10-K405 1 b38778ace10-k405.txt ALKERMES CLINICAL PARTNERS, L.P. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-26758 ALKERMES CLINICAL PARTNERS, L.P. (Exact name of registrant as specified in its charter) DELAWARE 043-145043 --------------------------------------------- ------------------------------------ (State or other jurisdiction of organization) (I.R.S. Employer Identification No.) 64 Sidney Street, Cambridge, MA 02139-4136 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (617) 494-0171 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None -------------------- Securities registered pursuant to Section 12(g) of the Act: Class A Limited Partnership Interest -------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of voting stock held by non-affiliates of the Registrant: There is no voting equity security of the Registrant and there is no market, public or private, for the equity securities of the Registrant. NO DOCUMENTS ARE INCORPORATED BY REFERENCE IN THIS REPORT ON FORM 10-K. 2 ITEM 1. BUSINESS The following Business section contains forward-looking statements which involve risks and uncertainties. The Partnership's and the Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Important Factors Regarding Forward-Looking Statements." GENERAL Alkermes Clinical Partners, L.P. (the "Partnership") was formed in February 1992 under the laws of the State of Delaware. The Partnership operates pursuant to an Agreement of Limited Partnership, dated as of February 7, 1992, as amended. The sole general partner of the Partnership, Alkermes Development Corporation II, a Delaware corporation (the "General Partner"), is a wholly owned subsidiary of Alkermes, Inc. ("Alkermes" or the "Company"). The limited partners of the Partnership are investors who purchased Class A and Class B limited partnership interests in the Partnership in a private placement that closed in April 1992 and their transferees. The principal objective of the Partnership is to develop and derive income from the sale or license of a family of molecules designated by Alkermes as Receptor-Mediated Permeabilizers(TM) ("RMPs(TM)") for human pharmaceutical use in the United States and Canada. The principal technology is Cereport(TM), formerly known as RMP-7(TM), a product candidate designed to facilitate drug delivery to the central nervous system. Cereport, a member of the family of RMPs, is a nine amino acid peptide based on bradykinin, a compound occurring naturally in the body and known to affect vascular permeability. Cereport is a proprietary, synthetic analog of bradykinin developed to increase transiently the permeability of the blood-brain barrier. Following injection, Cereport increases permeability by triggering a brief relaxation of the tight cellular junctions of the blood-brain barrier. During the time the tight junctions are relaxed, permeability is increased and drug molecules in the bloodstream can diffuse into the brain in concentrations greater than can usually be achieved without Cereport. Preclinical and clinical data also suggest that Cereport can be administered at doses that selectively increase permeability in the region of brain tumors and other pathology while not significantly affecting permeability in healthy brain tissue. Cereport exerts a pharmacologic effect on the vasculature of the brain and does not itself bind to or serve as a carrier for the drug of which it is facilitating delivery. The Partnership, through a product development agreement with Alkermes described below, is developing Cereport to be manufactured, packaged and dispensed as a standalone product. In the clinical setting, Cereport is administered in conjunction with a therapeutic or diagnostic agent. Timing of Cereport administration relative to that of the therapeutic or diagnostic agent is determined on a drug by drug basis to optimize barrier permeability during the time of peak drug plasma concentrations. 2 3 Cereport is intended to be marketed as an independent agent to increase the utility of other therapeutic and diagnostic compounds given with it. The General Partner believes Cereport may be administered along with cancer chemotherapeutic and anti-infective agents not currently used in the treatment of central nervous system disorders because of their limited ability to penetrate the blood-brain barrier. THE PRODUCT DEVELOPMENT AGREEMENT The Partnership entered into a product development agreement, dated as of March 6, 1992, with Alkermes (the "Product Development Agreement") pursuant to which Alkermes granted to the Partnership an exclusive, royalty-free license to certain patent rights and other technology owned or controlled by the Company related to RMPs (the "Background Technology"). The license granted to the Partnership is limited to Background Technology necessary or materially useful for the development and commercialization of products based on RMPs (each a "Product") for human pharmaceutical use in the United States and Canada (the "Field of Activity"). Under the Product Development Agreement, the Partnership granted to Alkermes an exclusive, royalty-free license to all patent rights and other technology arising from research and development conducted under the Product Development Agreement (the "Program Technology" which, taken together with the Background Technology, comprises the "Technology") for exploitation outside the Field of Activity. Alkermes has agreed, pursuant to the Product Development Agreement, to the extent permitted by Partnership funds (including any funds which the Company may, in its discretion, elect to contribute to the Partnership) to use its best efforts to perform the research and development necessary to engage in the Field of Activity (the "Research Program"). Through June 30, 1996, the Partnership reimbursed Alkermes for its research and development expenses on behalf of the Partnership and paid a management fee equal to ten percent (10%) of such expenses. The Partnership's funds have been expended and no United States Food and Drug Administration ("FDA") marketing approval has been received for the sale by or on behalf of the Partnership of any Product in the Field of Activity. In this circumstance, the Product Development Agreement provides that the General Partner is to determine the amount of additional funds required by the Partnership in the upcoming year, and the Company will have the right, in its sole discretion, to contribute such funds to the Partnership or to pay such funds in any manner to which the Company and the General Partner agree (including the direct payment of research and development expenses). The Company is paying and intends to continue to pay research and development expenses directly. The Company has agreed to use its best efforts to manufacture and market the Products in the Field of Activity directly or through third parties in the United States and Canada in accordance with the marketing program approved by the Board of Directors of the General Partner (the "Marketing Program"). If at any time the Board of Directors of the General Partner shall determine to discontinue the Marketing Program with respect to any Product or Products, the Company's obligation to market such Product or Products will cease. 3 4 Prior to the end of each quarter of each year, the General Partner reviews the progress of the Research Program during the preceding three-month period to determine whether the continuation of all or any part thereof is in the best interests of the Limited Partners. The General Partner is to begin similar reviews of the Marketing Program after the beginning of Phase II/III clinical trials for RMPs. If at any time the Board of Directors of the General Partner determines that the Research Program is infeasible or uneconomic and should be discontinued with respect to one or more products, or if the Board of Directors of the General Partner determines to discontinue the Marketing Program with respect to all Products, or if the Company decides not to contribute the additional funds to the Partnership which are determined by the General Partner to be required when all Partnership funds have been expended and no FDA marketing approval has been received for the sale of any product in the Field of Activity, the Product Development Agreement and the Purchase Option (as defined below under "The Purchase Agreement") will terminate. The Partnership granted to the Company a royalty-bearing right and license to make, use, modify and improve the Technology within the Field of Activity (the "Interim License"). The Company has agreed to pay to the Partnership within 60 days after the end of each calendar quarter until the Interim License terminates a payment equal to twelve percent (12%) of revenues on sales of RMPs in the United States and Canada. The Company has also agreed to pay to the Partnership, to the extent necessary to allow the Partnership to pay projected distributions in any calendar year, quarterly payments equal to ten percent (10%) of revenues on sales of RMPs in Europe. The Company will be required, under certain circumstances, to make payments to the Partnership in an amount equal to a percentage of the revenues of the Company from the sale of certain products which are competitive with any of the Partnership's products, which percentage of revenues will be no greater than one-half of the applicable percentage of revenues on sales of products. Any payments based on sales of RMPs in Europe may be reduced if such sales are made through sublicensees or other third parties. All such payments are referred to as "Interim License Payments." In addition, the Company has agreed to pay to the Partnership a milestone payment (the "Milestone Payment") equal to twenty percent (20%) of the aggregate capital contributions of all Partners, payable, at the Company's option, in cash or shares of Common Stock, upon the receipt of the first approval from the FDA to market any product in the Field of Activity. The Partnership Agreement provides for the allocation of such payments among the Partners. Upon termination of the Interim License (which will occur upon exercise or termination of the Purchase Option), any royalties on sales of certain competitive products will be payable until the fifth anniversary of such termination. Upon termination of the Interim License, the Company has also agreed to pay to the Partnership, to the extent necessary to pay projected distributions to the partners in any year, payments of ten percent (10%) of the Company's revenues on sales of RMPs in Europe, and after each Class A Limited Partner has received payments under the Partnership Agreement aggregating eight hundred percent (800%) of its capital contribution, such payments will be reduced to nine percent (9%) of the Company's revenues on sales of RMPs in Europe, and after each Class A Limited Partner has received payments under the Partnership Agreement aggregating one thousand percent (1,000%) of its capital contribution, such payments will be reduced to four percent (4%) of the Company's revenues on sales of RMPs in Europe. Any payments based on European sales of certain competitive products and RMPs may be reduced if such sales are made through sublicensees or 4 5 other third parties. Any payments based on European sales of RMPs will terminate on the last day of the calendar quarter in which the eleventh anniversary of the exercise or termination of the Purchase Option occurs. The Company has agreed to file patent and similar applications that it or the Partnership believes in its reasonable business judgment are necessary or useful to protect the Partnership's interest in the Technology and has agreed to use reasonable diligence to prosecute and maintain in force such applications and any resultant patents or similar rights. The Company will have the right but not the obligation to bring patent infringement actions against third parties that infringe any of the Partnership's rights with respect to the Technology. The Company has agreed to pay all expenses (including attorneys' fees) incurred in connection with such infringement action, subject to reimbursement to the extent described below. If as a result of any such infringement action, a judgment is executed in favor of the Company or a settlement is reached with the infringing party, the Company has agreed to divide the proceeds thereof between itself and the Partnership in proportion to their respective relative economic interests in the Technology affected by such judgment or settlement giving consideration to the countries and Products involved. Expenses incurred by the Company in bringing such action are to be allocated between the Partnership and the Company in the same proportions as the proceeds thereof. The Partnership's allocation of such expenses is to be reimbursed by the Partnership to the Company out of the proceeds received by the Partnership. In addition, the Partnership will retain the right to maintain such patent infringement actions, at its own expense, should the Company fail to do so. THE PURCHASE AGREEMENT The Company entered into a purchase agreement dated as of March 6, 1992 (the "Purchase Agreement") with each investor in the Private Placement and the Class B Limited Partner. Under the terms of the Purchase Agreement, each Class A Limited Partner and the Class B Limited Partner granted to the Company an irrevocable option (the "Purchase Option") to purchase his, her or its interest in the Partnership (a "Class A Partnership Interest" or "Class B Partnership Interest" as applicable). The Purchase Option is exercisable only if all Class A and Class B Partnership Interests (collectively, the "Partnership Interests") are to be purchased and such option is exercised by sending a notice to all Class A and Class B Limited Partners on a date during the 45-day period commencing on the date which is the earlier of (a) the date which is the last day of the first month in which the Partnership shall have received Interim License Payments equal to fifteen percent (15%) of the Limited Partner's Capital Contributions (excluding the Milestone Payment) and the last day of the twenty-fourth full month after the date of the Company's first commercial sale of any Product within the Field of Activity and (b) the last day of the forty-eighth full month after the date of such first commercial sale. The date of purchase (if any) of the Partnership Interests (the "Purchase Date") pursuant to the Purchase Agreement must take place within 60 days after the Purchase Option is exercised. The Purchase Option will terminate upon the occurrence of any of the following termination events: (i) the bankruptcy of the Company, (ii) the cessation of operations by the Company, (iii) the seizure or attachment of all or a substantial part of the Company's assets or (iv) the termination of the Research Program or the Marketing Program. In addition, the 5 6 Purchase Option will terminate upon the earlier of (a) the Company's notice to the Partnership and the Limited Partners that it does not intend to exercise the Purchase Option or (b) the expiration unexercised of the Purchase Option. Upon any such termination, the Partnership will be free to license or sell the Technology. The Purchase Option will also terminate on the Purchase Date. If the Company exercises the Purchase Option, the Company has agreed to pay to each Class A Limited Partner an advance payment of $40,000 per Class A Partnership Interest plus certain royalty payments, both of which are payable in the manner described below. The advance payment may be paid, at the Company's option, in (i) cash, or (ii) Common Stock in an amount equal to the number of shares of Common Stock obtained by dividing $40,000 by ninety-five percent (95%) of the average closing price per share of Common Stock for the 15 trading days immediately preceding the fifth trading day prior to the date the Purchase Option is exercised (subject to adjustments as aforesaid). Under the terms of the Purchase Agreement, the Company agreed that it will, on or prior to the date that it exercises the Purchase Option, register under the Securities Act of 1933, as amended, all shares of Common Stock to be delivered to partners under the Purchase Agreement. Shares of Common Stock may be used to make the advance payment only if they are then listed on a national securities exchange or quoted on the Nasdaq National Market. In addition to the advance payment described above, but subject to the limitations stated below, each Class A Limited Partner is to receive quarterly payments equal to such Class A Limited Partner's pro rata portion (based on the ratio that such Class A Limited Partner's capital contribution to the Partnership bears to the aggregate capital contributions of (i) all Limited Partners or (ii) after the Class B Threshold Date (as defined below), all Class A Limited Partners) of (i) twelve percent (12%) of revenues on sales of RMPs in the United States and Canada and (ii) ten percent (10%) of revenues on sales of RMPs in Europe, and after each such Class A Limited Partner has received payments pursuant to the Purchase Agreement aggregating eight hundred percent (800%) of his capital contribution, such royalties will be reduced to nine percent (9%) in the United States, Canada and Europe and after each such Class A Limited Partner has received payments pursuant to the Purchase Agreement aggregating one thousand percent (1,000%) of his capital contribution, such royalties will be reduced to four percent (4%) in the United States, Canada and Europe, in each case provided that royalties on sales of RMPs in Europe will be payable only to the extent necessary to pay projected distributions in any calendar year; and provided further, that royalties on sales of RMPs in Europe may be reduced if such sales are made through sublicensees or other third parties. Beginning with the first day (the "Class B Threshold Date") of the calendar quarter following the calendar quarter by the end of which each Class A Limited Partner will have received distributions pursuant to the Partnership Agreement and the Purchase Agreement in an aggregate amount equal to or greater than $50,000 for each Unit (or $25,000 for each half Unit owned by such Class A Limited Partner), the Class A Limited Partners will receive only ninety-five percent (95%) of the above royalties. Such royalties will terminate on the last day of the calendar quarter in which the eleventh anniversary of the Purchase Date occurs (the "Cut-Off Date"). Under certain circumstances, Limited Partners will also receive royalties in an amount equal to a percentage of the revenues of the Company from the sale of certain products which are competitive with any Product, which 6 7 percentage of revenues will be no greater than one half of the applicable percentage of revenues on sales of Products. If Alkermes exercises the Purchase Option, the Class B Limited Partner is to receive, in addition to an advance payment of $80,000, payable in cash or stock in the same manner as described above for Class A Limited Partners, quarterly payments equal to (i) prior to the date on which the Class B Threshold occurs, the Class B Limited Partner's pro rata portion (based upon the ratio that the Class B Limited Partner's capital contribution bears to the aggregate capital contributions of all Limited Partners) of the royalties described in the previous paragraph and (ii) beginning with the date the Class B Threshold occurs and ending with the Cut-Off Date, five percent (5%) of all such royalties. The Purchase Agreement provides that, at any time after the Company has purchased the Partnership Interests, the Company will have the right to make offers to pay cash or other consideration in satisfaction of its outstanding royalty payment obligations under the Purchase Agreement. If at any time holders of at least sixty-six and two-thirds percent (66-2/3%) in value of the Partnership Interests of all former Class A Limited Partners ("Class A Royalty Payment Recipients") shall have accepted the terms of any such offer, the Company will have the right, for 60 days after the date on which such Class A Royalty Payment Recipients have indicated acceptance, to prepay its obligations to all such Class A Royalty Payment Recipients. Such prepayment will be on the terms of the most recent offer accepted by such Class A Royalty Payment Recipients. The Company also agreed to use its best efforts to manufacture Products and to sell the products for use in the Field of Activity. If the Company determines that such manufacture and sale is not commercially practicable, it has agreed to use its best efforts to license or sell the Technology to a third party. The Company is not permitted to assign, delegate or transfer its rights under the Purchase Agreement (with certain exceptions) without the prior written consent of (i) sixty-six and two thirds percent (66-2/3%) in interest of the Class A Royalty Payment Recipients for which the Company shall not have made all payments required to be made pursuant to the Purchase Agreement and (ii) the Class B Limited Partner, which consent shall not be unreasonably withheld. The Partnership Agreement provides for the allocation among the Limited Partners of any proceeds resulting from the assignment, delegation or transfer of the Company's rights under the Purchase Agreement. The Limited Partners are not permitted to assign, transfer, or sell their rights under the Purchase Agreement without the prior written consent of the Company, which consent may be withheld in the Company's absolute discretion, except that (i) the Limited Partners may assign the Common Stock delivered to them pursuant to the Purchase Agreement and (ii) the Class B Limited Partner may assign its rights to any present or former officer(s) or director(s) of PaineWebber Development Corporation. CEREPORT Cereport is a nine amino acid peptide based on bradykinin, a compound occurring naturally in the body and known to affect vascular permeability. Cereport is a proprietary, synthetic analog of bradykinin developed by Alkermes on behalf of the Partnership pursuant to 7 8 the Product Development Agreement, to increase transiently the permeability of the blood-brain barrier. Following injection, Cereport increases permeability by triggering a brief relaxation of the tight cellular junctions of the blood-brain barrier. During the time the tight junctions are relaxed, permeability is increased and drug molecules in the bloodstream can diffuse into the brain in concentrations greater than can usually be achieved without Cereport. Preclinical and clinical data also suggest that Cereport increases the uptake of pharmaceuticals in the region of brain tumors and other pathology. Cereport exerts a pharmacologic effect on the vasculature of the brain and does not itself bind to or serve as a carrier for the drug of which it is facilitating delivery. In the clinical setting, Cereport is administered in conjunction with the therapeutic or diagnostic agent. Timing of Cereport administration relative to that of the therapeutic or diagnostic agent is determined on a drug-by-drug basis to optimize barrier permeability during the time of peak drug plasma concentrations. Cereport is intended to be marketed as an independent agent to increase the utility of other therapeutic and diagnostic compounds given with it. The General Partner believes Cereport may be administered along with cancer chemotherapeutic and anti-infective agents not currently used in the treatment of central nervous system disorders because of their limited ability to penetrate the blood-brain barrier. Cereport has the potential to be used in combination with a variety of agents in various disease settings. The goal of the General Partner is to develop Cereport through its own development activities, the Product Development Agreement and, when appropriate, collaborations with pharmaceutical companies. Alkermes may collaborate with companies having drugs whose uses could be expanded to include central nervous system indications. In such cases, Alkermes and its partner could collaborate in the clinical development of the combination without any exchange of product rights. BRAIN TUMOR Cereport is being tested for the treatment of primary brain tumor, recurrent malignant glioma, metastatic brain tumor and pediatric brain tumor. Brain tumors can be classified into two major groups: primary brain tumors, which originate and recur in the brain, and metastatic brain tumors, which are tumors that have spread to the brain from other parts of the body. Each year in the United States and Europe a total of 40,000 patients are diagnosed with primary brain tumors, of which approximately 60%-70% are malignant glioma, and 150,000 patients are diagnosed with metastatic brain tumors. Current treatment for brain tumor is limited and inadequate. Standard treatment typically involves surgery to remove cancerous tissue, followed by radiation therapy. After initial treatment with surgery and/or radiotherapy, brain tumors often recur. Upon recurrence, tumors typically progress rapidly, neurological function and quality of life deteriorate and patients die within months. Chemotherapy has played only a limited role in treatment, in part due to the limited access of many chemotherapeutic agents to the brain because of the normally restrictive blood-brain barrier. Carboplatin is a chemotherapeutic approved for use by the FDA and other regulatory authorities worldwide for use in the treatment of various tumor types outside of the 8 9 brain, but is limited in its ability to penetrate into the brain. Cereport is designed to enable more effective use of chemotherapeutic agents like carboplatin in the treatment of brain tumors by transiently increasing the permeability of the blood-brain barrier. RECURRENT MALIGNANT GLIOMA CLINICAL TRIALS The General Partner's clinical strategy for Cereport has been to establish a foundation of safety and pharmacologic effect of increasing blood-brain barrier permeability prior to entering Phase III clinical trials of Cereport administered in combination with carboplatin. To date, over 700 human subjects have received Cereport in a series of clinical trials in all indications studied. Through the Phase I, Phase I/II and Phase III clinical trials, Cereport was shown to have a good safety profile in volunteers and patients. Transient flushing was the most consistent adverse event noted and nausea and vomiting were determined to be the dose limiting toxicity. There was no evidence of increased toxicity associated with the combination of Cereport and carboplatin, and the drug combination was generally well tolerated by patients. Based on the successful completion of Phase I and Phase I/II clinical trials, Alkermes initiated multiple Phase II clinical trials both of intravenous and intra-arterial Cereport and carboplatin in patients with recurrent malignant glioma. Three multi-center Phase II clinical trials of intravenous Cereport and carboplatin and one multi-center Phase II clinical trial of intra-arterial Cereport and carboplatin were completed. The results of the three Phase II intravenous Cereport clinical trials provided the basis for the Company's decision to proceed in the United States and Europe into study ALK01-040, a Phase III clinical trial of intravenous Cereport and carboplatin in patients with newly diagnosed brain tumors. NEWLY DIAGNOSED BRAIN TUMOR In April 1999, we announced our plans to discontinue study ALK01-040, which was a Phase III clinical trial of Cereport and carboplatin for the treatment of newly-diagnosed brain tumor patients. The study began enrollment in March 1998, and was designed to enroll patients with high grade primary brain tumors following surgical resection of the tumor and prior to the initiation of radiotherapy. The discontinuation of the study was not based on any issues related to the safety or potential efficacy of Cereport in this indication, but, based on our experience with the trial, we determined that elements of the study design were inappropriate and that the probability of successful completion was low. We are not planning to initiate another clinical trial in this indication in the near future. METASTATIC BRAIN TUMOR We conducted a Phase I/II clinical trial of Cereport and carboplatin in patients with metastatic brain tumors, or tumors that have spread to the brain from other sites in the body. The study also included a dose escalation component, in which progressively larger doses of Cereport are being investigated in this patient population. The clinical trial phase of this study was completed in 1999. The results of this trial were presented to ALZA Corporation ("ALZA") in 2000. 9 10 PEDIATRIC BRAIN TUMOR The Pediatric Branch of the National Cancer Institute ("NCI") has completed one study and is conducting a second study of Cereport and carboplatin in pediatric patients with primary brain tumors. The first study began in August 1996 and enrolled 25 patients. The study was a non-controlled, open label Phase I/II clinical trial of intravenous Cereport and carboplatin in pediatric brain tumor patients who have failed other therapies. The study was completed in August 1999. The second study began in June 1998, and is a Phase II multi-center study, in pediatric brain tumor patients. Ten centers are enrolling up to a total of 146 children over two to four years. An investigator sponsored investigational new drug application to study the radiosensitization effect of Cereport and carboplatin given with radiation therapy in pediatric brain stem gliomas began in 2001. This study is being managed by the Children's Oncology Group in coordination with the NCI. Eight centers will enroll up to a total of 36 children over two years. COLLABORATION WITH ALZA CORPORATION As of September 30, 1997, Alkermes and ALZA entered into an agreement relating to the development and commercialization of Cereport. Under the terms of the agreement, ALZA made a $10.0 million upfront payment to Alkermes to fund clinical development; in return, ALZA has the option to acquire exclusive worldwide commercialization rights to Cereport, subject to the rights and obligations of the Partnership. During the past year Alkermes presented a final report to ALZA of two Phase II clinical trials that use Cereport in combination with carboplatin for the treatment of brain tumors. ALZA is considering those final reports and its interest in continuing development of Cereport. If ALZA decides not to continue development of Cereport, we will consider whether to develop Cereport on our own or to seek another partner. If ALZA chooses to continue the development of Cereport, ALZA will make additional payments to cover costs associated with advanced clinical development. If Cereport is commercialized successfully by ALZA, ALZA will pay Alkermes certain milestone payments. Alkermes would be responsible for the manufacturing of Cereport, and the two companies would share approximately equally in profits from sales of the product. If ALZA does not exercise its option, funding for the further development of Cereport would have to be obtained from Alkermes or a third party. There can be no assurance that such funding could be obtained and that development of Cereport would not suffer a material set back in its development. PATENTS AND PROPRIETARY RIGHTS The Partnership's success will be dependent, in part, on Alkermes' ability to obtain patent protection for its and the Partnership's products, to maintain trade secret protection and to operate without infringing upon the proprietary rights of others. Alkermes has a proprietary portfolio of patent rights and exclusive licenses to patents and patent applications. Alkermes has filed numerous United States and foreign patent applications directed to composition of matter as well as processes of preparation and methods of use, including applications relating to: permeabilizers, certain rights to which have been licensed to the Partnership, of which one United States patent was issued in each of May 1992, December 1993, April 1996, December 1996 and November 1997. In the future, the Company plans to file 10 11 further United States and foreign patent applications directed to new or improved products and processes. No United States patent issued to the Company is expected to expire prior to 2010. Alkermes intends to file additional patent applications when appropriate and intends to defend its and the Partnership's patent positions aggressively. Alkermes has exclusive rights through a licensing agreement to two issued United States patents and corresponding foreign patent applications in many countries relating to RMPs. The United States patents that have been licensed to the Company will expire in the year 2013. Under this licensing agreement, the Company currently pays minimum annual royalties. During the fiscal year ended March 31, 2000, such fees were $50,000. In addition, under all licensing agreements, Alkermes is obligated to pay royalties on future sales of products, if any, covered by the licensed patents. Two applications for patents were filed by a third party in the United States and in Europe that contain claims covering certain analogs and uses thereof of the same naturally occurring molecule on which Cereport is based. Two United States patents have issued from these applications. There can be no assurance that the claims of the issued United States patents are not infringed and the claims of future patents issuing from these applications, if any, will not be infringed by the Partnership's or the Company's proposed manufacture, use or sale of Cereport. There can be no assurance that Alkermes or the Partnership would prevail in any legal action seeking damages or injunctive relief for infringement of any patent that might issue under such applications or that any license required under any such patents would be made available or, if available, would be available on acceptable terms. There can be no assurance that the cost of defending an infringement action would not be substantial and would not have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, there can be no assurance that any licenses under any patents would be made available on commercially viable terms, if at all. Failure to obtain a required license could result in the inability to proceed with RMP-based products. The patent positions of pharmaceutical, biopharmaceutical and biotechnology firms, including the Partnership and Alkermes, are generally uncertain and involve complex legal and factual questions. In addition, there can be no assurance that the Company's or its licensors' current patent applications will be allowed or that the claims of any patents issued to Alkermes or its licensors (in connection with either the Company's product candidates or the Partnership's product candidate, or both) will be sufficiently broad to protect the Company's or the Partnership's technology or to provide Alkermes or the Partnership with any competitive advantages. Moreover, no assurance can be given that patents issued to Alkermes (in connection with either the Company's product candidates or the Partnership's product candidate, or both), or its respective licensors, if any, will not be contested, narrowed, invalidated or circumvented. In addition, if Alkermes or the Partnership brings a patent infringement action or otherwise brings an action to protect its own proprietary rights against third parties or is required to defend against a charge of patent infringement, substantial costs could be incurred. In the future, the Partnership and the Company may be required to obtain additional licenses to patents or other proprietary rights of third parties. There can be no assurance that any such licenses will be available on acceptable terms, if at all, and failure to obtain such licenses 11 12 could result in delays in marketing the Partnership's products or the inability to proceed with the development, manufacture or sale of product candidates requiring such licenses. The Company also relies upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain its competitive position which it seeks to protect, in part, by confidentiality agreements with its corporate partners, collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. The Company's practice is to require its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. The agreements provide that all confidential information developed or made known to an individual during the course of the employment or consulting relationship shall be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual while employed by the Company shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's or the Partnership's trade secrets in the event of unauthorized use or disclosure of such information. COMPETITION The biotechnology and pharmaceutical industries are subject to rapid and substantial technological change. The Partnership and Alkermes face, and will continue to face, intense competition in the development, manufacturing, marketing and commercialization of RMP product candidates from academic institutions, government agencies, research institutions, biotechnology and pharmaceutical companies, including its collaborators, and drug delivery companies. The General Partner believes that there are currently no products approved by the FDA for increasing the permeability of the blood-brain barrier. There are, however, many novel experimental therapies for the treatment of brain tumors and central nervous system infections being tested in the United States and Europe. There can be no assurance that developments by others will not render RMP product candidates or technologies obsolete or noncompetitive or that the Company's collaborators will not choose to use competing drug delivery methods. At the present time, Alkermes has no sales force, commercial manufacturing capability for Cereport or marketing experience. In addition, many of the competitors and potential competitors of the Partnership and Alkermes have substantially greater capital resources, manufacturing and marketing experience, research and development resources and production facilities than does Alkermes. Many of these competitors also have significantly greater experience than Alkermes in undertaking preclinical testing and clinical trials of new pharmaceutical products and obtaining FDA and other regulatory approvals. There can be no assurance that the Company will be able to compete successfully with such companies. The existence of products developed by the Company's competitors, or other products or treatments of which the Company is not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products developed by the Company. 12 13 MANUFACTURING AND MARKETING Cereport is a small peptide manufactured using standard synthetic techniques. Alkermes relies on an independent European pharmaceutical company for the manufacture and supply of Cereport. Scale up of Cereport manufacturing process to support international clinical trials and commercial launch has been completed. The Partnership and Alkermes believe that, if necessary, there are other companies which could manufacture and supply the requirements for Cereport. Nevertheless, there can be no assurance that any manufacturer of Cereport will continue to meet demands for quality, quantity, cost and timeliness of delivery. As of September 30, 1997, Alkermes and ALZA entered into an agreement relating to the development and commercialization of Cereport under which ALZA has the option to acquire exclusive worldwide commercialization rights to Cereport, subject to the rights and obligations of the Partnership. If Cereport is commercialized successfully by ALZA, ALZA will pay Alkermes certain milestone payments. Alkermes would be responsible for the manufacturing of Cereport, and the two companies would share approximately equally in profits from sales of the product. See "Collaboration with ALZA Corporation." Alkermes currently has no experience in marketing or selling pharmaceutical products. In order to achieve commercial success for any product candidate approved by the FDA, Alkermes must either develop a marketing and sales force or enter into arrangements with third parties to market and sell its products. There can be no assurance that Alkermes will successfully develop such experience or that it will be able to enter into marketing and sales agreements with others on acceptable terms, if at all. If the Company develops its own marketing and sales capability, it will compete with other companies that currently have experienced and well-funded marketing and sales operations. To the extent that the Company enters into co-promotion or other sales and marketing arrangements with other companies, any revenues received by Alkermes (and consequent payments to the Partnership or the Limited Partners, as applicable) will be dependent on the efforts of others, and there can be no assurance that such efforts will be successful. GOVERNMENT REGULATION The manufacture and marketing of pharmaceutical products in the United States require the approval of the FDA under the Federal Food, Drug and Cosmetic Act. Similar approvals by comparable agencies are required in most foreign countries. The FDA has established mandatory procedures and safety standards which apply to the preclinical testing and clinical trials, manufacture and marketing of pharmaceutical products. Pharmaceutical manufacturing facilities are also regulated by state, local and other authorities. As an initial step in the FDA regulatory approval process, preclinical studies are typically conducted in animal models to assess the drug's efficacy and to identify potential safety problems. The results of these studies must be submitted to the FDA as part of an Investigational New Drug application ("IND"), which must be reviewed by the FDA before proposed clinical testing can begin. Typically, clinical testing involves a three-phase process. Phase I trials are conducted with a small number of subjects and are designed to provide information about both product safety and the expected dose of the drug. Phase II trials are designed to provide 13 14 additional information on dosing and preliminary evidence of product efficacy. Phase III trials are large scale studies designed to provide statistical evidence of efficacy and safety in humans. The results of the preclinical testing and clinical trials of a pharmaceutical product are then submitted to the FDA in the form of a New Drug Application ("NDA"), or for a biological product in the form of a Product License Application ("PLA"), for approval to commence commercial sales. Preparing such applications involves considerable data collection, verification, analysis and expense. In responding to an NDA or PLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not satisfy its regulatory approval criteria. Prior to marketing, any product developed by Alkermes for the Partnership must undergo an extensive regulatory approval process, which includes preclinical testing and clinical trials of such product candidate to demonstrate safety and efficacy. This regulatory process can require many years and the expenditure of substantial resources. Data obtained from preclinical testing and clinical trials are subject to varying interpretations, which can delay, limit or prevent FDA approval. In addition, changes in FDA approval policies or requirements may occur or new regulations may be promulgated which may result in delay or failure to receive FDA approval. Similar delays or failures may be encountered in foreign countries. Delays and costs in obtaining regulatory approvals would have a material adverse effect on the Company's business, financial condition and results of operations. Among the conditions for NDA or PLA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform on an ongoing basis with Good Manufacturing Process ("GMP"). Before approval of an NDA or PLA, the FDA will perform a prelicensing inspection of the facility to determine its compliance with GMP and other rules and regulations. In complying with GMP, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. After the establishment is licensed, it is subject to periodic inspections by the FDA. The requirements which the Company must satisfy to obtain regulatory approval by governmental agencies in other countries prior to commercialization of its or the Partnership's products in such countries can be as rigorous and costly as those described above. The Company is also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research. Compliance with laws and regulations relating to the protection of the environment has not had a material effect on capital expenditures, earnings or the competitive position of the Company. However, the extent of government regulation which might result from any legislative or administrative action cannot be accurately predicted. EMPLOYEES The Partnership and the General Partner do not have any full-time employees. As of March 13, 2001, Alkermes had approximately 400 full-time employees. A significant number of the Company's management and professional employees have had prior experience with 14 15 pharmaceutical, biotechnology or medical product companies. Alkermes believes that it has been highly successful in attracting skilled and experienced scientific personnel; however, competition for such personnel is intense. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its relations with employees to be good. ITEM 2. PROPERTIES The Registrant and the General Partner do not own or lease any property. Alkermes leases and occupies approximately 72,000 square feet at its corporate headquarters in Cambridge, Massachusetts, a portion of which is used by Alkermes in the performance of its obligations to the Partnership. Additionally, during 2000 Alkermes entered into a lease for a new facility to be constructed adjacent to its current headquarters for approximately 145,000 square feet of laboratory, clinical manufacturing and office space. Both leases contain provisions permitting Alkermes to extend the term of such leases for up to two ten-year periods. Alkermes believes that these facilities are adequate for its preclinical and clinical operations. Alkermes does not manufacture and does not expect to manufacture Cereport for clinical trials. Alkermes has engaged a third party to manufacture preclinical, clinical and commercial supplies of Cereport. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no trading market for the Limited Partnership Interests, public or otherwise. Any transfer of a limited partnership interest is severely restricted by certain conditions outlined in the Partnership Agreement, and requires the consent of the General Partner which can be withheld in its sole discretion. As of March 13, 2001, there was one holder of a General Partnership Interest, one holder of a Class B Partnership Interest and 1,105 holders of Class A Partnership Interests. There have been no cash distributions to the partners to date. Distributions in the future, if any, will be made by the General Partner to the partners as soon as practicable after the end of any fiscal quarter, in proportion to the partners' respective capital accounts as of the end of such quarter. Distributable cash, which must be distributed to the partners, is generally defined as the excess of cash revenues over certain expenditures and other amounts determined by the General Partner to be necessary for the proper operation of the Partnership's business. The capital account of each partner will be increased by such partner's cash contributions (net of selling commissions, investment banking fees, warrant valuation fees and financial advisory fees allocated to the Partner) to the Partnership decreased by the amount of any cash distribution and 15 16 the fair market value of other property from the Partnership to such partner, and increased or decreased by such partner's allocation of the net gain or loss of the Partnership for Federal income tax purposes ("Profits" and "Losses", respectively). Partnership profits and losses are allocated 99% to the Limited Partners (pro rata to their capital accounts) and 1% to the General Partner. ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31, ---------------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Statements of Operations Data (1): --------- Total Revenues $ 11,481 $ 232 $ -- $ -- $ -- Total Expenses 4,920,997 4,764 29,348 44,112 37,870 Net Loss (4,909,516) (4,532) (29,348) (44,112) (37,870) Net Loss Per Class A and B Unit $ (5,238) $ (--) $ (--) $ (--) $ (--) =========== =========== =========== =========== =========== Average Class A and B Units Outstanding 921 921 921 921 921 =========== =========== =========== =========== =========== 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Balance Sheets Data: -------------------- Total Assets $ 32,804 $ -- $ -- $ -- $ -- Long-term Obligations -- -- -- -- --
(1) The Partnership did not make any cash distributions to its partners during any of the periods presented. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Partnership was formed on February 7, 1992, and is managed by its general partner, Alkermes Development Corporation II (the "General Partner"), a wholly owned subsidiary of Alkermes. The Partnership was organized to fund the further development and clinical testing of a family of molecules, designated by Alkermes as RMPs, for human pharmaceutical use in the United States and Canada. 16 17 IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS Any statements set forth below or otherwise made in writing or orally by the Partnership or the General Partner with regard to its expectations as to financial results and other aspects of its business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by forward-looking words such as "may", "will", "expects", "anticipates", "believes", "estimates", "continues" or similar words. Although the General Partner believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results of the Partnership's or the Company's development activities and its results of operations will not differ materially from its expectations. Factors which could cause actual results to differ from expectations include, among others: (i) the Partnership and the Company could not be permitted by regulatory authorities to undertake additional clinical trials for Cereport(TM) or clinical trials could be delayed or regulatory authorities could require additional clinical trials before approving Cereport; (ii) clinical trials for Cereport may not proceed as planned, the trials may require more time to enroll patients than anticipated, and even if they are completed Cereport could prove to be ineffective or unsafe; (iii) the Company could incur difficulties or set-backs in obtaining the substantial additional funding required to continue research and development programs and clinical trials; (iv) the Company could reduce or discontinue funding of Cereport; (v) even if Cereport appears promising at an early stage of development, it could fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical, fail to achieve market acceptance, be precluded from commercialization by proprietary rights of third parties or experience substantial competition in the marketplace; and (vi) technological change in the biotechnology or pharmaceutical industries and the approval of other drugs or therapies to treat brain tumors could render Cereport obsolete or noncompetitive. RESULTS OF OPERATIONS Years ended December 31, 2000 and 1999 Revenue The Partnership had no revenue for the years ended December 31, 2000 and 1999. The Partnership anticipates that it will have no revenues in the foreseeable future. 17 18 Expenses Research and development expenses for the years ended December 31, 2000 and 1999 were both zero. The research and development expenses were zero because of the completion of the development funding to Alkermes pursuant to the product development agreement between Alkermes and the Partnership (the "Product Development Agreement"). General and administrative expenses for the year ended December 31, 2000 were $37,870 as compared to $44,112 for the year ended December 31, 1999. The decrease was mainly a result of decreased professional service fees. Alkermes is obligated through the General Partner to perform general and administrative services for the Partnership at its expense, unless Alkermes exercises its Purchase Option and thereby acquires all limited partnership interests in the Partnership (see Liquidity and Capital Resources). Years ended December 31, 1999 and 1998 Revenue The Partnership had no revenue for the years ended December 31, 1999 and 1998. The Partnership anticipates that it will have no revenues in the foreseeable future. Expenses Research and development expenses for the years ended December 31, 1999 and 1998 were both zero. The research and development expenses were zero because of the completion of the development funding to Alkermes pursuant to the Product Development Agreement. General and administrative expenses for the year ended December 31, 1999 were $44,112 as compared to $29,348 for the year ended December 31, 1998. The increase was mainly a result of increased professional service fees. Alkermes is obligated through the General Partner to perform general and administrative services for the Partnership at its expense, unless Alkermes exercises its Purchase Option and thereby acquires all limited partnership interests in the Partnership (see Liquidity and Capital Resources). QUARTERLY FINANCIAL INFORMATION The following table sets forth certain unaudited quarterly data of the Partnership for each of the quarters during calendar years 1999 and 2000. This information has been prepared on the same basis as the annual financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the selected quarterly information when read in conjunction with the annual financial statements and the notes thereto included elsewhere in this document. The quarterly operating results of the Partnership's operations are not necessarily indicative of the results of the Partnership's operations for any other interim period or for a full year. 18 19
QUARTERS ENDED ------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2000 2000 2000 2000 ------------------------------------------------------------------- Revenue: $ -- $ -- $ -- $ -- -------- -------- -------- -------- Expenses: General and administrative 7,754 3,053 6,615 20,448 -------- -------- -------- -------- 7,754 3,053 6,615 20,448 -------- -------- -------- -------- Net Loss $( 7,754) $( 3,053) $( 6,615) $(20,448) ======== ======== ======== ======== Net Loss Per Class A and B Unit $ -- $ -- $ -- $ -- ======== ======== ======== ======== Average Class A and B Units Outstanding 921 921 921 921 ======== ======== ======== ========
QUARTERS ENDED ------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1999 1999 1999 1999 ------------------------------------------------------------------- Revenue: $ -- $ -- $ -- $ -- -------- -------- -------- -------- Expenses: General and administrative 18,208 2,695 4,021 19,188 -------- -------- -------- -------- 18,208 2,695 4,021 19,188 -------- -------- -------- -------- Net Loss $(18,208) $( 2,695) $( 4,021) $(19,188) ======== ======== ======== ======== Net Loss Per Class A and B Unit $ -- $ -- $ -- $ -- ======== ======== ======== ======== Average Class A and B Units Outstanding 921 921 921 921 ======== ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Partnership had no remaining assets or liabilities. The Partnership's primary source of funding and capital resources had been the annual capital contributions by the Limited Partners and the General Partner. The Limited Partners' capital contributions were remitted to the Partnership in four annual installments, the fourth and final payment of which was due on April 15, 1995. There have been and will be no additional capital contributions received by the Partnership from the Limited Partners after the quarter ended June 30, 1996. The Partnership was funding research and development expenses for Cereport from capital contributions received from Partners. Such development was and continues to be conducted for the Partnership by Alkermes pursuant to the Product Development Agreement. The research and development funding to Alkermes ended during the quarter ended June 30, 19 20 1996 when such capital contributions were substantially depleted. None of the Partners is obligated to make any further capital contributions. Because the funding was not sufficient for Alkermes to complete clinical trials and seek regulatory approval of Cereport, Alkermes has used its own resources, and intends to continue to obtain such resources through equity offerings, bank borrowings and its collaborative arrangements. Effective September 30, 1997, Alkermes entered into an agreement with ALZA Corporation related to the development and commercialization of Cereport. Alkermes is required to fund the development of Cereport to maintain its Purchase Option with the Limited Partners. The Partnership used its remaining cash and cash equivalents during the quarter ended September 30, 1997 to pay for administrative services for the Partnership. Alkermes is obligated, through the General Partner, to perform administrative services for the Partnership, such as preparing financial statements, tax returns and reports to the Limited Partners. Alkermes intends to continue to cause the General Partner to perform such services at its expense since the Partnership's current assets are depleted to maintain its Purchase Option with the Limited Partners, unless it exercises its Purchase Option and thereby acquires all limited partnership interests in the Partnership. The activities performed by Alkermes and the General Partner constitute all of the activities undertaken by or on behalf of the Partnership. After December 31, 2000, the Partnership is expected to have no future liquidity or capital resource requirements other than those funded by Alkermes. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 20 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: ALKERMES CLINICAL PARTNERS, L.P. (A LIMITED PARTNERSHIP) Financial Statements as of December 31, 2000 and 1999 and for Each of the Three Years in the Period Ended December 31, 2000 and Independent Auditors' Report 21 22 INDEPENDENT AUDITORS' REPORT To the Partners of Alkermes Clinical Partners, L.P. Cambridge, Massachusetts We have audited the accompanying balance sheets of Alkermes Clinical Partners, L.P. (a Limited Partnership) as of December 31, 2000 and 1999, and the related statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2000 and 1999, and the results of its operations, changes in its partners' capital and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 6 to the financial statements, the Partnership completed its development funding to Alkermes, Inc. (an affiliate) and none of the partners are obligated to make any further capital contributions to the Partnership. Alkermes, Inc., through the General Partner, is obligated to continue to provide administrative services at its expense after the Partnership's assets are depleted to maintain its purchase option with the limited partners and has indicated that it intends to cause the General Partner to perform such administrative services at its expense, unless it exercises its purchase option and acquires all the interests. /s/ Deloitte & Touche LLP Boston, Massachusetts March 21, 2001 22 23 ALKERMES CLINICAL PARTNERS, L.P. (A LIMITED PARTNERSHIP) BALANCE SHEETS DECEMBER 31, 2000 AND 1999 -------------------------------------------------------------------------------- 2000 1999 ASSETS TOTAL ASSETS $ -- $ -- ======== ======== LIABILITIES AND PARTNERS' CAPITAL TOTAL LIABILITIES AND PARTNERS' CAPITAL $ -- $ -- ======== ======== See notes to financial statements. 23 24 ALKERMES CLINICAL PARTNERS, L.P. (A LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 -------------------------------------------------------------------------------- 2000 1999 1998 REVENUE: $ -- $ -- $ -- --------- --------- -------- EXPENSES: General and administrative 37,870 44,112 29,348 --------- --------- -------- 37,870 44,112 29,348 --------- --------- -------- NET LOSS $ (37,870) $ (44,112) $(29,348) ========= ========= ======== NET LOSS PER CLASS A AND B UNIT $ -- $ -- $ -- ========= ========= ======== AVERAGE CLASS A AND B UNITS OUTSTANDING 921 921 921 ========= ========= ======== See notes to financial statements. 24 25 ALKERMES CLINICAL PARTNERS, L.P. (A LIMITED PARTNERSHIP) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 -------------------------------------------------------------------------------- GENERAL PARTNER TOTAL BALANCE, JANUARY 1, 1998 $ -- $ -- General Partner's capital contributions 29,348 29,348 Net loss for year (29,348) (29,348) -------- -------- BALANCE, DECEMBER 31, 1998 -- -- General Partner's capital contributions 44,112 44,112 Net loss for year (44,112) (44,112) -------- -------- BALANCE, DECEMBER 31, 1999 -- -- General Partner's capital contributions 37,870 37,870 Net loss for year (37,870) (37,870) -------- -------- BALANCE, DECEMBER 31, 2000 $ -- $ -- ======== ======== See notes to financial statements. 25 26 ALKERMES CLINICAL PARTNERS, L.P. (A LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 --------------------------------------------------------------------------------
2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(37,870) $(44,112) $(29,348) -------- -------- -------- Net cash used by operating activities (37,870) (44,112) (29,348) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: General Partner's capital contributions 37,870 44,112 29,348 -------- -------- -------- Net cash provided by financing activities 37,870 44,112 29,348 -------- -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS -- -- -- CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR -- -- -- -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ -- $ -- $ -- ======== ======== ========
See notes to financial statements. 26 27 ALKERMES CLINICAL PARTNERS, L.P. (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 -------------------------------------------------------------------------------- 1. ORGANIZATION AND BUSINESS OPERATIONS Alkermes Clinical Partners, L.P. (the "Partnership") was formed on February 7, 1992 and is managed by its general partner, Alkermes Development Corporation II (the "General Partner"), a wholly owned subsidiary of Alkermes, Inc. ("Alkermes"). The Partnership was organized to fund the further development and clinical testing of a family of molecules, designated by Alkermes as Receptor-Mediated Permeabilizers ("RMPs"), for human pharmaceutical use in the United States and Canada. On April 10, 1992, the Partnership and Alkermes sold in a private placement (i) 920 Class A units, each unit (a "Class A Unit") consisting of one Class A limited partnership interest in the Partnership and warrants to purchase shares of Alkermes common stock, and (ii) one Class B unit (the "Class B Unit") consisting of one Class B limited partnership interest (the "Class B Interest") in the Partnership and warrants to purchase shares of Alkermes common stock. The purchase price was $50,000 for each Class A Unit, $10,718 of which was paid at the time of subscription, and the balance of which was evidenced by an investor note (each, an "Investor Note" and collectively, the "Investor Notes"), $12,372 of which was paid during 1993, $14,166 of which was paid during 1994 and the remainder of which was paid in April 1995. The purchase price for the Class B Unit was $100,000, $21,000 of which was paid at the time of subscription, and the balance of which was evidenced by a promissory note, $24,744 of which was paid during 1993, $28,332 of which was paid during 1994 and the remainder of which was paid in April 1995. All warrants issued in the private placement have expired, unless exercised earlier. The net proceeds from the sale of the units were used primarily to fund the further development and clinical testing of RMPs, which testing is being conducted for the Partnership by Alkermes pursuant to a product development agreement by and between Alkermes and the Partnership (the "Product Development Agreement") (see Note 3). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The Partnership prepares its financial statements on the accrual basis of accounting. USE OF ESTIMATES - The preparation of the Partnership's financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during each of the reporting periods. Actual results could differ from those estimates. 27 28 NET LOSS PER CLASS A AND B LIMITED PARTNERSHIP INTEREST - Net loss per Class A and B limited partnership interest is calculated with the net loss attributable only to the limited partners of the partnership (each, a "Limited Partner" and collectively, the "Limited Partners") and excludes the loss attributable to the General Partner. There were no losses attributable to the Limited Partners for the years ended December 31, 2000, 1999 and 1998. INCOME TAXES - Federal and state income taxes are the responsibility of the General Partner and each of the Limited Partners of the Partnership. Accordingly, no provision for income taxes has been recorded. COMPREHENSIVE INCOME - There are no elements of other comprehensive income in the financial statements. 3. PRODUCT DEVELOPMENT AGREEMENT In March 1992, the Partnership entered into the Product Development Agreement with Alkermes, pursuant to which Alkermes licensed to the Partnership certain technologies of Alkermes relating to RMPs. The Partnership paid Alkermes a nonrefundable fee of $1,750,000 under the Product Development Agreement for prior research and costs incurred by Alkermes relating to RMPs and recorded such fee as research and development expense in the period ended December 31, 1992. The Partnership granted to Alkermes an exclusive interim license to manufacture and market RMPs for human pharmaceutical use in the United States and Canada (the "Interim License"). Pursuant to this Interim License, upon the first marketing approval of an RMP product by the United States Food and Drug Administration, the Partnership is to receive a payment from Alkermes equal to 20% of the aggregate capital contributions of all partners (the "Milestone Payment"). Additionally, the Partnership is to receive royalty payments from Alkermes equal to 12% of United States and Canadian revenues and 10% of European revenues, in certain circumstances, from any sales of RMPs by Alkermes. The Interim License will terminate if Alkermes does not exercise its purchase option to acquire all of the Limited Partners' interests in the Partnership, as discussed below. Alkermes, Inc. has been issued five patents, U.S. Patent No. 5,112,596 in May 1992, U.S. Patent No. 5,268,164 in December 1993, U.S. Patent No. 5,506,206 in April 1996, U.S. Patent No. 5,585,355 in December 1996 and U.S. Patent No. 5,686,416 in November 1997, the rights to which have been licensed to the Partnership pursuant to the Product Development Agreement. 28 29 4. PARTNERSHIP PURCHASE OPTION In consideration for the warrants to purchase Alkermes common stock, each Limited Partner has granted to Alkermes an option to purchase (the "Purchase Option"), under certain circumstances, the limited partnership interest in the Partnership held by such Limited Partner. Upon the exercise of the Purchase Option, each owner of a Class A limited partnership interest (a "Class A Limited Partner") will be entitled to receive an initial payment of, at the option of Alkermes, $40,000 in cash or approximately $42,100 in Alkermes' common stock, as well as certain additional payments (which are subject to certain limitations) based on Alkermes' net revenues from sales of RMPs in the United States, Canada and Europe (the "royalty stream") as follows: - 12% of net revenues to Alkermes on sales of RMPs in the United States and Canada and 10% of net revenues to Alkermes on sales of RMPs in Europe, until each Class A Limited Partner has received an aggregate of $400,000 per interest from the initial payment and the royalty stream; and thereafter, - 9% of net revenues to Alkermes on sales of RMPs in the United States, Canada and Europe, until each Class A Limited Partner has received an aggregate of $500,000 per interest from the initial payment and the royalty stream; and thereafter, - 4% of net revenues to Alkermes on sales of RMPs in the United States, Canada and Europe. If Alkermes exercises the Purchase Option, the holder of the Class B Interest (the "Class B Limited Partner") will receive, in addition to an advance payment of $80,000, payable in cash or stock in the same manner as described above for the Class A Limited Partners, quarterly payments equal to (i) prior to the date on which the Class B Threshold (as described below) occurs, the Class B Limited Partner's pro rata portion (based upon the ratio that the Class B Limited Partner's capital contribution bears to the aggregate capital contributions of all Limited Partners) of the royalties described in the previous paragraph, and (ii) beginning on the date on which the Class B Threshold occurs, the Class A Limited Partners will receive only 95% of the above royalties. The Class B Threshold will occur on the first day of the calendar quarter that follows the calendar quarter in which each Class A Limited Partner will have received distributions in an aggregate amount equal to its capital contribution. Royalties on sales of RMPs in Europe will be payable only in certain circumstances. The royalties described above will terminate on the last day of the calendar quarter eleven years after Alkermes exercises the Purchase Option. Alkermes may exercise the Purchase Option to purchase all of the limited partnership interests in the Partnership upon the earlier of: (i) the date that is the later of the last day of the first month in which the Partnership shall have received payments under the Interim License (excluding the Milestone Payment) equal to 15% of the Limited Partners' capital contributions and the expiration of 24 months after the first commercial sale of an RMP product under the Interim License and (ii) the expiration of 48 months after the first commercial sale of an RMP product under the Interim License. None of the above-mentioned events have occurred; accordingly, the Purchase Option still remains outstanding. 29 30 5. PARTNERS' CAPITAL The Partnership allocates its profits or losses for each fiscal year 1% to the General Partner and 99% to the Limited Partners. The Partnership then allocates the profits and losses allocated to the Limited Partners pro rata in accordance with the Limited Partners' capital contributions, as adjusted for certain allocations and returns to each Limited Partner. The capital contributions made by each Class A Limited Partner and the Class B Limited Partner are discussed in Note 1. Losses in excess of the Limited Partners' capital contributions are allocated to the General Partner. If and when the Class B Threshold occurs (see Note 4), the Partnership will allocate to the Class B Limited Partner 5% of profits and losses allocated to the Limited Partners and will allocate to the Class A Limited Partners 95% of profits and losses allocated to the Limited Partners. Such allocation to the Class A Limited Partners will be made pro rata based on such Limited Partners' capital contributions, as adjusted for certain allocations and returns to such Limited Partners. 6. COMPLETION OF SCHEDULED FUNDING For the years ended December 31, 2000, 1999 and 1998, the Partnership incurred no research and development expenses related to the RMP program, notwithstanding the continuing development of such product candidate. The Partnership was providing funding to Alkermes for research and development expenses for Cereport from capital contributions received from Partners. Funding to Alkermes ended during the quarter ended June 30, 1996 when such capital contributions were substantially depleted. None of the Partners of the Partnership is obligated to make any further capital contributions. Since the funding was not sufficient for Alkermes to complete clinical trials and seek regulatory approval of Cereport, Alkermes has used its own resources, and intends to continue to use its own resources, to develop Cereport. Alkermes has obtained and intends to continue to obtain such resources through equity offerings, bank borrowings and its collaborative arrangements. Alkermes is required to fund the development of Cereport to maintain its purchase option with the Limited Partners. Alkermes is also obligated, through the General Partner, to perform administrative services for the Partnership, such as preparing financial statements, tax returns and reports to Partners. During 2000, 1999 and 1998, Alkermes provided such services to the Partnership and has confirmed its intention to provide such services through at least March 31, 2002. Alkermes intends to continue to cause the General Partner to perform such services at its expense since the Partnership's current assets are depleted, unless it exercises its Purchase Option and thereby acquires all the interests in the Partnership. The services performed by Alkermes and the General Partner constitute all of the activities undertaken by or on behalf of the Partnership. After December 31, 2000, the Partnership is expected to have no future liquidity or capital resource requirements other than those funded by Alkermes. 30 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) DIRECTORS OF THE GENERAL PARTNER. Richard F. Pops, age 39 has been a director of the General Partner since its inception in 1992. Mr. Pops has also been Chief Executive Officer and a director of Alkermes since February 1991. From February 1991 to June 1994, Mr. Pops was also President of Alkermes. Mr. Pops also serves on the Board of Directors of Neurocrine Biosciences, Inc., the Biotechnology Industry Organization (BIO), the Massachusetts Biotechnology Council (MBC) and The Brain Tumor Society (a non-profit organization). James M. Frates, age 33, has been a director of the General Partner since June 1998. Mr. Frates has also been the Chief Financial Officer, Vice President, Treasurer and Assistant Secretary of Alkermes since June 1998. From June 1996 to July 1998, he was a Vice President and Senior Associate of Robertson Stephens & Company. In June 1996, he obtained his M.B.A. from Harvard Business School. From July 1992 through September 1994, he was a Senior Associate of Robertson Stephens. Robin Stanley, age 40, has been a director of the General Partner since March 2000. Ms. Stanley has been a Vice President of PaineWebber Development Corporation since 1989. Ms. Stanley is also a director of Repligen Development Corporation, the general partner of Repligen Clinical Partners, L.P. (b) EXECUTIVE OFFICERS OF THE GENERAL PARTNER. Mr. Pops has been the President of the General Partner since its inception and the Chief Executive Officer of the General Partner since 1993. Mr. Frates has been the Chief Financial Officer, Vice President, Treasurer and Assistant Secretary of the General Partner since June 1998. ITEM 11. EXECUTIVE COMPENSATION The General Partner receives no compensation for performing its duties under the Partnership Agreement. It will receive only its pro rata share of Partnership distributions and distributions upon liquidation of the Partnership and reimbursement for its expenditures for the payment of properly incurred obligations of the Partnership. Furthermore, the officers and directors of the General Partner receive no compensation other than reimbursement for appropriate expenses incurred while conducting the business of the General Partner. 31 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of all directors who own any class of the Partnership's securities and all persons known to the Partnership to be the beneficial owners of more than 5% of any class of the Partnership's securities as of March 13, 2001 is as follows:
Name and Address of Percent of Title of Class Beneficial Owner Beneficial Ownership Class -------------- ------------------- -------------------- ---------- General Partner Interest Alkermes Development One General Partner Interest 100.0% Corporation II 64 Sidney Street Cambridge, MA 02139 Class A Limited PaineWebber R&D Partners 133 Class A Limited 14.5% Partnership Interests III, L.P. Partnership Interests 1285 Avenue of the Americas New York, NY 10019 Alkermes, Inc. 74 Class A Limited 8.0% 64 Sidney Street Partnership Interests Cambridge, MA 02139 Robin Stanley 1/2 Class A Limited Less than 1% c/o PaineWebber Inc. Partnership Interest 703 Trancas Street Napa, CA 94588 Class B Limited PaineWebber Development One Class B Limited 100.0% Partnership Interest Corporation Partnership Interest 1285 Avenue of the Americas New York, NY 10019
Exclusive management and control of the Partnership's business is vested in the General Partner. As of March 13, 2001 none of the directors or officers of the General Partner have any security ownership in the Partnership other than as described above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Pops and Mr. Frates are officers of Alkermes and Mr. Pops is also a director of Alkermes. In March 1992, the Partnership entered into certain agreements with Alkermes, which are described above in Item 1. In the year ended December 31, 2000, Alkermes made capital contributions to the Partnership, through the General Partner, of $37,870 to cover all of the Partnership's general and administrative expenses. 32 33 The purchase price for Class A Units was paid in four annual installments. The final payment was due on April 15, 1995. The holders of 74 Class A Units failed to pay all of such payments and the Partnership foreclosed on such units. In February and April 1996, Alkermes subsequently purchased these Class A Units for approximately $2,052,000, the amount of the uncollected payments. Such amount was recorded as equity inflows in 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of the Report: (1) Financial Statements of the Registrant and Independent Auditors' Report thereon: Independent Auditors' Report. Balance Sheets, December 31, 2000 and 1999. Statements of Operations for the Years Ended December 31, 2000, 1999, and 1998. Statements of Changes in Partners' Capital for the Years Ended December 31, 2000, 1999 and 1998. Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998. Notes to Financial Statements. (2) Financial Statement Schedules: Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto. (3) Exhibits
Exhibit Number ------- 3.1 Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of February 7, 1992.* 3.1(a) Amendment No. 1 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of September 29, 1992.* 3.1(b) Amendment No. 2 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of March 30, 1993.*
33 34 4.1 Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of February 7, 1992.* 4.1(a) Amendment No. 1 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of September 29, 1992.* 4.1(b) Amendment No. 2 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of March 30, 1993.* 10.1 Product Development Agreement, dated as of March 6, 1992, between the Partnership and Alkermes.* 10.2 Purchase Agreement, dated as of March 6, 1992, by and among Alkermes and each of the Limited Partners, from time to time, of the Partnership.*
* Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form 10 filed September 13, 1995. (b) Since the beginning of the quarter ended December 31, 2000 the Registrant has not filed any reports on Form 8-K. 34 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALKERMES CLINICAL PARTNERS, L.P. (Registrant) By its General Partner ALKERMES DEVELOPMENT CORPORATION II Date: April 2, 2001 By: /s/ Richard F. Pops ------------------------------------ Richard F. Pops President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the General Partner of the Registrant on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Richard F. Pops Director, President and Chief April 2, 2001 ------------------- Executive Officer (Principal Richard F. Pops Executive Officer) /s/ James M. Frates Director, Vice President, April 2, 2001 ------------------- Chief Financial Officer, James M. Frates Treasurer and Assistant Secretary (Principal Financial and Accounting Officer) /s/ Robin Stanley Director April 2, 2001 ------------------- Robin Stanley
35 36 ALKERMES CLINICAL PARTNERS, L.P. ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX
Exhibit Number Exhibit ------- ------- 3.1 Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of February 7, 1992.* 3.1(a) Amendment No. 1 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of September 29, 1992.* 3.1(b) Amendment No. 2 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of March 30, 1993.* 4.1 Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of February 7, 1992.* 4.1(a) Amendment No. 1 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of September 29, 1992.* 4.1(b) Amendment No. 2 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of March 30, 1993.* 10.1 Product Development Agreement, dated as of March 6, 1992, between the Partnership and Alkermes.* 10.2 Purchase Agreement, dated as of March 6, 1992, by and among Alkermes and each of the Limited Partners, from time to time, of the Partnership.*
* Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form 10 filed September 13, 1995. 36