Annual Reports

  • 10-K (Mar 3, 2014)
  • 10-K (Mar 4, 2013)
  • 10-K (Mar 2, 2011)
  • 10-K (Mar 12, 2010)
  • 10-K (Mar 4, 2009)
  • 10-K (Feb 29, 2008)

 
Quarterly Reports

 
8-K

 
Other

Dyax 10-K 2005

 

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, 2004

OR

o                                 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 000-24537


DYAX CORP.

(Exact name of Company as specified in its charter)

Delaware

04-3053198

(State of Incorporation)

(IRS Employer Identification No.)

300 Technology Square, Cambridge, Massachusetts 02139

(Address of principal executive offices and zip code)

Company’s telephone number, including area code: (617) 225-2500

 

Securities registered pursuant to Section 12(b) of the Act:

 

None

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $.01 Par Value

 

 

(Title of Class)


Indicate by checkmark whether the Company (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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company’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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x  No o

The aggregate market value of the Company’s common stock held by nonaffiliates of the Company as of the last business day of the Company’s most recently completed fiscal second quarter, June 30, 2004, based on the last reported sale price of the Company’s common stock on The NASDAQ National Market as of the close of business on that day, was $368,368,105. The number of shares outstanding of the Company’s Common Stock, $.01 Par Value, as of February 25, 2005, was 31,578,981.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Definitive Proxy Statement for its 2005 Annual Meeting of Shareholders to be held on May 19, 2005, which Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the Company’s fiscal year-end of December 31, 2004, are incorporated by reference into Part III of this Form 10-K.

 




As used in this Form 10-K, “Dyax,” “Company,” “we,” “ours,” and “us” refer to Dyax Corp., except where the context otherwise requires or as otherwise indicated.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements, including statements regarding our results of operations, financial resources, research and development programs, clinical trials and collaborations. Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the industry and markets in which we compete. The statements contained in this report are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Important factors which may affect future operating results, research and development programs, clinical trials and collaborations include, without limitation, those set forth in Exhibit 99.1 “Important Factors That May Affect Future Operations and Results” to this Form 10-K, which is incorporated into this report by this reference.




ANNUAL REPORT ON FORM 10-K
INDEX

Item No.

 

Page

PART I

1.

Business

1

2.

Properties

17

3.

Legal Proceedings

17

4.

Submission of Matters to a Vote of Security Holders

17

PART II

 

5.

Market for the Company’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities

17

6.

Selected Consolidated Financial Data

18

7.

Management’s Discussion and Analysis of Financial Condition and Results of
Operations

19

7A.

Quantitative and Qualitative Disclosures about Market Risk

34

8.

Financial Statements and Supplementary Data

35

9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure

63

9A.

Controls and Procedures

63

9B.

Other Information

63

PART III

 

10.

Directors and Executive Officers of the Company

64

11.

Executive Compensation

64

12.

Security Ownership of Certain Beneficial Owners and Management

64

13.

Certain Relationships and Related Transactions

65

14.

Principal Accountant Fees and Services

65

PART IV

 

15.

Exhibits and Financial Statement Schedules

65

 

Signatures

69

 

 




PART I

ITEM 1.   BUSINESS

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel biotherapeutics for unmet medical needs, with an emphasis on cancer and inflammatory indications. We currently have two product candidates in or entering into Phase II clinical trials for three indications, and we are planning to initiate a Phase III trial of our lead product candidate in the first half of 2005. DX-88, a novel kallikrein inhibitor, is being studied in collaboration with Genzyme Corporation for the treatment of hereditary angioedema, or HAE, a genetic disease that can cause swelling of the larynx, gastrointestinal tract and extremities. Independent of our collaboration with Genzyme, we are also studying DX-88 for the prevention of blood loss and other systemic inflammatory responses for patients undergoing on-pump, open-heart surgery, specifically coronary artery bypass graft, or CABG, surgery. Our second product candidate, DX-890, a novel inhibitor of neutrophil elastase, is being developed in collaboration with Debiopharm S.A. which is studying it for the treatment of cystic fibrosis. Both DX-88 and DX-890 have received orphan drug designation for their lead indications in the United States and the European Union and DX-88 has been granted Fast Track designation by the U.S. Food and Drug Administration, or FDA, for the treatment of HAE.

DX-88 and DX-890 were identified using our patented phage display technology, which rapidly selects antibodies, peptides and small proteins that bind with high affinity and specificity to therapeutic targets. We are using this powerful discovery engine to build a pipeline of drug candidates that we may advance into clinical development on our own or in partnership with other companies. We also leverage phage display technology broadly through collaborations and licenses that are structured to generate revenues through research funding, license fees, technical and clinical milestone payments, and royalties. Currently, over 75 companies and research institutions, including Amgen Inc., Biogen Idec, Inc., Genzyme Corporation, ImClone Systems, Inc., Human Genome Sciences, Inc. MedImmune, Inc. and Tanox, Inc., have licenses to use our phage display technology and phage display derived compounds to research and develop therapeutic, diagnostic and other products.

We have accumulated losses since inception as we have invested in the development of our therapeutic product candidates and in our ongoing research and discovery programs. We seek to offset some of these research and development costs by generating revenue from the partnering of our portfolio of product candidates and by leveraging our phage display technology. We do not expect to generate profits until therapeutic products from our development portfolio reach the market. Obtaining regulatory approvals to market therapeutic products is a long and arduous process. While we cannot currently predict with any accuracy when, if ever, we will obtain such approvals, we anticipate filing a BLA for DX-88 for HAE in 2006 if the planned Phase III clinical trial is successful and completed on schedule.

We incorporated in Delaware in 1989 and merged with Protein Engineering Corporation in August 1995.

Our Business Strategy

The following are the principal elements of our strategy:

Develop our proprietary biopharmaceutical products now in the clinic.   We have two internally discovered and developed small proteins now in clinical trials for three indications.

·  DX-88 for HAE.   In a 50/50 collaboration with Genzyme, we are developing DX-88 as a treatment for HAE. Currently, we are conducting an open-label, repeat dose Phase II clinical trial known as EDEMA2 and plan to initiate a Phase III clinical trial, referred to as EDEMA3, during the first half

1




of 2005. If the EDEMA3 trial is successful and completed on schedule, we, together with Genzyme, currently anticipate filing a BLA for DX-88 for the treatment of HAE in the United States and an equivalent Marketing Authorization Application for DX-88 for the treatment of HAE in the European Union in 2006.

In parallel with our clinical program in HAE, in collaboration with Genzyme we are also developing a subcutaneous formulation of DX-88 for at-home use. We are currently accelerating the development of the subcutaneous formulation because we believe that an at-home product would give patients the most control over the debilitating effects of HAE and will also maximize the market potential for DX-88.

·  DX-88 for CABG.   We are independently developing DX-88 as a treatment for patients undergoing CABG surgery. We retain all commercial rights for DX-88 in all surgical indications. Subject to the successful completion of ongoing negotiations to partner this indication with another company, we are planning to conduct a Phase II trial in the United States to compare DX-88 to aprotinin, currently marketed by Bayer AG under the name Trasylol®, for reduction of blood loss in CABG patients. The trial in the United States is currently planned to involve approximately 100 patients and may be expanded to a larger trial following an interim analysis of the data.

·  DX-890 for cystic fibrosis.   In collaboration with Debiopharm S.A., DX-890 is being developed as a treatment for cystic fibrosis and Debiopharm recently initiated a placebo-controlled Phase II clinical trial for this indication. We are currently negotiating with Debiopharm to amend our collaboration agreement in order to provide Debiopharm worldwide rights to independently develop and commercialize DX-890 for cystic fibrosis and acute respiratory distress syndrome (ARDS). Under the proposed amendment, we would receive milestones and royalties from Debiopharm in connection with its ongoing development of DX-890. We would also receive worldwide rights to commercialize our independently developed, long-acting, pegylated form of DX-890 (known as PEG-DX-890). Currently, we are exploring the potential for advancing PEG-DX-890 into development for other pulmonary indications, which could include chronic obstructive pulmonary disease (COPD) and alpha-1 antitrypsin deficiency.

Discover and develop additional proprietary biopharmaceutical products.   We are also expanding our pipeline by identifying antibodies, peptides and small proteins that may be developed as product candidates, primarily for the treatment of some inflammatory diseases and cancers. We intend to discover new leads for targets that we identify or license from others. We intend to develop and commercialize these leads ourselves or through collaborative arrangements.

Leverage our phage display technology.   We use our phage display technology to advance our business objectives in a variety of ways:

·  Through biopharmaceutical product collaborations.   We are leveraging our technology and maximizing our opportunities through collaborative arrangements with several biotechnology and pharmaceutical companies for the discovery and/or development of antibody and peptide-based biopharmaceuticals.

·  By licensing our phage display patents and libraries.   We are further creating value from our phage display technology by licensing our patents and phage display libraries to companies and institutions on a non-exclusive basis to encourage the broad application of our technology.

·  In non-therapeutic areas.   We also offer our phage display technology to collaborators and licensees operating outside of the therapeutic field to develop diagnostic products for in vivo imaging and in the areas of separations and research reagents.

2




Continue to extend our intellectual property and technology.   We plan to continue to develop our technology internally and may acquire technology that is complementary to our existing technology. Through our patent licensing program, we will continue to enhance our phage display technology by gaining access to phage display improvements that our licensees develop. We have also entered into cross licensing agreements under which we have licensed our phage display patents to third parties and have received in the same agreements rights to practice under the phage display related patents of these third parties.

Clinical Development Programs

Our clinical development program consists of two product candidates that we discovered and developed using our proprietary phage display technology. These product candidates are now in clinical trials for three indications.

DX-88.   The enzyme plasma kallikrein is a key component responsible for the regulation of the inflammation and coagulation pathways. Excess plasma kallikrein activity is thought to play a role in a number of inflammatory and autoimmune diseases. Using phage display, we have developed DX-88, which we have shown in vitro to be a high affinity, high specificity inhibitor of human plasma kallikrein. We believe that the profile of DX-88 may allow for fewer side effects and/or greater efficacy than other marketed inhibitors of kallikrein, which lack DX-88’s specificity and affinity for plasma kallikrein.

·  Treatment of HAE.   Hereditary angioedema, or HAE, affects between 13,000 and 66,000 individuals in the United States and Europe. HAE is a genetic disease that can cause swelling of the larynx, gastrointestinal tract and extremities. Severe swelling of the larynx is life threatening and may require insertion of a breathing tube into the airway to prevent asphyxiation. In the United States, the only currently approved and available treatments are steroids, pain control, restriction of the inciting activity (e.g., repetitive motion such as typing or hammering), and rehydration. Patients are frequently given synthetic anabolic steroids but these have a variety of side effects and may not be well tolerated. Published research indicates that plasma kallikrein is a primary mediator of both the pain and swelling in HAE. We believe that DX-88 has the potential to decrease both the severity and frequency of symptoms during acute HAE attacks and, therefore, may provide an effective treatment for this disease.

In collaboration with Genzyme, we are developing DX-88 as a treatment for HAE. In March 2003, we successfully completed a nine patient Phase II, dose ranging clinical trial in Europe and reported positive results. In May 2004, we successfully completed a Phase II, 48 patient, dose escalating placebo-controlled study, known as EDEMA1, in which DX-88 achieved statistical significance with respect to the primary clinical endpoint of the trial: significant improvement within four hours. Additionally, DX-88 was well tolerated and a clinical benefit was observed for all types of HAE attacks, including potentially fatal laryngeal attacks. Currently, we are conducting an open-label, repeat dose Phase II clinical trial known as EDEMA2, a multi-center trial with 21investigational sites in the United States and Canada. EDEMA2 is designed to evaluate the safety and efficacy of DX-88 when administered to patients suffering multiple, separate attacks of HAE. To date, there have been no serious adverse events reported in the EDEMA2 trial and the interim results, based on the analysis of 61 attacks treated with DX-88 in 34 patients, suggest that DX-88 can provide repeated therapeutic benefit to HAE patients and that there is no apparent decrease in DX-88’s effects on HAE in patients exposed to multiple doses. We also plan to initiate a Phase III clinical trial of DX-88 for the treatment of HAE, referred to as EDEMA3, during the first half of 2005. If the EDEMA3 trial is successful and completed on schedule, we, together with Genzyme, currently anticipate filing a BLA for DX-88 for the treatment of HAE in the United States and an equivalent Marketing Authorization Application for DX-88 for the treatment of HAE in the European Union

3




in 2006. DX-88 for the treatment of HAE has received orphan drug designation in the United States and the European Union and has been granted Fast Track designation by the FDA.

In addition to the intravenous formulation of DX-88 that has been and is being used in our current clinical trials, Dyax and Genzyme are developing a subcutaneous formulation that would allow at-home use. We believe that an at-home product will give patients the most control over the debilitating effects of HAE and also maximize the market potential for DX-88. Therefore, we are currently accelerating the development of the subcutaneous formulation.

·  Mitigation of complications of CABG.   In the United States, there are over 500,000 cardiac surgeries annually that use cardiopulmonary bypass, the majority of which involve CABG procedures. On-pump, open-heart surgery elicits a systemic inflammatory response, which adversely affects the patient post-operatively. Many patients undergoing CABG experience significant intraoperative blood loss, requiring transfusion. In addition, an estimated 25% of patients have post-operative cardiac, pulmonary, hematologic or renal dysfunction. Kallikrein has been implicated in the body’s response to on-pump, open-heart surgery as a major contributor to the significant blood loss seen in CABG patients and to the pathologic inflammation that plays a role in the complications of CABG surgery.

We are currently developing DX-88 as a treatment for patients undergoing CABG surgery. This program is being conducted independent of our collaboration with Genzyme with respect to DX-88 for the treatment of HAE and we retain all commercial rights to DX-88 for all surgical indications. In December 2003, we completed the evaluation of DX-88 in a Phase I/II trial in the United States in patients undergoing CABG surgery. Subject to the successful completion of ongoing negotiations to partner this indication with another company, we are planning to conduct a Phase II trial in the United States to compare DX-88 to aprotinin, currently marketed by Bayer AG under the name of Trasylol®, for reduction of blood loss in CABG patients. The trial in the United States is currently planned to involve approximately 100 patients and may be expanded to a larger clinical trial following an interim analysis of the data. We believe that DX-88 may have benefits over this existing therapy, as it is a recombinant human protein rather than animal derived, which may make it appear less foreign to the patient’s immune system. DX-88 has also been shown in vitro to be 1,000 times more potent than aprotinin as an inhibitor of plasma kallikrein. In addition, recent studies have also demonstrated neuroprotective effects of DX-88 on brain ischemia and reperfusion injury in an animal model, indicating the potential for DX-88 to treat or prevent neurocognitive deficit that may occur as a result of CABG surgery. These findings have led us to consider expanding the profile of DX-88 to include an evaluation of neurocognitive protection in future clinical trials.

DX-890.   In a number of inflammatory diseases, the body secretes an excessive amount of the enzyme known as neutrophil elastase, or elastase. While elastase plays an important role in normal body function, in inflammatory conditions it can lead to the destruction of normal tissue. Using phage display technology, we have developed a novel human neutrophil elastase inhibitor, DX-890. This inhibitor binds to elastase with high affinity and high specificity, suggesting that it may be a potent inhibitor for treatment of elastase mediated diseases.

There are approximately 55,000 patients in the United States and Europe who suffer from cystic fibrosis. The median survival age of cystic fibrosis patients is approximately 32 years. A genetic mutation causes a number of problems including progressive lung destruction and frequent infections in these patients. Large amounts of elastase are found in the lungs of cystic fibrosis patients where it is thought to play a significant role in the disease process. The elastase directly destroys lung tissue and contributes to recurrent pulmonary infections, a cycle of inflammation, and repeated tissue destruction. Current treatments inadequately prevent this cycle of inflammation, infection, and destruction of tissue. By

4




blocking elastase, we believe that DX-890 may significantly prevent tissue destruction in cystic fibrosis and preserve pulmonary function.

Our collaborator for DX-890, Debiopharm, has completed two Phase IIa clinical trials of DX-890 in Europe, one in adult and one in pediatric cystic fibrosis patients, and has recently initiated a placebo-controlled Phase IIb trial for cystic fibrosis. Currently, we are in negotiations with Debiopharm to amend our collaboration agreement in order to provide Debiopharm worldwide rights to independently develop and commercialize DX-890 for cystic fibrosis and acute respiratory distress syndrome (ARDS). Under the proposed amendment, we would receive milestones and royalties from Debiopharm in connection with its ongoing development of DX-890. We would also receive worldwide rights to commercialize our independently developed, long-acting, pegylated form of DX-890 (known as PEG-DX-890). Currently, we are exploring the potential for advancing PEG-DX-890into development for other pulmonary indications, which could include chronic obstructive pulmonary disease (COPD) and alpha-1 antitrypsin deficiency.

Collaborations For Clinical Development

Genzyme.   Under our collaboration agreement with Genzyme Corporation, we have established a joint venture, Dyax–Genzyme LLC (formerly known as Kallikrein LLC), which now owns the rights to DX-88 for the treatment of HAE. Dyax and Genzyme are each responsible for 50% of ongoing costs incurred in connection with the development and commercialization of DX-88 for HAE and each will be entitled to receive approximately 50% of any profits realized as a result. In addition, we are entitled to receive potential milestone payments from Genzyme in connection with the development of DX-88. The first such milestone payment, approximately $3.0 million, is due upon dosing the first patient in a pivotal clinical trial of DX-88 for HAE, which we anticipate will occur during 2005. In addition, we will be entitled to receive potential milestone payments of $10.0 million for the first FDA-approved product derived from DX-88, and up to $15.0 million for additional therapeutic indications developed under the collaboration.

The term of the joint venture is perpetual unless terminated by either party with prior written notice, upon a material breach by the other party or immediately upon a change of control or bankruptcy of the other party. We currently anticipate that this collaboration will not terminate until the parties determine that no commercial products will result from the collaboration or, if commercial products are eventually sold, until the sale of those products is no longer profitable. Because the drug discovery and approval process is lengthy and uncertain, we do not expect to be able to determine whether any commercial products will result under this collaboration until the completion of clinical trials.

When we first amended the collaboration agreement in May 2002, we also executed a senior secured promissory note and security agreement under which Genzyme agreed to loan us up to $7.0 million and we agreed to grant Genzyme a continuing security interest in certain tangible and intangible personal property arising out of the DX-88 program. In addition, under the terms of the security agreement, once we exercised our option to purchase Genzyme’s interest in the application of DX-88 in on-pump, open-heart surgery and other surgical indications, we were required to pledge to Genzyme a percentage interest in our wholly owned subsidiary, Biotage. Under an amendment to the security agreement executed on October 15, 2003, Genzyme agreed to release the interest in Biotage pledged to it in exchange for a continuing security interest in Dyax’s rights to revenues from licenses of its fundamental phage display patent portfolio known as the Ladner patents. The security agreement, as amended, contains certain financial covenants under which we must (i) maintain at least $20.0 million in cash, cash equivalents and short-term marketable securities based on the Company’s quarterly consolidated financial statements and (ii) continue to satisfy at least one standard for continued listing of our securities on the NASDAQ National Market. As of December 31, 2004, we had borrowed the full $7.0 million available under the note.

5




Debiopharm.   We have a collaboration and license agreement with Debiopharm S.A., under which Debiopharm is developing our neutrophil elastase inhibitor, DX-890, for the treatment of cystic fibrosis. This agreement arose out of our March 1997 research and development program with Debiopharm for the clinical development of DX-890. Debiopharm is responsible for all preclinical and clinical trials and all costs associated with the clinical development of DX-890. Under our collaboration and license agreement, Debiopharm has exclusive rights to commercialize DX-890 in Europe for cystic fibrosis, acute respiratory distress syndrome (ARDS) and chronic obstructive pulmonary disease (COPD) and for these indications we have retained the rights to North America and the rest of the world. If we wish to outlicense the commercialization of any of these indications to a third party outside of Europe, Debiopharm has a right of first refusal to obtain the outlicensing rights. We have also retained worldwide rights to DX-890 for all other therapeutic indications, subject to Debiopharm’s first right to negotiate for a license in Europe should another party not already have such rights or if we do not wish to retain the indication. Under this collaboration, we are entitled to receive a percentage of revenues generated by Debiopharm from the commercialization of the cystic fibrosis product in Europe and we will pay Debiopharm a percentage of royalties we receive on product sales outside of Europe. None of the product candidates developed under this collaboration has been approved for sale. Thus, we have neither paid nor received any royalties to date and our future receipts of royalties will depend on future sales of any products that may be developed and approved for sale. The parties’ financial obligations to each other on product sales will expire on the later of ten years from the first commercial sale of a product or the life of the patent rights covering the product.

To date, Debiopharm’s progress in connection with the clinical development of DX-890 has been slower than expected, especially with regard to achieving clinical milestones established under our collaboration agreement. As a result of this issue, we are currently negotiating with Debiopharm to amend our collaboration agreement in order to provide Debiopharm worldwide rights to independently develop and commercialize DX-890 for cystic fibrosis and ARDS. Under the proposed amendment, we would receive milestones and royalties from Debiopharm in connection with its ongoing development of DX-890. We would also receive worldwide rights to commercialize our independently developed, long-acting, pegylated form of DX-890 (known as PEG-DX-890). Currently, we are exploring the potential for advancing PEG-DX-890 into development for other pulmonary indications, which could include chronic obstructive pulmonary disease (COPD) and alpha-1 antitrypsin deficiency.

Other Biopharmaceutical Discovery and Development Programs

We are pursuing biopharmaceutical discovery and development programs in the fields of immunology, tumor angiogenesis, tumor biology and inflammation using our optimized phage libraries that express human antibodies, peptides and small proteins. We have been able to establish a broad discovery platform to identify compounds that interact with a wide array of targets that have been shown to be involved in pathologic processes and are membrane proteins or circulating proteins. Our discovery processes have been automated, thus we are now able to evaluate a large number of molecules binding to each target. In this way we can rapidly identify and select a specific antibody, peptide or small protein with the desired biochemical and biological characteristics. While our discovery research efforts are focused primarily on monoclonal antibodies, we are also testing the in vitro and in vivo efficacy of several of our peptide and small protein compounds.

We have a total of seven discovery and development programs underway in oncology, three of which are in collaboration with other companies. These programs are focused on the discovery and development of therapies that fight cancer primarily in three ways: inhibiting angiogenesis (the growth of blood vessels); inhibiting proteases believed to be associated with tumor growth and proliferation; and targeting cell surface proteins believed to be over expressed by certain tumors. We also have four discovery and development programs focused on targets that are believed to be important mediators of inflammation, one of which we are developing in collaboration with another company. In addition, in collaboration with another company, we have a discovery and development program focused on an infectious disease target.

6




Dyax’s Phage Display Technology

Molecular binding is the key to the function of most biopharmaceutical products. The binding of a molecule to a target is the mechanism nature uses to modulate biochemical and physiological processes such as cellular growth, differentiation, metabolism and death. Naturally occurring binding molecules typically distinguish between the correct target and other closely related molecules (specificity), and bind more tightly to the target than non-target molecules (affinity), under appropriate physiological conditions. Biopharmaceutical products bind to targets, including cellular receptors and enzymes, to achieve a desired effect, and those with higher affinity and specificity are thought to be preferable. Binding also plays a significant role in diagnostics, research reagents and separations products.

Living organisms, such as viruses, have the ability to display a foreign gene product, or protein, on their surfaces. Based on this ability of organisms to display proteins, our scientists in the late 1980s invented protein phage display, a novel method to individually display up to tens of billions of human antibodies, peptides and small proteins on the surface of a small bacterial virus called a bacteriophage or phage. Using phage display, we are able to produce and search through large collections, or libraries, of antibodies, small proteins and peptides to rapidly identify those compounds that bind with high affinity and high specificity to targets of interest. Our phage display process generally consists of the following steps:

Generating a phage display library.   The generation of a phage display library is based upon a single protein framework and contains tens of billions of variations of this protein. The first step in generating a library is the selection of the protein framework upon which the library will be created. This selection is based on the desired product properties, such as structure, size, stability, or lack of immunogenicity. We then determine which amino acids in the framework will be varied, but do not vary amino acids that contribute to the framework structure. We also control the exact numbers and types of different amino acids that are varied, so that the resulting phage display library consists of a diverse set of chemical entities, each of which retains the desired physical and chemical properties of the original framework.

The next step is the creation of a collection of genes that encode the designed variations of the framework protein. We can easily generate diverse collections of up to hundreds of millions of different synthetic DNA sequences. Each new DNA sequence, or gene, encodes a single protein sequence that will be displayed on the surface of the individual phage that contains this gene. The scientists combine the new DNA sequences with phage genome DNA and certain enzymes so that the new DNA is inserted into a specific location of the phage genome. The result is that the new protein is displayed on the phage surface fused to one of the naturally occurring phage proteins. The phage acts as a physical link between the displayed protein and its gene.

In addition to fused synthetic DNA sequences, we can also use naturally occurring genes, such as cDNA, which are sequences that represent all of the expressed genes in a cell or organism, to create a library. We have also inserted genes from antibody expressing human cells into the phage genome. Using these genes, we have constructed phage display libraries that express tens of billions of different human antibodies on the phage surface. From one of these libraries, individual antibody fragments can be selected and used to build highly specific human monoclonal antibodies.

The new phage genome is then transferred into laboratory bacteria, where the phage genome directs the bacterial cells to produce thousands of copies of each new phage. The collection of phage displaying multiple antibodies, peptides or small proteins is referred to as a phage display library. Because we can reproduce the phage display library by infecting a new culture of laboratory bacteria to produce millions of additional copies of each phage, we can use each library for a potentially unlimited number of screenings.

Screening phage display libraries.   We can then select binding compounds with high affinity and high specificity by exposing the library to specified targets of interest and isolating the phage that display compounds that bind to the target. For certain applications of phage display, such as separations, we can

7




design the binding and release conditions into the selection process. Each individual phage contains the gene encoding one potential binding compound, and when its displayed protein is selected in the screening procedure, it can be retrieved and amplified by growth in laboratory bacteria.

To screen a phage display library, we expose the library to the target under desired binding conditions. The target is normally attached to a fixed surface; such as the bottom of a tube, or a bead, allowing removal of phage that do not express binding compounds that recognize the target. Once these unbound phage are washed away, the phage containing the selected binding compounds can be released from the target. Since the phage are still viable, they can be amplified rapidly by again infecting bacteria. The capacity of the phage to replicate itself is an important feature that makes it particularly well suited for rapid discovery of specific binding compounds. We can amplify a single phage by injecting it into bacteria and producing millions of identical phage in one day.

If the binding affinity of the compounds identified in an initial screening for a target is not considered sufficiently high, information derived from the binding compounds identified in the initial screening can be used to design a new focused library. The design, construction and screening of a second generation library, known as affinity maturation, can lead to increases of 10-to 100-fold in the affinity of the binding compounds for the target.

Evaluation of selected binding compounds.   Screening phage display libraries generally results in the identification of one or more groups of related binding compounds such as antibodies, peptides or small proteins. These groups of compounds are valuable in providing information about which chemical features are necessary for binding to the target with affinity and specificity, as well as which features can be altered without affecting binding. Using DNA sequencing, we can determine the amino acid sequences of the binding compounds and identify the essential components of desired binding properties by comparing similarities and differences in such sequences. If desired, scientists can further optimize the binding compounds by building additional phage display libraries based on these key components and repeating this process. We can complete the entire selection process in several weeks. We can produce small amounts of the binding compound by growing and purifying the phage. For production of larger amounts, we can remove the gene from the phage DNA and place it into a standard recombinant protein expression system. Alternatively, if the identified binding compound is sufficiently small, it can be chemically synthesized. These binding compounds can be evaluated for desired properties including affinity, specificity and stability under conditions that will be encountered during its intended use. From each group of compounds, scientists can identify, develop and test a compound with the desired properties for utility as a biopharmaceutical, diagnostic, research reagent or affinity separations product.

The entire phage display process for identifying compounds that bind to targets of interest is nearly identical whether the ultimate product is to be used for biopharmaceuticals, diagnostics, research reagents or separations, which allows for an efficient use of scientific resources across a broad array of commercial applications.

Advantages of phage display technology in therapeutic drug discovery.   We believe our phage display technology has the following advantages over other drug discovery technologies:

·       Diversity and abundance.   Many of our phage display libraries contain billions of potential binding compounds that are rationally-designed variations of a particular antibody, peptide or small protein framework. Furthermore, we can isolate a diverse family of genes by including, for example, those that encode human antibodies. The size and diversity of our libraries significantly increase the likelihood of identifying binding compounds with high affinity and high specificity for the target. Once we generate libraries, we can reproduce them rapidly in phage and use them for an unlimited number of screenings.

8




·       Speed and cost effectiveness.   We can construct phage display libraries in a few months and screen them in a few weeks to identify binding compounds. Conventional or combinatorial chemistry approaches require between several months and several years to complete this process. Similarly, mouse and human-mouse technologies generally require four to six months to identify an antibody. As a result, our phage display technology can significantly reduce the time and expense required to identify an antibody, peptide or small protein with desired binding characteristics.

·       Automated parallel screening.   In an automated format, we can apply our phage display technology to many targets simultaneously to discover specific, high-affinity proteins, including human monoclonal antibodies, for each target. In contrast, human-mouse antibody technology identifies antibodies that bind to a single target per test group of mice and is difficult to automate. Among antibody technologies, phage display is particularly well suited for functional genomic applications, due to the large number of genetic targets that need to be screened for specific antibodies.

·       Rapid optimization.   We screen phage display libraries to identify binding compounds with high affinity and high specificity for the desired target and can design and produce successive generations of phage display libraries to further optimize the leads. We have demonstrated between 10- and 100-fold improvement in binding affinity with second-generation phage display libraries. Optimization of humanized mouse or human-mouse antibodies is more difficult and cannot progress as rapidly.

Leveraging Phage Display

Scientists can use phage display to improve the speed and cost effectiveness of drug discovery and optimization. Phage display offers important advantages over, and can be used to improve, other drug discovery technologies which are currently employed to identify binding proteins, such as combinatorial chemistry, single target high-throughput screening and conventional hybridoma technology. Over the past decade, our scientists, collaborators and licensees have applied this powerful technology to a wide range of biopharmaceutical applications. We and our collaborators and licensees are using phage display technology at many stages of the drug discovery process to identify and determine the function of novel targets and to discover biopharmaceutical leads.

Over the past few years, we have brought on-line high-throughput automated capacity, developed state-of-the-art antibody phage display libraries, and successfully implemented a strategy under which we have obtained freedom to operate in the antibody phage display area through cross-licenses with Affimed Therapeutics AG, Affitech AS, Biosite Incorporated, Genentech, Inc. and XOMA Ireland Limited. In addition, during 2003, we amended our existing cross-license agreement with Cambridge Antibody Technology Limited (CAT). As a result of the amended CAT agreement, we have a worldwide research license under all the CAT antibody phage display patents and now have more options to obtain product licenses from CAT to develop and commercialize therapeutic and diagnostic antibody products, for which CAT will receive milestones and royalties. We also have given CAT an option to develop with us our own therapeutic antibody products and further agreed to pay CAT a portion of the revenues that we generate from certain other applications of antibody phage display. Under the terms of the amended CAT agreement, we agreed that CAT will no longer have any royalty obligations to us with regard to any products covered by our phage display patents.

With our phage display technology, we have established the capability to identify fully human antibodies with high specificity and high affinity. We also have proprietary high-throughput technologies available to increase the affinity and specificity of antibody panels and for batch reformatting and protein expression. Our technologies allow us to move product candidates rapidly into both in vitro testing and optimization. We continue to use our increased capabilities to support our discovery and development programs for antibody-based therapeutics and to expand our revenue-generating collaborations.

9




Phage display collaborations for therapeutics.   In addition to our therapeutic product development collaborations with Genzyme and Debiopharm, we leverage our phage display technology in a variety of other collaborations to enhance the discovery and development of therapeutic leads:

·       Funded Research.   We perform funded research for various collaborators using our phage display technology to identify, characterize and optimize antibodies that bind to disease targets provided by the collaborators. Our funded research collaborators include AstraZeneca AB, Baxter Healthcare S.A., and Biogen Idec, Inc.

·       Co-Development.   We also collaborate with other biotechnology companies to co-develop therapeutic leads. Under the typical co-development collaboration, we use our phage display libraries to identify antibody, peptide and small protein compounds that bind disease targets provided by our co-development collaborator. With our collaborator, we evaluate the leads that we generate during the research phase of our collaboration to determine if we wish to jointly develop and commercialize such leads as therapeutics. Our co-development collaborators currently include Dendreon Corporation, Inhibitex, Inc. and Syntonix Pharmaceuticals, Inc.

Patent and library licensing programs.   We have established a broad licensing program for our phage display patents for use in the fields of therapeutic, diagnostic and other products. Through this program, we grant companies and research institutions non-exclusive licenses to practice our phage display patents in their discovery and development efforts in the licensed fields. Currently, over 75 companies and research institutions, including Amgen Inc., Biogen Idec, Inc., Genzyme Corporation, ImClone Systems, Inc., Human Genome Sciences, Inc., MedImmune, Inc. and Tanox, Inc., have licenses to use our phage display technology and phage display derived compounds to research and develop therapeutic, diagnostic and other products. We believe that the success of our patent licensing program provides support for our patent position in phage display, enhances the usefulness of phage display as an enabling discovery technology and generates short-term and long-term value for us through licensing fees, milestones and royalties. Our business model is to grant non-exclusive licenses so that we may retain the right to practice our phage display technology in multiple fields. Our license agreements generally provide for signing or technology transfer fees, annual maintenance fees, milestone payments based on successful product development, and royalties based on any future product sales. In addition, under the terms of our license agreements, most licensees have agreed not to sue us for using phage display improvement patents developed by the licensee that are dominated by our phage display patents and some have granted us specific access to certain technologies developed or controlled by the licensee. We believe that these covenants and provisions allow us to practice enhancements to phage display developed by our licensees. We have also entered into cross licensing agreements with third parties under which we have granted rights to our phage display patents and have received rights to practice under the phage display related patents of such third parties.

Phage display collaborations in non-core areas.   While our focus is on therapeutic programs, we are able to leverage our phage display technology in a number of other ways. For example, often the binding compounds that we discover for biopharmaceutical targets can be used in diagnostic or imaging formats to assess therapeutic effectiveness and monitor disease progression. In addition, other binding compounds we discover, known as ligands, have a high affinity and high specificity, and can be used for the purification of biopharmaceuticals. Binding compounds are also active components of many research products used for drug discovery and development, specifically to detect and analyze proteins. In the diagnostic imaging and research product fields, we have formed collaborations, and we also license others to practice our phage display technology in other fields. For example, we have granted a non-exclusive license to our phage display technology for the development of diagnostic imaging products to Bracco Imaging S.p.A., a subsidiary of Bracco S.p.A., a leader in the imaging products market. We previously used our phage display technology to identify peptides for Epix Medical, Inc. to use in blood clot imaging applications in the magnetic resonance imaging field. In the area of affinity separations, we have granted licenses to Wyeth

10




and Human Genome Sciences, Inc. to use ligands we developed for them. Wyeth is using a Dyax ligand for purification of its recombinant blood factor product, ReFacto AF, for treating hemophilia and Human Genome Sciences is using a Dyax ligand to purify its B-Lymphocyte Stimulator Protein. We have also granted a non-exclusive license to Amersham Biosciences, a market leader in the separations media field, to practice our phage display patents to discover ligands from libraries for use as affinity-based media for chromatography separations.

Competition

We compete in industries characterized by intense competition and rapid technological change. New developments occur and are expected to continue to occur at a rapid pace. Discoveries or commercial developments by our competitors may render some or all of our technologies, products or potential products obsolete or non-competitive.

Our principal focus is on the development of therapeutic products. We will conduct research and development programs to develop and test product candidates and demonstrate to appropriate regulatory agencies that these products are safe and effective for therapeutic use in particular indications. Therefore our principal competition going forward, as further described below, will be companies who either are already marketing products in those indications or are developing new products for those indications. Many of our competitors have greater financial resources and experience than we do.

For DX-88 as a treatment for HAE, our principal competitors include ZLB Behring, Jerini AG, Pharming Group N.V., and Lev Pharmaceuticals, Inc. ZLB Behring currently markets plasma-derived C1 esterase inhibitor products that are approved for the treatment of HAE in Europe. Jerini has received Fast Track and orphan drug designations from the FDA for its bradykinin receptor antagonist for the treatment of HAE and has announced that it will be initiating Phase III clinical trials for HAE in both the United States and Europe. Pharming is developing a transgenic human C1 inhibitor for the treatment of HAE and has announced that it has completed a Phase II clinical trial with positive results, has initiated a pivotal Phase III clinical trial in Europe and has received FDA approval of an IND application for a Phase III clinical trial in the United States. Lev Pharmaceuticals, whose product candidates is a plasma derived C1 esterase inhibitor, filed an IND with the FDA to begin a Phase III clinical trial of C1 esterase inhibitor for the treatment of HAE and expects to initiate this Phase III trial during the first half of 2005. Lev Pharmaceuticals has received orphan drug designation from the FDA for this product candidate. Other competitors include companies that market and develop corticosteroid drugs or other anti-inflammatory compounds.

For DX-88 as a treatment for CABG surgery patients, our principle competitor is Bayer AG, which currently markets aprotinin under the name Trasylol® for reduction of blood loss in CABG patients. A number of other companies, including Alexion Pharmaceuticals, Inc., Avant Immunotherapeutics, Inc. and Zymogenetics, Inc., are developing additional products to reduce the complications associated with cardiopulmonary bypass procedures.

For our DX-890 product candidate, companies with marketed products for the treatment of cystic fibrosis include Genentech, Inc., which produces Pulmozyme®, and Chiron Corporation, which produces TOBI®. In addition, a number of companies are developing products for the treatment of cystic fibrosis, including Inspire Pharmaceuticals Inc., Genaera Corporation, Targeted Genetics Corporation and BCY LifeSciences, Inc. A number of other companies are also developing neutrophil elastase inhibitors for broader indications. These include Ono Pharmaceuticals, Teijin Institute for Bio-medical Research, Arriva Pharmaceuticals, Inc., and Ivax Corporation.

For potential oncology product candidates coming out of our biopharmaceutical discovery and development programs, our potential competitors include numerous pharmaceutical and biotechnology companies, most of which have substantially greater financial resources and experience than we do.

11




In addition, most large pharmaceutical companies seek to develop orally available small molecule compounds against many of the targets for which others and we are seeking to develop antibody, peptide and/or small protein products.

Our phage display technology is one of several technologies available to generate libraries of compounds that can be used to discover and develop new antibody, peptide and/or small protein products. The primary competing technology platforms that pharmaceutical, diagnostics and biotechnology companies use to identify antibodies that bind to a desired target are transgenic mouse technology and the humanization of murine antibodies derived from hybridomas. Abgenix Inc., Medarex Inc., Genmab A/S, and Protein Design Labs, Inc. are leaders in these technologies. Further, we license our phage display patents and libraries to other parties in the fields of therapeutics and diagnostic products on a non-exclusive basis. Our licensees may compete with us in the development of specific therapeutic and diagnostic products. In particular, Cambridge Antibody Technology Group plc (CAT), Morphosys AG, and BioInvent International AB, all of which have licenses to our base technology, compete with us, both to develop therapeutics and to offer research services to larger pharmaceutical and biotechnology companies. Biosite Incorporated, which is also a patent licensee of ours, has partnered with Medarex, Inc. to combine phage display technology with transgenic mouse technology to create antibody libraries derived from the RNA of immunized mice. Other companies are attempting to develop new antibody engineering technology. These include CAT, which is developing ribosomal display technology and antibody mimics, Diversa Corp., which is developing combinatorial arrays for large-scale screening of antibodies, our patent licensee Domantis Limited, which makes single domain antibody libraries, and Novagen, Inc., which is developing cDNA display technology.

In addition, we may experience competition from companies that have acquired or may acquire technology from universities and other research institutions. As these companies develop their technologies, they may develop proprietary positions that may prevent us from successfully commercializing our products.

Patents and Proprietary Rights

Our success is significantly dependent upon our ability to obtain patent protection for our products and technologies, to defend and enforce our issued patents, including patents related to phage display, and to avoid the infringement of patents issued to others. Our policy generally is to file for patent protection on methods and technology useful for the display of binding molecules and on biopharmaceutical, diagnostic and separation product candidates.

Our proprietary position in the field of phage display is based upon patent rights, technology, proprietary information, trade secrets and know-how. Our patents and patent applications for phage display, known as the Ladner patents, include U.S. Patent Nos. 5,837,500, which expires June 29, 2010, 5,571,698, which expires June 29, 2010, 5,403,484, which expires April 4, 2012, and 5,223,409, which expires June 29, 2010, issued patents in Canada and Israel, and pending patent applications in the United States and other countries. These phage display patent rights contain claims covering inventions in the field of the surface display of proteins and certain other peptides, including surface display on bacteriophage.

For our therapeutic product candidates, we file for patent protection on groups of antibodies, peptides and small proteins that we identify using phage display. These patent rights now include U.S. Patent No. 5,666,143, which expires September 2, 2014 and European Patent No. 573,603, which expires February 28, 2012, claiming sequences of peptides that have neutrophil elastase inhibitory activity, including the sequence for DX-890; and U.S. Patent Nos. 5,994,125, which expires January 11, 2014, 5,795,865, which expires August 18, 2015, 6,057,287, which expires August 18, 2015, and 6,333,402, which expires January 11, 2014 and European Patent No. 739355 which expires January 11, 2015 claiming

12




sequences of peptides that have human kallikrein inhibitory activity, including the sequence for DX-88, and polynucleotide sequences encoding these peptides.

For our affinity separation technology, our patent rights include U.S. Patent No. 6,326,155, which expires March 20, 2016. The patent rights cover methods for identifying affinity ligands to purify biological molecules. The patented method can be used in combination with our proprietary phage display technology, making it a powerful tool for biological purification, discovery and development.

There are no legal challenges to our phage display patent rights or our other patent rights now pending in the United States. However, we cannot assure that a challenge will not be brought in the future. We plan to protect our patent rights in a manner consistent with our product development and business strategies. If we bring legal action against an alleged infringer of any of our patents, we expect the alleged infringer to claim that our patent is invalid, not infringed, or not enforceable for one or more reasons, thus subjecting that patent to a judicial determination of infringement, validity and enforceability. In addition, in certain situations, an alleged infringer could seek a declaratory judgment of non-infringement, invalidity or unenforceability of one or more of our patents. We cannot be sure that we will have sufficient resources to enforce or defend our patents against any such challenges or that a challenge will not result in an adverse judgment against us or the loss of one or more of our patents. Uncertainties resulting from the initiation and continuation of any patent or related litigation, including those involving our patent rights, could have a material adverse effect on our ability to maintain and expand our licensing program and collaborations, and to compete in the marketplace.

Our first phage display patent in Europe, European Patent No. 436,597, known as the 597 Patent was ultimately revoked in 2002 in a proceeding in the European Patent Office. We have two divisional patent applications of the 597 Patent pending in the European Patent Office. We will not be able to prevent other parties from using our phage display technology in Europe if the European Patent Office does not grant us another patent. We cannot be assured that we will prevail in the prosecution of either of these patent applications.

Our phage display patent rights are central to our non-exclusive patent licensing program. We offer non-exclusive licenses under our phage display patent rights to companies and non-profit institutions in the fields of therapeutics, diagnostics and other select fields. In jurisdictions where we have not applied for, obtained, or maintained patent rights, we will be unable to prevent others from developing or selling products or technologies derived using phage display. In addition, in jurisdictions where we have phage display patent rights, we cannot assure that we will be able to prevent others from selling or importing products or technologies derived using phage display.

We are aware that other parties have patents and pending applications to various products and processes relating to phage display technology. Through licensing our phage display patent rights, we have secured a limited ability to practice under some of the third party patent rights relating to phage display technology. These rights are a result of our standard license agreement, which contains a covenant by the licensee that it will not sue us under the licensee’s phage display improvement patents. In addition, we have sought and obtained affirmative rights of license or ownership under certain patent rights relating to phage display technology owned by other parties. For example, in addition to our amended license agreement with CAT, we have entered into licensing agreements with Affimed Therapeutics AG, Affitech AS, Biosite Incorporated and Genentech, Inc. under which we granted each of those companies rights to practice our phage display patents and in return received rights to practice under their phage display related patents. These types of agreements in which each party license technology to the other are referred to as cross-licensing agreements. We have also entered into a cross-licensing agreement with XOMA Ireland Limited under which we received a license to use XOMA’s antibody expression technology to develop antibody products for ourselves and our collaborators. We also received a license from XOMA to produce antibodies. In exchange we agreed to pay XOMA a license fee and a royalty in connection with

13




the sale of any of our antibody products. We also granted XOMA a license to our phage display patents and agreed to provide them with one of our antibody phage display libraries.

The issues relating to the validity, enforceability and possible infringement of such patents present complex factual and legal issues that we periodically reevaluate. Third parties have patent rights related to phage display, particularly in the area of antibodies. While we have gained access to key patents in the antibody area through our cross-licensing agreement with Affimed, Affitech, Biosite, Genentech, XOMA and CAT, other third party patent owners may contend that we need a license or other rights under their patents in order for us to commercialize a process or product. In addition, we may choose to license patent rights from third parties. While we believe that we will be able to obtain any needed licenses, we cannot assure that these licenses, or licenses to other patent rights that we identify as necessary in the future, will be available on reasonable terms, if at all. If we decide not to seek a license, or if licenses are not available on reasonable terms, we may become subject to infringement claims or other legal proceedings, which could result in substantial legal expenses. For example, George Pieczenik and I.C. Technologies America, Inc. have sued us in a variety of patent infringement actions since 1999, all of which have been dismissed and no appeals are pending at this time. If we are unsuccessful in these actions, adverse decisions may prevent us from commercializing the affected process or products. Moreover, if we are unable to maintain the covenants with regard to phage display improvements that we obtain from our licensees through our patent licensing program and the licenses that we have obtained to third party phage display patent rights it could have a material adverse effect on our business.

In all of our activities, we substantially rely on proprietary materials and information, trade secrets and know-how to conduct research and development activities and to attract and retain collaborative partners, licensees and customers. Although we take steps to protect these materials and information, including the use of confidentiality and other agreements with our employees and consultants in both academic and commercial relationships, we cannot assure you that these steps will be adequate, that these agreements will not be violated, or that there will be an available or sufficient remedy for any such violation, or that others will not also develop similar proprietary information.

Government Regulation

The production and marketing of any of our future biopharmaceutical or diagnostic products will be subject to numerous governmental laws and regulations on safety, effectiveness and quality, both in the United States and in other countries where we intend to sell the products. In addition, our research and development activities in the United States are subject to various health and safety, employment and other laws and regulations.

United States FDA Approval.   In the United States, the U.S. Food & Drug Administration (FDA) rigorously regulates products intended for diagnostic or therapeutic use in humans.

The steps required before a new pharmaceutical can be sold in the United States include:

·       preclinical tests;

·       submission of an Investigational New Drug Application to the FDA, which must become effective before initial human clinical testing can begin;

·       human clinical trials that are frequently time consuming and costly to establish safety and effectiveness of the product, which normally occurs in three phases each monitored by the FDA;

·       submission to FDA of a New Drug or Biologics License Application containing the safety and effectiveness data developed by the company, followed by FDA review and, if warranted, approval of the application; and

14




·       compliance with the FDA’s Good Manufacturing Practices regulations in the manufacture, processing and packing of regulated products and facility and equipment validations and inspection.

The requirements for testing and approval for in vitro diagnostic products, which are usually regulated as medical devices, can be somewhat less onerous than for pharmaceutical products, but similar steps are usually required. All our biopharmaceutical or diagnostic product leads, including our neutrophil elastase inhibitor, DX-890, our plasma kallikrein inhibitor, DX-88, and the pharmaceutical and diagnostic products of our collaborators and licensees, will need to complete successfully the FDA-required testing and approvals before they can be marketed. There is no assurance that our collaborators or we can gain the necessary approvals. Failure to do so would have a material adverse effect on our ability to achieve our business goals and implement our business strategy. In addition, following approval, manufacturers must continue to report all adverse events of which they become aware to the FDA. On occasion such events may be sufficiently serious to warrant changes in the approved uses of products, or in especially serious cases, removal from the market. This, should it occur, could also produce material adverse effects on future business.

Foreign Regulatory Approval.   In many countries outside the United States, especially within the European Union (EU), governmental regulatory authorities similar to the FDA must approve the investigational program and/or marketing application for pharmaceutical and diagnostic products. New legislation for investigative medicinal product was implemented by all EU member states on May 1, 2004. Some delays in the time required to initiate a clinical trial in the EU are expected until processes become well established. Following the conclusion of the clinical evaluation of a medicinal product, a marketing authorization is prepared and submitted. The format of the required documentation has been harmonized in the United States, the European Union, and Japan. However, some variations continue to exist. In addition, the national laws governing manufacturing requirements, advertising and promotion, and pricing and reimbursement may vary widely. Therefore, the time to market can vary widely among different regions and countries. In addition, the export to foreign countries for investigation and /or marketing of medicinal products that have been manufactured in the US but not approved for marketing by the FDA is subject to US law as well as the laws of the importing country and may require one or more regulatory authorizations. There is no assurance that we will be able to gain the necessary authorizations in a timely fashion or at all. Failure to do so would have a material adverse effect on our ability to achieve our business goals and implement our business strategy.

Environmental, Health, Safety and Other Regulations.   In addition to the laws and regulations that apply to the development, manufacture and sale of our products, our operations are subject to numerous foreign, federal, state and local laws and regulations. Our research and development activities involve the use, storage, handling and disposal of hazardous materials, chemicals and, as a result, we are required to comply with regulations and standards of the Occupational Safety and Health Act and other safety and environmental laws. Although we believe that our activities currently comply with all applicable laws and regulations, the risk of accidental contamination or injury cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result, which could have a material adverse effect on our business, financial condition and results of operations.

Manufacturing

We currently rely on contract manufacturers for the production of our therapeutic recombinant proteins for preclinical and clinical studies, including the manufacture of both the bulk drug substance and the final pharmaceutical product. The testing of the resultant products is the responsibility of the contract manufacturer, the Company, and /or an independent testing laboratory. These materials must be manufactured and tested according to strict regulatory standards established for pharmaceutical products. Despite our close oversight of these activities, there is no assurance that the technology can be readily transferred from our facility to those of the contractors, that the process can be scaled up adequately to

15




support clinical trials, or that the required quality standards can be achieved. To date, we have identified only a few facilities that are capable of performing these activities and willing to contract their services. There is no assurance that contractors will have the capacity to manufacture or test our products at the required scale and within the required time frame. There is no assurance that the supply of clinical materials can be maintained during the clinical development of our product candidates.

It is our current intent to rely on contract manufacturers for the production and testing of marketed pharmaceuticals following the approval of one or more of our products. The quality standards for marketed pharmaceuticals are even greater than for investigational products. The inability of these contractors to meet the required standards and/or to provide an adequate and constant supply of the pharmaceutical product would have a material adverse effect on our business.

Sales and Marketing

Therapeutic Products.   We do not currently have any therapeutic products approved for sale. For any products that are approved in the future for diseases where patients are treated primarily by limited numbers of physicians, we intend in most cases to conduct sales and marketing activities ourselves in North America and, possibly, in Europe. For any product that we intend to market and sell ourselves, we do not expect to establish direct sales capability until shortly before the products are approved for commercial sale, but we will begin product management and market education activities earlier during clinical trials. For markets outside of North America, including possibly European markets, we will seek to establish arrangements where our products are sold by pharmaceutical companies, which are already well established in these regions. For products that are indicated for conditions where patients may be treated by large numbers of internists, general surgeons, or family practitioners, we will seek to establish arrangements under which our products will be sold and marketed by large pharmaceutical organizations with established sales representatives. We expect that these arrangements will generally be worldwide on a product-by-product basis.

Other Product Areas.   For areas other than therapeutic products, we will generally seek to establish arrangements with leading companies in particular business areas under which those companies develop the products based on our technology and conduct sales and marketing activities through their established channels.

Segment Information

We provide financial information by geographical area in Note 15 to our Consolidated Financial Statements included in Item 8 of this report. We are incorporating that information into this section by this reference.

Employees

As of December 31, 2004, we had 131 employees worldwide, including 32 with Ph.D.s and/or M.D.s. Approximately 92 of our employees are in research and development, 3 in business development and 36 in administration. Our workforce is non-unionized, and we believe that our relations with employees are good.

Additional Information

We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 available without charge through our website, www.dyax.com, as soon as reasonably practicable after filing them with or furnishing them to the Securities and Exchange Commission. Information contained on the website is not part of this report.

16




ITEM 2.   PROPERTIES

In June of 2001, we signed a ten-year lease with the Massachusetts Institute of Technology. The leased property is located in Cambridge, Massachusetts and serves as our corporate headquarters and main research facility. Under the terms of the lease, we have initially leased 67,197 square feet. Of the space we initially leased, we have subleased a total of approximately 14,000 square feet to two different biotechnology companies under subleases, both of which are due to expire, unless extended, on October 31, 2005. We are obligated to lease an additional 24,122 square feet on November 1, 2007. We have the option to extend the lease for two additional five-year terms. We have provided the lessor with a Letter of Credit in the amount of $4.3 million, which may be reduced after the fifth year of the lease term. Through our subsidiary, Dyax S.A., we maintain 10,000 square feet of laboratory and office space in Liege, Belgium to support our research efforts.

ITEM 3.   LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the quarter ended December 31, 2004, no matters were submitted to a vote of security holders through the solicitation of proxies or otherwise.

PART II

ITEM 5.                MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on The NASDAQ National Market under the symbol DYAX. As of February 25, 2005, there were 31,578,981 shares of our common stock outstanding, which were held by approximately 275 common stockholders of record, and approximately 2,550 beneficial owners.

The following table sets forth, for the periods indicated, the high and low selling prices for our common stock as reported on NASDAQ National Market:

 

 

High

 

Low

 

Fiscal year ended December 31, 2004:

 

 

 

 

 

First Quarter

 

$

14.54

 

$

7.56

 

Second Quarter

 

$

15.65

 

$

9.20

 

Third Quarter

 

$

11.97

 

$

6.30

 

Fourth Quarter

 

$

9.80

 

$

5.46

 

 

 

 

High

 

Low

 

Fiscal year ended December 31, 2003:

 

 

 

 

 

First Quarter

 

$

2.25

 

$

1.52

 

Second Quarter

 

$

4.90

 

$

1.67

 

Third Quarter

 

$

7.50

 

$

2.58

 

Fourth Quarter

 

$

9.05

 

$

4.45

 

 

We have never declared or paid cash dividends on our capital stock. We currently intend to retain our future earnings, if any, for use in our business and therefore do not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.

17




ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

The following table summarizes certain selected consolidated financial data, which should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Form 10-K. The selected consolidated financial data at December 31, 2004 and 2003, and for the years ended December 31, 2004, 2003, and 2002 have been prepared from our audited financial statements and the selected consolidated financial data at December 31, 2002, 2001 and 2000, and for the years ended December 31, 2001 and 2000 has been prepared from our accounting records. On October 29, 2003, we completed the sale of our wholly owned separations product subsidiary known as Biotage. The following data includes all activities of Biotage presented as discontinued operations.

 

 

December 31,

 

 

 

2004

 

2003

 

2002

 

2001

 

2000

 

 

 

(In thousands, except per share data)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Product development and license fee revenues 

 

$

16,590

 

$

16,853

 

$

17,750

 

$

14,237

 

$

9,434

 

Research and development:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

39,432

 

29,990

 

28,713

 

16,795

 

12,104

 

Less research and development expenses reimbursed by joint venture (Dyax–Genzyme LLC)

 

(10,408

)

(5,203

)

 

 

 

Net research and development

 

29,024

 

24,787

 

28,713

 

16,795

 

12,104

 

Equity loss in joint venture (Dyax–Genzyme LLC)

 

5,988

 

2,243

 

 

 

 

General and administrative

 

14,451

 

13,205

 

14,882

 

14,186

 

11,307

 

Total operating expenses

 

49,463

 

40,235

 

43,595

 

30,981

 

23,411

 

Loss from operations

 

(32,873

)

(23,382

)

(25,845

)

(16,744

)

(13,977

)

Other (expense) income, net

 

(241

)

(1,112

)

(795

)

2,136

 

1,981

 

Loss from continuing operations

 

(33,114

)

(24,494

)

(26,640

)

(14,608

)

(11,996

)

Gain on sale of Biotage, net of tax

 

 

18,959

 

 

 

 

Loss from discontinued operations of Biotage, net of tax

 

 

(1,880

)

(178

)

(2,557

)

(3,193

)

Net Loss

 

$

(33,114

)

$

(7,415

)

$

(26,818

)

$

(17,165

)

$

(15,189

)

Basic and diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(1.06

)

$

(1.04

)

$

(1.35

)

$

(0.76

)

$

(1.40

)

Gain on sale of Biotage

 

 

0.81

 

 

 

 

Loss from discontinued operations of
Biotage

 

 

(0.08

)

(0.01

)

(0.13

)

(0.37

)

Net loss

 

$

(1.06

)

$

(0.31

)

$

(1.36

)

$

(0.89

)

$

(1.77

)

Shares used in computing basic and diluted net loss per share

 

31,207,218

 

23,546,524

 

19,652,474

 

19,244,809

 

8,577,912

 

 

 

 

December 31,

 

 

 

2004

 

2003

 

2002

 

2001

 

2000

 

 

 

In thousands:

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,978

 

$

36,508

 

$

28,199

 

$

51,034

 

$

74,205

 

Short-term investments

 

50,163

 

 

 

 

 

Working capital

 

46,832

 

27,219

 

14,095

 

39,984

 

68,380

 

Total assets

 

82,760

 

71,187

 

76,042

 

81,441

 

91,405

 

Long-term obligations, less current portion

 

10,645

 

10,648

 

13,809

 

3,756

 

1,190

 

Accumulated deficit

 

(151,356

)

(118,242

)

(110,827

)

(84,009

)

(66,844

)

Total stockholders’ equity

 

47,831

 

33,945

 

30,843

 

55,464

 

69,857

 

 

18




ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel biotherapeutics for unmet medical needs, with an emphasis on cancer and inflammatory indications.  We currently have two product candidates in or entering into Phase II clinical trials for three indications, and we are planning to initiate a Phase III trial of our lead product candidate in the first half of 2005. DX-88, a specific inhibitor of human plasma kallikrein, is being evaluated in Phase II trials for its potential to treat hereditary angioedema (HAE), a rare and life-threatening inflammatory disease. The DX-88 trials in HAE are being conducted by us in a joint venture with Genzyme Corporation. Independently, we are advancing DX-88 into Phase II trials in cardiac surgery, initially for its potential to reduce blood loss and related complications during on-pump, open-heart surgery, specifically coronary artery bypass graft, or CABG, surgery. DX-890, a specific inhibitor of human neutrophil elastase, is being evaluated in Phase II clinical trials for its potential in the treatment of cystic fibrosis (CF). The CF clinical trials are being conducted by Debiopharm S.A., our collaborator for this program. Both DX-88 and DX-890 have received orphan drug designation in the United States of America (U.S.) and European Union, and DX-88 has been granted Fast Track designation by the U.S. Food and Drug Administration (FDA) for the treatment of HAE.

DX-88 and DX-890 were identified using our patented phage display technology, which rapidly selects antibodies, peptides and small proteins that bind with high affinity and specificity to therapeutic targets. We are using this technology to build a pipeline of drug candidates that we may advance into clinical development on our own or in partnership with other companies. We also leverage phage display technology broadly through collaborations and licenses that are structured to generate revenues through research funding, license fees, technical and clinical milestone payments, and royalties. Currently, over 75 companies and research institutions, including Amgen Inc., Biogen Idec, Inc., Genzyme Corporation, ImClone Systems, Inc., Human Genome Sciences, Inc., MedImmune, Inc. and Tanox, Inc., have licenses to use our phage display technology and phage display derived compounds to research and develop therapeutic, diagnostic and other products.

We continued to incur losses in 2004 and expect to incur significant operating losses over at least the next several years as we continue our current and anticipated development projects, particularly our clinical trial programs for DX-88, and as we develop our discovery, research, marketing, sales and manufacturing capabilities.

Clinical Development Programs

DX-88 for HAE.   In collaboration with Genzyme, we are developing DX-88 as a treatment for HAE. This collaboration is managed through Dyax–Genzyme LLC (formerly known as Kallikrein LLC), a jointly owned limited liability company. Currently, we are conducting an open-label, repeat dose Phase II clinical trial known as EDEMA2. EDEMA2 is a multi-center trial with investigational sites in the U.S. and Canada. We also plan to initiate a Phase III clinical trial of DX-88 for the treatment of HAE, referred to as EDEMA3, during the first half of 2005. If the EDEMA3 trial is successful and completed on schedule, we, together with Genzyme, currently anticipate filing a BLA for DX-88 for the treatment of HAE in the United States and an equivalent Marketing Authorization Application for DX-88 for the treatment of HAE in the European Union in 2006. Based upon this timeline for the BLA filing, we estimate Dyax–Genzyme LLC’s total remaining costs to commercialization to be in the range of $44 million to $54 million. We will be responsible for funding one half of these costs, or $22 million to $27 million. These costs include costs associated with the development of a subcutaneous formulation of DX-88 for at-home use.

19




The following table illustrates the activity associated with DX-88 for HAE included in our consolidated statements of operations and comprehensive loss:

 

 

Years Ended December 31,

 

 

 

2004

 

2003

 

2002

 

 

 

(In thousands)

 

DX-88 for HAE costs included within research and development expenses in the consolidated statements of operations and comprehensive loss

 

$

10,440

 

$

7,067

 

$

4,444

 

Less research and development expenses reimbursed by joint venture (Dyax–Genzyme LLC) per the consolidated statements of operations and comprehensive loss

 

(10,408

)

(5,203

)

 

Net research and development expenses for DX-88 for HAE

 

32

 

1,864

 

4,444

 

Equity loss in joint venture (Dyax–Genzyme LLC) separately classified within the consolidated statements of operations and comprehensive loss

 

5,988

 

2,243

 

 

Net loss on DX-88 for HAE program

 

$

6,020

 

$

4,107

 

$

4,444

 

 

During 2004, our research and development expenses on this program totaled $10.4 million compared with $7.1 million in 2003 and $4.4 million in 2002. Research and development expenses increased year over year principally due to increased activity in the areas of manufacturing and preclinical pharmacology and toxicology studies. In addition, net research and development expenses increased from 2002 to 2003 due to the initiation of the EDEMA1 trial in 2003.

Dyax–Genyzme LLC is responsible for the reimbursement of all development expenses related to the HAE program incurred after the completion of the first Phase II clinical trial for HAE, which occurred in 2003. During 2004, Dyax–Genzyme LLC reimbursed us for $10.4 million of our expenses. This reimbursement is recorded as research and development expenses reimbursed by joint venture (Dyax–Genzyme LLC) in our consolidated statements of operations and comprehensive loss. In 2003, Dyax–Genzyme LLC reimbursed us $5.2 million for our expenses relating to the program. The $1.9 million of net research and development expenses in 2003 for DX-88 for HAE represent costs incurred prior to the completion of the first Phase II clinical trial for HAE, which therefore were not reimbursed.  All future costs will be reimbursed by Dyax–Genzyme LLC.

Dyax–Genzyme LLC had a net loss of approximately $12.0 million and $4.5 million for the years ended December 31, 2004 and 2003. This loss represents the total research and development expenses incurred by Dyax and Genzyme on DX-88 for HAE. Our portion of the loss, accounted for under the equity method, was $6.0 million and $2.2 million for the years ended December 31, 2004 and 2003 and is proportional to our 50.01% financial interest in the program and is separately classified within the consolidated statements of operations and comprehensive loss.

DX-88 for CABG.   Independent of our collaboration with Genzyme, we are developing DX-88 as a treatment for patients undergoing on-pump, open-heart surgery, specifically coronary artery bypass graft, or CABG, surgery. During the first quarter of 2003, we exercised an option to purchase from Genzyme full rights to DX-88 for this and other surgical indications. The cost for exercising the option was $1.0 million and was expensed in the second quarter of 2003.

Expenses on this program totaled $3.1 million, $2.6 million and $1.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. The increase in spending from 2003 to 2004 is attributable to an increase in market research, preclinical studies and manufacturing expenses in addition to an increase in headcount related costs. During 2004 there was additional spending attributable to a $264,000 increase in market research costs, a $239,000 increase in personnel related costs and a $186,000 increase in other expenses all of which were associated with developing the clinical plan and identifying a suitable

20




partner for the program. Preclinical studies and the associated manufacturing expenses increased $620,000 in 2004.  The total increase in expenses on this program from 2003 to 2004 was offset by the one time, $1.0 million payment made to Genzyme for its interest in the application of DX-88 for surgical indications in 2003. The increase in spending from 2002 to 2003 is primarily attributable to the $1.0 million payment made to Genzyme in 2003.

Subject to the successful completion of ongoing negotiations to partner this indication with another company, we are planning to conduct a Phase II trial in the United States to compare DX-88 to aprotinin, currently marketed by Bayer AG under the name Trasylol®, for reduction of blood loss in CABG patients. The trial, to be conducted in the United States, is currently planned to involve approximately 100 patients. As currently designed, we expect this trial to cost approximately $2.8 million to $3.2 million. Following an interim analysis of the data generated from this comparative trial, we may expand it into a larger clinical trial, which would entail significant additional costs.

DX-890 for Cystic Fibrosis.   In collaboration with Debiopharm S.A., DX-890 is being developed as a treatment for cystic fibrosis, a fatal genetic mutation that causes problems including progressive lung destruction and frequent infections. Debiopharm has completed two Phase IIa clinical trials with DX-890 in Europe, one in adult and one in pediatric cystic fibrosis patients, and has recently initiated a placebo-controlled Phase IIb clinical trial for cystic fibrosis. We are currently negotiating with Debiopharm to amend our collaboration agreement in order to provide Debiopharm worldwide rights to independently develop and commercialize DX-890 for cystic fibrosis and ARDS. Under the proposed amendment, we would receive milestones and royalties from Debiopharm in connection with its ongoing development of DX-890.  We would also receive worldwide rights to commercialize our independently developed,  long-acting, pegylated form of DX-890 (known as PEG-DX-890). Currently, we are exploring the potential for advancing PEG-DX-890 into development for other pulmonary indications, which could include chronic obstructive pulmonary disease (COPD) and alpha-1 antitrypsin deficiency.

During 2004, we incurred research, development and manufacturing expenses on this program of $6.3 million compared with $5.4 million in 2003. Research and development expenses on this program increased from 2003 principally due to an increase in manufacturing costs. These costs were fully funded by Debiopharm and this funding is reflected in our product development revenues. Under our existing collaboration agreement, Debiopharm is responsible for the management of all preclinical and clinical trials, and all costs associated with such trials and any costs incurred by Dyax in connection with the manufacture and testing of the active pharmaceutical ingredient for DX-890 are fully funded by Debiopharm. This financial structure could be altered if we were to amend our collaboration agreement with Debiopharm and allow them to independently assume responsibility for the clinical development of DX-890 for cystic fibrosis.

Goals for Clinical Development Programs.   Our goal for each of our ongoing clinical development programs is to obtain marketing approval from the FDA and analogous international regulatory agencies. Because of uncertainties associated with our ongoing clinical trials, our ability to locate a development partner or obtain the additional funding needed to complete clinical trials in the CABG and DX-890 programs, the preparation and filing of a BLA, the regulatory review process, and the risks associated with the clinical approval process, including the risk that we may have to repeat, revise or expand the scope of trials or conduct additional clinical trials not presently planned to secure marketing approvals, we are unable to accurately predict the costs to complete any of these programs, the completion dates, or whether these projects will be successfully completed at all. Material cash inflows for any of these programs other than milestone payments will not commence until after marketing approvals are obtained, and then only if the product candidate finds acceptance in the marketplace as a treatment for its disease indication. Because of the many risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows from these programs will commence, if ever.

21




Discovery Programs

Through internal discovery activities and through business relationships with academic institutions and private biotechnology and pharmaceutical companies, we use our proprietary phage display technology to identify compounds with therapeutic and diagnostic potential. We have a total of seven discovery and development programs underway in oncology, three of which are in collaboration with other companies. These programs are focused on the discovery and development of therapies that fight cancer primarily in three ways: inhibiting angiogenesis (the growth of blood vessels), inhibiting proteases believed to be associated with tumor growth and proliferation, and targeting cell surface proteins believed to be over expressed by certain tumors. We also have four discovery and development programs focused on targets that are believed to be important mediators of inflammation, one of which we are developing in collaboration with another company. In addition, in collaboration with another company, we have a discovery and development program focused on an infectious disease target.

Licensing and Funded Research Activities

Currently, over 75 companies and research institutions have licenses to use our proprietary phage display technology and phage display libraries. These licenses allow others to exploit our technology in therapeutic discovery and in non-core areas such as diagnostic imaging, research reagents and separations. In addition, we perform funded research for collaborators within the biopharmaceutical industry. We believe that these programs provide support for our patent position in phage display and for the usefulness of phage display as an enabling discovery technology. Additionally, these programs generate short-term and long-term value for us through licensing fees, milestones and royalties.

Sale of Separations Business

On October 29, 2003, we completed the sale of our wholly owned separations product subsidiary known as Biotage for a gross purchase price of $35.0 million. The sale of Biotage has allowed us to focus exclusively on biotherapeutics, and the cash generated by the sale of Biotage helped us advance our clinical programs as well as the preclinical candidates in our pipeline. We received approximately $25.4 million in cash at closing and paid approximately $2.5 million in transaction expenses. An additional $5.0 million was received in 2004 that was being held in an indemnity escrow. For the year ended December 31, 2003, we have recognized a $19.0 million gain on this sale. For the years ended December 31, 2003 and 2002, operations of Biotage are presented as discontinued operations in our financial statements. Prior period amounts have been reclassified to be consistent with the treatment of Biotage as a discontinued operation.

Results of Operations

Revenues.   Substantially all our revenues have come from licensing, funded research and development activities, including milestone payments from our licensees and collaborators. These revenues fluctuate from year to year. Total revenues for 2004 were $16.6 million, compared with $16.9 million in 2003 and $17.8 million in 2002. The decrease from 2003 to 2004 was due to a $1.7 million decrease in funded research and development activities and a $1.4 million increase in licensing activities.  Our decrease in funded research and development revenue was due to a $1.6 million decrease from a funded research agreement with Bracco Imaging S.P.A. and a $1.5 million decrease from a funded research agreement with Human Genome Sciences, Inc. (HGS)  The agreement with HGS was completed in June 2003. These decreases in funded research and development activities were partially offset by a $1.7 million increase in revenue arising from our DX-890 product collaboration with Debiopharm. On a period-to-period basis our DX-890 manufacturing revenue may vary substantially due to the timing of production activities. Our increase in licensing revenue was primarily due to revenue recognized for new licenses of our proprietary phage display libraries and milestones under existing licenses. The decrease from 2002 to 2003 was

22




primarily due to a $2.2 million decrease from a funded research agreement with HGS. This decrease was partially offset by a $377,000 increase in other licensing and funded research agreements.

Research and Development.   Our research and development expenses for the years ended December 31, 2004, 2003 and 2002, are summarized as follows:

 

 

Year Ended December 31,

 

 

 

2004

 

2003

 

2002

 

 

 

(In thousands)

 

Research and development per consolidated statements of operations and comprehensive loss

 

$

39,432

 

$

29,990

 

$

28,713

 

Less research and development expenses reimbursed by joint venture (Dyax–Genzyme LLC) per consolidated statements of operations and comprehensive loss

 

(10,408

)

(5,203

)

 

Net, research and development expenses per consolidated statements of operations and comprehensive loss

 

29,024

 

24,787

 

28,713

 

Equity loss in joint venture (Dyax–Genzyme LLC) separately classified within the consolidated statements of operations and comprehensive loss 

 

5,988

 

2,243

 

 

Pro forma research and development expenses

 

$

35,012

 

$

27,030

 

$

28,713

 

 

Our research and development expenses arise primarily from compensation and other related costs, including personnel dedicated to research and development activities and from the fees paid and costs reimbursed to outside professionals to conduct research, clinical trials, and to manufacture drug compounds prior to FDA approval. Since mid-2003, the expenses we incur on the DX-88 program for HAE are included in our overall research and development expenses, but then are reimbursed by the Dyax–Genzyme LLC joint venture and excluded from net research and development expenses. However, we jointly fund the losses of that program with Genzyme, so our line item for equity loss in joint venture represents our share of the expenses for the development of DX-88 for HAE, including any incurred by Genzyme.

Combining our net research and development expenses and our equity loss in joint venture to show our total expenses for research and development, our pro forma research and development expenses increased $8.0 million from 2003 to 2004 due to increases in both items. The $4.2 million increase in net research and development expenses was the result of an approximately $3.0 million increase in headcount and associated personnel and occupancy costs, primarily to support our discovery pipeline. Compared to 2003, manufacturing costs associated with our DX-890 for CF program increased $1.1 million and manufacturing, and marketing and other external costs associated with our DX-88 for CABG program increased $1.1 million, exclusive of the cost of exercising a $1.0 million option to purchase from Genzyme the rights to DX-88 for CABG and other surgical indications, which occurred in 2003. Equity loss in joint venture (Dyax–Genzyme LLC) increased $3.7 million primarily due to an increase in manufacturing expenses, ongoing pharmacology and toxicology studies, as well as increased clinical trial costs and the associated internal costs to support these activities.

Pro forma research and development expenses decreased from 2002 to 2003 primarily due to reduced headcount at the end of 2002 and the reimbursement of HAE expenses by Dyax–Genzyme LLC effective April 2003.

Our management believes that the above presentation of pro forma research and development expenses provides investors a better understanding of how total research and development efforts affect our consolidated statements of operations and comprehensive loss. Our presentation of this measure, however, may not be comparable to similarly titled measures used by other companies.

23




General and Administrative.   Our general and administrative expenses consist primarily of the costs of our management and administrative staff, as well as expenses related to business development, protecting our intellectual property, administrative occupancy, professional fees, market research and promotion activities and the reporting requirements of a public company. Total general and administrative expenses were $14.5 million in 2004 compared to $13.2 million in 2003 and $14.9 million for 2002. The increase of $1.3 million from 2003 to 2004 was primarily due to an increase in professional fees, including approximately $900,000 in costs associated with Sarbanes-Oxley compliance and internal headcount. The decrease of $1.7 million from 2002 to 2003 was primarily due to a $1.1 million decrease in employment costs, partially attributable to the effects of lower headcount and a $699,000 decrease in legal costs. These decreases were partially offset by increases in the cost of directors’ and officers’ insurance.

Discontinued Operations.   Our activities from discontinued operations are the operations our wholly owned separations product subsidiary known as Biotage, which were sold on October 29, 2003 including the gain on the sale of Biotage. The gain was comprised of a $19.0 million gain on sale and a loss of $1.9 million on Biotage’s operations for the year-to-date period ended October 29, 2003, compared to a loss on operations of $178,000 for 2002. The $1.7 million increase in loss on operations from 2002 to the 2003 period were primarily due to a decrease in revenues in non-core product lines, specifically Biotage’s Kiloprep® and Flex Systems.

Liquidity and Capital Resources

We require cash to fund our operating expenses, to make capital expenditures, acquisitions and investments, and to pay debt service. Through December 31, 2004, we have funded our operations principally through the sale of equity securities, which have provided aggregate net cash proceeds since inception of approximately $188 million, including net proceeds of $44.7 million from our January 2004 underwritten offering, $8.3 million from our March 2003 registered directed offering and $62.4 million from our August 2000 initial public offering. We have also generated funds from biopharmaceutical product development and license fee revenues, our sale of our Biotage subsidiary in 2003 that raised $25.4 million in cash with another $5.0 million received in 2004, separations product revenues of our former Biotage division, interest income, long-term obligations and other sources. As of December 31, 2004, we had cash and cash equivalents and short-term investments aggregating $57.1 million. Our excess funds are currently invested in short-term investments primarily consisting of U.S. Treasury notes and bills, obligations of U.S. government agencies and money market funds backed by U.S. Treasury obligations.

Our operating activities used cash of approximately $21.3 million in 2004, $14.9 million in 2003 and $22.0 million in 2002. Our cash used in operating activities for 2004 consisted primarily of our net loss from continuing operations of $33.1 million, partially offset by adjustments for non-cash items, including depreciation and amortization of fixed assets and intangibles totaling $4.0 million and equity loss in joint venture (Dyax–Genzyme LLC) of $6.0 million, and a $1.0 million change in operating assets and liabilities. Our cash used in operating activities for 2003 consisted primarily of our net loss from continuing operations of $24.5 million, an increase in accounts receivable of $1.6 million due to the timing of billings to Debiopharm under our collaboration agreement, and an increase in prepaid expense and other assets of $1.3 million. These uses of cash were partially offset by an increase in accounts payable and accrued expenses of $4.6 million due primarily to the timing of payments made to our contract manufacturer and adjustments for non-cash items, including depreciation and amortization of fixed assets and intangibles totaling $3.8 million and equity loss in joint venture (Dyax–Genzyme LLC) of $2.2 million. The activities for 2002 consisted primarily of our net loss from continuing operations of $26.6 million, a decrease in deferred revenue of $1.7 million due primarily to the timing of revenue recognition on our collaboration with Debiopharm, and an increase in prepaid expense and other assets of $1.4 million. These decreases were partially offset by proceeds from incentives given to us by our landlord for enticement to enter our lease in Cambridge, Massachusetts and depreciation and amortization costs totaling $2.9 million.

24




Our investing activities used cash totaling $53.2 million in 2004, provided cash of $21.8 million in 2003 and used cash of $7.8 million in 2002. Our cash used in investing activities for the 2004 included the purchase of $51.0 million of short-term investments, $5.4 million contributed to Dyax–Genzyme LLC and $2.3 million in fixed asset purchases. These uses were partially offset by $5.0 received from the escrow relating to the sale of Biotage. Our investing activities for 2003 included the $25.4 million received on the sale of Biotage, repayments on employee notes receivable of $1.3 million, including approximately $1.2 million received from our Chief Executive Officer as full payment on the related note which were partially offset by $3.1 million paid to Dyax–Genzyme LLC and payment of $2.0 million for licensed technology purchased in 2002. Our investing activities for 2002 included the purchases of fixed assets relating to our move to a new corporate and research facility in Cambridge totaling $5.2 million, $1.5 million spent on a purchase of licensed technology and a $1.2 million increase in restricted cash to secure long-term obligations.

The following table summarizes our 2004 cash contributions to and investment in our joint venture, Dyax–Genzyme LLC:

 

 

(In thousands)

 

Balance at December 31, 2003 per the consolidated balance sheets

 

 

$

817

 

 

Investment in joint venture (Dyax–Genzyme LLC) per the consolidated statement of cash flows

 

 

5,425

 

 

Equity loss in joint venture (Dyax–Genzyme LLC) separately classified within the consolidated statements of operations and comprehensive loss

 

 

(5,988

)

 

Balance at December 31, 2004 per the consolidated balance sheets

 

 

$

254

 

 

 

Our financing activities provided cash of $44.9 million, $6.0 million and $7.8 million in 2004, 2003 and 2002, respectively. Our financing activities for 2004 included net proceeds of $46.8 million from the sale of our common stock, including $44.7 million from our January 2004 offering and $1.4 million in new long-term obligations. These increases in cash were partially offset by the repayments of long-term obligations of $3.3 million. Our financing activities for 2003 included net proceeds of $8.3 million from the registered directed offering completed in March 2003. These proceeds were partly offset by repayments of long-term obligations of $3.4 million. Our financing activities for 2002 included a $7.0 million loan from Genzyme under the terms of our collaboration agreement, as well as proceeds of $2.4 million from our Cambridge landlord for leasehold improvements. These proceeds were partially offset by $2.2 million in repayments of long-term obligations.

We have financed fixed asset purchases through capital leases and debt. Capital lease obligations are collateralized by the assets under lease.

In conjunction with our collaboration agreement with Genzyme for the development of DX-88, Genzyme loaned us $7.0 million pursuant to a senior secured promissory note and security agreement, and we granted Genzyme a continuing security interest in certain tangible and intangible personal property arising out of the DX-88 program. In addition, the security agreement, as amended contains certain financial covenants under which we must (i) maintain at least $20.0 million in cash, cash equivalents and short-term marketable securities based on the Company’s quarterly consolidated financial statements and (ii) continue to satisfy at least one standard for continued listing of our securities on the NASDAQ National Market. The principal and all unpaid interest is due on the maturity date of May 31, 2005. We may extend the maturity date to May 31, 2007 if the amended collaboration agreement is in effect, no default or event of default exists and we satisfy the financial covenants as of May 31, 2005. As of December 31, 2004, we satisfied the criteria for extending the maturity date of the note to May 31, 2007 and intend to extend the maturity date. Accordingly, the note is classified as a long-term liability in the consolidated balance sheet.

25




We have borrowed the full $7.0 million available under the note, the terms of which are discussed in Note 14 to the consolidated financial statements.

We believe that existing cash and cash equivalents and short-term investments plus anticipated cash flow from product development, license fees and collaborations will be sufficient to support our current operating plans into 2006. We expect to use approximately $33 million in cash during 2005. For the foreseeable future, we expect to continue to fund any deficit from our operations through the sale of additional equity or debt securities. The sale of any equity or debt securities may result in additional dilution to our stockholders, and we cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain any required additional financing, we may be required to reduce the scope of our planned research, development and commercialization activities, which could harm our financial condition and operating results.

We have no off-balance sheet arrangements with the exception of operating leases.

Contractual Obligations

Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contingent liabilities which we cannot reasonably predict future payment. The following chart represents our total contractual obligations, including principal and interest, at December 31, 2004, aggregated by type (in thousands):

 

 

Payments due by period

 

Contractual obligations

 

 

 

Total

 

Less than 1 year

 

1-3 years

 

3-5 years

 

More than 5
years

 

Obligation to related party

 

$

8,309

 

 

$

590

 

 

$

7,719

 

$

 

 

$

 

 

Capital leases

 

3,783

 

 

1,842

 

 

1,863

 

78

 

 

 

 

Leasehold improvement arrangements

 

2,991

 

 

413

 

 

825

 

825

 

 

928

 

 

Operating lease obligations

 

35,563

 

 

3,997

 

 

9,329

 

10,788

 

 

11,449

 

 

Patent and product license obligations(1)

 

3,238

 

 

272

 

 

544

 

540

 

 

1,882

 

 

Obligation for research, development and manufacturing(2)

 

12,117

 

 

11,996

 

 

81

 

40

 

 

 

 

Total contractual obligations

 

$

66,001

 

 

$

19,110

 

 

$

20,361

 

$

12,271

 

 

$

14,259

 

 


(1)          These amounts exclude any royalties and milestones that we may owe in connection with the development or commercialization of any of our product candidates. Since the prospect of development and commercialization of any particular product candidate is uncertain, we believe the timing and amounts of any potential royalties and other milestones are not currently calculable in any manner that would fairly present purchase obligations.

(2)          These amounts represent the cash commitment due on research, development and manufacturing contracts. We will not owe any royalties or milestones in connection with these contracts.

In addition, we have received a grant from the Walloon region of Belgium. This grant includes specific criteria regarding employment and investment levels that need to be met through 2006. If we do not meet the criteria, we will be required to refund all or a portion of amounts received under this grant. As of December 31, 2004, we have received $1.1 million under this grant.

26




Critical Accounting Estimates

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, receivable collectibles, useful lives with respect to long-lived and intangible assets and valuation of common stock, related stock options, and deferred tax assets. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates. We believe that our judgment and assumptions with respect to the following significant accounting policies are most critical to the accounting estimates used in the preparation of our consolidated financial statements.

Revenue Recognition.   We make significant assumptions and estimates relating to  revenue recognition, which include the expected term of the agreement and total expected cost. Our assumptions and estimates may prove to be inaccurate. Therefore, although we make every effort to ensure the accuracy of our estimates, any significant unanticipated changes in our estimates could have a material impact on revenues and our results of operations.

Our revenue recognition policies are in accordance with the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. We enter into biopharmaceutical product development agreements with collaborators for the research and development of therapeutic, diagnostic and other products. The terms of the agreements may include non-refundable signing and licensing fees, funding for research and development, milestone payments and royalties on any product sales derived from the collaborations. Non-refundable signing and licensing fees are recognized as services are performed over the expected term of the collaboration. Funding for research and development, where the amounts recorded are non-refundable, is recognized as the related expenses are incurred. We evaluate all collaborative agreements on a quarterly basis to determine the appropriate revenue recognition for that period. The evaluation includes all of the potential revenue components from each specific collaborative agreement. Upon achievement of milestones, a portion of the milestone payment equal to the percentage of the collaboration completed through that date is recognized. The remainder is recognized as services are performed over the remaining term of the collaboration. Royalties are recognized when earned.

We generally license our patent rights covering phage display as well as our proprietary phage display libraries on a non-exclusive basis to third parties for use in connection with the research and development of therapeutic, diagnostic, and other products. Standard terms of the license patent rights agreements, for which we have no future obligations, generally include non-refundable signing fees, non-refundable license maintenance fees, development milestone payments and royalties on product sales. Signing fees and maintenance fees are recognized ratably over the period to which the payment applies. Perpetual patent licenses are recognized immediately if we have no future obligations. Standard terms of the proprietary phage display libraries agreements generally include non-refundable signing fees, non-refundable license maintenance fees, development milestone payments and royalties on product sales. Signing fees and maintenance fees are recognized ratably over the period to which the payment applies, which is normally between 3 and 5 years, but have been determined to be up to 14 years. Upon the achievement of milestones under non-exclusive phage display patent licenses and phage display libraries a portion of the milestone equal payment to the percentage of the license agreement that has elapsed is recognized as

27




revenue. Milestone payments under these license arrangements are recognized when the milestone is achieved if the Company has no future obligations under the license, and royalties are recognized when they are earned.

Payments received that have not met the appropriate criteria for revenue recognition are recorded as deferred revenue. At December 31, 2004 and 2003, our deferred revenue related to product development agreements was $9.8 million and $7.7 million, respectively. Of the $9.8 million deferred at December 31, 2004, $5.3 million, $1.5 million and $573,000 is expected to be recognized as revenue in 2005, 2006 and 2007 respectively, and the remaining is expected to be recognized over the next 14 years.

Allowance for Doubtful Accounts.   We estimate the uncollectibility of our accounts receivable. When evaluating the adequacy of our allowance for doubtful accounts, we analyze our accounts receivable aging, historical bad debts, customer concentrations, customer credit-worthiness and current economic trends. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Our accounts receivable balance net of allowances for doubtful accounts was $3.1 million and $4.7 million at December 31, 2004 and 2003, respectively. At December 31, 2004 and 2003 the provision for doubtful accounts was $75,000.

Valuation of Long-Lived and Intangible Assets.   We review long-lived assets, including capitalized license rights, for impairment whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Factors considered important which could trigger an impairment review include the following:

·       Significant change relative to historical or projected future operating results;

·       Significant changes in the use of the assets or the strategy for the overall business;

·       Significant industry or economic trends and developments.

Each impairment test is based on a comparison of the undiscounted cash flow to the recorded value of the asset. When it is determined that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, the asset is written down to its estimated fair value on a discounted cash flow basis. Our intangible assets at the end of 2004 consisted of licenses for antibody technology from third parties. The balance of our other intangible assets net of accumulated amortization was $2.4 million and $2.9 million at December 31, 2004 and 2003, respectively. No impairment losses have been recognized in any of the periods presented in our consolidated financial statements.

Related Party Transactions

Our Chairman, President and Chief Executive Officer also serves as an outside director of Genzyme Corporation and was a consultant to Genzyme until 2001. One of our other directors is a member of Genzyme’s directors and another was a senior advisor to the Chief Executive Officer of Genzyme and a former officer.

We have a collaboration agreement with Genzyme for the development and commercialization of DX-88. Under this agreement, which was amended on May 31, 2002, and again effective as of September 30, 2003, we were initially responsible for all expenses incurred in connection with the development of DX-88 for the treatment of HAE through the completion of the first Phase II clinical trial for HAE, which occurred in the second quarter of 2003. In June 2003, Genzyme exercised its option under the collaboration agreement to join us in the development and commercialization of DX-88 for HAE. Through the creation of Dyax–Genzyme LLC (formerly known as Kallikrein LLC), Dyax and Genzyme now jointly own the rights to DX-88 for the treatment of HAE. Dyax and Genzyme are each responsible for 50% of ongoing costs incurred in connection with the development and commercialization of DX-88

28




for HAE and each will be entitled to receive approximately 50% of any profits realized as a result. In addition, we are entitled to receive potential milestone payments from Genzyme in connection with the development of DX-88. The first such milestone payment, approximately $3.0 million, is due upon dosing the first patient in a pivotal clinical trial of DX-88 for HAE, which we anticipate will occur during 2005. In addition, we will be entitled to receive potential milestone payments of $10.0 million for the first FDA-approved product derived from DX-88, and up to $15.0 million for additional therapeutic indications developed under the collaboration.

Under this collaboration agreement, we had the option to purchase Genzyme’s interest in the application of DX-88 for the prevention of blood loss and other systemic inflammatory responses in on-pump, open-heart surgery and other surgical indications for $1.0 million. We exercised this option in the first quarter of 2003.

When the Company and Genzyme first amended the collaboration agreement in May 2002, the Company and Genzyme also executed a senior secured promissory note under which Genzyme agreed to loan us up to $7.0 million. Under a security agreement associated with this note, we agreed to grant Genzyme a continuing security interest in certain tangible and intangible personal property arising out of the DX-88 program, including all intellectual property rights related to DX-88 for non-surgical applications. Under an amendment to the security agreement executed on October 15, 2003, Genzyme was granted a continuing security interest in our rights to revenues from licenses of our fundamental phage display patent portfolio. The security agreement, as amended, contains certain financial covenants, under which we must (i) maintain at least $20.0 million in cash, cash equivalents and short-term marketable securities based on the Company’s quarterly consolidated financial statements and (ii) continue to satisfy at least one standard for continued listing of our securities on the NASDAQ National Market.

On October 18, 2002, we received the $7.0 million under this Genzyme note. The note bears interest at the prime rate (5.25% at December 31, 2004) plus 2%. Interest is payable quarterly. The principal and all unpaid interest will be due on the maturity date of May 31, 2005. We may extend the maturity date to May 31, 2007 if the amended collaboration agreement is in effect, no default or event of default exists and we satisfy the financial covenants as of May 31, 2005. As of December 31, 2004, we satisfy the criteria for extending the maturity date of the note to May 31, 2007 and intend to extend the maturity date. Accordingly, we have presented the note as a long-term liability as an obligation to related party on our consolidated balance sheet. At December 31, 2004 and 2003, there was $7.0 million outstanding under the loan. At December 31, 2004 and 2003, we owed $82,000 and $488,000, respectively, of interest on this note, which is included in accounts payable and accrued expenses due to current nature of this liability.

All research and development expenses incurred by each party related to the HAE program are billed to and reimbursed by Dyax–Genzyme LLC. Both Genzyme and we are each required to fund 50% of the actual monthly expenses of Dyax–Genzyme LLC, as needed. We have accounted for our interest in Dyax–Genzyme LLC using the equity method of accounting. Under this method, the reimbursement of expenses to us is recorded as a reduction to research and development expenses because it includes funding that we provided to Dyax–Genzyme LLC. Our 50.01% share of Dyax–Genzyme LLC loss is recorded as an Equity Loss in Joint Venture (Dyax–Genzyme LLC) in the consolidated statements of operations and comprehensive loss. At December 31, 2004 and  2003, our investment in the joint venture was $254,000 and $817,000, respectively, which is recorded as an Investment in Joint Venture (Dyax–Genzyme LLC) in the consolidated balance sheets.

We have evaluated this agreement to determine if the related joint venture qualifies as a variable interest entity under Financial Accounting Standards Board (FASB) Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R). Both we and Genzyme fund the operations of Dyax–Genzyme LLC on a monthly basis and therefore under Paragraph 5a of FIN 46R, the joint venture qualifies as a variable interest entity because its total equity investment at risk is not sufficient to finance its activities without

29




additional subordinated financial support. We have a financial interest in Dyax–Genzyme LLC. However, based on our analysis of the agreement, we believe that our exposure to the expected losses of Dyax–Genzyme LLC are less than Genzyme’s and therefore we are not the primary beneficiary of Dyax–Genzyme LLC under Paragraph 17 of FIN 46R. Accordingly, we have not consolidated Dyax–Genzyme LLC.

During 1996, we signed two patent license agreements with Genzyme under our standard license terms. We recorded license revenues of $50,000, for each year ended December 31, 2004, 2003 and 2002, in connection with the maintenance fees on these two agreements. As of December 31, 2004 and 2003, there were no outstanding accounts receivable due from Genzyme related to the patent license agreements.

During 2004, we signed a library license agreement with Genzyme consistent with our standard license terms. We received $1.3 million from Genzyme and recorded license revenues of $275,000, for the year ended December 31, 2004, in connection with the technology access fees on this agreement. Of the $1.3 million received under this agreement, approximately $1.0 million has not been recognized as revenue and is included in deferred revenue on the consolidated balance sheet. This amount will be recognized ratably over the next 52 months. As of December 31, 2004, there was no accounts receivable balance related to the library license agreement

Tax Loss Carryforwards

As of December 31, 2004, we had federal net operating loss (NOL) and research and experimentation credit carryforwards of approximately $112.8 million and $11.0 million, respectively, which may be available to offset future federal income tax liabilities and expire at various dates from 2005 through 2024. We have recorded a deferred tax asset of approximately $2.3 million reflecting the benefit of deductions from the exercise of stock options. This deferred asset has been fully reserved until it is more likely than not that the benefit from the exercise of stock options will be realized. The benefit from this $2.3 million deferred tax asset will be recorded as a credit to additional paid-in capital when realized. As required by SFAS No. 109, our management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of NOL and research and experimentation credit carryforwards. Management has determined at this time that it is more likely than not that we will not recognize the benefits of federal and state deferred tax assets and, as a result, a valuation allowance of approximately $59.8 million has been established at December 31, 2004.

Recent Pronouncements

In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-01 provides guidance on determining when an investment is considered impaired, whether that impairment is other than temporary and the measure of the impairment loss. EITF 03-01 also provides new disclosure requirements for other-than-temporary impairments on debt and equity investments. In September 2004, the FASB delayed until further notice the effective date of the measurement and recognition guidance contained in EITF 03-01, however the disclosure requirements are currently effective. The adoption of EITF 03-01 is not expected to have a material impact on our financial position or results of operations.

In March 2004, the EITF reached a final consensus on EITF Issue No. 03-06, Participating Securities and the Two-Class Method under FASB 128, Earnings Per Share. EITF No. 03-06 addresses a number of questions regarding the computation of earnings per share (EPS) by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating EPS. It clarifies what constitutes a participating

30




security and how to apply the two-class method of computing EPS once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. The consensuses reached on EITF No. 03-06 is effective for fiscal periods beginning after March 31, 2004. The adoption of EITF No. 03-06 had no effect on the Company’s financial position, results of operations or cash flows.

In December 2004, the FASB, issued a revision to SFAS 123 Share-Based Payment, also known as SFAS 123R, that amends existing accounting pronouncements for share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method. SFAS 123R’s effective date would be applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after June 15, 2005. SFAS 123R includes three transition methods: one that provides for prospective application and two that provide for retrospective application. We intend to adopt SFAS 123R prospectively commencing in the third quarter of the fiscal year ending December 31, 2005; it is expected that the adoption of SFAS 123R will cause us to record, as expense each quarter, a non-cash accounting charge approximating the fair value of such share based compensation meeting the criteria outlined in the provisions of SFAS 123R; as of December 31, 2004, we have approximately 1,823,084 stock options outstanding which had not yet become vested.

Important Factors That May Affect Future Operations and Results

This Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements appear principally in the sections entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements may appear in other sections of this report as well. Forward-looking statements may appear in other sections of this report as well. Generally, the forward-looking statements in this report use words like “expect,” “believe,” “continue,” “anticipate,” “estimate,” “may,” “will,” “could,” “opportunity,” “future,” “project,” and similar expressions.

The forward-looking statements include statements about our:

·       expected future revenues, operations and expenditures;

·       research and development programs;

·       results of clinical trials and projected timetables for the preclinical and clinical development of, regulatory submissions and approvals for, and market introduction of, our product candidates;

·       income tax benefits;

·       projected cash needs;

·       assessments of competitors and potential competitors;

·       credit facilities; and

·       collaborations.

Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the industry and markets in which we compete. The forward-looking statements contained in this report are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements. We caution investors not to place undue reliance on the forward-looking statements contained in this report. These

31




statements speak only as of the date of this report, and we do not undertake any obligation to update or revise them, except as required by law.

The following factors, among others, create risks and uncertainties that could affect our future or other performance:

·       our history of operating losses and our expectation that we will incur significant additional operating losses;

·       any inability to raise the capital that we will need to sustain our operations;

·       any inability to successfully and expeditiously complete the rigorous clinical trials and regulatory approvals processes that any biopharmaceutical product candidates that we develop must undergo, which could substantially delay or prevent their development or marketing;

·       our dependence on third parties to manufacture biopharmaceuticals, which may adversely affect our ability to commercialize any biopharmaceuticals we may develop;

·       our limited experience in conducting clinical trials, regulatory processes, and sales and marketing activities, any or all of which may adversely impact our ability to commercialize any biopharmaceuticals we may develop;

·       our dependence on our collaborator to successfully and timely complete clinical trials for our DX-890 product candidate;

·       any inability to establish and maintain successful license and collaborative relationships could adversely affect our ability to generate revenues;

·       any failure by us or our collaborators to gain market acceptance of biopharmaceuticals we own or develop;

·       competition and technological change that may make our product candidates and technologies less attractive or obsolete;

·       any inability to obtain and maintain intellectual property protection for our product candidates and technologies;

·       time consuming and expensive proceedings to obtain, enforce or defend patents and to defend against charges of infringement that may result in unfavorable outcomes and could limit our patent rights and our activities;

·       the scope, validity and enforceability of patents and other proprietary rights held by third parties and their impact on our ability to commercialize our product candidates and technology;

·       significant fluctuations in our revenues and operating results, which have occurred in the past and which we expect to continue to fluctuate in the future;

·       any loss or inability to hire and retain qualified personnel;

·       our handling, storage or disposal of hazardous materials used and generated in our business may be time-consuming and expensive;

·       our exposure to product liability;

·       risks associated with international operations and collaborations;

·       any failure to maintain an effective system of internal controls in the future could adversely affect our ability to accurate report financial results or prevent fraud;

32




·       compliance with changing regulation of corporate governance and public disclosure may result in additional expenses;

·       any failure to acquire useful technology and /or integrate complimentary businesses;

·       any inability to obtain continued funding of clinical development product candidates by our development partners;

·       our common stock may continue to have a volatile public trading price and low trading volume; and

·       anti-takeover provisions in our governing documents and under Delaware law and our shareholder rights plan that may make an acquisition of us more difficult.

As a result of the foregoing and other factors, we may experience material fluctuations in our future operating results, which could materially affect our business, financial position, and stock price. These risks and uncertainties are discussed in more detail in Exhibit 99.1 “Important Factors That May Affect Future Operations and Results” to this Form 10-K, which is incorporated into this item by this reference.

33




ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is confined to our cash and cash equivalents, and short-term investments. We place our investments in high-quality financial instruments, primarily U.S. Treasury notes and bills, and obligations of U.S. government agencies, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. As of December 31, 2004, we had cash and cash equivalents, and short-term investments of $57.1 million, consisting of cash and short-term investments. Our short-term investments will decline by an immaterial amount if market interest rates increase, and therefore, our exposure to interest rate changes is immaterial. Declines of interest rates over time will, however, reduce our interest income from our short-term investments.

As of December 31, 2004, we had $12.5 million outstanding under long-term obligations. Interest rates on $5.5 million of these obligations are fixed and therefore are not subject to interest rate fluctuations. The interest rate on the remaining $7 million under the Genzyme promissory note is variable based on the prime interest rate and is therefore subject to interest rate fluctuations. A 2% increase in the prime rate would result in an additional $140,000 in annual interest expense.

Most of our transactions are conducted in U.S. dollars. We have collaboration and technology license agreements with parties located outside of the United States. We also have a research facility located in Europe. Transactions under certain of the agreements between us and parties located outside of the United States, as well as transactions conducted by our foreign facility are conducted in local foreign currencies. If exchange rates undergo a change of up to 10%, we do not believe that it would have a material impact on our results of operations or cash flows.

34







Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Dyax Corp.:

We have completed an integrated audit of Dyax Corp.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Dyax Corp. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index  presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

36




A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 1, 2005

 

37




Dyax Corp. and Subsidiaries
Consolidated Balance Sheets

 

 

  December 31,  
2004

 

  December 31,  
2003

 

 

 

(In thousands, except share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

6,978

 

 

 

$

36,508

 

 

Short-term investments

 

 

50,163

 

 

 

 

 

Accounts receivable, net of allowances for doubtful accounts of $75 at December 31, 2004 and 2003

 

 

3,089

 

 

 

4,683

 

 

Cash in escrow

 

 

 

 

 

5,000

 

 

Prepaid research and development

 

 

1,955

 

 

 

2,568

 

 

Other current assets

 

 

1,375

 

 

 

586

 

 

Total current assets

 

 

63,560

 

 

 

49,345

 

 

Fixed assets, net

 

 

11,867

 

 

 

12,694

 

 

Intangibles, net

 

 

2,437

 

 

 

2,917

 

 

Restricted cash

 

 

4,642

 

 

 

5,213

 

 

Investment in joint venture (Dyax–Genzyme LLC)

 

 

254

 

 

 

817

 

 

Other assets

 

 

 

 

 

201

 

 

Total assets

 

 

$

82,760

 

 

 

$

71,187

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

$

9,611

 

 

 

$

12,564

 

 

Current portion of deferred revenue

 

 

5,280

 

 

 

6,149

 

 

Current portion of long-term obligations

 

 

1,837

 

 

 

3,413

 

 

Total current liabilities

 

 

16,728

 

 

 

22,126

 

 

Deferred revenue

 

 

4,485

 

 

 

1,524

 

 

Obligation to related party

 

 

7,000

 

 

 

7,000

 

 

Long-term obligations

 

 

3,645

 

 

 

3,648

 

 

Deferred rent

 

 

1,914

 

 

 

1,666

 

 

Other long-term liabilities

 

 

1,157

 

 

 

1,278

 

 

Total liabilities

 

 

34,929

 

 

 

37,242

 

 

Commitments and Contingencies (Notes 8, 9, 10, 12 and 17)

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 1,000,000 shares authorized at December 31, 2004 and 2003; 0 shares issued and outstanding at December 31, 2004 and 2003

 

 

 

 

 

 

 

Common stock, $0.01 par value; 125,000,000 and 50,000,000 shares authorized at December 31, 2004 and 2003, respectively; 31,547,627 and 24,887,757 shares issued and outstanding at December 31, 2004 and 2003, respectively

 

 

315

 

 

 

249

 

 

Additional paid-in capital

 

 

198,446

 

 

 

151,445

 

 

Accumulated deficit

 

 

(151,356

)

 

 

(118,242

)

 

Deferred compensation

 

 

 

 

 

(47

)

 

Accumulated other comprehensive income

 

 

426

 

 

 

540

 

 

Total stockholders’ equity

 

 

47,831

 

 

 

33,945

 

 

Total liabilities and stockholders’ equity

 

 

$

82,760

 

 

 

$

71,187

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

38




Dyax Corp. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss

 

 

Years Ended December 31,

 

 

 

2004

 

2003

 

2002

 

 

 

(In thousands, except per share data)

 

Product development and license fee revenues

 

$

16,590

 

$

16,853

 

$

17,750

 

Research and development:

 

 

 

 

 

 

 

Research and development

 

39,432

 

29,990

 

28,713

 

Less research and development expenses reimbursed by joint venture (Dyax–Genzyme LLC)

 

(10,408

)

(5,203

)

 

Net research and development

 

29,024

 

24,787

 

28,713

 

Equity loss in joint venture (Dyax–Genzyme LLC)

 

5,988

 

2,243

 

 

General and administrative

 

14,451

 

13,205

 

14,882

 

Total operating expenses

 

49,463

 

40,235

 

43,595

 

Loss from operations

 

(32,873

)

(23,382

)

(25,845

)

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

786

 

208

 

457

 

Interest expense

 

(1,027

)

(1,320

)

(1,252

)

Total other expense

 

(241

)

(1,112

)

(795

)

Loss from continuing operations

 

(33,114

)

(24,494

)

(26,640

)

Gain on sale of Biotage, net of tax

 

 

18,959

 

 

Loss from discontinued operations of Biotage, net of tax

 

 

(1,880

)

(178

)

Net loss

 

(33,114

)

(7,415

)

(26,818

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(27

)

36

 

410

 

Unrealized loss on short-term investments

 

(87

)

 

 

Comprehensive loss

 

$

(33,228

)

$

(7,379

)

$

(26,408

)

Basic and diluted loss per share:

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(1.06

)

$

(1.04

)

$

(1.35

)

Gain on sale of Biotage

 

 

0.81

 

 

Loss from discontinued operations of Biotage

 

 

(0.08

)

(0.01

)

Net loss

 

$

(1.06

)

$

(0.31

)

$

(1.36

)

Shares used in computing basic and diluted net loss per share

 

31,207,218

 

23,546,524

 

19,652,474

 

 

The accompanying notes are an integral part of the consolidated financial statements.

39




Dyax Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2004, 2003 and 2002
(In thousands, except share data)

 

 

Common Stock

 

Additional

 

 

 

 

 

Accumulated
Other

 

 

 

 

 

Shares

 

Par
Value

 

Paid-in
Capital

 

Accumulated
Deficit

 

Deferred
Compensation

 

Comprehensive
Income (Loss)

 

Total

 

Balance at December 31, 2001

 

19,433,928

 

$

194

 

$

141,384

 

 

$

(84,009

)

 

 

$

(2,199

)

 

 

$

94

 

 

$

55,464

 

Exercise of stock options

 

224,222

 

2

 

395

 

 

 

 

 

 

 

 

 

 

397

 

Issuance of common stock for employee stock purchase plan

 

46,890

 

1

 

249

 

 

 

 

 

 

 

 

 

 

250

 

Deferred compensation

 

 

 

(391

)

 

 

 

 

1,531

 

 

 

 

 

1,140

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

410

 

 

410

 

Net Loss

 

 

 

 

 

(26,818

)

 

 

 

 

 

 

 

(26,818

)

Balance at December 31, 2002

 

19,705,040

 

197

 

141,637

 

 

(110,827

)

 

 

(668

)

 

 

504

 

 

30,843

 

Exercise of stock options

 

351,703

 

4

 

786

 

 

 

 

 

 

 

 

 

 

790

 

Issuance of common stock for employee stock purchase plan

 

109,389

 

1

 

162

 

 

 

 

 

 

 

 

 

 

163

 

Sale of common stock, net of expenses of $521

 

4,721,625

 

47

 

8,214

 

 

 

 

 

 

 

 

 

 

8,261

 

Deferred compensation

 

 

 

(66

)

 

 

 

 

621

 

 

 

 

 

555

 

Compensation expense associated with stock options

 

 

 

712

 

 

 

 

 

 

 

 

 

 

712

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

36

 

 

36

 

Net Loss

 

 

 

 

 

(7,415

)

 

 

 

 

 

 

 

(7,415

)

Balance at December 31, 2003

 

24,887,757

 

249

 

151,445

 

 

(118,242

)

 

 

(47

)

 

 

540

 

 

33,945

 

Exercise of stock options

 

632,414

 

6

 

1,924

 

 

 

 

 

 

 

 

 

 

 

1,930

 

Issuance of common stock for employee stock purchase plan

 

27,456

 

 

124

 

 

 

 

 

 

 

 

 

 

124

 

Sale of common stock, net of expenses of $215

 

6,000,000

 

60

 

44,689

 

 

 

 

 

 

 

 

 

 

44,749

 

Deferred compensation

 

 

 

 

 

 

 

 

 

47

 

 

 

 

 

47

 

Compensation expense associated with stock options

 

 

 

264

 

 

 

 

 

 

 

 

 

 

264

 

Unrealized loss on short-term investments

 

 

 

 

 

 

 

 

 

 

 

(87

)

 

(87

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(27

)

 

(27

)

Net Loss

 

 

 

 

 

(33,114

)

 

 

 

 

 

 

 

 

(33,114

)

Balance at December 31, 2004

 

31,547,627

 

$

315

 

$

198,446

 

 

$

(151,356

)

 

 

$

 

 

 

$

426

 

 

$

47,831

 

 

The accompanying notes are an integral part of the consolidated financial statements.

40

 




Dyax Corp. and Subsidiaries
Consolidated Statements of Cash Flows

 

 

Years Ended December 31,

 

 

 

2004

 

2003

 

2002

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(33,114

)

$

(24,494

)

$

(26,640

)

Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:

 

 

 

 

 

 

 

Amortization of purchased premium/discount

 

754

 

 

 

Depreciation and amortization of fixed assets

 

3,476

 

3,277

 

3,046

 

Amortization of intangibles

 

500

 

500

 

83

 

Amortization of deferred rent

 

(235

)

(235

)

(216

)

Loss on disposal of fixed assets

 

24

 

24

 

 

Compensation expenses associated with stock options

 

311

 

1,267

 

1,140

 

Equity loss in joint venture (Dyax–Genzyme LLC)

 

5,988

 

2,243

 

 

Changes in operating assets and liabilities, net of divestiture:

 

 

 

 

 

 

 

Accounts receivable

 

1,594

 

(1,611

)

169

 

Prepaid research and development, and other assets

 

41

 

(1,342

)

(1,370

)

Accounts payable and accrued expenses

 

(3,014

)

4,567

 

591

 

Deferred revenue

 

2,092

 

506

 

(1,694

)

Other long-term liabilities

 

323

 

378

 

553

 

Proceeds from landlord incentives

 

 

 

2,352

 

Net cash used in operating activities

 

(21,260

)

(14,920

)

(21,986

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of short-term investments

 

(51,004

)

 

 

Purchase of fixed assets

 

(2,305

)

(444

)

(5,241

)

Cash received for sale of Biotage

 

5,000

 

25,427

 

 

Restricted cash

 

597

 

507

 

(1,220

)

Notes receivable, employees

 

 

1,320

 

182

 

Licensed patent technology

 

(20

)

(2,000

)

(1,500

)

Investment in joint venture (Dyax–Genzyme LLC)

 

(5,425

)

(3,060

)

 

Net cash provided by (used in) investing activities

 

(53,157

)

21,750

 

(7,779

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from the issuance of common stock under employee stock purchase plan and exercise of stock options

 

2,054

 

953

 

647

 

Net proceeds from common stock offerings

 

44,749

 

8,261

 

 

Proceeds from landlord for leasehold improvements

 

 

 

2,352

 

Proceeds from long-term obligations

 

1,408

 

171

 

7,000

 

Repayment of long-term obligations

 

(3,304

)

(3,431

)

(2,212

)

Net cash provided by financing activities

 

44,907

 

5,954

 

7,787

 

Effect of foreign currency translation on cash balances

 

(20

)

30

 

65

 

Net cash used in discontinued operations

 

 

(4,505

)

(922

)

Net increase (decrease) in cash and cash equivalents

 

(29,530

)

8,309

 

(22,835

)

Cash and cash equivalents at beginning of the period

 

36,508

 

28,199

 

51,034

 

Cash and cash equivalents at end of the period

 

$

6,978

 

$

36,508

 

$

28,199

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

1,432

 

$

1,104

 

$

981

 

Supplemental disclosure of non cash investing and financing activities:

 

 

 

 

 

 

 

Acquisition of property and equipment under long-term obligations

 

$

212

 

$

306

 

$

3,581

 

Fair value of license patent technology

 

 

 

 

 

$

3,500

 

Less: license fee obligation

 

 

 

 

 

(2,000

)

Cash paid for licensed patent technology

 

$

20

 

$

2,000

 

$

1,500

 

 

The accompanying notes are an integral part of the consolidated financial statements.

41




Dyax Corp. and Subsidiaries
Notes to Consolidated Financial Statements

1.   Nature of Business

Dyax Corp. (Dyax or the Company) is a biopharmaceutical company focused on the discovery, development and commercialization of novel biotherapeutics for unmet medical needs, with an emphasis on cancer and inflammatory indications. Dyax currently has two product candidates in or entering into Phase II clinical trials for three indications, and the Company is planning to initiate a Phase III trial of its lead product candidate in the first half of 2005. DX-88, a specific inhibitor of human plasma kallikrein, is being evaluated in Phase II trials for its potential to treat hereditary angioedema (HAE), a rare and life-threatening inflammatory disease. Two Phase II trials in this indication have been successfully completed and one Phase II trial is ongoing. The DX-88 trials in HAE are being conducted by Dyax in a joint venture with Genzyme Corporation. Dyax is also evaluating DX-88 for its potential to reduce blood loss and related complications during on-pump, open-heart surgery, specifically coronary artery bypass graft, or CABG, surgery. A Phase I/II trial in this indication has been successfully completed by Dyax, and the Company is seeking a partner with whom to advance the CABG program into Phase II development. DX-890, a specific inhibitor of human neutrophil elastase, is being evaluated in Phase II clinical trials in Europe by Debiopharm S.A., Dyax’s collaborator, for its potential in the treatment of cystic fibrosis (CF). Both DX-88 and DX-890 have received orphan drug designation in the United States of America (U.S.) and European Union for angioedema and CF, respectively. In addition, DX-88 has been granted Fast Track designation by the U.S. Food and Drug Administration for the treatment of HAE.

The Company identified DX-88 and DX-890 using its patented phage display technology, which rapidly selects antibodies, peptides and small proteins that bind with high affinity and specificity to therapeutic targets. The Company is using this technology to build a pipeline of drug candidates that may be advanced into clinical development on its own or in partnership with other companies. The Company is also leveraging phage display technology broadly through collaborations and licenses that are structured to generate revenues through research funding, license fees, technical and clinical milestone payments, and royalties. Currently, over 75 companies and research institutions, including Amgen, Inc., Biogen-Idec, Inc., Genzyme Corporation, ImClone Systems, Inc., Human Genome Sciences, Inc., MedImmune, Inc. and Tanox, Inc., have licenses to use the Company’s phage display technology and  phage derived compounds to research and develop therapeutic, diagnostic and other products.

On October 29, 2003, the Company completed the sale of its wholly owned subsidiary know as Biotage. The operations of Biotage for the period ended October 29, 2003 and for the years ended December 31, 2002 are presented as discontinued operations in the consolidated statements of operations and comprehensive loss, and the statements of cash flows.

The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, dependence on collaborative arrangements, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with FDA and other governmental regulations and approval requirements.

2.   Accounting Policies

Basis of Consolidation:   The accompanying consolidated financial statements include the accounts of the Company and its European research subsidiaries Dyax S.A. and Dyax BV (formerly known as TargetQuest BV), and through October 29, 2003, the date of disposal, Biotage and its foreign sales subsidiaries. All inter-company accounts and transactions have been eliminated.

42




Dyax Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

2.   Accounting Policies (Continued)

Reclassifications:   Certain reclassifications have been made to the prior years’ financial statements to conform to current presentation.

Use of Estimates:   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts of assets and liabilities reported and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The significant estimates and assumptions in these financial statements include revenue recognition, receivable collectibility, useful lives with respect to long lived assets, valuation of stock options, accrued expenses and tax valuation reserves. Actual results could differ from those estimates.

Concentration of Credit Risk:   Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-tem investments and trade accounts receivable. At December 31, 2004, approximately 93% of the Company’s cash, cash equivalents and short-term-investments were invested in money market funds backed by U.S. Treasury obligations, U.S. Treasury notes and bills, and obligations of U.S. government agencies held by one financial institution. The Company maintains balances in various operating accounts in excess of federally insured limits.

The Company provides most of its services and licenses its technology to pharmaceutical and biomedical companies worldwide. Concentrations of credit risk with respect to trade receivable balances are limited due to the diverse number of customers comprising the Company’s customer base. Receivable write offs in 2004, 2003 and 2002 were nominal. One customer accounted for approximately 51% and 60% of the Company’s accounts receivable balance at December 31, 2004 and 2003. Another customer accounted for approximately 21% and 13% of the Company’s accounts receivable balance at December 31, 2004 and 2003. One other customer accounted for approximately 10% of the Company’s accounts receivable balance at December 31, 2004.

Cash and Cash Equivalents:   All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash and cash equivalents consist principally of cash and U.S. Treasury funds. The Company currently invests its excess cash in U.S. Treasury funds.

Short-term Investments:   Short-term investments consist primarily of investments with original maturities greater than ninety days and less than one year when purchased. The Company considers its investment portfolio of short-term investments available-for-sale as defined by Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. As of December 31, 2004, the Company’s short-term investments consist of U.S. Treasury notes and bills, and obligations of U.S. government agencies with an amortized cost of $50.3 million, estimated fair value of $50.2 million and had an unrealized loss of $87,000, which is recorded in other comprehensive income on the accompanying consolidated balance sheets. All short-term investments mature in one year or less. The Company held no short-term investments at December 31, 2003.

Fixed Assets:   Property and equipment are recorded at cost and depreciated over the estimated useful lives of the related assets using the straight-line method. Laboratory and production equipment, and furniture and office equipment are depreciated over a three to seven year period. Leasehold improvements

43




Dyax Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

2.   Accounting Policies (Continued)

are stated at cost and are amortized over the lesser of the non-cancelable term of the related lease or their estimated useful lives. Leased equipment is amortized over the lesser of the life of the lease or their estimated useful lives. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation and amortization are eliminated from the balance sheet and any resulting gains or losses are included in operations in the period of disposal.

Goodwill and Other Intangibles:   Prior to January 1, 2002, the Company amortized goodwill on a straight line basis over its useful life, periods not exceeding 15 years. Goodwill had previously been tested for impairment under the provisions of SFAS No. 121, Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of. Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires cessation of goodwill amortization and a fair value approach to testing the impairment of goodwill and other intangibles. After the disposition of the Biotage operations, the Company has no goodwill requiring assessment for impairment at December 31, 2004 and 2003.

Impairment of Long-Lived Assets:   The Company reviews its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flow to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value on a discounted cash flow basis.

Revenue Recognition:   The Company’s revenue recognition policies are in accordance with the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The Company enters into biopharmaceutical product development agreements with collaborative partners for the research and development of therapeutic, diagnostic and separations products. The terms of the agreements may include non-refundable signing and licensing fees, funding for research and development, milestone payments and royalties on any product sales derived from collaborations. Non-refundable signing and licensing fees are recognized as services are performed over the expected term of the collaboration. Funding for research and development, where the amounts recorded are non-refundable is recognized as revenue as the related expenses are incurred. The Company evaluates all collaborative agreements on a quarterly basis to determine the appropriate revenue recognition for that period. The evaluation includes all of the potential revenue components from each specific collaborative agreement. Upon achievement of milestones, a portion of the milestone payment equal to the percentage of the collaboration completed through that date is recognized. The remainder is recognized as services are performed over the remaining term of the collaboration. Royalties are recognized when earned. Costs of revenues related to product development and license fees are classified as research and development in the consolidated statements of operations and comprehensive loss. Debiopharm S.A. accounted for approximately 36%, 25% and 23% of product development and license fee revenues in 2004, 2003 and 2002, respectively. Bracco Imaging S.p.A accounted for approximately 11%, 21% and 20% of product development and license fee revenues in 2004, 2003 and 2002, respectively. Human Genome Sciences, Inc.

44




Dyax Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

2.   Accounting Policies (Continued)

accounted for no product development and license fee revenues in 2004 and approximately 9% and 21% of product development and license fee revenues in 2003 and 2002, respectively.

The Company generally licenses its patent rights covering phage display as well as its proprietary phage display libraries on a non-exclusive basis to third parties for use in connection with the research and development of therapeutic, diagnostic, and other products. Standard terms of the license patent rights agreements, for which the Company has no future obligations, generally include non-refundable signing fees, non-refundable license maintenance fees, development milestone payments and royalties on product sales. Signing fees and maintenance fees are recognized ratably over the period to which the payment applies. Perpetual patent licenses are recognized immediately if the Company has no future obligations. Standard terms of the proprietary phage display libraries agreements gener