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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Filed Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 29, 2001
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INTERLEUKIN GENETICS, INC.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-23413 94-3123681
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(Commission File Number) (IRS Employer Identification No.)
135 Beaver Street, Waltham, Massachussetts 02452
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(Address of Principal Executive Offices) (Zip Code)
(781) 398-0700
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(Registrant's Telephone Number, Including Area Code)
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(Former Name or Former Address, if Changed Since Last Report)
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Item 5. OTHER EVENTS.
This filing is being made for the purpose of updating the factors affecting
Interleukin Genetics Inc.'s (the "Company") business, operating results and
financial condition set forth in the Company's documents on file with the
Securities and Exchange Commission and to provide investors with cautionary
statements regarding any forward-looking statements that may be made from time
to time by the Company in its filings with the Securities and Exchange
Commission, press releases and other public statements.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS AND FACTORS
AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS
AND FINANCIAL CONDITION
Our filings with the Securities and Exchange Commission, our press releases
and our other public statements may include, or may incorporate by reference,
certain statements that may be deemed "forward- looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements relating to our objectives,
strategies, plans, intentions and expectations are forward-looking statements,
as are all statements that address actions, events or circumstances that we
expect, believe or intend will occur in the future (other than statements of
historical facts). We do not undertake to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise. All forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from historical results or
those anticipated in the forward-looking statements. Those risks and
uncertainties include the following:
RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT THESE LOSSES TO CONTINUE IN THE
FUTURE
We have experienced significant operating losses since our inception and
expect these losses to continue for the foreseeable future. We incurred losses
from operations of $0.7 million in fiscal year 1996, $4.1 million in 1997, $9.8
million in 1998, $6.2 million in 1999 and $5.2 million in 2000. As of December
31, 2000, our accumulated deficit was $31.0 million. Our losses result primarily
from research and development and selling, general and administrative expenses.
We have not generated significant revenues from product sales, and we do not
know if we will ever generate significant revenues from product sales. We will
need to generate significant revenues to continue our research and development
programs and achieve profitability. We cannot predict when, if ever, we will
achieve profitability.
IF WE FAIL TO OBTAIN ADDITIONAL CAPITAL, OR OBTAIN IT ON UNFAVORABLE TERMS, THEN
WE MAY HAVE TO END OUR RESEARCH AND DEVELOPMENT PROGRAMS AND OTHER OPERATIONS
We anticipate that our current financial resources are adequate to maintain
our current and planned operations through July 2002. If we cannot raise
additional capital prior to July 2002, we will be unable to fund our business
operations and probably declare bankruptcy.
Our future capital needs depend on many factors. We will need capital for
the commercial launch of additional genetic tests, continued research and
development efforts, obtaining and protecting patents and administrative
expenses. Additional financing may not be available when needed, or, if
available, it may not be available on favorable terms. If we cannot obtain
additional funding on acceptable terms when needed, we
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may have to discontinue operations, or, at a minimum, curtail one or more of our
research and development programs.
THE MARKET FOR GENETIC SUSCEPTIBILITY TESTS IS UNPROVEN
The market for genetic susceptibility tests is at an early stage of
development and may not continue to grow. Both we and the general scientific
community have only a limited understanding of the role of genes in predicting
disease. When we identify a gene or genetic marker that may predict disease, we
conduct clinical trials to confirm the initial scientific discovery and to
establish the scientific discovery's clinical utility in the marketplace. The
results of these clinical trials could limit or delay our ability to bring the
test to market, reduce the test's acceptance by our customers or cause us to
cancel the program, any of which limit or delay sales and cause additional
losses. The only genetic susceptibility test we currently market is PST, and it
has produced only minimal revenues to date. The marketplace may never accept our
products, and we may never be able to sell our products at a profit. We may not
complete development of or commercialize our other genetic susceptibility tests.
The success of our genetic susceptibility tests will depend upon their
acceptance as medically useful and cost-effective by patients, physicians,
dentists, other members of the medical and dental community and by third-party
payors, such as insurance companies and the government. We can achieve broad
market acceptance only with substantial education about the benefits and
limitations of genetic susceptibility tests. Our tests may not gain market
acceptance on a timely basis, if at all. If patients, dentists and physicians do
not accept our tests, or take a longer time to accept them than we anticipate,
then it will reduce our sales, resulting in additional losses.
WE RELY HEAVILY ON THIRD PARTIES TO PERFORM SALES, MARKETING AND DISTRIBUTION
FUNCTIONS ON OUR BEHALF, WHICH COULD LIMIT OUR EFFORTS TO SUCCESSFULLY MARKET
PRODUCTS
We have limited experience and capabilities with respect to distributing,
marketing and selling genetic susceptibility tests. We have relied and plan to
continue to rely significantly on sales, marketing and distribution arrangements
with third parties, over which we have limited influence. If these third parties
do not successfully market our products, it will reduce our sales and increase
our losses. If we are unable to negotiate acceptable marketing and distribution
agreements with future third parties, or if in the future we elect to perform
sales, marketing and distribution functions ourselves, we will incur significant
costs and face a number of additional risks, including the need to recruit
experienced marketing and sales personnel.
WE RELY HEAVILY ON THIRD PARTIES TO PERFORM RESEARCH AND DEVELOPMENT ON OUR
BEHALF, WHICH COULD LIMIT OUR EFFORTS TO SUCCESSFULLY DEVELOP PRODUCTS
We have limited research and development capabilities. In July 1999, we
entered into a new contractual arrangement with the University of Sheffield,
replacing the research and development agreement that had been in place since
1996. Under our arrangement with Sheffield, we will undertake the business
development and commercialization of discoveries resulting from Sheffield's
research. The agreement is non-cancellable for those discoveries on which we and
Sheffield have reached a specific business development agreement, but otherwise
either party can end the arrangement upon six months' notice. If Sheffield ends
our arrangement and we are unable to make alternative arrangements, our ability
to develop new products will be significantly diminished, causing us to
discontinue our operations. This agreement with Sheffield has a five-year term
with an automatic yearly renewal. As part of this arrangement, we issued an
aggregate of 475,000 shares of our common stock to Sheffield and its researchers
in exchange for patent rights and other interests held by Sheffield and its
researchers under our previous project agreements. Our agreement with Sheffield
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requires us to fund agreed upon research and development activities at the
University of Sheffield on our behalf based upon annual budgets. This agreement
automatically renews in one-year increments. We also entered into a five-year
consulting agreement with Sheffield's key collaborator, Dr. Gordon Duff.
Reliance on third party research and development entails risks we would not
be subject to if we performed this function ourselves. These risks include
reliance on the third party for regulatory compliance and quality assurance, the
possibility of breach of the agreement by the third party because of factors
beyond our control and the possibility of termination or nonrenewals of the
agreement by the third party, based on its own business priorities, at a time
that is costly or inconvenient for us. We may in the future elect to perform our
own research and development, which will require us to raise substantial
additional funds and recruit additional qualified personnel.
IF WE ARE UNSUCCESSFUL IN ESTABLISHING ADDITIONAL STRATEGIC ALLIANCES, OUR
ABILITY TO DEVELOP AND MARKET PRODUCTS AND SERVICES WILL BE DAMAGED
Entering into strategic alliances for the development and commercialization
of products and services based on our discoveries is an important element of our
business strategy. We anticipate entering into additional collaborative
arrangements with Sheffield and other parties in the future. We face significant
competition in seeking appropriate collaborators. In addition, these alliance
arrangements are complex to negotiate and time-consuming to document. If we fail
to maintain existing alliances or establish additional strategic alliances or
other alternative arrangements, then our ability to develop and market products
and services will be damaged. In addition, the terms of any future strategic
alliances may be unfavorable to us or these strategic alliances may be
unsuccessful.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS OR
SERVICES BY THIRD PARTY PAYORS, THEN OUR PRODUCTS AND SERVICES WILL NOT BE
COMMERCIALLY VIABLE
The availability and levels of reimbursement by governmental and other
third party payors affect the market for any healthcare service. These third
party payors continually attempt to contain or reduce the costs of healthcare by
challenging the prices charged for medical products and services. Our ability to
successfully commercialize our existing genetic susceptibility tests and others
that we may develop depends on obtaining adequate reimbursement from third-party
payors. The extent of third-party payor reimbursement will likely heavily
influence physicians' and dentists' decisions to recommend genetic
susceptibility tests, as well as patients' elections to pursue testing. If
reimbursement is unavailable or limited in scope or amount, then we cannot sell
our products and services profitably. In particular, third-party payors tend to
deny reimbursement for services which they determine to be investigational in
nature or which are not considered "reasonable and necessary" for diagnosis or
treatment. To date, few third-party payors have agreed to reimburse patients for
genetic susceptibility tests, and we do not know if third-party payors will, in
the future, provide full reimbursement coverage for these genetic tests. If
third-party payors do not provide adequate reimbursement coverage, then
individuals may choose to directly pay for the test. If both third-party payors
and individuals are unwilling to pay for the tests, then the number of tests we
can sell will be significantly decreased, resulting in reduced revenues and
additional losses.
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IF WE FAIL TO OBTAIN PATENT PROTECTION FOR OUR PRODUCTS AND PRESERVE OUR TRADE
SECRETS, THEN COMPETITORS MAY DEVELOP COMPETING PRODUCTS AND SERVICES, WHICH
WILL DECREASE OUR SALES AND MARKET SHARE
Our success will partly depend on our ability to obtain patent protection,
in the United States and in other countries, for our products and services. In
addition, our success will also depend upon our ability to preserve our trade
secrets and to operate without infringing upon the proprietary rights of third
parties.
We have 22 U.S. patent applications pending and a number of foreign
counterparts to these applications, including applications covering some of our
anticipated genetic susceptibility tests. Our patent positions, and those of
other pharmaceutical and biotechnology companies, are generally uncertain and
involve complex legal, scientific and factual questions. Our ability to develop
and commercialize products and services depends on our ability to:
- Obtain patents;
- Obtain licenses to the proprietary rights of others;
- Prevent others from infringing on our proprietary rights; and
- Protect trade secrets.
Our pending patent applications may not result in issued patents or any
issued patents may never afford meaningful protection for our technology or
products. Further, others may develop competing products which avoid legally
infringing upon, or conflicting with, our patents. In addition, competitors may
challenge any patents issued to us, and these patents may subsequently be
narrowed, invalidated or circumvented.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, by confidentiality agreements. The third parties we contract
with may breach these agreements, and we might not have adequate remedies for
any breach. Additionally, our competitors may discover or independently develop
our trade secrets.
THIRD PARTIES MAY OWN OR CONTROL PATENTS OR PATENT APPLICATIONS AND REQUIRE US
TO SEEK LICENSES, WHICH COULD INCREASE OUR COSTS OR PREVENT US FROM DEVELOPING
OR MARKETING OUR PRODUCTS OR SERVICES
We may not have rights under patents or patent applications which are
related to our current or proposed products. Third parties may own or control
these patents and patent applications in the United States and abroad.
Therefore, in some cases, to develop or sell any proposed products or services,
with patent rights controlled by third parties, we or our collaborators may
seek, or may be required to seek, licenses under third-party patents and patent
applications. If this occurs, we will pay license fees or royalties or both to
the licensor. If licenses are not available to us on acceptable terms, we or our
collaborators may be prohibited from developing or selling our products or
services.
If third parties believe our products or services infringe upon their
patents, they could bring legal proceedings against us seeking damages or
seeking to enjoin us from testing, manufacturing or marketing our products or
services. Any litigation could result in substantial expenses to us and
significant diversion of attention by our technical and management personnel.
Even if we prevail, the time, cost and diversion of resources of patent
litigation would likely damage our business. If the other parties in any patent
litigation brought against us are successful, in addition to any liability for
damages, we may have to cease the infringing activity or obtain a license.
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TECHNOLOGICAL CHANGES MAY CAUSE OUR PRODUCTS AND SERVICES TO BE OBSOLETE
Our competitors may develop susceptibility tests that are more effective
than our technologies or that make our technologies obsolete. Innovations in the
treatment of the diseases in which we have products or product candidates could
make our products obsolete. These innovations could prevent us from selling, and
significantly reduce or eliminate the markets for, our products.
WE MAY BE DELISTED FROM NASDAQ RESULTING IN A LIMITED PUBLIC MARKET FOR OUR
COMMON STOCK AND VOLATILITY IN OUR STOCK PRICE
Our common stock is currently listed on the Nasdaq SmallCap Market and the
Boston Stock Exchange. During 1999, we received several notices from Nasdaq
stating that we were not in compliance with their continued listing
requirements. We believe that we currently comply with the continued listing
requirements, but we have not been notified by Nasdaq that we are in compliance.
Regardless, we may not be able to maintain our continued listing on the Nasdaq
or the Boston Stock Exchange.
If Nasdaq or the Boston Stock Exchange delists our shares, then trading
would be conducted in the over-the-counter market in the so-called "pink sheets"
or the OTC Bulletin Board. Selling our common stock will be more difficult
because of reduced trading volume and transaction size, transactions could be
delayed, and security analysts' and news media's coverage, if any, of ILGN will
be reduced. These factors may result in lower prices and larger spreads in the
bid and ask prices for our shares. The delisting of our shares would also
greatly impair our ability to raise additional necessary capital through equity
or debt financing.
Historically, our common stock has experienced low trading volumes. The
market price of our common stock also has been highly volatile, and it may
continue to be highly volatile, as has been the case with the securities of
other public biotechnology companies. Factors such as announcements by us or by
our competitors concerning technological innovations, new commercial products or
procedures, proposed government regulations and developments or disputes
relating to patents or proprietary rights are likely to affect the market price
of our common stock. Changes in the market price of our common stock may bear no
relation to our actual operational or financial results.
WE MAY BE PROHIBITED FROM FULLY USING OUR NET OPERATING LOSS CARRYFORWARDS,
WHICH COULD AFFECT OUR FINANCIAL PERFORMANCE
As a result of the losses incurred in 1998, 1999 and 2000, we have not
recorded a federal income tax provision for those years and have recorded a
valuation allowance against all future tax benefits. As of December 31, 2000, we
had net operating loss carryforwards of approximately $23.3 million for federal
income tax purposes, expiring in varying amounts through the year 2020. We also
had a research tax credit of approximately $317,000 at December 31, 2000, that
expires in varying amounts through the year 2020. Our ability to use these net
operating loss and credit carryforwards is subject to restrictions contained in
the Internal Revenue Code which provide for limitations on our utilization of
our net operating loss and credit carryforwards following a greater than 50%
ownership change during the prescribed testing period. We experienced a change
in ownership interest in June 1999. As a result, approximately $15.6 million of
our net operating loss carryforwards are limited in utilization to approximately
$825,000 annually. The annual limitation may result in the expiration of the
carryforwards prior to utilization.
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WE ARE SUBJECT TO INTENSE COMPETITION FROM COMPANIES, WHICH MAY DAMAGE OUR
BUSINESS
Our industry is highly competitive. Our competitors in the United States
and abroad are numerous and include major pharmaceutical and diagnostic
companies, specialized biotechnology firms, universities and other research
institutions, including those receiving funding from the Human Genome Project.
Many of our competitors have considerably greater financial resources, research
and development staffs, facilities, technical personnel, marketing and other
resources than we do. Furthermore, many of these competitors are more
experienced than we are in discovering, commercializing and marketing products.
These greater resources may allow our competitors to discover important genes or
genetic markers before we do. If we, in conjunction with the University of
Sheffield, do not discover disease predisposing genes and commercialize these
discoveries before our competitors, then our ability to generate sales and
revenues will be reduced or eliminated, and could make our products obsolete. We
expect competition to intensify in our industry as technical advances are made
and become more widely known.
WE ARE SUBJECT TO GOVERNMENT REGULATION WHICH MAY SIGNIFICANTLY INCREASE OUR
COSTS AND DELAY INTRODUCTION OF FUTURE PRODUCTS
The sale, performance or analysis of our genetic tests do not currently
require FDA or regulatory authority approval. Changes in existing regulations
could require advance regulatory approval of genetic susceptibility tests,
resulting in a substantial curtailment or even prohibition of our activities
without regulatory approval. If our genetic tests ever require regulatory
approval, then the costs of introduction will increase and marketing and sales
of products may be significantly delayed.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT ARE COSTLY TO DEFEND AND THAT
COULD LIMIT OUR ABILITY TO USE SOME TECHNOLOGIES IN THE FUTURE
The design, development, manufacture and use of our genetic susceptibility
tests involve an inherent risk of product liability claims and associated
adverse publicity. Producers of medical products face substantial liability for
damages in the event of product failure or allegations that the product caused
harm. We currently maintain product liability insurance, but it is expensive and
difficult to obtain and may not be available in the future on economically
acceptable terms. We may become subject to product liability claims which, even
if they are without merit, could result in significant legal defense costs. We
could be held liable for damages in excess of the limits of our insurance
coverage, and any claim or resulting product recall could create significant
adverse publicity.
ETHICAL, LEGAL AND SOCIAL ISSUES RELATED TO GENETIC TESTING MAY REDUCE DEMAND
FOR OUR PRODUCTS
Genetic testing has raised issues regarding the appropriate utilization and
the confidentiality of information provided by genetic testing. Genetic tests
for assessing a person's likelihood of developing a chronic disease have focused
public attention on the need to protect the privacy of genetic assessment
medical information. For example, concerns have been expressed that insurance
carriers and employers may use these tests to discriminate on the basis of
genetic information, resulting in barriers to the acceptance of genetic tests by
consumers. This could lead to governmental authorities prohibiting genetic
testing or calling for limits on or regulating the use of genetic testing,
particularly for diseases for which there is no known cure. Any of these
scenarios would decrease demand for our products and result in substantial
losses.
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OUR DEPENDENCE ON KEY EXECUTIVES AND SCIENTISTS COULD ADVERSELY IMPACT THE
DEVELOPMENT AND MANAGEMENT OF OUR BUSINESS
Our success substantially depends on the ability, experience and
performance of our senior management and other key personnel. If we lose one or
more of the members of our senior management or other key employees, it could
damage our development programs and our business. In addition, our success
depends on our ability to continue to hire, train, retain and motivate skilled
managerial and scientific personnel. The pool of personnel with the skill that
we require is limited. Competition to hire from this limited pool is intense. We
compete with numerous pharmaceutical and health care companies, as well as
universities and nonprofit research organizations in the highly competitive
Boston, Massachusetts business area. Loss of the services of Dr. Phillip J.
Reilly, our Chairman and CEO, Dr. Kenneth Kornman, our President, or Dr. Paul M.
Martha, our Chief Medical Officer, could delay our research and development
programs and damage our business. We have entered into employment agreements
with three to five year terms with Drs. Reilly, Kornman and Martha. Any of these
employees can terminate his employment upon 30 days notice. We do not maintain
key man life insurance on any of our personnel.
BECAUSE OUR PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS CONTROL A LARGE
PERCENTAGE OF OUR VOTING POWER, OTHER STOCKHOLDERS' VOTING POWER MAY BE LIMITED
As of February 1, 2001, our directors, executive officers and certain of
their affiliates beneficially owned approximately 20% of our outstanding common
stock. Accordingly, these shareholders, individually and as a group, may be able
to influence the outcome of shareholder votes, including votes concerning the
election of directors, the adoption or amendment of provisions in our
Certificate of Incorporation or By-Laws and the approval of certain mergers and
other significant corporate transactions, including a sale of substantially all
of our assets. These shareholders may make decisions that are adverse to other
shareholders' interests. This ownership concentration may also adversely affect
the market price of our common stock.
WE DO NOT EXPECT TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE AND YOU SHOULD NOT
EXPECT TO RECEIVE ANY FUNDS WITHOUT SELLING YOUR SHARES, WHICH YOU MAY ONLY BE
ABLE TO DO AT A LOSS
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any earnings for use in the operation and expansion
of our business and do not anticipate paying any cash dividends in the
foreseeable future. Therefore, you should not expect to receive any funds
without selling your shares, which you may only be able to do at a loss.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERLEUKIN GENETICS, INC.
By /s/ Fenel M. Eloi
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Fenel M. Eloi, Chief Financial Officer,
Secretary and Treasurer
DATE: May 30, 2001
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