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Cautionary Note From time to time in this annual report we may make oral or written statements which reflect our current expectations regarding our future results of operations, economic performance, and financial condition as well as other matters that may affect our business. In general, we try to identify these forward-looking statements by using words such as:
While these statements reflect our current plans and expectations and we base the statements on information currently available to us, we cannot be sure that we will be able to implement these plans successfully. We may not realize our expectations in whole or in part in the future. The forward-looking statements contained in this annual report may cover, but are not necessarily limited to, the following topics:
All of these items involve significant risks and uncertainties. Any of the statements we make in this annual report that are forward-looking we are making pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We wish to caution you that our actual results may differ significantly from the results we discuss in the forward-looking statements. We discuss factors that could cause or contribute to such differences elsewhere in this annual report as well as in our filings with the Securities and Exchange Commission. Our SEC filings include the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 1998. For convenience we refer to this document as the “1998 Form 10-K” in the discussion set forth below. In addition, we intend that any forward-looking statement we make speaks only as of the date on which we make it. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which we make such statement. Introduction
As you read Management’s Discussion and Analysis, you may find it helpful to refer to our Consolidated Financial Statements beginning on page 30 of this annual report. These financial statements present the results of our operations for 1998, 1997, and 1996 as well as our financial position at December 31, 1998 and 1997. In Management’s Discussion and Analysis, we analyze and explain the annual changes in the specific line items set forth in the section of our Consolidated Financial Statements entitled “Consolidated Statements of Operations.” Our analysis may be important to you in making decisions about your investment in Guilford. You will notice some changes in this year’s discussion compared to past years. In 1998 the SEC adopted new rules requiring public companies like us to write certain documents in plain English. Even though the Commission does not require us to present our Management’s Discussion and Analysis in plain English, we have decided voluntarily to apply these rules to the following discussion. Our goal is to describe and analyze our financial condition in language that may be easier for our stockholders to understand. General
In February 1997, we commercially launched our first product, GLIADEL We have also licensed from others and internally developed on our own:
In addition, in 1998 we accelerated research and development activities with respect to certain of these technologies. We anticipate that our future revenues will come primarily from the following sources:
As we discuss in greater detail below, if we or our corporate collaborators, RPR and Amgen Inc., attain certain regulatory and/or development objectives, we are eligible to receive certain milestone and other payments from these companies. We view these potential payments as significant future revenue opportunities. As we discuss in the 1998 Form 10-K, we cannot be sure that our corporate partners will achieve the designated milestones and that we will receive any or all of the milestone payments for which we are eligible under our existing or any future collaborations. We also cannot be sure that we will be able to enter into collaborations in the future with others for the research, development and/or commercialization of our technologies. Since the commercial launch of GLIADEL in the United States in February 1997 through December 31, 1998, we have recognized an aggregate of $13.7 million in transfer payments and royalties. Of this amount, $9.6 million are transfer payments from both RPR and Orion Corporation Pharma for our sales of GLIADEL to these two collaborators. The additional $4.1 million are royalties paid to us from RPR on RPR’s sales of GLIADEL to third parties, such as hospitals. Under the terms of our agreements with RPR, if RPR is able to achieve certain specified regulatory objectives, RPR is obligated to pay us up to an additional $35 million in milestone payments and payments for the purchase of shares of our stock. These regulatory objectives include obtaining approvals to market GLIADEL in certain foreign countries. As we discuss below and in greater detail in the 1998 Form 10-K, a number of factors subject our future sales of GLIADEL to significant risk and uncertainty. We cannot be sure that our sales of GLIADEL to RPR and RPR’s sales of GLIADEL to third parties will increase over time or even continue at the current rate. The milestone payments and other amounts payable by RPR are contingent on:
We cannot control the timing and extent of governmental clearances. We also cannot be sure that we and RPR will attain any of these regulatory objectives. Except for GLIADEL, we do not expect to sell other products for at least the next several years, if ever. In August 1997, we entered into a collaboration with Amgen to research, develop and commercialize our FKBP neuroimmunophilin compound technology. Under our agreement with Amgen, Amgen paid us $35 million in 1997. Of this amount, Amgen paid $15 million in the form of a one-time, non-refundable rights fee upon signing the agreement. Amgen paid us the remaining $20 million for the purchase of 640,095 shares of our common stock and warrants to purchase up to an additional 700,000 shares of our common stock. These warrants are exercisable for five years and have an exercise price of $35.15 per share. We also granted to Amgen certain rights to register shares of our common stock with the SEC for sale in the public markets. As part of this collaboration, Amgen agreed to fund up to a total of $13.5 million to support Guilford’s research relating to the FKBP neuroimmunophilin ligand technology. This research funding began on October 1, 1997 and is payable quarterly over three years. As of December 31, 1998, we had recognized an aggregate of approximately $5.6 million in research support from Amgen under this arrangement. Amgen also has the option to fund a fourth year of research, or under certain conditions, to terminate the research program after two years. Our agreement also requires that Amgen make milestone payments to us if Amgen achieves specified regulatory and product development milestones. If Amgen is able to meet all of these milestones for each of 10 different specified clinical indications (i.e., uses), these payments could total up to $392 million in the aggregate. Amgen is also required to pay us royalties on its sales to third parties of any product(s) that result from our collaboration. So long as it funds two years of research, Amgen may elect at any time to discontinue all development and commercialization for the FKBP neuroimmunophilin compound technology. As we discuss below and in greater detail in the 1998 Form 10-K, we cannot be sure that Amgen will be successful in its efforts to develop one or more FKBP neuroimmunophilin compounds into products that the FDA and foreign regulatory authorities will approve as safe and effective drugs for neurological or other uses. Consequently, we cannot be sure that we will earn any of the milestone payments related to these regulatory and product development activities. In addition to revenues related to GLIADEL, the only other significant revenues we recognized in 1998 consist of:
Amgen made this $1.0 million payment following its initiation of a one-month Good Laboratory Practices (GLP) toxicology study of Amgen’s first lead FKBP neuroimmunophilin compound. Amgen refers to this compounds as “NIL-A.” Amgen is initially working to advance NIL-A into human clinical trials for the treatment of Parkinson’s disease. As we describe above, pursuant to our agreement, we expect Amgen to pay us $4.5 million in 1999 to support our research on the FKBP neuroimmunophilin ligand technology. As we note above, Amgen may make certain other milestone payments to us in the future if Amgen achieves certain product development and/or regulatory milestones. Amgen will also pay royalties to us on future sales of products that result from our collaboration, if there are any. As we discuss below and in greater detail in the 1998 Form 10-K, whether Amgen will ever make milestone or royalty payments to us in the future is subject to significant risk and uncertainty. We cannot be sure that we will recognize any or significant revenues from Amgen in the future. With the sole exception of 1996, we have not earned an operating profit in any year since our inception in July 1993. Our operating profit in 1996 was $5.1 million. This operating profit was primarily due to two, one-time rights payments from RPR which totaled $27.5 million:
For the year ended December 31, 1998, we incurred a net loss of $29.7 million. Since inception through December 31, 1998, we had an accumulated deficit of $56.0 million. Our accumulated deficit is equal to the sum of our cumulative profits and losses since inception in July 1993. We do not expect 1999 to be profitable. We cannot be sure that we will ever achieve or sustain profitability in the future. Furthermore, our revenues have fluctuated significantly in the past because of the nature of their sources. We expect fluctuations in our revenues to continue, and thus our operating results should also vary significantly from quarter-to-quarter and year-to-year. A variety of factors cause these fluctuations, including:
We expect that expenses in all areas of our business will continue to increase as we conduct our research and product development activities. These areas include research and product development, preclinical testing, human clinical trials, regulatory affairs, operations, manufacturing and general and administrative activities. The number of our employees has grown significantly since inception. At December 31, 1998, we had 218 full-time employees. This compares to 198 full-time employees at December 31, 1997 and 138 full-time employees at December 31, 1996. Our ability to achieve consistent profitability in the future will depend on many factors, including:
For a discussion of these and other risks, you should read the “Risk Factors” section of the 1998 Form 10-K, particularly those paragraphs specifically addressing the risks we note above. Results of Operations Years Ended December 31, 1998, 1997 and 1996
In 1998, 1997 and 1996, we recognized revenues of $12.5 million, $23.8 million and $28.0 million, respectively. These revenues consisted primarily of the following:
Revenues from the sale and distribution of GLIADEL consist primarily of:
We did not recognize transfer payments or royalty revenues related to the sale and distribution of GLIADEL prior to 1997 because RPR had not commercially launched GLIADEL in the United States until February 1997. GLIADEL Transfer Payments GLIADEL Royalties
Since launch, RPR’s sales of GLIADEL to third parties have increased on an annual basis. As we discuss in greater detail in the 1998 Form 10-K, a number of factors subject our future sales of GLIADEL to significant risk and uncertainty. We cannot be sure that GLIADEL sales will increase from, or even remain at, current levels or will ever generate significant revenues for us in the future. Cost of Sales
Because GLIADEL was commercially launched in the United States in February 1997, we did not incur cost of sales prior to 1997. The reduction in the cost of sales for 1998 compared to 1997 primarily reflects a reduction in the number of units of GLIADEL manufactured for sale to RPR during 1998. In 1998 cost of product sales represented 53% of total product sales revenues as compared to 45% in 1997. To the extent GLIADEL production levels increase in the future, we expect the cost per unit to manufacture GLIADEL may decrease as we achieve economies of scale. We cannot be sure, however, that GLIADEL product sales will ever reach levels necessary for us to realize significant cost savings related to manufacturing economies of scale. Research and Development Expenses
At December 31, 1998, we employed 185 individuals on a full-time basis in the areas of research, development and manufacturing. We employed 167 individuals and 113 individuals in these areas at December 31, 1997 and 1996, respectively. During 1998, we continued to increase our research and product development efforts, particularly with respect to our NAALADase inhibitor and PARP inhibitor neuroprotectant programs, our FKBP neuroimmunophilin compound program, and our polymer development program. We also continued to fund development activities at a third-party manufacturer of clinical supply of DOPASCAN During 1997, we continued to increase our research and development efforts, particularly with respect to our FKBP neuroimmunophilin compound program, our NAALADase inhibitor program, our biodegradable polymer program, and other research and development programs. We also continued to fund development activities at the third-party manufacturer for DOPASCAN In 1998, 1997 and 1996 our research and development expenses included charges relating to certain consulting agreements we entered into in April 1996. These charges consisted of:
We entered into these agreements to assist in the commercialization of GLIADEL, including our efforts to expand the labeling for this product and to generate product line extensions, and to enhance our ability to develop new polymer technologies and products for the delivery of anti-cancer agents for those diseases or conditions where local tumor recurrence is likely and controlled release may be more effective than current therapies. We expect to record up to an additional $750,000, in total, of non-cash compensation charges in our research and development expenses quarterly through 2001 because of these agreements. We also anticipate that our research and development expenses will continue to increase in future periods. General and Administrative Expenses We included the costs to prepare, file and prosecute domestic and international patent applications and for other activities to establish and preserve our intellectual property rights in our general and administrative expenses. These costs also increased from 1996 through 1998. Costs related to our operations as a publicly-traded company contributed to the increase in general and administrative costs for 1997 as compared to 1996. We anticipate that our general and administrative expenses will continue to increase in future periods. Other Income and Expense
In 1998, 1997 and 1996, we incurred interest expense of $768,000, $837,000 and $528,000, respectively. These expenses resulted from loans we have with First Union National Bank. These loans have helped fund the construction of our manufacturing, administrative, and research and development facilities and the purchase of certain furniture and equipment. Because we continued to repay these loans, interest expense decreased in 1998 as compared to 1997, resulting in a lower average principal balance during 1998. Liquidity and Capital Resources The increase of $4.4 million in the amount of restricted investments at December 31, 1998 as compared to December 31,1997 resulted from an increase in the amount of cash collateral related to our design and construction of a new research and development facility. We describe the financing for this facility below. A decrease in cash collateral on certain of our loans with First Union National Bank partially offset this increase in cash collateral. In June 1998, the State of Maryland increased its commitment to guarantee repayment of one of our loans with First Union National Bank. As a result, First Union National Bank reduced the amount of cash collateral related to that loan. In addition, our cash collateral levels decreased somewhat in 1998 as a result of our continued repayment of our loans with First Union National Bank. We describe our cash collateral requirements in Notes 7 and 8, “Indebtedness - Restrictive Covenants” and “Leases,” to the footnotes to our Consolidated Financial Statements on page 37. In 1998, we began a program to purchase up to 1,000,000 shares of our common stock in the open market from time to time in our discretion. As of December 31, 1998, we had repurchased 39,600 of our shares for an aggregate of $475,000. In addition, in 1998, individuals holding options to purchase shares of our stock exercised their rights to acquire an aggregate of approximately178,678 shares. In exchange for issuing these shares, these individuals paid us approximately $1.0 million in cash. Our debt decreased to $10.9 million at December 31, 1998 compared to $13.1 million at December 31, 1997. This decrease resulted primarily because of our continued repayment of principal under our loans with First Union National Bank. We incurred net capital expenditures of $5.2 million in 1998. These amounts were $6.4 million in 1997 and $9.1 million in 1996. We used these capital expenditures to fund the construction of our GLIADEL and biodegradable polymer manufacturing facilities. They also funded improvements to our current facility for research and development laboratories and administrative offices. Additionally, we purchased capital equipment, including laboratory and manufacturing equipment, and computer hardware and software. In March 1998, we entered into arrangements with others that permit us to lease up to $10.8 million in equipment, including computer hardware and software, furniture and fixtures. We leased $3.4 million in equipment under these arrangements in 1998. Depending on the type of equipment covered and certain other factors, the term of any lease we enter under these arrangements can range from two to four years. At December 31, 1998, $7.4 million was available under these arrangements to lease additional equipment. In addition, at December 31, 1998, we were leasing an additional $3.5 million in equipment under a prior lease arrangement. We expect our existing financing arrangements, our internal capital resources and potential external sources of funds to provide for our current equipment needs at least until the end of 1999. If we decide to expand our research and development programs, our capital equipment requirements may increase and thus we may require additional capital funding. In order to meet our anticipated future facilities needs, in 1997 we initiated a project to design and construct a new research and development facility. To accomplish this task, in February 1998 we entered into an operating lease and other related agreements with a trust affiliated with First Union National Bank for such a facility. This new facility is being constructed on a lot adjacent to our current headquarters in Baltimore, Maryland and will be approximately 73,000 square feet when complete. We anticipate that this new R&D facility, along with our current facility, will support our research, development, commercialization and administrative activities until at least the end of 2000. Since construction began in the first quarter 1998, we have been acting as construction agent for the First Union National Bank trust, responsible for performing substantially all of the duties associated with the development of the property. We anticipate that we will be able to move into the facility prior to the end of the second quarter of 1999 and expect to consolidate all of our operations into our current headquarters and the new facility in 1999. Our lease to the new facility expires in February 2005. We anticipate that the lease payments for this facility will not exceed $1.5 million annually. At the expiration of the lease term, we may purchase the property for an amount equal to:
For convenience we refer to this amount as the “Termination Amount.” In the alternative, we may sell the property on behalf of the First Union National Bank trust. The trust then has to credit the proceeds from the sale against our repayment of the Termination Amount. If the sale proceeds are not enough to cover the entire Termination Amount, we then have to repay an amount equal to the difference between 83% of the Termination Amount and the shortfall. In addition, we may extend the lease term, but only if First Union National Bank in its discretion agrees to such an extension. We describe these arrangements with First Union National Bank in Note 8, “Leases,” of the footnotes to our Consolidated Financial Statements on page 37. Under our agreements with First Union National Bank related to this new facility, we are required to hold in the aggregate unrestricted cash, cash equivalents and investments of $40 million at all times during the term of the lease. This requirement is in addition to the cash collateral requirements we discuss above in this “Liquidity and Capital Resources” section. RPR has extended to us a $7.5 million line of credit to support expansion of our GLIADEL and polymer manufacturing capacity. As of January 2, 1997, $4.0 million was available to us. The remaining $3.5 million becomes available no earlier than 12 months nor later than 18 months following funding of the initial portion. Any principal amounts we borrow are due five years from the date borrowed. These amounts will carry an interest rate equal to the lowest rate RPR pays from time to time on its most senior debt. We had not borrowed any amounts under this credit facility as of December 31, 1998. We have not yet determined whether to draw on the capital available from RPR to finance the expansion of our polymer manufacturing facilities. During 1998, we entered into a series of interest rate swap transactions with First Union covering $20 million in financial obligations under our lease with the First Union trust. In January 1999, we entered into additional interest rate swap agreements with First Union National Bank covering $10 million in floating rate debt. As a result, we fixed the interest rates on these financial lease obligations and debt at approximately 6% in the aggregate. We describe these interest rate swap transactions with First Union National Bank in Note 4, “Interest Rate Swap Agreements,” of the footnotes to our Consolidated Financial Statements on page 36. We expect to need much more money to continue our research and product development programs and preclinical and clinical testing and to manufacture and possibly market our products. We will also need additional funds to meet our future facilities needs. Our capital requirements depend on a number of factors, including:
We believe that our existing resources will be sufficient to fund our activities for at least the next 24 months. We may, however, expend these resources before that time for a number of reasons including, among others:
We anticipate that we will fund future capital requirements through a combination of (1) our existing working capital, (2) future revenues generated under our agreements with RPR and Amgen, (3) potential public or private equity or debt financing, (4) additional collaborative agreements with corporate partners for research and product development and/or commercialization, and (5) other potential sources. Our ability to raise capital in the future on acceptable terms depends on conditions in the public and private markets for stock and our performance as well as the overall performance of other companies in our industry. We cannot be sure that any future financing arrangements that we may need will be available to us on acceptable terms, or at all. Subsequent Event The Year 2000 Issue We have developed a multi-phase program to address this potential problem. It consists of the following steps:
We have focused our Year 2000 compliance assessment program on four principal areas:
For convenience purposes, we refer to these institutions as our “Major Third Parties.” Assessment and Remediation of Internal Systems
We believe that we will complete these actions no later than June 30, 1999, but expect to continue to test our systems intermittently through the end of 1999. Our information technology personnel have discussed whether our enterprise-wide software systems are Year 2000 compliant with the vendors of those systems. We have also tested those systems for Year 2000 compliance. Based on these activities, we believe that such systems are Year 2000 compliant. We will continue to stay in contact with these vendors in order to obtain any additional revisions or upgrades the vendors issue to ensure that such enterprise-wide software remains Year 2000 compliant. Inquiries of Third Parties
We are in the process of contacting our Major Third Parties, which consist of approximately 20 institutions, to ask that they give us information about their Year 2000 compliance status, and we recently mailed Year 2000 compliance inquiry letters to them in this regard. Except for asking these third parties about their Year 2000 compliance and assessing their responses, we cannot independently verify whether these institutions are or will be Year 2000 compliant. In most cases we have limited or no ability to influence directly the Year 2000 compliance activities of these Major Third Parties. If any or all of these institutions fail to achieve substantial Year 2000 compliance, this failure could have a material adverse effect on our business, financial condition and results of operations. Furthermore, most of RPR’s sales of GLIADEL are to hospitals. The failure of these hospitals, or of any of RPR’s other customers for GLIADEL, to pay for their GLIADEL purchases because of a Year 2000 problem could materially and adversely affect our business. In addition, sales of GLIADEL are dependent, in part, on the availability of reimbursements from third-party healthcare payors, such as government insurance plans like Medicare and Medicaid, and private insurance plans. Again, the failure of these third-party healthcare payors to reimburse claims because of Year 2000 problems could materially and adversely affect our business. Remediation Costs However, as we note above, with respect to most of our internal computer systems, we are still conducting our Year 2000 compliance and remediation activities. Depending on the actual outcome of our Year 2000 compliance testing activities, the costs may be significantly greater than our current estimates. We also do know whether the costs associated with our efforts to assess and address any Year 2000 compliance concerns regarding our Major Third Parties will be material. As we note above, with most Major Third Parties, we have little or no direct ability to influence the Year 2000 compliance efforts of these institutions. Depending on the responses we get from suppliers, we will decide on a case-by-case basis whether to seek out alternative suppliers. As of March 15, 1999, we had not switched vendors because of concerns over Year 2000 readiness. If we determine to seek out an alternative supplier in the future because of that supplier’s inability to assure us of its Year 2000 compliance, we may not be able to find an adequate alternative supplier. In certain cases, a vendor may represent the sole supplier for a good or service. Disaster Recovery Plans and Certain Mitigating Factors We currently make complete back-up copies of all of the data generated on our computer systems on a weekly basis. We also track changes to such data on a daily basis. We believe this practice should limit the amount of computer system data that would be lost if our computer systems were to fail as a result of a Year 2000 issue. Many of our Facilities Systems, including our environmental controls, security systems, and fire protection systems, have manual override functions. These will allow us to operate certain of our Facilities Systems even if their software malfunctions. In addition, while we primarily hold our financial assets at a single banking institution, we hold certain financial assets at, and have established a $5 million line of credit with, another banking institution. This arrangement should allow us to meet our operating expenses in the short term in the event our primary banking relationship were to be interrupted because of a Year 2000 issue. With respect to GLIADEL, we maintain what we believe to be sufficient inventories of raw materials, package components and product to prevent a product supply interruption if a vendor should have a Y2K problem. Due to the nature of our business, even if (1) we were to fail to implement our Year 2000 compliance program successfully for our internal company systems or (2) the Year 2000 compliance provisions of our disaster recovery plan prove inadequate, we believe that these circumstances would not have a material adverse effect on our business, financial condition and results of operations over the long term. They would, however, disrupt our operations in the short-term. However, the failure of one or more of our Major Third Parties, particularly our banks, investment managers, corporate partners, and suppliers of key raw materials to be Year 2000 compliant could have a material adverse effect on our business, financial condition and results of operations over the long term. Risks Specific factors that might cause our estimates not to be correct include:
Furthermore, our current cost estimates do not include costs that we may incur as a result of the failure of Major Third Parties, including Amgen and RPR, to become Year 2000 compliant on a timely basis. Moreover, if a Year 2000 issue causes (1) hospitals and other of RPR’s customers for GLIADEL to fail to pay for their GLIADEL purchases or (2) third-party healthcare payors to fail to reimburse claims for GLIADEL, such failures could materially and adversely affect our business. Finally, our ability to continue to manufacture GLIADEL, conduct our research and product development programs, and function as a viable business enterprise depends on the continued availability of various basic infrastructure systems. These include electric power, telecommunications and transportation systems. We cannot be sure that the Year 2000 issue will not disrupt these infrastructure systems. If such disruptions were to occur in the Baltimore, Maryland metropolitan region where our manufacturing facilities and research and development laboratories are located and/or the East Coast of the United States, these disruptions could very well have a material adverse effect on our business, financial condition, results of operations, or business prospects. Quantitative and Qualitative Disclosures About Market Risk |
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Wafer, in the United States through RPR. GLIADEL is a proprietary polymer product for the treatment of certain types of brain cancer. This product degrades over time and releases an anti-cancer drug known as “BCNU” (or carmustine) directly to the tumor site. RPR is our exclusive worldwide marketing partner for GLIADEL, except in Japan and Scandinavia. Orion Corporation Pharma (formerly Orion Corporation Farmos) is our marketing partner for GLIADEL in Scandinavia.