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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q 
 (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period
ended March 31, 2005 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
001-16043 ALTEON INC. 
  Delaware
    
    13-3304550(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 6 Campus Drive, Parsippany, New Jersey 07054 
 
 (201) 934-5000 
  Not Applicable 
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Yes þ No o On May 2, 2005, 57,996,711 shares of the registrants Common Stock were outstanding.




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ALTEON INC. INDEX PagePART I  FINANCIAL INFORMATIONItem 1. Condensed Financial Statements (Unaudited)Condensed Balance Sheets as of March 31, 2005 And December 31, 2004
    
    
    3Condensed Statements of Operations for the three months ended March 31, 2005 and 2004
    
    
    4Condensed Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Qualitative and Quantitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 6. Exhibits
    
    
    23SIGNATURES
    
    
    24INDEX TO EXHIBITS
    
    
    25PRINCIPAL EXECUTIVE OFFICER CERTIFICATION PURSUANT TO SECTION 302PRINCIPAL FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302CERTIFICATION PURSUANT TO SECTION 906
 2




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PART I  FINANCIAL INFORMATION 
 ITEM l. Condensed Financial Statements (Unaudited) ALTEON INC. 
 CONDENSED BALANCE SHEETS 
(Unaudited)
 March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    15,415,788
    
    
    $
    11,175,762Other current assets
    
    
    491,558
    
    
    
    159,364Total current assets
    
    
    15,907,346
    
    
    
    11,335,126Property and equipment, net
    
    
    90,760
    
    
    
    107,269Restricted cash
    
    
    200,000
    
    
    
    200,000Total assets
    
    $
    16,198,106
    
    
    $
    11,642,395LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    683,117
    
    
    $
    593,094Accrued expenses
    
    
    1,512,366
    
    
    
    2,002,381Total liabilities
    
    
    2,195,483
    
    
    
    2,595,475Stockholders Equity:Preferred Stock, $0.01 par value,
1,993,329 shares authorized, and 1,304 and 1,277 shares
of Series G and 3,916 and 3,836 shares of Series H
issued and outstanding, as of March 31, 2005 and
December 31, 2004, respectively. The liquidation value at
March 31, 2005, was $52,199,146
    
    
    52
    
    
    
    51Common Stock, $0.01 par value,
175,000,000 shares authorized, and 57,996,711 and
48,472,898 shares issued and outstanding, as of
March 31, 2005 and December 31, 2004, respectively
    
    
    579,967
    
    
    
    484,729Additional paid-in capital
    
    
    224,849,131
    
    
    
    214,274,790Accumulated deficit
    
    
    (211,426,527
    )
    
    
    (205,712,650
    )Total stockholders equity
    
    
    14,002,623
    
    
    
    9,046,920Total liabilities and stockholders equity
    
    $
    16,198,106
    
    
    $
    11,642,395
 The accompanying notes are an integral part of these unaudited financial statements. 3




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ALTEON INC. 
 CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended March 31,2005
    
    
    2004Income:Investment income
    
    $
    99,149
    
    
    $
    37,366Other Income
    
    
    
    
    
    
    51,821Total income
    
    
    99,149
    
    
    
    89,187Expenses:Research and development
    
    
    3,641,100
    
    
    
    2,684,135General and administrative
    
    
    1,100,348
    
    
    
    1,140,045Total expenses
    
    
    4,741,448
    
    
    
    3,824,180Net loss
    
    
    (4,642,299
    )
    
    
    (3,734,993
    )Preferred stock dividends
    
    
    1,071,578
    
    
    
    995,853Net loss applicable to common stockholders
    
    $
    (5,713,877
    )
    
    $
    (4,730,846
    )Basic/diluted net loss per share applicable to
common stockholders
    
    $
    (0.10
    )
    
    $
    (0.12
    )Weighted average common shares used
in computing basic/diluted net loss per
share applicable to common stockholders
    
    
    56,547,028
    
    
    
    40,471,349
 The accompanying notes are an integral part of these unaudited financial statements. 4




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ALTEON INC. 
 CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months Ended March 31,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (4,642,299
    )
    
    $
    (3,734,993
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    17,269
    
    
    
    19,934Stock compensation expense
    
    
    65,707
    
    
    
    3,059Changes in operating assets and liabilities:Other current assets
    
    
    (332,194
    )
    
    
    (210,449
    )Accounts payable and accrued expenses
    
    
    (399,992
    )
    
    
    430,290Net cash used in operating activities
    
    
    (5,291,509
    )
    
    
    (3,492,159
    )Cash flows from investing activities:Capital expenditures
    
    
    (760
    )
    
    
    (76,316
    )Net cash used in investing activities
    
    
    (760
    )
    
    
    (76,316
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    9,532,295
    
    
    
    Net proceeds from exercise of employee stock options
    
    
    
    
    
    
    5,085Net cash provided by financing activities
    
    
    9,532,295
    
    
    
    5,085Net increase/(decrease) in cash and cash equivalents
    
    
    4,240,026
    
    
    
    (3,563,390
    )Cash and cash equivalents, beginning of period
    
    
    11,175,762
    
    
    
    16,678,582Cash and cash equivalents, end of period
    
    $
    15,415,788
    
    
    $
    13,115,192
 The accompanying notes are an integral part of these unaudited financial statements. 5




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ALTEON INC. 
 NOTES TO CONDENSED FINANCIAL STATEMENTS 
(Unaudited)
 Note 1  Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2005, are not necessarily
indicative of the results that may be expected for the year ending December 31, 2005. For further
information, refer to the financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and
Exchange Commission. Note 2  Liquidity The Company has devoted substantially all of its resources to research, drug discovery and
development programs. To date, it has not generated any revenues from the sale of products and
does not expect to generate any such revenues for a number of years, if at all. As a result,
Alteon has incurred net losses since inception, has an accumulated deficit of $211,426,527 as of
March 31, 2005, and expects to incur net losses, potentially greater than losses in prior years,
for a number of years. The Company has financed its operations through proceeds from the sale of common and preferred
equity securities, revenue from former collaborative relationships, reimbursement of certain of our
research and development expenses by collaborative partners, investment income earned on cash and
cash equivalent balances and short-term investments and the sale of a portion of the Companys New
Jersey state net operating loss carryforwards and research and development tax credit
carryforwards. In February 2005, Alteon voluntarily and temporarily suspended enrollment of new patients into
its ongoing clinical studies of alagebrium pending receipt of additional pre-clinical toxicity
data. However, patients currently enrolled in these clinical studies
are permitted to continue treatment. In May 2005, the Company reported encouraging interim results from these ongoing toxicity
tests. The Company also announced its intention to perform an interim analysis of the data from
the ongoing Phase 2b SPECTRA trial of alagebrium in patients with uncontrolled systolic
hypertension. The results of both the pre-clinical data and the interim analysis are expected
approximately mid-year 2005. The Company expects that decisions regarding resumption of enrollment
in these clinical trials will be made at that time. As of March 31, 2005, the Company had working capital of $13,711,863, including $15,415,788 of
cash and cash equivalents. In January 2005, the Company completed the sale of 9,523,813 shares of
common stock, which provided net proceeds of $9,532,295 (see Note 5). The Companys net cash used
in operating activities for the three months ended March 31, 2005 was $5,291,509 and for the year
ended December 31, 2004 was $13,109,869. The Company expects to utilize cash and cash equivalents to fund its operating activities,
including the ongoing Phase 2 studies of our lead compound, alagebrium. The Company will actively
continue to pursue fund-raising possibilities through the sale of its equity securities. If the
Company is unsuccessful in its efforts to raise additional funds through the sale of additional
equity securities or if the level of cash and cash equivalents falls below anticipated levels,
Alteon will be required to significantly reduce or curtail its research and product development
activities, including the number of patients enrolled in the studies and other operations. The
Company has the ability to quickly and significantly reduce its cash burn rate, if necessary, as it
has limited fixed commitments. The Company expects to have sufficient cash and cash equivalents to
satisfy its working capital requirements at least into the first quarter of 2006, either by future
fund-raising or, if needed, curtailment actions. The amount and timing of the Companys future capital requirements will depend on numerous
factors, including the progress of its research and development programs, the number and
characteristics of product candidates that it pursues, the conduct of pre-clinical tests and
clinical studies, the status and timelines of regulatory submissions, the costs associated with
protecting patents and other proprietary rights, the development of marketing and sales
capabilities, the ability to complete strategic collaborations and the availability of third-party
funding. The Company will require, over the long term, substantial new funding to pursue development
and commercialization of alagebrium and its other product candidates and to continue its
operations. Alteon believes that satisfying these capital requirements over the long term will
require successful commercialization of its product 6




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candidates, particularly alagebrium. However, it is uncertain whether any products will be
approved or will be commercially successful. Selling securities to satisfy the Companys short-term and long-term capital requirements may
have the effect of materially diluting the current holders of its outstanding stock. Alteon may
also seek additional funding through corporate collaborations and other financing vehicles. There
can be no assurance that such funding will be available at all or on terms acceptable to the
Company. If adequate funds are not available, the Company may be required to curtail significantly
one or more of its research and development programs. If funds are obtained through arrangements
with collaborative partners or others, the Company may be required to relinquish rights to certain
of its technologies or product candidates. If Alteon is unable to obtain the necessary funding, it
may need to cease operations. Note 3  Stock-Based Compensation The Company accounts for employee stock-based compensation and awards issued to
non-employee directors using the intrinsic value method under Accounting Principles Board, or APB,
Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, under
which no compensation cost (excluding those options granted below fair market value) has been
recognized. Stock option awards issued to consultants and contractors are accounted for in
accordance with Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for
Stock-Based Compensation, SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments that
are Issued To Other Than Employees for Acquiring or In Conjunction with Selling Goods or Services.
In March 2000, the Financial Accounting Standards Board, or the FASB, released Interpretation No.
44, or FIN No. 44, Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25. The interpretation became effective on July 1, 2000, but in
some circumstances applies to transactions that occurred prior to the effective date. Under the
interpretation, stock options that are repriced must be accounted for as variable-plan arrangements
until the options are exercised, forfeited or expire. This requirement applies to any options
repriced after December 15, 1998. On February 2, 1999, the Company repriced certain stock options. There was no non-cash stock
compensation expense resulting from the 1999 repricing for the three months ended March 31, 2005
and 2004, respectively. As of March 31, 2005, there were 388,759 repriced options outstanding,
which expire on various dates through January 2008. If the Company had applied the fair value recognition provisions of SFAS No. 123 to its
employee and director option grants, the Companys pro forma net loss and net loss per share
applicable to common stockholders for the three months ended March 31, 2005 and 2004, would be as
follows: Three Months Ended March 31,2005
    
    
    2004Net loss, as reported
    
    $
    (4,642,299
    )
    
    $
    (3,734,993
    )Less: Total stock-based employee and director
compensation expense determined
under fair value method
    
    
    (464,128
    )
    
    
    (373,436
    )Pro forma net loss
    
    
    (5,106,427
    )
    
    
    (4,108,429
    )Preferred stock dividends
    
    
    1,071,578
    
    
    
    995,853Pro forma net loss applicable to common
stockholders
    
    $
    (6,178,005
    )
    
    $
    (5,104,282
    )Net loss per share applicable to common stockholders:Basic/diluted, as reported
    
    $
    (0.10
    )
    
    $
    (0.12
    )Basic/diluted, pro forma
    
    $
    (0.11
    )
    
    $
    (0.13
    )
 In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS 123(R)), Share-Based
Payment, which is a revision of SFAS 123 and supersedes APB 25 and its related implementation
guidance. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123.
However, SFAS 123(R) requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair values at the date of
grant. As a result of the issuance of SFAS No. 123(R), the Company will be required to expense the
fair value of employee stock options over the vesting period, beginning no later than with its
fiscal quarter ending March 31, 2006. 7




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Note 4  Net Loss Per Share Applicable to Common Stockholders Basic net loss per share is computed by dividing net loss applicable to common
stockholders by the weighted average number of shares outstanding during the period. Diluted net
loss per share is the same as basic net loss per share applicable to common stockholders, since the
assumed exercise of stock options and warrants and the conversion of preferred stock would be
antidilutive. The amount of common stock equivalents excluded from the calculation as of March 31,
2005 and 2004, was 87,780,852 and 32,182,486 shares, respectively. Note 5  Stockholders Equity In January 2005, Alteon completed a public offering of 9,523,813 shares of common stock at
$1.05 per share, which provided net proceeds of $9,532,295. In connection with this offering, the
Company issued to its placement agent in the offering a five-year warrant to purchase 312,381
shares of common stock at $1.37 per share. Series G Preferred Stock and Series H Preferred Stock dividends are payable quarterly in
shares of preferred stock at a rate of 8.5% of the accumulated balance. Each share of Series G
Preferred Stock and Series H Preferred Stock is convertible, upon 70 days prior written notice,
into the number of shares of common stock determined by dividing $10,000 by the average of the
closing sales price of the common stock, as reported on the American Stock Exchange, for the 20
business days immediately preceding the date of conversion. For the three months ended March 31,
2005 and 2004, preferred stock dividends of $1,071,578 and $995,853, respectively, were recorded.
On March 31, 2005, the Series G and Series H Preferred Stock would have been convertible into
19,892,906 common stock shares and 59,739,588 common stock shares, respectively, and had a total
liquidation value of $52,199,146. The Series G and Series H Preferred Stock have no voting rights. 8




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations Overview We are a product-based biopharmaceutical company engaged in the discovery and development of
small molecule drugs to reverse or slow down diseases of aging and complications of diabetes. Our
product candidates represent novel approaches to some of the largest pharmaceutical markets. Our
lead compound, alagebrium (formerly ALT-711), is in Phase 2 clinical development for systolic
hypertension, diastolic dysfunction in heart failure, or DHF, and erectile dysfunction, or ED. We
have identified several other promising drug candidates for future development; none of these other
candidates is currently in active clinical development. Our pharmaceutical candidates were
developed as a result of our research on the Advanced Glycation End-Product, or A.G.E., pathway, a
fundamental pathological process and inevitable consequence of aging that causes or contributes to
many medical disorders. Alagebrium is our lead product candidate and we believe it to be the only A.G.E. Crosslink
Breaker in advanced human clinical testing. We initiated several Phase 2 studies of alagebrium
during 2004: the SPECTRA (Systolic Pressure Efficacy and Safety Trial of Alagebrium)
trial in systolic hypertension and the PEDESTAL (Patients with Impaired Ejection Fraction and
Diastolic Dysfunction: Efficacy and Safety Trial of Alagebrium) study in heart failure, as well as
a study in endothelial dysfunction. We initiated a Phase 2a study in ED, EMERALD (Efficacy and
Safety of Alagebriumin Erectile Dysfunction in Male Diabetics), in January 2005. Several Phase 2
clinical studies have been completed: the DIAMOND (Distensibility Improvement and Remodeling in
Diastolic Heart Failure) study in DHF, the SAPPHIRE/SILVER (Systolic And Pulse Pressure Hemodynamic
Improvement by Restoring Elasticity/Systolic Hypertension Interaction with Left VEntricular
Remodeling) trial in systolic hypertension and a study in cardiovascular compliance. Of the
approximately 1,300 patients who have participated in the Phase 1 and Phase 2 clinical studies of
alagebrium to date, approximately 1,000 patients have received alagebrium and approximately 300
patients have received placebo. The compound has demonstrated an excellent safety profile in all
human clinical testing to date. In December 2004, we announced that findings of a two-year toxicity study indicated that male
Sprague Dawley rats exposed to high doses of alagebrium over their natural lifetime developed
dose-related increases in liver cell alterations including hepatocarcinomas, and that the
alteration rate was slightly over the expected background rate in this gender and species of rat.
The relevance of these findings to humans is unknown. Our Data Monitoring Committee, or DMC, has
reviewed the cumulative human safety data and previous pre-clinical experience of alagebrium and
found that the data did not demonstrate an association with the lifetime carcinogenicity study in
rats. We have previously completed four genotoxicity studies of alagebrium to help determine
potential toxicities in humans, and these studies have not indicated any potential human risk.
Earlier pre-clinical toxicity studies found no mutagenic or carcinogenic activity in either rats or
mice. We also announced in December 2004 our intent to conduct a series of pre-clinical
experiments to explore the mechanism by which the liver alterations developed and the relevance of
such alterations to human exposure. In February 2005, we voluntarily and temporarily suspended
enrollment of new patients into our ongoing clinical studies of alagebrium pending receipt of
additional pre-clinical data. However, patients currently enrolled in these clinical studies are
permitted to continue treatment. In May 2005, we announced that the interim results from the
pre-clinical toxicity tests announced in December 2004 appear to be encouraging, but that we expect
that decisions regarding resumption of enrollment in our clinical trials will be made when the
tests are completed, which is expected to be by mid-year 2005. Prior to resuming enrollment into
any of our clinical studies of alagebrium, we intend to review all relevant findings with
appropriate oversight entities, including our DMC, Investigational Review Boards, or IRBs, and the
U.S. Food and Drug Administration, or FDA. In May 2005, we also announced our intention to perform an interim analysis of the data from
the ongoing Phase 2b SPECTRA trial of alagebrium in patients with uncontrolled systolic
hypertension. The results of this analysis, expected to be done approximately mid-year, will also
help guide us in determining the appropriateness of continuing our development of alagebrium for
uncontrolled systolic hypertension. We cannot predict at this time when enrollment in our clinical studies will resume, if ever.
If we do not resume enrollment in one or more of our clinical studies we will evaluate moving into
more focused clinical trials in different indications or returning to our pre-clinical library of
compounds to identify new compounds to bring forward for further evaluation. Should we be unable
to resume enrollment in our clinical studies, in a timely manner, or at all, our business will be
materially adversely affected. Our primary priorities are to continue the clinical development of alagebrium in systolic
hypertension, diastolic dysfunction in heart failure and ED, and to ensure that we have the funding
and personnel necessary to accomplish this objective. As we continue clinical development of alagebrium, we will determine if it is appropriate to
retain development and marketing rights for one or several indications in North America, while at
the same time continuing to evaluate
potential corporate partnerships for the further development and ultimate marketing of the compound
in other territories throughout the world. We believe that alagebrium may address the
cardiovascular, diabetes, urology and primary care physician markets. 9




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) We continue to evaluate potential pre-clinical and clinical trials in other therapeutic
indications in which A.G.E. Crosslink Breaker compounds may address significant unmet needs. In
addition to our clinical studies in systolic hypertension, heart failure, endothelial dysfunction
and ED, we have early research studies focused on atherosclerosis; Alzheimers disease; photoaging
of the skin; eye diseases, including age-related macular degeneration, or AMD, and glaucoma; and
diabetic complications, including renal diseases. Since our inception in October 1986, we have devoted substantially all of our resources to
research, drug discovery and development programs. To date, we have not generated any revenues
from the sale of products and do not expect to generate any such revenues for a number of years, if
at all. We have incurred an accumulated deficit of $211,427,000 as of March 31, 2005, and expect
to incur net losses, potentially greater than losses in prior years, for a number of years. We have financed our operations through proceeds from public offerings of common stock,
private placements of common and preferred equity securities, revenue from former collaborative
relationships, reimbursement of certain of our research and development expenses by our
collaborative partners, investment income earned on cash and cash equivalent balances and
short-term investments and the sale of a portion of our New Jersey State net operating loss
carryforwards and research and development tax credit carryforwards. Our business is subject to significant risks including, but not limited to, (1) our ability to
resume enrollment in our clinical studies of alagebrium, (2) our ability to obtain funding, (3) the
risks inherent in our research and development efforts, including clinical trials and the length,
expense and uncertainty of the process of seeking regulatory approvals for our product candidates,
(4) our reliance on alagebrium, which is our only significant drug candidate, (5) uncertainties
associated with obtaining and enforcing our patents and with the patent rights of others, (6)
uncertainties regarding government healthcare reforms and product pricing and reimbursement levels,
(7) technological change and competition, (8) manufacturing uncertainties, and (9) dependence on
collaborative partners and other third parties. Even if our product candidates appear promising at
an early stage of development, they may not reach the market for numerous reasons. These reasons
include the possibilities that the products will prove ineffective or unsafe during pre-clinical or
clinical studies, will fail to receive necessary regulatory approvals, will be difficult to
manufacture on a large scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties. These risks and others are discussed
under the heading Forward-Looking Statements and Cautionary Statements. Results of Operations Three Months ended March 31, 2005 and 2004 Total income for the three months ended March 31, 2005 and 2004, was $99,000 and $89,000,
respectively. Investment income for the three months ended March 31, 2005 and 2004 was $99,000 and
$37,000, respectively. This increase was attributed to higher investment balances and interest
rates. In 2004, income also included approximately $52,000 in other income derived from the sale
of fully depreciated laboratory equipment and supplies. Our total expenses were $4,741,000 for the three months ended March 31, 2005, compared to
$3,824,000 for the three months ended March 31, 2004, and in each period consisted primarily of
research and development expenses. Research and development expenses included third-party expenses
associated with pre-clinical and clinical studies, manufacturing costs, including the development
and preparation of clinical supplies, personnel and personnel-related expenses and facility
expenses. In 2005, we continued the clinical development of alagebrium. In January, we announced the
initiation of a Phase 2a study of alagebrium in ED. EMERALD will assess the ability of alagebrium
to restore erectile function in diabetic patients with moderate to severe ED who are insufficiently
responsive to current treatment with Phosphodiesterase Type 5, or PDE5 inhibitors, the first class
of orally-active compounds marketed for ED. In February 2005, we voluntarily and temporarily
suspended enrollment of new patients into EMERALD pending receipt of additional pre-clinical
toxicity data. We expect that decisions regarding resumption of enrollment will be made following
completion of the pre-clinical tests. Prior to resuming enrollment in EMERALD, we intend to review
all relevant findings with appropriate oversight entities, including our DMC, IRBs and the FDA. In March 2004, we initiated SPECTRA, a Phase 2b clinical trial in patients with systolic
hypertension. The trial is being conducted at over 70 clinical sites throughout the United States. In April 2004, we initiated PEDESTAL,
a Phase 2a study being conducted at Baylor Heart Clinic in Houston. PEDESTAL is designed to
evaluate the effect of alagebrium on diastolic dysfunction and left ventricular mass in patients
with significant heart failure. In December 2004, we announced preliminary data from the initial
14 (of planned 20) patients in the study. In February 2005, we voluntarily and temporarily
suspended
enrollment of new patients into both SPECTRA and PEDESTAL pending receipt of additional
pre-clinical data. We expect that decisions regarding resumption of enrollment will be made
following completion of the pre-clinical 10




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) tests. Prior to resuming enrollment in any of our clinical studies of alagebrium, we intend to
review all relevant findings with appropriate oversight entities, including our DMC, IRBs and the
FDA. In May 2005, the Company announced that interim results from the pre-clinical toxicity tests
announced in December 2004 appear encouraging. These toxicity tests are ongoing and are expected
to be completed by mid-year 2005. Decisions regarding resumption of enrollment of patients into
each of the Phase 2 trials will be made at that time. In May 2005, the Company also announced that it intends to perform an interim analysis of the
ongoing Phase 2b SPECTRA trial. The results of this analysis, together with the results of the
pre-clinical toxicity tests under way, will help guide Alteon in determining the next steps for
continuing our development of alagebrium for uncontrolled systolic hypertension and resuming
enrollment in SPECTRA. Research and development expenses were $3,641,000 for the three months ended March 31, 2005,
as compared to $2,684,000 for the same period in 2004, an increase of $957,000, or 35.7%. This
increase was primarily attributed to higher clinical costs and personnel and personnel-related
expenses associated with SPECTRA, and increased pre-clinical expenses related to the additional
toxicity studies referenced above. In 2005, of the total amount spent on research and development
expenses, we incurred $1,275,000 in clinical trial expenses primarily related to SPECTRA,
$1,252,000 in personnel and personnel-related expenses, $441,000 in pre-clinical expenses and
$284,000 related to manufacturing (packaging and distribution). Research and development expenses
for the three months ended March 31, 2004, primarily consisted of $821,000 in personnel and
personnel-related expenses, $760,000 in clinical trial expenses related to the initiation of
SPECTRA, $534,000 related to manufacturing (tableting and packaging) and $152,000 in pre-clinical
expenses. General and administrative expenses were $1,100,000 for the three months ended March 31, 2005,
as compared to $1,140,000 for the same period in 2004. Although general and administrative
expenses remained relatively flat, 2005 includes approximately $200,000 in Sarbanes-Oxley
compliance fees which offset lower business development and patent fees. Our net loss applicable to common stockholders was $5,714,000 for the three months ended March
31, 2005, compared to $4,731,000 in the same period in 2004, an increase of 20.8%, primarily
related to higher clinical trial expenses associated with SPECTRA and additional toxicity studies.
Included in the net loss applicable to common stockholders are preferred stock dividends of
$1,072,000 and $996,000 for the three months ended March 31, 2005 and 2004 respectively. Liquidity and Capital Resources We had cash and cash equivalents at March 31, 2005, of $15,416,000, compared to
$11,176,000 at December 31, 2004. The increase is attributable to $9,532,000 of net cash provided
by financing activities offset by $5,292,000 of net cash used in operating activities, consisting
primarily of research and development expenses, personnel-related costs and facility expenses. At
March 31, 2005, we had working capital of $13,712,000. In January 2005, we completed a public offering of 9,523,813 shares of common stock at $1.05
per share, which provided net proceeds of $9,532,000 (see Note 5). In 2004, we sold $3,456,000 of our gross state net operating loss carryforwards and $123,000
of our state research and development tax credit carryforwards under the State of New Jerseys
Technology Business Tax Certificate Transfer Program, referred to as the Program. The Program
allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of
net operating loss carryforwards and defined research and development tax credits for cash. Due to
the uncertainty at any time as to our ability to effectuate the sale of our available New Jersey
state net operating losses, and since we have no control or influence over the Program, the
benefits are recorded once the agreement with the counterparty is signed and the sale is approved
by the State. The proceeds from the sales in 2004 were $386,000 and were recorded as a tax
benefit in the December 31, 2004 statements of operations. As of December 31, 2004, we had state
net loss carryforwards and state research and development tax credit carryforwards available for
sale of $81,730,000. We cannot be certain if we will be able to sell any or all of these
carryforwards under the Program. We do not have any approved products and currently derive cash from sales of our securities,
sales of our New Jersey state net operating loss carryforwards and interest on cash and cash
equivalents. We are highly susceptible to conditions in the global financial markets and in the
pharmaceutical industry. Positive and negative movement in those markets will continue to pose
opportunities and challenges to us. Previous downturns in the
market valuations of biotechnology companies and of the equity markets more generally have
restricted our ability to raise additional capital on favorable terms. 11




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) We expect to utilize cash and cash equivalents to fund our operating activities, including
the ongoing Phase 2 studies of our lead compound, alagebrium. The first two of these Phase 2
studies, the SPECTRA trial and the PEDESTAL study, were initiated in 2004, and the EMERALD study
was initiated in 2005. In February 2005, Alteon voluntarily and temporarily suspended enrollment
of new patients into its ongoing clinical studies of alagebrium pending receipt of additional
pre-clinical toxicity data. In May 2005, the Company reported encouraging interim results from
these ongoing toxicity tests. The Company also announced its intention to perform an interim
analysis of the data from the ongoing Phase 2b SPECTRA trial of alagebrium in patients with
uncontrolled systolic hypertension. The results of both the pre-clinical data and the interim
analysis are expected by mid-year 2005. The Company expects that decisions regarding resumption of
enrollment in these clinical trials will be made at that time. Clinical studies of alagebrium are
ongoing and patients currently enrolled in these clinical studies are continuing treatment. Assuming enrollment is resumed in all our ongoing trials by mid-year 2005, the remaining cost
of these studies, exclusive of our internal cost, is estimated to be $7.5 million. The cost
includes executed, but cancelable, agreements with outside organizations. The estimated cost
includes additional expenses for SPECTRA as a result of our decision to increase the number of
clinical sites and to engage a clinical research organization. If enrollment does not resume in one
or more of our clinical trials, Alteons cash required for operations may be reduced. In January
2005, we completed a sale of common stock, which provided net proceeds of approximately $9.5
million. We intend to continue to pursue fund-raising possibilities through the sale of our equity
securities actively. If we are unsuccessful in our efforts to raise additional funds through the
sale of additional equity securities, we will be required to significantly reduce or curtail our
research and product development activities, including the number of patients enrolled in our
studies, and other operations if our level of cash and cash equivalents falls below anticipated
levels. We have the intent and ability to quickly and significantly reduce the cash burn rate, if
necessary, as we have limited fixed commitments. We expect to have sufficient cash and cash
equivalents to satisfy our working capital requirements at least into the first quarter of 2006,
either by future fund-raising or, if needed, curtailment actions. The amount and timing of our future capital requirements will depend on numerous factors,
including the progress of our research and development programs, the number and characteristics of
product candidates that we pursue, the conduct of pre-clinical tests and clinical studies, the
status and timelines of regulatory submissions, the costs associated with protecting patents and
other proprietary rights, the development of marketing and sales capabilities, our ability to
complete strategic collaborations and the availability of third-party funding. Our current priorities and the focus of our resources are the evaluation and continued
development of alagebrium and determining the optimal course for the development of other compounds
in our patent estate. As we continue clinical development of alagebrium, we will determine if it
is appropriate to retain development and marketing rights for one or several indications in North
America, while at the same time, continuing to evaluate potential corporate partnerships for the
further development and ultimate marketing of the compound throughout the world. We will require, over the long term, substantial additional funding to pursue development and
commercialization of alagebrium and our other product candidates and to continue our operations.
We believe that satisfying these capital requirements over the long term will require successful
commercialization of our product candidates, particularly alagebrium. However, it is uncertain
whether alagebrium or any product candidate will be approved or will be commercially successful. Selling securities to satisfy our short-term and long-term capital requirements may have the
effect of materially diluting the current holders of our outstanding stock. We may also seek
additional funding through corporate collaborations and other financing vehicles. There can be no
assurance that such funding will be available at all or on terms acceptable to us. If adequate
funds are not available, we may be required to curtail significantly one or more of our research
and development programs. If we obtain funds through arrangements with collaborative partners or
others, we may be required to relinquish rights to certain of our technologies or product
candidates. If we are unable to obtain the necessary funding, we may need to cease operations. Critical Accounting Policies In December 2001, the SEC issued a statement concerning certain views of the SEC regarding
the appropriate amount of disclosure by publicly held companies with respect to their critical
accounting policies. In particular, the SEC expressed its view that in order to enhance investor
understanding of financial statements, companies should explain the effects of critical accounting
policies as they are applied, the judgments made in the application of these policies and the
likelihood of materially different reported results if different assumptions or conditions were to
prevail. We have since carefully reviewed the disclosures included in our filings with the SEC,
including, without limitation, this Quarterly Report on Form 10-Q and accompanying unaudited
financial statements
and related notes thereto. We believe the effect of the following accounting policy is significant
to our results of operations and financial condition. 12




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) We account for options granted to employees and directors using the intrinsic value method
in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on fixed stock grants only if the
current fair value of the underlying stock exceeds the exercise price of the option at the date of
grant and it is recognized on a straight-line basis over the vesting period. Based on the
performance of our stock, we repriced certain employee stock options on February 2, 1999. As a
result of this repricing, options to purchase 1.06 million shares of stock were repriced and
certain vesting periods related to these options were modified or extended. FIN No. 44,
Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion
No. 25 requires us to record compensation expense or benefit, which is adjusted every quarter, for
increases or decreases in the fair value of the repriced options based on changes in our stock
price from the value at July 1, 2000, until adoption of newly issued accounting rules on January 1,
2006 described below. As a result, net loss applicable to common stockholders and net loss per
share applicable to common stockholders may be subject to volatility. Had we accounted for
repricing of stock option grants in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, the expense related to the vested options would have been recorded at the repricing
date, and the expense related to non-vested options would have been recorded over the vesting
period. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS
No. 123(R), which replaces FASB Statement No. 123 and will be effective for us beginning no later
than with our fiscal quarter ending March 31, 2006. This Statement requires that the costs of
employee share-based payments be measured at fair value on the awards grant date using an
option-pricing model and recognized in the financial statements over the requisite service period. SFAS No. 123(R) allows for two alternative transition methods. The first method is the
modified prospective application whereby compensation cost for the portion of awards for which the
requisite service has not yet been rendered that are outstanding as of the adoption date will be
recognized over the remaining service period. The compensation cost for that portion of awards
will be based on the grant date fair value of those awards as calculated for pro forma disclosures
under SFAS No. 123, as originally issued. All new awards and awards that are modified, repurchased
or cancelled after the option date will be accounted for under the provisions of SFAS No. 123(R).
The second method is the modified retrospective application, which requires that we restate prior
period financial statements. We are currently determining which transition method we will adopt
and are evaluating the impact SFAS No. 123(R) will have on our financial position and results of
operations. However, we believe it may have a material effect on our results of operations. Forward-Looking Statements and Cautionary Statements Statements in this Form 10-Q that are not statements or descriptions of historical facts are
forward-looking statements under Section 21E of the Securities Exchange Act of 1934, as amended,
and the Private Securities Litigation Reform Act of 1995, and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking statements made by us or
our representatives are based on a number of assumptions. The words believe, expect,
anticipate, intend, estimate or other expressions, which are predictions of or indicate
future events and trends and which do not relate to historical matters, identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-looking statements,
as they involve risks and uncertainties, and actual results could differ materially from those
currently anticipated due to a number of factors, including those set forth in this section and
elsewhere in this Form 10-Q. These factors include, but are not limited to, the risks set forth
below. The forward-looking statements represent our judgments and expectations as of the date of this
Report. We assume no obligation to update any such forward-looking statements. If we do not obtain sufficient additional funding to meet our needs, we may have to curtail or
discontinue the research, product development, pre-clinical testing and clinical trials of some or
all of our product candidates. As of March 31, 2005, we had working capital of $13,712,000, including $15,416,000 of cash
and cash equivalents. Our cash used in operating activities for the three months ended March 31,
2005 was $5,292,000. Alagebrium is our lead product candidate and we believe it to be the only A.G.E. Crosslink
Breaker in advanced human clinical testing. We initiated several Phase 2 studies of alagebrium
during 2004: the SPECTRA trial in systolic hypertension, the PEDESTAL study in heart failure and a
study in endothelial dysfunction. A Phase 2a study in ED, EMERALD, was initiated in January 2005.
Several Phase 2 clinical studies have been completed: the DIAMOND study in DHF, the
SAPPHIRE/SILVER trial in systolic hypertension and a study in cardiovascular compliance. In
February 2005, Alteon voluntarily and temporarily suspended enrollment of new patients into its
ongoing clinical studies of alagebrium pending receipt of additional pre-clinical toxicity data.
However, patients currently enrolled in these clinical studies are permitted to continue treatment.
In May 2005, the Company reported encouraging interim results from these ongoing toxicity tests.
The Company also announced its intention to perform an interim analysis of the data from the
ongoing Phase 2b SPECTRA trial of alagebrium in patients with uncontrolled 13




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) systolic hypertension. The results of both, the pre-clinical data and the interim analysis are
expected by mid-year 2005. The Company expects that decisions regarding resumption of enrollment
in these clinical trials will be made at that time. Prior to resuming enrollment in any of our
clinical studies of alagebrium, we intend to review all relevant findings with appropriate
oversight entities, including our DMC, IRBs and the FDA. We cannot predict at this time when
enrollment in our clinical studies will resume, if ever. If we are unable to resume enrollment in
our clinical studies in a timely manner, or at all, our business will be materially adversely
affected. We expect to utilize cash and cash equivalents to fund our operating activities, including the
ongoing Phase 2 studies. In January 2005, we completed a sale of common stock that provided net
proceeds of approximately $9.5 million. We will actively continue to pursue fund-raising
possibilities through the sale of our equity securities. If we are unsuccessful in our efforts to
raise additional funds through the sale of additional equity securities or if our level of cash and
cash equivalents falls below anticipated levels, we will be required to significantly reduce or
curtail our research and product development activities, including the number of patients enrolled
in our studies and other operations. We have the ability to quickly and significantly reduce the
cash burn rate, if necessary, as we have limited fixed commitments. We expect to have sufficient
cash and cash equivalents to satisfy our working capital requirements at least into the first
quarter of 2006, either by future fund-raising or, if needed, curtailment actions. The amount and timing of our future capital requirements will depend on numerous factors,
including the progress of our research and development programs, the number and characteristics of
product candidates that we pursue, the conduct of pre-clinical tests and clinical studies, the
status and timelines of regulatory submissions, the costs associated with protecting patents and
other proprietary rights, the development of marketing and sales capabilities, our ability to
complete strategic collaborations and the availability of third-party funding. We will require, over the long term, substantial new funding to pursue development and
commercialization of alagebrium and our other product candidates and to continue our operations.
We believe that satisfying these capital requirements over the long term will require successful
commercialization of our product candidates, particularly alagebrium. However, it is uncertain
whether any products will be approved or will be commercially successful. Selling securities to satisfy our short-term and long-term capital requirements may have the
effect of materially diluting the current holders of our outstanding stock. We may also seek
additional funding through corporate collaborations and other financing vehicles. There can be no
assurance that such funding will be available at all or on terms acceptable to us. If adequate
funds are not available, we may be required to curtail significantly one or more of our research
and development programs. If we obtain funds through arrangements with collaborative partners or
others, we may be required to relinquish rights to certain of our technologies or product
candidates. If we are unable to obtain the necessary funding, we may need to cease operations. Clinical studies required for our product candidates are time-consuming, and their outcome is
uncertain. Before obtaining regulatory approvals for the commercial sale of any of our products under
development, we must demonstrate through pre-clinical and clinical studies that the product is safe
and effective for use in each target indication. Success in pre-clinical studies of a product
candidate may not be predictive of similar results in humans during clinical trials. None of our
products has been approved for commercialization in the United States or elsewhere. As we announced in December 2004, findings of a two-year toxicity study indicated that male
Sprague Dawley rats exposed to high doses of alagebrium over their natural lifetime developed
dose-related increases in liver cell alterations and including hepatocarcinomas, and that the
alteration rate was slightly over the expected background rate in this gender and species of rat.
The relevance of these findings to humans is unknown. As we further announced in February 2005, we
have voluntarily and temporarily suspended enrollment of patients into our active clinical studies
of alagebrium, pending receipt of additional pre-clinical toxicity data. In May 2005, we also
announced our intention to perform an interim analysis of the data from the ongoing Phase 2b
SPECTRA trial of alagebrium in patients with uncontrolled systolic hypertension. The results of
both, the pre-clinical data and the interim analysis are expected by mid-year 2005. The Company
expects that decisions regarding resumption of enrollment in these clinical trials will be made at
that time. Prior to resuming enrollment in any of our clinical studies of alagebrium, we intend to
review all relevant findings with appropriate oversight entities, including the DMC, IRBs and the
FDA. We cannot predict at this time that enrollment in our clinical studies will resume. If we
are unable to resume enrollment in our clinical studies in a timely manner, or at all, our business
will be materially adversely affected. Before a clinical trial may commence in the United States, we must submit an investigational
new drug application, or IND, containing pre-clinical studies, chemistry, manufacturing, control
and other information and a
study protocol to the FDA. If the FDA does not object within 30 days after submission of the
IND, then the trial may commence. If commenced, the FDA may delay, limit, suspend or terminate
clinical trials at any time, or may delay, condition or reject approval of any of our product
candidates, for many reasons. For example: 14




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)  
    ongoing pre-clinical or clinical study results may indicate that the product candidate is not safe or effective;
    the FDA may interpret our pre-clinical or clinical study results to indicate that the
product candidate is not safe or effective, even if we interpret the results differently;
or
    the FDA may deem the processes and facilities that our collaborative partners, our
third-party manufacturers or we propose to use in connection with the manufacture of the
product candidate to be unacceptable. If we do not prove in clinical trials that our product candidates are safe and effective, we
will not obtain marketing approvals from the FDA and other applicable regulatory authorities. In
particular, one or more of our product candidates may not exhibit the expected medical benefits in
humans, may cause harmful side effects, may not be effective to treat the targeted indication or
may have other unexpected characteristics that preclude regulatory approval for any or all
indications of use or limit commercial use if approved. The length of time necessary to complete clinical trials varies significantly and is difficult
to predict. Factors that can cause delay or termination of our clinical trials include:  
    slower than expected patient enrollment due to the nature of the protocol, the proximity
of patients to clinical sites, the eligibility criteria for the study, competition with
clinical trials for other drug candidates or other factors;
    adverse results in pre-clinical safety or toxicity studies;
    lower than expected retention rates of patients in a clinical trial;
    inadequately trained or insufficient personnel at the study site to assist in overseeing
and monitoring clinical trials;
    delays in approvals from a study sites review board, or other required approvals;
    longer treatment time required to demonstrate effectiveness or determine the appropriate product dose;
    lack of sufficient supplies of the product candidate;
    adverse medical events or side effects in treated patients;
    lack of effectiveness of the product candidate being tested; and
    regulatory changes. Even if we obtain positive results from pre-clinical or clinical studies for a particular
product, we may not achieve the same success in future studies of that product. Data obtained from
pre-clinical and clinical studies are susceptible to varying interpretations that could delay,
limit or prevent regulatory approval. In addition, we may encounter delays or rejections based
upon changes in FDA policy for drug approval during the period of product development and FDA
regulatory review of each submitted new drug application, or NDA. We may encounter similar delays
in foreign countries. Moreover, regulatory approval may entail limitations on the indicated uses
of the drug. Failure to obtain requisite governmental approvals or failure to obtain approvals of
the scope requested will delay or preclude our licensees or marketing partners from marketing our
products or limit the commercial use of such products and will have a material adverse effect on
our business, financial condition and results of operations. In addition, some or all of the clinical trials we undertake may not demonstrate sufficient
safety and efficacy to obtain the requisite regulatory approvals, which could prevent or delay the
creation of marketable products. Our product development costs will increase if we have delays in
testing or approvals, if we need to perform more, larger or different clinical or pre-clinical
trials than planned or if our trials are not successful. Delays in our clinical trials may harm
our financial results and the commercial prospects for our products. If we do not successfully develop any products, or are unable to derive revenues from product
sales, we will never be profitable . Virtually all of our revenues to date have been generated from collaborative research
agreements and interest income. We have not received any revenues from product sales. We may not
realize product revenues on a timely basis, if at all, and there can be no assurance that we will
ever be profitable. 15




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) At March 31, 2005, we had an accumulated deficit of $211,427,000. We anticipate that we
will incur substantial, potentially greater, losses in the future as we continue our research,
development and clinical studies. We have not yet requested or received regulatory approval for
any product from the FDA or any other regulatory body. All of our product candidates, including
our lead candidate, alagebrium, are still in research, pre-clinical or clinical development. We
may not succeed in the development and marketing of any therapeutic or diagnostic product. We do
not have any product other than alagebrium in active clinical development, and there can be no
assurance that we will be able to bring any other compound into clinical development. Adverse
results of any pre-clinical or clinical study could cause us to materially modify our clinical
development programs, resulting in delays and increased expenditures, or cease development for all
or part of our ongoing studies of alagebrium. As we announced in December 2004, findings of a
two-year toxicity study indicated that male Sprague Dawley rats exposed to high doses of alagebrium
over their natural lifetime developed dose-related increases in liver cell alterations and
including hepatocarcinomas, and that the alteration rate was slightly over the expected background
rate in this gender and species of rat. The relevance of these findings to humans is unknown. As
we further announced, we have voluntarily and temporarily suspended enrollment of patients into our
ongoing clinical studies of alagebrium, pending receipt of additional pre-clinical data. However,
patients currently enrolled in these clinical studies are permitted to continue treatment. In May
2005, Alteon announced that the interim results from the pre-clinical toxicity tests announced in
December 2004 appear to be encouraging, but that decisions regarding resumption of enrollment in
our clinical trials will be made when the tests are completed, which is expected to be by mid-year
2005. Prior to resuming enrollment into any of our clinical studies of alagebrium, we intend to
review all relevant findings with appropriate oversight entities, including our DMC, IRBs and the
FDA. In May 2005, we also announced that we are preparing to perform an interim analysis of the
data from the ongoing Phase 2b SPECTRA trial of alagebrium in patients with uncontrolled systolic
hypertension. The results of this analysis will also help guide us in determining the
appropriateness of continuing our development of alagebrium for uncontrolled systolic hypertension. We cannot predict at this time that enrollment in our clinical studies will resume. If we are
unable to resume enrollment in our clinical studies in a timely manner, or at all, our business
will be materially adversely affected. We have discussed the findings from the two-year toxicity
study announced in December 2004 with the FDA and intend to conduct additional studies to explore
the mechanism by which the liver alterations developed and will provide that information to the
agency. We cannot yet determine what effect, if any, these preliminary results will have on our
ability to complete clinical development of alagebrium in a timely manner, or at all. To achieve profitable operations, we must, alone or with others, successfully identify,
develop, introduce and market proprietary products. Such products will require significant
additional investment, development and pre-clinical and clinical testing prior to potential
regulatory approval and commercialization. The development of new pharmaceutical products is
highly uncertain and subject to a number of significant risks. Potential products that appear to
be promising at early stages of development may not reach the market for a number of reasons.
Potential products may be found ineffective or cause harmful side effects during pre-clinical
testing or clinical studies, fail to receive necessary regulatory approvals, be difficult to
manufacture on a large scale, be uneconomical, fail to achieve market acceptance or be precluded
from commercialization by proprietary rights of third parties. We may not be able to undertake
additional clinical studies. In addition, our product development efforts may not be successfully
completed, we may not obtain regulatory approvals, and our products, if introduced, may not be
successfully marketed or achieve customer acceptance. We do not expect any of our products,
including alagebrium, to be commercially available for a number of years, if at all. If we are unable to form the collaborative relationships that our business strategy requires,
then our programs will suffer and we may not be able to develop products. Our strategy for developing and deriving revenues from our products depends, in large
part, upon entering into arrangements with research collaborators, corporate partners and others.
We intend to enter into these arrangements, especially in target indications in which our potential
collaborator has particular therapeutic expertise or that involve a market that must be served by
large sales and marketing organizations. The potential market, pre-clinical and clinical study
results and safety profile of our product candidates may not be attractive to potential corporate
partners. As noted above, a recent preliminary report of a two-year toxicity study found that male
rats exposed to high doses of alagebrium over their natural lifetime developed dose-related
increases in liver cell alterations including hepatocarcinomas, and that the alteration rate was
slightly over the expected background rate in this gender and species of rat. Also, as noted
above, in February 2005, we voluntarily and temporarily suspended enrollment into our ongoing
clinical studies of alagebrium pending receipt of additional pre-clinical data. Such results could
adversely affect our ability to enter into research and development collaborations with respect to
alagebrium. We face significant competition in seeking appropriate collaborators and these
collaborations are complex and time-consuming to negotiate and document. We may not be able to
negotiate collaborations on acceptable terms, or at
all. If that were to occur, we may have to curtail the development of a particular product
candidate, reduce or delay its development program or one or more of our other development
programs, delay its potential commercialization or reduce the scope of our sales or marketing
activities, or increase our expenditures and undertake development or 16




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) commercialization activities at our own expense. If we elect to increase our expenditures to
fund development or commercialization activities on our own, we may need to obtain additional
capital, which may not be available to us on acceptable terms, or at all. If we do not have
sufficient funds, we will not be able to bring our product candidates to market and generate
product revenue. Failure to remediate the material weaknesses in our internal controls and to achieve and
maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of
2002 could have a material adverse effect on our business and stock price. On April 22, 2005, we filed an amendment to our Annual Report on Form 10-K for the fiscal
year ended December 31, 2004 (the 10-K Amendment), in which we reported that, as of December 31,
2004, and as required by Section 404 of the Sarbanes-Oxley Act of 2002, management, with the
participation of our principal executive officer and principal financial officer, had assessed the
effectiveness of our internal control over financial reporting based on the framework established
in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Managements assessment included an evaluation of the design of our
internal control over financial reporting and testing of the operational effectiveness of our
internal control over financial reporting. Management reviewed the results of its assessment with
the Audit Committee of our Board of Directors, and based on this assessment, management determined
that as of December 31, 2004, there were three material weaknesses in our internal control over
financial reporting. In light of these material weaknesses, management concluded that, as of
December 31, 2004, Alteon did not maintain effective internal control over financial reporting. The three material weaknesses identified were in the areas of audit committee oversight of the
internal control review process, information technology controls and process controls, and control
over cash disbursements. With respect to each of these matters, as set forth in the Form 10-K
Amendment, management either has implemented, or is in the process of implementing, remedial
measures or procedures to address these matters. However, we cannot currently assure you that the
remedial measures that are currently being implemented will be sufficient to result in a conclusion
that our internal controls no longer contain any material weaknesses, and that our internal
controls are effective. In addition, we cannot assure you that, even if we are able to achieve
effective internal control over financial reporting, our internal controls will remain effective
for any period of time. If we are able to form collaborative relationships, but are unable to maintain them, our
product development may be delayed and disputes over rights to technology may result. We may form collaborative relationships that, in some cases, will make us dependent upon
outside partners to conduct pre-clinical testing and clinical studies and to provide adequate
funding for our development programs. In general, collaborations involving our product candidates pose the following risks to us:  
    collaborators may fail to adequately perform the scientific and pre-clinical studies
called for under our agreements with them;
    collaborators have significant discretion in determining the efforts and resources that
they will apply to these collaborations;
    collaborators may not pursue further development and commercialization of our product
candidates or may elect not to continue or renew research and development programs based on
pre-clinical or clinical study results, changes in their strategic focus or available
funding or external factors, such as an acquisition that diverts resources or creates
competing priorities;
    collaborators may delay clinical trials, provide insufficient funding for a clinical
program, stop a clinical study or abandon a product candidate, repeat or conduct new
clinical trials or require a new formulation of a product candidate for clinical testing;
    collaborators could independently develop, or develop with third parties, products that
compete directly or indirectly with our products or product candidates if the collaborators
believe that competitive products are more likely to be successfully developed or can be
commercialized under terms that are more economically attractive; collaborators with
marketing and distribution rights to one or more products may not commit enough resources
to their marketing and distribution;
    collaborators may not properly maintain or defend our intellectual property rights or
may use our proprietary information in such a way as to invite litigation that could
jeopardize or invalidate our proprietary information or expose us to potential litigation; 17




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)  
    disputes may arise between us and the collaborators that result in the delay or
termination of the research, development or commercialization of our product candidates or
that result in costly litigation or arbitration that diverts management attention and
resources; and
    collaborations may be terminated and, if terminated, may result in a need for additional
capital to pursue further development of the applicable product candidates. In addition, there have been a significant number of business combinations among large
pharmaceutical companies that have resulted in a reduced number of potential future collaborators.
If a present or future collaborator of ours were to be involved in a business combination, the
continued pursuit and emphasis on our product development program could be delayed, diminished or
terminated. Our product candidates will remain subject to ongoing regulatory review even if they receive
marketing approval. If we fail to comply with continuing regulations, we could lose these
approvals and the sale of our products could be suspended. Even if we receive regulatory approval to market a particular product candidate, the
approval could be granted with the condition that we conduct additional costly post-approval
studies or that we limit the indicated uses included in our labeling. Moreover, the product may
later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from
the market or impede or delay our ability to obtain regulatory approvals in additional countries.
In addition, the manufacturer of the product and its facilities will continue to be subject to FDA
review and periodic inspections to ensure adherence to applicable regulations. After receiving
marketing approval, the manufacturing, labeling, packaging, adverse event reporting, storage,
advertising, promotion and record keeping related to the product will remain subject to extensive
regulatory requirements. We may be slow to adapt, or we may never adapt, to changes in existing
regulatory requirements or adoption of new regulatory requirements. If we fail to comply with the regulatory requirements of the FDA and other applicable United
States and foreign regulatory authorities or if previously unknown problems with our products,
manufacturers or manufacturing processes are discovered, we could be subject to administrative or
judicially imposed sanctions, including:  
    restrictions on the products, manufacturers or manufacturing processes;
    warning letters;
    civil or criminal penalties;
    fines;
    injunctions;
    product seizures or detentions;
    import bans;
    voluntary or mandatory product recalls and publicity requirements;
    suspension or withdrawal of regulatory approvals;
    total or partial suspension of production; and
    refusal to approve pending applications for marketing approval of new drugs or
supplements to approved applications. If we cannot successfully develop a marketing and sales force or maintain suitable
arrangements with third parties to market and sell our products, our ability to deliver products to
the market may be impaired. We currently have no experience in marketing or selling pharmaceutical products. In order
to achieve commercial success for any approved product, we must either develop a marketing and
sales force ourselves, or,
where appropriate and permissible, enter into arrangements with third parties to market and sell
our products. We might not be successful in developing marketing and sales capabilities. Further,
we may not be able to enter into marketing and sales agreements with others on acceptable terms,
and any such arrangements, if entered into, may be terminated. If we develop our own marketing and
sales capability, we will compete with other companies that currently have experienced, well funded
and larger marketing and sales operations. To the extent that we enter into 18




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) co-promotion or other sales and marketing arrangements with other companies, our revenues will
depend on the efforts of others, which may not be successful. If we cannot successfully form and maintain suitable arrangements with third parties for the
manufacturing of the products we may develop, our ability to develop or deliver products may be
impaired. We have no experience in manufacturing products and do not have manufacturing facilities.
Consequently, we are dependent on contract manufacturers for the production of products for
development and commercial purposes. The manufacture of our products for clinical trials and
commercial purposes is subject to current cGMP regulations promulgated by the FDA. In the event
that we are unable to obtain or retain third-party manufacturing capabilities for our products, we
will not be able to commercialize our products as planned. Our reliance on third-party
manufacturers will expose us to risks that could delay or prevent the initiation or completion of
our clinical trials, the submission of applications for regulatory approvals, the approval of our
products by the FDA or the commercialization of our products or result in higher costs or lost
product revenues. In particular, contract manufacturers:  
    could encounter difficulties in achieving volume production, quality control and
quality assurance and suffer shortages of qualified personnel, which could result
in their inability to manufacture sufficient quantities of drugs to meet our
clinical schedules or to commercialize our product candidates;
    could terminate or choose not to renew the manufacturing agreement, based on
their own business priorities, at a time that is costly or inconvenient for us;
    could fail to establish and follow FDA-mandated cGMPs, as required for FDA
approval of our product candidates, or fail to document their adherence to cGMPs,
either of which could lead to significant delays in the availability of material
for clinical study and delay or prevent filing or approval of marketing
applications for our product candidates; and
    could breach, or fail to perform as agreed, under the manufacturing agreement. Changing any manufacturer that we engage for a particular product or product candidate may be
difficult, as the number of potential manufacturers is limited, and we will have to compete with
third parties for access to those manufacturing facilities. cGMP processes and procedures
typically must be reviewed and approved by the FDA, and changing manufacturers may require
re-validation of any new facility for cGMP compliance, which would likely be costly and
time-consuming. We may not be able to engage replacement manufacturers on acceptable terms quickly
or at all. In addition, contract manufacturers located in foreign countries may be subject to
import limitations or bans. As a result, if any of our contract manufacturers is unable, for
whatever reason, to supply the contracted amounts of our products that we successfully bring to
market, a shortage would result which would have a negative impact on our revenues. Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the U.S.
Drug Enforcement Agency and corresponding state and foreign agencies to ensure strict compliance
with cGMPs, other government regulations and corresponding foreign standards. While we are
obligated to audit the performance of third-party contractors, we do not have control over our
third-party manufacturers compliance with these regulations and standards. Failure by our
third-party manufacturers or us to comply with applicable regulations could result in sanctions
being imposed on us, including fines, injunctions, civil penalties, failure of the government to
grant pre-market approval of drugs, delays, suspension or withdrawal of approvals, seizures or
recalls of product, operating restrictions and criminal prosecutions. Our current dependence upon
others for the manufacture of our products may adversely affect our profit margin, if any, on the
sale of future products and our ability to develop and deliver such products on a timely and
competitive basis. If we are not able to protect the proprietary rights that are critical to our success, the
development and any possible sales of our product candidates could suffer and competitors could
force our products completely out of the market. Our success will depend on our ability to obtain patent protection for our products,
preserve our trade secrets, prevent third parties from infringing upon our proprietary rights and
operate without infringing upon the proprietary rights of others, both in the United States and
abroad. The degree of patent protection afforded to pharmaceutical inventions is uncertain and our
potential products are subject to this uncertainty. Competitors may develop competitive products
outside the protection that may be afforded by the claims of our patents. We are aware that other
parties have been issued patents and have 19




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) filed patent applications in the United States and foreign countries with respect to other
agents that have an effect on A.G.E.s., or the formation of A.G.E. crosslinks. In addition,
although we have several patent applications pending to protect proprietary technology and
potential products, these patents may not be issued, and the claims of any patents that do issue,
may not provide significant protection of our technology or products. In addition, we may not
enjoy any patent protection beyond the expiration dates of our currently issued patents. We also rely upon unpatented trade secrets and improvements, unpatented know-how and
continuing technological innovation to maintain, develop and expand our competitive position, which
we seek to protect, in part, by confidentiality agreements with our corporate partners,
collaborators, employees and consultants. We also have invention or patent assignment agreements
with our employees and certain, but not all, corporate partners and consultants. Relevant
inventions may be developed by a person not bound by an invention assignment agreement. Binding
agreements may be breached, and we may not have adequate remedies for such breach. In addition,
our trade secrets may become known to or be independently discovered by competitors. The effect of accounting rules relating to our equity compensation arrangements may have an
adverse effect on our stock price and financial condition. Based on the performance of our stock and in order to bolster employee retention, we
repriced certain employee stock options on February 2, 1999. As a result of this repricing,
options to purchase 1.06 million shares of stock were repriced and certain vesting periods related
to these options were modified or extended. This repricing may have a material adverse impact on
future financial performance based on the Financial Accounting Standards Board, or the FASB,
Interpretation No. 44, or FIN No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of Accounting Principles Board, or APB Opinion No. 25. This
interpretation requires us to record compensation expense or benefit, which is adjusted every
quarter, for increases or decreases in the fair value of the repriced options based on changes in
our stock price from the value at July 1, 2000, until the adoption of newly issued accounting rules
on January 1, 2006 described below. The options expire at various dates through January 2008. In December 2004, the FASB issued Statement of Financial Accounting Standards, or SFAS, No.
123 (revised 2004), Share-Based Payment, or SFAS No. 123(R), which replaces FASB Statement No.
123 and will be effective for us beginning no later than with our fiscal quarter ending March 31,
2006. This Statement requires that the costs of employee share-based payments be measured at fair
value on the awards grant date using an option-pricing model and recognized in the financial
statements over the requisite service period. We are currently determining which transition method
we will adopt and are evaluating the impact SFAS No. 123(R) will have on our financial position and
results of operations. However, we believe it may have a material effect on our results of
operations. If we are not able to compete successfully with other companies in the development and
marketing of cures and therapies for cardiovascular diseases, diabetes, erectile dysfunction and
the other conditions for which we seek to develop products, we may not be able to continue our
operations. We are engaged in pharmaceutical fields characterized by extensive research efforts and
rapid technological progress. Many established pharmaceutical and biotechnology companies with
financial, technical and human resources greater than ours are attempting to develop, or have
developed, products that would be competitive with our products. Many of these companies have
extensive experience in pre-clinical and human clinical studies. Other companies may succeed in
developing products that are safer, more efficacious or less costly than any we may develop and may
also be more successful than us in production and marketing. Rapid technological development by
others may result in our products becoming obsolete before we recover a significant portion of the
research, development or commercialization expenses incurred with respect to those products. Certain technologies under development by other pharmaceutical companies could result in
better treatments for cardiovascular disease, diabetes and its related complications or ED.
Several large companies have initiated or expanded research, development and licensing efforts to
build pharmaceutical franchises focusing on these medical conditions, and some companies already
have products approved and available for commercial sale to treat these indications. It is
possible that one or more of these initiatives may reduce or eliminate the market for some of our
products. In addition, other companies have initiated research in the inhibition or crosslink
breaking of A.G.E.s. If governments and third-party payers continue their efforts to contain or decrease the costs
of healthcare, we may not be able to commercialize our products successfully. In certain foreign markets, pricing and/or profitability of prescription pharmaceuticals
are subject to government control. In the United States, we expect that there will continue to be
federal and state initiatives to control and/or reduce pharmaceutical expenditures. In addition,
increasing emphasis on managed care in the United 20




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ITEM 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued) States will continue to put pressure on pharmaceutical pricing. Cost control initiatives could
decrease the price that we receive for any products for which we may receive regulatory approval to
develop and sell in the future and could have a material adverse effect on our business, financial
condition and results of operations. Further, to the extent that cost control initiatives have a
material adverse effect on our corporate partners, our ability to commercialize our products may be
adversely affected. Our ability to commercialize pharmaceutical products may depend, in part, on
the extent to which reimbursement for the products will be available from government health
administration authorities, private health insurers and other third-party payers. Significant
uncertainty exists as to the reimbursement status of newly approved healthcare products, and
third-party payers, including Medicare, frequently challenge the prices charged for medical
products and services. In addition, third-party insurance coverage may not be available to
patients for any products developed by us. Government and other third-party payers are attempting
to contain healthcare costs by limiting both coverage and the level of reimbursement for new
therapeutic products and by refusing in some cases to provide coverage for uses of approved
products for disease indications for which the FDA has not granted labeling approval. If
government and other third-party payers for our products do not provide adequate coverage and
reimbursement levels, the market acceptance of these products would be adversely affected. If the users of the products that we are developing claim that our products have harmed them,
we may be subject to costly and damaging product liability litigation, which could have a material
adverse effect on our business, financial condition and results of operations. The use of any of our potential products in clinical studies and the sale of any approved
products, including the testing and commercialization of alagebrium or other compounds, may expose
us to liability claims resulting from the use of products or product candidates. Claims could be
made directly by participants in our clinical studies, consumers, pharmaceutical companies or
others. We maintain product liability insurance coverage for claims arising from the use of our
products in clinical studies. However, coverage is becoming increasingly expensive, and we may not
be able to maintain or acquire insurance at a reasonable cost or in sufficient amounts to protect
us against losses due to liability that could have a material adverse effect on our business,
financial condition and results of operations. We may not be able to obtain commercially
reasonable product liability insurance for any product approved for marketing in the future, and
insurance coverage and our resources may not be sufficient to satisfy any liability resulting from
product liability claims. A successful product liability claim or series of claims brought against
us could have a material adverse effect on our business, financial condition and results of
operations . If we are unable to attract and retain the key personnel on whom our success depends, our product
development, marketing and commercialization plans could suffer. We depend on the principal members of our management and scientific staff. The loss of
services of any of these personnel could impede the achievement of our development objectives.
Furthermore, recruiting and retaining qualified scientific personnel to perform research and
development work in the future will also be critical to our success. We may not be able to attract
and retain personnel on acceptable terms given the competition between pharmaceutical and
healthcare companies, universities and non-profit research institutions for experienced managers
and scientists. In addition, we rely on consultants to assist us in formulating our research and
development strategy. All of our consultants are employed by other entities and may have
commitments to or consulting or advisory contracts with those other entities that may limit their
availability to us. 21




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ITEM 3. Qualitative and Quantitative Disclosures about Market Risk Our cash and cash equivalents are invested primarily in money market accounts. We do not
use derivative financial instruments. Accordingly, we believe we have limited exposure to market
risk for changes in interest rates. 
 ITEM 4. Controls and Procedures a) Evaluation of Disclosure Controls and Procedures. Our management has evaluated, with
the participation of our Chief Executive Officer and our Vice President, Finance, the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the fiscal quarter covered
by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and
the Vice President, Finance, have concluded that as of the end of such fiscal quarter, our current
disclosure controls and procedures were not effective, because of the material weaknesses in
internal control over financial reporting described below. With the exception of such weaknesses,
however, the Chief Executive Officer and the Vice President, Finance, believe that our current
disclosure controls and procedures are adequate to ensure that information required to be disclosed
in the reports we file under the Exchange Act is recorded, processed, summarized and reported on a
timely basis. b) Material Weaknesses and Changes in Internal Controls. As described in the 10-K Amendment,
management has concluded that, as of December 31, 2004, we had three material weaknesses in our
internal control over financial reporting. Since December 31, 2004, we have made the following
changes in our internal control over financial reporting in order to address these material
weaknesses: 1. INTERNAL CONTROL REVIEW  AUDIT COMMITTEE EFFECTIVENESS. As noted in the 10-K Amendment, the
Audit Committee of our Board of Directors and management initially underestimated the complexity
and depth of work that would be required to comply with the internal control review required under
Section 404 of the Sarbanes-Oxley Act of 2002, as well as the comprehensive nature of the internal
control assessment. As a result, this process was begun later than appropriate and certain
remediation efforts were not completed or tested until after December 31, 2004. Since December 31, 2004, management and the Audit Committee have implemented remedial measures to
address these matters, including establishment of a Disclosure Committee, more rigorous and
documented internal sub-certification procedures, and commitment of additional resources to
document and monitor ongoing changes to our internal control over financial reporting, and to
document Audit Committee involvement with all of the foregoing. 2. INFORMATION TECHNOLOGY CONTROLS AND PROCESS CONTROLS. As noted in the 10-K Amendment, management
has determined that, as of December 31, 2004, we did not adequately document and implement certain
controls over information technology. These areas include certain change management and vendor
management procedures. In addition, certain financial computer program application controls and
related access controls relating to information security were not adequately implemented. Back-up
and recovery processes were not adequately documented, and testing of recovery procedures was not
implemented. The Company has drafted, and is in the process of implementing remedial procedures to
address these matters. 3. CONTROLS OVER CASH DISBURSEMENTS. As noted in the 10-K Amendment, management has determined
that, as of December 31, 2004, inadequate internal controls existed over our processing of cash
disbursements. Specifically, during the fiscal year ended December 31, 2004, a number of checks,
which we believe to be not greater than nine, were issued from our account without signature, and a
number of checks, in amounts greater than $7,500, which we believe to be not greater than eight,
were issued from our account with only one signature, when our internal policy requires that checks
greater than that amount be issued with two signatures. In all instances reviewed by us, the
disbursements had been appropriately authorized and were valid disbursements. Since December 31,
2004, we have implemented remedial controls to address this matter, involving a review of checks
prior to issuance to ensure their signature. c) Except for the changes in controls described above, there were no changes in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting. 22




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PART II  OTHER INFORMATION 
 ITEM 6. Exhibits Exhibits See the Exhibit Index on page 25 for exhibits required to be filed with this
Quarterly Report on Form 10-Q. 23




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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 thereunto duly authorized. Date: May 10, 2005 ALTEON INC.By: /s/Kenneth I. MochKenneth I. Moch
President and Chief Executive Officer
(principal executive officer)By: /s/Elizabeth A. ODellElizabeth A. ODell
Vice President, Finance
Secretary and Treasurer
(principal financial officer)
 24




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EXHIBIT INDEX ExhibitNo.
    
    Description of Exhibit31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 25