Form 10KSB for PROTEIN POLYMER TECHNOLOGIES, INC., filed
on March 24, 2000
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________to_________
Commission file number 0-19724
PROTEIN POLYMER TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0311631
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
10655 Sorrento Valley Road, San Diego, CA 92121
(Address of Principal Executive Offices)
Issuer's Telephone Number: (858) 558-6064
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
-------- --------
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the most recent fiscal year were $1,189,495.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on February 16, 2001 was $6,935,027.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of February 16, 2001, 18,910,313
shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement to be filed no later than April 30, 2001 pursuant to
Regulation 14A with respect to the Registrant's 2001 Annual Meeting of
Stockholders (incorporated by reference in Part III).
Transitional Small Business Disclosure Format: Yes No X
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PROTEIN POLYMER TECHNOLOGIES, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
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Page No.
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<S> <C>
PART I...................................................................... 2
Item 1. Business....................................................... 2
Item 2. Properties..................................................... 18
Item 3. Legal Proceedings.............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............ 18
PART II..................................................................... 19
Item 5. Market for Common Equity and Related
Stockholder Matters............................................ 19
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 22
Item 7. Financial Statements........................................... F-1
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 27
PART III.................................................................... 27
Items 9, 10, 11 and 12 - Incorporated by Reference
Item 13. Financial Statements, Exhibits and Reports on Form 8-K......... 27
Signatures................................................................ 33
1
PART I
Item 1. Business
Company Background
Protein Polymer Technologies, Inc., a Delaware corporation ("PPTI") is a
development-stage biotechnology company incorporated on July 6, 1988 and is
engaged in the research, development, production and clinical testing of medical
products based on its proprietary protein-based biomaterials technology. Since
1992, we have focused primarily on developing materials technology and products
to be used in the surgical repair of tissue: surgical adhesives and sealants;
soft tissue augmentation products; wound healing matrices; drug delivery
formulations; and surgical adhesion barriers. We have also developed coating
technology that can efficiently modify and improve the surface properties of
more traditional biomedical devices. A common goal is to develop materials that
beneficially interact with human cells, enabling cell growth and the
regeneration of tissues with improved outcomes as compared to current products
and practices.
We began studies to identify our most promising biomaterial formulations
for use in soft tissue augmentation products in 1996. We devoted increased
resources to the program through 1997 and 1998, and with promising preclinical
test results, we focused on preparations for human clinical testing in 1999.
In December 1999, we initiated human clinical testing of our urethral
bulking agent for the treatment of female stress urinary incontinence. This
pilot clinical study is ongoing. The Investigational Device Exemption ("IDE")
approved by the U.S. Food and Drug Administration ("FDA") allows us to test the
safety and effectiveness of the incontinence product in women over the age of 40
who have become incontinent due to the shifting of their bladder or the
weakening of the muscle at its base that controls the flow of urine, or both
problems combined.
We estimate that more than 2.5 million women begin to experience stress
urinary incontinence in the United States each year. In most untreated cases,
the problem becomes progressively more pronounced. Due to limited efficacy or
invasiveness of current treatments, only a small proportion of the women
experiencing stress urinary incontinence are clinically treated, relying instead
on pads and plugs and the like that only address the symptoms. In contrast, our
product is injected, typically in an out patient procedure, into urethral tissue
at the base of the bladder forming a solid implant that provides support to the
muscles controlling the flow of urine. We believe that our product, if approved,
will prove to be easy for the physician to use, offer enduring effectiveness,
and avoid most of the other limitations of urethral bulking products on the
market or in development.
In January 2000, we established a strategic alliance with Femcare, Ltd.
("Femcare") for the commercialization of the incontinence product in Europe and
Australia. In the agreement, Femcare is responsible for clinical testing,
regulatory approval, and product sales and marketing within these territories,
and we are responsible for product manufacturing. Contingent on successful
clinical trials, commercialization of the product in Europe is expected to begin
more than a year before approval for marketing the product in the United States
could be obtained.
2
The soft tissue augmentation materials and technology underlying the
incontinence product have the potential to be effective and desirable in a
number of other clinical applications. In November 2000, the FDA approved our
IDE to begin human clinical testing of a tissue augmentation product for use in
cosmetic and reconstructive surgery applications. The product is injected into
or under the skin for the correction of contour deficiencies (facial lines,
wrinkles, scars, etc.) caused by aging or disease. We expect to initiate our
pilot clinical study for this application in the first quarter of 2001 to the
extent resources are available.
We estimate that approximately 350,000 cosmetic tissue augmentation
procedures using injected materials (e.g. collagen, fat) were performed in the
U.S in 1998, having grown over 20% compared to 1996. With a product
demonstrating greater durability than currently available materials, we believe
the number of procedures could grow dramatically.
Between 1994 and 1997, our efforts were focused predominantly on the
development of surgical adhesive and sealant technology. As part of this effort,
we targeted the establishment of a strategic alliance with a market leader in
the field of surgical wound closure products which led to the execution of
comprehensive license, supply and development agreements in September 1995, with
Ethicon, Inc. ("Ethicon"), a subsidiary of the Johnson & Johnson Company
("J&J"). Ethicon elected to terminate these agreements in December 1997.
We have demonstrated both the adhesive performance and the biocompatibility
of our product formulations in animal models, including the resorption of the
adhesive matrix in conjunction with the progression of wound healing. We are
committed to the commercial development of our adhesive and sealant technology.
Subsequent to the termination of the Ethicon agreement, we have worked to
determine the most significant market and product opportunities for its use. We
are seeking to establish new strategic alliances with leaders in those markets.
Our cash balance as of December 31, 2000 was $866,000. We believe this
amount is sufficient to fund operations through March 2001. Substantial
additional capital resources will be required to fund continuing expenditures
related to our research, development, manufacturing and business development
activities. We believe there may be a number of alternatives available to meet
the continuing capital requirements of our operations, such as collaborative
agreements and public or private financings. During 2001, we expect that the
possible exercise of other existing warrants could result in additional funds
for continuing operations. Further, we are currently in preliminary discussions
with a number of potential collaborative partners and, based on the results of
various materials evaluations, funding in the form of license fees, milestone
payments or research and development reimbursements could be generated. There
can be no assurance that any of these fundings will be consummated in the
necessary timeframes needed for continuing operations or on terms favorable to
us. If adequate funds are not available, we will be required to significantly
curtail our operating plans and may have to sell or license out significant
portions of our technology or potential products. (See the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations for further discussion.)
3
To the extent sufficient resources are available, we continue to research
the use of our protein polymers for other tissue repair and medical device
applications, principally for use in tissue engineering matrices and drug
delivery devices.
Through 1999, we marketed specialty use products for in vitro cell culture
applications including SmartPlastic/(R)/ and ProNectin/(R)/ F Cell Attachment
Factor. ProNectin F was launched commercially in 1991. SmartPlastic is ProNectin
F Activated Cultureware where ProNectin F is presented in ready to use form on
the surfaces of disposable plastic labware for culturing human and animal cells.
SmartPlastic was launched commercially in 1995. In 1998 we discontinued direct
sales of our cell culture products, and in February 2000, we sold all rights to
the use of the technology for in vitro cell culture applications, the product
trademarks, and remaining inventory to Sanyo Chemical Industries, Ltd.
Prior to 1992, our scientists had successfully demonstrated the ability to
create and produce novel protein polymer materials having important physical,
biological and chemical properties. During this period, most of the our efforts
were dedicated to supplying E. I. DuPont de Nemours & Co. ("DuPont") with
materials under contract for DuPont's proprietary research and testing purposes.
Technology
We are focused on developing products to improve medical and surgical
outcomes, based on an extensive portfolio of proprietary biomaterials.
Biomaterials are materials that are used to direct, supplement, or replace the
functions of living systems. The interaction between materials and living
systems is dynamic. It involves the response of the living system to the
materials (e.g., biocompatibility) and the response of the materials to the
living system (e.g., degradation). The requirements for performance within this
demanding biological environment have been a critical factor in limiting the
myriad of possible metal, polymer, and ceramic compositions to a relatively
small number that to date have been proven useful in medical devices.
The goal of biomaterials development historically has been to produce inert
materials, i.e., materials that elicit little or no response from the living
system. However, we believe that such conventional biomaterials are constrained
by their inability to convey appropriate messages to the cells that surround
them, the same messages that are conveyed by proteins in normal human tissues.
The products we have targeted for development are based on a new generation
of biomaterials which have been designed to be recognized and accepted by human
cells, to aid in the natural process of bodily repair (including the healing of
tissue and the restoration or augmentation of its form and function), and,
ultimately, to promote the regeneration of tissues. We believe that the
successful realization of these properties will substantially expand the role
that artificial devices can play in the prevention and treatment of human
disability and disease, and enable the culture of native tissues for successful
reimplantation.
Through our proprietary core technology, we produce high molecular weight
polymers that can be processed into a variety of material forms such as gels,
sponges, films, and fibers, with their physical strength and rate of resorption
tailored to each potential product application.
4
These polymers are constructed of the same amino acids as natural proteins found
in the body. We have demonstrated that our polymers can mimic the biological and
chemical functions of natural proteins and peptides, such as the attachment of
cells through specific membrane receptors and the ability to participate in
enzymatic reactions, thus overcoming a critical limitation of conventional
biomaterials. In addition, materials made from our polymers have demonstrated
excellent biocompatibility in a variety of preclinical feasibility studies.
Our patented core technology enables messages that direct activities of
cells to be precisely formulated and presented in a structured environment
similar to what nature has demonstrated to be essential in creating, maintaining
and restoring the body's functions. Our protein polymers are made by combining
the techniques of modern biotechnology and traditional polymer science. The
techniques of biotechnology are used to create synthetic genes that direct the
biological synthesis of protein polymers in recombinant microorganisms. The
methods of traditional polymer science are used to design novel materials for
specific product applications by combining the properties of individual
"building block" components in polymer form.
In contrast to natural proteins, either isolated from natural sources or
produced using traditional genetic engineering techniques, our technology
results in the creation of new proteins with unique properties. We have
demonstrated an ability to create materials that:
. combine properties of different proteins found in nature;
. reproduce and amplify selected activities of natural proteins;
. eliminate undesired properties of natural proteins; and
. incorporate synthetic properties via chemical modifications.
This ability is fundamental to our current primary product research and
development focus -- tissue repair and regeneration. Tissues are highly
organized structures made up of specific cells arranged in relation to an
extracellular matrix ("ECM"), which is principally composed of proteins. The
behavior of cells is determined largely by their interactions with the ECM.
Thus, the ability to structure the cells' ECM environment allows the protein
messages they receive -- and their activity -- to be controlled. Similar to
what nature has demonstrated to be essential in creating, maintaining and
restoring the body's functions, our patented core technology enables messages
that direct activities of cells to be precisely formulated and presented in a
structured environment.
Fundamental Protein Polymers
PPTI's primary products under development are based on protein polymers
combining selected properties from two of the most extraordinary structural
proteins found in nature: silk and elastin. Silk, based upon its crystalline
structure, has long been known as an incredibly strong material, and has a long
history of medical use in humans as a material for sutures. Elastin fibers are
one of the most remarkable rubber-like materials ever studied. Found in human
tissues such as skin, lungs and arteries, elastin fibers must expand and
contract over a life time, and can be extended nearly three times their resting
length without damaging their flexibility.
Despite the incredible individual properties of silk and elastin, neither
of these natural protein materials is capable of being processed into forms
other than what nature has provided
5
without destroying their valuable materials properties. However, our proprietary
technology has enabled the creation of polymers that combine the repeating
blocks of amino acids responsible for the strength of silk and the elasticity of
elastin. By precisely varying the number and sequence of the different blocks in
the assembled protein polymer, new combinations of properties suitable for
various medical applications have been created.
We have also created protein polymers based on repeating blocks of amino
acids found in two other classes of structural proteins found in nature:
collagen and keratin. Collagen is the principal structural component of the
body, found in some shape or form in virtually every tissue, ranging from shock
absorbing cartilage to light transmitting corneas. Keratin is a major component
in hair, nails and skin. The development of materials based on these polymers is
at an early stage of research.
Product Candidates and Anticipated Markets
Our technology and materials have the potential to create products and
product applications in a variety of medical and specialty use markets. Our
current development efforts are principally focused on preparations for scale-up
and validation of manufacturing processes for our hydrogel bulking agents for
soft tissue augmentation. However, opportunities for research and development of
product candidates for other medical and specialty use continue to be evaluated,
particularly those based on our tissue adhesive and sealant technology.
All of our product candidates are subject to preclinical and clinical
testing requirements for obtaining U.S. Food and Drug Administration's ("FDA's")
marketing approval. The actual development of product candidates, if any, will
depend on a number of factors, including the availability of funds required to
research, develop, test and obtain necessary regulatory approvals; the
anticipated time to market; the potential revenues and margins that may be
generated if a product candidate is successfully developed and commercialized;
and the Company's assessment of the potential market acceptance of a product
candidate.
Soft Tissue Augmentation
Conditions where there is a need to augment the body's soft tissues include
both cosmetic and medical applications. In the former, for example, current
procedures include the injection of collagen-based materials to smooth out
facial wrinkles, acne scars and to modify lip contours. However, these
treatments only last a matter of months, which puts them economically out of
reach for a large portion of the population of people who would otherwise desire
the procedure.
Medical applications include the treatment of stress urinary incontinence,
gastroesophageal reflux, fecal incontinence, the reversible blockage of
fallopian tubes for birth control, the augmentation of vocal chords, and the
expansion of gingival tissues impacted by periodontal disease. We believe there
is a lack of materials with suitable properties for these applications,
primarily because materials having the required durability in vivo either lack
the requisite biocompatibility or the ability to be easily injected.
We have developed protein polymers that demonstrate excellent
biocompatibility, are soluble in water at room temperature, and are easily
injected into body tissues, irreversibly
6
forming soft, durable gels at body temperature. Previously, we have shown gels
of similar composition to persist at least 18 months in an animal model.
Our bulking agents are unique in that they are applied as an aqueous
solution, easily injected through a 30-gauge needle, rapidly spreading
throughout the native tissue architecture. With the increase from room to body
temperature, the polymer solution irreversibly transforms within minutes to a
soft, pliable hydrogel. Importantly, the volume of material remains constant in
the liquid to gel transition, such that the tissue expansion observed by the
physician upon administration will be subsequently maintained.
This is in direct contrast to the majority of competing technologies, which
are suspensions or slurries of solid particles in an aqueous carrier such as
saline. When injected through a fine gauge needle, with some difficulty due to
their thick constitution, the carrier liquid dissipates through the tissues with
time, usually within 24 hours, such that roughly half of the effective bulking
volume is lost. This requires the physician to either overcompensate for the
expected volume reduction upon initial administration, with increased risks to
the patient, or to "top off" the bulking effect with repeated administrations of
the product over time, with substantially increased costs.
Other hydrogel technologies of which we are aware are either preformed
gels, difficult to administer by injection, or polymer solutions mixed with a
chemical cross-linking agent prior to injection. We believe that such
technologies are limited in their overall performance including durability,
biocompatibility and ease of administration.
In August 1999, we obtained the FDA's approval of our Investigational
Device Exemption ("IDE") to begin human clinical testing of our urethral bulking
agent for the treatment of female stress urinary incontinence. We began pilot
clinical testing of the product's safety and efficacy in December 1999. We
project expanding into a multi-site pivotal clinical study in the first quarter
of 2002 to the extent resources are available.
In November 2000, we obtained the FDA's approval of our IDE to begin human
clinical testing of a tissue augmentation product for use in cosmetic and
reconstructive surgery applications. The product is injected into or under the
skin for the correction of contour deficiencies (facial lines, wrinkles, scars,
etc.) caused by aging or disease. We expect to initiate our pilot clinical study
for this application in the first quarter of 2001, potentially expanding into a
multi-site pivotal clinical study also in the first quarter of 2002 to the
extent resources are available.
Surgical Adhesives and Sealants
Certain surgical adhesives and sealants that seek to avoid the limitations
of sutures, staples, pins and screws have been developed and marketed outside
the United States by other parties. In 1998, the FDA approved two such products
for certain uses in the U.S. DermaBond(TM), a cyanoacrylate adhesive, was
approved for topical application to close skin incisions and lacerations.
Cyanoacrylate adhesives set fast and have high strength, but are toxic to
certain tissues and form brittle plastics that do not resorb. These limitations
restrict their use to bonding the outer surfaces of skin together. Tisseel(TM),
a fibrin sealant, was approved for use as an adjunct
7
to hemostasis in surgery. Fibrin sealants have excellent hemostatic properties,
but are derived from human and/or animal blood products, set slowly, have low
strength, and lose their strength rapidly.
A third category of tissue adhesives combines natural proteins such as
collagen or albumin with aldehyde cross-linking agents. Such products are
marketed in Europe for limited life-threatening indications. The aldehyde cross-
linking agents employed (i.e. glutaraldehyde, formaldehyde) in such products are
known to cause adverse tissue reactions. Additional adhesive and/or sealant
products employing other polymer systems and cross-linking agents are also under
development.
We are seeking to develop surgical adhesives and sealants that combine the
biocompatibility of fibrin glues (without the risks associated with use of
blood-derived products) with the high strength and fast setting times of
cyanoacrylates. Unique features include significant elasticity within the
adhesive matrix (to move as tissues move) and the capability of tailoring the
resorption rate of the adhesive matrix with the rate at which the wound heals. A
non-resorbable adhesive or sealant can only be used where the damaged tissues
will not heal. Otherwise, a barrier to wound healing is unavoidably created.
In September 1995, we entered into a series of agreements with Ethicon
regarding this program. Ethicon elected to terminate these agreements in
December 1997. However, we had previously demonstrated both the adhesive
performance and the biocompatibility of our product formulations in animal
models, including the resorption of the adhesive matrix in conjunction with the
progression of wound healing. Subsequently, we have worked to determine the
specific markets and products providing the most significant opportunities for
the use of our adhesive and sealant technology.
As a result of our evaluations of the medical market needs, the properties
achievable with our technology, and the capabilities of competitive
technologies, we have focused our product development interests on certain
orthopedic applications, particularly those related to the repair of the spinal
disc for the treatment of chronic low back pain. Low back pain is the most
common musculoskeletal disorder in industrialized societies. We are committed to
the commercial development of our adhesive and sealant technologies and are
seeking to establish new strategic alliances with market leaders. However, there
can be no assurance that such alliances will be entered into.
Wound Healing/Tissue Engineering Matrices
The current market for wound care products is highly segmented, involving a
variety of different approaches to wound care. Products currently marketed and
being developed by other parties include fabric dressings (such as gauze),
synthetic materials (such as polyurethane films) and biological materials (such
as growth factors and living tissue skin graft substitutes). While the type of
product used varies depending on the type of wound and extent of tissue damage,
we believe that a principal treatment goal in all instances is to stimulate
wound healing while regenerating functional (as opposed to scar) tissue.
8
We have developed protein polymers which we believe may be useful in the
treatment of dermal wounds, particularly chronic wounds such as decubitous
ulcers, where both reconstruction of the ECM and re-establishment of its
function are desired. These polymers, based on key ECM protein sequence blocks,
are biocompatible, fully resorbable and have been processed into gels, sponges,
films and fibrous sheets. We believe that such materials, if successfully
developed, could improve the wound-healing process by providing physical support
in situ for cell migration and tissue regeneration and as delivery systems for
growth factors. Additionally, such materials may serve as scaffolds for the ex
vivo production of living tissue substitutes.
This program is in the early stages of research, which we have principally
conducted in collaboration with third parties. Such collaborations have
primarily focused on the treatment of dermal wounds.
Controlled Release Drug Delivery
Oral delivery of drugs is the most preferred route of administration.
However, for many drugs this is not possible and alternative drug delivery
routes are required. Alternative routes include transdermal, mucosal, and by
implantation or injection. For implantation or injection, it is often desirable
to extend the availability of the drug in order to minimize the frequency of
these invasive procedures. A few materials have been commercialized which act as
depots for a drug when implanted or injected, releasing the drug over periods
ranging from one month to several years. Other material and drug combinations
are being developed by third parties. We believe that the properties of these
materials for such applications can be substantially improved upon, making
available the use of depot systems for a wider range of drugs and applications.
Our soft tissue augmentation products, wound healing matrices, and medical
device coating technology all provide platforms for drug delivery applications,
serving as controlled release drug depots. The protein polymer materials we have
developed exhibit exceptional biocompatibility, provide for control over rates
of resorption, and are fabricated using aqueous solvent systems at ambient
temperatures -- attributes which can be critical in maintaining the activity of
the drug, particularly protein-based drugs emerging from the biotechnology
industry. This program is in the early stages of research.
Manufacturing, Marketing and Distribution
Preclinical and clinical testing of potential medical device products,
where the results will be submitted to the FDA, requires compliance with the
FDA's Good Laboratory Practices ("GLP") and other Quality System Regulations
("QSR"). We have implemented, and continue to implement, polymer production and
quality control procedures, and have made certain facilities renovations to
operate in conformance with FDA requirements. We believe our current polymer
production capacity is sufficient for supplying our development programs with
the required quality and quantity of materials needed for feasibility and
preclinical testing and initial ("pilot") clinical testing. To expand beyond
initial clinical trials, we will require additional manufacturing capacity.
9
We are considering several methods for increasing production of our
biomedical and other product candidates to meet clinical and commercial
requirements. For example, we may expand our existing facility to produce needed
quantities of materials under FDA's GLP and QSR regulations for clinical and
commercial use. Alternatively, we may establish external contract manufacturing
arrangements for needed quantities of materials. However, there can be no
assurance that such arrangements, if desired, could be entered into or
maintained on acceptable terms, if at all, or that the existence or maintenance
of such arrangements would not adversely affect the our margins or our ability
to comply with applicable governmental regulations. The actual method, or
combination of methods, that we may ultimately pursue will depend on a number of
factors, including availability, cost and our assessment of the ability of such
production methods to meet our commercial objectives.
We have entered into an agreement with Femcare for marketing and
distribution of our urethral bulking agent for stress urinary incontinence in
certain countries, if the required regulatory approvals are obtained. We
currently expect that our other biomedical products, if any were commercialized,
would be marketed and distributed by corporate partners. While this arrangement
could minimize our marketing costs and facilitate wider distribution of any
biomedical products we may develop, these arrangements could possibly reduce our
revenues and profits as compared to what would be possible if we directly sold
such products.
Research and Development
Information regarding Company-sponsored research and development activities
and contract research and development revenue is set forth below under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
Collaborative Agreements
Because of the highly technical focus of our business, we must conduct
extensive research and development prior to any commercial production of our
biomedical products or the biomaterials from which they are created. During this
development stage, our ability to generate revenues is limited. Because of this
limitation, we do not have sufficient resources to devote to extensive testing
or marketing of our products. Our primary method to expand our product
development, testing and marketing capabilities is to seek to form collaborative
arrangements with selected corporate partners with specific resources that we
believe complement our business strategies and goals.
The medical device industry has traditionally licensed from development
stage companies product candidates whose safety and efficacy has been
demonstrated at least in pilot human clinical trials. In December 1999, we began
human clinical testing of our urethral bulking agent for the treatment of female
stress urinary incontinence. We intend to begin human clinical testing of a
tissue augmentation product for use in cosmetic and reconstructive surgery
applications in the first quarter of 2001 to the extent resources are available.
10
Genencor International
In December 2000, we announced the signing of a broad-based, worldwide
exclusive license agreement with Genencor International, Inc. ("Genencor")
enabling Genencor to potentially develop a wide variety of new products for
industrial markets. As a result of the agreement, Genencor can use our patented
protein polymer design and production technology, in combination with Genencor's
extensive gene expression, protein design, and large-scale manufacturing
technology, to design and develop new products with improved performance
properties for defined industrial fields. We retain all rights to the technology
for use in medical products.
In return for the licensed rights, Genencor paid to us an upfront license
fee of $750,000, and will pay royalties on the sale of products commercialized
by Genencor under the agreement, if any. In addition, we may receive up to $5
million in milestone payments associated with the achievement of various product
development milestones. We may provide certain funded R&D services to Genencor
if negotiated in a separate agreement at a later date. Genencor received
warrants to acquire up to $1 million of our common stock.
Femcare, Ltd.
In January 2000, we announced the formation of a strategic alliance with
Femcare, Ltd. for the commercialization in Europe and Australia of our urethral
bulking agent for treatment of stress urinary incontinence. Femcare is a
British-based developer and international marketer of surgical products for
gynecological and urological applications.
In the alliance, we will provide Femcare with technical assistance, and the
incontinence product for Femcare's clinical testing and regulatory approvals in
the Femcare territories. Femcare will utilize its existing customer base and its
extensive distribution network as the basis for introducing the product into
Europe and Australia. Currently, Femcare markets its products in 40 countries
worldwide. A Urology division has been created to extend the company's success
in gynecology to urological applications, in particular, female stress urinary
incontinence. We received a $1 million license fee and will receive a royalty on
the revenues generated by Femcare from the sale of the product. We will be
responsible for providing the product to Femcare for clinical testing and
commercial sale, or with providing Femcare with the necessary know-how to
arrange its own manufacturing.
Other Agreements
We are discussing other potential collaboration agreements with prospective
marketing partners for both our soft tissue augmentation products and our tissue
adhesive and sealant products. There can be no assurance that we will continue
such discussions or be able to establish such agreements at all, or do so in a
timely manner and on reasonable terms, or that such agreements will lead to
successful product development and commercialization. From time to time, we are
party to certain materials evaluation agreements regarding biomedical and
specialty use applications of our products, polymers and technology, including
applications in areas other than those identified as product candidates above.
These agreements provide, or are intended to provide, for the evaluation of
product feasibility. There can be no assurance that we will continue to be able
to establish such agreements at all, or do so in a timely manner and on
reasonable
11
terms, or that such agreements will lead to joint product development and
commercialization agreements.
Intense Competition
The principal anticipated commercial uses of our biomaterials are as
components of end-use products for biomedical and other specialty applications.
End-use products using or incorporating our biomaterials would compete with
other products that rely on the use of alternative materials. For example,
bulking agents for soft tissue augmentation are currently marketed based on
bovine and human cadaver collagen and, outside the U.S., silicone particles and
other synthetic materials. Similarly, all targeted applications of our potential
products will compete with other products having the same or similar
applications.
The areas of business in which we engage and propose to engage are
characterized by intense competition and rapidly evolving technology.
Competition in the biomedical and surgical repair markets is particularly
significant. Our competitors in the biomedical and surgical repair markets
include major pharmaceutical, surgical product, chemical and specialized
biopolymer companies, many of which have financial, technical, research and
development and marketing resources significantly greater than ours. Academic
institutions and other public and private research organizations are also
conducting research and seeking patent protection in the same or similar
application areas, and may commercialize products on their own or through joint
ventures. Most of our competitors depend on synthetic polymer technology rather
than protein engineering for developing products. However, we believe that
DuPont and several university laboratories are currently conducting research
into similar protein engineering technology.
The primary elements of competition in the biomedical and surgical repair
products market are performance, cost, safety, reliability, convenience and
commercial production capabilities. We believe that our ability to compete in
this market will be enhanced by our issued patent claims, the breadth of our
other pending patent applications, our early entry into the field and our
experience in protein engineering.
Patents and Trade Secrets
We are aggressively pursuing domestic and international patent protection
for our technology, making claim to an extensive range of recombinantly prepared
structural and functional proteins, methods for preparing synthetic repetitive
DNA encoding these proteins, methods for the production and purification of
protein polymers, end-use products incorporating such materials and methods for
their use.
The United States Patent and Trademark Office ("USPTO") has issued twenty
patents to us. U.S. Patent 5,235,041 (1993) relates to our method for purifying
structurally ordered recombinant protein polymers. U.S. Patent 5,243,038 (1993)
covers our synthetic DNA compositions that encode polymers and copolymers
comprising the amino acid "building blocks" of silk and elastin. U.S. Patent
5,496,712 (1996) covers our family of high molecular weight collagen like
polymers and the DNA sequences encoding them. U.S. Patent 5,514,581 (1996)
covers DNA sequences encoding silk-like structural building blocks with an
intervening
12
sequence coding for the key cell attachment ligand from human fibronectin. One
of the claimed sequences encodes ProNectin F.
U.S. Patent 5,606,019 (1997) covers the protein compositions comprising
copolymers of the amino acid "building blocks" of silk and elastin. These are
the primary materials used in our current product development efforts. U.S.
Patent 5,641,648 (1997) covers methods by which synthetic genes encoding protein
polymers are created.
U.S. Patent 5,723,588 (1998) covers molded articles incorporating
biologically active proteins. U.S. Patent 5,760,004 (1998) covers chemically
modified protein polymers with enhanced water solubility. U.S. Patent 5,770,697
(1998) broadly covers protein polymers incorporating repetitive amino acid
sequences found in naturally occurring proteins. U.S. Patent 5,773,249 (1998)
expands the coverage of high molecular weight collagen like polymers. U.S.
Patent 5,773,577 (1998) covers protein polymers that can be cross-linked by
certain enzymes that naturally occur in the body. U.S. Patent 5,808,012 (1998)
expands the coverage of molded articles to those incorporating chemically active
proteins. U.S. Patent 5,817,303 (1998) covers the use of protein polymers with
chemical cross-linking agents as adhesives and sealants, key to our product
development for the repair of spinal discs. U.S. Patent 5,830,713 (1998) expands
the coverage of methods by which synthetic genes encoding protein polymers are
created.
U.S. Patent 6,015,474 (2000) covers methods and compositions useful for
enhancing the performance of tissue adhesives and sealants. U.S. Patent
6,018,030 (2000) broadly covers DNA sequences encoding protein polymers
incorporating repetitive amino acid sequences found in naturally occurring
proteins. U.S. Patent 6,033,654 (2000) covers cross-linked protein compositions
(adhesives and sealants). U.S. Patent 6,034,022 (2000) covers methods for
preparing chemically modified protein polymers with enhanced water solubility.
U.S. Patent 6,140,072 (2000) broadly covers DNA sequences encoding protein
polymers incorporating intervening sequences providing functional properties
(e.g. biological or chemical activity). U.S. Patent 6,184,348 (2001) broadly
covers protein polymers incorporating intervening sequences providing functional
properties (e.g. biological or chemical activity).
Additionally, we have four U.S. patent applications pending, covering
related aspects of our core technology.
Although we believe our existing issued patent claims provide a competitive
advantage, there can be no assurance that the scope of our patent protection is
or will be adequate to protect our technology or that the validity of any patent
issued will be upheld in the future. Additionally, with respect to our pending
applications, there can be no assurance that any patents will be issued, or
that, if issued, they will provide substantial protection or be of commercial
benefit to us. The two patents issued to PPTI in 1993 will expire in 2010, as
will one of the patents issued in 1996. The other patent issued in 1996 will
expire in 2013, and the patents issued in 1997 will expire in 2014. The three
patents issued in 1998, which expand the coverage of previously issued patents,
will expire in concert with the original patents. The other five patents issued
in 1998 will expire in 2015. Three patents issued in 2000 expand upon the claims
of previously issued patents and will expire in concert with the original
patents (one in 2010 and two in 2015). The other two patents issued in 2000 will
expire in 2017 and 2018, the difference due to the date each
13
application was filed. The patent issued in 2001 expands upon the claims of a
previously issued patent and will expire in 2015.
Although we do not currently have any operations outside the U.S., we
anticipate that our potential products will be marketed on a worldwide basis,
with possible manufacturing operations outside the U.S. For example, we have
recently established a licensing and distribution agreement with Femcare Ltd.
for the sale of our urethral bulking agent in Europe and Australia. Accordingly,
international patent applications corresponding to the major U.S. patents and
patent applications described above have been filed in these and other important
market jurisdictions. Due to translation costs and patent office fees,
international patents are significantly more expensive to obtain than U.S.
patents. Additionally, there are differences in the requirements concerning
novelty and the types of claims that can be obtained compared to U.S. patent
laws, as well as the nature of the rights conferred by a patent grant. We
carefully consider these factors in consultation with our patent counsel, as
well as the size of the potential markets represented, in determining the
foreign countries in which to file patents.
In almost all cases, we file for patents in Europe and Japan. Currently, we
have fourteen issued foreign patents, and twenty-five pending foreign
applications. One of the issued foreign patents is in Europe and the scope of
its claims broadly covers protein polymers having biological or chemical
activity. In order to reduce our patent-related expenses, we are currently
implementing a policy of only maintaining foreign patents or applications in
Europe and Japan, unless required due to our license agreements. This has
resulted in our abandoning issued, allowed and pending foreign patent cases.
Because of the uncertainty concerning patent protection and the
unavailability of patent protection for certain processes and techniques, we
also rely upon trade secret protection and continuing technological innovation
to maintain our competitive position. Although all our employees have signed
confidentiality agreements, there can be no assurance that our proprietary
technology will not be independently developed by other parties, or that secrecy
will not be breached. Additionally, we are aware that substantial research
efforts in protein engineering technology are taking place at universities,
government laboratories and other corporations and that numerous patent
applications have been filed. We cannot predict whether we may have to obtain
licenses to use any technology developed by third parties or whether such
licenses can be obtained on commercially reasonable terms, if at all.
In the course of our business, we employ various trademarks and trade names
in packaging and advertising its products. We have assigned the federal
registration of our ProNectin/(R)/ trademark and its SmartPlastic/(R)/ trademark
for ProNectin F Activated Cultureware to Sanyo Chemical Industries, Ltd. in
connection with the sale to Sanyo of our cell culture business. We intend to
protect and promote all of our trademarks and, where appropriate, will seek
federal registration of our trademarks.
Regulatory Matters
Regulation by governmental authorities in the United States and other
countries is a significant factor affecting the success of products resulting
from biotechnological research. Our current operations and products are, and
anticipated products and operations will be, subject to
14
substantial regulation by a variety of agencies, particularly those products and
operations related to biomedical applications. Currently, our activities are
subject principally to regulation under the Occupational Safety and Health Act
and the Food, Drug and Cosmetic Act (including amendments and updates).
Extensive preclinical and clinical testing and pre-market approval from the
FDA is required for new medical devices, drugs or vaccines, which is generally a
costly and time-consuming process. We are required to be in compliance with many
of the FDA's regulations to conduct testing in support of product approvals; in
particular, compliance with the FDA's GLP and QSR. Where we have conducted such
testing, our company may choose to file product approval submissions itself or
maintain with the FDA a "Master File" containing, among other items, such test
results. A Master File can then be accessed by the FDA in reviewing particular
product approval submissions from companies commercializing products based on
our materials.
There can be no assurance that we or our customers will be able to obtain
or maintain the necessary approvals from the FDA or corresponding international
regulatory authorities, or that we will be able to maintain a Master File in
accordance with FDA regulations. In either case, our anticipated business could
be adversely affected. To the extent we manufacture medical devices, as opposed
to a component material supplied to a medical device manufacturer, we will be
required to conform commercial manufacturing operations to the FDA's QSR
requirements. We would also be required to register our facility with the FDA as
an establishment involved in the manufacture of medical devices. QSR
requirements are rigorous, and there can be no assurance that compliance could
be obtained in a timely manner and without the expenditure of substantial
resources, if at all. International quality system requirements, i.e., ISO 9001
issued by the International Organization for Standardization, is the quality
model used by medical product manufacturers and is required for the sale of
medical devices in Europe. ISO 9001 standards are similar to the FDA's QSR.
In August 1999, we obtained the FDA's approval of our IDE to begin human
clinical testing of our urethral bulking agent for the treatment of female
stress urinary incontinence. We initiated clinical testing in December 1999. We
submitted an IDE to the FDA in October 2000 to obtain approval to begin human
clinical testing of a tissue augmentation product for use in cosmetic and
reconstructive surgery applications. This IDE was approved in November 2000, and
we expect to begin a pilot clinical study in the first quarter of 2001 to the
extent resources are available. We have implemented, and continue to implement,
polymer production and quality control procedures, and have made certain
facilities renovations, to operate in conformance with FDA requirements.
Our research, development and production activities are, or may be, subject
to various federal and state laws and regulations relating to environmental
quality and the use, discharge, storage, transportation and disposal of toxic
and hazardous substances. The Company's future activities may be subject to
regulation under the Toxic Substances Control Act, which requires us to obtain
pre-manufacturing approval for any new "chemical material" we produce for
commercial use that does not fall within the FDA's regulatory jurisdiction. We
believe we are currently in substantial compliance with all such laws and
regulations. Although we intend to use our best efforts to comply with all
environmental laws and regulations in the future, there can be
15
no assurance that we will be able to fully comply with such laws, or that full
compliance will not require substantial capital expenditures.
Product Liability and Absence of Insurance
Our business may expose us to potential product liability risks whenever
human clinical testing is performed, or upon the use of any commercially
marketed medical product. Prior to initiating human clinical testing of our
urethral bulking agent, we procured product liability insurance. This insurance
coverage has been expanded to cover the cosmetic augmentation product as well.
There can be no assurance, however, that we will be able to continue to obtain
such insurance on acceptable terms or that such insurance will provide adequate
coverage against potential liabilities. A successful product liability claim or
series of claims could result in a material adverse effect on our businesss.
16
Executive Officers of the Registrant
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
J. Thomas Parmeter 61 Chairman of the Board of Directors,
President and Chief Executive Officer
Joseph Cappello, Ph.D. 44 Vice President, Research and Development,
Chief Technical Officer and Director,
Polymer Research
Philip J. Davis 71 Corporate Secretary
Franco A. Ferrari, Ph.D. 49 Vice President, Laboratory Operations and
Polymer Production and Director, Molecular
Genetics
John E. Flowers 44 Vice President, Planning and Operations
Janis Y. Neves 50 Director, Finance and Administration,
Treasurer, and Assistant Secretary
Mr. Parmeter has been the Company's President, Chief Executive Officer and
Chairman of the Board of Directors since its inception in July 1988 (and, from
July 1988 to July 1992, its Chief Financial Officer). From 1982 to November
1987, Mr. Parmeter was President, Chief Executive Officer and, from June 1987 to
June 1988, Chairman of the Board of Syntro Corporation.
Dr. Cappello has been the Company's Vice President, Research and
Development since February 1997 and Director, Polymer Research and Chief
Technical Officer since February 1993. From September 1988 to February 1993, he
was the Company's Senior Research Director, Protein Engineering.
Mr. Davis has been the Company's Secretary since January 1989. Mr. Davis
has been a director of the Company since April 1995; he previously served as a
director of the Company from January 1989 until October 1991. Mr. Davis was
employed by Donaldson, Lufkin & Jenrette since June 1994 and retired at the end
of 2000 as a Managing Director of Investment Banking. He was Director,
Institutional Sales at Merrill Lynch, Inc. (formerly Merrill Lynch Capital
Markets) from February 1991 to June 1994, and was a Vice President at Merrill
Lynch, Inc. from 1986 to 1991.
Dr. Ferrari has been the Company's Vice President, Laboratory Operations
and Director, Molecular Genetics since February 1993. From September 1988 to
February 1993, he was the Company's Senior Research Director, Genetic
Engineering.
17
Mr. Flowers has been the Company's Vice President, Planning and Operations,
since February 1993. From September 1988 to February 1993, he was the Company's
Vice President, Commercial Development.
Ms. Neves has been the Company's Director of Finance since November 1998
and Controller and Assistant Secretary since January 1990. From July 1988 until
January 1990, Ms. Neves was the Company's Business Office Manager.
All executive officers of our Company were elected by the Board of
Directors and serve at its discretion. No family relationships exist between any
of the officers or directors of our company.
Employees
As of February 16, 2001, we had 19 full-time employees, of whom four hold
employment contracts with our company and three hold Ph.D. degrees. We are
highly dependent on the services of our executive officers and scientists. The
loss of the services of any one of these individuals would have a material
adverse effect on the achievement of our development objectives, our business
opportunities and prospects. The recruitment and retention of additional
qualified management and scientific personnel is also critical to our success.
There can be no assurance that we will be able to attract and retain required
personnel on acceptable terms, due to the competition for such experienced
personnel from other biotechnology, pharmaceutical, medical device and chemical
companies, universities and non-profit research institutions.
Item 2. Properties
We do not own any real property. We lease approximately 27,000 square feet
in San Diego, California from Sycamore/San Diego Investors. The leased property
includes our administrative offices, which encompass approximately 4,000 square
feet, and our laboratory facilities, which encompass approximately 15,000 square
feet. The current annual rent for this space is approximately $367,000. We
currently sublease at cost an additional 9,000 square feet of office and
laboratory space in our present facility. The master lease expires in May 2005.
The sublease expires at the end of January 2002. We believe that our current
facilities are adequate to meet our needs until the end of 2001.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of 2000.
18
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters.
NASDAQ Delisting
Prior to September 1999, our common stock traded on The Nasdaq Stock Market
under the symbol "PPTI". Our common stock was delisted from the NASDAQ Small Cap
Quotation System, effective September 20, 1999. The reasons for the delisting
were failure to maintain the minimum bid requirement of $1.00 per share for our
common stock, and failure to meet the minimum net asset requirement of $2
million. Our common stock is now traded on the "over-the-counter" NASD Bulletin
Board. To access the quotations for our common stock, use the call letters
PPTI.OB.
The trade prices set forth below represent inter-dealer prices without
retail markups, markdowns or commissions, and may not represent actual
transactions.
<CAPTION>
Trade Prices
------------
<S> <C> <C>
2000 High Low
---- ---- ---
First Quarter $3.375 $0.187
Second Quarter 1.625 0.750
Third Quarter 1.125 0.562
Fourth Quarter 1.437 0.375
1999
----
First Quarter $1.531 $1.063
Second Quarter 2.250 0.875
Third Quarter 1.719 0.750
Fourth Quarter 1.250 0.688
As of February 16, 2001, we had approximately 161 shareholders of record;
we estimate we had approximately 1,500 beneficial holders. We have never paid
cash dividends on our Common Stock. We currently intend to retain earnings, if
any, for use in the operation and expansion of our business and therefore do not
anticipate paying any cash dividends on our Common Stock in the foreseeable
future.
Unregistered Offerings
On December 21, 2000, Genencor International was issued two warrants, each
convertible into the Company's common stock. The warrants were issued in
conjunction with our execution of a licensing agreement with Genencor in which
Genencor would use our technology for the potential development of products for
industrial markets in defined fields. The issuance was exempt under Section 4(2)
of the Securities Act.
19
On August 16, 1999, we received $1,775,000 for 17,750 shares of Series G
Convertible Preferred Stock ("Series G Stock") from several institutional and
accredited individual investors following the 10 day stockholder notification
period required by the NASD prior to the sale. On September 15, 1999, we
received an additional $325,000 for 3,250 shares of Series G Stock, for a total
of $2,100,000. Each share of Series G Stock was priced at $100 per share. Each
share can be converted at any time by the holder into common stock at a price of
$0.50 per share, subject to certain antidilution adjustments. Each share of
Series G Preferred Stock also received a common stock warrant, exercisable for
12 months, that allows the holder to acquire 200 shares of our common stock at a
price of $0.50 per share. In February 2000, we received approximately $2.1
million from the exercise of common stock warrants originally granted as part of
the sale of Series G Convertible Preferred Stock and warrants. At the time of
exercise, exercising shareholders were granted additional warrants for an
equivalent number shares, exercisable until the last day of February 2001,
bearing a conversion price of $1.50.
Between April 1 and April 15, 1999, we received approximately $508,000 from
the exercise of redeemable, publicly traded, warrants originally issued as part
of our Initial Public Offering. Following the close of business on April 15, the
remaining unexercised redeemable, publicly traded, warrants expired.
On May 12, 1999, we received approximately $416,000 from the exercise of
warrants issued in conjunction with the private placement of the Series E
Convertible Preferred Stock ("Series E Stock").
In April and May of 1998, the Company raised approximately $5.4 million
from the sale of 54,437 shares of the our Series E Stock priced at $100 per
share, with warrants to purchase an aggregate of 3,266,250 shares of common
stock to a small group of institutional and accredited investors.
Each share of Series E Stock is convertible at any time at the election of
the holder into 80 shares of common stock at a conversion price of $1.25 per
share, subject to certain antidilution adjustments. No underwriters were engaged
in connection with such issuance and, accordingly, no underwriting discounts
were paid.
Each share of Series E Stock received two common stock warrants. One
warrant (first warrant) was exercisable at any time for 40 shares of common
stock at an exercise price of $2.50 per share, and has expired approximately 18
months after the close of the offering; the other warrant (second warrant) is
exercisable at any time for 20 shares of common stock at an exercise price of
$5.00 per share, and expires approximately 36 months after the close of the
offering. In addition, an 18 month warrant to acquire 200,000 common shares
exercisable at $2.50 per share and a 36 month warrant to acquire 100,000 common
shares exercisable at $5.00 per share were issued as a finder and document
review fee paid to a lead investor. An 18 month warrant to acquire 32,000 common
shares exercisable at $2.50 per share, a 24 month warrant to acquire 16,000
common shares exercisable at $5.00 per share, and 5 year warrants to acquire an
aggregate of 25,200 common shares exercisable at $2.50 per share were issued to
certain persons for service as finders in relation to the private placement.
20
In connection with the above private placement, we issued 26,420 shares of
Series F Convertible Preferred Stock in exchange for the same number of shares
of outstanding Series D Convertible Preferred Stock. Series F Convertible
Preferred Stock is equivalent to our Series E Stock with regard to liquidation
preferences. All other terms of the Company's Series F Convertible Preferred
Stock remained the same as our Series D Convertible Preferred Stock. The Series
D and F Convertible Preferred Stock is convertible into common stock at the
holder's option. The conversion price at the time of conversion is the lesser of
$3.75 or the market price. The Series D and F Convertible Preferred Stock is
redeemable at our option after four years from the date of issuance. Automatic
conversion of all of the Series D and F Convertible Preferred Stock will occur
if: (a) we complete a public offering of common stock at a price of $2.50 or
higher; or (b) the holders of a majority thereof elect to convert. We have the
option to demand conversion of the Series D and F Convertible Preferred Stock if
the average market price of its common stock equals or exceeds $5.00 per share
over a period of twenty business days.
The above issuances of preferred stock and related warrants, and the
exercise of such warrants noted above were exempt from registration under
Section 4(2) of the Securities Act, and met the requirements of Rule 506 of
Regulation D promulgated under the Securities Act.
21
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
Certain statements contained or incorporated by reference in this Annual
Report on Form 10-KSB constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements of the company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by forward-looking statements.
Such risks and uncertainties include, among others, history of operating losses,
raising adequate capital for continuing operations, early stage of product
development, scientific and technical uncertainties, competitive products and
approaches, reliance upon collaborative partnership agreements and funding,
regulatory testing and approvals, patent protection uncertainties and
manufacturing scale-up and required qualifications. While these statements
represent management's current judgment and expectations for the company, such
risks and uncertainties could cause actual results to differ materially from any
future results suggested herein. We undertake no obligation to release publicly
the results of any revisions to these forward-looking statements to reflect
events or circumstances arising after the date hereof.
General Overview
Incorporated in 1988, Protein Polymer Technologies, Inc. has concentrated
its research and development efforts on establishing a scientific and technical
leadership position in the production and development of unique protein-based
materials. We have identified biomedical market and product opportunities for
further research and development that we believe will exploit the unique
properties of our technology to competitive advantage. We have been unprofitable
to date, and as of December 31, 2000 we had an accumulated deficit of
$39,743,572.
Our product candidates for surgical repair, augmentation and regeneration
of human tissues are in various stages of research and development. Our more
advanced programs are in the areas of bulking agents for soft tissue
augmentation, particularly for use in urethral tissue for the treatment of
female stress incontinence and in dermal tissue for cosmetic and reconstructive
procedures. We currently are devoting the majority of our resources to the
development and registration of these products, with the greatest emphasis on
the incontinence product which began human clinical trials in December 1999. Our
other advanced product technology is in the area of tissue adhesives and
sealants. Currently our research and development in this area is focused on the
repair of spinal discs for the treatment of lower back pain. Our first
commercial products, ProNectin F and SmartPlastic, are used by biologists and
cell culture laboratories, principally to grow mammalian cells for biomedical
research purposes. In February 2000, we licensed the rights for the manufacture
and sale of these products for use in in vitro cell culture, including the
transfer of all existing inventory, to a third party.
22
Our strategy with most of our programs is to enter into collaborative
development agreements with major medical product marketing and distribution
companies. Although these relationships, to the extent any are consummated, may
provide significant near-term revenues through up-front licensing fees, research
and development reimbursements and milestone payments, we expect to continue
incurring operating losses for the next several years.
In December 2000, we entered into a license and collaborative agreement
with Genencor International for the development by Genencor of industrial
products from our existing biomaterials and for the development of new
industrial applications using our proprietary protein polymer technology. The
agreement provided for an upfront $750,000 license fee, and also included
potential payments of up to $5 million to PPTI for the accomplishment by
Genencor of certain milestones, issuance of PPTI common stock warrants to
Genencor, PTI, and the payment of royalties to PPTI upon the successful
commercialization and sale of products developed under the agreement, if any.
Our cash balance as of December 31, 2000 was $866,000. We believe this
amount is sufficient to fund our operations through March 2001. In addition to
potential cost reduction measures being implemented and/or contemplated, we will
continue to attempt to raise additional funds for continuing operations through
private or public offerings and collaborative agreements (see "Liquidity and
Capital Resources" below, and Note 1 of the Audited Financial Statements for
additional information and a description of the associated risks).
Results of Operations
We received $1,107,000 in contract and licensing revenue for the year ended
December 31, 2000 as compared to $2,000 for the years ended December 31, 1999,
and $50,000 for the year ended December 31, 1998. The increase in contract and
licensing revenue primarily represents the amortized portion of an up front
license payment of $1 million (being recognized ratably over a period of three
years) from Femcare Ltd. for the commercial rights to our incontinence product
in Europe and Australia, payments from Sanyo Chemical Industries Ltd. for the
comprehensive license to our in vitro cell culture business and existing product
inventory, initial R&D payments from Perkin-Elmer for a development project, and
an upfront license fee of $750,000 (less the issuance of warrants to purchase
PPTI common stock valued at $319,000) received from Genencor International for
rights to use our technology in the development of certain industrial products.
The lack of revenue in 1999 and 1998 reflects primarily the termination of
research and development reimbursements from various operating entities of the
Johnson & Johnson Company, including Ethicon, Inc.
Interest income was $79,000 for the year ended December 31, 2000, as
compared to $39,000 for 1999 and $135,000 for 1998. The year-to-year
variability resulted from the amount and timing of the receipt of equity capital
and the amounts of excess cash available for investment.
There were no product sales for the year ended December 31, 2000 as
compared to $54,000 and $71,000 in 1999 and 1998 respectively. Product sales
consisted of ProNectin F related product revenues and licensing fees. Sales
prior to 1998 reflected disappointing market interest in the line of ProNectin
products; as a result the Company discontinued related
23
promotional expenditures to conserve cash. Sales in 1998 and 1999 primarily
reflect distributor stocking orders. The manufacturing and marketing rights and
the inventory for this product line were sold to Sanyo Chemical Industries, Ltd.
in February 2000. Because of previously booked inventory reserves, there was no
cost of sales booked for any product sales in 2000.
Research and development expenses for the year ended December 31, 2000 were
$2,322,000, compared to $2,812,000 in 1999, a decrease of 17%, and $4,138,000 in
1998. This decrease is due primarily to a downsizing of our staff and
operational expenses in 2000, but also in part to lower than expected clinical
testing and regulatory consulting costs. These latter savings are temporary and
will be replaced and increased by the cost of conducting human clinical testing
which began in 1999 for the urinary incontinence bulking agent, and which are
expected to begin in 2001 for the dermal augmentation product. Other related
expenses include expanded manufacturing capacity and manufacturing process
validation, quality assurance efforts, and outside testing services. We expect
our research and development expenses will increase in the future, to the extent
additional capital is obtained, due to the expansion of product-directed
development efforts including human clinical testing, increased manufacturing
requirements, and increased use of outside testing services.
Selling, general and administrative expenses for the year ended December
31, 2000 were $1,366,000, as compared to $1,554,000 for 1999, a decrease of 12%,
and $1,727,000 in 1998. This decrease was due to the Corporate downsizing, and
generally tighter cost management. To the extent possible, we continue to
concentrate on controlling costs reflected in reduced travel, office supplies,
and non-regulatory consulting costs. We expect our selling, general and
administrative expenses will increase in the future, to the extent additional
capital is obtained, consistent with supporting our research and development
efforts and as business development, patent, legal and investor relations
activities require.
For the year ended December 31, 2000, we recorded a net loss applicable to
common shareholders of $2,776,000, or $.16 per share, as compared to $4,535,000,
or $.36 per share for 1999, and $9,183,000, or $.88 per share for 1998. The
difference between 2000 and 1999 is primarily due to tighter cost management and
license and contract fees received from collaborative partners. The difference
between 1999 and 1998 results is due primarily to a non-cash "imputed dividend"
expense of $3,266,000 that resulted from the sale and issuance of the Company's
Series E Convertible Preferred Stock during 1998. The 2000, 1999 and 1998 losses
and per share calculations also include $278,000 in each year, of undeclared
and/or paid dividends from the Company's Preferred Stock.
We expect to incur increasing operating losses for the next several years,
to the extent additional capital is obtained, based upon the successful
continuation of the tissue augmentation program and product registration, and
the tissue adhesives program, as well as expected increases in our other
research and development, manufacturing and business development activities. Our
results depend in part on our ability to establish strategic alliances and
generate contract revenues, increased research, development and manufacturing
efforts, preclinical and clinical product testing and commercialization
expenditures, expenses incurred for regulatory compliance and patent
prosecution, and other factors. Our results will also fluctuate from period to
period due to timing differences.
24
To date, we believe that inflation and changing prices have not had a
material impact on our continuing operations. However, given the State of
California's continuing energy crisis, our utility costs have doubled over the
past two months, and these increases are expected to continue for the
foreseeable future. Based upon our earnings history, a valuation allowance of
$13,943,000 is required to reduce our net deferred tax assets to the amount
realizable.
Liquidity and Capital Resources
As of December 31, 2000, we had cash, cash equivalents and short-term
investments totaling $866,000, as compared to $156,000 at December 31, 1999. As
of December 31, 2000, we had working capital of $143,000, compared to $(458,000)
at December 31, 1999. We received in January and February 2000 approximately
$1,350,000 (net of costs) in cash and receivables from licensing and R&D
agreements with Femcare, Ltd. for the European and Australian marketing rights
to the stress urinary incontinence bulking product, with Perkin-Elmer for a
research and development project and commercialization option, and with Sanyo
Chemical Industries, Ltd. for the rights to the in vitro cell culture business.
Also in February 2000, we received approximately $2.1 million from the exercise
of common stock warrants originally granted as part of the sale of Series G
Convertible Preferred Stock and warrants. In December 2000, we received $750,000
in the form of an upfront license fee from Genencor International for rights to
the use of our technology in the development by Genencor of certain industrial
products.
We had no long-term capital lease obligations as of December 31, 2000,
compared to an obligation of $25,000 as of December 31, 1999. For the year ended
December 31, 2000, our cash expenditures for capital equipment and leasehold
improvements totaled $45,000, compared with $26,000 for the same period in the
prior year. To the extent capital is available, we anticipate that these
expenditures will be increased in 2001 for laboratory renovations and additional
equipment required to meet GLP manufacturing regulat 