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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended ....................................December 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number 0-28674
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CADUS PHARMACEUTICAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3660391
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
777 Old Saw Mill River Road
Tarrytown, New York 10591-6705
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (914) 467-6200
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of
the Company, computed by reference to the closing price on March 19, 1999 was
$5,660,242.
Number of shares outstanding of each class of Common Stock, as of March
19, 1999: 13,068,940 shares.
Special Note Regarding Forward Looking Statements
Certain statements in this Annual Report on Form 10-K, particularly under Items
1 through 8, constitute "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, the Company's lack of developed pharmaceutical products and uncertainties
regarding its ability to develop safe and efficacious pharmaceutical products,
technological uncertainties regarding the Company's technologies including risks
and uncertainties relating to the Company's development and commercial testing
of alternative readout methodologies to replace that found to infringe a patent
of SIBIA Neurosciences, Inc. ("SIBIA"), uncertainties regarding the Company's
future acquisition and licensing of technologies, the Company's relationship
with its collaborative partners and uncertainties regarding its ability to enter
into future collaborative agreements, the Company's capital needs and
uncertainty of future funding, risks and uncertainties relating to the Company's
ongoing litigation with SIBIA, including uncertainties relating to the outcome
of appeals and the re-examination of SIBIA's patent at issue in the litigation,
the Company's history of operating losses, the Company's dependence on
proprietary technology and the unpredictability of patent protection, intense
competition in the pharmaceutical and biotechnology industries, rapid
technological development that may result in the Company's technologies and
future products becoming obsolete, uncertainties regarding the Company's ability
to attract and retain key officers, employees and consultants, as well as other
risks and uncertainties discussed in the Company's prospectus dated July 17,
1996.
PART I
Item 1. Business.
General
Cadus Pharmaceutical Corporation ("Cadus" or the "Company") was
incorporated under the laws of the State of Delaware in January 1992. Cadus is
engaged in the identification of genomic targets in human cell signaling
pathways, the elucidation of their function and the discovery of novel small
molecule therapeutics that act on such targets. The Company is using proprietary
drug discovery technologies based on genetically engineered yeast cells to
simultaneously discover the function of specific genes and create high
throughput screens for the discovery of chemical compounds that act on the
products of such genes. The Company believes that its proprietary technologies
enable it and its collaborative partners to initiate drug discovery against
targets for which conventional techniques cannot initially be used and generally
to accelerate and reduce the cost of the drug discovery process. The Company has
research collaborations with Bristol-Myers Squibb Company ("Bristol-Myers
Squibb"), Solvay Pharmaceuticals B.V. ("Solvay Pharmaceuticals") and SmithKline
Beecham p.l.c. ("SmithKline Beecham").
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Cadus is a leader in the development of proprietary technologies that
exploit the similarities between yeast and human genes to elucidate gene
function and cell signaling pathways. The Company has developed several
proprietary drug discovery technologies. Two of these technologies are used to
identify small molecules that act as agonists or antagonists to cell surface
receptors and other targets in the signal transduction pathway: (i) a hybrid
yeast cell technology that expresses a functioning human receptor and a portion
of its signaling pathway in a yeast cell and (ii) the Autocrine Peptide
Expression ("Apex(TM)") system that expresses in a hybrid yeast cell both a
known human ligand and the receptor that is activated by that ligand. Two other
technologies are used to identify and characterize orphan receptors (receptors
whose function is not known), ligands and key signaling molecules: (i) the
Company's Self Selecting Combinatorial Library ("SSCL(TM)") technologies, which
are used to identify a ligand that activates a targeted orphan receptor and (ii)
the Company's signal transduction technologies, which are used to determine
potential molecular targets in the human cell signaling pathway and to assist in
the determination of a receptor's biological function. The Company has also
developed proprietary software algorithms that it uses to identify potential new
targets from data generated by the Human Genome Project. The Company uses other
complementary technologies, including in-house combinatorial chemistry
libraries, high throughput screening, medicinal chemistry, pharmacology and
mammalian cell biology.
Background
The human body is comprised primarily of specialized cells that perform
different physiological functions and that are organized into organs and
tissues. All human cells contain DNA, which is arranged in a series of subunits
known as genes. It is estimated that there are approximately 100,000 genes in
the human genome. Genes are responsible for the production of proteins. Proteins
such as hormones, enzymes and receptors are responsible for managing most of the
physiological functions of humans, including regulating the body's immune
system. Thus, genes are the indirect control center for all physiological
functions. Over the last few decades, there has been a growing recognition that
many major diseases have a genetic basis. It is now well established that genes
play an important role in diseases such as cancer, cardiovascular disease,
psychiatric disorders, obesity, and metabolic diseases. Significant resources
are being focused on genomics research based on the belief that the sequence and
function of a gene, and the protein that gene expresses, will lead to an
understanding of that gene's role in the functioning and malfunctioning of
cells. This understanding is expected in turn to lead to therapeutic and
diagnostic applications focused on molecular targets associated with the gene
and the protein it expresses.
Cell surface receptors are an important class of proteins involved in
cellular functioning because they are the primary mediators of cell to cell
communication. Their location on the cell surface also makes them the most
accessible targets for drug discovery. Cellular communication occurs when one
cell releases a chemical messenger, called a "ligand," which communicates with
another cell by binding to and activating the receptor on the exterior of the
second cell. Typically, a ligand binds only with one specific receptor or
families of related receptors. This binding event activates the receptor
triggering the transmission of a message through a cascade of signaling
molecules from the exterior to the interior of the cell. This process is called
signal transduction. When the signal is transmitted into the interior of the
cell, it may, among other things, activate or
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suppress specific genes that switch on or switch off specific biological
functions of the cell. The biological response of the cell, such as the
secretion of a protein, depends primarily on the specific ligand and receptor
involved in the communication.
Many diseases, such as cancer, stem from the malfunctioning of cellular
communication. Efforts to treat a particular disease often concentrate on
developing drugs that interact with the receptor or signaling pathway believed
to be associated with the malfunction. These drugs work by inhibiting or
enhancing the transmission of a signal through the cascade of signaling
molecules triggered by the receptor. Drugs that inhibit signal transduction by
blocking a receptor or the intracellular proteins that carry the signal sent by
a receptor are called antagonists and those that enhance signal transduction by
stimulating a receptor or associated intracellular proteins are called agonists.
Human cells carry many different types of receptors. Receptors are
classified into groups based upon similarities in their chemistry and structure.
Some of the major receptor groups involved in signal transduction are: G
Protein-coupled receptors, tyrosine kinase receptors and multisubunit immune
recognition receptors. G Protein-coupled receptors, which are located on the
surface of the cell, constitute the largest group of receptors. In humans, G
Protein-coupled receptors are involved in many of the body's most basic
functions, including heartbeat, sight, sense of smell, cognition and behavior
and also mediate most of the body's basic responses such as secretion from
glands, contractility of blood vessels, movement of cells, growth and cell
death. Tyrosine kinase coupled receptors are involved in cell growth and
differentiation. Multisubunit immune recognition receptors activate the body's
immune defense system.
There are approximately 2,000 G Protein-coupled receptors estimated to
be in the human genome, half of which are believed to be involved in taste,
smell and sight. The importance of G Protein-coupled receptors is demonstrated
by the fact that more than 60% of all currently available prescription drugs
work by interacting with known G Protein-coupled receptors. These drugs include
the anti-ulcer agents Zantac and Tagamet, the anti-depressants Prozac and
Zoloft, and the anti-histamine Claritin. Many of these drugs were developed
through the application of time consuming and expensive trial and error methods
without an understanding of the chemistry and structure of the G Protein-coupled
receptors with which they interact. More efficient drug discovery methods are
available once the gene sequence, biological function and role in disease
processes of a G Protein-coupled receptor have been determined.
The sequences and functions of approximately 200 human G
Protein-coupled receptors have been identified. This knowledge has also been
used to help identify the sequence of at least 100 more orphan G Protein-coupled
receptors. The Company believes that the identification of the gene sequences
and functions of the remaining G Protein-coupled receptors (other than those
involved in taste, smell or sight) will yield a substantial number of potential
drug discovery targets. Scientists working on the Human Genome Project have
sequenced portions of thousands of genes and have published such sequences or
placed them in public databases. Although the Human Genome Project has produced
and made publicly available an ever increasing volume of raw DNA sequences
(including sequence fragments that may represent portions of human G
Protein-coupled receptors),
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such data cannot be used in drug discovery until (i) a DNA sequence is
recognized to comprise a portion of a G Protein-coupled receptor (ii) the full
DNA sequence of the G Protein-coupled receptor is identified, (iii) the function
of the G Protein-coupled receptor is elucidated, and (iv) agonists and/or
antagonists for the G Protein-coupled receptor are identified.
Traditional Drug Discovery
Drug discovery consists of three key elements: (i) the target, such as
a receptor, on which the drug will act, (ii) the potential drug candidates,
which include organic chemicals, proteins or peptides, and (iii) the assays or
tests to screen these compounds to determine their effect on the target.
Historically, drug discovery has been an inefficient and expensive
process. Traditional drug discovery has been hampered by the limited number of
known targets and a reliance on in vitro assays as a format in which to test
compounds. Until scientists began to define the molecular structure of receptors
and ligands, there was no simple method to determine the function of such
molecules in the cell and, therefore, their utility as drug discovery targets.
Even when the target's molecular structure is known, incorporating that target
effectively into an in vitro assay can be difficult. For example, all known G
Protein-coupled receptors are woven through the cell membrane seven times in a
very complex, looped structure that cannot be maintained when the isolated
protein is put into an in vitro assay format. If an assay does not accurately
replicate the structure of a target receptor, the compounds identified in the
assay may not function as expected when applied to the target receptor on a
living cell. Furthermore, receptors, signal transduction proteins and other
molecular targets for therapeutic intervention do not exist in isolation in the
cell. Their functional activity results from a complex interrelationship with
numerous other molecules within the cell. Consequently, traditional drug
screening assays often identify compounds as potential drug candidates which,
when tested in living cells, prove to have no useful activity or are even toxic.
A variety of methods have been developed to address these problems, including
using living cells in assays. However, most live cell assays are slow, complex
and expensive to maintain.
In recent years, scientific advances have created new and improved
tools for drug discovery. For example, molecular biology is identifying a
growing number of targets and their gene sequences. There have been significant
developments in turning these gene sequences into drug discovery candidates.
Cells have been genetically engineered to produce assays that more effectively
replicate the physiological environment of a living organism. Robotics have
enabled the creation of high-throughput screening systems. Combinatorial
chemistry has enhanced the ability to optimize lead compounds by improving their
pharmacological characteristics. However, due to the complexity of G
Protein-coupled receptors and limited knowledge of their gene sequences and
function, these advances do not offer a comprehensive, rapid and cost effective
approach to the identification of drug discovery candidates targeted at G
Protein-coupled receptors.
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Yeast
The Company has developed technologies based on yeast that are useful
in identifying drug discovery candidates targeted at G Protein-coupled
receptors. Yeast is a single-celled microorganism that is commonly used to make
bread, beer and wine. In the 1980's, scientists discovered structural and
functional similarities between yeast cells and human cells. Both yeast and
human cells consist of a membrane, an intracellular region and a nucleus
containing genes. Basic cellular processes, including metabolism, cell division,
DNA and RNA synthesis and signal transduction, are the same in both human and
yeast cells. Yeast also have signal transduction pathways that function
similarly to human cell pathways. More than 40 percent of all human gene classes
have functional equivalents in yeast. The genes in yeast express proteins,
including cell-surface receptors such as G Protein-coupled receptors and
signaling molecules such as protein kinases, that are similar to human proteins.
The Company believes that yeast cells have several important
characteristics that are useful in drug discovery.
o The strong correlation between human and yeast gene classes
enables the evaluation of the biological function of human
proteins, including receptors and signaling molecules, of
unknown function. Proteins with comparable gene sequences
frequently carry out similar functions. This fact can be used
to determine the function of a human gene by genetically
engineering a yeast cell to replace a yeast gene coding for a
known function with the human gene suspected of having a
comparable function. If the yeast cell retains its normal
function, it suggests that the human gene and its protein have
a biological function similar to that of their yeast
counterparts. Consequently, genetically engineered yeast cells
can replicate human gene function and provide a biologically
relevant context for evaluating interactions between receptors
and their related signaling pathways.
o In 1996, the yeast genome was fully sequenced. This knowledge
has facilitated analysis of the correlation between yeast and
human gene structure and aids in the definition of human gene
functions.
o While the yeast signaling mechanism bears many similarities to
the human signaling mechanism, the yeast intracellular
environment is less complex, thus eliminating much of the
ancillary and redundant intracellular signaling pathways that
exist in human cells.
o Yeast have the ability to absorb DNA fragments and incorporate
them into their genome. As a result, their genetic structure
can be easily manipulated using common genetic engineering
techniques.
o Yeast cells replicate rapidly. Speed of replication is
particularly important because creating a new yeast strain
that successfully incorporates new genetic material and
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adapts to new conditions may take several generations and the
strain that so adapts is identifiable by growth. In addition,
because a yeast cell reproduces itself every two hours,
compared with 24 to 48 hours for mammalian cells, a drug
screen using yeast can be developed and evaluated much faster
than one using human cell assays.
o Yeast can be easily and inexpensively grown in the laboratory
using standard microbiological techniques and, as a
consequence, can readily be used in automated screening
systems.
o Yeast are resistant both to the solvents often needed to
dissolve potentially active compounds and the toxins often
found in natural products. Consequently, hybrid yeast cells
can be used to screen libraries of synthetic compounds,
combinatorial chemicals or natural products.
Cadus's Drug Discovery and Development Strategy
The Company's goal is to discover and develop novel small molecule
drugs targeted to receptors and signaling molecules. The following are the key
elements of the Company's strategy:
o Identify and Isolate Human Orphan G Protein-Coupled Receptors.
The Company uses its bioinformatics and cloning capabilities
to identify and isolate human orphan G Protein-coupled
receptors.
o Elucidate the Function of Orphan Receptors. The Company uses
its proprietary yeast-based and signal transduction
technologies to determine the biological function of orphan
receptors in human cells and to determine whether they are
appropriate drug discovery targets.
o Develop Proprietary Yeast-Based Drug Discovery Technologies.
The Company manipulates the yeast genome by inserting human
genes into yeast cells to create hybrid yeast strains as a
novel drug discovery platform.
o Conduct Proprietary Drug Discovery and Development Programs.
The Company conducts proprietary drug discovery programs to
identify lead compounds. The Company uses its combinatorial
chemistry capability and other technologies to develop
selected lead compounds through the preclinical testing stage.
o Collaborate with Pharmaceutical Companies. The Company
collaborates with pharmaceutical companies in order to combine
its drug discovery capabilities with its collaborators'
research, drug development, manufacturing, marketing and
financial resources. The Company is currently engaged in
collaborations with Bristol-Myers Squibb, Solvay
Pharmaceuticals and SmithKline Beecham.
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o Improve Proprietary Technologies and Acquire Complementary
Technologies. The Company expends significant resources on
research to improve its proprietary technologies, including
its yeast-based and signal transduction platform technologies,
bioinformatics and the creation of targeted small molecule
chemical libraries. The Company also seeks to acquire
companies and technologies that will complement its
proprietary technologies.
Cadus's Drug Discovery Platform
The Company has developed a novel platform for drug discovery that
addresses many of the limitations of traditional drug discovery methods. This
platform consists of several proprietary drug discovery technologies including
tools used to screen for compounds that act as agonists or antagonists to cell
surface receptors and other molecules in the signal transduction pathway and
tools used to identify and characterize orphan receptors, ligands and key
signaling molecules.
Hybrid Yeast Cells
The Company has developed a proprietary technology to insert human
genes into yeast cells to create hybrid yeast cells. Initially, the Company has
focused its hybrid yeast cell technology primarily on G Protein-coupled
receptors. The Company's scientists typically create hybrid yeast cells by
replacing yeast G Protein-coupled receptor genes and certain signaling molecules
with their human equivalents. As a result, these hybrid yeast cells express a
human G Protein-coupled receptor and a portion of its signaling pathway. The
Company uses these hybrid yeast cells to identify those compounds that act as
agonists or antagonists to that receptor or a molecule that is in its signaling
pathway. The Company has also created hybrid yeast cells using other classes of
human cell-surface receptors that have a functional equivalent in yeast. To
facilitate drug screen development, the Company has designed and developed more
than ten thousand genetically different yeast strains that it uses to build
novel hybrid yeast cells.
The Company believes that hybrid yeast cells are highly effective for
screening compounds. Hybrid yeast cells can be used to measure the biological
activity of the human signaling pathway in which intervention is desired. In
addition, hybrid yeast cells contain a single human receptor which connects to a
defined signaling pathway. Accordingly, a specific change in cell behavior, such
as replication, is easily monitored and can be attributed to the compound being
tested. Also, because the Company is able to insert different human genes into
yeast, hybrid yeast cells enable the Company to identify compounds that act at
virtually any site in the human cell signaling pathway. These sites include the
ligand binding site on the receptor, as well as other sites on the receptor, and
the protein components of individual signaling pathways. Moreover, because yeast
are resistant to solvents and toxins often used to dissolve test compounds,
hybrid yeast cells can be used to screen synthetic organic libraries,
combinatorial libraries and natural product libraries. The Company and its
collaborative partners use hybrid yeast cells to perform high throughput
screening of compound libraries.
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The Company has developed a biological database that catalogues the
Company's collection of proprietary cells, cell lines, yeast strains and genetic
engineering tools. This database currently has approximately 25,000 entries,
that include the phenotype and the genotype of the cell or yeast strain and its
storage site. The Company's scientists select from this database strains or
cells for their research that, based on their prior experience, will most
readily incorporate a particular receptor, enabling the Company's scientists to
more rapidly construct assays and hybrid yeast cell strains. The Company's
biological database grows by approximately 1,000 new entries per quarter. The
Company believes that its collection of cells, cell lines, yeast strains and
genetic engineering tools in its biological database is unique.
Autocrine Peptide Expression System (Apex(TM))
The Company has extended its hybrid yeast cell technology to develop a
novel drug screening technology. Biological signaling frequently involves the
concerted behavior of at least two cells: one that sends the signal and a second
that receives and responds to that signal. The Company's scientists have
converted this natural multi-cell process into a single cell process by
inserting into a hybrid yeast cell both the human G Protein-coupled receptor and
the gene that causes the yeast cell to produce the ligand that naturally binds
to the receptor being expressed by the same hybrid yeast cell. As a result, the
Company's scientists have made the cell self-stimulating, or "autocrine," in
that it both sends a signal through production and secretion of a ligand and
responds, by replication, to that same signal through the receptor. The Company
believes that the autocrine nature of the Apex(TM) system makes it an effective
tool for the identification of compounds that act as agonists or antagonists
with respect to that receptor or a molecular target in its signaling pathway. As
a result, drug screening may be conducted in an accelerated, cost effective
process as compared to conventional screening techniques.
Self Selecting Combinatorial Library Technology (SSCL(TM))
The Company has developed and is using a systematic approach to
determine the biological function of orphan receptors and demonstrate their
value as drug discovery targets. The critical first step in this approach is to
identify a ligand that activates the orphan receptor. The Company accomplishes
this by using its proprietary SSCL(TM) technology. The SSCL(TM) technology
involves the creation of a library of peptides encoded in DNA, called a
combinatorial peptide expression library. This library is inserted into a strain
of hybrid yeast cells that all express the same orphan receptor. The activation
of this receptor is functionally coupled with cell replication. Each of the
millions of yeast cells in the strain incorporates a different peptide encoded
in DNA, resulting in a library of yeast cells which all express the same orphan
receptor but are each programmed to secrete a different peptide. Most of the
secreted peptides have no effect on the orphan receptor and the hybrid yeast
cells producing these peptides do not replicate. The Company estimates that one
in a million hybrid yeast cells generates a peptide ligand that activates the
orphan receptor. These particular hybrid yeast cells replicate and, therefore,
are readily identified. Thus, the SSCL(TM) technology uses self selection to
identify the ligand that binds to the targeted orphan receptor. The sequence of
the peptide ligand can then be rapidly identified and undergo further
evaluation. The Company's combinatorial peptide expression libraries contain
approximately one hundred million peptides. One to ten million peptides
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can be tested in a matter of hours. The Company has used its SSCL(TM) technology
to successfully identify ligands to orphan receptors in less than a month,
significantly accelerating this step in the drug discovery process.
Once the Company has identified a ligand that activates an orphan
receptor, the Company uses a number of different approaches to determine the
biological significance of the orphan receptor. These include testing the ligand
on human cells, in animals and on human tissue. In addition, the Company uses
its signal transduction technologies to determine the human cell signaling
pathway that is linked to the orphan receptor in order to thereby determine
whether to focus drug discovery efforts at the receptor or in the signaling
pathway.
The strains of hybrid yeast cells constructed for the SSCL(TM) can
simultaneously be used as screens for large libraries of chemical compounds.
This capability enables the Company to seek to identify a peptide ligand to an
orphan receptor while simultaneously creating a high throughput screen for small
molecule agonists and antagonists to that receptor.
Readout Methods
Until December 18, 1998, when the jury issued a verdict in favor of
SIBIA in its patent infringement litigation against the Company, the Company
used a readout method that utilized an added reporter gene to enable detection
of the results from screening compounds against its hybrid yeast cells. After
December 18, 1998, the Company began implementing alternative readout methods to
replace the readout method found to infringe SIBIA's patent. Until these
alternative readout methods are further developed and commercially tested,
certain aspects of the drug discovery efforts of the Company and its
collaborative partners will be delayed. If there are delays in further
developing and commercially testing these alternative readout methods, the
Company's relationships with its collaborative partners could be materially
adversely affected.
Signal Transduction Technologies
The Company has developed signal transduction technologies, based on
genetically engineered human cells, to complement its yeast-based technologies.
The Company can use these signal transduction technologies to dissect human cell
signaling pathways from the receptor to the interior of the cell. As a result,
the Company can confirm the effectiveness of compounds identified through the
use of hybrid yeast cells and ligands identified by the SSCL(TM) technology and
determine where and how compounds and ligands modulate the signaling pathway.
Bioinformatics for Target Identification
The Company has developed proprietary software algorithms that it uses,
together with its extensive knowledge of the structure of G Protein-coupled and
other receptors, to rapidly search through the data generated by the Human
Genome Project for DNA sequences that are likely to be those of G
Protein-coupled receptors. The Company has identified hundreds of partial gene
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sequences that it believes are likely to be portions of G Protein-coupled
receptors. The Company is using such information to seek to fully sequence
orphan G Protein-coupled receptors.
On July 25, 1998, the Company entered into a collaboration agreement
with Genome Therapeutics Corporation, which has bioinformatics technologies and
know-how that it uses to identify and sequence orphan G Protein-coupled
receptors. The objective of the collaboration is to identify and isolate a large
number of full length human orphan G Protein-coupled receptors and other
biological targets and to enter into collaboration agreements, for the benefit
of both the Company and Genome Therapeutics Corporation, with third party
pharmaceutical companies to discover, develop and commercialize products that
act on such orphan G Protein-coupled receptors and other biological targets. The
collaboration agreement has term of ten (10) years, but either party may
terminate it at any time on or after July 25, 1999 upon ninety (90) days prior
written notice to the other party. Each of the Company and Genome Therapeutics
Corporation bears its own expenses of engaging in the collaboration and shares
in the research funding, equity investments, license fees, milestone payments
and royalties that may be received from third party pharmaceutical companies
that enter into collaboration agreements with the Company and/or Genome
Therapeutics Corporation with respect to the G Protein-coupled receptors and
other biological targets identified and isolated pursuant to the collaboration
between the Company and Genome Therapeutics Corporation.
Primary and Secondary Screening Capabilities
High throughput screening, or primary screening, is the practice of
rapidly testing thousands of compounds against a target assay by using
computer-based technologies, including robotics. The Company currently conducts
high throughput screening in-house and uses a laboratory information management
system to handle the vast quantity of data generated.
In May 1998, the Company licensed from Axiom Biotechnologies Inc.
("Axiom") a High Throughput Pharmacology System ("HT-PS(TM)") produced by Axiom.
The HT-PS(TM) measures the immediate physiological responses to chemical
compounds of natural or genetically engineered human cells and performs both
selectivity profiles and dose-response curves. By automating the slow,
labor-intensive and costly process of assessing the pharmacological properties
of potential therapeutic compounds identified through primary screening, the
HT-PS(TM) enables scientists at the Company to accelerate the secondary
screening process and thus the identification of lead compounds.
Combinatorial and Medicinal Chemistry Capabilities
As the Company's drug discovery strategy includes the screening of
compound libraries, access to libraries of compounds is an important aspect of
the Company's drug discovery efforts. The Company develops its own in-house
libraries of compounds by purchasing commercially available compounds and
through automated compound synthesis.
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The Company creates small molecule chemical libraries targeted
specifically at G Protein-coupled receptors. The Company believes that its
collection and knowledge of G Protein-coupled receptors enables it to synthesize
libraries of compounds that have a greater likelihood of interacting with G
Protein-coupled receptors. The Company has created these targeted libraries and
has used them to identify small molecule agonists and antagonists to selected G
Protein-coupled receptors, including orphan receptors.
The Company's use of traditional medicinal and combinatorial chemistry
techniques also allows for the optimization of a compound's pharmacological
characteristics once it has been identified as a drug candidate. Optimization
involves improving the potency, selectivity, in vivo stability, bioavailability
and toxicological characteristics of a lead compound by synthesizing new
compound analogs.
LivingChip(TM) Project
In January 1998 and January 1999, the Company entered into sponsored
research agreements with Massachusetts Institute of Technology ("M.I.T.")
pursuant to which M.I.T. will use its expertise in micro-robotics to co-develop
the LivingChip(TM), a novel drug discovery screening tool that would miniaturize
and automate the Company's proprietary hybrid yeast cell technology. If
developed, the LivingChip(TM) could ultimately accommodate as many as 100,000
yeast-based drug discovery assays on a single CD-sized synthetic disc and could
permit the testing of thousands of compounds on multiple assays at the
individual scientist's lab bench. The Company provided M.I.T. with full research
funding for 1998 and partial funding for 1999 and has the option to extend the
arrangement through the remainder of 1999. In January 1998, the Company also
entered into a license agreement with M.I.T. pursuant to which the Company
obtained exclusive worldwide rights, for use in pharmaceutical, diagnostic,
animal health and agricultural businesses, to the technology developed under the
sponsored research arrangement. In order to maintain its exclusive license, the
Company must provide M.I.T. with a minimum specified level of research funding
for 1998 and 1999 and make a minimum level of expenditures thereafter to
commercialize the technology until the technology is commercialized. The Company
is required to pay M.I.T. an annual license fee, royalties on the sale or lease
of LivingChip(TM) systems, royalties on the sale by the Company of therapeutics
and diagnostics developed using the LivingChip(TM) and royalties on services
rendered by the Company based on the LivingChip(TM). In lieu of royalty payments
on sales by sublicensees of drugs initially identified by sublicensees through
the use of licensed technology, the Company pays an annual fee for each
sublicense in effect, provided that a license to other technology owned or
licensed by the Company was granted to the sublicensee at the same time.
Cadus's Proprietary Drug Discovery Program
The Company is conducting proprietary drug discovery programs to
identify novel targets and lead compounds. The Company currently directs these
efforts exclusively to G Protein-coupled receptors as potential targets for a
variety of therapeutic areas. These therapeutic areas include asthma, glaucoma,
cardiac disease, renal failure, gastrointestinal inflammation and cancer. There
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can be no assurance that the Company's drug discovery efforts will lead to the
discovery of lead compounds in these therapeutic areas.
Asthma. Approximately 14 million people each year suffer from asthma in
the United States. Asthma results from a complex series of physiological events
involving a variety of signaling molecules, including some that are ligands for
G Protein-coupled receptors.
The Company's Asthma Program focuses on subtype-specific antagonists of
adenosine receptors. A considerable body of literature demonstrates that
adenosine is a key physiological mediator of both airway constriction and mast
cell degranulation. These physiological responses are believed to be mediated by
two of the four known subtypes of G Protein-coupled adenosine receptors,
specifically A1 and A2b. In fact, it is very likely that theophylline, a
standard treatment for asthma, acts in part by blocking these receptors. The
Company's scientists are developing as potential asthma therapeutics both
selective A1 receptor antagonists to block broncho-constriction, and selective
A2b receptor antagonists to block the inflammatory component of the disease
mediated by mast cells.
To identify such selective antagonists, the Company's scientists use
yeast-based functional assays for the A1, A2a and A2b subtypes of adenosine
receptors (an A3 assay is under development), as well as mammalian cell-based
functional assays. Binding assays based on receptor expression in yeast and
mammalian cells are also used. Coupled with a chemistry program focused on
generation of selected small molecule agonists and antagonists for adenosine
receptors, these assays enable the Company to rapidly identify compounds that
are potent and subtype specific.
The Company's scientists have identified a potent and selective
antagonist for the A1 receptor. This proprietary non-nucleoside compound has
advanced through initial efficacy testing in animal models. Adenosine
A2b-selective antagonists as well as antagonists with dual selectively for
adenosine A1 and A2b receptors have been identified. The Company's scientists
have also identified subtype-specific antagonists of A2a and A3 as well as
non-nucleoside based agonists for the adenosine A2a receptor subtypes that may
have application to therapeutic indications other than asthma.
SCLC. Approximately 20% of all lung cancer is small-cell lung carcinoma
("SCLC"), and approximately 35,000 people each year are diagnosed with this
disease in the United States. The disease is characterized by rapid tumor growth
and metastasis, and the mean survival of untreated patients is only two to three
months. SCLC generally cannot be surgically removed and chemotherapy has not
been effective. When stimulated, certain G Protein-coupled receptors cause SCLC
growth. Based on this knowledge, the Company has used its signal transduction
technologies and identified small molecules that selectively cause the death of
SCLC cells in vitro. The Company has used its hybrid yeast cells and other
technologies to identify small molecules that may mimic the action of SCLC
death-promoting peptides in cells. The Company entered such small molecules into
initial animal studies during 1998 but the studies were inconclusive.
Accordingly, the Company plans to cease its SCLC Program.
13
Collaborative Arrangements
As a key part of its business strategy, the Company pursues
collaborations with pharmaceutical companies to combine the Company's drug
discovery capabilities with the collaborators' research, drug development,
manufacturing, marketing and financial resources. The Company has existing
collaborative arrangements with three pharmaceutical companies and is currently
in discussions with several other pharmaceutical companies regarding potential
collaborations. The Company structures its collaborations around specific
targets, such as receptors, rather than in specific therapeutic areas. This
approach enables the Company to broadly exploit its drug discovery technologies,
while retaining maximum flexibility in pursuing additional collaborations. In
addition, the Company has structured its collaborations so that while each
collaborator has exclusive rights to particular molecular targets, the reagents,
yeast strains and cell lines (without the molecular target) created as part of a
collaboration are available to the Company and its other collaborators. This
structure enables the Company to grant exclusivity to particular targets while
retaining rights to improvements to its core technologies for use in its
internal programs and collaborations with others. There can be no assurance,
however, that the current collaborations will result in the development of
drugs, any new collaboration will be established or, if a collaboration is
established, it will be on terms favorable to the Company. Failure either to
maintain its existing, or enter into any new, collaborations could limit the
scope of the Company's drug discovery and development activities, particularly
if alternative sources of funding are unavailable. Such failure could have a
material adverse effect on the Company's business, financial condition and
results of operations.
On January 29, 1999, SIBIA obtained an injunction that precludes the
Company from using the readout method covered by a patent owned by SIBIA. See
"Legal Proceedings." The injunction does not bar the Company from providing
certain specified screening assays that utilize a readout method covered by the
SIBIA patent to Bristol-Myers Squibb and SmithKline Beecham, two of the
Company's collaborative partners, and does not bar Bristol-Myers Squibb or
SmithKline Beecham from using those assays for screening purposes, up to a
specified number of compounds and/or natural product samples. The injunction
does not affect Solvay Pharmaceuticals since it utilizes screening assays
obtained from the Company solely outside the United States. The Company has
begun implementing alternative readout methods in its screening assays. Until
these alternative readout methods are further developed and commercially tested,
certain aspects of the drug discovery efforts of the Company and its
collaborative partners will be delayed. If there are delays in further
developing and commercially testing these alternative readout methods, the
Company's relationship with its collaborative partners could be materially
adversely affected.
The Company's existing collaborations are as follows:
The Bristol-Myers Squibb Collaboration
In July 1994, the Company and Bristol-Myers Squibb entered into a
three-year drug discovery collaboration. In January 1997, Bristol-Myers Squibb
exercised its option to extend the research collaboration until July 1999. In
March 1999, the Company and Bristol-Myers Squibb
14
amended their collaboration arrangement to specify the amount of research
funding to be provided by Bristol-Myers Squibb for the period January 1, 1999
through the expiration of the research collaboration in July 1999 and to relieve
the Company of allocating a specific number of scientists to the research
collaboration. Since the research collaboration will expire in July 1999, the
Company intends to significantly reduce the number of scientists that it
allocates to the research collaboration for the remainder of its term. The
research collaboration focused on certain G Protein-coupled receptors whose
functions are known, certain orphan receptors and certain other molecular
targets as targets for drug discovery in a variety of therapeutic areas.
From July 1994 through December 31, 1998, Bristol-Myers Squibb paid the
Company approximately $17.9 million in research funding. For the period January
1, 1999 through the expiration of the research program in July 1999,
Bristol-Myers Squibb Company is obligated to pay the Company approximately $1.3
million in research funding. Bristol-Myers Squibb is required to make payments
to the Company upon the achievement by Bristol-Myers Squibb of certain
pre-clinical and drug development milestones and to pay the Company royalties on
the sale of any drugs developed as a result of the research program or through
the use of the Company's drug discovery technologies. There can be no assurance
that the collaboration will result in the development of any drugs.
Bristol-Myers Squibb purchased $12.5 million of the Company's Series B
Preferred Stock in July 1994, an additional $5.0 million of such Series B
Preferred Stock in September 1995 upon the Company achieving a research
milestone and $2.5 million of the Company's Common Stock in the Company's
initial public offering in July 1996. All such shares of Series B Preferred
Stock were converted into shares of Common Stock on July 22, 1996. Bristol-Myers
Squibb has certain registration rights with respect to the shares of Common
Stock issued to it upon such conversion.
The Solvay Pharmaceuticals Collaboration
In November 1995, the Company and Solvay Pharmaceuticals (an indirect
wholly-owned subsidiary of Solvay S.A.) entered into a drug discovery
collaboration. The collaboration focuses on certain G Protein-coupled receptors
whose functions are known, certain orphan receptors and certain other molecular
targets as targets for drug discovery in a variety of therapeutic areas. These
therapeutic areas include cardiovascular disease, central nervous system
disorders, gynecological diseases and gastrointestinal indications. The Company
has provided Solvay Pharmaceuticals with a number of targets and assays that
Solvay Pharmaceuticals is using to search for novel therapeutics.
During the term of the research program, which expires in December
2000, Solvay Pharmaceuticals is required to provide the Company with research
funding of up to $2.5 million each year, adjusted for inflation. From November
1995 through February 28, 1999, Solvay Pharmaceuticals paid the Company
approximately $8.8 million in research funding. Solvay Pharmaceuticals is
required to make payments to the Company upon the achievement by Solvay
Pharmaceuticals of certain drug development milestones and to pay the Company
royalties on the
15
sale of drugs developed through the use of the Company's drug discovery
technologies. There can be no assurance that the collaboration will result in
the development of any drugs.
The term of the research program may be extended by Solvay
Pharmaceuticals for between two and five years by notice to the Company given at
least two years (and in some circumstances at least 18 months) prior to January
2001. Solvay Pharmaceuticals has the right under certain circumstances to
terminate the program after July 2000, if the Company fails to meet certain
minimum performance objectives in connection with the conduct of the research
program. In the event of such termination, Solvay Pharmaceuticals has no further
obligation to provide the Company with funding for the research program. There
can be no assurance that the Company will be able to meet the minimum
performance objectives or that the collaboration with Solvay Pharmaceuticals
will be extended.
The Company has reserved the right to use certain hybrid yeast cells
that are part of the research program for its own benefit in the discovery of
drugs relating to cancer, autoimmune, allergic and inflammatory diseases, with
certain specific exclusions. The Company is required to make payments to Solvay
Pharmaceuticals upon the achievement by the Company of certain drug development
milestones and to pay Solvay Pharmaceuticals royalties on the sale of such
drugs.
Physica B.V., an indirect wholly-owned subsidiary of Solvay S.A.,
purchased $10.0 million of the Company's Series B Preferred Stock in November
1995 and $5.0 million of the Company's Common Stock in the Company's initial
public offering in July 1996. All such shares of Series B Preferred Stock were
converted into shares of Common Stock on July 22, 1996. Physica B.V. has certain
registration rights with respect to the shares of Common Stock issued to it upon
such conversion.
The SmithKline Beecham Collaboration
In February 1997, the Company entered into a drug discovery
collaboration with SmithKline Beecham. During the term of the research
collaboration, which expires in February 2002, the Company will seek to identify
ligands and to elucidate the function of orphan G Protein-coupled receptors
included within the collaboration and create high-throughput screens to discover
small molecule agonists and antagonists to these receptors.
During the term of the research collaboration, SmithKline Beecham is
required to provide the Company with research funding of $3.0 million each year,
adjusted for inflation, and certain other payments. From February 1997 through
February 1999, SmithKline Beecham paid the Company approximately $6.5 million in
research funding and a one-time $2.0 million technology development fee.
SmithKline Beecham is also required to make payments to the Company upon the
achievement of certain research milestones and upon the achievement by
SmithKline Beecham of certain drug development milestones. In January 1999, the
Company achieved its first research milestone in the collaboration and received
a $1.0 million payment for such milestone. SmithKline Beecham is also required
to pay the Company royalties on the sale of drugs developed through the
16
use of the Company's drug discovery technologies. The Company has co-promotion
rights in North America for certain products that may result from the
collaboration and rights to certain potential products that SmithKline Beecham
may choose not to develop. There can be no assurance that the collaboration will
result in the development of any drugs.
SmithKline Beecham has the right to extend the term of the research
collaboration for between two and five years by notice to the Company given
prior to February 25, 2001. SmithKline Beecham has the right to terminate the
research collaboration (i) after August 25, 1999 if the Company fails to meet
certain scientific objectives in connection with the conduct of the research
collaboration or (ii) if the Company fails to perform its obligations in the
conduct of the research collaboration in any material respect and does not cure
such failure within a period of 60 days after receiving notice thereof. In the
event of such termination, SmithKline Beecham has no further obligation to
provide the Company with funding for the research collaboration. There can be no
assurance that the Company will be able to timely meet such scientific
objectives or that the collaboration with SmithKline Beecham will be extended.
In February 1997, the Company and SmithKline Beecham Corporation
entered into a stock purchase agreement pursuant to which the Company has the
option to sell to SmithKline Beecham Corporation (i) shares of the Company's
common stock having a then fair market value of $5.0 million during a 90-day
period commencing on February 25, 1998 and (ii) shares of the Company's Common
Stock having a then fair market value of $5.0 million, during a 90-day period
commencing on the date certain scientific objectives are achieved (subject to
the Company achieving such objectives prior to August 25, 1999 and meeting
certain financial requirements). In May 1998, the Company exercised its first
option and sold 660,962 shares of its common stock to SmithKline Beecham p.l.c.
and SmithKline Beecham Corporation for approximately $7.56 per share or an
aggregate consideration of $5.0 million. In addition, SmithKline Beecham
Corporation has the right, at its option, to purchase up to $5.0 million worth
of shares of the Company's Common Stock at 150% of then fair market value in
lieu of making certain research milestone payments. The Company granted
SmithKline Beecham Corporation certain registration rights with respect to
shares of the Company's Common Stock which SmithKline Beecham Corporation may
purchase pursuant to the stock purchase agreement.
Patents, Proprietary Technology and Trade Secrets
The Company believes that patents and other proprietary rights are
important to the development of its business. The Company also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. As of March 19,
1999, the Company was the assignee of two issued U.S. patents covering aspects
of its yeast technology and was the exclusive worldwide licensee of six issued
U.S. patents for use in drug discovery and the non-exclusive licensee of four
other issued U.S. Patents. In addition, as of such date, the Company had filed
or held licenses to 77 other U.S. patent applications, as well as related
foreign patent applications.
17
The Company seeks to protect its proprietary technology at every stage
of development. The Company files patent applications which claim inventions
arising from each of the various aspects of the Company's drug discovery and
development process including: gene sequences encoding novel targets and
ligands, amino acid sequences of protein targets, methods of treating a disease
based on the Company's knowledge of how signaling molecules interact with one
another and how this causes an abnormal condition, and specific chemical
compositions that may be useful as therapeutics, as well as novel methods of
manufacture. In addition, the Company files patent applications claiming its
proprietary methodologies, such as drug discovery techniques, unless it believes
that keeping an invention a trade secret is preferable.
The Company has obtained from Duke University an exclusive worldwide
license to two issued U.S. patents and U.S. and international patent
applications covering hybrid yeast cell technologies. These patents and patent
applications are directed to hybrid yeast cells engineered to express human G
Protein-coupled receptors and to methods of their use. In consideration for such
license, the Company pays a minimum annual royalty and is required to make
payments upon the achievement by the Company of certain drug development
milestones and to pay royalties (net of minimum royalties) on the sale of drugs
by the Company which were initially identified by the Company through the use of
the licensed technology. In lieu of milestones and royalty payments on sales of
drugs by sublicensees initially identified by sublicensees through the use of
the licensed technology, the Company pays an annual fee (net of the minimum
annual royalty) for each sublicense granted by it to such technology.
The Company has also filed patent applications based on inventions by
Cadus's scientists directed to hybrid yeast cells and yeast cells engineered to
produce both peptide libraries and human proteins that can function in certain
signal transduction pathways of the engineered yeast cell. These applications
seek to protect aspects of the Apex(TM) and SSCL(TM) technologies. The Company
has also filed patent applications directed to methods, constructs and reagents,
including engineered cells, for discovering ligands to orphan receptors.
Peptides, and mimetics thereof, which have been discovered using the SSCL(TM)
technology are also covered in these patent applications both as compositions
and for their therapeutic use.
The Company is the exclusive worldwide licensee of an issued U.S.
patent relating to an MEKK enzyme and U.S. and international patent applications
in the field of signal transduction in human cells from National Jewish Center
for Immunology and Respiratory Medicine. In consideration for such license, the
Company pays an annual maintenance fee and is required to make payments upon the
achievement by the Company of certain drug development milestones and to pay
royalties (net of annual fees and milestone payments) on the sale of drugs by
the Company whose utility was identified by the Company through the use of the
licensed technology. In lieu of milestone and royalty payments on sales of drugs
by sublicensees initially identified by sublicensees through the use of the
licensed technology, the Company pays an annual fee (net of the annual
maintenance fee) for each sublicense in effect. Certain of these patent
applications are directed to novel genes and gene products and methods of their
use, including as therapeutic targets in drug screening assays. Certain other
patent applications are directed to certain small molecule agents and their uses
in modulating cellular signal transduction, particularly as therapeutic agents.
18
The Company has obtained from M.I.T. an exclusive worldwide license,
for use in pharmaceutical, diagnostic, animal health and agricultural
businesses, to the technology being developed by M.I.T. with respect to the
LivingChip(TM) under its sponsored research arrangement with the Company. In
order to maintain its exclusive license, the Company must provide M.I.T. with a
minimum specified level of research funding for 1999 and make a minimum level of
expenditures thereafter to commercialize the technology until the technology is
commercialized. In consideration for such license, the Company is required to
pay M.I.T. an annual license fee, royalties on the sale or lease of
LivingChip(TM) systems, royalties on the sale by the Company of therapeutics
and diagnostics developed using the LivingChip(TM), and royalties on services
rendered by the Company based on the LivingChip(TM). In lieu of royalty payments
on sales by sublicensees of drugs initially identified by sublicensees through
the use of the licensed technology, the Company pays an annual fee for each
sublicense in effect, provided that a license to other technology owned or
licensed by the Company was granted to the sublicensee at the same time.
The Company has granted certain rights under several of its patents and
patent applications relating to its yeast-based technologies to Bristol-Myers
Squibb, Solvay Pharmaceuticals and SmithKline Beecham.
In addition to patent protection, the Company relies upon trade
secrets, proprietary know-how and technological advances to develop and maintain
its competitive position. To maintain the confidentiality of its trade secrets
and proprietary information, the Company requires its employees, consultants and
collaborative partners to execute confidentiality agreements upon the
commencement of their relationships with the Company. In the case of employees
and consultants, the agreements also provide that all inventions resulting from
work performed by them while in the employ of the Company will be the exclusive
property of the Company.
Patent law as it relates to inventions in the biotechnology field is
still evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, no predictions can be made
regarding the breadth or enforceability of claims allowed in the patents that
have been issued to the Company or its licensors or in patents that may be
issued to the Company or its licensors in the future. Accordingly, no assurance
can be given that the claims in such patents, either as initially allowed by the
United States Patent and Trademark Office or any of its foreign counterparts or
as may be subsequently interpreted by courts inside or outside the United
States, will be sufficiently broad to protect the Company's proprietary rights,
will be commercially valuable or will provide competitive advantages to the
Company and its present or future collaborative partners or licensees. Further,
there can be no assurance that patents will be granted with respect to any of
the Company's pending patent applications or with respect to any patent
applications filed by the Company in the future. There can be no assurance that
any of the Company's issued or licensed patents would ultimately be held valid
or that efforts to defend any of its patents, trade secrets, know-how or other
intellectual property rights would be successful.
The field of gene discovery has become intensely competitive. A number
of pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent
19
applications or received patents covering their gene discoveries. Some of these
applications or patents may be competitive with the Company's applications or
conflict in certain respects with claims made under the Company's applications.
Moreover, because patent applications in the United States are maintained in
secrecy until patents issue, because patent applications in certain other
countries generally are not published until more than eighteen months after they
are filed and because publication of technological developments in the
scientific or patent literature often lags behind the date of such developments,
the Company cannot be certain that it was the first to invent the subject matter
covered by its patents or patent applications or that it was the first to file
patent applications for such inventions. If an issue regarding priority of
inventions were to arise with respect to any of the patents or patent
applications of the Company or its licensors, the Company might have to
participate in litigation or interference proceedings declared by the United
States Patent and Trademark Office or similar agencies in other countries to
determine priority of invention. Any such participation could result in
substantial cost to the Company, even if the eventual outcome were favorable to
the Company.
In some cases, litigation or other proceedings may be necessary to
defend against or assert claims of infringement, to enforce patents issued to
the Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the scope and
validity of the proprietary rights of third parties. Such litigation could
result in substantial cost to and diversion of resources by the Company. An
adverse outcome in any such litigation or proceeding could subject the Company
to significant liabilities, require the Company to cease using the subject
technology or require the Company to license the subject technology from the
third party, all of which could have a material adverse effect on the Company's
business, financial condition and results of operations. If any licenses are
required, there can be no assurance that the Company will be able to obtain any
such license on commercially favorable terms, if at all, and if these licenses
are not obtained, the Company might be prevented from using certain of its
technologies. The Company's failure to obtain a license to any technology that
it may require to continue its drug discovery efforts may have a material
adverse effect on the Company's business, financial condition and results of
operations.
In July 1996, SIBIA commenced a patent infringement action against the
Company alleging infringement by the Company of a patent covering the use of
cells, engineered to express any type of cell surface receptor and a reporter
gene, used to report results in the screening of compounds against target assays
and seeking injunctive relief and monetary damages. After trial, on December 18,
1998, the jury issued a verdict in favor of SIBIA and awarded SIBIA $18.0
million in damages. On January 29, 1999, the United States District Court
granted SIBIA's request for injunctive relief that precludes the Company from
using the method claimed in SIBIA's patent. The injunction does not bar the
Company from engaging in development of screening assays. The injunction also
does not bar the Company from providing certain specified screening assays to
Bristol-Myers Squibb or SmithKline Beecham which utilize a readout covered by
the SIBIA patent, and does not bar Bristol-Myers Squibb or SmithKline Beecham
from using those assays for screening purposes, up to a specified maximum number
of compounds and/or natural product samples. Additionally, the injunction does
not bar any action which is wholly outside the United States by Solvay
20
Pharmceuticals or any other entity. On February 26, 1999, the United States
District Court denied the Company's motions to set aside the jury verdict, to
grant a new trial and to reduce or set aside the $18.0 million damage award by
the jury. The Company has appealed the judgment. The appeal will be heard by the
Court of Appeals for the Federal Circuit in Washington, D.C. In order to stay
execution pending appeal of the $18.0 million judgment obtained by SIBIA, in
March 1999, the Company deposited $18.5 million in escrow to secure payment of
the judgment in the event the Company were to lose the appeal. Such $18.5
million was classified, as of December 31, 1998, as "long-term restricted cash"
and the Company's "cash and cash equivalents" was reduced by $18.5 million. The
Company has begun implementing alternative readout methods in its screening
assays. Until these alternative readout methods are further developed and
commercially tested, certain aspects of the drug discovery efforts of the
Company and its collaborative partners will be delayed. If there are delays in
further developing and commercially testing these alternative readout methods,
the Company's relationship with its collaborative partners could be materially
adversely affected. If the Company is not successful in materially reducing or
setting aside the $18.0 million damage award on appeal, the business, financial
condition and results of operations of the Company will be materially adversely
affected. The costs of and the diversion of Company resources associated with
this litigation have had a material adverse effect on the business, financial
condition and results of operations of the Company.
In January 1999, the U.S. Patent and Trademark Office granted the
Company's request to re-examine the patent issued to SIBIA that was the subject
of the litigation. The re-examination by the Patent Office is independent of the
litigation and a final decision by the Patent Office that SIBIA's patent is
invalid would take precedence over the jury verdict. There can be no assurance
that the Patent Office will find SIBIA's patent to be invalid.
Competition
The biotechnology and pharmaceutical industries are intensely
competitive. Many companies, including large, multinational biotechnology and
pharmaceutical companies, are actively engaged in drug discovery similar to that
of the Company. The Company's technology platform consists principally of
genetically engineered yeast cells and certain signal transduction technologies,
which it utilizes to determine the biological function of orphan receptors and
signaling molecules. The Company is aware of other companies, such as American
Home Products Corporation and Glaxo Wellcome, Plc, that may use yeast as a drug
discovery medium, other companies, such as Merck & Co., Inc., that may be
engaged in efforts to determine the biological function of orphan receptors, and
other companies such as Novartis A.G. and Pfizer Inc. that may be engaged in
research and development efforts relating to signal transduction. In addition,
many smaller companies are pursuing these areas of research. The Company is
aware of other companies that are seeking to identify large numbers of human
orphan G Protein-coupled receptors, the focus of the Company's collaboration
with Genome Therapeutics Corporation. The Company is also aware of other
companies that are inserting human orphan G Protein-coupled receptors into yeast
and other cells and using these hybrid cells for drug discovery purposes.
Certain other companies are seeking to determine the functions of human orphan G
Protein-coupled receptors by identifying agonists to
21
these receptors, as the Company does, and by other research methods. All of the
above companies are significant competitors of the Company. Furthermore, many
companies have potential drugs in various stages of development to treat asthma,
a disease targeted by the Company in its proprietary research programs. Many of
the Company's competitors have greater financial and human resources, and more
experience in research and development, preclinical and clinical testing,
obtaining regulatory approvals, manufacturing and marketing than the Company.
There can be no assurance that competitors of the Company will not develop
competing drug discovery technologies or drugs that are more effective than
those developed by the Company and its collaborative partners or obtain
regulatory approvals of their drugs more rapidly than the Company and its
collaborative partners, thereby rendering the Company's and its collaborative
partners' drug discovery technologies and/or drugs obsolete or noncompetitive.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's or its collaborative partners' ability to use the Company's drug
discovery technologies or commercialize drugs, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that some of the Company's
collaborative partners will not develop independently or with third parties
drugs that could compete with drugs of the types covered by the collaboration or
otherwise being developed by the Company.
The Company also expects to encounter significant competition with
respect to any drugs that may be developed using its technologies. Companies
that complete clinical trials, obtain required regulatory approvals and commence
commercial sales of their drugs before their competitors may achieve a
significant competitive advantage. In order to compete successfully, the
Company's goal is to obtain patent protection for its gene discoveries and drug
discovery technologies and to make these technologies available to
pharmaceutical companies through collaborative and licensing arrangements for
use in discovering drugs. There can be no assurance, however, that the Company
will obtain patents covering its technologies that protect it against
competitors. Moreover, there can be no assurance that the Company's competitors
will not succeed in developing technologies that circumvent the Company's
technologies or that such competitors will not succeed in developing
technologies and drugs that are more effective than those developed by the
Company and its collaborative partners or that would render technology or drugs
of the Company and its collaborators less competitive or obsolete.
Government Regulation
The development, manufacturing and marketing of drugs developed through
the use of the Company's technologies are subject to regulation by numerous
governmental agencies in the United States and in other countries. To date, none
of the Company's technologies has resulted in any clinical drug candidates. The
FDA and comparable regulatory agencies in other countries impose mandatory
procedures and standards for the conduct of certain preclinical testing and
clinical trials and the production and marketing of drugs for human therapeutic
use. Product development and approval of a new drug are likely to take a number
of years and involve the expenditure of substantial resources.
22
The steps required by the FDA before new drugs may be marketed in the
United States include:(i) preclinical studies; (ii) the submission to the FDA of
a request for authorization to conduct clinical trials on an investigational new
drug (an "IND"); (iii) adequate and well-controlled clinical trials to establish
the safety and efficacy of the drug for its intended use; (iv) submission to the
FDA of a new drug application (an "NDA"); and (v) review and approval of the NDA
by the FDA before the drug may be shipped or sold commercially.
In the United States, preclinical testing includes both in vitro and in
vivo laboratory evaluation and characterization of the safety and efficacy of a
drug and its formulation. Laboratories involved in preclinical testing must
comply with FDA regulations regarding Good Laboratory Practices. Preclinical
testing results are submitted to the FDA as part of the IND and are reviewed by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to an IND, the IND will become effective 30 days following its receipt
by the FDA. There can be no assurance that submission of an IND will result in
the commencement of human clinical trials.
Clinical trials, which involve the administration of the
investigational drug to healthy volunteers or to patients under the supervision
of a qualified principal investigator, are typically conducted in three
sequential phases, although the phases may overlap with one another. Clinical
trials must be conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent Institutional Review Board (the
"IRB") at the institution where the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. Compounds must be formulated
according to the FDA's Good Manufacturing Practices ("GMP").
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product
23
development, manufacturing, preclinical testing, clinical trials and related
information are submitted to the FDA in the form of an NDA for approval of the
marketing and shipment of the drug.
Timetables for the various phases of clinical trials and NDA approval
cannot be predicted with any certainty. The Company, its collaborative partners
or the FDA may suspend clinical trials at any time if it is believed that
individuals participating in such trials are being exposed to unacceptable
health risks. Even assuming that clinical trials are completed and that an NDA
is submitted to the FDA, there can be no assurance that the NDA will be reviewed
by the FDA in a timely manner or that once reviewed, the NDA will be approved.
The approval process is affected by a number of factors, including the severity
of the targeted indications, the availability of alternative treatments and the
risks and benefits demonstrated in clinical trials. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, or may require additional
testing or information with respect to the investigational drug. Even if initial
FDA approval is obtained, further studies, including post-market studies, may be
required in order to provide additional data on safety and will be required in
order to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested. The FDA
will also require post-market reporting and may require surveillance programs to
monitor the side effects of the drug. Results of post-marketing programs may
limit or expand the further marketing of the drug. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process or labeling, an NDA supplement may be required to be submitted to the
FDA.
Each manufacturing establishment for new drugs is also required to
receive some form of approval by the FDA. Among the conditions for such approval
is the requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other Federal, state
or local agencies.
There can be no assurance that the regulatory framework described above
will not change or that additional regulations will not arise that may affect
approval of or delay an IND or an NDA. The Company has no preclinical or
clinical development expertise and intends to rely on its collaborative partners
and third party clinical research organizations to design and conduct most of
such activities if required. Moreover, because the Company's present
collaborative partners are, and it is expected that the Company's future
collaborative partners will be, responsible for preclinical testing, clinical
trials, regulatory approvals, manufacturing and commercialization of drugs, the
ability to obtain and the timing of regulatory approvals are not within the
control of the Company.
Prior to the commencement of marketing a product in other countries,
regulatory approval in such countries is required, whether or not FDA approval
has been obtained for such product. The requirements governing the conduct of
clinical trials and product approvals vary widely from country to country, and
the time required for approval may be longer or shorter than the time required
for
24
FDA approval. Although there are some procedures for unified filings for certain
European countries, in general, each country has its own procedures and
requirements.
The Company is also subject to regulation under other Federal laws and
regulation under state and local laws, including laws relating to occupational
safety, laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
the Company believes that its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its research and
development activities comply with the standards prescribed by Federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any such accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company.
Manufacturing and Clinical Development
The Company has no manufacturing or clinical development facilities and
intends to rely on its collaborative partners, contract manufacturers and
contract research organizations to produce the materials required for and to
conduct preclinical and clinical development. If the Company were unable to
contract for these services on acceptable terms, or if it should encounter
delays or difficulties in its relationships with such providers, the Company's
product development would be delayed, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Scientific Consultants
The Company has consulting arrangements with a number of leading
academic scientists. The consultants routinely attend project meetings and are
available to the scientific staff and management of the Company. Most of the
Company's consultants are paid for their services on a per diem basis and are
reimbursed for their travel expenses and other expenses incurred at the request
of the Company pursuant to the terms of their consulting arrangements with the
Company. Certain other consultants are paid fixed fees for their services on a
monthly or quarterly basis. Several of the Company's consultants serve on the
Company's Scientific Advisory Board. None of the consultants is an employee of
the Company. Most of the consultants have other commitments to, or consulting or
advisory contracts with, their employers and other institutions.
The Company is highly dependant on Dr. James Broach, a scientific
founder and director of the Company who is also a consultant and Director of
Research of the Company. The consulting agreement with Dr. Broach contains an
exclusivity provision that restricts him from providing services to a competitor
of the Company without the Company's consent.
25
Scientific Advisory Board
The Company has assembled a Scientific Advisory Board (the "SAB")
presently comprised of eight individuals (the "Scientific Advisors") who are
leaders in the fields of drug discovery, molecular biology, yeast biology,
immunology, oncology and pharmacology.
Members of the SAB review the Company's research, development and
operating activities and are available for consultation with the Company's
management and staff relating to their respective areas of expertise. The SAB
holds regular meetings. Several of the individual Scientific Advisors meet more
frequently, on an individual basis, with the Company's management and staff to
discuss the Company's ongoing research and development projects. The Scientific
Advisors are reimbursed for their expenses in connection with their service. In
addition, the Scientific Advisors own Common Stock or hold options to purchase
Common Stock. The Scientific Advisors are expected to devote only a small
portion of their time to the business of the Company.
The Scientific Advisors are all employed by entities other than the
Company. Each Scientific Advisor has entered into a consulting agreement with
the Company that contains confidentiality and non-disclosure provisions that
prohibit the disclosure of confidential information to anyone outside the
Company. Such consulting agreement also provides that all inventions,
discoveries or other intellectual property that come to the attention of or are
discovered by the Scientific Advisor while performing services under a
consulting agreement with the Company will be assigned to the Company. The
current members of the SAB are as follows:
Thomas F. Deuel, M.D., Chairman of the Scientific Advisory Board, is
the Director of the Division of Growth Regulation at Beth Israel Hospital and
Professor of Medicine at Harvard University. He is widely known for his work in
cell growth and development and is an international expert on the biology of
platelet derived growth factor and transforming growth factor beta. He conducted
post-doctoral training at Harvard Medical School and the NIH and completed his
M.D. at Columbia University's College of Physicians and Surgeons.
John C. Cambier, Ph.D., inventor of certain of the Company's signal
transduction technologies, has been a consultant to the Company since November
1994. He is Chief of the Division of Basic Sciences in the Department of
Pediatrics at the National Jewish Center for Immunology and Respiratory
Medicine. Dr. Cambier is also Professor of Immunology at the University of
Colorado Health Sciences Center. He is internationally known for his work on
transmembrane signal transduction, especially antigen and immunoglobulin Fc
receptors. Dr. Cambier conducted his postdoctoral training at the University of
Texas Southwestern Medical School, completed his Ph.D. in Immunology and
Virology at the University of Iowa, and received his B.S. from Southwest
Missouri State University.
Gary L. Johnson, Ph.D., inventor of certain of the Company's signal
transduction technologies, has been a consultant to the Company since November
1994. He is Director of the Program in Molecular Signal Transduction at the
National Jewish Center for Immunology and
26
Respiratory Medicine. He is also Professor of Pharmacology at the University of
Colorado School of Medicine and a Senior Member of its Cancer Center where he
serves on the executive board. Dr. Johnson's research focuses on receptor
activation of G Proteins and the integration of signal transduction pathways
regulated by G Proteins and tyrosine kinases. He received his Ph.D. in
Pharmacology from the University of Colorado and his B.S. from California State
University.
Norman R. Klinman, M.D., Ph.D. is a member of the Department of
Immunology in the Research Institute of Scripps Clinic and an Adjunct Professor
in the Department of Biology of the University of California at San Diego.
Previously he served as Professor of Pathology and Microbiology in the School of
Medicine at the University of Pennsylvania. He is widely known for his work on
immunoregulation, humoral immunity and B cell maturation, and repertoire
expression. Dr. Klinman has had numerous editorial appointments. He received his
Ph.D. from the University of Pennsylvania and his M.D. from Jefferson Medical
College.
Eva J. Neer, M.D., is a Professor of Medicine (Biochemistry), and an
Associate Master, Cannon Society at Harvard Medical School and Senior Biochemist
in the Department of Medicine at Brigham and Women's Hospital. Dr. Neer is best
known for her studies on the structure and function of the heterotrimeric G
Proteins. She has served as Chairman of the Board of Scientific Counselors of
the Division of Intramural Research and as Chairman of the Board of the
Publication Committee for ASBMB. She serves on multiple editorial boards and has
been the recipient of numerous scientific awards. Dr. Neer is also a fellow of
the American Academy of Arts and Sciences. Dr. Neer had post-doctoral training
at Yale University and Harvard University and received her M.D. at Columbia
University's College of Physicians and Surgeons.
Elliot M. Ross, Ph.D. is a Professor of Pharmacology at the University
of Texas Southwestern Medical Center. Dr. Ross' research focuses on G
Protein-mediated signal transduction, where he is best known for direct
biochemical studies of the mechanisms whereby receptors regulate G Protein
activation. His other interests include the structure of G Protein-coupled
receptors, the action of GTPase-activating proteins in G Protein signaling
pathways and the impact of the membrane environment on regulatory interactions
among G Proteins. He received his Ph.D. in Biochemistry from Cornell University.
Jeremy W. Thorner, Ph.D. holds the William V. Power Endowed Chair in
Biology and is a Professor in the Department of Molecular and Cell Biology at
the University of California at Berkeley. He is coauthor, with R.J. Lefkowitz,
of the seminal paper published in Science in 1990 that forms the basis of the
initial yeast-related drug discovery technology within the Company. His research
interests include the structure and function of peptide ligands, receptors and
other components of signal transduction pathways and their role in the biology
of saccharomyces cerevisiae (bakers yeast). Dr. Thorner is the Program Director
for an NIH Training Grant in Cellular and Molecular Science. He conducted
post-doctoral research at Stanford University School of Medicine and received
his Ph.D. in Biochemistry from Harvard University.
27
Employees
As of March 19, 1999, the Company had 108 full-time employees, 40 of
whom hold Ph.D. degrees. Of the Company's full-time employees, 85 are engaged
directly in scientific research and 23 are engaged in general and administrative
functions. The Company's scientific staff members have diversified experience
and expertise in a wide variety of disciplines, including molecular and cell
biology, biochemistry, molecular pharmacology and chemistry.
All employees have entered into agreements with the Company pursuant to
which they are prohibited from disclosing to third parties the Company's
proprietary information and they are obligated to assign to the Company all
rights to inventions made by them during their employment with the Company. See
"--Patents, Proprietary Technology and Trade Secrets."
The Company's employees are not covered by a collective bargaining
agreement, and the Company believes that its relationship with its employees is
good.
Item 2. Properties.
The Company currently leases approximately 45,569 square feet of
laboratory and office space at 777 Old Saw Mill River Road in Tarrytown, New
York, under an agreement expiring on December 31, 2002. The Company has the
option to renew such lease for a five-year period commencing January 1, 2003.
Item 3. Legal Proceedings.
The Company is not a party to any material legal proceedings other than
SIBIA Neurosciences, Inc. v. Cadus Pharmaceutical Corporation. SIBIA commenced
an action on July 9, 1996 in the United States District Court for the Southern
District of California alleging infringement by the Company of a patent covering
the use of cells, engineered to express any type of cell surface receptor and a
reporter gene, used to report results in the screening of compounds against
target assays, and seeking injunctive relief and monetary damages. After trial,
on December 18, 1998, the jury issued a verdict in favor of SIBIA and awarded
SIBIA $18.0 million in damages. On January 29, 1999, the United States District
Court granted SIBIA's request for injunctive relief that precludes the Company
from using the method claimed in SIBIA's patent. The injunction does not bar the
Company from engaging in development of screening assays. The injunction also
does not bar the Company from providing certain specified screening assays to
Bristol-Myers Squibb or SmithKline Beecham which utilize a readout covered by
the SIBIA patent, and does not bar Bristol-Myers Squibb or SmithKline Beecham
from using those assays for screening purposes, up to a specified maximum number
of compounds and/or natural product samples. Additionally, the injunction does
not bar any action which is wholly outside the United States by Solvay
Pharmceuticals or any other entity. On February 26, 1999, the United States
District Court denied the Company's motions to set aside the jury verdict, to
grant a new trial and to reduce or set aside the $18.0 million damage award by
the jury. The Company has appealed the judgment. The appeal will be heard by the
Court of
28
Appeals for the Federal Circuit in Washington, D.C. In order to stay execution
pending appeal of the $18.0 million judgment obtained by SIBIA, in March 1999,
the Company deposited $18.5 million in escrow to secure payment of the judgment
in the event the Company were to lose the appeal. Such $18.5 million was
classified, as of December 31, 1998, as "restricted cash noncurrent" and the
Company's "cash and cash equivalents" was reduced by $18.5 million. The Company
has begun implementing alternative readout methods in its screening assays.
Until these alternative readout methods are further developed and commercially
tested, certain aspects of the drug discovery efforts of the Company and its
collaborative partners will be delayed. If there are delays in further
developing and commercially testing these alternative readout methods, the
Company's relationship with its collaborative partners could be materially
adversely affected. If the Company is not successful in materially reducing or
setting aside the $18.0 million damage award on appeal, the business, financial
condition and results of operations of the Company will be materially adversely
affected. The costs of and the diversion of Company resources associated with
this litigation have had a material adverse effect on the business, financial
condition, results of operations and liquidity of the Company.
In January 1999, the U.S. Patent and Trademark Office granted the
Company's request to reexamine the patent issued to SIBIA that was the subject
of the litigation. The re-examination by the Patent Office is independent of the
litigation and a final decision by the Patent Office that SIBIA's patent is
invalid would take precedence over the jury verdict. There can be no assurance
that the Patent Office will find SIBIA's patent to be invalid.
Item 4. Submission to a Vote of Security Holders.
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock, $.01 par value per share (the
"Common Stock"), is traded on the Nasdaq National Market under the symbol KDUS.
The table below sets forth the high and low sales price per share of the Common
Stock for the periods indicated, as reported by the Nasdaq National Market.
Fiscal Year 1997 High Low
First quarter ended March 31, 1997 $ 20 7/8 $ 8 1/2
Second quarter ended June 30, 1997 $ 15 $ 9 3/8
29
Third quarter ended September 30, 1997 $ 14 1/2 $ 11
Fourth quarter ended December 31, 1997 $ 15 7/16 $ 5 3/8
Fiscal Year 1998 High Low
First quarter ended March 31, 1998 $ 9 $ 4 11/16
Second quarter ended June 30, 1998 $ 8 1/4 $ 4 7/16
Third quarter ended September 30, 1998 $ 6 3/4 $ 2 3/4
Fourth quarter ended December 31, 1998 $ 3 15/16 $ 1 25/32
As of March 19, 1999, there were approximately 73 holders of
record of the Company's Common Stock.
The Company has not declared or paid any cash dividends on its
Common Stock during the past two fiscal years and does not anticipate paying any
such dividends in the foreseeable future. The Company intends to retain any
earnings for the growth of and for use in its business.
Recent Sales of Unregistered Securities.
Within the past three years, the Company has issued and sold the
following securities that were not registered under the Securities Act of 1933,
as amended (the "Act"), in each case in reliance on an exemption from required
registration pursuant to Section 3(b) or 4(2) of the Act:
(1) From March 19, 1996, to February 14, 1997 (when a registration
statement on Form S-8 covering the Company's 1993 Stock Option Plan was filed),
options to acquire 43,418 shares of the Company's Common Stock granted pursuant
to the Company's 1993 Stock Option Plan were exercised. The exercise price of
such options ranged from $1.37 to $3.00.
(2) From May 10, 1996 to February 14, 1997 (when a registration
statement on Form S-8 covering the Company's 1996 Stock Option Plan was filed),
the Company granted options to acquire 669,864 shares of the Company's Common
Stock to employees, officers and consultants pursuant to the Company's 1996
Incentive Plan. In general such options are exercisable at a price equal to the
fair market value of a share of Common Stock on the date of grant, have a
ten-year term and vest over four-year periods at various rates.
(3) In November 1996, the Company granted options to acquire 120,000
shares of the Company's Common Stock to certain directors pursuant to individual
stock option agreements. The exercise price of such options is $6.75. Such
options have a ten-year term and vest over four years in equal annual
installments.
30
(4) From March 19, 1996 to February 14, 1997 (when a registration
statement on Form S-8 covering the individual stock option agreements granted by
the Company was filed), options to acquire 1,500 shares of the Company's Common
Stock granted pursuant to individual stock option agreements were exercised. The
exercise price of such options was $3.60.
(5) In May 1998, the Company sold 660,962 shares of its Common Stock to
SmithKline Beecham p.l.c. and SmithKline Beecham Corporation for approximately
$7.56 per share or an aggregate consideration of $5.0 million.
Use of Proceeds of Initial Public Offering
The information provided below represents a reasonable estimate of the
application through December 31, 1998 of the net proceeds of $19,783,140 which
were received from the Company's initial public offering on July 17, 1996:
Construction of plant, building and facilities $829,101
Purchase and installation of machinery and equipment $2,326,239
Research and license payments to others $1,433,195
Investment in companies complementary to the
Company's business $2,150,000
Working capital used to fund operations $7,185,178
Except for payments described in the following sentence, the
application of the net offering proceeds listed above represents direct payments
to others. No payments were made to directors or officers or to their associates
except for payments made in the ordinary course of business which include, but
may not be limited to, the payment of officer salaries, fringe benefits, and
expense reimbursements or compensation paid to directors for their services
provided to the Company under consulting arrangements. At December 31, 1998, the
Company had $5,859,427 of net offering proceeds that were still not utilized.
Item 6. Selected Financial Data.
The selected financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
thereto included elsewhere in this Report.
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except per share data)
Revenues............................ $12,576 $9,013 $6,500 $4,418 $1,355
Operating costs and expenses:
Research and development......... 15,389 11,561 8,283 5,383 2,246
General and administrative....... 8,977 4,092 2,315 1,376 937
-------- ------- ------- ------- -------
Total operating costs and
expenses........................ 24,366 15,653 10,598 6,759 3,183
-------- ------ ------- ------- -------
Operating loss...................... (11,790) (6,640) (4,098) (2,341) (1,828)
Net loss ........................ $(29,690)(1) $(5,411) $(2,441) $(1,482)(2) $(1,393)
======== ======= ======= ======= =======
Net loss per share (3).............. $(2.32) $(.44) $(.39) $(1.07)
======== ======= ======= =======
Shares used in calculation of
net loss per share............. 12,811,525 12,225,463 6,280,917 1,382,139
31
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data: (in thousands)
Cash and cash equivalents.......... $11,262(4) $36,762 $43,153 $25,683 $14,406
Total assets....................... 36,587 42,241 47,287 30,725 15,740
Short-term debt.................... -- 150 13 2,397 203
Long-term debt..................... -- -- 166 29 46
Accumulated deficit................ (13,532) (13,842) (8,431) (5,991) (4,508)
Stockholders' equity (deficit)..... 15,989 40,500 45,181 27,723 14,534
- -----------
(1) The net loss of $29,690,000 for the year ended December 31, 1998,
includes an $18.5 million reserve for litigation damages with respect
to the patent infringement litigation with SIBIA.
(2) The net loss of $1.4 million for the year ended December 31, 1994
includes an extraordinary gain of approximately $159,000 from the early
extinguishment of a debt obligation.
(3) Computed as described in Note 2 of notes to financial statements.
(4) In order to stay execution pending appeal of the $18.0 million judgment
obtained by SIBIA, in March 1999, the Company deposited $18.5 million
in escrow to secure payment of the judgment in the event the Company
were to lose the appeal. Such $18.5 million was classified, as of
December 31, 1998, as "restricted cash noncurrent" and the Company's
"cash and cash equivalents" was reduced by $18.5 million.
The Company has not paid any dividends since its inception and does not
anticipate paying any dividends on its Common Stock in the foreseeable future.
Item 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations.
Overview
The Company was incorporated in 1992 and has devoted substantially all
of its resources to the development and application of novel yeast-based and
signal transduction drug discovery
32
technologies. To date, all of the Company's revenues have resulted from research
funding provided by its collaborative partners.
The Company has incurred operating losses in each year since its
inception, including net losses of approximately $29.7 million during the year
ended December 31, 1998. The net loss for the year ended December 31, 1998
includes an $18.5 million reserve for litigation damages with respect to the
patent infringement litigation with SIBIA. At December 31, 1998, the Company had
an accumulated deficit of approximately $43.5 million. The Company's losses have
resulted principally from costs incurred in research and development and from
general and administrative costs associated with the Company's operations. These
costs have exceeded the Company's revenues and interest income. The Company
expects to continue to incur substantial operating losses as a result of funding
its research and product development.
On December 18, 1998, after trial, the jury issued a verdict in favor
of SIBIA in its patent infringement litigation against the Company and awarded
SIBIA $18.0 million in damages. On February 26, 1999, the United States District
Court for the Southern District of California denied the Company's motions to
set aside the jury verdict to grant a new trial and to reduce or set aside the
$18.0 million damage award by the jury. The Company has appealed the judgment.
If the Company is not successful in materially reducing or setting aside the
$18.0 million damage award on appeal, the business, financial condition, results
of operations and liquidity of the Company will be materially adversely
affected. In order to stay execution of the $18.0 million judgment pending
appeal, in March 1999, the Company deposited $18.5 million in escrow to secure
payment of the judgment in the event the Company were to lose the appeal. Such
$18.5 million was classified, as of December 31, 1998, as "restricted cash
noncurrent" and the Company's working capital was reduced by $18.5 million.
Through December 31, 1998, the Company received research funding from
its collaborative partners aggregating $31.7 million, including $10.6 million
during 1998. Since the research collaboration with Bristol-Myers Squibb will
expire in July 1999 and since the Company will only receive approximately $1.3
million in research funding from Bristol-Myers Squibb for 1999, the Company will
receive several million dollars less research funding from its collaborative
partners in 1999 than it did in 1998. In addition, if there are delays in
further developing and commercially testing these alternative readout methods,
the Company's relationships with its collaborative partners could be materially
adversely affected. See "Business -- Collaborative Arrangements." Research
funding is received quarterly based on predetermined funding requirements and is
recognized as revenue when earned as a result of work completed. The Company
does not expect to receive royalties for a number of years if at all.
Results of Operations
Years Ended December 31, 1998 and 1997
Revenues
Revenues for 1998 increased to $12.6 million from $9.0 million in 1997.
This increase was primarily attributable to a one time $2.0 million technology
development fee and an increase
33
in research funding from SmithKline Beecham, one of the Company's collaborative
partners. The research collaboration with SmithKline Beecham began in February
1997.
Operating Expenses
The Company's research and development expenses for 1998 increased to
$15.4 million from $11.6 million in 1997. This increase was attributable to
increases in staffing, supplies and facility expenses as well as expenses
associated with the Company's sponsored research agreement with M.I.T., which
began in January 1998.
General and administrative expenses for 1998 increased to $9.0 million
from $4.1 million in 1997. This increase was attributable primarily to increased
litigation expenses.
Net Interest Income
Net interest income for 1998 decreased to $1.8 million from $2.1 in
1997. This decrease related primarily to the decrease in the Company's cash
reserves.
Equity in Other Ventures
Equity in other ventures reflects losses and gains associated with the
Company's two equity investments. For the years ended December 31, 1998 and
1997, the Company recognized a gain and a loss of approximately $8,000 and
$174,000, respectively, related to its investment in Laurel Partners Limited
Partnership. For the years ended December 31, 1998 and 1997, the Company
recognized approximately $1.2 million and $658,000, respectively, in losses
generated by Axiom. The Company's investments in Axiom are accounted for under
the equity method with the Company recognizing 100% of Axiom's net losses prior
to the investment made by JAFCO Co. Ltd. ("JAFCO") in Axiom in June 1998.
Following the JAFCO investment, the Company began recognizing 50% of the net
losses generated by Axiom which is the extent to which the Company is deemed to
be funding such losses.
Reserve for Litigation Damages
The Company recorded a reserve for litigation damages of $18.5 million
with respect to the patent infringement litigation with SIBIA for the year ended
December 31, 1998.
Net Loss
The net loss for 1998 increased to $29.7 million from $5.4 million in
1997. The increase can be attributed primarily to the establishment of the $18.5
million reserve for litigation damages with respect to the patent infringement
litigation with SIBIA as well as an increase in the operating expenses of the
Company as described above, which was partially offset by increases in revenues.
34
Years Ended December 31, 1997 and 1996
Revenues
Revenues for 1997 increased to $9.0 million from $6.5 million in 1996.
This increase was primarily attributable to the commencement in February 1997 of
research funding from SmithKline Beecham, one of the Company's collaborative
partners.
Operating Expenses
The Company's research and development expenses for 1997 increased to
$11.6 million from $8.3 million in 1996. This increase was attributable
primarily to increases in staffing and laboratory supplies for the SmithKline
Beecham collaboration and the Company's internal programs, including expansion
of its chemistry and bioinformatics capabilities, as well as facilities expenses
in connection with the Company's occupancy of additional laboratory space.
General and administrative expenses for 1997 increased to $4.1 million
from $2.3 million in 1996. This increase was attributable primarily to increased
legal expenses, the hiring of management personnel, and the increase in the
Company's directors and officers liability insurance premium and other
administrative expenses resulting from the regulatory requirements of being a
public company.
Net Interest Income
Net interest income for 1997 increased to $2.1 million from $1.7 in
1996. This increase related primarily to interest earned on the net proceeds
from the Company's initial public offering and additional revenues from research
collaborations, as well as the reduction in interest expense on the line of
credit, which was repaid in September 1996.
Equity in Other Ventures
Equity in other ventures reflects losses associated with the Company's
two investments. For the year ended December 31, 1997, the Company recognized
losses of approximately $174,000 related to its investment in Laurel Partners
Limited Partnership. For the year ended December 31, 1997, the Company
recognized approximately $658,000 in losses generated by Axiom. The Company's
investment in Axiom is accounted for under the equity method with the Company
recognizing 100% of Axiom's net losses to the extent that the Company's
investment was funding those losses.
Net Loss
The net loss for 1997 increased to $5.4 million from $2.4 million in
1996. The increase can be attributed to the increase in the operating expenses
of the Company as described above, which was partially offset by increases in
revenues and interest income.
35
Liquidity and Capital Resources
At December 31, 1998, the Company held cash and cash equivalents of
$11.3 million. The Company's working capital at December 31, 1998 was $9.5
million. On December 18, 1998, after trial, the jury issued a verdict in favor
of SIBIA in its patent infringement litigation against the Company and awarded
SIBIA $18.0 million in damages. On February 26, 1999, the United States District
Court for the Southern District of California denied the Company's motions to
set aside the jury verdict, to grant a new trial and to reduce or set aside the
$18.0 million damage award by the jury. The Company has appealed the judgment.
In order to stay execution pending appeal of the $18.0 million judgment, in
March 1999, the Company deposited $18.5 million in escrow to secure payment of
the judgment in the event the Company were to lose the appeal. Such $18.5
million was classified, as of December 31, 1998, as "long-term restricted cash"
and the Company's working capital was reduced by $18.5 million.
For the year ended December 31, 1998, the Company invested
approximately $3.5 million in property and equipment of which approximately $2.4
million was financed through sale leaseback arrangements with General Electric
Capital Corporation ("GECC"). The Company also invested $2.1 million in equity
ventures during the year ended December 31, 1998.
Pursuant to its Master Lease Agreement (the "Master Lease") with GECC,
the Company must maintain unrestricted cash, cash equivalents and investment
grade securities (the "Cash Equivalents") of at least $10,000,000. In March
1999, the Company ceased to maintain Cash Equivalents of at least $10,000,000.
Under the Master Lease, by April 15, 1999, the Company must notify GECC of the
amount of the Cash Equivalents of the Company and that the Company is not in
compliance with the Master Lease. GECC may then require the Company to deliver
to GECC within fifteen (15) days an irrevocable standby letter of credit (the
"Letter of Credit") in the amount of the "stipulated loss value" of the
equipment covered by the Master Lease (the "Equipment"), which amount is
currently $3.1 million, to secure the Company's obligations under the Master
Lease. In order to obtain the Letter of Credit, the Company would most likely
have to provide to the issuer thereof cash collateral in the amount of the
Letter of Credit. If the Letter of Credit is not delivered, the Company will be
in default under the Master Lease. If the Company does not cure such default
within thirty (30) days after written notice thereof from GECC, GECC may require
the Company, at its own cost and expense, to return the Equipment and to pay to
GECC the stipulated loss value of the Equipment as liquidated damages and any
rentals or other sums then due. GECC is not required to mitigate damages.
The Company has funded operations through December 31, 1998 with sales
of preferred stock and common stock totaling $57.8 million and payments from
collaborative partners totaling $33.7 million.
In July 1996, the Company completed an initial public offering of
2,750,000 shares of Common Stock at $7.00 per share. The Company received
proceeds, net of underwriting discounts, commissions and other initial public
offering expenses, of approximately $17.2 million.
In August 1996, the Company sold an additional 412,500 shares of Common
Stock at $7.00 per share pursuant to the exercise by the underwriters of an
over-allotment option granted to them. The Company received proceeds, net of
underwriting discounts and commissions, of approximately $2.7 million.
In May 1997, the Company purchased $2.0 million of convertible
preferred stock in Axiom, representing approximately 26% of the outstanding
shares of Axiom on an as converted basis. In June 1998, the Company purchased an
additional $2.0 million of convertible preferred stock in Axiom. This increased
the Company's equity interest in Axiom to approximately 30% of Axiom's then
outstanding shares on an as converted basis, after taking into account the
purchase by JAFCO of shares of convertible preferred stock of Axiom.
In May 1998, the Company sold 660,962 shares of its Common Stock to the
SmithKline Beecham p.l.c. and SmithKline Beecham Corporation for approximately
$7.56 per share or an aggregate consideration of $5.0 million.
In August 1998, the Company guaranteed the payment of a $286,000 loan
made to the Director of Research of the Company (who is also a Board member) and
secured its guarantee with cash collateral of $286,000. Accordingly, such
$286,000 is "restricted cash" and not available to the Company.
36
The Company believes that its existing capital resources, together with
interest income and future payments due under its research collaborations, will
be sufficient to support its current and projected funding requirements through
the middle of the first quarter of 2000. The Company will seek to reduce its
expenditures in order to preserve its financial resources and extend the period
of time that its financial resources will be able to support its operations.
This forecast of the period of time through which the Company's financial
resources will be adequate to support its operations is a forward-looking
statement that may not prove accurate and, as such, actual results may vary. The
Company's capital requirements may vary as a result of a number of factors,
including outcome of its appeal of the judgment in the SIBIA patent litigation,
the progress of its drug discovery programs, competitive and technological
developments, the continuation of its existing collaborative agreements and the
establishment of additional collaborative agreements, and the progress of the
research efforts of the Company's collaborative partners. The Company expects
that it will require significant additional financing in the future, which it
may seek to raise through public or private equity offerings, debt financings or
additional collaborative partnerships. No assurance can be given that such
additional financing will be available when needed or that, if available, such
financing will be obtained on terms favorable to the Company. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's stockholders.
At December 31, 1998, the Company had tax net operating loss
carryforwards of approximately $21,459,000 million and research and development
credit carryforwards of approximately $2,111,000 million which expire in years
2008 through 2018. The Company's ability to utilize such net operating loss and
research and development credit carryforwards is subject to certain limitations
due to ownership changes as defined by rules enacted with the Tax Reform Act of
1986.
37
Year 2000
The Company is aware of challenges associated with the inability of
certain computer systems to properly format information after December 31, 1999
(the "Year 2000 Challenge"). The Company is modifying its computer systems to
address the Year 2000 Challenge and does not expect that the cost of modifying
such systems will be material to its results of operations. The Company believes
it will fully remediate any of its Year 2000 Challenges in advance of the year
2000 and does not anticipate any material disruption in its operations as the
result of any failure by the Company to fully remediate such challenges.
The Company is in the process of contacting all significant suppliers
and financial institutions in order to identify potential areas of concern. It
is anticipated that this inquiry will be complete by the second quarter of 1999.
Improper or inadequate remediation of Year 2000 problems by parties
with whom the Company does business could adversely affect the Company's ability
to conduct its research activities. In addition, administrative functions
essential to day to day operations of the business could be impaired if Year
2000 remediation is not completed in a timely manner. Due to uncertainty of the
Year 2000 readiness of parties with whom the Company does business, the Company
is unable to determine at this time whether the consequences of Year 2000
failures will have a material adverse impact on the Company's results of
operations, liquidity or financial condition.
Based on the responses of its significant suppliers and financial
institutions, the Company intends to develop a contingency plan to identify and
document potential business disruptions and continuity planning procedures. The
focus of this activity is on potential failures of external systems required to
carry out normal business operations, including services provided by the public
infrastructure such as electric power and telecommunications. The Company
expects this activity to be an ongoing process well into the third quarter of
1999.
The above comments on the Year 2000 issue contain forward-looking
statements relating to the Company's plans, strategies, expectations,
intentions, and resources that should be read in conjunction with the Company's
disclosures on forward-looking statements.
New Accounting Pronouncements
38
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which is effective for all
quarters of fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In accordance with SFAS 133, an entity is required to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. The Company does not believe that the implementation of SFAS 133
will have a material effect on its financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due
to changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities and, secondarily, its long-term debt arrangements.
The Company does not believe it is materially exposed to changes in interest
rates. Under its current policies the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes.
Item 8. Financial Statements.
The financial statements and notes thereto may be found following Item
14 of this report. For an index to the financial statements and supplementary
data, see Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
39
PART III
Item 10. Directors and Executive Officers of the Company.
Information with respect to the executive officers, directors, key
employees and consultants of the Company as of March 19, 1999 is set forth
below:
Name Age Position
- ---- --- --------
Charles Woler, M.D., Ph.D. 49 President, Chief Executive Officer and Director
Philip N. Sussman 47 Senior Vice President of Finance and Corporate
Development and Chief Financial Officer
David R. Webb, Ph.D. 54 Vice President of Research and Chief Scientific
Officer
James S. Rielly 35 Vice President of Finance, Treasurer and
Secretary
Arlindo L. Castelhano, Ph.D. 46 Executive Director of Chemistry
James R. Broach, Ph.D. 51 Director of Research and Director
Algis Anilionis, Ph.D. 48 Director of Intellectual Property
O. Prem Das, Ph.D. 45 Director of Business Development
Carl C. Icahn 63 Director
Theodore Altman 57 Director
Harold First (1)(2) 62 Director
Russell D. Glass 36 Director
William Koster, Ph.D. 54 Director
Peter S. Liebert, M.D. 63 Director
Robert J. Mitchell(2) 52 Director
Professor Siegfried G. Schaefer 50 Director
Nicole Vitullo (1) 41 Director
Samuel D. Waksal, Ph.D. (2) 51 Director
Jack G. Wasserman (1) 62 Director
- ----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
40
Charles Woler, Ph.D., M.D., President and Chief Executive Officer,
joined the Company in September 1998. From late 1994 to July 1998, he was
General Manager of the Bouchara Group, a French based pharmaceutical company
specializing in bronchopulmonary disease and dermatology. From July 1993 to
September 1996, he was Vice Chairman of Pierre Fabre Pharma, a $1.0 billion
private pharmaceutical company based in France with operations in 26 countries
and was directly in charge of international operations. From January 1993 to
June 1998, he also served as Associate Professor of Strategy, Management, and
Organization at Paris University. From March 1992 to June 1993, Dr. Woler was
Chairman of Europe Pharmaceuticals at SmithKline Beecham p.l.c. in London and
from 1985 to 1991 he was at Hoffman la Roche-France, serving initially as
Director of Pharma Operations and General Manager of the Pharma Division and
then as Chairman of Pharma, Diagnostic, Vitamines and Fine Chemicals. From 1980
to 1985, he was Medical and Scientific Director and then Marketing and Sales
Director at Riom Laboratories, a division of Akzo Pharma France. From 1976 to
1979 he was Medical Director at Warner Lambert Parke Davis France. Dr. Woler
holds a Doctor of Medicine and a Master's degree in Pharmacokinectics and
Clinical Pharmacology from Paris University, a Ph.D. in Clinical Pharmacology
and Methodology from Lyon University, and an M.B.A. from Paris Trade
Chamber/Paris University.
Philip N. Sussman, Senior Vice President of Finance and Corporate
Development and Chief Financial Officer, joined the Company in September 1993 in
the capacity of Vice President of Corporate Development. From December 1990 to
September 1993, Mr. Sussman was Director of Strategy and Business Development
for the Pharmaceuticals Division of Ciba-Geigy Corporation, a public
pharmaceutical company. He is a member of the Review Panel for the Innovative
Technology Research Grant Program, Center for Biotechnology, New York State
Science and Technology Foundation. He is also a member of the New York Venture
Capital Forum, Inc. and a director of the M.I.T. Enterprise Forum of New York.
He is a member of the Board of Directors of Axiom Biotechnologies, Inc., a
private biotechnology company. Mr. Sussman holds an M.S. degree in Biotechnology
from Manhattan College and an S.M., with a concentration in Finance, from the
Sloan School of Management at the Massachusetts Institute of Technology. He also
holds a B.S. in Physics from the State University of New York at Stony Brook.
David R. Webb, Ph.D., Vice President of Research and Chief Scientific
Officer, joined the Company in such capacities in July 1995. From January 1987
to July 1995, Dr. Webb was a Distinguished Scientist at Syntex Inc., a public
pharmaceutical company, in the Department of Molecular Immunology. From April
1990 to January 1995, Dr. Webb was also Director of Syntex Inc.'s Institute of
Immunology and Biological Sciences. Prior to that Dr. Webb was a member of the
Department of Cell Biology at the Roche Institute of Molecular Biology. From
January 1989 to 1996, Dr. Webb was a Consulting Professor of Cancer Biology at
Stanford University. Dr. Webb is a member of the Board of Directors and of the
Scientific Advisory Board of Axiom Biotechnologies, Inc., a private
biotechnology company. Dr. Webb holds a Ph.D. in Microbiology from Rutgers
University, and an M.A. and a B.A. in Biology from California State University
at Fullerton.
41
James S. Rielly, Vice President of Finance, Treasurer and Secretary,
joined the Company in September 1992 as its Controller, became its Treasurer and
Secretary in September 1993 and became its Vice President of Finance in December
1997. From November 1989 to September 1992, Mr. Rielly was the Controller and
Treasurer of Baring Brothers & Co., Inc., an investment banking firm. Mr. Rielly
is a certified public accountant and holds a B.S.B.A. from Bucknell University.
Arlindo L. Castelhano, Ph.D., has been Executive Director of Chemistry
of the Company since June 1996 and Director of Chemistry from September 1995 to
June 1996. He was a scientist at Syntex Inc., a public pharmaceutical company,
from 1982 to 1995 and served as Principal Scientist from 1993 to 1995. He
received his Ph.D. in Chemistry from McMaster University and his B.S. from
University of Toronto.
James R. Broach, Ph.D., a scientific founder of the Company and
inventor of the Company's yeast-based drug discovery technology, has been
Director of Research of the Company since its inception. He is and has been
since 1984 a Professor at Princeton University in the Department of Molecular
Biology. In 1984, Dr. Broach and his collaborators were the first ones to
demonstrate that human genes could be successfully implanted into yeast cells.
He received his Ph.D. in Biochemistry from University of California at Berkeley
and his B.S. from Yale University.
Algis Anilionis, Ph.D., has been Director of Intellectual Property of
the Company since November 1994. He was Patent Manager at Oncogene Science Inc.,
a public biotechnology company, from 1991 to 1994 and Manager of Molecular
Biology and Genetics Research at Praxis Biologics, Inc. (now known as
Lederle/Praxis, a division of American Home Products), a public vaccine
manufacturer and research and development company, from 1986 to 1991. Dr.
Anilionis has nine issued U.S. patents and four granted European patents. He is
a registered Patent Agent. He received his Ph.D. in Molecular Biology from
Edinburgh University and a B.A. Hons. degree from University of Oxford.
O. Prem Das., Ph.D., Director of Business Development, joined the
Company in September 1996. Dr. Das was President of Heartland BioTechnologies,
Inc. from May 1995 to September 1996, and its Vice President from April 1994 to
May 1995. From April 1994 to September 1996, he was also Director of Research at
Heartland. Prior to that, Dr. Das completed several postdoctoral fellowships in
biochemistry, molecular biology and genetics at Rutgers University, the
University of Minnesota and Georgetown University. Dr. Das received his Ph.D.
from MIT, an M.Sc. from the Indian Institute of Technology and a B.Sc. from
Loyola College, Madras University.
Carl C. Icahn became a director of the Company in July 1993. He was a
Co-Chairman of the Board of Directors from May 1995 to May 1996. Mr. Icahn has
been Chairman of the Board and Chief Executive Officer of ACF Industries Inc., a
privately-held railcar leasing and
42
manufacturing company, since 1984, ACF Industries Holding Corp., a
privately-held holding company for ACF Industries Inc. since August 1993, and,
since 1968, Icahn & Co., Inc., a registered broker-dealer and until 1995 a
member firm of the New York Stock Exchange, Inc. Since November 1990, Mr. Icahn
has been Chief Executive Officer and Chairman of the Board of American Property
Investors, Inc., the general partner of American Real Estate Partners, L.P., a
public limited partnership that invests in real estate. From before 1991 to
January 1993, Mr. Icahn was Chief Executive Officer and Chairman of the Board of
Trans World Airlines, Inc., a public airline company. Mr. Icahn received his
B.A. from Princeton University.
Theodore Altman became a director of the Company in May 1996. For the
past five years, Mr. Altman has been a senior partner in the law firm of Gordon
Altman Butowsky Weitzen Shalov & Wein, concentrating his areas of practice in
securities law and litigation. Mr. Altman received a B.A. from Bucknell
University and an LL.B. from New York University.
Harold First became a director of the Company in April 1995. Mr. First
has been since January 1993 an independent financial consultant. From December
1990 through January 1993, Mr. First served as Chief Financial Officer of Icahn
Holding Corp., a privately held holding company, and related entities; served as
a director of Trump Taj Mahal Holding Corp., a public gaming and casino
organization, and a director of Trump Taj Mahal Realty Corp., a privately held
real estate company, from October 1991 until September 1996; a member of the
Supervisory Board of Directors of Memorex Telex N.V., a public technology
company, from February 1992 until February 1997; a director of Tel-Save.Com, a
public long-distance telephone service company, since September 1995; a director
of Panaco, Ltd., an oil and gas drilling firm, since September 1997 and is a
director of Philip Services Corp, a leading integrated provider of industrial
and metals service, since November 1998. Mr. First was a director of Trans World
Airlines, Inc., a public airline company, from December 1990 through January
1993; a director of ACF Industries, Inc., a privately held railcar leasing and
manufacturing company, from February 1991 through December 1992; Vice Chairman
of the Board of Directors of American Property Investors, Inc., the general
partner of American Real Estate Partners, L.P., a public limited partnership
that invests in real estate from March 1991 through December 1992; and a
director of both Marvel Entertainment Group, Inc., a public company that
publishes comic books and develops, sells and licenses comic book and other
characters, and Toy Biz, Inc., a public company that markets and sells toys,
from June 1997 through April 1998. He is a certified public accountant and holds
a B.S. from Brooklyn College.
Russell D. Glass became a director of the Company in June 1998. Since
April 1998 Mr. Glass has been President and Chief Investment Officer of Icahn
Associates Corp., a diversified investment firm. Since August 1998 he has also
served as Vice-Chairman and Director of Lowestfare.com, Inc., a leading internet
travel reservations company. Previously, Mr. Glass had been a partner in
Relational Investors LLC, from 1996 to 1998, and in Premier Partners Inc., from
1988 to 1996, firms engaged in investment research and management. From 1984 to
1986 he served as an investment banker with Kidder, Peabody & Co. Mr. Glass
serves as a Director of Automated Travel Systems, Inc., a software development
firm; National Energy Group, Inc., an
43
oil & gas exploration and production company; and the A.G. Spanos Corporation, a
national real estate developer and owner of the NFL San Diego Chargers Football
Club. Mr. Glass earned a B.A. in economics from Princeton University and an
M.B.A. from the Stanford University Graduate School of Business.
William H. Koster, Ph.D., became a director of the Company in April
1998. Dr. Koster has been Senior Vice President, Drug Discovery of Bristol-Myers
Squibb Pharmaceutical Research Institute since July 1997. From 1990 until July
1997, he was a Vice President of Bristol-Myers Squibb Pharmaceutical Research
Institute. Dr. Koster received a Ph.D. in Organic Chemistry from Tufts
University and a B.A. from Colby College.
Peter S. Liebert, M.D., became a director of the Company in April 1995.
Dr. Liebert has been a pediatric surgeon in private practice since 1968 and is
affiliated with Babies Hospital of Columbia Presbyterian. He is Clinical
Associate Professor of Surgery, College of Physicians and Surgeons, Columbia
University. He is also Chairman of the Board of Rx Vitamins, Inc. Dr. Liebert
holds an M.D. from Harvard University Medical School and a B.A. from Princeton
University.
Robert J. Mitchell became a director of the Company in May 1996. Mr.
Mitchell has been Senior Vice President-Finance of ACF Industries Inc. since
March 1995 and was Treasurer of ACF Industries Inc. from December 1984 to March
1995. Mr. Mitchell has also served as President and Treasurer of ACF Industries
Holdings Corp. since August 1993 and as Vice President, Liaison Officer of Icahn
& Co., Inc. since November 1984. From 1987 to January 1993, Mr. Mitchell served
as Treasurer of Trans World Airlines, Inc. Mr. Mitchell has been a director of
National Energy Group, Inc., a public company involved in the exploration of oil
and gas reserves, since August 1996. He received his B.S. degree in Business
Administration from St. Francis college.
Professor Siegfried G. Schaefer became a director of the Company in
January 1998. Dr. Schaefer has been head of worldwide research at Solvay
Pharmaceuticals since July 1997 and the head of research at a Dutch division of
Solvay Pharmaceuticals from May 1996 to July 1997. From September 1992 to July
1997 Dr. Schaefer was a department head for project management at an affiliate
of Solvay Pharmaceuticals. Dr. Schaefer has a Ph.D. in Biology from the
University of Bochum and a Doctorate in Pharmacology and Toxicology from the
University of Munich. Dr. Shaefer is currently a Professor at the University of
Hamburg in the Department of Pharmacology and Toxicology.
Nicole Vitullo became a director of the Company in December 1996. Ms.
Vitullo has been Senior Vice President of Rothschild International Asset
Management since November 1996 and Vice President thereof from November 1992
until November 1996. From July 1991 to November 1992, Ms. Vitullo served as
Director of Corporate Communications and Investor Relations at Cephalon, Inc., a
public biotechnology company. From June 1979 to July 1991, she held various
positions at Eastman Kodak, including Manager of Venture Capital Development of
44
the Healthcare Group. Ms. Vitullo serves as a director of Cytel Corporation,
Anergen, Inc., Onyx Pharmaceuticals, Inc. and Corvas International, public
biotechnology companies. Ms. Vitullo received her M.B.A. from the University of
Rochester's William E. Simon School of Business and her B.S. in
Mathematics/Statistics from the University of Rochester.
Samuel D. Waksal, Ph.D., a founder of the Company, has been a director
of the Company since its inception and was a Co-Chairman of the Board of
Directors from May 1995 to May 1996. Dr. Waksal was Chief Executive Officer of
the Company from June 1992 to December 1992 and was its Chairman of the Board of
Directors from June 1992 to May 1995. Dr. Waksal has been the Chief Executive
Officer and a director of ImClone Systems Incorporated, a public biotechnology
company, since 1985 and President since March 1987. From 1982 to 1985, Dr.
Waksal was a member of the faculty of the Mt. Sinai School of Medicine as
Associate Professor of Pathology and Director of the Division of Immunotherapy
within the Department of Pathology. He has served as visiting investigator of
the National Cancer Institute, Immunology Branch, Research Associate of the
Department of Genetics, Stanford University Medical School, Assistant Professor
of Pathology at Tufts University School of Medicine and Senior Scientist for the
Tufts Cancer Research Center. Dr. Waksal was a scholar of the Leukemia Society
of America from 1979 to 1984. He currently serves as Chairman of the New York
Council for the Humanities. Dr. Waksal received his Ph.D. in Immunology from
Ohio State University College of Medicine.
Jack G. Wasserman became a director of the Company in May 1996. For the
past five years, Mr. Wasserman has been a senior partner in Wasserman,
Schneider, Babb & Reeds, a New York law firm that concentrates its practice in
legal matters relating to international trade. Mr. Wasserman is a director of
American Property Investors, Inc., the general partner of American Real Estate
Partners, L.P., a public limited partnership that invests in real estate. Mr.
Wasserman is also a director of National Energy Group, Inc., a public company
engaged in oil exploration. Mr. Wasserman received a B.A. from Adelphi
University, a J.D. from Georgetown University and a Graduate Diploma from the
Johns Hopkins University School of Advanced International Studies.
Directors are elected by the stockholders of the Company at each annual
meeting of stockholders and serve until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
removal or resignation.
The Board of Directors has (i) a Compensation Committee, consisting of
Messrs. First and Wasserman and Ms. Vitullo, which makes recommendations
regarding salaries and incentive compensation for employees of and consultants
to the Company and which administers the 1993 Stock Option Plan and the 1996
Incentive Plan and (ii) an Audit Committee, consisting of Messrs. First and
Mitchell and Dr. Waksal, which oversees actions taken by the Company's
independent auditors and reviews the Company's internal accounting controls.
45
In September 1995, the Board of Directors granted to each director then
in office a 30-day option to purchase 8,334 shares of Common Stock at an
exercise price of $2.25 per share. In October 1995, each of Harold First, Carl
C. Icahn, Peter S. Liebert, Samuel D. Waksal and two former directors of the
Company exercised his option and purchased 8,334 shares of Common Stock at $2.25
per share. In November 1996, the Compensation Committee granted to each of the
non-employee directors then in office, other than one former director, an option
to purchase 12,000 shares of Common Stock at an exercise price of $6.75 per
share. Each stock option is exercisable in four cumulative annual installments
of 3,000 shares commencing in November 1997 and expires in November 2006. In
October 1997, the Compensation Committee granted to Nicole Vitullo an option to
purchase 12,000 shares of Common Stock at an exercise price of $14.00 per share.
The stock option is exercisable in four cumulative annual installments of 3,000
shares commencing in December 1997 and expires in October 2007. In December
1997, the Board of Directors granted to each of the three members of the
Compensation Committee an option to purchase 2,500 shares of Common Stock at an
exercise price of $6.375 per share. Each stock option expires in December 2007
and is currently exercisable. The shares issuable upon the exercise of such
options are registered pursuant to a registration statement on Form S-8.
The non-employee directors receive $1,000 for each meeting of the Board
of Directors attended and $500 for each meeting of a committee of the Board of
Directors attended.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock of the Company. Reporting persons are
required by SEC regulation to furnish the Company with copies of all such filed
reports. To the Company's knowledge, based solely on a review of copies of such
filed reports furnished to the Company, all of the Company's directors, officers
and greater than ten percent beneficial owners made all required filings during
fiscal year 1998 in a timely manner, except that the Form 3 for Mr. Charles
Woler was filed five weeks late.
Item 11. Executive Compensation.
The following table sets forth certain information concerning the
compensation paid or accrued by the Company for services rendered to the Company
in all capacities for the fiscal years ended December 31, 1998, 1997 and 1996,
by its current Chief Executive Officer, its former Chief Executive Officer who
resigned in January 1998 and each of the Company's other executive officers
whose total salary and bonus exceeded $100,000 during such fiscal year
(collectively, the "Named Executive Officers"):
46
Summary Compensation Table
Long-Term
Compensation
Awards
------
Annual Compensation Securities
------------------- Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation
--------------------------- ---- ---------- --------- ----------- ------------
Charles Woler (1) ......................... 1998 125,000 -- 295,145 53,225(2)
President and Chief Executive
Officer
Philip N. Sussman ......................... 1998 191,000 -- 255,000 --
Senior Vice President of Finance 1997 160,000 20,000 75,000 --
and Corporate Development and 1996 149,375 -- 65,000 --
Chief Financial Officer
David R. Webb ............................. 1998 183,750 20,000 20,000 --
Vice President of Research and 1997 175,000 20,000 45,000 --
Chief Scientific Officer 1996 175,000 17,500 17,500 --
Arlindo L. Castelhano, Ph.D ............... 1998 128,300 7,056 32,500 --
Executive Director of Chemistry 1997 118,800 15,000 1,000 --
1996 105,833 15,000 11,666 --
James S. Rielly ........................... 1998 100,000 20,000 20,000 --
Vice President of Finance 1997 95,000 20,000 15,000 --
1996 100,846 15,000 16,666 --
Jeremy M. Levin (3) ....................... 1998 18,750 -- -- --
1997 225,000 45,000 300,000 231,164
1996 225,000 45,000 25,000 --
- -------------------
(1) Dr. Woler joined the Company in October 1998 and received a salary at the
rate of $300,000 per annum for 1998.
(2) All other compensation consists of relocation expenses paid by the Company
on behalf of Dr. Woler.
(3) Dr. Levin ceased being the President and Chief Executive Officer of the
Company on January 31, 1998.
Employment Agreements
Dr. Charles Woler
Dr. Woler is employed as President and Chief Executive Officer under a
three-year employment agreement with the Company, which is extendable to four
years at the Company's option, entered into effective as of October 1, 1998.
Pursuant to his agreement, Dr. Woler will receive an annual base salary of
$300,000 for his first year of employment, $330,000 for his second year of
employment and $360,000 for his third year of employment. If the agreement is
extended, Dr. Woler will receive an annual base salary of $400,000 for his
fourth year of employment. Dr. Woler also received a $24,000 housing allowance
for the first six months of his employment with the Company and is eligible to
receive bonuses from time to time at the discretion of the Compensation
Committee. If the Company terminates Dr. Woler's employment without "cause," as
defined in his employment agreement, if Dr. Woler terminates his
47
employment with the Company within 18 months after a "change of control," as
defined in his employment agreement, and prior to October 1, 2001 and after Dr.
Woler's position or responsibilities are changed, or if Dr. Woler terminates his
employment with the Company within three months of a material change in his
position or principal place of work the Company will pay to Dr. Woler a lump sum
severance payment equal to the base salary he would have earned for the balance
of his agreement, but not more than two years' base salary, and all unvested
stock options issued to him will immediately vest as of the date of termination.
Philip N. Sussman
Mr. Sussman is employed as Senior Vice President of Finance and
Corporate Development and Chief Financial Officer under a three-year employment
agreement with the Company entered into effective as of September 10, 1998.
Pursuant to his agreement, Mr. Sussman will receive an annual base salary of
$225,000 for his first year of employment, $250,000 for his second year of
employment and $275,000 for his third year of employment. Mr. Sussman is also
eligible to receive bonuses from time to time at the discretion of the
Compensation Committee. If the Company terminates Mr. Sussman's employment
without "cause," as defined in his employment agreement, or if the Company fails
to renew his employment agreement upon terms as favorable as the terms of his
agreement then in effect and Mr. Sussman terminates his employment with the
Company as of September 9, 2001, the Company will pay to Mr. Sussman a lump sum
severance payment equal to the greater of the base salary he would have earned
for the balance of the agreement or $275,000, and all unvested stock options
issued to him will immediately vest as of the date of termination. If Mr.
Sussman terminates his employment within 18 months after a "change of control,"
as defined in his employment agreement, and prior to September 9, 2001 and after
Mr. Sussman's position or responsibilities are changed, or within three months
of a material change in his position or an involuntary relocation, the Company
will pay to Mr. Sussman a lump sum severance payment equal to the greater of the
base salary he would have earned for the balance of the agreement or $275,000,
and all unvested stock options issued to him will immediately vest as of the
date of termination. The Company will provide Mr. Sussman with employee
benefits, at the level in effect on the date of termination, for one year after
the date of termination.
Dr. David R. Webb
Dr. Webb is an employee at will but has a severance agreement with the
Company which provides that if he is terminated without cause he will receive
severance equal to whatever is deemed appropriate for other officers of the
Company at the time of termination.
James S. Rielly
Mr. Rielly is an employee at will but has a severance agreement with
the Company which provides that if he is terminated without cause (i) the
Company will continue to pay him his then salary and provide him with medical
benefits until the earlier of six months from the date of
48
termination or his commencement of new employment and (ii) all unvested stock
options issued to him will immediately vest as of the date of termination.
Option Grants
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1998 by the Company to the
Named Executive Officers:
Option Grants in Last Fiscal Year
Individual Grants
---------------------------------------------------------------
Potential Realizable Value
Percent of At Assumed Annual Rates
Total of Stock Price
Securities Options Appreciation for Option
Underlying Granted to Exercise Terms ($)
Options Employees in Price Expiration ------------------------------
Name Granted (#) Fiscal Year ($/share) Date 5% 10%
---- ----------- ----------- --------- ------ -- ---
Charles Woler.............. 295,145 31.36 2.75 10/1/08 1,322,090 2,105,208
Philip N. Sussman.......... 100,000 10.63 2.75 9/10/08 172,946 438,279
95,000 10.09 2.75 9/10/08 164,299 416,365
20,000 2.13 2.75 9/10/08 34,589 87,655
20,000 2.13 2.75 9/10/08 34,589 87,655
20,000 2.13 2.75 9/10/08 34,589 87,655
David R. Webb.............. 20,000 2.13 2.688 11/16/08 33,809 85,680
Arlindo L. Castelhano...... 25,000 2.66 8.563 3/16/08 134,631 341,180
7,500 0.8 2.688 11/16/08 12,679 32,130
James S. Rielly............ 20,000 2.13 2.688 11/16/08 33,809 85,680
Jeremy M. Levin............ - - - - - --
Option Exercises and Holdings
The following table sets forth certain information concerning each
exercise of stock options, during the fiscal year ended December 31, 1998 by the
Named Executive Officers and unexercised stock options held by the Named
Executive Officers as of the end of such fiscal year.
49
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 1998 (#) December 31, 1998 ($)(1)
Shares Aggregate --------------------------- ---------------------------
Acquired on Value
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- -------- ------------ ----------- ------------- ----------- -------------
Charles Woler............ - - - 295,145 - -
Philip N. Sussman........ - - 117,918 343,750 - -
David R. Webb............ - - 56,250 82,917 - -
Arlindo L. Castelhano.... - - 9,418 42,416 - -
James S. Rielly.......... - - 15,418 41,248 - -
Jeremy M. Levin.......... 12,500 4,688 290,071 - - -
- ------------
(1) Based on the difference between the closing price of the underlying shares
of Common Stock on December 31, 1998 as reported by the NASDAQ National
Market ($1.938) and the option exercise price.
1993 Stock Option Plan
The 1993 Stock Option Plan provides for the grant of options to
purchase shares of Common Stock to officers, employees and consultants of the
Company. The maximum number of shares of Common Stock that may be issued
pursuant to the 1993 Stock Option Plan is 666,667 (plus any shares that are the
subject of canceled or forfeited awards). Effective as of May 10, 1996, the 1993
Stock Option Plan was replaced by the 1996 Incentive Plan with respect to all
future awards to the Company's employees and consultants. See " -- 1996
Incentive Plan."
The 1993 Stock Option Plan is administered by the Compensation
Committee which is presently comprised of Harold First, Jack G. Wasserman and
Nicole Vitullo.
Under the 1993 Stock Option Plan, the Compensation Committee may
establish with respect to each option granted such vesting provisions as it
determines to be appropriate or advisable. In general, options granted under the
1993 Stock Option Plan have a ten-year term, and such options vest or have
vested over four-year periods at various rates. Unexercised options
automatically terminate upon the termination of the holder's relationship with
the Company. However, the Compensation Committee may accelerate a vesting
schedule and/or extend the time for exercise of all or any part of an option in
the event of the termination of the holder's relationship with the Company. In
addition, the 1993 Stock Option Plan includes a provision authorizing the
Compensation Committee to adjust the number of shares of Common Stock available
for grant, the number of shares of Common Stock subject to outstanding awards
thereunder and the per share exercise price thereof in the event of any stock
dividend, stock split, recapitalization, merger or certain other events. The
Compensation Committee may terminate the
50
1993 Stock Option Plan at any time but any such termination will not adversely
affect options previously granted.
Options granted under the 1993 Stock Option Plan are nontransferable
except by will or the laws of descent and distribution.
During 1998, there were no stock options granted under the 1993 Stock
Option Plan.
As of March 19, 1999, an aggregate of 445,976 shares of Common Stock
were subject to outstanding stock options granted under the 1993 Stock Option
Plan. As of March 19, 1999, options to purchase 423,808 shares were exercisable
at prices ranging from $1.37 to $3.51 per share.
The Company has registered the shares issuable upon exercise of stock
options granted under the 1993 Stock Option Plan pursuant to a registration
statement on Form S-8.
Stock Option Agreements
The Company has granted non-qualified stock options to directors,
officers, employees and consultants of the Company by means of stock option
agreements. During 1998, there were no stock options granted pursuant to stock
option agreements. As of March 19, 1999, an aggregate of 583,923 shares of
Common Stock were subject to outstanding stock options granted under stock
option agreements, and options to purchase 501,035 shares under such option
agreements were exercisable at prices ranging from $1.50 to $6.75 per share.
The Company has registered the shares issuable upon exercise of stock
options granted under such stock option agreements pursuant to a registration
statement on Form S-8.
1996 Incentive Plan
The Company's 1996 Incentive Plan (the "1996 Incentive Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in May 1996. The 1996 Incentive Plan replaced the 1993 Stock Option
Plan, effective as of May 10, 1996, with respect to all future awards by the
Company to its employees and consultants. However, while all future awards will
be made under the 1996 Incentive Plan, awards made under the 1993 Stock Option
Plan will continue to be administered in accordance with the 1993 Stock Option
Plan. See "Incentive Plans -- 1993 Stock Option Plan." In December 1996, the
Board of Directors amended the 1996 Incentive Plan to (i) increase the maximum
number of shares of Common Stock that may be the subject of awards under the
1996 Incentive Plan from 333,334 to 833,334 (plus any shares that are the
subject of canceled or forfeited awards) and (ii) provide for the grant of stock
options to directors of the Company. The stockholders of the Company approved
such amendments to the 1996 Incentive Plan in June 1997. In December 1997, the
Board of Directors amended the 1996 Incentive Plan to increase the maximum
number of shares of Common Stock that may be the subject of awards under the
1996 Incentive Plan from 833,334 to 1,833,334 (plus
51
any shares that are the subject of canceled or forfeited awards). The
stockholders of the Company approved this amendment to the 1996 Incentive Plan
in June 1998.
The 1996 Incentive Plan is administered by the Compensation Committee,
which has the power and authority under the 1996 Incentive Plan to determine
which of the Company's employees, consultants and directors will receive awards,
the time or times at which awards will be made, the nature and amount of the
awards, the exercise or purchase price, if any, of such awards, and such other
terms and conditions applicable to awards as it determines to be appropriate or
advisable.
Options granted under the 1996 Incentive Plan may be either
non-qualified stock options or options intended to qualify as incentive stock
options under Section 422 of the Code. The term of incentive stock options
granted under the 1996 Incentive Plan cannot extend beyond ten years from the
date of grant (or five years in the case of a holder of more than 10% of the
total combined voting power of all classes of stock of the Company on the date
of grant).
Shares of Common Stock may either be awarded or sold under the 1996
Incentive Plan and may be issued or sold with or without vesting and other
restrictions, as determined by the Compensation Committee.
Under the 1996 Incentive Plan, the Compensation Committee may establish
with respect to each option or share awarded or sold such vesting provisions as
it determines to be appropriate or advisable. Unvested options will
automatically terminate within a specified period of time following the
termination of the holder's relationship with the Company and in no event beyond
the expiration of the term. The Company may either repurchase unvested shares of
Common Stock at their original purchase price upon the termination of the
holder's relationship with the Company or cause the forfeiture of such shares,
as determined by the Compensation Committee. All options granted and shares sold
under the 1996 Incentive Plan to employees of the Company may, in the discretion
of the Compensation Committee, become fully vested upon the occurrence of
certain corporate transactions if the holders thereof are terminated in
connection therewith.
The exercise price of options granted and the purchase price of shares
sold under the 1996 Incentive Plan are determined by the Compensation Committee,
but may not, in the case of incentive stock options, be less than the fair
market value of the Common Stock on the date of grant (or, in the case of
incentive stock options granted to a holder of more than 10% of the total
combined voting power of all classes of stock of the Company on the date of
grant, 110% of such fair market value), as determined by the Compensation
Committee.
The Compensation Committee may also grant, in combination with
non-qualified stock options and incentive stock options, stock appreciation
rights ("Tandem SARs"), or may grant Tandem SARs as an addition to outstanding
non-qualified stock options. A Tandem SAR permits the participant, in lieu of
exercising the corresponding option, to elect to receive any appreciation in the
value of the shares subject to such option directly from the Company in shares
of Common Stock. The amount payable by the Company upon the exercise of a Tandem
SAR is
52
measured by the difference between the market value of such shares at the time
of exercise and the option exercise price. Generally, Tandem SARs may be
exercised at any time after the underlying option vests. Upon the exercise of a
Tandem SAR, the corresponding portion of the related option must be surrendered
and cannot thereafter be exercised. Conversely, upon exercise of an option to
which a Tandem SAR is attached, the Tandem SAR may no longer be exercised to the
extent that the corresponding option has been exercised. Nontandem stock
appreciation rights ("Nontandem SARs") may also be awarded by the Compensation
Committee. A Nontandem SAR permits the participant to elect to receive from the
Company that number of shares of Common Stock having an aggregate market value
equal to the excess of the market value of the shares covered by the Nontandem
SAR on the date of exercise over the aggregate base price of such shares as
determined by the Compensation Committee. With respect to both Tandem and
Nontandem SARs, the Compensation Committee may determine to cause the Company to
settle its obligations arising out of the exercise of such rights in cash or a
combination of cash and shares, in lieu of issuing shares only.
Under the 1996 Incentive Plan, the Compensation Committee may also
award tax offset payments to assist employees in paying income taxes incurred as
a result of their participation in the 1996 Incentive Plan. The amount of the
tax offset payments will be determined by applying a percentage established from
time to time by the Compensation Committee to all or a portion of the taxable
income recognizable by the employee upon: (i) the exercise of a non-qualified
stock option or an SAR; (ii) the disposition of shares received upon exercise of
an incentive stock option; (iii) the lapse of restrictions on restricted shares;
or (iv) the award of unrestricted shares.
The number and class of shares available under the 1996 Incentive Plan
may be adjusted by the Compensation Committee to prevent dilution or enlargement
of rights in the event of various changes in the capitalization of the Company.
At the time of grant of any award, the Compensation Committee may provide that
the number and class of shares issuable in connection with such award be
adjusted in certain circumstances to prevent dilution or enlargement of rights.
The Board of Directors may suspend, amend, modify or terminate the 1996
Incentive Plan. However, the Company's stockholders must approve any amendment
that would (i) materially increase the aggregate number of shares issuable under
the 1996 Incentive Plan, (ii) materially increase the benefits accruing to
employees under the 1996 Incentive Plan or (iii) materially modify the
requirements for eligibility to participate in the 1996 Incentive Plan. Awards
made prior to the termination of the 1996 Incentive Plan shall continue in
accordance with their terms following such termination. No amendment, suspension
or termination of the 1996 Incentive Plan shall adversely affect the rights of
an employee or consultant in awards previously granted without such employee's
or consultant's consent.
As of March 19, 1999, an aggregate of 1,620,044 shares of Common Stock
were subject to outstanding stock options granted under the 1996 Incentive Plan.
As of March 19, 1999, stock options to purchase 314,088 shares were exercisable
at prices ranging from $2.69 to $14.00 per share.
53
The Company has registered the shares issuable upon exercise of stock
options granted or which may be granted under the 1996 Incentive Plan pursuant
to a registration statement on Form S-8.
401(k) Plan
In November, 1993, the Company adopted a tax-qualified employee savings
and retirement plan (the "401(k) Plan") covering the Company's employees.
Generally, employees may elect to contribute to the 401(k) Plan, through payroll
deductions, up to 20% of their compensation for services rendered in any year,
not to exceed a statutorily prescribed annual limit. The trustee under the
401(k) Plan, at the direction of each participant, invests the assets of the
401(k) Plan in any of seven investment options. The 401(k) Plan is intended to
qualify under Section 401 of the Code so that contributions by employees to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn. The Company made an aggregate matching contribution
for the year ended December 31, 1998 of approximately $90,000 to participants
under the 40l(k) Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 19, 1999 with respect to
(i) each person known by the Company to be the beneficial owner of more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Executive Officers and (iv) all directors and officers as a group. All
information is based upon ownership filings made by such persons with the
Securities and Exchange Commission (the "Commission") or upon information
provided by such persons to the Company.
Number of Shares
Amount and Nature Percentage of Outstanding
Name and Address of Beneficial Owner (1) of Beneficial Ownership Owned(2)
- ---------------------------------------- ----------------------- -------------------------
Carl C. Icahn................................... 3,367,216(3) 25.75%
767 Fifth Avenue
New York, New York 10153
Bristol-Myers Squibb............................ 2,061,673 15.78%
P.O. Box 4000
Route 206 and Province Line Road
Princeton, New Jersey 08543-4000
Physica B.V. (4)................................ 1,599,942 12.24%
C.J. van Houtenlaan 36
1381 CP Weesp
The Netherlands
54
Number of Shares
Amount and Nature Percentage of Outstanding
Name and Address of Beneficial Owner (1) of Beneficial Ownership Owned(2)
- ---------------------------------------- ----------------------- -------------------------
International Biotechnology Trust plc .......... 850,000(5) 6.50%
c/o Rothschild Asset Management Limited
Five Arrows House
St. Swithins Lane
London EC4N 8NR
United Kingdom
SmithKline Beecham Corporation 660,962(6) 5.06%
One Franklin Plaza
Philadelphia, PA 19102
Charles Woler * *
Philip N. Sussman............................... 131,807(7) *
David R. Webb, Ph.D............................. 56,250(8) *
Arlindo L. Castelhano, Ph.D..................... 22,334(9) *
James S. Rielly................................. 15,618(10) *
Jeremy M. Levin, D.Phil., MB. BCHIR............. 290,071(11) 2.17%
Theodore Altman................................. 6,000(12) *
James R. Broach................................. 203,668(13) 1.55%
Harold First.................................... 16,834(14) *
Russell D. Glass................................ * *
William H. Koster, Ph.D......................... 2,061,673(15) 15.78%
Peter S. Liebert, M.D........................... 14,334(16) *
Robert J. Mitchell.............................. 6,000(17) *
Siegfried G. Schaefer, Ph.D..................... 1,599,942(18) 12.24%
Nicole Vitullo.................................. 858,500(19) 6.56%
Samuel D. Waksal, Ph.D.......................... 6,000(20) *
Jack G. Wasserman............................... 8,500(21) *
All executive officers and directors as a....... 8,664,747(22) 63.04%
group (18 persons)
- ----------
* Less than one percent
(1) Except as otherwise indicated above, the address of each stockholder
identified above is c/o the Company, 777 Old Saw Mill River Road,
Tarrytown, NY 10591-6705. Except as indicated in the other footnotes to
this table, the persons named in this table have sole voting and
investment power with respect to all shares of Common Stock.
55
(2) Share ownership in the case of each person listed above includes shares
issuable upon the exercise of options held by such person as of March
19, 1999, that may be exercised within 60 days after such date for
purposes of computing the percentage of Common Stock owned by such
person, but not for purposes of computing the percentage of Common Stock
owned by any other person.
(3) Includes 2,258,790 shares of Common Stock held by High River Limited
Partnership. Mr. Icahn is the sole shareholder of the sole general
partner of High River Limited Partnership. Also includes 6,000 shares of
Common Stock that Mr. Icahn currently has the right to acquire upon the
exercise of stock options.
(4) Physica B.V. is an affiliate of Solvay Pharmaceuticals.
(5) Consists of 850,000 shares of Common Stock held by the International
Biotechnology Trust plc ("IBT"). Rothschild Asset Management acts as the
investment manager to IBT and therefore may be deemed to share
beneficial ownership of these shares.
(6) Includes 330,481 shares of Common Stock held by SmithKline Beecham
p.l.c., an affiliate of SmithKline Beecham Corporation.
(7) Consists of 131,807 shares of Common Stock which Mr. Sussman currently
has the right to acquire upon the exercise of stock options. See
"Management - Incentive Plans."
(8) Consists of 56,250 shares of Common Stock which Dr. Webb currently has
the right to acquire upon the exercise of stock options. See "Management
- Incentive Plans."
(9) Includes 15,668 shares of Common Stock which Dr. Castelhano currently
has the right to acquire upon the exercise of stock options. See
"Management - Incentive Plans."
(10) Includes 15,418 shares of Common Stock which Mr. Rielly currently has
the right to acquire upon the exercise of stock options. See "Management
- Incentive Plans."
(11) Consists of 290,071 shares of Common Stock which Dr. Levin currently has
the right to acquire upon the exercise of stock options.
(12) Consists of 6,000 shares of Common Stock which Mr. Altman currently has
the right to acquire upon the exercise of stock options.
(13) Includes 110,667shares of Common Stock which Dr. Broach currently has
the right to acquire upon the exercise of stock options.
(14) Includes 8,500 shares of Common Stock which Mr. First currently has the
right to acquire upon the exercise of stock options.
(15) Includes 2,061,973 shares of Common Stock held by Bristol-Myers Squibb.
Dr. Koster is Senior Vice President, Drug Discovery of Bristol-Myers
Squibb Pharmaceutical Research Institute. Dr. Koster may be deemed the
beneficial owner of the 2,061,973 shares of Common Stock held by
Bristol-Myers Squibb, but disclaims such beneficial ownership.
(16) Includes 6,000 shares of Common Stock which Dr. Liebert currently has
the right to acquire upon the exercise of stock options.
(17) Consists of 6,000 shares of Common Stock which Mr. Mitchell currently
has the right to acquire upon the exercise of stock options.
(18) Consists of 1,599,942 shares of Common Stock held by Physica B.V., an
affiliate of Solvay Pharmaceuticals. Professor Schaefer is the head of
worldwide research at Solvay Pharmaceuticals.
56
Professor Schaefer may be deemed the beneficial owner of the 1,599,942
shares of Common Stock held by Physica B.V., but disclaims such
beneficial ownership.
(19) Includes (a) 850,000 shares of Common Stock held by IBT and (b) 8,500
shares of Common Stock which Ms. Vitullo currently has the right to
acquire upon the exercise of stock options. Ms. Vitullo is Vice
President of Rothschild Asset Management Ltd., the investment manager
for IBT. Ms. Vitullo may be deemed the beneficial owner of the 850,000
shares of Common Stock held by IBT, but disclaims such beneficial
ownership.
(20) Consists of 6,000 shares of Common Stock which Dr. Waksal currently has
the right to acquire upon the exercise of stock options.
(21) Consists of 8,500 shares of Common Stock which Mr. Wasserman currently
has the right to acquire upon the exercise of stock options.
(22) Includes (a) 675,381 shares of Common Stock issuable upon exercise of
options, (b) 2,061,673 shares of Common Stock held by Bristol-Myers
Squibb, (c) 1,599,942 shares of Common Stock held by Physica B.V., and
(d) 850,000 shares of Common Stock held by IBT. See footnotes (3), (7),
(8), (9), (10), (11), (12), (13), (14), (15), (16), (17), (18), (19),
(20), and (21).
Item 13. Certain Relationships and Related Transactions.
For the year ended December 31, 1998, the Company received $4,387,017
in cash for research funding from Bristol-Myers Squibb, which constituted 35% of
the Company's gross revenues in 1998. William H. Koster, a director of the
Company, is Senior Vice President, Drug Discovery of Bristol-Myers Squibb
Pharmaceutical Research Institute.
For the year ended December 31, 1998, the Company received $2,645,842
in cash for research funding from Solvay Pharmaceuticals, an affiliate of
Physica B.V., which constituted 21% of the Company's gross revenues in 1998.
Siegfried G. Schaefer, a director of the Company, is the head of worldwide
research at Solvay Pharmaceuticals.
For the year ended December 31, 1998, the Company received $3,543,610
in cash for research funding and $2.0 million in cash as a one-time technology
development fee from SmithKline Beecham which constituted 44% of the Company's
gross revenues in 1998. In May 1998, the Company sold 660,962 shares of its
Common Stock to SmithKline Beecham p.l.c. and SmithKline Beecham Corporation for
approximately $7.56 per share or an aggregate consideration of $5.0 million.
During 1998, the Company loaned $15,000 to Dr. Charles Woler, the Chief
Executive Officer of the Company. The loan bears interest at 5.5% per annum.
Principal and interest are repayable in monthly installments of $453 over 3
years. At December 31, 1998, the outstanding balance of the loan was $13,452.
In September 1998, Dr. James Broach, a director of the Company, entered
into a five-month employment arrangement with the Company pursuant to which he
worked full-time at the Company and was compensated at the rate of $20,000 per
month. The Company also granted Dr. Broach an option to purchase 50,000 shares
of Common Stock at an exercise price of $2.75 per share. The option vests in
increments of 10,000 or 20,000 shares upon the achievement of
57
specific milestones. In connection with the employment arrangement, the Company
guaranteed the payment of a $286,000 loan made to Dr. Broach by a third party
and secured its guarantee obligation with cash collateral of $286,000. Dr.
Broach indemnified the Company from any liabilities arising from its guarantee
and pledged securities owned by him to secure his indemnification obligation.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements
Page
- ----
Index to Financial Statements F-1
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity
Statements of Cash Flows F-6
Notes to Financial Statements F-7
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the last quarter of the
period covered by this Report.
(c) Exhibits
Exhibit No. Description of Document
- ----------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of Cadus Pharmaceutical
Corporation (the "Company"), as filed with the Secretary of State of Delaware
on July 22, 1996. (1)
3.2 By-laws of the Company. (2)
4.1 Specimen of Common Stock Certificate of the Company. (2)
4.2 1993 Cadus Pharmaceutical Corporation Stock Option Plan. (2)
4.3 Cadus Pharmaceutical Corporation 1996 Incentive Plan. (2)
58
4.4 Amendment to Cadus Pharmaceutical Corporation 1996 Incentive Plan. (1)
4.5 Form of Incentive Stock Option Agreement utilized in connection with
issuances of stock options under the Cadus Pharmaceutical Corporation 1996
Incentive Plan. (1)
4.6 Form of Stock Option Agreement between the Company and each of the
following employees of the Company: Philip N. Sussman, John Manfredi,
Andrew Murphy, Jeremy Paul, Lauren Silverman, Joshua Trueheart, James S.
Rielly, Thomas F. Deuel, Norman R. Klinman, Elliott M. Ross, Jeremy
Thorner, Arnold Levine, John Ransom, Christine Klein, Suzanne K.
Wakamoto, Christopher Pleiman, Algis Anilionis, Anupama K. Nadkarni,
Mitchell Silverstein, Michael A. Spruyt and David Fruhling. (1)
4.7 Form of Stock Option Agreement between the Company and each of the
following non-employee directors of the Company: Theodore Altman, Harold
First, Carl Icahn, Peter Liebert, Robert Mitchell, Mark Rachesky, William
Scott, Jack Wasserman and Samuel D. Waksal. (1)
4.8 Stock Purchase Agreement between the Company and SmithKline Beecham
Corporation, dated as of February 25, 1997. (3)
4.9 Registration Rights Agreement between the Company and SmithKline Beecham
Corporation, dated as of February 25, 1997. (3)
10.1 Form of Indemnification Agreement entered into between the Company and its
directors and officers. (2)
10.2 Form of Agreement Regarding Assignment of Inventions, Confidentiality and
Non-Competition. (2)
10.3 The 401(k) Plan of the Cadus Pharmaceutical Corporation. (2)
10.4 Employment Agreement between Jeremy M. Levin and the Company. (2)
10.5 Preferred Stock Purchase Agreement dated as of July 30, 1993 between the
Company and the purchasers of Series A Preferred Stock, together with the First
and Second Amendments thereto dated as of July 26, 1994 and October 31, 1995,
respectively. (2)
10.6 Preferred Stock Purchase Agreement dated as of July 26, 1994 between the
Company and Bristol-Myers Squibb Company ("Bristol-Myers") concerning Series B
Preferred Stock, together with the First Amendment thereto dated as of October
31, 1995. (2)
59
10.7 Preferred Stock Purchase Agreement dated as of November 1, 1995 between the
Company and Physica B.V. concerning Series B Preferred Stock. (2)
10.8 Research Collaboration and License Agreement, dated as of July 26, 1994,
between the Company and Bristol-Myers. (2)
10.9 Screening and Option Agreement, dated as of July 26, 1994, between the Company
and Bristol-Myers. (2)
10.10 Research Collaboration and License Agreement, dated as of November 1, 1995
between the Company and Solvay Pharmaceuticals B.V. (2)
10.11 Sublease Agreement, dated as of October 19, 1994, between the Company and Union
Carbide Corporation. (2)
10.12 Lease, dated as of June 20, 1995 between the Company and Keren Limited
Partnership. (2)
10.13 Consulting Agreement between the Company and James R. Broach, dated February 1,
1994. (2)
10.14 Amended and Restated License Agreement between the Company and Duke University,
dated May 10, 1994. (2)
10.15 License Agreement between the Company and National Jewish Center for Immunology
and Respiratory Medicine dated November 1, 1994. (2)
10.16 Stock Option Agreement, dated as of November 1, 1994, between the Company and
John C. Cambier. (2)
10.17 Stock Option Agreement, dated as of November 1, 1994, between the Company and
Gary L. Johnson. (2)
10.18 Consulting Agreement, dated as of November 1, 1994, between the Company and
John C. Cambier. (2)
10.19 Consulting Agreement, dated as of November 1, 1994, between the Company and
Gary L. Johnson. (2)
10.20 Research Collaboration Agreement, dated as of January 9, 1995, between the
Company and Houghten Pharmaceuticals, Inc., together with the Amendment thereto
dated as of March 1996. (2)
60
10.21 Stock Option Agreement, dated as of December 18, 1995, between the Company and
James R. Broach. (2)
10.22 Waiver, dated May 17, 1996, of Section 1.05 of the Preferred Stock Purchase
Agreement dated as of July 26, 1994 between the Company and Bristol-Myers, as
amended by the First Amendment thereto dated as of October 31, 1995. (2)
10.23 Waiver, dated May 17, 1996, of Section 1.04 of the Preferred Stock Purchase
Agreement dated as of November 1, 1995 between the Company and Physica B.V. (2)
10.24 Research Collaboration and License Agreement among the Company, SmithKline
Beecham Corporation and SmithKline Beecham p.l.c., dated as of February 25,
1997. (3)
10.25 Employment Agreement, dated as of June 30, 1998, between the Company and
Charles Woler. (4)
10.26 Employment Agreement, dated as of September 10, 1998, between the Company and
Philip N. Sussman. (4)
10.27 Agreement and Instructions to Stakeholder among the Company, SIBIA and Security
Trust Company entered into March 1999.
23 Consent of KPMG LLP, independent auditors.
24 Power of Attorney (filed as part of the signature page to this Report).
27 Financial Data Schedule.
- ------------
(1) Filed with the Company's Registration Statement on Form S-8 (Registration
No. 333- 21871), dated February 14, 1997.
(2) Filed with the Company's Registration Statement on Form S-1 (Registration
No. 333-4441), declared effective by the Commission on July 17, 1996.
(3) Filed with the Company's Current Report on Form 8-K, dated March 7, 1997.
(4) Filed with the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998.
61
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CADUS PHARMACEUTICAL CORPORATION
By: /s/ Charles Woler
-------------------------------------------
Charles Woler,
Chief Executive Officer and President
Each person whose signature appears below constitutes and appoints
Charles Woler and James S. Rielly, or either of them, each with the power of
substitution, his or her true and lawful attorney-in-fact to sign any amendments
to this report and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact, or his or her
substitute, may do or choose to be done by virtue hereof.
Pursuant to the Requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Charles Woler Chief Executive Office and President March 27, 1999
- --------------------------- (Principal Executive Officer)
Charles Woler
/s/ James S. Rielly Vice President of Finance, Secretary and Treasurer March 27, 1999
- --------------------------- (Principal Accounting Officer)
James S. Rielly
- -------------------------- Director March __, 1999
Carl C. Icahn
- -------------------------- Director March __, 1999
Theodore Altman
/s/ James R. Broach Director March 27, 1999
- --------------------------
James R. Broach
/s/ Harold First
- -------------------------- Director March 27, 1999
Harold First
/s/ Russell Glass
- -------------------------- Director March 29, 1999
Russell Glass
- -------------------------- Director March __, 1999
William H. Koster
/s/ Peter S. Liebert Director March 27, 1999
- --------------------------
Peter S. Liebert
- -------------------------- Director March __, 1999
Robert J. Mitchell
/s/ Siegfried G. Schaefer
- -------------------------- Director March 30, 1999
Siegfried G. Schaefer
/s/ Nicole Vitullo Director March 29, 1999
- --------------------------
Nicole Vitullo
/s/ Samuel D. Waksal Director March 27, 1999
- --------------------------
Samuel D. Waksal
/s/ Jack G. Wasserman Director March 27, 1999
- --------------------------
Jack G. Wasserman
CADUS PHARMACEUTICAL CORPORATION
Index
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets - December 31, 1998 and 1997 F-3
Statements of Operations - For the years ended
December 31, 1998, 1997 and 1996. F-4
Statement of Stockholders' Equity - For the years
ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows - For the years ended
December 31, 1998, 1997 and 1996. F-6
Notes to Financial Statements F-7
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Cadus Pharmaceutical Corporation:
We have audited the accompanying balance sheets of Cadus Pharmaceutical
Corporation (the Company) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cadus Pharmaceutical
Corporation as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
March 29, 1999
F-2
Cadus Pharmaceutical Corporation
Balance Sheets
December 31, December 31,
1998 1997
------------ ------------
Assets
Current assets:
Cash and cash equivalents $10,975,528 $36,761,516
Restricted cash (note 5) 286,000 -
Prepaid and other current assets 298,319 405,597
----------- -----------
Total current assets 11,559,847 37,167,113
Restricted cash noncurrent (note 3) 18,500,000 -
Fixed assets, net of accumulated depreciation and amortization of $2,254,840
at December 31, 1998, $2,582,661 at December 31, 1997 (note 4) 2,792,268 2,646,936
Deferred tax asset, less valuation allowance of $19,582,000 at December 31, 1998
and $7,204,000 at December 31, 1997 (note 7) - -
Investments in other ventures (note 6) 2,334,081 1,478,229
Other assets, net (note 2) 1,400,870 948,912
----------- ------------
Total assets $36,587,066 $42,241,190
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $217,414 $892,636
Accrued expenses and other current liabilities (note 12) 1,730,021 604,146
Deferred revenue (notes 8 and 13) 150,584 94,190
Note payable to partnership-current portion - 150,000
----------- -----------
Total current liabilities 2,098,019 1,740,972
Reserve for litigation damages (note 3) 18,500,000 -
----------- ------------
Total liabilities 20,598,019 1,740,972
Commitments and contingencies (notes 1, 3 and 13)
Stockholders' equity (notes 8, 10 and 11 ):
Common stock, $.01 par value. Authorized 35,000,000 shares at
December 31, 1998 and 1997; issued 13,210,607 shares at December 31, 1998
and 12,500,156 shares at December 31, 1997; outstanding 13,068,940 shares
at December 31, 1998 and 12,358,489 shares at December 31, 1997 132,106 125,001
Additional paid-in capital 59,689,446 54,517,519
Accumulated deficit (note 1) (43,532,430) (13,842,227)
Treasury stock, 141,667 shares of common stock at December 31, 1998 and 1997 (300,075) (300,075)
----------- -----------
Total stockholders' equity 15,989,047 40,500,218
----------- -----------
Total liabilities and stockholders' equity $36,587,066 $42,241,190
=========== ===========
See accompanying notes to financial statements
F-3
Cadus Pharmaceutical Corporation
Statements of Operations
For the Years Ended December 31,
1998 1997 1996
-------- -------- --------
Revenues, principally from
related parties (note 8) $12,576,469 $9,013,113 $6,500,000
------------ ----------- -----------
Costs and expenses:
Research and development costs 15,388,991 11,561,213 8,282,507
General and administrative expenses 8,977,408 4,091,866 2,315,042
------------ ----------- -----------
Total costs and expenses 24,366,399 15,653,079 10,597,549
------------ ----------- -----------
Operating loss (11,789,930) (6,639,966) (4,097,549)
------------ ----------- -----------
Other income and (expenses):
Interest income 1,844,177 2,079,058 1,829,820
Interest expense (10,500) (17,865) (110,416)
Loss of equity in other ventures, net (note 6) (1,144,148) (832,431) -
Reserve for litigation damages (note 3) (18,500,000) - -
Gain on sale of equipment 16,368 3,281 -
------------ ----------- -----------
Total other income and (expenses) (17,794,103) 1,232,043 1,719,404
Loss before income taxes (29,584,033) (5,407,923) (2,378,145)
State and local taxes (note 7) 106,170 2,975 62,580
------------ ----------- -----------
Net loss ($29,690,203) ($5,410,898) ($2,440,725)
------------ ----------- -----------
Basic and diluted net loss per share (note 2) ($2.32) ($0.44) ($0.39)
====== ====== ======
Shares used in calculation of basic and diluted
net loss per share (note 2) 12,811,525 12,225,463 6,280,917
============ =========== ===========
See accompanying notes to financial statements
F-4
Cadus Pharmaceutical Corporation
Statement of Stockholders' Equity
Convertible Convertible
Preferred Stock, Series A Preferred Stock, Series B
------------------------- -------------------------
Shares Amount Shares Amount
------ ------ ------ ------
Balance at January 1, 1996 14,879,651 $14,880 7,321,429 $7,321
Issuance of common stock for cash in connection with
exercise of options
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996
Conversion of preferred stock into common stock in
connection with the initial public offering in July 1996 (14,879,651) (14,880) (7,321,429) (7,321)
Issuance of common stock for cash at $7.00 per share, net of
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996
Net loss for year ended December 31, 1996
------------- --------- ---------- -----------
Balance at December 31, 1996 - - - -
Issuance of common stock for cash in connection with
exercise of options
Net loss for year ended December 31, 1997
------------- --------- ---------- -----------
Balance at December 31, 1997 - - - -
Issuance of common stock for cash in connection with
exercise of options
Issuance of restricted common stock in connection with
Stock Purchase Agreement with SmithKline Beecham
Net loss for year ended December 31, 1998
------------- --------- ---------- -----------
Balance at December 31, 1998 - $0 - $0
============= ======== ========= ===========
Common Stock Additional
------------ paid-in
Shares Amount capital
------ ------ -------
Balance at January 1, 1996 1,323,342 $14,650 $33,976,940
Issuance of common stock for cash in connection with
exercise of options 23,877 239 36,704
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996 2,750,000 27,500 17,149,124
Conversion of preferred stock into common stock in
connection with the initial public offering in July 1996 7,551,514 75,515 (53,314)
Issuance of common stock for cash at $7.00 per share, net of 412,500 4,125 2,681,250
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996
Net loss for year ended December 31, 1996
---------- -------- -----------
Balance at December 31, 1996 12,061,233 122,029 53,790,704
Issuance of common stock for cash in connection with
exercise of options 297,256 2,972 726,815
Net loss for year ended December 31, 1997
---------- -------- -----------
Balance at December 31, 1997 12,358,489 125,001 54,517,519
Issuance of common stock for cash in connection with
exercise of options 49,489 495 178,537
Issuance of restricted common stock in connection with
Stock Purchase Agreement with SmithKline Beecham 660,962 6,610 4,993,390
Net loss for year ended December 31, 1998 ---------- -------- -----------
Balance at December 31, 1998 13,068,940 $132,106 $59,689,446
========== ======== ===========
Accumulated Treasury Stock
Deficit Shares Amount Total
------- ------ ------ -----
Balance at January 1, 1996 ($5,990,604) (141,667) ($300,075) $27,723,112
Issuance of common stock for cash in connection with
exercise of options 36,943
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996 17,176,624
Conversion of preferred stock into common stock in
connection with the initial public offering in July 1996 -
Issuance of common stock for cash at $7.00 per share, net of 2,685,375
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996
Net loss for year ended December 31, 1996 (2,440,725) (2,440,725)
------------- --------- ---------- ---------
Balance at December 31, 1996 (8,431,329) (141,667) (300,075) 45,181,329
Issuance of common stock for cash in connection with
exercise of options 729,787
Net loss for year ended December 31, 1997 (5,410,898) (5,410,898)
------------- --------- ---------- ---------
Balance at December 31, 1997 (13,842,227) (141,667) (300,075) 40,500,218
Issuance of common stock for cash in connection with
exercise of options 179,032
Issuance of restricted common stock in connection with
Stock Purchase Agreement with SmithKline Beecham 5,000,000
Net loss for year ended December 31, 1998 (29,690,203) (29,690,203)
------------- --------- ---------- -----------
Balance at December 31, 1998 ($43,532,430) (141,667) ($300,075) $15,989,047
============= ======== ========= ===========
See accompanying notes to financial statements
F-5
Cadus Pharmaceutical Corporation
Statements of Cash Flow
For the Years Ended December 31,
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net loss ($29,690,203) ($5,410,898) ($2,440,725)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 992,224 1,328,532 837,984
Loss of equity in other ventures 1,144,148 832,431 -
Other non-cash gain (16,368) (94,190) -
Changes in assets and liabilities:
Decrease (increase) in prepaid and other current assets 107,278 (142,545) (186,242)
Increase in other assets (53,171) (16,645) (64,701)
(Decrease) increase in deferred revenue - (909,091) 1,000,000
(Decrease) increase in accounts payable (675,222) 436,842 301,331
Increase in accrued expenses and other current liabilities 1,125,875 133,486 49,505
Increase in reserve for litigation damages 18,500,000 - -
----------- ----------- -----------
Net cash used in operating activities (8,565,439) (3,842,078) (502,848)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets (3,450,130) (1,696,861) (1,574,678)
Sale and leaseback of fixed assets 2,463,888 820,384 -
(Increase) decrease in restricted cash (18,786,000) 118,000 2,380,000
Repayment of stockholder's loan - 5,974 7,762
Investments in other ventures (2,150,000) (2,000,000) (160,660)
Capitalized patent costs (477,339) (497,292) (181,375)
----------- ----------- -----------
Net cash (used in) provided by investing activities (22,399,581) (3,249,795) 471,049
----------- ----------- -----------
Cash flows from financing activities:
Repayments of bank line of credit - - (2,380,000)
Payments on bank loans - (29,075) (17,386)
Net proceeds from issuance of common stock in public offering - - 19,861,999
Proceeds from issuance of common stock upon exercise of stock options 179,032 729,787 36,943
Proceeds from issuance of restricted common stock 5,000,000 - -
----------- ----------- -----------
Net cash provided by financing activities 5,179,032 700,712 17,501,556
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (25,785,988) (6,391,161) 17,469,757
Cash and cash equivalents at beginning of period 36,761,516 43,152,677 25,682,920
----------- ----------- -----------
Cash and cash equivalents at end of period $10,975,528 $36,761,516 $43,152,677
=========== =========== ===========
See accompanying notes to financial statements
F-6
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(1) Organization and Basis of Preparation
Cadus Pharmaceutical Corporation (the "Company") was incorporated on
January 23, 1992, under the laws of the State of Delaware. The Company is
a biotechnology Company engaged in genomics research and the discovery of
novel small molecule therapeutics.
The Company has accumulated a loss of $43.5 million from January 23,
1992, (date of inception) to December 31, 1998. Management intends to
continue research toward the development of commercial products in order
to generate future revenues from license fees, royalties, direct sales
and performance of contract research. The Company has financed its
operations through the sale of common stock in the public market, the
sale of convertible preferred stock and through revenues resulting from
research funding provided by its collaborative partners (note 8).
The Company is at an early stage of development and therefore faces
certain risks and uncertainties which are present in an emerging
biotechnology company. The Company's yeast-based and signal transduction
technologies are novel as drug discovery methods and have not yet been
shown to be successful in the development of any commercialized drug. The
Company has not completed development of any drugs and does not expect
that any drugs resulting from its and its collaborative partners'
research and development efforts will be commercially available for a
significant number of years, if at all. The Company is relying on its
collaborative partners to fund a substantial portion of its research
operations over the next several years. Through December 31, 1998, the
Company had entered into three collaborative arrangements, however there
can be no assurance that the Company will be able to establish additional
collaborative arrangements, or that these contracts will continue to be
renewed, or that any renewal will be made on terms favorable to the
Company. SmithKline Beecham and Solvay Pharmaceuticals may terminate
their respective collaboration agreements for nonperformance by the
Company under certain circumstances, which termination would result in
the Company losing its research funding from each of them. The
collaboration arrangement with Bristol-Myers Squibb will expire in July
1999. The loss of research funding from SmithKline Beecham or Solvay
Pharmaceuticals, or failure by Solvay Pharmaceuticals or SmithKline
Beecham to provide research funding to the Company, could have a material
adverse effect on the Company's business, financial condition and results
of operations.
In addition, the Company faces risks and uncertainties regarding the
future profitability of the Company, ability to obtain additional
funding, protection of patents and property rights, uncertainties
regarding the Company's technologies including risks and uncertainties
relating to the Company's development and commercial testing of
alternative readout methodologies to replace that found to infringe a
patent of SIBIA Neurosciences, Inc. ("SIBIA") (see note 3), risks and
uncertainties relating to the Company's ongoing litigation with SIBIA
including uncertainties relating to the outcome of appeals and the
re-examination of SIBIA's patent at issue in the litigation, competition
and technological change, government regulations including the need for
product approvals and the changing health care marketplace, and
attracting and retaining key officers, employees and consultants.
F-7
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(2) Significant Accounting Policies
(a) Development Stage Enterprise
Through December 31, 1996, the Company reported as a development
stage enterprise in accordance with the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises". Management believes it has established major
scientific and research collaborations and that these
collaborations have generated significant revenues. Therefore,
beginning with the year ended December 31, 1997, the Company no
longer reports as a development stage enterprise.
(b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash
equivalents. Included in restricted and unrestricted cash, at
December 31, 1998 and 1997, there was cash equivalents of
$13,937,939 and $36,571,433, respectively.
(c) Fixed Assets
Fixed assets are stated at cost. Depreciation of equipment and
furniture and fixtures is calculated using the straight-line
method over estimated useful lives of five to seven years.
Leasehold improvements are amortized on a straight-line basis over
the lesser of the estimated useful lives of the improvements or
the remaining term of the lease.
(d) Other Assets, Net
Other assets include capitalized patent costs that are amortized
on a straight-line basis over fifteen years. At December 31, 1998
and 1997, accumulated amortization is $156,958 and $78,406,
respectively.
(e) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
F-8
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(f) Research and Development
Research and development costs are expensed as incurred and
include direct costs of research scientists and supplies and an
allocation of shared facilities, services and overhead.
(g) Revenue Recognition
The Company has entered into research agreements that provide for
the payment of nonrefundable fees during the term of the research
programs. In addition, the agreements provide for payment of fees
when certain milestone events have occurred. These fees are
reflected as revenue when earned, as related costs are incurred or
when milestone events have occurred.
Revenue recognized in the accompanying statements of operations is
not subject to repayment. Revenue received that is related to
future performance under such contracts is deferred and recognized
as revenue when earned.
(h) Net Loss Per Share
All common share data has been restated to give effect to a
one-for-three reverse stock split effected on July 18, 1996 (see
note 10).
At December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per
Share. Basic net loss per share as of December 31, 1998 and 1997
is computed by dividing the net loss by the weighted average
number of common shares outstanding. Diluted net loss per share is
the same as basic net loss per share since the inclusion of
potential common stock equivalents (stock options and warrants) in
the computation would be anti-dilutive.
(i) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(j) Fair Value of Financial Instruments
For cash and accounts payable, the carrying amount approximates
the fair value because of the short maturities of those
instruments.
F-9
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(k) Stock-Based Compensation
SFAS No. 123 "Accounting for Stock-Based Compensation" establishes
a fair value based method for accounting for stock-based
compensation plans and for the measurement basis of transactions
in which an entity acquires goods or services from non-employees
in exchange for equity instruments. SFAS No. 123 requires that
reporting entities either elect expense recognition or its
disclosure-only alternative for stock-based employee compensation.
During 1996, the Company adopted SFAS No. 123 and has elected to
continue measuring stock-based employee compensation cost in
accordance with the intrinsic value based method of Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock
Issued to Employees". Therefore, the Company has included in the
notes to the financial statements pro forma net income and pro
forma earnings per share using the fair value based method for the
year ended December 31, 1998 with comparable disclosures for the
years ended December 31, 1997 and 1996.
(3) Patent Litigation
In July 1996, SIBIA Neurosciences, Inc. ("SIBIA") commenced a patent
infringement action against the Company alleging infringement by the
Company of a patent concerning the use of cells, engineered to express
any type of cell surface receptor and a reporter gene, used to report
results in the screening of compounds against target assays and seeking
injunctive relief and monetary damages. After trial, on December 18,
1998, the jury issued a verdict in favor of SIBIA and awarded SIBIA $18.0
million in damages. On January 29, 1999, the United States District Court
granted SIBIA's request for injunctive relief that precludes the Company
from using the method claimed in SIBIA's patent. On February 26, 1999,
the United States District Court denied the Company's motions to set
aside the jury verdict to grant a new trial and to reduce or set aside
the $18.0 million damages award by the jury. The Company has appealed the
judgement. The appeal will be heard by the Court of Appeals for the
Federal Circuit in Washington, D.C. In order to stay execution pending
appeal of the $18.0 million judgement obtained by SIBIA, in March 1999,
the Company deposited $18.5 million in escrow to secure payment of the
judgement in the event the Company were to lose the appeal. Such $18.5
million was classified, as of December 31, 1998, as "restricted cash
noncurrent" and the Company's "cash and cash equivalents" was reduced by
$18.5 million. The Company recorded a reserve for litigation damages of
$18.5 million in the accompanying statement of operations for the year
ended December 31, 1998.
In January 1999, the U.S. Patent and Trademark Office granted the
Company's request to re-examine the patent issued to SIBIA that was the
subject of the litigation. The re-examination by the Patent Office is
independent of the litigation and a final decision by the Patent Office
that SIBIA's patent is invalid would take precedence over the jury
verdict. There is no evidence that the patent office will find SIBIA's
patent to be invalid.
F-10
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(4) Fixed Assets
Fixed assets, at cost, are summarized as follows:
December 31,
------------
1998 1997
---- ----
Equipment $3,873,323 $4,196,654
Furniture and fixtures 294,150 253,008
Leasehold improvements 879,635 779,935
---------- ----------
5,047,108 5,229,597
Less accumulated depreciation
And amortization 2,254,840 2,582,661
---------- ----------
$2,792,268 $2,646,936
========== ==========
Depreciation and amortization expense for the years ended December 31,
1998, 1997 and 1996 was approximately $914,000, $1,283,000 and $839,000,
respectively.
(5) Related Party Transactions
During 1998, the Company loaned $15,000 to Dr. Charles Woler, the Chief
Executive Officer of the Company. The loan bears interest at 5.5% per
annum. Principal and interest are repayable in monthly installments of
$453 over three years. At December 31, 1998, the outstanding balance of
the loan was $13,452.
In September 1998, Dr. James Broach, a director of the Company, entered
into a five month employment arrangement with the Company pursuant to
which he worked full time at the Company and was compensated at the rate
of $20,000 per month. The Company also granted Dr. Broach an option to
purchase 50,000 shares of common stock at an exercise price of $2.75 per
share. The option vests in increments of 10,000 or 20,000 shares upon the
achievement of specific milestones. In connection with the employment
arrangement, the Company guaranteed the payment of a $286,000 loan made
to Dr. Broach by a third-party and secured its guarantee obligation with
cash collateral of $286,000 which is included in restricted cash on the
balance sheet. Dr. Broach indemnified the Company from any liabilities
arising from its guarantee and pledged securities owned by him to secure
his indemnification obligation.
See note 6 for further discussion of transactions with related parties.
(6) Investments in Other Ventures
In December 1996, the Company issued a $150,000 promissory note bearing
interest at 7% per annum in exchange for a 42% limited partnership
interest in Laurel Partners Limited Partnership ("Laurel"), a limited
partnership of which a shareholder of the Company is the general partner.
An interest payment of $10,500 was accrued at December 31, 1997 and paid
in January 1998. The principal amount and interest accrued thereon was
paid in
F-11
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
December 1998. In addition, the Company purchased for $160,660 in cash, a
47% limited partnership interest in Laurel from Tortoise Corporation, a
corporation wholly-owned by the shareholder. Laurel's purpose is to
invest, directly or indirectly, in securities of biotechnology companies.
The Company has the right to require the shareholder to match any future
investment made by the Company in Laurel up to an aggregate investment on
the part of the shareholder of $5.0 million. This right expires on the
earlier of December 31, 1999 or such time that neither the shareholder
nor one of his affiliates is the general partner of Laurel. The Company
is not required to make any additional investment in Laurel. The
investment is accounted for under the equity method with the recognition
of losses limited to the Company's capital contributions. For the years
ended December 31, 1998 and 1997, the Company recognized gains of $7,968
and losses of $173,964, respectively, related to the investment. The
remaining investment in Laurel of $144,664 is included in investments in
other ventures on the balance sheet.
In May 1997, the Company purchased $2.0 million of convertible preferred
stock in Axiom Biotechnologies Inc. ("Axiom"), representing approximately
26% of the outstanding shares of Axiom on an as converted basis. As part
of the arrangement, Axiom agreed to deliver and license to the Company
its first High Throughput Pharmacology System (HT-PS(TM)). The Company
purchased an additional $2.0 million of convertible preferred stock in
Axiom on June 5, 1998, after the Company received and accepted Axiom's
HT-PS(TM). The Company also made a payment to Axiom for the HT-PS(TM)
which is included in fixed assets in the accompanying balance sheet at
December 31, 1998. The additional investment increased the Company's
equity interest in Axiom to approximately 30% of Axiom's outstanding
shares on an as converted basis, after taking into account an investment
in Axiom by JAFCO Co., Ltd., ("JAFCO"), an affiliate of the Nomura Group.
The Company's investment is accounted for under the equity method with
the Company recognizing 100% of Axiom's net losses prior to the JAFCO
investment and 50% after such investment. Such percentage represents the
extent to which the Company is deemed to be funding Axiom's losses. For
the years ended December 31, 1998 and 1997, the Company recognized
$1,152,116 and $658,467, respectively, in losses generated by Axiom. The
remaining investment in Axiom of $2,189,417 is included in investments in
other ventures on the balance sheet.
(7) Income Taxes
Deferred tax assets of approximately $19,582,000 and $7,204,000 at
December 31, 1998 and 1997, respectively, relate principally to tax net
operating loss carryforwards of $21,459,000 and $13,933,000 and research
credit carryforwards of $2,111,000 and $1,212,000 at December 31, 1998
and 1997, respectively and also to the current litigation reserve
pending of $18.5 million. An offsetting valuation allowance has been
established for the full amount of the deferred tax assets to reduce such
assets to zero, as a result of the significant uncertainty regarding
their ultimate realization. The aggregate valuation allowance increased
$12,378,000 and $3,417,000 during the periods ended December 31, 1998 and
1997, respectively.
The Company's net operating loss carryforwards and research and
development tax credit carryforwards noted above expire in various years
from 2008 to 2018. The Company's ability to utilize such net operating
loss and research and development tax credit
F-12
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
carryforwards is subject to certain limitations due to ownership changes,
as defined by rules enacted with the Tax Reform Act of 1986.
The Company is subject to New York State tax on capital.
(8) Research Collaboration and License Agreements
Since July 1994, the Company has been a party to a Research Collaboration
and License Agreement with Bristol-Myers Squibb Company ("BMS") pursuant
to which BMS agreed to provide research funding to the Company during the
term of the research collaboration. The research collaboration expires in
July 1999. In addition, BMS is obligated to make payments to the Company
upon the achievement of certain scientific and commercial milestones and
to pay royalties on sales of products developed under the agreement.
In July 1996, BMS purchased $2.5 million of the Company's common stock in
the Company's initial public offering.
Since November 1995, the Company has been a party to a Research
Collaboration and License Agreement with Physica B.V., a subsidiary of
Solvay Pharmaceuticals B.V. ("Solvay") pursuant to which Solvay agreed to
provide research funding to the Company during the term of the research
collaboration. The research collaboration expires in November 2000 unless
extended at the option of Solvay. In addition, Solvay is obligated to
make payments to the Company upon the achievement of certain drug
development milestones and to pay royalties on sales of products
developed under the agreement. The Company has reserved the right to use
certain hybrid yeast cells that are part of the research program for its
own benefit in the discovery of drugs relating to cancer, autoimmune,
allergic and inflammatory diseases, with certain specific exclusions. The
Company is required to make payments to Solvay upon the achievement by
the Company of certain drug development milestones and to pay Solvay
royalties on the sale of such drugs.
In July 1996, Solvay purchased $5.0 million of the Company's common stock
in the Company's initial public offering.
Both BMS and Solvay had purchased convertible preferred stock of the
Company. See note 10 for discussion of the conversion of the convertible
preferred stock to common stock.
In February 1997, the Company entered into a drug discovery collaboration
and license agreement with SmithKline Beecham p.l.c. and SmithKline
Beecham Corporation ("SmithKline Beecham"). During the term of the
research collaboration, which expires in February 2002, the Company will
seek to identify ligands and to elucidate the function of orphan G
protein-coupled receptors included within the collaboration and create
high-throughput screens to discover small molecular agonists and
antagonists to these receptors.
During the term of the collaboration, SmithKline Beecham is required to
provide the Company with research funding and certain other payments. In
February 1998, SmithKline Beecham paid the Company a one-time $2.0
million technology development fee.
F-13
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
SmithKline Beecham is also required to make payments to the Company upon
the achievement of certain research milestones and upon the achievement
by SmithKline Beecham of certain drug development milestones. In January
1999, the Company achieved its first research milestone in the
collaboration, and received a $1.0 million dollar payment therefor (see
footnote 16). SmithKline Beecham is also required to pay the Company
royalties on the sale of drugs developed through the use of the Company's
drug discovery technologies. The Company has co-promotion rights in North
America for certain products that may result from the collaboration and
rights to certain potential products that SmithKline Beecham may choose
not to develop.
SmithKline Beecham has the right to extend the term of the collaboration
for between two and five years by notice to the Company given prior to
February 25, 2001. SmithKline Beecham has the right to terminate the
research collaboration (i) after August 25, 1999, if the Company fails to
meet certain scientific objectives in connection with the conduct of the
research collaboration or (ii) if the Company fails to perform its
obligations in the conduct of the research collaboration in any material
respect and does not cure such failure within a period of 60 days after
receiving notice thereof. In the event of such termination, SmithKline
Beecham has no further obligation to provide the Company with funding for
the research collaboration.
In February 1997, the Company and SmithKline Beecham Corporation entered
into a stock purchase agreement pursuant to which the Company has the
option to sell to SmithKline Beecham Corporation (i) shares of the
Company's common stock having a then fair market value of $5.0 million
during a 90-day period commencing on February 25, 1998 and (ii) shares of
the Company's common stock having a then fair market value of $5.0
million, during a 90-day period commencing on the date certain scientific
objectives are achieved (subject to the Company achieving such objectives
prior to the August 25, 1999 and meeting certain financial requirements).
In May 1998, the Company exercised its first option and sold 660,962
shares of its common stock to SmithKline Beecham p.l.c. and SmithKline
Beecham Corporation for approximately $7.56 per share or an aggregate
consideration of $5.0 million. In addition, SmithKline Beecham
Corporation has the right, at its option, to purchase up to $5.0 million
worth of shares of the Company's common stock at 150% of the then fair
market value in lieu of making certain research milestone payments. The
Company granted SmithKline Beecham Corporation certain registration
rights with respect to shares of the Company's common stock which
SmithKline Beecham Corporation may purchase pursuant to the stock
purchase agreement.
For the year ended December 31, 1998, the Company received and recognized
$10.6 million in research revenue and the one-time $2.0 million
technology development fee from SmithKline Beecham. For the years ended
December 31, 1997 and 1996 the Company recognized $8.8 million and $6.5
million, respectively, in research revenue.
(9) Sponsored Research and License Agreements
In January 1998 and January 1999, the Company entered into sponsored
research agreements with Massachusetts Institute of Technology ("M.I.T.")
pursuant to which M.I.T. will use its expertise in micro-robotics to
co-develop the LivingChip(TM), a novel drug
F-14
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
discovery screening tool that would miniaturize and automate the
Company's proprietary hybrid yeast cell technology. If developed, the
LivingChip(TM) would ultimately accommodate at least 100,000 yeast-based
drug discovery assays on a single CD-sized synthetic disc and would
permit the testing of thousands of compounds on multiple assays at the
individual scientist's lab bench. The Company provided M.I.T. with full
research funding for 1998 and partial funding for 1999 and has the option
to extend the arrangement through the remainder of 1999. The Company also
entered into a license agreement with M.I.T. pursuant to which the
Company obtained exclusive worldwide rights, for use in pharmaceutical,
animal health and agricultural businesses, to the technology developed
under the sponsored research arrangement. In order to maintain its
exclusive license, the Company must provide M.I.T. with specified levels
of research funding in 1998 and 1999 and make a minimum level of
expenditures thereafter to commercialize the technology until the
technology is commercialized. The Company is required to pay M.I.T. an
annual license fee, royalties on the sale or lease of LivingChip(TM)
systems, royalties on the sale of therapeutics and diagnostics developed
using the LivingChip(TM), royalties on services rendered based on the
LivingChip(TM), and an annual sublicense fee for each sublicense of the
LivingChip(TM).
The Company has entered into several other license and sponsored research
agreements with various third parties. Generally, the agreements provide
that the Company will make research payments and will pay license fees
and/or maintenance payments, in return for the use of technology and
information and the right to manufacture, use and sell future products.
These agreements provide for payments based on the completion of
milestone events, as well as royalty payments based upon a percentage of
product or assay sales. License fees and maintenance payments, including
payments made to M.I.T., for the years ended December 31, 1998, 1997 and
1996, amounted to approximately $2.0 million, $590,000 and $355,000,
respectively.
(10) Equity Transactions
In July 1996, the Company effected a one-for-three reverse common stock
split and changed the par value of the common stock to $.01 from $.001.
All common stock and option data have been restated to give effect to
this reverse stock split and change in par value for all periods
presented.
In July 1996, the Company completed an initial public offering of
2,750,000 shares of common stock at $7.00 per share. The Company received
proceeds, net of underwriting discounts, commissions and other initial
public offering expenses of $17,176,624. Following the initial public
offering, all outstanding shares of the Series A and Series B preferred
stock were converted into an aggregate of 7,551,514 shares of common
stock. Upon conversion, the entire class of convertible preferred stock
of the Company was canceled and withdrawn from the authorized capital
stock of the Company. As a result, upon completion of the offering, the
Company's authorized capital consisted of 35,000,000 shares of common
stock.
In August 1996, the Company sold an additional 412,500 shares of common
stock at $7.00 per share pursuant to the exercise by the underwriters of
an over-allotment option granted
F-15
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
to them. The Company received proceeds, net of underwriting discounts and
commissions, of $2,685,375.
In May 1998, the Company sold 660,962 shares of its common stock to
SmithKline Beecham p.l.c. and SmithKline Beecham Corporation for
approximately $7.56 per share or an aggregate consideration of $5.0
million.
(11) Stock Options
The 1993 Stock Option Plan ("the 1993 Plan") was adopted in January 1993.
The 1993 Plan provides for the grant of options to reward executives,
consultants and employees in order to foster in such personnel an
increased personal interest in the future growth and prosperity of the
Company. The options granted under the 1993 Plan may be either incentive
stock options or nonqualified options. An aggregate of 666,667 common
shares were reserved for issuance under the 1993 Plan.
Options granted under the 1993 Plan expire no later than ten years from
the date of grant. The option price is required to be at least 100% and
85% of the fair market value on the date of grant as determined by the
Board of Directors for incentive stock options and nonqualified options,
respectively. The options generally become exercisable according to a
schedule of vesting as determined by the Compensation Committee of the
Board of Directors. The schedule prescribes the date or dates on which
the options become exercisable, and may provide that the option rights
accrue or become exercisable in installments over a period of months or
years.
Effective May 10, 1996, the 1993 Plan was replaced by the 1996 Incentive
Plan ("the 1996 Plan") with respect to all future awards to the Company's
employees and consultants. However, awards made under the 1993 Plan will
continue to be administered in accordance with the 1993 Plan.
F-16
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
Activity under the 1993 Plan is as follows:
Options Outstanding
Number Weighted
of Average
Shares Exercise Price
------ --------------
Balance at January 1, 1996 651,693 $1.67
1996 activity:
Granted - -
Exercised (23,877) 1.55
Canceled (10,091) 2.91
--------
Balance at December 31, 1996 617,725 1.65
1997 activity:
Granted - -
Exercised (140,796) 1.65
Canceled (2,569) 2.94
--------
Balance at December 31, 1997 474,360 1.65
1998 activity:
Granted - -
Exercised (18,813) 1.48
Canceled (236) 3.00
-------
Balance at December 31, 1998 455,311 $1.65
=======
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.37 to $3.51 and
5 years, respectively.
At December 31, 1998 and 1997, the number of options exercisable was
432,383 and 422,553, respectively and the weighted-average exercise price
of those options was $1.62 and $1.73, respectively.
The Company entered into stock option agreements not pursuant to any plan
with certain directors, employees, founders and consultants. These
options generally become exercisable according to a schedule of vesting
as determined by the Compensation Committee of the Board of Directors.
The options become exercisable in installments over a period of months or
years. As of December 31, 1998, an aggregate of 597,257 common shares was
reserved for issuance pursuant to such stock option agreements.
In November 1996, the Compensation Committee granted to certain directors
then in office an option to purchase 12,000 shares of common stock at an
exercise price of $6.75 per share. Each stock option grant is exercisable
in four cumulative annual installments of 3,000 shares commencing in
November 1997 and expires in November 2006.
F-17
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
Activity for all of the above grants not issued pursuant to any plan is
as follows:
Options Outstanding
Number Weighted
Of Average
Shares Exercise Price
------ --------------
Balance at January 1, 1996 646,301 $2.29
1996 activity:
Granted 120,000 6.75
Exercised - -
Canceled (25,334) 5.09
--------
Balance at December 31, 1996 740,967 2.92
1997 activity:
Granted - -
Exercised (115,647) 1.96
Canceled (14,520) 6.20
--------
Balance at December 31, 1997 610,800 3.02
1998 activity:
Granted - -
Exercised - -
Canceled (13,543) 2.84
--------
Balance at December 31, 1998 597,257 $3.02
========
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.50 to $6.75 and
6.5 years, respectively.
At December 31, 1998 and 1997, the number of options exercisable was
427,704 and 295,684, respectively and the weighted-average exercise
price of those options was $2.85 and $2.82, respectively.
The 1996 Plan was adopted in May 1996. The options granted under the
1996 Plan may be either incentive stock options or nonqualified options.
In December 1996, the maximum number of shares of common stock that may
be the subject of awards under the 1996 Incentive Plan was increased
from 333,334 to 833,334 (plus any shares that are the subject of
canceled or forfeited awards) by the Board of Directors and such
increase was approved by the stockholders of the Company in June 1997.
In December 1997, the maximum number of shares of common stock that may
be the subject of awards under the 1996 Incentive Plan was increased to
1,833,334 (plus any shares that are the subject of canceled or forfeited
awards) by the Board of Directors and approved by the stockholders of
the Company in June 1998.
F-18
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
Options granted under the 1996 Plan expire no later than ten years from
the date of grant. The option price is required to be at least 100% of
the fair value on the date of grant as determined by the Board of
Directors for incentive stock options. The options generally become
exercisable according to a schedule of vesting as determined by the
Compensation Committee of the Board of Directors. The schedule
prescribes the date or dates on which the options become exercisable,
and may provide that the option rights accrue or become exercisable in
installments over a period of months or years.
Activity under the 1996 Plan is as follows:
Options Outstanding
Number Weighted
of Average
Shares Exercise Price
------ --------------
Balance at January 1, 1996 - $ -
1996 activity:
Granted 369,864 6.58
Exercised - -
Canceled - -
---------
Balance at December 31, 1996 369,864 6.58
1997 activity:
Granted 671,250 11.28
Exercised (40,813) 6.62
Canceled (344,895) 14.60
---------
Balance at December 31, 1997 655,406 7.17
1998 activity:
Granted 941,145 3.13
Exercised (17,133) 6.57
Canceled (60,178) 6.68
---------
Balance at December 31, 1998 1,519,240 $ 4.70
=========
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.69 to $14.00 and
9.3 years, respectively.
At December 31, 1998 and 1997, the number of options exercisable was
278,751 and 137,216, respectively, and the weighted average exercise
price of those options was $6.40 and $6.72, respectively.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its
stock options in the financial
F-19
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
statements. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at the grant date under
SFAS No. 123, net loss and loss per share would have been reduced to the
pro forma amounts indicated in the table below (in thousands except per
share amounts):
1998 1997 1996
---- ---- ----
Net loss - as reported $(29,690) $(5,411) $(2,441)
Net loss - pro forma $(31,314) $(6,546) $(3,217)
Loss per share - as reported $(2.32) $(.44) $(.39)
Loss per share - pro forma $(2.44) $(.54) $(.51)
Pro forma net loss reflects only options granted since 1995. Therefore,
the full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to January 1, 1995
is not considered.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
1998 1997 1996
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock price volatility .88 to .99 0.79 to .99 .90
Risk-free interest rate 4.46% to 5.72% 5.65% to 6.36% 6.00% to 6.66%
Expected life of options 8 years 6 years 6 years
The weighted average grant date fair value of options granted during the
years ended December 31, 1998, 1997 and 1996 was $2.67 per share, $8.00
per share and $5.02 per share, respectively.
(12) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the
following:
December 31,
------------
1998 1997
---- ----
Accrued legal costs $1,175,000 $170,000
Accrued 401(k) matching
contributions 90,000 -
Accrued compensation 197,056 254,649
Other accrued expenses
and liabilities 267,965 179,497
---------- --------
Total $1,730,021 $604,146
========== ========
F-20
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(13) Commitments and Contingencies
Lease Commitments
In October 1994, the Company entered into a sublease agreement with Union
Carbide Corporation to sublease laboratory and office space in Tarrytown,
New York. The term of this agreement is for a period of approximately
three years commencing on May 15, 1995 and expiring on December 30, 1997.
Pursuant to this agreement, the Company received the first four months
rent free, which was amortized through December 30, 1997 so as to produce
a level amount of rent expense over the life of the lease. The
unamortized portion was included in accrued expenses and other current
liabilities in the accompanying balance sheet.
During 1997, the Company exercised its option to lease these facilities
directly from the landlord for a five-year period commencing January 1,
1998. Upon the signing of the lease, the landlord paid the Company
$140,000 which is included in accrued expenses and is being amortized
over the life of the lease. From October 1, 1997 through December 31,
1998, the Company temporarily leased approximately 7,000 square feet from
the landlord. The Company leased an additional 18,528 square feet of
contiguous space during 1998 under the same terms as the original lease
with the landlord. The Company also has an option to renew such lease for
a five-year period commencing on January 1, 2003.
In November 1994, the Company entered into an agreement to sublease
laboratory and office space, in Lakewood, Colorado, from Colorado
Bio/Medical Venture Center ("CBVC") for a period of 21 months ending on
July 9, 1996. In March 1996, the Company extended the sublease agreement
for eight additional months, therefore extending the lease expiration
date to March 9, 1997 at which time the Company became a month-to-month
tenant. The Company relocated its Lakewood, Colorado operations to New
York and terminated its lease with CBVC on December 31, 1997. The
approximate cost of the relocation was $349,000.
Future minimum lease payments for each of the five years subsequent to
December 31, 1998 and thereafter are $898,249 per year from 1999 through
the year ended December 31, 2002.
Rent expense, excluding utility and operating costs, for the years ended
December 31, 1998, 1997 and 1996 amounted to approximately $728,407,
$759,800 and $620,600, respectively.
Equipment Lease Line of Credit
In November 1997, the Company signed a $3.5 million Master Lease
Agreement ("Master Lease") with General Electric Capital Corporation
("GECC"). Under the agreement, the Company purchases equipment and then
enters into a sale-leaseback arrangement with GECC whereby the Company
sells the equipment to GECC and then leases back the equipment for a
period of 37 months. The lease arrangements are considered operating
leases for financial reporting purposes. Any gains recognized on the
difference between
F-21
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
the equipment's book value and sale price are booked to deferred revenue
and recognized over the life of the lease.
Pursuant to its Master Lease with GECC, the Company must maintain
unrestricted cash, cash equivalents and investment grade securities (the
"Cash Equivalents") of at least $10,000,000. In March 1999, the Company
ceased to maintain Cash Equivalents of at least $10,000,000. Under the
Master Lease, by April 15, 1999, the Company must notify GECC of the
amount of Cash Equivalents of the Company and that the Company is not in
compliance with the Master Lease. GECC may then require the Company to
deliver to GECC within fifteen (15) days an irrevocable standby letter of
credit (the "Letter of Credit") in the amount of the "stipulated loss
value" of the equipment covered by the Master Lease (the "Equipment"),
which amount is currently $3.1 million to secure the Company's
obligations under the Master Lease. In order to obtain the Letter of
Credit, the Company would most likely have to provide to the issuer
thereof cash collateral in the amount of the Letter of Credit. If the
Letter of Credit is not delivered, the Company will be in default under
the Master Lease. If the Company does not cure such default with in
thirty (30) days after written notice thereof from GECC, GECC may require
the Company at its own cost and expense, to return the Equipment and to
pay to GECC the stipulated loss value of the Equipment as liquidated
damages and any rentals or other sums then due. GECC is not required to
mitigate damages.
The Company has made the following drawdowns against the Master Lease:
Monthly
Lease Gain
Date Amount Payment Deferred
---- ------ ------- --------
Round #1 November 1997 $600,871 $13,650 $80,936
Round #2 December 1997 219,158 4,926 16,535
Round #3 March 1998 704,478 15,890 37,974
Round #4 July 1998 611,431 13,766 21,864
Round #5 October 1998 748,434 15,985 34,519
Round #6 December 1998 379,364 8,080 8,002
---------- ------- --------
Totals $3,263,736 $72,297 $199,830
========== ======= ========
The gains totaling $199,830 relating to the sale of the equipment to GE
Capital were credited to deferred revenue on the balance sheet and are
being amortized over the life of the individual leases. At December 31,
1998 and 1997, $45,965 and $3,281, respectively, of the deferred gain was
recognized as gain on sale of equipment in the accompanying statement of
operations.
Future minimum lease payments for each of the three years subsequent to
December 31, 1998 are $867,569, $861,730 and $439,850, respectively.
F-22
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1998, 1997 and 1996
Consulting Agreements
The Company has entered into various consulting agreements. These
agreements generally require the Company to pay consulting fees on a
quarterly or per diem basis. These agreements are generally terminable at
the Company's or the consultant's option.
(14) Supplemental Cash Flow Information
1998 1997 1996
---- ---- ----
Cash payment for:
Interest $21,000 $7,365 $110,416
Income taxes $89,170 $28,541 $45,475
(15) Employee Benefits
The Company has a 401(k) savings plan in which all of its permanent
employees are eligible to participate. Annually, the Company's
Compensation Committee determines the amount the Company will match of
the participants' contributions. In 1998, the Compensation Committee
elected to match 25% of the participant's contribution up to a maximum of
$2,500. In 1997, the Compensation Committee elected to match 25% of the
participant's contribution up to a maximum of $3,500. In 1996, the
Compensation Committee elected to match 50%, of the participant's
contribution up to a maximum of 6% of the participant's salary. The total
Company contribution for the years ended December 31, 1998, 1997 and 1996
were $89,976, $74,646 and $37,856, respectively. No matching
contributions were made by the Company prior to December 31, 1996.
(16) Subsequent Event
SmithKline Beecham Milestone
In January 1999, the Company achieved a research milestone in its
collaboration with SmithKline Beecham Corporation. The milestone involved
the identification, during 1998, of ligands for orphan G-Protein coupled
receptors identified from the human genome. The Company received a $1.0
million payment for achieving the milestone, which payment was recorded
as revenue in January 1999.
F-23
Exhibit No. Description of Document
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3.1 Amended and Restated Certificate of Incorporation of Cadus Pharmaceutical
Corporation (the "Company"), as filed with the Secretary of State of Delaware
on July 22, 1996. (1)
3.2 By-laws of the Company. (2)
4.1 Specimen of Common Stock Certificate of the Company. (2)
4.2 1993 Cadus Pharmaceutical Corporation Stock Option Plan. (2)
4.3 Cadus Pharmaceutical Corporation 1996 Incentive Plan. (2)
4.4 Amendment to Cadus Pharmaceutical Corporation 1996 Incentive Plan. (1)
4.5 Form of Incentive Stock Option Agreement utilized in connection with
issuances of stock options under the Cadus Pharmaceutical Corporation 1996
Incentive Plan. (1)
4.6 Form of Stock Option Agreement between the Company and each of the
following employees of the Company: Philip N. Sussman, John Manfredi,
Andrew Murphy, Jeremy Paul, Lauren Silverman, Joshua Trueheart, James S.
Rielly, Thomas F. Deuel, Norman R. Klinman, Elliott M. Ross, Jeremy
Thorner, Arnold Levine, John Ransom, Christine Klein, Suzanne K.
Wakamoto, Christopher Pleiman, Algis Anilionis, Anupama K. Nadkarni,
Mitchell Silverstein, Michael A. Spruyt and David Fruhling. (1)
4.7 Form of Stock Option Agreement between the Company and each of the
following non-employee directors of the Company: Theodore Altman, Harold
First, Carl Icahn, Peter Liebert, Robert Mitchell, Mark Rachesky, William
Scott, Jack Wasserman and Samuel D. Waksal. (1)
4.2 Stock Purchase Agreement between the Company and SmithKline Beecham
Corporation, dated as of February 25, 1997. (3)
4.3 Registration Rights Agreement between the Company and SmithKline Beecham
Corporation, dated as of February 25, 1997. (3)
10.1 Form of Indemnification Agreement entered into between the Company and its
directors and officers. (2)
10.2 Form of Agreement Regarding Assignment of Inventions, Confidentiality and
Non-Competition. (2)
10.3 The 401(k) Plan of the Cadus Pharmaceutical Corporation. (2)
10.4 Employment Agreement between Jeremy M. Levin and the Company. (2)
10.5 Preferred Stock Purchase Agreement dated as of July 30, 1993 between the
Company and the purchasers of Series A Preferred Stock, together with the First
and Second Amendments thereto dated as of July 26, 1994 and October 31, 1995,
respectively. (2)
10.6 Preferred Stock Purchase Agreement dated as of July 26, 1994 between the
Company and Bristol-Myers Squibb Company ("Bristol-Myers") concerning Series B
Preferred Stock, together with the First Amendment thereto dated as of October
31, 1995. (2)
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10.7 Preferred Stock Purchase Agreement dated as of November 1, 1995 between the
Company and Physica B.V. concerning Series B Preferred Stock. (2)
10.8 Research Collaboration and License Agreement, dated as of July 26, 1994,
between the Company and Bristol-Myers. (2)
10.9 Screening and Option Agreement, dated as of July 26, 1994, between the Company
and Bristol-Myers. (2)
10.10 Research Collaboration and License Agreement, dated as of November 1, 1995
between the Company and Solvay Pharmaceuticals B.V. (2)
10.11 Sublease Agreement, dated as of October 19, 1994, between the Company and Union
Carbide Corporation. (2)
10.12 Lease, dated as of June 20, 1995 between the Company and Keren Limited
Partnership. (2)
10.13 Consulting Agreement between the Company and James R. Broach, dated February 1,
1994. (2)
10.14 Amended and Restated License Agreement between the Company and Duke University,
dated May 10, 1994. (2)
10.15 License Agreement between the Company and National Jewish Center for Immunology
and Respiratory Medicine dated November 1, 1994. (2)
10.16 Stock Option Agreement, dated as of November 1, 1994, between the Company and
John C. Cambier. (2)
10.17 Stock Option Agreement, dated as of November 1, 1994, between the Company and
Gary L. Johnson. (2)
10.18 Consulting Agreement, dated as of November 1, 1994, between the Company and
John C. Cambier. (2)
10.19 Consulting Agreement, dated as of November 1, 1994, between the Company and
Gary L. Johnson. (2)
10.20 Research Collaboration Agreement, dated as of January 9, 1995, between the
Company and Houghten Pharmaceuticals, Inc., together with the Amendment thereto
dated as of March 1996. (2)
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10.21 Stock Option Agreement, dated as of December 18, 1995, between the Company and
James R. Broach. (2)
10.22 Waiver, dated May 17, 1996, of Section 1.05 of the Preferred Stock Purchase
Agreement dated as of July 26, 1994 between the Company and Bristol-Myers, as
amended by the First Amendment thereto dated as of October 31, 1995. (2)
10.23 Waiver, dated May 17, 1996, of Section 1.04 of the Preferred Stock Purchase
Agreement dated as of November 1, 1995 between the Company and Physica B.V. (2)
10.24 Research Collaboration and License Agreement among the Company, SmithKline
Beecham Corporation and SmithKline Beecham p.l.c., dated as of February 25,
1997. (3)
10.25 Employment Agreement, dated as of June 30, 1998, between the Company and
Charles Woler. (4)
10.26 Employment Agreement, dated as of September 10, 1998, between the Company and
Philip N. Sussman. (4)
10.27 Agreement and Instructions to Stakeholder among the Company, SIBIA and Security
Trust Company entered into March 1999.
23 Consent of KPMG LLP, independent auditors.
24 Power of Attorney (filed as part of the signature page to this Report).
27 Financial Data Schedule.
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(1) Filed with the Company's Registration Statement on Form S-8 (Registration
No. 333- 21871), dated February 14, 1997.
(2) Filed with the Company's Registration Statement on Form S-1 (Registration
No. 333-4441), declared effective by the Commission on July 17, 1996.
(3) Filed with the Company's Current Report on Form 8-K, dated March 7, 1997.
(4) Filed with the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998.
II-3