company is developing its PSMA technology as part of its approach to offering a full range of prostate cancer management products and services throughout the progression of the disease, including gene-based immunotherapy vaccines, antibody-delivered therapeutic compounds and novel assays for detection of primary prostate cancer. Cytogen also plans to apply its PSMA technology, including therapeutics and in vitro diagnostics, toward other types of cancer based upon the Company's experience in prostate cancer. The Company's in vivo immunotherapeutic development program is being conducted in collaboration with Progenics Pharmaceuticals, Inc. Proteomics is the study of the expression and interaction of proteins. Genomics is the study and identification of an organism's genetic makeup. While genomics provides important information regarding genetic makeup, it does not directly provide information regarding protein functions or protein interactions. However, genomics data can prove useful in proteomics research as a source of obtaining complete protein sequences of ligands the Company has identified. Public availability allows for effective integration in the Company's database of public and proprietary information. The Company recognized in its past research that the key to understanding or developing the means to intervene in diseases was primarily based on understanding protein interactions rather than only through the use or study of genomics. The Company undertook this approach on its own initiative and with its own funds. Cytogen's proteomics program, under development by its subsidiary, AxCell Biosciences Corporation, is focused on the identification of protein interaction and signaling pathways within cells as relating to disease processes. The Company utilizes its proprietary proteomics technology to map selective protein-protein interactions and to develop a database, called the Inter- Functional Proteomic Database, or IFP Database, which includes data relating to protein signaling pathways linked to a variety of other bioinformatic data. The IFP Database is designed to permit customers to integrate existing databases, both public and proprietary, with the Company's proprietary data to create a "virtual laboratory" on the computer desktop of researchers involved in drug discovery. The Company believes this database has significant potential commercial value to the pharmaceutical and biotechnology industries as a means of expediting drug target identification, validation, screen development and lead compound optimization faster and cheaper than with current methodologies. These proprietary technologies are designed to provide a platform from which the Company can quickly and cost-effectively determine protein-protein interactions and build pathways of intracellular signaling data. The Company's IFP Database also offers a consolidated platform to enable statistical and mathematical modeling of complex protein pathways. Basis of Consolidation The consolidated financial statements include the accounts of Cytogen and its wholly owned subsidiaries, AxCell Biosciences Corporation ("AxCell"), Cellcor Inc. ("Cellcor") and Prostagen Inc. ("Prostagen"). The financial statements also included the investment results of Targon Corporation ("Targon"), which were accounted for on the equity method (see Investment in Targon Subsidiary). Intercompany balances and transactions have been eliminated in consolidation. In the third quarter of 1998, the Company sold Targon and closed Cellcor. 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Statement of Cash Flow Cash and cash equivalents include cash on hand; cash in banks and all highly liquid investments with maturity of three months or less at the time of purchase. Cash paid for interest expense was $44,000, $500,000 and $524,000 in 1999, 1998, and 1997, respectively. During 1999, the Company purchased $223,000 of equipment under various capital leases. 64 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Short-Term Investments At December 1999, the Company's short-term investments are classified as available for sale and are carried at fair value based on quoted market prices. Receivables At December 31, 1999 and 1998, accounts receivable were net of an allowance for doubtful accounts of $83,000 and $73,000, respectively. The Company charged to expense $10,000 and $23,000 as a provision for doubtful accounts in 1999 and 1998, respectively. At December 31, 1999, approximately $870,000 of the Company's accounts receivable balance was due from Progenics Pharmaceuticals, Inc. ("Progenics") to be paid in installments through December 31, 2001 (see Note 3). At December 31, 1998, the Company had a $2.5 million receivable due from The State of Wisconsin Investment Board relating to a sale of Cytogen common stock. The Company received the proceeds from the stock sale in January 1999 (see Note 11). Inventory The Company's inventory is primarily related to ProstaScint and OncoScint CR/OV. Inventory is stated at the lower of cost or market using the first-in, first-out method and consisted of the following:
December 31, ----------------------- 1999 1998 --------- --------- Raw materials ..................... $ 529,000 $ 57,000 Work-in process ................... 28,000 143,000 Finished goods .................... 128,000 50,000 --------- --------- $ 685,000 $ 250,000 ========= =========
Property and Equipment Equipment and furniture are stated at cost, net of depreciation and a $102,000 reserve for idle equipment. Leasehold improvements are amortized on a straight-line basis over the lease period or the estimated useful life, whichever is shorter. Equipment and furniture are depreciated on a straight-line basis over five years. Expenditures for repairs and maintenance are charged to expense as incurred. Property and equipment consisted of the following:
December 31, -------------------------- 1999 1998 ----------- ------------ Leasehold improvements ............................. $ 3,196,000 $ 9,438,000 Equipment and furniture ............................ 4,764,000 7,350,000 ----------- ------------ 7,960,000 16,788,000 Less - accumulated depreciation and amortization.... (5,963,000) (14,163,000) ----------- ------------ $ 1,997,000 $ 2,625,000 =========== ============
65 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In January 1999, the Company sold certain of its laboratory and manufacturing facilities to Bard BioPharma L.P., a subsidiary of Purdue Pharma L.P. ("Purdue"), for $3.6 million, net of approximately $300,000 of transaction costs. Cytogen also signed a three-year agreement under which two of Cytogen's products, ProstaScint and OncoScint CR/OV, will continue to be manufactured by Cytogen at its former facility. As a result of the sale, the Company recognized a gain of approximately $3.3 million during the first quarter of 1999. Investment in Targon Subsidiary As a result of the 1998 reduction of Cytogen's ownership interest in Targon, the Company began accounting for its investment in Targon using the equity method. Under the equity method, the Company recognized 100% of Targon's losses through March 31, 1998 in its consolidated statement of operations as "Equity Loss in Targon Subsidiary," with a corresponding reduction in the carrying amount of its investment. The Company did not recognize Targon's losses after March 31, 1998 based on the completion of the sale of Targon. In August 1998 the Company sold its remaining ownership interest in Targon to Elan Corporation, plc ("Elan") for $2.0 million (see Note 4). As a result, the Company recorded a gain of approximately $2.8 million in 1998. Other Assets In October 1999, the Company sold its undeveloped land in Ewing, New Jersey for net proceeds of $714,000. As a result of the sale the company recognized a gain of approximately $54,000. During 1998 and 1997, the Company charged to expense $240,000 and $384,000, respectively, to write down the land to its estimated market value. Revenue Recognition Product related revenues include product sales by Cytogen to its customers and Quadramet royalties. Product sales are recognized upon shipment of the finished goods. From the time of Quadramet's launch in the second quarter of 1997 to June 1998, Cytogen recorded Quadramet royalty revenues from DuPont based on minimum contractual payments, which were in excess of actual Quadramet sales. Pursuant to an agreement between Cytogen and DuPont, the minimum royalty arrangement was discontinued and Cytogen reclaimed the marketing rights to Quadramet. Subsequent to June 1998, Cytogen recorded product revenues from Quadramet based on actual sales. Starting in 1999, Quadramet royalties are based on sales of Quadramet by Berlex Laboratories ("Berlex"), Cytogen's new marketing partner for Quadramet (see Note 5). License and contract revenues include milestone payments and fees under collaborative agreements with third parties, revenues from contract manufacturing and research services, and revenues from other miscellaneous sources. The Company's contract manufacturing services included filling, testing, validation, and process development of monoclonal antibodies; process development and clinical development of biopharmaceutical products; and the preclinical manufacturing of an antibody product. The Company is phasing out contract manufacturing services, concurrent with the sale of the manufacturing and laboratory facilities (see Property and Equipment above) and expects to receive no further revenues from 66 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) this service after 1999. Revenues from milestone payments are recognized when all parties concur that the events stipulated in the agreement have been achieved. Revenues from cost-plus contracts are recognized when the costs are incurred. Revenues from up-front payments are recognized when the Company has no obligation to return the fee under any circumstances. In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). The bulletin draws on existing accounting rules and provides specific guidance on how those accounting rules should be applied, and specifically addresses revenue recognition for non-refundable technology access fees in the biotechnology industry. SAB 101 is effective for fiscal years beginning after December 15, 1999. The Company is evaluating SAB 101 and the effect it may have on the Company's financial position or results of operations. Cost of Product and Contract Manufacturing Revenues In June 1998, the Company paid DuPont $995,000 for manufacturing and distributing Quadramet as a result of Cytogen's reacquiring the marketing rights of Quadramet. In addition, the Company recorded a $4 million charge for securing a long-term manufacturing commitment for Quadramet from DuPont (see Note 6). Beginning in 1999, pursuant to the marketing agreement with Berlex (see Note 5), there is no manufacturing and distribution costs related to Quadramet. In addition, the Company is phasing out the contract manufacturing services to third parties which is resulting in lower costs associated with these services and expects no further costs in 2000. Research and Development Research and development expenditures consist of projects conducted by the Company and payments made to sponsored research programs and consultants. All research and development costs are charged to expense as incurred. Research and development expenditures for customer sponsored programs were $194,000, $228,000 and $1.1 million in 1999, 1998 and 1997, respectively. Patent Costs Patent costs are charged to expense as incurred. Net Income (Loss) Per Share Basic net income (loss) per common share is based upon the weighted average common shares outstanding during each period. Diluted net income per common share is based upon the weighted average common stock outstanding and common stock equivalents which represent the incremental common shares that would have been outstanding under certain employee stock options and warrants, upon assumed exercise of dilutive stock options and warrants. Diluted net loss per share for 1998 and 1997 is the same as basic net loss per share, as the inclusion of common stock equivalents would be antidilutive 67 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. ACQUISITION OF PROSTAGEN, INC.: On June 15, 1999, Cytogen reacquired the rights for immunotherapy to its PSMA technology by acquiring 100% of the outstanding capital stock of Prostagen for 2,050,000 shares of Cytogen common stock, plus transaction costs. The acquisition was accounted for using the purchase method of accounting, whereby the purchase price was allocated to the assets acquired and liabilities assumed from Prostagen based on the respective fair values at the acquisition date. The excess of the purchase price over the fair value of the net tangible assets of approximately $1.2 million was assigned to acquire technology rights and has been recorded as a non-cash charge to operations in the accompanying financial statements. Acquired technology rights reflects the value of the PSMA technology development projects underway at the time of the Prostagen acquisition. The Company may issue up to an additional 450,000 shares of Cytogen common stock upon the satisfactory termination of lease obligations assumed in the Prostagen acquisition. The Company had sublicensed PSMA to Prostagen for prostate cancer immunotherapy in 1996. In connection with the acquisition, Cytogen acquired approximately $550,000 in cash, a minority ownership in Northwest Biotherapeutics, Inc., which is developing PSMA for cell therapy, and a contract with Velos, Inc. for marketing a cancer patient software management program for hospitals and health care payors. In addition, the Company may issue up to an additional $4.0 million worth of Cytogen common stock (based on the value at the time of issuance) if certain milestones are achieved in the PSMA development program. The Company may also issue up to 500,000 shares of Cytogen common stock upon beneficial resolution of other contractual arrangements entered into by Prostagen. 3. PROGENICS PHARMACEUTICALS, INC. JOINT VENTURE: On June 15, 1999, Cytogen entered into a joint venture with Progenics to develop vaccine and antibody-based immunotherapeutic products utilizing Cytogen's proprietary PSMA technology. The joint venture will be owned equally by Cytogen and Progenics. Progenics will fund up to $3 million of development costs of the program. After that point, the Company and Progenics will equally share the future costs of the program. Cytogen has the exclusive North American marketing rights on products developed by the joint venture. In connection with the licensing of the PSMA technology to the joint venture, Cytogen will receive $2 million in payments of which $1 million was received in 1999, with the balance to be paid in installments through December 31, 2001. As a result, Cytogen recorded approximately $1.8 million in license fee revenue in the second quarter of 1999, based on the net present value of the future payments (using a discount rate of 10%). 4. SALE OF TARGON CORPORATION: Targon was established in September 1996 pursuant to agreements between Cytogen and Elan, and was a majority-owned (99.75%) subsidiary of Cytogen. In March 1998, Elan exchanged its shares of the Company's Series A Convertible and Exchangeable Preferred Stock for 50% of Cytogen's interest in Targon. In August 1998, Cytogen sold its remaining 49.875% interest in Targon to Elan for $2.0 million (see Note 1). As a result of the sale, a warrant to purchase up to 1,000,000 shares of Cytogen common stock previously granted to Elan and all notes among Cytogen, Elan and Targon were cancelled. In addition, in August 1998, Cytogen received $2.0 million from Elan in exchange for a convertible promissory note (see Note 10). The Company recognized a gain of approximately $2.8 million in 1998 on the Targon transaction. 68 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. BERLEX LABORATORIES: In October 1998, Cytogen entered into an exclusive license and marketing agreement ("Berlex Agreement") with Berlex for the manufacture and sale of Quadramet. Under the terms of the Berlex Agreement, Cytogen received a one-time license fee of $8 million in 1998 and Berlex pays Cytogen royalties on net sales of Quadramet, as well as milestone payments based on achievement of certain sales levels. Quadramet was re-launched by Berlex in the first quarter of 1999. In connection with the Berlex Agreement, Cytogen granted Berlex a warrant to purchase 1,000,000 shares of Cytogen common stock at an exercise price of $1.002 per share. Using the Black-Scholes option pricing model, the estimated value of the warrant was calculated at $855,000, and was recorded as a reduction of the one-time license fee revenue, with a corresponding increase in stockholders' equity. 6. THE DUPONT PHARMACEUTICAL COMPANY: Pursuant to the terms of an agreement between Cytogen and DuPont, Cytogen received from DuPont (i) $1.5 million in 1997 to fund clinical programs to expand the use and marketing of Quadramet; (ii) a $2.0 million milestone payment in 1997 upon the FDA clearance of Quadramet and (iii) royalty revenues of $1.7 million and $3.3 million in 1998 and 1997, respectively, based on minimum contractual payments which were in excess of actual sales. In June 1998, the agreement was amended and the minimum royalty arrangement was discontinued. In 1998, Cytogen terminated its marketing agreement with DuPont and recorded as a charge to Costs of Product payments to DuPont of $4 million for securing a long-term manufacturing commitment for Quadramet from DuPont and $995,000 for manufacturing and distributing Quadramet in 1998. 7. THE DOW CHEMICAL COMPANY: In 1993, Cytogen acquired from The Dow Chemical Company ("DOW") an exclusive license for the treatment of osteoblastic bone metastases in the U.S. for Quadramet. This license was amended in 1995 and 1998 to expand the territory to include Canada, Latin America, Europe and Japan, in 1996 to expand the field to include all osteoblastic diseases and in 1998 to include rheumatoid arthritis. In 1997, the Company recorded a $4.0 million milestone payment to Dow upon FDA clearance of Quadramet. The agreement also requires the Company to pay Dow royalties based on a percentage of net sales of Quadramet, or a guaranteed contractual minimum payments, whichever is greater, and future payments upon achievement of certain milestones. The Company recorded $500,000, $500,000 and $375,000, in royalty expense for 1999, 1998 and 1997, respectively. Future annual minimum royalties due to Dow are $750,000 in both 2000 and 2001 and $1.0 million per year thereafter through 2012. 69 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. REVENUES FROM MAJOR CUSTOMERS: Revenues from major customers as a percentage of total were as follows:
Year Ended December 31, ------------------------- 1999 1998 1997 ------ ------ ------ Berlex (see Note 5) 9% 36% -% DuPont (see Note 6) - 8 47 Progenics Pharmaceuticals, Inc. (see Note 3) 16 - - Mallinckrodt Medical Inc. 16 8 6 Medi-Physics 15 10 9
Mallinckrodt Medical Inc. and Medi-Physics are chains of radiopharmacies, which distribute ProstaScint and OncoScint CR/OV kits. 9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
December 31, -------------------------- 1999 1998 ---------- ---------- Accounts payable............................................. $1,785,000 $2,465,000 Accrued payroll and related expenses......................... 1,309,000 1,222,000 Restructuring accruals....................................... - 856,000 Accrued research contracts and materials..................... 236,000 474,000 Accrued commission and royalties............................. 404,000 828,000 Accrued professional and legal............................... 422,000 655,000 Facility payable............................................. 689,000 - Other accruals............................................... 633,000 886,000 ---------- ---------- $5,478,000 $7,386,000 ========== ==========
In connection with the closure of the Company's Cellcor subsidiary and corporate downsizing in 1998, Cytogen incurred a restructuring charge of approximately $1.9 million relating to severances, other closure related expenses and costs to implement a corporate turnaround plan, of which $856,000 was accrued at December 31, 1998 and paid in full in 1999. 10. LONG-TERM LIABILITIES:
December 31, -------------------------- 1999 1998 ---------- ---------- Due to Elan ................................................. $2,200,000 $2,054,000 Due to CIT Group/Credit Finance ............................. - 744,000 Capital lease obligations.................................... 378,000 273,000 ---------- ---------- 2,578,000 3,071,000 Less: Current portion....................................... (162,000) (848,000) ---------- ---------- $2,416,000 $2,223,000 ========== ==========
70 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In August 1998, Cytogen received $2.0 million from Elan in exchange for a convertible promissory note. The note is convertible into shares of Cytogen common stock at $2.80 per share, subject to adjustments, and matures in seven years. The note bears annual interest of 7%, compounded semi-annually, however, such interest is not payable in cash but will be added to the principal for the first 24 months; thereafter, interest is payable in cash. In 1999 and 1998, the Company accrued $146,000 and $54,000 in interest expense on this note. In October 1998, the Company entered into a $750,000 term loan agreement with The CIT Group/Credit Finance Inc., using the Company's tangible assets as collateral. In January 1999, the Company paid the remaining balance of the loan with the proceeds from the sale of its laboratory and manufacturing facilities (see Note 1). The Company leases certain equipment under capital lease obligations, which will expire on various dates through 2002. Property and equipment leased under non-cancelable capital leases have a net book value of $484,000 at December 31, 1999. Payments to be made under capital lease obligations (including interest of $86,000) are $204,000 in 2000, $176,000 in 2001 and $84,000 in 2002. 11. COMMON STOCK: In December 1998, the Company sold to The State of Wisconsin Investment Board 3,333,334 shares of Cytogen common stock at an aggregate price of $2.5 million, or $0.75 per share. In January 1999, the Company sold 2,666,667 shares of Cytogen common stock to a subsidiary of The Hillman Company for an aggregate price of $2.0 million, or $0.75 per share. Also in January, the Company exercised a put right granted to Cytogen under a $12.0 million equity line agreement with an institutional investor, for the sale of 475,342 shares of common stock at an aggregate price of $500,000, or $1.0519 per share. The Company will not draw on the remaining $11.5 million of the equity line agreement and has deregistered shares, which were previously registered with the Securities and Exchange Commission to be issued under the facility. In August 1999, the Company sold to the State of Wisconsin Investment Board 3,105,590 shares of Cytogen common stock at an aggregate price of $5.0 million, or $1.61 per share. 12. CONVERTIBLE PREFERRED STOCK: In December 1997, Cytogen obtained a financing commitment from private investors for the purchase of up to $20.0 million of its Convertible Preferred Stock subject to satisfaction of certain conditions. Cytogen completed the first tranche of the financing in December 1997 by issuing 750 shares of Series B Preferred Stock ("Series B") for an aggregate price of $7.5 million. The Series B carried a dividend rate of 6% which was payable in cash or common stock at the option of Cytogen. In connection with the conversion feature of the Series B, the Company recorded a deemed dividend of $1.3 million in 1997, which represented the maximum 15% conversion discount given to the holders of the Series B. In 1998, all of the outstanding Series B was converted into 7,377,054 shares of Cytogen common stock including $128,000 of accrued dividends. 71 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. STOCK OPTIONS AND WARRANTS: The Company has various stock option plans that provide for the issuance of incentive and non-qualified stock options to employees, non-employee directors and outside consultants, for which an aggregate of 6,733,357 shares of common stock have been reserved. The persons to whom options may be granted and the number, type, and terms of the options vary among the plans. Options are granted with an exercise term of 10 years and generally become exercisable in installments over periods of up to 5 years at an exercise price determined either by the plan or equal to the fair market value of the common stock at the date of grant. Under certain circumstances, vesting may accelerate. In January 1998, the Company cancelled unexercised stock option grants to purchase 671,555 shares ranging in price from $3.687 to $16.50 per share and issued stock option grants to purchase 537,244 shares at $1.95 per share which equaled fair market value at the date of grant. This repricing was not available to officers, directors, executives and consultants of the Company. Activity under these plans was as follows:
Aggregate Number of Price Range Exercise Shares Per Share Price ----------- -------------- ------------ Balance at December 31, 1996 3,522,940 $ 2.69 - 17.00 $ 19,164,910 Granted 822,400 2.06 - 6.13 2,745,830 Exercised (60,350) 1.77 - 5.47 (197,267) Cancelled (459,530) 2.69 - 8.88 (2,171,735) ----------- ------------ Balance at December 31, 1997 3,825,460 $ 2.06 - 17.00 19,541,738 Granted 2,285,920 0.70 - 2.13 3,927,819 Cancelled (2,319,085) 1.36 - 17.00 (10,480,467) ----------- ------------ Balance at December 31, 1998 3,792,295 $ 0.70 - 16.63 12,989,090 Granted 536,155 0.95 - 2.67 1,068,223 Exercised (231,842) 0.81 - 2.69 (306,507) Cancelled (1,266,609) 0.80 - 8.06 (5,963,368) ----------- ------------ Balance at December 31, 1999 2,829,999 $ 0.70 - 16.63 $ 7,787,438 =========== ============
72 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table summarizes information about stock options at December 31, 1999:
Outstanding Stock Options Exercisable Stock Options - ------------------------------------------------------------------------ -------------------------------- Weighted-Average Remaining Weighted-Average Range of Outstanding Contractual Weighted-Average Exercisable Exercise Exercise Prices Shares Life Exercise Price Shares Price - --------------- ----------- ---------------- ---------------- ------------ ---------------- $ 0.70 - 1.83 716,822 8.4 $1.11 405,390 $ 1.00 1.84 - 3.67 1,465,042 6.3 2.13 674,233 2.10 3.68 - 5.50 444,075 4.7 5.10 356,772 5.11 5.51 - 7.33 118,060 4.8 5.99 98,660 6.07 7.34 - 9.17 58,000 5.5 7.74 38,800 7.78 9.17 - 11.00 500 6.1 9.28 300 9.28 14.66 - 16.50 15,000 1.9 15.69 15,000 15.69 16.50 - 16.63 12,500 2.8 16.51 12,500 16.51 --------- --------- $ 0.70 - 16.63 2,829,999 6.5 $2.75 1,601,655 $ 3.12 ========= =========
At December 31, 1999, options to purchase 1,601,655 shares of common stock were exercisable and 1,776,926 shares of common stock were available for issuance under approved plans of additional options that may be granted under the plans. In August 1998, the Company granted to a key employee an option to purchase 2,250,000 shares of Cytogen common stock at an exercise price of $1.0937 per share, of which, the vesting of 1,350,000 shares ("Performance Options") are subject to the completion of certain performance based milestones as determined by the Board of Directors (the "Board"). This option was granted outside of the approved plans. During 1999, the Board approved the commencement of vesting for 675,000 of the Performance Options upon the achievement of certain milestones. In 1999, the Company recorded $84,000 of deferred compensation related to the vesting of the Performance Options, which represents the fair market value of Cytogen's common stock in excess of the exercise price of the option on the date, which the Board determined the performance milestones had been met. Deferred compensation is being amortized over the three-year vesting period of the Performance Options. As of December 31, 1999, 300,000 shares under this option were exercisable. In 1999, the Company granted options to purchase 152,384 shares of common stock to certain former employees that are employed by Purdue and involved in the manufacture of Cytogen's products. During 1999, the Company recorded $62,000 of expense related to these option grants. In 1997, the Company adopted an employee stock purchase plan under which eligible employees may elect to purchase shares of common stock at the lower of 85% of fair market value as of the first trading day of each quarterly participation period, or as of the last trading day of each quarterly participation period. In 1999, 1998 and 1997, employees purchased 29,209, 54,023 shares and 16,017 shares, respectively, for aggregate proceeds of $29,000, $41,000 and $32,000, respectively. The Company has reserved 400,751 shares for future issuance under its employee stock purchase plan. 73 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company applies Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the related interpretations in accounting for its stock option plans. The disclosure requirement of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," was adopted by the Company in 1996. Had compensation cost of the Company's common stock option plan been determined under SFAS No. 123, the Company's net loss would have been increased to the following pro forma amounts:
Year Ended December 31, ---------------------------------------------- 1999 1998 1997 ----------- ------------ ------------ Net income (loss) to common stockholders, as reported $ 729,000 $(13,271,000) $(32,064,000) Pro forma net loss to common stockholders $(1,103,000) $(16,601,000) $(34,946,000) Diluted net income (loss) per common share, as reported $ 0.01 $ (0.24) $ (0.63) Diluted pro forma net loss per common share $ (0.02) $ (0.29) $ (0.68)
The average fair value per option of the options granted under the stock option plans during 1999, 1998 and 1997 is estimated as $1.29, $0.92 and $2.10, respectively, on the date of grant using the Black-Scholes option pricing model with the following assumptions for 1999, 1998 and 1997: dividend yield of zero, volatility of 87.99%, 78.42% and 69.87%, respectively, risk-free interest rate of 5.85%, 5.37% and 6.07%, respectively, and an expected life of 5 years. The average fair value per option ascribed to the employee stock purchase plan during 1999, 1998 and 1997 is estimated at $0.40, $0.65 and $2.17, respectively, on the date of grant using the Black-Scholes option pricing model with the following assumptions for 1999, 1998 and 1997: divided yield of zero, volatility of 111.48%, 84.75% and 50.20%, respectively, risk free interest rate of 4.46%, 4.88% and 5.13%, respectively, and expected life of three months. Because the SFAS No. 123 method of accounting is not required to be applied to options granted prior to January 1, 1995, the resulting pro forma compensation charge may not be representative of that to be expected in future years. 14. RELATED PARTY TRANSACTION: Consulting services have been provided to the Company under an agreement with the Chairman of the Board of Directors related to time spent in that function on Company matters. Fees and expenses under this agreement were $136,000 and $172,000 in 1999 and 1998, respectively. 15. PENSION PLANS: The Company maintains a defined contribution pension plan. The contribution is determined by the Board of Directors each year and is based upon a percentage of gross wages of eligible employees. The plan provides for vesting over five years, with credit given for prior service. The Company also makes contributions under a 401(k) plan in amounts, which match up to 50% of the salary deferred by the participants. Matching is capped at 6% of deferred salaries. Total pension expense was $182,000, $310,000 and $405,000 for 1999, 1998 and 1997, respectively. 74 CYTOGEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 16. INCOME TAXES: As of December 31, 1999, Cytogen had federal net operating loss carryforwards of approximately $187 million. The Company also had federal and state research and development tax credit carryforwards of approximately $6.5 million. Certain operating loss and credit carryforwards began to expire in 1995. The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss and tax credit carryforwards if there has been an "ownership change". Such an "ownership change", as described in Section 382 of the Internal Revenue Code may limit the Company's utilization of its net operating loss and tax credit carryforwards. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Based upon the Company's loss history, a valuation allowance for deferred tax assets has been provided:
1999 1998 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 63,700,000 $ 60,300,000 Capitalized research and development expenses 17,400,000 19,500,000 Research and development credit 6,500,000 5,400,000 Acquisition of in-process technology 1,200,000 1,200,000 Other, net 6,400,000 300,000 ------------ ------------ Total deferred tax assets 95,200,000 86,700,000 Valuation allowance for deferred tax assets (95,200,000) (86,700,000) ------------ ------------ Net deferred tax assets $ - $ - ============ ============
In 1995, Cytogen acquired CytoRad and Cellcor, both of which had net operating loss carryforwards. Due to Section 382 limitations, approximately $10 million of CytoRad and $12.0 million of Cellcor carryforwards may be available to offset future taxable income. A 100% valuation allowance was established on the acquisition dates as realization of these tax assets is uncertain. During 1999, the Company sold New Jersey state operating loss carryforwards and research and development credits, which resulted in the recognition of a $2.7 million tax benefit. 17. COMMITMENTS AND CONTINGENCIES: The Company leases its facilities and certain equipment under non-cancelable operating leases that expire at various times through 2004. Rent expense incurred on these leases was $998,000, $1.6 million and $1.8 million in 1999, 1998 and 1997, respectively. Minimum future obligations under the operating leases are $3.6 million as of December 31, 1999 and will be paid as follows: $1.3 million in 2000, $1.4 million in 2001, $496,000 in 2002, $214,000 in 2003 and $209,000 in 2004. The Company is obligated to make minimum future payments under research and development contracts that expire at various times. As of December 31, 1999, the minimum future payments under contracts are $130,000 each year from 2000 and thereafter. In addition, the Company is obligated to pay performance-based compensation through mid-year 2000 to its marketing partner for ProstaScint and royalties on revenues from commercial product sales including certain guaranteed minimum payments. 75 EXHIBIT INDEX -------------
Exhibit Sequentially Number Description Numbered Page - ------ ----------- ------------- 10.25 Strategic Alliance Agreement between AxCell Biosciences Corporation and InforMax, Inc. dated as of September 15, 1999. 39 10.26 Master Loan and Security Agreement No. S7600 among Cytogen 10.27 Master Loan and Security Agreement No. S7600 among Cytogen Corporation, AxCell Biosciences Corporation and Finova Capital Corporation dated December 30, 1999. 21 Subsidiaries of Cytogen Corporation 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (Submitted to SEC only in electronic format)
76 EX-10.25 2 STRATEGIC ALLIANCE AGREEMENT EXHIBIT 10.25 STRATEGIC ALLIANCE AGREEMENT ---------------------------- This Agreement, dated September 15, 1999 ("Effective Date") is made between InforMax, Inc. ("InforMax"), a Delaware corporation doing business at 6010 -------- Executive Boulevard, North Bethesda, Maryland 20852 and AxCell Biosciences Corporation ("AxCell"), a Delaware corporation doing business at 600 College ------ Road East, Princeton, New Jersey 08540, who, intending to be legally bound, hereby agree as follows: 1. INTRODUCTION 1.1. InforMax has rights in software called Software Solutions for BioMedicine and related end user documentation ("SSBM") and distributes certain ---- third party public and private genome data therewith ("Genome Database"). --------------- 1.2. AxCell has rights in its proprietary protein interaction data (the "Protein Database"). - ----------------- 1.3. The parties desire to work together to (i) integrate the Protein Database with SSBM to permit use with other databases including the Genome Database, (ii) develop certain Tools for SSBM to enable the users of SSBM to access the Protein Database and (iii) market and sell subscriptions for the Protein Database to existing and potential SSBM customers as well as related professional, research, and development services all in accordance with the terms of this Agreement. 2. DEFINITIONS 2.1. "Confidential Information" means Protein Database, Genome Database, ------------------------ SSBM, any business or technical information of a party, including but not limited to any information relating to a party's product plans, designs, costs, finances, marketing plans, business opportunities, personnel, research, development or know-how, and the terms and conditions of this Agreement. Confidential Information shall not include information that: (i) is in or enters the public domain without breach of this Agreement through no fault of the receiving party; (ii) the receiving party was demonstrably in possession of prior to first receiving it from the disclosing party; (iii) the receiving party can demonstrate it was developed by the receiving party independently and without use of or reference to the disclosing party's Confidential Information; or (iv) the receiving party receives from a third party without restriction on disclosure and without breach of a nondisclosure obligation. 2.2. "Database Launch Date" means the date the Protein Database is mutually -------------------- accepted and first made commercially available by InforMax and/or AxCell. 2.3. "Distributor" means a direct or indirect customer of InforMax who is ----------- authorized by a distributor agreement as specified in Section 4.3 to distribute ----------- the Protein Database to End Users or other Distributors. 2.4. "End User" means a customer who is authorized by an end user -------- subscription agreement as specified in Section 4.2 to use the Protein Database. ----------- 2.5. "Genome Database" has the meaning set forth in Section 1.1. --------------- ----------- 2.6. "Intellectual Property Rights" means patent rights, copyright rights ---------------------------- (including, but not limited to, rights in audiovisual works and moral rights), trade secret rights, and any other intellectual property or proprietary rights recognized by the law of each applicable jurisdiction. 2.7. "Marks" means trademarks, service marks, trade names, logos or ----- designations. 2.8. "Net Revenues" means [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] ------------ 2.9. "Protein Database" has the meaning set forth in Section1.3. ---------------- ---------- 2.10. "SSBM" has the meaning set forth in Section1.1. ---- ---------- 2.11. "Tools" has the meaning set forth in Section3.1.1. ----- ------------ 3. COLLABORATION 3.1. Integration Project. ------------------- 3.1.1. General. The parties shall collaborate with each other in a project ("Integration Project") to develop the Protein Database and to develop ------------------- new visual and analytical software tools and/or algorithms and related documentation for the purpose of making the Protein Database accessible via SSBM and creating specific enhancements related thereto ("Tools"). The parties agree ----- that AxCell will have primary responsibility for developing the Protein Database in a format agreed to between the parties that will be compatible with SSBM, and InforMax will have primary responsibility for developing the Tools. 3.1.2. Project Plan. Prior to commencement of the Integration Project, the parties will, by mutual agreement, develop a project plan (the "Project ------- Plan") to govern the Integration Project, and the Project Plan will contain the - ---- specification of the work to be performed (including the identification and specification of any Tools), each party's responsibilities, a project schedule, milestones, schedule of deliverables, and a completion date. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] 3.1.3. Change Control. Both parties acknowledge that the scope of the Integration Project may require modification from time to time to meet changing requirements or to take advantage of new technologies or processes. The parties agree to discuss in advance any proposed change to determine its desirability and its impact on the cost and schedule, and to refrain from making any such change until it has been discussed and mutually approved by both parties. For any approved change, the Project Plan will be modified accordingly. 3.1.4. Acceptance. Upon completion of the Protein Database and any Tools, both parties will participate in acceptance testing to ensure that the Protein Database and any Tools conform to the specifications, and will notify the other [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] from delivery thereof of any defects it has found. Each party will be responsible for correcting any deficiency so noted in its portion of the deliverables and resubmitting any such deliverables for retesting, until the parties mutually agree that the Protein Database and Tools conform with the specifications set forth in the Project Plan. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] -2- 3.1.5. Database Launch Date. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] 3.1.6. SSBM License. Subject to the terms and conditions of this Agreement, InforMax will provide to AxCell a non-transferable, non-exclusive, license to use SSBM during the term of this Agreement solely for its internal business purposes in accordance with InforMax's standard terms and conditions, as modified for this arrangement, such software to be installed on an AxCell- owned server. 3.2. Marketing. In the interest of promoting the Database, the parties --------- agree to: 3.2.1. Actively work together to develop a joint marketing plan in accordance with this Agreement covering mutually agreed upon marketing and promotional activities and related budgets to promote the Protein Database, and other products or services to which the plan will apply, including related professional, research and development services ("Joint Marketing Plan"), -------------------- [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED]; 3.2.2. Each use their commercially reasonable efforts to vigorously advertise, market, promote the Protein Database and other products or services to which the Joint Marketing Plan applies in accordance with the Joint Marketing Plan and this Agreement, provided that neither party will use advertisements or marketing material that contain the other party's Marks that have not been approved in writing by the other party; 3.2.3. Coordinate and assist each other in joint presentations and sales efforts as reasonably requested by the other party in accordance with the agreed upon Joint Marketing Plan, and coordinate prospective customer calls as necessary in cases where such joint presentations or similar cooperative marketing or technical support efforts are anticipated. 3.2.4. Furnish each other with all reasonable scientific and technical information and assistance for marketing support and planning purposes. 3.2.5. Assist each other to develop appropriate educational and promotional materials, and provide each other with copies of appropriate promotional documentation, that each party's sales force may use for purposes of this Agreement. All such material, however, to the extent it concerns the other party's products and/or services, shall be subject to prior approval by such other party in each case; 3.2.6. Periodically inform the other concerning any market information that comes to the attention of that party respecting the other party, its products and services, or the continued competitiveness of the other party's products and services in the marketplace; 3.2.7. Provide appropriate technical support to the other for demonstrations and mutually agreed upon general sales promotion as well as for selected exhibitions and promotional seminars on a case-by-case basis; and 3.2.8. Perform its obligations under the Joint Marketing Plan. 3.3. Management. Each party shall appoint two senior managers to act as ---------- the primary representatives responsible for facilitating communication between the parties and for coordinating the activities associated with the Integration Project and each party's marketing efforts. Each party shall -3- manage its own activities. The Parties' representatives shall confer, as needed, to assess the status of the Integration Project, each party's marketing efforts, and to coordinate on upcoming activities as necessary. 3.4. Staff. Each party shall train and maintain a sufficient number of ----- capable technical and sales personnel having the knowledge and training necessary to (i) inform customers properly concerning the features and capabilities of the Protein Database; (ii) service and support the Protein Database in accordance with its obligations under this Agreement; and (iii) otherwise carry out its obligations and responsibilities under this Agreement. 3.5. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] 4. PROTEIN DATABASE LICENSE GRANT 4.1. Protein Database License. Subject to the following sentence, AxCell ------------------------ grants InforMax an exclusive, worldwide license to (i) market, promote, reproduce for distribution, distribute and sublicense the Protein Database to Distributors and End Users solely for their own internal business purposes during the term of this Agreement and (ii) use a reasonable number of copies of the Protein Database for the sole purpose of performing its obligations under Section 3, demonstrating the Protein Database, and providing training to - --------- Distributors and End Users. Notwithstanding anything to the contrary, AxCell may market, promote, reproduce for distribution, distribute and sublicense the Protein Database directly to End Users solely for their internal business purposes but may not appoint another distributor to do so. 4.2. End User Agreement. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] ------------------ 4.3. Distributor Agreement. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] --------------------- 4.4. License Restrictions. InforMax will not modify the Protein Database -------------------- in any manner, except as it may be expressly directed by AxCell in writing. 4.5. Pricing. The parties understand and agree that the Protein Database ------- and SSBM may be priced and licensed separately. 5. ADDITIONAL OBLIGATIONS AND COVENANTS 5.1. AxCell's Obligations. In addition to AxCell's other obligations set -------------------- forth in this Agreement, AxCell shall: 5.1.1. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED]; 5.1.2. Promptly inform InforMax in writing of any analytic or visualization tools or other software enhancements AxCell determines are reasonably necessary or desirable to include as Tools, and of any SSBM or Tools defects, intellectual property infringement claims, or customer complaints; 5.1.3. Introduce InforMax's staff to AxCell's established contacts and other appropriate personnel in the pharmaceutical industry who may be interested in SSBM and/or the Protein Database and promptly inform InforMax of any potential customers for the Protein Database or SSBM; 5.1.4. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED]; -4- 5.1.5. Perform its obligations under any research and development contracts that involve use of the Protein Database and/or SSBM to define targets and validate leads; 5.1.6. Make available to End Users at rates no higher than AxCell's published rates and if ordered, perform, appropriate and desirable Protein Database related training and professional services; 5.1.7. Provide primary technical and scientific support to End Users regarding the Protein Database, which shall include, without limitation, diagnosing problems and using its reasonable efforts to provide solutions and the other support obligations; and 5.1.8. Perform AxCell's obligations set forth in Section 3. --------- 5.2. InforMax's Obligations. In addition to InforMax's other obligations ---------------------- set forth in this Agreement, InforMax shall: 5.2.1. Assist in the use of SSBM to find targets and validate leads for customers; 5.2.2. Make available to End Users at rates no higher than InforMax's published rates and if ordered, perform appropriate and desirable Protein Database related professional services support for the Protein Database; 5.2.3. Provide primary technical support to End Users regarding the use of SSBM in accordance with InforMax's standard polices relating thereto; 5.2.4. Provide reasonable amounts of SSBM related training to AxCell's technical and sales staff free of charge to enable such staff to inform customers properly concerning the features and capabilities of SSBM; and 5.2.5. Perform InforMax's obligations set forth in Section 3, --------- including without limitation, developing the Tools in accordance with the Project Plan as set forth in Section 3. --------- 5.3. Covenants. Each party covenants to the other that it will (i) conduct --------- business in a manner that reflects favorably at all times on the other party's products and services, and the good name, good will and reputation of the other party, (ii) avoid deceptive, misleading or unethical practices that are or might be detrimental to the other party, its products and services, or the public; (iii) make no false or misleading representations with regard to the other party or its products and services; (iv) not publish or employ, or cooperate in the publication or employment of, any misleading or deceptive advertising material with regard to the other party or its products and services; and (v) make no representations, warranties or guarantees to customers or to the trade with respect to the specifications, features or capabilities of the other party's products and services that are inconsistent with the literature distributed by the other party. 5.4. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] 5.5. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] 5.5.1. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] -5- 5.5.2. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] 6. PAYMENTS 6.1. Compensation. Each party will pay royalties and fees to the other ------------ based upon the timing of End User payment as set forth in Exhibit A. --------- 6.2. Payment Terms. Within thirty (30) days from the close of the ------------- preceding calendar quarter, each party will pay the other for any royalties or fees due under this Agreement (based on Section 6.1 above) for payments received ----------- from End Users during such quarter and within twenty (20) days from the close of such quarter. Interest shall accrue on any past due payments at the lesser of one and one-half percent (1-1/2%) per month or the maximum rate permitted by applicable law. 6.3. Taxes. Each Party shall be responsible for paying any and all taxes ----- resulting from any of its sales of Protein Database subscriptions, or of any associated products and services, such taxes including but not limited to any national, federal, state or local sales, income, use, value-added or other taxes, customs duties, or similar tariffs and fees, but excluding any tax or levy on the income of the non-selling party. 7. REPORTS, RECORDS AND AUDITS 7.1. Reports. Within [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] after the -------- close of each calendar quarter each party will deliver to the other party a report which will provide all information reasonably necessary for computation and/or confirmation of the payments, if any, due or credited to the other party for such period. Such report will include quarter gross revenues, deductions by category, and net revenues received by customer and in total. In addition, an accounts receivable report by customer and in total will be included to reconcile the royalty and fees payment, net revenues and cash receipts. 7.2. Records and Audits. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] ------------------ 8. TERM AND TERMINATION 8.1. Term. The term of this Agreement will begin on the Effective Date and ---- will continue for three (3) years from the Database Launch Date unless it is terminated earlier in accordance with the provisions hereof. 8.2. Events of Termination. Either party will have the right to terminate --------------------- this Agreement if: (i) the other party breaches any material term or condition of this Agreement and fails to cure such breach within [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] after written notice (including without limitation if InforMax fails to materially perform its marketing obligations hereunder); or (ii) the other party becomes the subject of an involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such involuntary petition or proceeding is not dismissed within sixty (60) days of filing, or becomes the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors. In addition, AxCell may terminate this Agreement in accordance with the provisions of Section 5.4. -6- 8.3. Effect of Termination. --------------------- 8.3.1. Upon termination or expiration of this Agreement: (i) all license rights granted to each party hereunder will automatically terminate, and InforMax will immediately cease soliciting orders for the Protein Database; (ii) each party will immediately cease use of the other party's Marks and cease all marketing activities with respect to the other party's products and services; and (iii) each party will immediately return to the other party or (at the other party's request) destroy all copies of the Protein Database and other Confidential Information in its possession or control, and an officer of such party will certify to the other party in writing that it has done so. Notwithstanding the foregoing, the license grant in Section 10.1 shall survive ------------ termination or expiration of this Agreement and all end user agreements for Protein Database subscriptions will remain in full force and effect. Upon such termination or expiration, AxCell will maintain, update and transport updates to such End Users, and support such End User's use of the Database for the term of their Protein Database subscription. 8.3.2. Each party shall remain obligated to pay and shall continue to pay any royalties due the other arising out of any sales of any Protein Database subscriptions prior to the date of termination, but the obligation to pay royalties shall cease upon the expiration or termination of such Protein Database subscriptions as well as all on-going royalties due for End User discoveries made using the Protein Database during the life of such End User's subscription. 8.3.3. The rights and obligations of the parties contained in Sections 8.3, 9, 10, 12, 13, and 15 will survive the termination or expiration of this Agreement. 8.4. Nonexclusive Remedy. The exercise by either party of any remedy under ------------------- this Agreement will be without prejudice to its other remedies under this Agreement or otherwise. 9. CONFIDENTIALITY 9.1. Obligations. Each party will maintain the Confidential Information of ----------- the other party in strict confidence and will exercise due care with respect to the handling and protection of such Confidential Information, consistent with its own policies concerning protection of its own Confidential Information of like importance, which require at least reasonable care. Each party will use the Confidential Information of the other party only as expressly permitted herein, and will disclose such Confidential Information only to its employees and consultants as is reasonably required in connection with the exercise of its rights and obligations under this Agreement (and only subject to binding use and disclosure restrictions at least as protective as those set forth herein executed in writing by such employees and consultants). However, each party may disclose Confidential Information of the other party pursuant to the order or requirement of a court, administrative agency, or as required by applicable law, and the receiving party will give reasonable notice to the other party to contest such order or requirement. Any such disclosure by the receiving party of the Confidential Information of the disclosing party, will, in no way, be deemed to change, affect or diminish the confidential and proprietary status of such Confidential Information. Each party's obligations under this Section 9 will --------- survive for a period of five (5) years from the termination or expiration of this Agreement. 9.2. Injunctive Relief. Each party acknowledges that improper use or ----------------- disclosure of the Confidential Information of the other party would cause substantial harm to the other party that could not be remedied by the payment of damages alone. Accordingly, each party will be entitled to preliminary and permanent injunctive relief and other equitable relief for any breach of this Section9. - -------- -7- 10. PROPRIETARY RIGHTS 10.1. AxCell's Ownership. The Protein Database, and all updates thereto ------------------ are and will remain the sole and exclusive property of AxCell, including all Intellectual Property Rights therein, AxCell reserves all rights in the Protein Database not expressly granted herein. AxCell will use its reasonable best efforts to protect and maintain the value of the Protein Database, and to preserve all of its Intellectual Property Rights therein. 10.2. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] 10.3. InforMax's Ownership. SSBM and all updates or enhancements to SSBM -------------------- are and will remain the sole and exclusive property of InforMax and its suppliers, if any, including all Intellectual Property Rights therein, whether such items are separate or combined with any other products, and InforMax reserves all rights in such items not expressly granted herein. 10.4. Proprietary Rights Notices. Neither party will delete or in any -------------------------- manner alter the Intellectual Property Rights notices of the other party and its suppliers, if any, appearing on or in connection with the Protein Database, SSBM or the Tools, and will reproduce and display such notices on each copy it makes of such items. Each party will also include appropriate trademark notices when referring to SSBM or the Protein Database in advertising and promotional materials. 10.5. Third Party Infringement. Each party will use its reasonable efforts ------------------------ to protect the other party's Intellectual Property Rights in the Protein Database, SSBM, and Tools, as applicable, and will report promptly to the other party any infringement of such rights of which it becomes aware. 10.6. Trademarks. Subject to the terms and conditions of this Agreement, ---------- each party grants to the other party a non-exclusive, non-transferable license for the term of this Agreement to use the Marks of such party in connection with the other party's performance of its marketing and promotional obligations set forth in Section 3.2. Each party's use of the other party's Marks must be in ----------- accordance with other party's trademark usage guidelines then in effect, and such use will inure to the other party's benefit. Nothing in this Agreement grants to either party ownership or any rights in or to use the Marks of the other party, except in accordance with this license. The rights granted in this Section 10.6 will terminate upon any termination or expiration of this - ------------ Agreement. Upon such termination or expiration, each party will no longer make any use of any of the other party's Marks. Each party will have the exclusive right to own, use, hold, apply for registration for, and register its Marks during the term of, and after the expiration or termination of, this Agreement and the other party will neither take nor authorize any activity inconsistent with such exclusive right. 11. WARRANTIES AxCell warrants to InforMax that it has sufficient right and authority to grant to InforMax all licenses and rights that AxCell grants under this Agreement. InforMax warrants to AxCell that it has sufficient right and authority to grant to AxCell all licenses and rights that InforMax grants under this Agreement. THE WARRANTIES IN THIS SECTION ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NONINFRINGEMENT. 12. INDEMNITIES 12.1. Mutual Indemnity. Each party agrees to indemnify and hold harmless ---------------- the other party against any third party claims against the indemnified party for loss, damage, liability, or expense (including but not limited to reasonable attorneys' fees) ("Losses") arising out of any acts or omissions of indemnifying party arising from (i) the indemnifying party's willful misconduct, or (ii) abreach of the indemnifying party's obligations under Section 5.3. ----------- 12.2. By InforMax. InforMax agrees to indemnify and hold harmless AxCell ----------- from and against third party claims against AxCell for Losses arising out of any claim that the SSBM or the Tools as supplied by InforMax infringe a U.S. patent, copyright or trade secret of a third party. If a final injunction is obtained in any such claim, or if in InforMax's opinion such an injunction is likely to be obtained, InforMax may, at its sole option, either (a) obtain for AxCell's customers the right to continue using the infringing item, (b) replace or modify the infringing item or infringing portion thereof so that it becomes noninfringing, or (c) if neither (a) nor (b) can be reasonably effected by InforMax, terminate this Agreement. The foregoing indemnity will not apply to modifications to the Tools or SSBM not performed by InforMax or InforMax's compliance with AxCell's specifications or requirements for the Tools. The foregoing states the entire liability of InforMax with respect to infringements of any intellectual property rights by the Tools or SSBM or their use. -8- 12.3. By AxCell. AxCell agrees to indemnify and hold harmless InforMax --------- from and against third party claims against InforMax for Losses arising out of any claim that Protein Database as supplied by AxCell infringes a U.S. patent, copyright or trade secret of third party. If a final injunction is obtained in any such claim, or if in AxCell's opinion such an injunction is likely to be obtained, AxCell may, at its sole option, either (a) obtain for InforMax's customers the right to continue using the Protein Database or (b) replace or modify the or infringing portion thereof so that it becomes noninfringing. The foregoing indemnity will not apply to modifications to the Protein Database not performed by AxCell. The foregoing states the entire liability of AxCell with respect to infringements of any intellectual property rights by the Protein Database or its use. 12.4. Contingency. The foregoing indemnities shall be contingent upon (i) ----------- the indemnified party giving prompt written notice to the other party of any claim, demand or action for which indemnity is sought; (ii) the indemnified party being given sole control of the defense thereof; and (iii) the indemnified party fully cooperating in the defense or settlement of any such claim, demand or action, at the expense of the indemnifying party. 13. LIMITATIONS OF LIABILITY IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PART FOR ANY SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY, OR OTHERWISE, AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. INFORMAX'S TOTAL LIABILITY TO AXCELL UNDER THIS AGREEMENT WILL BE LIMITED TO THE PAYMENTS DUE FROM INFORMAX UNDER THIS AGREEMENT. The parties have agreed that the limitations specified in this Section 13 will survive and apply even if any limited remedy specified in this Agreement is found to have failed of its essential purpose. 14. COMPLIANCE WITH LAW Each party will comply with all applicable international, national, state, regional, and local laws and regulations in performing its duties hereunder and in any of its dealings with respect to the products of the other party. 15. GENERAL 15.1. Assignment. This Agreement will bind and inure to the benefit of each party's permitted successors and assigns. Any assignment of this Agreement by AxCell (except to an entity controlling, controlled by or under common control with AxCell) without the prior written consent of InforMax shall be null and void. 15.2. Non-Solicitation. The parties agree that, for the duration of the term of this Agreement and for twelve (12) months thereafter, neither party shall, directly or indirectly or for or on the behalf of any entity, solicit the employment or services of the employees of the other party or enter into any agreement for the purpose of causing such employees to leave the employment of the other party. 15.3. Press Release. The parties agree to issue joint press releases (i) announcing the execution of this Agreement within five (5) days of such execution and (ii) announcing the commercial availability of the Protein Database within five (5) days of the Database Launch Date. 15.4. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York, excluding that body of law known as conflicts of laws. 15.5. Severability. If any provision of this Agreement is found invalid or ------------ unenforceable, that provision will be enforced to the maximum extent permissible, and the other provisions of this Agreement will remain in full force and effect. 15.6. Force Majeure. Neither party shall be liable to the other party for ------------- failure or delay in fulfilling its obligations under this Agreement to the extent that such failure or delay is due to causes beyond its control. 15.7. Notices. All notices under this Agreement will be deemed given when ------- delivered personally, sent by confirmed facsimile transmission, or sent by certified or registered U.S. mail or -9- nationally-recognized express courier, return receipt requested, to the respective addresses set forth in this Agreement or as may otherwise be specified by either party to the other in accordance with this section. 15.8. Independent Contractors. The parties to this Agreement are ----------------------- independent contractors. There is no relationship of partnership, joint venture, employment, franchise, or agency between the parties. Neither party will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent. 15.9. Waiver. Failure or delay by either party to enforce compliance with ------ any term or condition of this Agreement shall not constitute a waiver of such term or condition. 15.10. Dispute Resolution and Binding Arbitration. ------- ---------- --- ------- ----------- 15.10.1. The parties shall attempt to settle any dispute between them amicably and agree to exercise their best efforts to resolve the controversy or dispute prior to seeking a judicial resolution. To invoke the dispute resolution process, the invoking party shall give to the other party written notice of its decision to do so, including a description of the issues subject to the controversy or dispute and a proposed resolution thereof. The InforMax Project Managers and the AxCell Project Managers shall attempt to resolve the controversy or dispute within five (5) business days after receipt of such notice. If they cannot resolve the controversy or dispute, the parties shall meet at InforMax's office and describe the controversy or dispute and their respective proposals for resolution to their respective chief operating officers or another designated person with comparable authority who shall act in good faith to resolve the controversy or dispute. If the controversy or dispute is not resolved within ten (10) business days after such meeting, the parties by mutual Agreement may engage an independent consultant to mediate the controversy or dispute and the charges of the independent consultant shall be shared equally by the parties. However, nothing in this clause shall preclude any party from commencing suit or arbitration if said negotiations do not reach a resolution within thirty (30) days after written notice that the negotiations have commenced. 15.10.2. In the event that the parties cannot reach an amicable settlement through an informal dispute resolution process, the parties agree that any dispute, controversy, or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be finally settled by binding arbitration. Such binding arbitration shall take place in the location reasonably selected by the party not initiating the arbitration, and shall be administered by the American Arbitration Association under its Commercial Arbitration Rules. The number of arbitrators shall be one (1) and shall be appointed within thirty (30) days following the commencement of arbitration. If possible, the arbitrator will be an expert in the field of bioinformatics and software development. If the parties cannot agree on an arbitrator within such thirty (30) day period, the number or arbitrators shall be increased to three (3), and each party will select an arbitrator within fifteen (15) days, and those arbitrators will promptly select a third arbitrator. 15.10.3. The arbitrator's award shall be final and binding and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The parties expressly agree that prior to the selection of the arbitrator(s), nothing in this Agreement shall prevent the parties from applying to a court that would otherwise have jurisdiction for provisional or interim measures. -10- 15.10.4. The costs of the arbitration shall be borne by the parties to the arbitration in equal shares. Each party shall pay its own costs and expenses, including attorneys' fees. The arbitration shall be conducted in the English language. All submissions shall be made in English or with an English translation. Witnesses may provide testimony in a language other than English, provided that a simultaneous English translation is provided. Each party shall bear its own translation costs. 15.11. Entire Agreement. This Agreement and its exhibits are the complete ---------------- and exclusive agreement between the parties with respect to the subject matter hereof, superseding and replacing any and all prior agreements, communications, and understandings (both written and oral) regarding such subject matter. This Agreement may only be modified, or any rights under it waived, by a written document executed by both parties. [The rest of this page is intentionally left blank.] -11- The parties have caused this Agreement to be executed by their duly- authorized representatives as of the Effective Date. InforMax: AxCell: ----------------------- ------------------------------ By: /s/ Alex Titomirov By: /s/ Brian Bullard Name: Alex Titomirov Name: Brian Bullard Title: President/CEO Title: Vice President, CIO -12- [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED] -13- EX-10.26 3 AXCELL BIOSCIENCES CORPORATION STOCK OPTION PLAN Exhibit 10.26 AXCELL BIOSCIENCES CORPORATION STOCK OPTION PLAN 1. Purpose; Effective Date. This Stock Option Plan is intended to encourage stock ownership by directors, employees and designated paid consultants of AxCell BioSciences, Inc., a Delaware corporation (the "Company", which shall include any subsidiaries of the Company), in order to increase their proprietary interest in the success of the Company and to encourage them to remain in its employ. The Plan provides for options which qualify as incentive stock options as well as Non-Qualified Stock Options. The effective date of this Plan is August 15, 1998, subject to approval by the sole stockholder of the Company. 2. Definitions. Whenever used in this Plan, the following terms will have the meanings set forth in this paragraph: "Board of Directors" means, until such time as the Company is Publicly Traded, or is no longer a subsidiary of Cytogen Corporation, the Board of Directors of Cytogen Corporation. At such time as the Company is Public Traded, "Board of Directors" shall mean the Board of Directors of AxCell BioSciences Corporation, and at such time as the Company is a subsidiary of a corporation other than Cytogen Corporation, the Board of Directors (or comparable governing body) of such other corporation. "Code" means the U.S. Internal Revenue Code of 1986, as amended. "Committee" means the committee described in paragraph 3. "Common Stock" means the common stock, par value $.01 per share, of the Company. "Consultant" shall mean a paid consultant of the Company who would be eligible to participate in a plan registrable under Form S-8 of the Securities and Exchange Commission, or comparable successor forms. "Date of Grant" means with respect to any Option the date the Committee approves the grant of the Option or such later date as may be specified by the Committee as the date the option will become effective. "Employee" means any person employed by the Company (including, without limitation, a person employed by the Company who is also an officer or director of the Company). "Exercise Price" means with respect to any Option the price per share which must be paid upon exercise of the Option. "Fair Market Value" means (i) if the Company's stock is not registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, such fair market value as shall be determined by the Board or the Committee in good faith, (ii) if the Common Stock is traded in a market in which actual transactions are reported, the average of the high and low prices at which the Common Stock is reported to have traded on the relevant date in the principal market on which trading in the Common Stock is reported, or if there is no reported sale of the Common Stock on the relevant date, the average of the highest reported bid price and lowest reported asked price for the Common Stock on the relevant date, or (iii) if the Common Stock is Publicly Traded but only in markets in which there is no reporting of actual transactions, the average of the highest reported bid price and the lowest reported asked price for the Common Stock on the relevant date. "Incentive Stock Option" means any Option that at the time of the grant qualifies and is designated as an incentive stock option within the meaning of Section 422 of the Code. "Non-Qualified Option" means any Option that is not an Incentive Stock Option. "Option" means any Incentive Stock Option or Non-Qualified Option granted under this Plan. "Option Agreement" means an agreement in such form as may be determined by the Committee, executed and delivered by the Company to the holder of any Option with respect to that Option. "Outside Director" means a member of the Board who is a "disinterested person" within the meaning of rules promulgated under Section 16(b) of the Securities Exchange Act of 1934, or any successor provision, and is a non- employee director for purposes of Section 162(m) of the Code, and meets such other applicable requirements with respect to employee stock option plans as may imposed by a stock market or other governing entity. "Plan" means the AxCell Biosciences Corporation 1998 Stock Option Plan. "Publicly Traded" means, with respect to any class of stock, that the class of stock is required to be registered under Section 12 of the Securities Exchange Act of 1934, as amended, or that stock of that class has been sold within the preceding 12 months in an underwritten public offering. "Ten Percent Shareholder" means, with respect to the grant of any Option, a person who at the Date of Grant is the beneficial owner of stock possessing more than 10% of the total combined voting power of all classes of stock of the Company. "Termination of Employment" means the time when the employee-employer relationship between an Employee and the Company ceases to exist for any reason, or the time when an officer who is not also an Employee ceases to be an officer of the Company for any reason, including, but not limited to, a termination by resignation, discharge, death, Total Disability or 2 retirement. Any leave of absence taken with the consent of the Company for a period of not more than 90 days shall not be a Termination of Employment, or if longer, so long as the optionee's right to reemployment with the Company is guaranteed by contract. If the period of leave exceeds 90 days and if the right to reemployment is not guaranteed by contract, the Termination of Employment will be deemed to occur on the 91st day of the leave. "Total Disability" means inability of an Employee to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. All determinations as to the date and extent of disability of an Employee will be made by the Committee. 3. Administration. (a) This Plan shall be administered by a Committee of the Board of Directors, which shall be composed of not less than two Outside Directors. The Committee may, from time to time, adopt or rescind rules and regulations for carrying out the provisions and purposes of this Plan. Subject to the express provisions of this Plan, the Board or the Committee shall have the authority, in their discretion, to determine which Employees (or categories of Employees) shall receive Options, the time when Options shall be granted, the terms and provisions of the Options (which may differ from one another) and to do everything necessary or appropriate to administer this Plan, including, without limitation, interpreting the provisions of this Plan and the Options. All determinations made by the Committee with respect to this Plan and the Options shall be final, binding and conclusive. (b) No member of the Committee shall be liable for any act or omission of the Committee or any other member of the Committee, or for any act or omission on his own part, in connection with the administration, implementation or interpretation of this Plan, unless it resulted from the member's own willful misconduct. 4. Persons Eligible to Receive Options. (a) Options may be granted under this Plan only to persons who at the Date of Grant either (i) are officers or Employees of the Company, or (ii) have agreed to become officers or Employees of the Company, and, in either case, are determined by the Committee to be of substantial importance to the Company, or (iii) directors of the Company, until such time as the Company becomes Publicly Traded, or (iv) Consultants of the Company. (b) Options granted to persons who are not yet officers or Employees at the Date of Grant may not be exercised until the optionee has become an officer or Employee, and shall expire if the optionee fails to commence service as an officer or Employee within six months (or such other period as the Committee may determine) after the Date of Grant. (c) Incentive Stock Options may be granted only to persons who are Employees at the Date of Grant, and only on such terms as are provided in paragraphs 6, 7 and 8 hereof. 3 (d) No Employee to whom Options may be granted under this Plan may be granted Options to purchase more than 200,000 shares in any one calendar year. 5. Stock Subject to the Plan. Subject to any adjustment as may be permitted in Section 10, the maximum number of shares of Common Stock which may at any time be subject to Options, or which may be issued upon the exercise of Options granted under the Plan, shall be limited to 2,000,000 based upon a minimum share capitalization of 10,000,000 outstanding shares, with the remaining shares initially held by Cytogen Corporation. The shares reserved for issuance pursuant to the Plan may consist either of authorized but previously unissued shares of stock, or of issued shares of stock which have been reacquired by the Company. If any Option expires, terminates or is canceled for any reason without having been exercised in full, the shares of stock allocable to the unexercised portion of such Option may again be made subject to an Option under the Plan. 6. Grants of Options. (a) Subject to paragraph 4(d), the Committee will have complete discretion to determine when, and to which officers or other Employees, Options are to be granted, the number of shares of Common Stock to which Options granted to each officer or other Employee will relate, whether and to what extent Options granted to an officer or other Employee will be Incentive Stock Options or Non- Qualified Options and, subject to the provisions of paragraphs 7 and 8, the Exercise Price and the term of each Option. The Committee may, in its discretion, provide that the Exercise Price may be paid in cash or by other means; subject, however, to any requirements of applicable law which may limit the type or amount of such non-cash consideration. If payment by interest bearing promissory note at the applicable federal rate is permitted: (i) the optionee shall be required to make a cash payment upon exercise of the Option of not less than 20% of the Exercise Price; (ii) the note shall provide for full recourse against the maker; and (iii) the note shall be payable in full prior to its stated maturity upon the optionee's Termination of Employment for any reason other than death or Total Disability. (b) Any Options which are not designated as Incentive Stock Options when they are granted will be Non-Qualified Options. (c) Promptly after the Date of Grant of each Option, the Company shall cause an Option Agreement to be executed and delivered to the holder of the Option. The Option Agreement shall clearly state whether the Option granted is or is not an Incentive Stock Option. Separate Option Agreements shall be used for Incentive Stock Options and Non-Qualified Stock Options. 4 7. Option Provisions. (a) Exercise Price. No consideration shall be payable by any optionee for the grant of an Option. Subject to the provisions of paragraph 8, the Exercise Price of each Option will be as determined by the Committee. The Exercise Price of a Non-Qualified Option may, until such time as the Company is Publicly Traded, be less than the Fair Market Value of the Common Stock on the Date of Grant of the Option; after such time as the Company is Publicly Traded, the Exercise Price of a Non-Qualified Option may not be less than the Fair Market Value of the Common Stock on the Date of Grant of the Option. (b) Term. The term of each Option will be as determined by the Committee, but in no event will the term of an Option be longer than ten years from the Date of Grant, or five years in the case of an Incentive Stock Option granted to a Ten Percent Shareholder. Options may not be exercised before six months after the Date of Grant. Options will cease to be exercisable prior to the expiration of their term under certain circumstances as provided in paragraphs 7(f), (g), and (h). Subject to the foregoing, and to any vesting or other conditions imposed at the time it is granted, an Option may be exercised in whole or in part at any time, or from time to time, during its term. (c) Manner of Exercise. To exercise an Option, the person exercising the Option must deliver to the Company, at its principal office: (i) a notice of exercise, which states the extent to which the Option is being exercised; (ii) a certified or bank cashier's check, or such other form of payment as the Company may permit, in an amount equal to the Exercise Price of the Option times the number of shares as to which it is being exercised, or consideration in such other form as may be permitted under the terms on which the Option is granted; and (iii) payment of an amount equal to any withholding taxes the Company is required to pay because of the exercise of the Option. The date on which the Company receives all the items specified in this subsection will be the date on which the Option is exercised to the extent described in the notice of election. (d) Delivery of Stock Certificates. As promptly as practicable after an Option is exercised, the Company will deliver to the person who exercises the Option certificates, registered in that person's name, representing the number of shares of Common Stock which were purchased by the exercise of the Option. Each certificate may bear a legend to indicate, if applicable, that (i) the Common Stock represented by the certificate was issued in a transaction which was not registered under the Securities Act of 1933, as amended, and may only be sold or transferred in a transaction which is registered under that Act or is exempt from the registration requirements of that Act, and (ii) the Common Stock represented by the certificate is subject to the obligation of the holder to pay any unpaid balance of the Exercise Price 5 (whether pursuant to a promissory note or otherwise), and/or that the Common Stock is pledged to secure such an obligation. (e) Nontransferability of Options. During the lifetime of the person to whom an Option is issued, the Option may be exercised only by that person or his or her guardian or legal representative. An Option may not be assigned, pledged or hypothecated in any way, will not be subject to execution, and will not be transferable otherwise than by will or the laws of descent and distribution. The Company will not recognize any attempt to assign, transfer, pledge, hypothecate or otherwise dispose of an Option contrary to the provisions of this Plan, or any levy of any attachment or similar process upon any Option, and, except as expressly stated in this Plan, the Company will not be required to, and will not, issue Common Stock on exercise of an Option to anyone who claims to have acquired that Option from the person to whom it was granted. (f) Termination of Employment of Holder of Option Other Than Because of Total Disability or Death. If there is a Termination of Employment of a person to whom an Option has been granted, other than by reason of the person's death or Total Disability, each Option held by the person may be exercised (if otherwise exercisable) until the earlier of (i) the end of the three-month period immediately following the date of the Termination of Employment, (ii) the expiration of the term specified in the Option, or (iii) such earlier time as may be determined by the Committee at the time of granting the Option. (g) Major Event. Upon the occurrence of a Major Event, as defined below, in addition to those shares available for purchase as of the date of the Major Event all of the remaining Option Shares not then otherwise available for purchase as of such date shall become immediately available for purchase. (i) The term "Major Event" as used in this Agreement shall mean (1) the Company enters into one or more definitive agreements to merge or consolidate the Company with or into another corporation, or to sell or otherwise dispose of all or substantially all of the Company's assets, or to effect any other transaction, consolidation or reorganization having similar results or effect, or to sell a greater than 50% interest to third parties other than in connection with the Company becoming Publicly Traded; provided, that such events shall not be deemed a Major Event, in the discretion of the Board or the Committee if provision is made in such transaction for the Options to be converted into equivalent securities of the entity with which such a transaction is entered at the same pricing as received by the Company or Cytogen Corporation (or its successors) in such transaction; and, following such time at which the Company is Publicly Traded: (2) any person other than the Company makes a tender or exchange offer for more than 50% of Common Stock pursuant to which purchases of any amount of Common Stock are made; (3) stock representing more than 50% of the voting power of the Company is acquired by any person other than the Company in any one or more transactions; or (4) within any 24-month period persons who were members of the Company's Board of Directors immediately prior to such 24-month period, together with any persons who were first elected as directors during such 24-month period by or upon the recommendation of members of the Board of Directors who were members immediately prior to such 24-month period and who constituted a 6 majority of the Board of Directors at the time of such election, cease to constitute a majority of the Board of Directors. (g) Total Disability of Holder of Option. If there is a Termination of Employment of a person to whom an Option has been granted by reason of his or her Total Disability, each Option held by the person may be exercised (if otherwise exercisable) until the earlier of (i) the end of the one-year period immediately following the date of the Termination of Employment, (ii) the expiration of the term specified in the Option, or (iii) such earlier time as may be determined by the Committee at the time of granting the Option. (h) Death of Holder of Option. If there is a Termination of Employment of a person to whom an Option has been granted by reason of his or her death, or a former officer or Employee dies following the date of his or her Termination of Employment but at a time when an Option still would be exercisable by that person but for the death of the person, each Option held by the person at the time of his or her death may be exercised by the person or persons to whom the Option passed by will or by the laws of descent and distribution (but by no other persons) until the earlier of (i) the end of the one-year period immediately following the date of death (or such other period as may be determined by the Committee at the time of granting the Option), (ii) the expiration of the term specified in the Option, or (iii) if the death occurs after the Termination of Employment, the end of the period in which the Option could be exercised under paragraph 7(f) or (g). (i) Company's Right of First Purchase. While and so long as the stock of the class subject to this Plan has not been Publicly Traded for at least ninety days, and as a long as there has been no Major Event, any shares of common stock issued on exercise of any Option shall be subject to the Company's right of first purchase. By virtue of that right, (a) such stock may not be transferred during the optionee's lifetime to any person other than members of the optionee's immediate family, a partnership whose members are the optionee and/or members of the optionee's immediate family, or a trust for the benefit of the optionee and/or members of the optionee's immediate family, unless such transfer occurs within fifteen days following the expiration of thirty days after the Company has been given a written notice which correctly identified the prospective transferees and which offered the Company an opportunity to purchase such shares at the price of a bona fide offer by the prospective transferee or third party in cash, and such offer was not accepted within thirty days after the Company's receipt of that notice; and (b) upon the optionee's death, the Company shall have the right to purchase all or some of such stock at its fair market value within nine months after the date of death. This right of first purchase shall continue to apply to any such shares after the transfer during the optionee's lifetime of that stock to a member of the optionee's immediate family or to a family partnership or trust as aforesaid, and after any transfer of that stock with respect to which the Company expressly waived its right of first purchase without also waiving it as to any subsequent transfers thereof, but it shall not apply after a transfer of that stock with respect to which the Company was offered but did not exercise or waive its right of first purchase or more than nine months after the optionee's death. The Company may assign all or any portion of its right of first purchase to any one or more of its stockholders, or to a pension or retirement Plan 7 or trust for employees of the Company, who may then exercise the right so assigned. Stock certificates evidencing stock subject to this right of first purchase shall be appropriately legended to reflect that right. 8. Special Provisions Relating to Incentive Stock Options. The Exercise Price of an Incentive Stock Option will be not less than 100% of the Fair Market Value of the Common Stock on the Date of Grant of the Option. An Incentive Stock Option may not be granted to a person who, at the time the Option is granted, is a Ten Percent Shareholder, unless (i) the Exercise Price of the Option is at least 110% of the Fair Market Value of the Common Stock on the Date of Grant and (ii) the Option by its terms is not exercisable after the expiration of five years from the Date of Grant. To the extent that the aggregate Fair Market Value (determined at the time an Incentive Stock Option is granted) of the Common Stock with respect to which Incentive Stock Options are first exercisable by an Employee during any calendar year (under this Plan and any other incentive stock option plans of the Company) exceeds $100,000, such Options shall be treated as Non-Qualified Options. 9. Recapitalization. (a) The existence of outstanding Options shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business or any other corporate act or proceeding, whether of a similar character or otherwise, or to sell additional shares of Common Stock dilutive of the shares issuable upon exercise of Options. Unless otherwise determined by the Board, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or on conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number, class or price of shares of Common Stock then subject to outstanding Options. (b) If as a result of any (i) reorganization or liquidation of the Company or (ii) reclassification of the Company's capital stock, or (iii) consolidation or merger of the Company with or into another corporation, or sale of all or substantially all the assets of the Company (a reorganization or liquidation of the Company or reclassification of the Company's capital stock, or a merger, consolidation or sale of the type described in this subsection being a "Corporate Transaction") while an Option is outstanding, the holders of the Common Stock become entitled to receive with respect to their Common Stock, securities or assets other than, or in addition to, their Common Stock, upon exercise of that Option the holder will receive what the holder would have owned if the holder had exercised the Option immediately before the Corporate Transaction which occurred while the Option was outstanding and had not disposed 8 of anything the holder would have received as a result of that and all subsequent Corporate Transactions. 10. Rights of Option Holder. (a) The holder of an Option will not have any rights as a stockholder by reason of holding that Option. Upon exercise of an Option, the holder will be deemed to acquire the rights of a stockholder when, but not before, the issuance of Common Stock as a result of the exercise is recorded in the stock records of the Company. (b) Nothing in this Plan or in the grant of an Option will confer upon any Employee the right to continue in the employment of the Company or will interfere with or restrict in any way the rights of the Company to discharge any Employee at any time for any reason whatsoever, with or without cause, nor will it impose any obligation on the Employee to remain in the employ of the Company. 11. Laws and Regulations. The obligation of the Company to sell and deliver shares of Common Stock on exercise of Options will be subject to the condition that legal counsel for the Company be satisfied that the sale and delivery will not violate the Securities Act of 1933, as amended, or any other applicable laws, rules or regulations, and to such conditions that the Company, if Publicly Traded, or Cytogen Corporation (or its successor) may impose related to such securities laws requirements. The Company and Cytogen Corporation (or its successors) shall have no obligation to take such steps as may be required to permit exercises if the Board or a Committee determines in good faith that such steps are not in the best interest of the Company or a parent corporation. 12. Withholding of Taxes. (a) In addition to the requirement in paragraph 7(c) that in order to exercise an Option a person must make a payment to the Company or authorize withholding in order to enable the Company to pay any withholding taxes due as a result of the exercise, if a person who exercised an Incentive Stock Option disposes of shares of Common Stock acquired through exercise of that Incentive Stock Option either (i) within two years after the Date of Grant of the Incentive Stock Option or (E) within one year after the issuance of the shares on exercise of the Incentive Stock Option, the person will notify the Company promptly of the occurrence of the event and, if the event was a disposition of Common Stock acquired on exercise of an Incentive Stock Option, the amount realized upon the disposition. (b) If, whether because of a disposition of Common Stock acquired on exercise of an Incentive Stock Option, or otherwise, the Company is required to pay withholding taxes to any Federal, state or other taxing authority and the Employee fails to provide the Company with the funds with which to pay that withholding tax, the Company may withhold up to 50% of each payment of salary or bonus to the Employee (which will be in addition to any other 9 required or permitted withholding), until the Company has been reimbursed for the entire withholding tax it was required to pay. (c) The obligations contained in this paragraph 12 shall bind each optionee, and each optionee, by accepting and/or exercising an Option, shall be deemed to agree to observe and comply with them. 13. Reservation of Shares. The Company will at all times keep reserved for issuance on exercise of Options a number of authorized but unissued or reacquired shares of Common Stock equal to the maximum number of shares the Company may be required to issue on exercise of outstanding Options (assuming no subsequent adjustments under paragraph 9). 14. Amendment of the Plan. The Board of Directors may at any time and from time to time modify or amend this Plan in any respect effective at any date the Board of Directors determines, subject to such requirements as may be imposed by the Securities Exchange Act of 1934, as amended, the Code, or by the rules of any stock market relating to stockholder approval, if applicable. No modification or amendment of this Plan will, without the consent of the holder of an outstanding Option, adversely affect the holder's rights under that Option. 15. Interpretation The Committee shall have the power to interpret the Plan and to make and amend rules for putting it into effect and administering it. It is intended that the Incentive Stock Options granted under the Plan shall constitute incentive stock options within the meaning of section 422 of the Code, that the Non-Qualified Options shall constitute property subject to federal income tax pursuant to the provisions of section 83 of the Code and that the Plan shall qualify for the exemption available under Rule 16b-3 (or any similar rule) of the Securities and Exchange Commission. It is also intended that all compensation income recognized by optionees as the result of the exercise of Options or the disposition of Common Stock acquired on exercise of Options shall be considered performance- based compensation excludable from such optionee's "applicable employee remuneration" pursuant to section 162(m)(4)(C) of the Code. The provisions of the Plan shall be interpreted and applied insofar as possible to carry out such intent. 16. Termination of the Plan. This Plan shall terminate on August 15, 2009, unless sooner terminated. The Board of Directors may suspend or terminate this Plan at any time or from time to time, but no such action may adversely affect the rights of a person holding an outstanding Option. 10 17. Applicable Law. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of New Jersey, without reference to the principles of conflict or laws thereof, except with respect to such matters as are governed by the corporate law of the State of Delaware. 11 EX-10.27 4 MASTER LOAN AND SECURITY AGREEMENT Exhibit 10.27 FINANCIAL INNOVATORS [LOGO] FINOVA Capital Corporation 10 Waterside Drive Farmington, CT 06032-3065 (860) 676-1818 MASTER LOAN AND SECURITY AGREEMENT Master Loan and Security Agreement No. S7600, dated December 30, 1999 FINOVA Capital Corporation ("we," "us" or "FINOVA"), having its principal place of business at 1850 North Central Avenue, Phoenix, Arizona 85004 is willing to make a loan (the "Loan") to Cytogen Corporation having its principal place of business at 600 College Road East, CN 5308,Princeton, New Jersey 08540 and AxCell Biosciences Corporation, jointly and severally liable (collectively "you" or "Borrower"), having its principal place of business at 825 Newtown Yardley Road, Newtown, Pennsylvania 18940, in one or more advances made from time to time (individually, an "Advance" and collectively, the "Advances"), in the aggregate principal amount of up to One Million, Four Hundred Thousand Dollars ($1,400,000), under the terms and conditions contained in this Master Loan and Security Agreement (this "Master Agreement"). The entire Loan will be "cross collateralized" and secured by the collateral (the "Collateral") described in each schedule (individually, a "Schedule" and collectively, "Schedules") which will be executed in connection with each Advance and the related Note (as hereinafter defined). The Collateral includes the Equipment hereinafter described and any and all replacement parts, additions, accessories and accessions that you may add to the Equipment, as well as all replacements and substitutions of the Equipment and all proceeds of the Equipment, including, without limitation, insurance proceeds. We may treat any Schedule as a separate loan and security agreement containing all of the provisions of this Master Agreement. 1. THE CREDIT (a) Advances. Each Advance shall be evidenced by and the specific terms applicable thereto set forth in a Note and related Schedule. All of the Notes and Schedules, taken together, will evidence the entire Loan. We will only make the Loan to you if all the conditions in this Master Agreement have been met to our reasonable satisfaction. We will rely on your representations and warranties contained in this Master Agreement, in making the Loan. The terms of this Master Agreement will each apply to the entire Loan. (b) Use of Proceeds. The proceeds of the Advances will be used solely to reimburse you for your payment of the purchase price for equipment which is reasonably satisfactory to us and which is described in the applicable Schedule ("Equipment"). If you have not yet paid for the Equipment (but the same is otherwise satisfactory to us), the proceeds of the Advance will be paid by us directly to the supplier (which you have chosen) to pay the purchase price of the Equipment. (c) Notes. Your obligation to repay the Advance and to pay interest thereon will be evidenced by separate secured promissory notes (individually, a "Note" and collectively, the "Notes"). Each Note will be dated the date of the Schedule to which the Advance evidenced by the Note is related. The related Schedule will be deemed to be part of the Note. (d) Term. The term ("Term") of each Schedule (and the related Advance) begins upon the date that we make payment for the Collateral covered under the Schedule (the "Closing Date"). The Term continues until you fully perform all of your obligations under this Master Agreement, each related Schedule and the related Note(s). (e) Loan Account. We will keep a loan account on our books and records for the Loan. We will record all payments of principal and interest in the loan account. Unless the entries in the loan account are in error, the loan account will definitively indicate the outstanding principal balance and accrued interest on the Loan. (f) Payments. The scheduled payments of principal and interest (the "Payments") are indicated on and due and payable in accordance with the terms of the applicable Note and Schedule. The Payments are payable in advance and otherwise on the dates and in the amounts set forth on the applicable Schedule. (g) First Payment and Subsequent Payments. The first Payment under a Note and Advance ("First Payment") is due at the beginning of its Term and shall, at our option, either be deducted from the proceeds of the Advance or paid directly to us by you. Subsequent Payments are due on the thirtieth (30th) day of each successive month as set forth on the Schedule until you pay to us in full all of the Payments and any other fees, costs, charges and expenses that you owe us. (h) Interest. Prior to Maturity of an Advance, you will pay us interest on the Advance at the interest rate indicated in the applicable Schedule (the "Interest Rate"). "Maturity" means the scheduled maturity or any earlier date on which we accelerate the Loan. The Payment amount indicated in the Schedule includes interest at the applicable Interest Rate. Interest is calculated in advance using a year of 360 days with twelve months of 30 days. (i) Interim Interest Payment. If an Advance is made on a day other than the thirtieth (30th) or thirty-first (31st) day of a month, you will also pay to us, together with the First Payment, interest on the Advance at the applicable interest rate for the period from the date the Advance is made until the twenty- ninth (29th) day of the month in which the Advance is made. If an Advance is made on the thirty-first (31st) day of a month, you will also pay to us, together with the First Payment, interest on the Advance at the applicable interest rate for the period from the date the Advance is made until the twenty- ninth (29th) day of the following month. If an Advance is made on the thirtieth (30th) day of a month, no interim interest will be due. (j) Default Interest Rate. After Maturity of the Loan or any Advance, you will pay us interest thereon at a rate of four (4%) percent per year above the applicable Interest Rate. This is referred to as the "Default Rate." (k) Usury. You and we intend to obey the law. If the Interest Rate charged would exceed the maximum legal rate, you will only have to pay the maximum legal rate. You do not have to pay any excess interest over and above the maximum legal rate of interest. However, if it later becomes legal for you to pay all or part of any excess interest, you will then pay it to us upon our request. (l) Payment Details. You will make all Payments due under this Master Agreement by 12:00 P.M., Connecticut time, on the day they are due. You will make all Payments in US Dollars (US$) in immediately available funds. We do not have to make or give "presentment, demand, protest or notice" to get paid. You waive "presentment, demand, protest and notice." (m) Application of Payments. Each Payment under this Master Agreement is to be 2 applied in the following order: first, to any fees, costs, expenses and charges you may owe us; second, to any interest due; and third to the principal balance. (n) Prepayment. You may prepay the Loan as specifically permitted by Exhibit B to the applicable Schedule. (o) No Setoffs. Your obligation to pay us all Payments is absolute and unconditional. You are not excused from making the Payments, in full, for any reason. You agree that you have no defense for failure to make the Payments and you will not make any counterclaims or setoffs to avoid making the Payments. 2. SECURITY INTEREST (a) You grant us a first and only lien on and security interest in the Collateral. The Collateral secures the full and timely payment and performance of all of your now existing or hereafter arising indebtedness, liabilities and obligations to us, whether under this Master Agreement, the Schedules, the Notes and any other agreement, loan or lease that you may at any time or times have with us or otherwise (collectively, the "Obligations"). You also grant us a security interest in any additional collateral identified in any Schedule. Any additional collateral is considered to be "Collateral" and it secures all of the Obligations. (b) If we request, you will put labels supplied by us stating "PROPERTY SUBJECT TO A SECURITY INTEREST HELD BY FINOVA CAPITAL CORPORATION" on the Collateral where they are clearly visible. (c) You give us permission to add to this Master Agreement or any Schedule the serial numbers and other information about the Collateral. (d) You give us permission to file this Master Agreement or Uniform Commercial Code financing statements, at your expense, in order to perfect our security interest in the Collateral. You also give us permission to sign your name on the Uniform Commercial Code financing statements where this is permitted by law. (e) You will pay our fees and costs for documentation, closing, administration and termination of this Master Agreement, the Notes and Schedules. These fees include such items as reasonable attorneys fees and expenses incurred in preparing this Master Agreement and all agreements, instruments and documents executed in connection herewith, and all amendments, supplements and waivers hereto and thereto, as well as due diligence searches and fees for preparing and filing UCC terminations and releases. You will also pay any filing, recording or stamp fees or taxes resulting from filing this Master Agreement or Uniform Commercial Code financing statements. (f) At your expense, you will defend our first priority security interest in the Collateral against, and keep the Collateral free of, any legal process, liens, other security interests, attachments, levies and executions. You will give us immediate written notice of any legal process, liens, attachments, levies or executions, and you will indemnify us against any loss that results to us from these causes. (g) You will notify us at least 15 days before you change the address of your principal executive office or principal place of business. Your principal executive office and principal place of business are set forth at the beginning of this Master Agreement. (h) You will notify us at least 15 days before you change your state of incorporation. (i) You will promptly sign and return additional documents that we may reasonably request in order to protect our first priority security interest in the Collateral. (j) Except as set forth in a Schedule, the Collateral is personal property and will remain personal property. Except as set forth in a Schedule, you will not incorporate it into real estate and will not do anything that will cause the Collateral to become part of real estate or a fixture. 3 3. CONDITIONS OF LENDING (a) See our Commitment Letter to you dated December 20, 1999 (the "Commitment Letter"), which you and we consider to be a part of this Master Agreement. The terms and conditions of the Commitment Letter continue following the making of the first Advance, including, without limitation, conditions to the Loan. However, if there is a conflict between the terms and conditions of this Master Agreement, any Schedule or any Note and the terms and conditions of the Commitment Letter, then you and we agree that the terms and conditions of this Master Agreement, the Schedules and the Notes control over the Commitment Letter terms and conditions. (b) Before we disburse any proceeds of any Advance, we also require the following: (i) That no payment is past due to us under any other agreement, loan or lease that you or any guarantor have with us. (ii) That you are complying with all terms of this Master Agreement, the Schedules and the Notes and there are no defaults hereunder or thereunder. (iii) That we have received all the documents we requested, including the signed Schedule and Note. (iv) That there has been no material adverse change in your financial condition, business or operations, or that of any guarantor, from the financial condition that you or any guarantor have disclosed to us. (v) All conditions contained in the Commitment Letter have been satisfied. 4. REPRESENTATIONS AND WARRANTIES You represent and warrant to us as follows: (a) You and each guarantor are duly organized, existing and in good standing wherever you or it are required by law to be so qualified, except where such lack of qualification would not have a material adverse impact on your or any guarantor's operations. You and each guarantor have full power and authority to execute, deliver and carry out the provisions of this Master Agreement, the Schedules and the Notes and to borrow hereunder and thereunder. This Master Agreement, the Schedules and the Notes are validly executed and delivered by you and the guarantors and are the legal, valid and binding obligations of you and the guarantors, each enforceable in accordance with its terms. (b) Neither you nor any guarantor is a defendant under any material litigation and there are no judgments outstanding against you or any guarantor. (c) All of the Equipment has been delivered to you and installed at the location set forth on the Schedule and you have accepted all of the Equipment for all purposes of this Master Agreement. (d) You have good title to all of your assets, including, without limitation, the Collateral, and in the case of the Collateral, free and clear of all security interests, liens and other encumbrances. Upon filing of UCC-1 financing statements in all applicable filing offices, we will be granted a first and only perfected lien on and security interest in all of the Collateral. There are no other security interests, liens or encumbrances covering the Collateral. (e) You have supplied us with information about the Collateral. To the best of your knowledge the amount of our Advance as to each item of Equipment is no more than the fair and usual price for this kind of Equipment, taking into account any discounts, rebates and allowances that you or any affiliate of yours may have been given for the Equipment. (f) The Collateral is located at the premises set forth on the Schedule. (g) All financial information and other information that you or any guarantor have given us is true and complete when provided. You or 4 any guarantor have not failed to tell us anything that would make the financial information not misleading in any material respect. There has been no material adverse change in your financial condition, business or operations, or the financial condition of any guarantor, from the financial condition that you disclosed to us. (h) You have complied with all "environmental laws" and will continue to comply with all "environmental laws." No "hazardous substances" are used, generated, treated, stored or disposed of by you or at your properties except in compliance with all environmental laws. "Environmental laws" mean all federal, state or local environmental laws and regulations, including the following laws: CERCLA, RCRA, Hazardous Materials Transport Act and The Federal Water Pollution Control Act. "Hazardous substances" means all hazardous or toxic wastes, materials or substances, as defined in the environmental laws, as well as oil, flammable substances, asbestos that is or could become friable, urea formaldehyde insulation, polychlorinated biphenyls and radon gas. 5. COVENANTS You agree to do the following things (or not to do the following things if so stated) until full payment of all amounts due to us under this Master Agreement, the Schedules and the Notes: (a) Care, Use, Location, Transfer, Encumbrance And Alteration of The Collateral. (i) You will make sure that the Collateral is maintained in good operating condition, and that it is serviced, repaired and overhauled when this is necessary to keep the Collateral in good operating condition. All maintenance must be done according to the Supplier's or Manufacturer's requirements or recommendations. All maintenance must also comply with any legal or regulatory requirements. (ii) You will maintain service logs for the Collateral, if applicable, and permit us or our agents to inspect the Collateral, the service logs and service reports. You give us and our agents permission to make copies of the service logs and service reports. (iii) We will give you prior notice if we, or our agents, want to inspect the Collateral or the service logs or service reports. We may inspect it during regular business hours. If we find during an inspection that you are not complying with this Master Agreement in any material respect or if you are otherwise in default under this Master Agreement, you (and not us) will pay our travel, meals and lodging costs, our salary costs, and our costs and fees and those of our agents for reinspection. You will promptly cure any problems with the Collateral that are discovered during our inspections. (iv) You will use the Collateral only for business purposes. You will obey all legal and regulatory requirements in your use of the Collateral. (v) You will make all additions, modifications and improvements to the Collateral that are required by law or government regulation. Otherwise, you will not alter the Collateral without our written permission, which will not be unreasonably withheld. You will replace all worn, lost, stolen or destroyed parts of the Collateral with replacement parts that are as good or better than the original parts. The new parts will become subject to our security interest upon replacement. (vi) You will not remove the Collateral from the location indicated in the Schedule. (vii) You have and will have good and merchantable title to all of the Collateral. (viii) You will not convey, assign, sell, mortgage, transfer, encumber, pledge, hypothecate, grant a security interest in, grant options with respect to, lease or otherwise dispose of all or any part of any interest whatsoever in or to any or all of the Collateral, or any interest therein. 5 (b) Year 2000 Compliant. You represent, warrant and agree to take all action necessary, including, but not limited to, due inquiry and due diligence with critical business partners to assure that there will be no material adverse change to your business by reason of the advent of the year 2000, including, without limitation, that all computer-based systems, embedded microchips and other processing capabilities effectively recognize and process all dates before and after December 31, 1999 ("Y2K Compliant"). At our request, you shall provide to us assurance reasonably acceptable to us that your computer-based systems, embedded microchips and other processing capabilities are Y2K Compliant. (c) Risk of Loss. (i) You have the complete risk of loss or damage to the Collateral. Loss or damage to the Collateral will not relieve you of your obligation to make the Payments. (ii) If any Collateral is lost or damaged, you have two choices although if you are in default under this Master Agreement, we and not you will have the two options. The choices are: (A) Repair or replace the damaged or lost Collateral so that, once again, the Collateral is in good operating condition and we have a perfected first priority security interest in it. (B) Pay us the present value (as of the date of payment) of the remaining Payments. We will calculate the present value using a discount rate of five (5%) percent per year. Once you have paid us this amount and any other amount that you may owe us, we will release our security interest in the damaged or lost Collateral and you (or your insurer) may keep the Collateral for salvage purposes, on an "AS IS, WHERE IS" basis and without any representation or warranty whatsoever. (d) Insurance. (i) Until you have made all Payments to us under this Master Agreement, the Schedules and the Notes and all Obligations have been satisfied in full, you will keep the Collateral insured. The amount of insurance, the coverage, and the insurance company must be reasonably acceptable to us. (ii) If you do not provide us with written evidence of insurance that is reasonably acceptable to us, we may buy the insurance ourselves, at your expense. You will promptly pay us the cost of this insurance. We have no obligation to purchase any insurance. Any insurance that we purchase will be our insurance, and not yours, and we may insure the Collateral beyond the date of satisfaction of the Obligations. (iii) Insurance proceeds may be used to repair or replace damaged or lost Collateral or to pay us the present value of the Payments, as provided above. (iv) You appoint us as your "attorney-in-fact" to make claims under the insurance policies, to receive payments under the insurance policies, and to endorse your name on all documents, checks or drafts relating to insurance claims for Collateral. (e) Taxes. (i) You will pay all sales, use, excise, stamp, documentary and ad valorum taxes, license, recording and registration fees, assessments, fines, penalties and similar charges imposed on the ownership, possession, use, lease or rental of the Collateral or on the Loan. (ii) You will pay all taxes (other than our federal or state net income taxes) imposed on you or on us regarding the Payments. (iii) You will reimburse us for any of these taxes that we pay or advance. (iv) You will file and pay for any personal property taxes on the Collateral. 6 (f) Information Supplied By You and any Guarantor. (i) During the Term you will promptly provide us with copies of any current, quarterly and annual reports and all proxy (or information) statements you or any guarantor file with the Securities and Exchange Commission ("SEC"). (ii) You and any guarantor will also provide us with the following financial statements: (A) Quarterly balance sheet and statements of earnings and cash flow - within 45 days after the end of your first three fiscal quarters in each fiscal year. These will be certified by the principal financial officer. (B) Annual balance sheet and statements of earnings and cash flow - within 90 days after the end of each fiscal year. These will be audited by independent auditors reasonably acceptable to us (Arthur Anderson & Company LLP is acceptable). Their audit report must be unqualified. All financial statements will be prepared according to generally accepted accounting principles, consistently applied. All financial statements and SEC filings that you or any guarantor provide us will be true and complete when provided. They will not fail to tell us anything that would make them not misleading in any material respect. (iii) At the same time you deliver the financial statements described in paragraph 5(f)(ii)(A) and cause to deliver the financial statements described in paragraph 5(f)(ii)(B), you will also provide us with a certificate of your principal financial officer stating that no default exists, or, if he cannot certify this because a default does exist, he must specify in reasonable detail the nature of the default. (iv) For so long as AxCell Biosciences Corporation is a consolidated subsidiary of Cytogen Corporation, information requirements within this Section 5(f) shall be satisfied by the provision of consolidated financial information and filings with respect to Cytogen Corporation. 6. DEFAULTS (a) Defaults. You are in default if any of the following happens: (i) You do not pay us, when it is due, any Payment or other payment that you owe us under this Master Agreement, any Schedule or any Note or that you owe under any other agreement, loan, lease or other financial arrangement that you have with us. (ii) Any of the financial information that you give us is not true and complete when provided, or you failed to tell us anything that would make the financial information not misleading, in each case in any material respect. (iii) You do something you are not permitted to do, or you fail to do anything that is required of you, under this Master Agreement, any Schedule or any other lease, loan or other financial arrangement that you have with us, in each case in any material respect. (iv) An event of default occurs for any other lease, loan or obligation of yours (or any guarantor) that exceeds $50,000 in the aggregate. (v) You or any guarantor file bankruptcy, or involuntary bankruptcy is filed against you or any guarantor and such involuntary bankruptcy is not dismissed within sixty (60) days. (vi) You or any guarantor are subject to any other insolvency proceeding other than bankruptcy (for example, a receivership action or an assignment for the benefit of creditors) and such proceeding that is involuntary is not dismissed within sixty (60) days. (vii) Without our permission, you sell all or a substantial part of your assets, merge or consolidate, or a majority of your voting stock or interests is transferred. However without violating the provisions of this clause, you may consolidate with or merge with a corporation or 7 other entity organized under the laws of one of the states of the United States or the District of Columbia (the surviving entity, a "successor"), or sell (except by means of a sale and leaseback arrangement) all or substantially all of your business and assets to a transferee (the "transferee"), on the condition that any successor or transferee either expressly or by operation of law assume in writing all of your obligations pursuant to this Master Agreement, and that the net tangible assets and the net worth (determined in accordance with generally accepted accounting principles) of the successor or transferee after the consolidation, merger or sale shall be at least equal to your net tangible assets and net worth immediately prior to the consolidation, merger or sale. (viii) There is a material adverse change in your financial condition, business or operations, or that of any guarantor. (b) Remedies, Default Interest, Late Fees. If you are in default we may exercise one or more of our "remedies." Each of our remedies is independent. We may exercise any of our remedies, all of our remedies or none of our remedies. We may exercise them in any order we choose. Our exercise of any remedy will not prevent us from exercising any other remedy or be an "election of remedies." If we do not exercise a remedy, or if we delay in exercising a remedy, this does not mean that we are forgiving your default or that we are giving up our right to exercise the remedy. Our remedies allow us to do one or more of the following: (i) "Accelerate" the Loan balance under any or all Notes. This means that we may require you to immediately pay us the entire outstanding principal balance of the entire Loan. (ii) Require you to immediately pay us all amounts that you are required to pay us for the entire Term of any other agreements, loans, leases or financial arrangements that you have with us. (iii) Sue you for the entire outstanding principal balance of the Loan and all other amounts you owe us (including, without limitation, all accrued and unpaid interest, including interest at the Default Rate), outstanding fees, costs, expenses and charges, plus all prepayment premiums. (iv) Require you at your expense to assemble the Collateral at a location we request in the United States of America. (v) Exercise any remedy under the Uniform Commercial Code or otherwise permitted by law including to the extent permitted retaking and removing the Collateral. If required, we may disconnect and separate the Collateral from your other property. You will not be entitled to any damages resulting from removal or repossession of the Collateral. We may use, ship, store, repair or lease any Collateral that we repossess. We may sell any repossessed Collateral at private or public sale. You give us permission to show the Collateral to buyers at your location free of charge during normal business hours. If we do this, we do not have to remove the Collateral from your location. If we repossess the Collateral and sell it, we will give you credit for the net sale price, after subtracting our costs of repossessing and selling the Collateral. If we rent the Collateral to somebody else, we will give you credit for the net rent received, after subtracting our costs of repossessing and renting the Collateral, but the credit will be discounted to present value using a discount rate equal to the Default Rate. The credit will be applied against what you owe us under this Master Agreement, the Schedules, the Notes and any other agreements, loans, leases and other financial arrangements that you have with us. If the credit exceeds the amount you owe under this Master Agreement, the Schedule, the Notes and any other agreements, loans, leases or financial arrangements that you have with us, we will refund the amount of the excess to you. (vi) We will have all of our rights and remedies under this Master Agreement, the Notes, the Schedules and all agreements, instruments and documents executed in connection herewith and therewith and all of our rights and remedies under applicable law, whether as a secured party or otherwise. 8 (vii) Return conditions: (A) Following a default, at our request you will return the Collateral, freight and insurance prepaid by you, to us at a location we request in the United States of America. It will be returned in good operating condition, as required by Section 5 above. The Collateral will not be subject to any liens when it is returned. (B) You will pack or crate the Collateral for shipping in the original containers, or comparable ones. You will do this carefully and follow all recommendations of the Supplier and the Manufacturer as to packing or crating. (C) You will also return to us the plans, specifications, operating manuals, software, documentation, discs, warranties and other documents furnished by the Manufacturer or Supplier. You will also return to us all service logs and service reports, as well as all written materials that you may have concerning the maintenance and operation of the Collateral. (D) At our request, you will provide us with up to 60 days free storage of the Collateral at your location, and will let us (or our agent) have access to the Collateral in order to inspect it, display it to others for purchase and sell it. (E) You will pay us what it costs us to repair the Collateral if you do not return it in the required condition. (viii) You will also pay us the following: (A) All our expenses of enforcing our remedies. This includes all our expenses to repossess, store, ship, repair and sell the Collateral. (B) Our reasonable attorney's fees and expenses. (C) Default interest on everything you owe us from the date of your default to the date on which we are paid in full at the Default Rate. (D) A premium in the amount of five percent (5%) of the outstanding principal balance of the Loan. (ix) You will pay us a late fee whenever you pay any amount that you owe us more than ten (10) days after it is due. You will pay the late fee within one month after the late Payment was originally due. The late fee will be ten (10%) percent of the late Payment. If this exceeds the highest legal amount we can charge you, you will only be required to pay the highest legal amount. The late fee is intended to reimburse us for our collection costs that are caused by late Payment. It is charged in addition to all other amounts you are required to pay us, including Default Interest. (x) You realize that the damages we could suffer as a result of your default are very uncertain. This is why we have agreed with you in advance on the Default Rate to be used in calculating the payments you will owe us if you default. You agree that, for these reasons, the payments you will owe us if you default are "agreed" or "liquidated" damages. You understand that these payments are not "penalties" or "forfeitures." 7. PERFORMING YOUR OBLIGATIONS IF YOU DO NOT If you do not perform one or more of your obligations under this Master Agreement or a Schedule or Note, we may perform it for you. We will notify you in writing at least ten (10) days before we do this. We do not have to perform any of your obligations for you. If we do choose to perform them, you will pay us all of our expenses to perform the obligations. You will also reimburse us for any money that we advance to perform your obligations, together with interest at the Default Rate on that amount. These will be additional "Payments" that you will owe us and you will pay them at the same time that your next Payment is due. 8. INDEMNITY (a) You will indemnify us, defend us and hold us harmless from and against any and all 9 claims, expenses and attorney's fees concerning or arising from the Collateral, this Master Agreement, any Schedule or Note, or your breach of any representation, warranty or covenant. It includes, without limitation, any claims, losses or charges concerning, arising out of or in connection with the manufacture, selection, delivery, possession, use, operation or return of the Collateral and any claims, losses or damages concerning, arising out of or in connection with this Master Agreement, any Schedule or the Notes. (b) This obligation of yours to indemnify us continues even after the Term is over. 9. MISCELLANEOUS (a) Assignment. WE MAY ASSIGN OR GRANT A SECURITY INTEREST IN THIS MASTER AGREEMENT, ANY SCHEDULE, ANY NOTE OR ANY PAYMENTS WITHOUT YOUR PERMISSION. THE PERSON TO WHOM WE ASSIGN IS CALLED THE "ASSIGNEE." THE ASSIGNEE WILL NOT HAVE ANY OF OUR OBLIGATIONS UNDER THIS MASTER AGREEMENT. YOU WILL NOT BE ABLE TO RAISE ANY DEFENSE, COUNTERCLAIM OR OFFSET AGAINST THE ASSIGNEE. NOTWITHSTANDING ANY SUCH ASSIGNMENT OR GRANTING OF A SECURITY INTEREST, WE WILL CONTINUE TO BE LIABLE FOR ALL OF OUR OBLIGATIONS UNDER THIS MASTER AGREEMENT. UNLESS YOU RECEIVE OUR WRITTEN PERMISSION, YOU MAY NOT ASSIGN OR TRANSFER YOUR RIGHTS UNDER THIS MASTER AGREEMENT OR ANY SCHEDULE. YOU ALSO ARE NOT ALLOWED TO LEASE OR RENT THE COLLATERAL OR LET ANYBODY ELSE USE IT UNLESS WE GIVE YOU OUR WRITTEN PERMISSION. (b) Acceptance By FINOVA, Governing Law, Jurisdiction, Venue, Service of Process, Waiver of Jury Trial. THIS MASTER AGREEMENT WILL ONLY BE BINDING WHEN WE HAVE ACCEPTED IT IN WRITING. THIS MASTER AGREEMENT IS GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK (NOT INCLUDING THE "CHOICE OF LAW" DOCTRINE). HOWEVER, IF THIS MASTER AGREEMENT IS UNENFORCEABLE UNDER NEW YORK LAW, IT WILL INSTEAD BE GOVERNED BY THE LAWS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED. YOU AND WE MAY ONLY SUE EACH OTHER IN A FEDERAL OR STATE COURT (A) THAT IS LOCATED IN NEW YORK, (B) LOCATED IN THE STATE WHERE THE COLLATERAL IS LOCATED OR (C) LOCATED IN THE STATE WHERE THE OTHER PARTY HAS ITS PRINCIPAL PLACE OF BUSINESS. THIS APPLIES TO ALL LAWSUITS UNDER ALL LEGAL THEORIES, INCLUDING CONTRACT, TORT AND STRICT LIABILITY. YOU CONSENT TO THE PERSONAL JURISDICTION OF THESE COURTS. YOU WILL NOT CLAIM THAT THESE COURTS ARE AN "INCONVENIENT FORUM" OR THAT THEY ARE NOT A PROPER "VENUE." WE MAY SERVE YOU WITH PROCESS IN A LAWSUIT BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO YOUR ADDRESS INDICATED AFTER YOUR SIGNATURE BELOW. YOU AND WE EACH WAIVE ANY RIGHT YOU OR WE MAY HAVE TO A JURY TRIAL IN ANY LAWSUIT BETWEEN YOU AND US. (c) Notices. Your address for notices is your address set forth below your name on the signature page of this Master Agreement. We may give you written notice in person, by mail, by overnight delivery service, or by fax. Mail notice will be effective three (3) days after we deposit it with the U.S. Postal Service. Overnight delivery notice requires a receipt and tracking number. Fax notice requires a receipt from the 10 sending machine showing that it has been sent to your fax number and received. Our address for notices is our address set forth below our name on the signature page of this Master Agreement, with Attention: Director, Contract Administration. You will also give copies of all notices to us at our principal place of business at the address set forth in the opening paragraph of this Master Agreement, with attention to Vice President, Law Department. You may give us notice the same way that we may give you notice. (d) General. This Master Agreement benefits our successors and assigns. This Master Agreement benefits only those successors and assigns of yours that we have approved in writing. This Master Agreement binds your successors and assigns. This Master Agreement binds only those successors and assigns of ours that clearly assume our obligations in writing. TIME IS OF THE ESSENCE OF THIS MASTER AGREEMENT This Master Agreement, all of the Schedules and the Notes and the Commitment Letter are together the entire agreement between you and us concerning the Collateral. Only an employee of FINOVA who is authorized by corporate resolution or policy may modify or amend this Master Agreement or any Schedule or Note on our behalf, and this must be in writing. Only he or she may give up any of our rights, and this must be in writing. If more than one person is the Borrower under this Master Agreement, then each of you is jointly and severally liable for your obligations under this Master Agreement and all Schedules and Notes. This Master Agreement is only for your benefit and for our benefit, as well as our successors and assigns. It is not intended to benefit any other person. If any provision in this Master Agreement is unenforceable, then that provision must be deleted. Only unenforceable provisions are to be deleted. The rest of this Master Agreement will remain as written. We may make press releases and publish a tombstone announcing this transaction and its total amount. You may publicize this transaction with our prior written consent or as may be required by law. BORROWER: CYTOGEN CORPORATION 600 College Road East, CN 5308 Princeton, NJ 08540 BY: /s/ Jane Maida PRINTED NAME: J. Maida TITLE: VP Finance Taxpayer ID# 22-2322400 FAX NUMBER: 609-750-8120 DATED: February 14, 2000 11 STATE OF New Jersey COUNTY OF Middlesex I acknowledge that Jane Maida, who stated that he/she is VP Finance & Administration of the CYTOGEN CORPORATION, signed this Master Loan and Security Agreement in my presence today: 02/14/00. He/She acknowledged to me that his/her signature on this Master Loan and Security Agreement was authorized by a valid resolution or other valid authorization from Borrower's board of directors or other governing body. Theresa Eamello ---------------------------------- Notary Public Theresa Eamello Notary Public, State of New Jersey ID No. 2217405 Qualified in Middlesex County Commission Expires September 1, 2003 [SEAL] \ LENDER: BORROWER: FINOVA CAPITAL CORPORATION AXCELL BIOSCIENCES CORPORATION 10 Waterside Drive 825 Newtown Yardley Road Farmington, CT 06032-3065 Newtown, PA 18940 BY: /s/ Linda Moschitto BY: /s/ Jane Maida PRINTED NAME: Linda Moschitto PRINTED NAME: J. Maida TITLE: Director, Contract Administration TITLE: CFO FAX NUMBER: (860) 676-1814 Taxpayer ID# 22-3473342 DATE ACCEPTED: February 29, 2000 FAX NUMBER: 609-750-8120 DATED: February 14, 2000 STATE OF New Jersey COUNTY OF Middlesex I acknowledge that Jane Maida, who stated that he/she is CFO of AXCELL BIOSCIENCES CORPORATION, signed this Master Loan and Security Agreement in my presence today: 02/14/00. He/She acknowledged to me that his/her signature on this Master Loan and Security Agreement was authorized by a valid resolution or other valid authorization from Borrower's board of directors or other governing body. Theresa Eamello ----------------------------------- Notary Public Theresa Eamello Notary Public, State of New Jersey ID No. 2217405 Qualified in Middlesex County Commission Expires September 1, 2003 [SEAL] 12 PROMISSORY NOTE NO. 1 $___________ ______________, 2000 CYTOGEN CORPORATION, a Delaware corporation and AXCELL BIOSCIENCES CORPORATION, a Delaware corporation ("you"), promise to pay to the order of FINOVA CAPITAL CORPORATION ("we," "us" or "FINOVA") the principal amount of ______ _______________________ Dollars ($_________), together with interest on the unpaid principal balance at the interest rate per annum and on the dates and as otherwise provided in the "Master Agreement" and "Schedule" referred to below. If the interest rate charged would exceed the maximum legal rate, you will only have to pay the maximum legal rate. You do not have to pay any excess interest over and above the maximum legal rate of interest. However, if it later becomes legal for you to pay all or part of any excess interest, you will then pay it to us upon our request. You will make all payments in US Dollars at our offices at 10 Waterside Drive, Farmington, Connecticut 06032-3065, or to another address that we request in writing. All payments will be made in immediately available funds. This Note is executed in connection with a Master Loan and Security Agreement dated December 30, 1999 (the "Master Agreement"), between you and us. This Note is one of the Notes referred to in the Master Agreement, is secured as provided therein, and by all collateral set forth on Exhibit A to the attached Schedule (the "Schedule"), dated the same date as this Note and made a part hereof, and is entitled to all of the benefits of the Master Agreement and may be prepaid only as provided in Exhibit B to the Schedule. All of the terms contained in the Schedule are incorporated in full herein as if set forth in its entirety. This Note may be accelerated by us upon a payment default or upon another default under the Master Agreement or any agreement, instrument or document executed in connection herewith or therewith. TIME IS OF THE ESSENCE. If you do not make a payment within ten (10) days after the date it is due, you will also pay us a late charge of ten percent (10%) of the amount past due. Your interest rate will be increased by four percent (4%) per annum, over and above your regular interest rate if payment is not made at the scheduled or accelerated maturity of this Note. You will also pay all of our costs of collection, including our reasonable attorney's fees and expenses. If we accelerate this Note, you will also owe us a premium, as set forth in Exhibit B to the Schedule. You waive diligence, presentment, formalities of demand, protest or notice of nonpayment or dishonor or any other notice as to this Note. THIS NOTE IS GOVERNED BY THE SUBSTANTIVE LAWS (AND NOT THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW YORK. YOU CONSENT TO THE JURISDICTIONS OF ANY FEDERAL OR STATE COURT LOCATED IN (A) THE STATE OF NEW YORK, (B) THE STATES IN WHICH THE COLLATERAL IS LOCATED AND (C) THE STATE WHERE THE OTHER PARTY HAS ITS PRINCIPAL PLACE OF BUSINESS. YOU WAIVE TRIAL BY JURY. 13 You represent to us that the proceeds of the Loan evidenced by this Note are being used to finance (or refinance) your purchase of the Collateral described in the Schedule, and that the Collateral will only be used for business purposes. CYTOGEN CORPORATION ATTEST: By:___________________________________ Name:________________________________ Title:_________________________________ ____________________________ [Assistant] Secretary AXCELL BIOSCIENCES CORPORATION ATTEST: By:___________________________________ Name:________________________________ Title:_________________________________ _____________________________ [Assistant] Secretary 14 SCHEDULE NO. 1 TO PROMISSORY NOTE NO. 1 AND MASTER LOAN AND SECURITY AGREEMENT Schedule No. 1, dated __________, 2000, (this "Schedule") to PROMISSORY NOTE NO. 1 and MASTER LOAN AND SECURITY AGREEMENT dated as of December 30, 1999 (the "Master Agreement") between CYTOGEN CORPORATION, a Delaware corporation, with its executive office and principal place of business at 600 College Road East, CN 5308, Princeton, New Jersey 08540 and AXCELL BIOSCIENCES CORPORATION, a Delaware corporation, with its executive office and principal place of business at 825 Newtown Yardley Road, Newtown, Pennsylvania 18940, jointly and severally liable ("you"); and FINOVA CAPITAL CORPORATION, a Delaware corporation, with its executive office and principal place of business at 1850 North Central Avenue, Phoenix, Arizona 85004 ("we," "us", or "FINOVA"). 1. Obligation to pay. You are presently borrowing ________________________ ----------------- Dollars ($_________) from us. This borrowing is evidenced by your promissory note dated the same date as this Schedule in the amount of ____________________ Dollars ($_________) (the "Note") to which this Schedule is attached and made a part thereof. 2. Payments (Subject to adjustment in Section 4). You will repay the Loan, --------------------------------------------- together with interest at the interest rate described below, in forty-one (41) consecutive monthly payments of principal and interest as follows: the first monthly payment of principal and interest, in the amount of $______________, followed by forty (40) consecutive monthly payments of principal and interest each in the amount $___________. These payments will be adjusted two (2) business days prior to the date we make the Loan to you as set forth in Section 4. The first monthly payment of principal and interest ("First Payment") will be due on the date that we make the Loan to you. Subsequent payments of principal and interest are due and payable on the thirtieth (30th) day of each and every month thereafter through and including the date upon which the last payment is scheduled to be due (the "Maturity Date"). Any remaining amount that you owe us is due on the Maturity Date. The First Monthly Payment of principal and interest (as well as any interim interest referred to below) shall, at our option, either be withheld from the proceeds of the Loan or paid directly to us by you. If the Loan is made on a day other than the thirtieth (30th) or thirty-first (31st) day of a month, you will also pay to us, together with the First Payment, interest on the Loan at the interest rate for the period from the date we make the Loan to you until the twenty-ninth (29th) day of the same month. If the Loan is made on the thirty-first (31st) day of a month, you will also pay to us, together with the First Payment, interest on the Loan at the interest rate for the period from the date we make the Loan to you until the twenty-ninth (29th) day of the following month. If the Loan is made on the thirtieth (30th) day of a month, no such interim interest will be due. 3. Transaction Fee. Borrower will pay Lender a transaction fee (the ---------------- "Transaction Fee") on either (a) the thirtieth day of the second month following the Maturity Date equal to ten (10%) percent of the principal amount of the Loan or (b) provided that no Event of Default (as defined in 15 the Master Agreement) has occurred, Borrower shall pay thirteen (13) additional consecutive monthly payments commencing on the thirtieth day of the month following the Maturity Date of which the first twelve (12) shall be in an amount equal to 1.50% of the principal amount of the Loan and the thirteenth payment equal to 2.50% of the principal amount of the Loan. Thirty days prior to the Maturity Date of the promissory note for the first Loan, Borrower shall give notice to Lender of the option chosen to pay the Transaction Fee. The option selected for the first Loan shall be deemed selected for all other Loans. 4. Interest; Indexing. The interest rate in your payments shown above is ------------------ calculated at the rate of 8.65% per annum plus an "Index Rate" of 6.02%. The Index Rate means the highest yield, as published in The Wall Street Journal of ----------------------- three-year United States Treasury Notes. The Index Rate of 6.02% was the Index Rate published in The Wall Street Journal on October 21, 1999. Two-business ----------------------- days prior to the date we make the Loan to you, we will read The Wall Street --------------- Journal to determine the final Index Rate. If the Index Rate is not published - ------- in The Wall Street Journal, we will determine it from another reliable source. ----------------------- We will increase or decrease the payments set forth above in Section 2 to reflect any increase or decrease in the Index Rate on such date. We will give you notice of any increase or decrease as soon as we can. You will pay the increased or decreased payments unless we have made an obvious mistake in our calculations. Interest is calculated in advance using a 360-day year of twelve 30-day months. 5. Purpose of Loan; Security Interest. You are making this borrowing to ---------------------------------- finance (or refinance) your purchase of the equipment described in the attached Exhibit A to this Schedule (the "Equipment"). The Equipment, together with all other property described on the attached Exhibit A is hereinafter referred to as the "Collateral". The Collateral includes, without limitation, the Equipment and all replacement parts, additions, accessories and accessions thereto, all replacements and substitutions thereof and all proceeds of the foregoing, including, without limitation, insurance proceeds. In order to secure all of the Obligations (as defined in the Master Agreement), you grant us a first lien on and security interest in the Collateral, as well as any additions, omissions, substitutions and proceeds of the Collateral, including, without limitation, insurance proceeds. You also grant us a security interest in any leases and rentals of the Collateral. This security interest secures the Note. It also secures the full and timely payment and performance of all of your other Obligations to us, whether under the Master Agreement, any other agreement, loan or lease that you may have with us, or otherwise. 6. Collateral Acceptance Date. The Equipment shall be delivered, installed and -------------------------- accepted no later than November 30, 2000. 16 7. Terms of Master Agreement. The terms of the Master Agreement are made a ------------------------- part of this Schedule as if repeated in its entirety in this Schedule. Any declaration of default under the Master Agreement is a default under this Schedule and permits us to exercise all remedies provided by the Master Agreement. CYTOGEN CORPORATION ATTEST: By:__________________________________ Name:________________________________ Title:_______________________________ Date:________________________________ _____________________________ [Assistant] Secretary AXCELL BIOSCIENCES CORPORATION ATTEST: By:__________________________________ Name:________________________________ Title:_______________________________ Date:________________________________ _____________________________ [Assistant] Secretary 17 EXHIBIT A TO SCHEDULE NO. 1 Collateral ---------- All of the following property, in each case, whether now existing or hereafter arising, now owned or hereafter acquired, wherever located: (a) all of the following laboratory equipment, computer servers, computer equipment, peripherals, office furniture and general office equipment and other assets ("Equipment"): (b) all accessions and additions thereto, substitutions for, and all replacements of, any and all of the foregoing, and all proceeds of the foregoing, cash and non-cash, including insurance proceeds. 18 EXHIBIT B TO SCHEDULE NO. 1 Prepayment You may not prepay the Advance evidenced by the Note, in whole or in part, prior to the date that you make the twenty-fourth (24) timely consecutive monthly Payment. You shall have the right, upon not less than thirty (30) days prior written notice to us, on any regularly scheduled Payment date occurring after the twenty-fourth (24) regularly scheduled Payment date, to prepay the Advance in whole, but not in part, provided that you shall pay to us, (i) the remaining monthly Payments discounted at a rate of six (6%) percent, (ii) option "a" of the Transaction Fee discounted at a rate of six (6%) percent, (iii) all accrued and unpaid interest on the amount prepaid through the date of prepayment, and (iv) all outstanding fees, charges and other amounts then due under the Master Agreement, Schedule, Note and all of the other agreements, instruments and documents executed in connection herewith. Once you give us a notice of prepayment, that notice is final and irrevocable. If we accelerate the Loan following a default the premium due upon acceleration will be five (5%) percent of the outstanding principal balance. If you prepay the Advance under the Note, you must prepay all other Advances under the Loan and Master Agreement and all Notes, and pay to us the applicable premiums due under those Notes as well as all other costs, fees, charges and other amounts due under the Master Agreement, the Notes, the Schedules and all other agreements, instruments and documents. 19 EX-21 5 SUBSIDIARIES OF CYTOGEN CORPORATION Exhibit 21 Subsidiaries of Cytogen Corporation AxCell Biosciences Corporation, a Delaware corporation, is a wholly owned subsidiary of Cytogen Corporation. Prostagen Inc., a Delaware corporation, is a wholly owned subsidiary of Cytogen Corporation. EX-23 6 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Cytogen CORPORATION: As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statement (File No. 33-30595), filed with the Securities and Exchange Commission on August 18, 1989, Form S-3 Registration Statement (File No. 33-35140), filed with the Securities and Exchange Commission on May 31, 1990, Form S-8 Registration Statement (File No. 33-52574), filed with the Securities and Exchange Commission on September 29, 1992, Form S-8 Registration Statement (File No. 33-57004), filed with the Securities and Exchange Commission on January 12, 1993, Form S-3 Registration Statement (File No. 33-77396) filed with the Securities and Exchange Commission on April 6, 1994, Form S-8 Registration Statement (File No. 33-63321), filed with the Securities and Exchange Commission on October 10, 1995, Form S-8 Registration Statement (File No. 333-00431), filed with the Securities and Exchange Commission on January 25, 1996 and Form S-8 Registration Statement (File No. 333-04679), filed with the Securities and Exchange Commission on May 29, 1996, Form S-8 Registration Statement (File No. 333-27673) filed with Securities and Exchange Commission on May 23, 1997, Form S-3 Registration Statement (File No. 333-43809) filed with the Securities and Exchange Commission on January 7, 1998, Form S-1/A-2 Registration Statement (File No. 333-68759) filed with the Securities and Exchange Commission on January 8, 1999, Form S-1/A-1 Registration Statement (File No. 333-67947) filed with the Securities and Exchange Commission on January 27, 1999, Form S-1/A-2 Registration Statement (File No. 333-67947) filed with the Securities and Exchange Commission on January 27, 1999 and Form S-3 Registration Statement (File No. 333-83215) filed with the Securities and Exchange Commission on July 20, 1999. ARTHUR ANDERSEN LLP Philadelphia, PA March 27, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 10,801,000 1,593,000 2,233,000 (83,000) 685,000 465,000 7,960,000 (5,963,000) 18,605,000 5,640,000 0 0 0 705,000 9,844,000 18,605,000 8,031,000 11,202,000 4,111,000 8,321,000 8,564,000 0 29,000 (1,973,000) (2,702,000) 729,000 0 0 0 729,000 0.01 0.01
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