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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 000-30231
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TANOX, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0196733
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10301 Stella Link, Houston, Texas 77025
(Address of principal executive offices)
713-578-4000
(Registrant's telephone number, including area code)
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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,
$.01 par value Preferred Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. Yes [_] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
The aggregate market value of the registrant's common stock held by
nonaffiliates as of February 28, 2003 was $267,989,639.
Number of shares of outstanding common stock as of February 28, 2003:
43,746,941
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Items 10, 11, 12 and 13 of Part III will be
included in the registrant's definitive proxy statement to be filed pursuant to
Regulation 14A and is incorporated herein by reference.
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TABLE OF CONTENTS
PART I Page
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ITEM 1. Business ................................................................................... 1
ITEM 2. Properties ................................................................................. 31
ITEM 3. Legal Proceedings .......................................................................... 31
ITEM 4. Submission of Matters to a Vote of Security Holders ........................................ 33
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters ..................... 34
ITEM 6. Selected Financial Data .................................................................... 35
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 36
Overview .............................................................................. 36
Critical Accounting Policies .......................................................... 37
Results of Operations ................................................................. 39
Liquidity and Capital Resources ....................................................... 40
ITEM 7A. Qualitative and Quantitative Disclosures About Market Risk ................................. 43
ITEM 8. Financial Statements and Supplementary Data ................................................ 44
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....... 67
PART III
ITEM 10. Directors and Executive Officers of the Registrant ......................................... 68
ITEM 11. Executive Compensation ..................................................................... 68
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ............................. 68
ITEM 13. Certain Relationships and Related Transactions ............................................. 68
ITEM 14. Controls and Procedures .................................................................... 68
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................ 69
SIGNATURES .................................................................................................. 71
CERTIFICATIONS .............................................................................................. 72
In this report, "Tanox", "we", "us" and "our" refer to Tanox, Inc. "Common
Stock" refers to Tanox's common stock, par value $0.01 per share.
Xolair(TM) (omalizumab) anti-IgE antibody is a trademark of Novartis AG.
i
PART I
ITEM 1. Business
Overview
Tanox discovers and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of asthma, allergy, inflammation
and other diseases affecting the human immune system. Tanox's products are
genetically engineered antibodies that target a specific molecule, or antigen.
In 1987, we discovered a novel approach for treating allergies and asthma by
using anti-immunoglobulin E, or anti-IgE, antibodies capable of blocking IgE, a
causative agent of the allergy pathway, thus preventing the onset of disease
symptoms. Xolair(TM) (trade name for omalizumab), our most advanced product in
development, is a humanized monoclonal antibody that blocks IgE. Its therapeutic
effect has been validated through clinical trials in patients suffering from
allergic asthma, seasonal allergic rhinitis (hay fever) and perennial allergic
rhinitis. We are developing Xolair in collaboration with Novartis Pharma AG and
Genentech, Inc. In June 2000, our collaboration partners filed a Biologics
License Application (BLA) with the U. S. Food and Drug Administration (FDA) and
a submission for marketing approval with health authorities in the EU,
Switzerland, Australia, and New Zealand for allergic asthma and hay fever in
adults, adolescents and children. Following receipt of a Complete Response
Letter from the FDA in July 2001 and treatment of additional patients to expand
the safety database, our collaboration partners submitted to the FDA an
amendment to the BLA in December 2002 for moderate-to-severe allergic asthma in
adults and adolescents. The FDA's Pulmonary-Allergy Drugs Advisory Committee is
scheduled to review the BLA on May 15, 2003. In June 2002, Xolair was approved
for marketing in adolescents and adults with moderate allergic asthma in
Australia.
Using our knowledge of the human immune system, we are building a
diverse pipeline of monoclonal antibody product candidates. TNX-901, a humanized
anti-IgE monoclonal antibody distinct from Xolair, completed a Phase 2 trial in
patients suffering from severe peanut allergy. Further development of TNX-901
will depend on the outcome of our pending discussions with Genentech and
Novartis regarding further anti-IgE therapy investigation in peanut and
potentially other food allergies. TNX-355, an anti-CD4 antibody, is currently in
a Phase 1b trial for treating HIV-infected patients. TNX-224, a complement
factor D inhibiting antibody, is in preclinical studies for treating complement
mediated diseases. We are also conducting target discovery and target validation
research on several new targets implicated in allergies and other
immune-mediated disorders.
Background
Human Immune System
The human immune system has three general mechanisms that protect the
body against infections, toxins and cancer by responding to and clearing foreign
agents that have either penetrated the body's protective barriers, or, in the
case of cancer, have developed within these barriers. These harmful agents
express molecules (antigens) that can be recognized as foreign by the host
immune system. These protective immune mechanisms are:
.. Antibodies. The body produces proteins called antibodies that deactivate
and help remove foreign antigens from the body. Each antibody matches an
antigen much as a key matches a lock. Antibodies are made by specialized
white blood cells called B cells. With the help of other white blood cells,
such as antigen presenting cells and helper T cells, a B cell can
manufacture millions of identical antibody molecules and release them into
the bloodstream.
.. Cell-Mediated Immune Response. The second protective immune mechanism
relies on cells to
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recognize and destroy pathogen-infected cells or cancer. This mechanism is
known as cell-mediated immunity. T cells are important in cell-mediated
immune responses. Some T cells, called killer T cells, seek out and kill
cancer cells or virus-infected cells. Helper T cells also play a role in
cell-mediated immune response by stimulating inflammatory cells called
macrophages to actively destroy foreign antigens, microorganisms and cancer
cells.
.. Innate Immune Response. Innate immunity is the body's first line of defense
against injury and infection and serves a surveillance and maintenance
role. One part of the innate immune system involves white blood cells
called phagocytes (literally, "cell-eaters") that can engulf and digest
foreign microorganisms and other antigens. Important phagocytes, including
macrophages, rid the body of dead cells and other debris, and granulocytes,
including neutrophils, which contain granules filled with potent chemicals,
function to kill invading microorganisms. Natural killer cells, another
component of this system, have the ability to recognize and kill foreign
cells. Another part of the innate immune response is known as the
complement system. The complement system includes a series of proteins that
work to "complement" the activity of antibodies in destroying bacteria,
either by stimulating the macrophages and neutrophils, or by puncturing the
bacterial cell membrane to kill the cells. These proteins also cause
neutrophils to accumulate at the site of infection or tissue damage.
Most of the time, the immune system protects us from infections, cancer
and some toxic agents. However, the immune system may, under certain
circumstances, cause the disease or symptoms of disease. For example, in the
case of allergic diseases such as asthma and hay fever, the immune system
responds to the antigen, or allergen in this case, typically an innocuous
protein, by producing an IgE form of antibody. IgE is instrumental in triggering
the symptoms of the disease. In other cases, T and B cells may recognize a part
of the body as foreign, triggering an immune response against the body resulting
in an autoimmune disease with associated destruction of healthy tissue or
biochemical dysfunction.
Monoclonal Antibodies as Therapeutics
Monoclonal antibodies represent an exciting area of therapeutic product
development. Genetically engineered monoclonal antibodies are man-made
antibodies that target a specific antigen. Most monoclonal antibodies are
derived from animals such as mice. Advances in antibody design technologies have
enabled scientists to develop humanized (human-like) and fully human antibody
products that can be administered to patients on a chronic basis with reduced
concern for adverse responses by the human immune system. Advances in antibody
production technologies, such as high productivity fermentation and experimental
technologies such as transgenic plants and animals, have enabled manufacturers
to produce antibody products more cost-effectively. Because of these advances,
14 monoclonal antibodies have already been approved for marketing as
therapeutics by the FDA, and a large number of monoclonal antibodies are
currently undergoing clinical and preclinical investigation.
Our Strategy
Our vision is to improve the health of individuals worldwide by
developing innovative therapeutics for diseases of the immune system and related
disorders. By leveraging our expertise in monoclonal antibodies and
understanding of the human immune system, our objective is to become a
profitable, fully integrated biopharmaceutical company. We intend to accomplish
this objective through the following strategies:
.. Advance Our Product Pipeline. We will continue our efforts to expand the
market opportunity for anti-IgE antibodies in collaboration with our
partners. We have demonstrated the potential of anti- IgE therapy to treat
peanut allergy using TNX-901 in a placebo-controlled Phase 2 trial.
Although an arbitration panel has ruled that Tanox does not have the right
to independently develop TNX-901,
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Tanox, Novartis and Genentech have agreed to discuss further anti-IgE
therapy investigation for peanut and potentially other food allergies. We
recently presented positive single dose Phase 1a data with TNX-355 in
HIV-infected patients (greater than one log/10/ decreases in viral load) at
the 10th Conference on Retroviruses and Opportunistic Infections, and plan
to complete a Phase 1b multiple dose trial later this year. If the data
from this trial are supportive, we will advance the product into further
clinical trials and develop a commercial manufacturing strategy.
.. Form Strategic Collaborations to Support Development and Commercialization
of Our Products. To enable us to develop a greater number of products and
to mitigate risk, we may deem it advantageous to partner with large
pharmaceutical and biotech companies. These partnerships could allow us to
obtain funding for our development and marketing activities, thereby
reducing the substantial financial investment that is required to develop
our products, and providing us with domestic and international marketing
and sales expertise for our partnered products. To the extent economically
feasible, we expect to retain strategically important development,
manufacturing or marketing rights in order to maximize the value of our
drug development opportunities.
.. Develop Innovative and Effective Therapies for Treating Asthma, Allergies
and Other Diseases Affecting the Immune System. We have research programs
aimed at furthering our understanding of disease pathways in asthma,
allergy, and immune-mediated disorders, thereby discovering potential
molecular targets for the development of new and effective therapeutics.
.. Identify Attractive Acquisition and In-licensing Candidates. In addition to
our in-house programs, we will identify and evaluate opportunities to
acquire or in-license products and technologies that will supplement our
technology platform and product pipeline. We believe that we are well
positioned to continue to attract in-licensing and acquisition candidates
as a result of our expertise in monoclonal antibody technology and our
strong financial position.
.. Expand Our Biologics Manufacturing Capability. Biologics manufacturing
capacity is in short supply worldwide. To support our future clinical
manufacturing and commercial supply needs, we are investigating
construction or acquisition of a new biologics manufacturing facility, as
well as other alternatives for manufacturing capacity, that can supply
drugs for our clinical trials and initial commercial launches.
.. Continue to Prudently Invest Our Resources. We are committed to moving our
product pipeline forward in a cost efficient and focused manner. In
addition, we are actively pursuing out-licensing opportunities, both
exclusive and non-exclusive, for certain of our intellectual property which
is not core to our development projects. We entered into two license
agreements in 2002 and expect to enter into one or more in 2003.
Our Product Development Programs
Our lead product, Xolair, has completed clinical development in several
indications and has been submitted to the FDA for marketing approval for
moderate-to-severe asthma in adults and adolescents. We are also evaluating
other products and potential product candidates in clinical and preclinical
studies. Our drugs target various elements or malfunctions of the immune system
underlying the cause of disease. We have designed drugs to deactivate or reduce
the activity of the immune system for diseases caused by over-activation or
inappropriate activation of immune responses, such as autoimmune and allergic
diseases and acute inflammation. We also have designed drugs to activate the
immune system for treatment of diseases where boosting immune protection is
desirable, such as HIV/AIDS. Our products have either resulted from internal
research or were in-licensed or acquired.
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The table below summarizes the development status for our principal
product candidates.
Antibody
Product Description Indication Status Partners
- ------- ----------- ---------- ------ --------
Xolair Anti-IgE Allergic asthma Registration Novartis/Genentech
Seasonal allergic rhinitis Phase 3 completed Novartis/Genentech
Perennial allergic rhinitis Phase 3 completed Novartis/Genentech
TNX-901 Anti-IgE Severe peanut allergy Phase 2 completed, (1)
Development halted (1)
TNX-355 Anti-CD4 HIV/AIDS Phase 1b --
TNX-224 Anti-complement Acute inflammatory Preclinical --
Factor D diseases
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(1) Following an unfavorable arbitration ruling in October 2002, Tanox halted
independent development of TNX-901. (See detailed discussion under "Item 3.
Legal Proceedings.") Further development, if any, of TNX-901 will be done in
collaboration with Genentech and Novartis.
(2) In addition to the products above, we are also evaluating TNX-100, an
anti-CD40 antibody that completed a Phase 1 trial in Crohn's disease in 2002.
Anti-IgE Development--Xolair
Xolair is a humanized anti-IgE monoclonal antibody designed to prevent
symptoms of allergic asthma and allergic rhinitis. In allergic diseases, the
immune system responds to the antigen, or allergen in this case, by producing
IgE. IgE binds to the surface of mast cells and basophils through high affinity
IgE receptors on the cell surface. These cells, which are found in tissue and
also circulate in the blood, contain or can manufacture chemicals such as
histamine and leukotrienes, which induce inflammation. The first time an
allergy-prone person is exposed to an allergen, he or she makes IgE antibodies
specific to that allergen. These IgE molecules circulate in the blood stream and
find their way to attach to the mast cells or basophils, thereby arming these
cells. When a mast cell or basophil armed with allergen specific IgE on its
surface again comes in contact with its specific allergen, the allergen will
bind to the specific IgE molecules, with resultant cross-linking of the
underlying receptors on the cell surface. This event signals the mast cell or
basophil to release its powerful chemicals, causing tissue inflammation and
asthma and allergy symptoms, including wheezing, coughing, sneezing, runny nose,
watery eyes and itching. Xolair binds to circulating IgE, preventing IgE from
binding to and arming mast cells and basophils, and thereby blocks or inhibits
the allergic response.
Market Opportunity
Allergic reactions triggered by IgE include allergic asthma and
allergic rhinitis.
Asthma. Asthma makes breathing difficult and is potentially life
threatening. According to a report by Decision Resources: Immune Disease, Asthma
1998, approximately 35.6 million people in the top seven global markets (France,
Germany, Italy, Spain, the United Kingdom, Japan and the United States) suffer
from asthma. Approximately two-thirds of these patients have allergic asthma. In
the
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United States, there are 17 million asthmatics. Approximately 8.5 million of
these patients have moderate to severe asthma and depend on the use of
corticosteroids to control asthma symptoms. Five percent of asthmatic patients
with disease symptoms are not adequately controlled by current medication.
Corticosteroids (primarily inhaled but also systemic) and beta-agonists, the
mainstays of asthma therapy, are usually effective, yet each is associated with
specific safety drawbacks. Particular side effects of even inhaled
corticosteroid treatment include osteoporosis, cataracts and growth retardation
in children. Beta-agonists offer only symptom relief and do not control the
underlying inflammation. Leukotriene modifiers, a class of controller
medications with the potential to reduce steroid requirements, are modestly
effective for many patients. However, these modifiers have been associated with
drug interactions and adverse events including liver injury. Increasing use of
beta-agonists indicates inadequate control of the underlying inflammation that
causes asthma.
Allergic Rhinitis. Allergic rhinitis is a disease characterized by
runny nose, sneezing, congestion, itchy eyes and similar symptoms, and includes
hay fever. Allergic rhinitis afflicts approximately 39.5 million people in the
United States, most of whom have seasonal allergies and many of whom also suffer
from allergic asthma. Doctors commonly treat the symptoms of allergic rhinitis
with antihistamines, decongestants, nasal steroids and other drugs. They
sometimes prescribe allergy shots, called hyposensitization therapy, for
severely allergic persons, which can be effective if the treating health care
professional knows the allergen to which the patient is reacting. However, it is
often difficult to identify which allergen(s) causes the patient's allergy, and
the frequent and lengthy treatment protocols, coupled with limited effectiveness
in many patients, and the potential for serious adverse side effects, generally
lessen the desirability of hyposensitization.
Development Status and Clinical Results
Moderate to Severe Allergic Asthma. Three Phase 3 clinical trials in
patients with moderate to severe allergic asthma have been completed in adults
(including adolescents) (12-75 years) or children (6-12 years) served as the
basis for filing the initial marketing application for Xolair. The three
randomized, placebo-controlled, multicenter clinical trials included: 525
patients in the U.S. adult study; 546 patients in the European adult study; and
334 patients in the U.S. pediatric study. In the adult studies, patients who
were experiencing asthma symptoms despite taking inhaled corticosteroids, were
given either Xolair or placebo. In the pediatric study, all patients were well
controlled, but required inhaled corticosteroids for control.
When Xolair-treated patients were compared with those given placebo,
statistically significant clinical differences in favor of Xolair were found in
all three studies:
.. Xolair-treated patients had significant reduction in steroid dosage as
assessed by both the mean reduction and the percentage of patients able to
completely withdraw from inhaled steroids. In the adult studies, more than
twice as many Xolair-treated (approximately 40%) as placebo-treated
patients (approximately 20%) were able to completely withdraw from
corticosteroids, and in the pediatric studies the proportions were 55% vs.
39%, respectively.
.. The mean number of exacerbations per patient was significantly less for
Xolair-treated adult patients, and a strong trend was seen in this
direction in the pediatric trial. In the adult trials, Xolair-treated
patients experienced approximately half the number of exacerbations as did
the placebo-treated patients, and in the pediatric study, approximately 25%
fewer exacerbations.
.. Over the full year of treatment in the two adult trials, only two
Xolair-treated patients (0.4%) were hospitalized as compared to 13 placebo
patients (2.5%). The children with moderate-to-severe allergic asthma
participating in the pediatric trial were monitored for hospitalizations
during the 28-week core trial period. None of the Xolair-treated patients
were hospitalized because of serious
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asthma exacerbations while five of the placebo-treated patients (4.6%) were
hospitalized.
.. Significant differences in favor of Xolair were also found in all three
studies in other secondary efficacy measures such as quality of life and
use of rescue medications.
Xolair was well tolerated. The incidence of adverse events during the
Phase 3 trials was similar in both the Xolair and placebo groups. Adverse events
suspected as being drug related that occurred more frequently in Xolair patients
than in placebo patients were fatigue (0.5% vs. 0.1%), rash (0.4% vs. 0%), and
urticaria (skin itching and hives) (0.4% vs. 0.1%). No anti-drug antibodies were
detected, and there was no evidence of immune complex disease. Furthermore,
there was no increase in the incidence of parasitic infections.
Severe Allergic Asthma. To confirm efficacy in the severe allergic
asthma patient, a separate Phase 3b study was conducted in 246 adolescents and
adults. The design and treatment regimens were similar to the previous studies
in moderate to severe patients, except patients required much higher doses of
inhaled steroids and had lower airway flow rates (FEV1) at baseline. As compared
to placebo-treated patients, Xolair-treated patients were able to achieve
significantly better Asthma Symptom and Quality of Life scores, and were able to
more significantly reduce their dosages of inhaled corticosteroids.
Seasonal Allergic Rhinitis. One randomized, placebo-controlled Phase 3
clinical trial of Xolair for seasonal allergic rhinitis was conducted in 251
adult and adolescent patients with history of birch pollen allergy. Patients
were treated every 3 to 4 weeks for 8 to 9 weeks. The results of the study
showed that, compared with patients given placebo, Xolair-treated patients had
decreased severity of nasal symptoms (sneezing, itchy nose, runny nose and
stuffy nose) and ocular allergy symptoms (itchy eyes, watery eyes and red eyes),
decreased use of rescue medication, and improved quality of life. Xolair
treatment was safe and well tolerated. The incidence of adverse events was
similar for Xolair and placebo groups. These results confirmed the statistically
significant results of an earlier pivotal Phase 2 trial in 536 patients with a
history of ragweed pollen allergy.
Perennial Allergic Rhinitis. A Phase 3 clinical trial of Xolair for
perennial allergic rhinitis (PAR) was completed in 289 adults and adolescent
patients (12-75 years) with moderate to severe PAR. The severity of nasal
symptoms, post nasal drip, and ocular symptoms was significantly lower in the
Xolair group compared with placebo group, as were the requirements for rescue
medication. Xolair was also found to be more effective than placebo in the
subsets of patients who had previously failed to be adequately controlled by
nasal corticosteroids or specific immunotherapy (allergy shots). There were no
drug-related serious adverse events, and the incidence of adverse events was
lower in the Xolair group (77%) than in the placebo group (85%).
Additional Studies. To increase the safety database, Genentech and
Novartis conducted a safety study (ALTO) in difficult-to-treat allergic asthma.
Approximately 1,900 patients from 6 to 75 years of age were enrolled and
received treatment with Xolair in open-label fashion for six months. Results of
the trial were submitted to the FDA as part of the BLA amendment.
Regulatory Status
In December 2002, Genentech and Novartis submitted to the FDA an
amendment to the BLA for Xolair for the treatment of adult and adolescent
moderate-to-severe allergic asthma. Data in the BLA amendment address the FDA's
requests outlined in a July 2001 Complete Response Letter for, among other
things, an expanded Xolair-treated patient database. To date, over 4,000
patients have been treated with Xolair. The FDA's Pulmonary-Allergy Drugs
Advisory Committee is scheduled to review the BLA on May 15, 2003.
New data from "at risk" allergic asthma patients (those hospitalized
for asthma within the past year) will be included as part of the Xolair
marketing application that Novartis expects to submit to the
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European Medical Evaluations Agency (EMEA) in the first half of 2004. Xolair has
already received marketing approval from the health authority in Australia.
Anti-IgE Development--TNX-901
TNX-901 is a humanized anti-IgE monoclonal antibody that has recently
completed a Phase 2 trial demonstrating its potential to prevent severe allergic
reaction from accidental ingestion of peanuts or peanut products in patients
allergic to peanuts, a potentially life-threatening condition. TNX-901 binds IgE
in a way similar to Xolair, and is designed to prevent allergic reactions. At
the initiation of our collaboration with Novartis and Genentech in 1996,
Novartis and Tanox were already developing TNX-901, and Genentech was developing
Xolair.
Market Opportunity. We believe anti-IgE antibodies, such as TNX-901 and
Xolair, have potential applications beyond asthma and allergic rhinitis in
treating other allergic reactions and diseases, including peanut and other food
allergies. For example, patients with severe peanut allergy may suffer
gastrointestinal, skin and respiratory symptoms, and may also suffer potentially
life-threatening anaphylaxis in response to unintended ingestion of peanuts.
According to a recently published survey, peanut or tree nut (e.g., walnut,
almond and cashew) allergy affects about 3 million people in the United States,
1.1% of the U.S. population. The current treatment is avoidance of peanuts and
peanut oil, which are used in the preparation of many food products. Complete
avoidance requires constant vigilance and is difficult because prepared food
labeling does not always identify peanut-derived ingredients. Accidental
exposures can result in serious allergic reactions and sometimes death. Patients
with severe peanut allergy take antihistamines for accidental exposure and may
require administration of epinephrine for severe anaphylactic reactions.
Approximately six million children and adults in the United States suffer from
food allergies. There is no approved preventive therapeutic for food allergies.
Development Status and Clinical Data. In July 1999, we initiated our
first independent clinical trial with TNX-901. In 2002, we completed a
double-blind, placebo-controlled Phase 2 clinical trial with TNX-901 to evaluate
safety and efficacy in patients with severe peanut allergy. The study was
conducted in 84 patients with a history of immediate hypersensitivity to
peanuts. At screening, the hypersensitivity threshold was established through a
double-blind, placebo-controlled oral food challenge with encapsulated peanut
flour. The patients were then randomized to receive either TNX-901 (150, 300, or
450 mg) or placebo every month for four months. Two to four weeks after the last
dose of study drug was given, the patients underwent another oral food challenge
with encapsulated peanut flour.
The results show a clear increase in the amount of peanut flour
required to induce a hypersensitivity reaction. From mean screening thresholds
ranging from 178-436 mg in the various treatment groups, mean increases in the
hypersensitivity threshold were 710, 913, 1650, and 2627 mg for the placebo,
150, 300, and 450 mg of TNX-901 dose groups, respectively. TNX-901 was well
tolerated.
As discussed under "Item 3. Legal Proceedings," Novartis and Genentech
have contested our right to develop TNX-901 independently. In October 2002, an
arbitration panel ruled that we do not have the right to independently develop
TNX-901, and we thereafter halted further development. Since then, Genentech,
Novartis and Tanox have agreed to discuss potential tripartite development of
TNX-901 and to reach a decision on the scope and timing of continued
development, if any, of TNX-901 for peanut allergy on or before July 1, 2003. If
TNX-901 is not further developed, the three companies may consider developing
Xolair for this indication.
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Anti-CD4 Development - TNX-355
TNX-355 is a humanized anti-CD4 monoclonal antibody that we are
developing for treatment of human immunodeficiency virus, or HIV. The virus
enters the host cell by binding to the CD4 receptors on these cells. In lab
studies, TNX-355 binds to the CD4 receptor on the cell surface and prevents
viral entry into the cell, thereby blocking cellular infection. TNX-355 binds
to a region of the CD4 molecule that is not involved with normal immune
function. TNX-355, therefore, does not suppress immune function in monkeys nor
in human blood cells in the laboratory. Furthermore, the antibody does not
deplete CD4 cells in animals or human blood cells in vitro. We have exclusive
worldwide rights to TNX-355 through a license with Biogen.
Market Opportunity. According to the World Health Organization, HIV
infects approximately 1.5 million people in North America and Western Europe. A
number of drugs targeting viral replication are being used, often in combination
with others. About 30% of the patients treated with drug combinations no longer
respond to the treatment since their HIV has become drug resistant. In addition,
many drug combinations produce a variety of undesirable side effects.
Development Status and Clinical Results. We have completed an open
label, single dose, dose-escalating Phase 1a safety study in 30 HIV-infected
patients. An analysis of the trial results shows that TNX-355 demonstrates
greater than one log/10/ decreases in viral load in a dose-responsive manner.
The drug was safe and well tolerated in all dose groups up to 25 mg/kg. We are
currently conducting an open label, multiple-dose Phase 1b trial to further
evaluate the drug's effectiveness in reducing HIV virus load and protecting CD4+
cells.
Anti-Factor D - TNX-224
TNX-224 is a monoclonal antibody that binds to Factor D, a component of
the complement system, and is currently under preclinical investigation for the
treatment of acute inflammatory diseases. The complement system is the body's
first line of defense against infection.
While the complement system generally functions to protect the body,
complement system activation can become excessive and uncontrolled, resulting in
inflammation and tissue damage. This can occur in cases of acute tissue injury
or surgical procedures that reduce blood flow into a tissue. TNX-224 binds to
Factor D and inhibits complement activation in the alternative complement
pathway.
Market Opportunity. Complement activation is believed to play a major
role in acute tissue injury associated with procedures such as cardiopulmonary
bypass surgery and organ transplantation, and ischemia/reperfusion injury as a
result of stroke, burns and myocardial infarction.
Development Status. TNX-224 is in preclinical development to assess its
potential therapeutic usefulness by treating acute inflammatory diseases in
animal disease models.
Our Approach to Drug Discovery
We are committed to identifying new drugs for treating asthma,
allergies, inflammation and other diseases affecting the human immune system. A
cornerstone of our discovery effort is our Monoclonal Antibody Development
Platform (MADP) which is a semi-automated, high-throughput system that gives us
the capability to identify and optimize individual monoclonal antibody leads in
a 12-18 month timeframe. The resulting biologic drug candidates are humanized to
reduce the possibility of immunogenicity which could lead to decreased activity
and tolerability in patients. Our antibodies are
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also optimized for affinity, effector function and circulating half-life to
enhance their therapeutic potential.
Our monoclonal antibody therapeutics treat disease by altering the
function of a specific disease-causing protein, called a drug target. We select
drug targets that are well-established in the scientific community, as well as
novel drug targets that are proprietary to Tanox. The latter process involves
genome-wide expression profiling, proteomics, bioinformatics and transgenic
mouse technologies. Once a new target has been identified and its relevance to
disease has been confirmed, or validated, MADP is used to generate proprietary
monoclonal antibody drug candidates.
Collaboration and Licensing Agreements
Collaboration with Novartis and Genentech
We are developing our lead product, Xolair, in collaboration with
Novartis and Genentech. In 1990, we established a collaboration with Novartis to
jointly develop anti-IgE antibodies to treat allergic diseases. In 1996,
Genentech joined our collaboration with Novartis and we agreed to combine our
respective anti-IgE development programs in a three-party collaboration. We and
our collaboration partners selected Xolair as the lead product for development
and commercialization.
The collaboration agreements include, among others, the following terms:
.. Development. Novartis and Genentech are responsible for completing the
development of and obtaining the regulatory approval for Xolair and the
other anti-IgE products developed through the collaboration. Novartis and
Genentech share all development costs relating to Xolair and other anti-IgE
products that the collaboration may select for development in the United
States and Europe. We and Novartis equally share development costs relating
to China, Hong Kong, Korea, Singapore and Taiwan. Novartis is responsible
for development costs in the rest of the world.
.. Manufacturing. Novartis and Genentech are responsible for manufacturing
Xolair and other selected anti-IgE products worldwide, subject to our right
to manufacture up to 50% of the worldwide requirements of those products.
.. Marketing. Novartis and Genentech share U.S. marketing rights, and Novartis
has marketing rights in Europe (with Hoffman-La Roche Ltd. retaining the
option, subject to certain conditions, to participate in Europe) to
products developed through the collaboration. Novartis is responsible for
marketing these products in the rest of the world, including China, Hong
Kong, Korea, Singapore and Taiwan.
.. Milestone Payments. We may receive payments of up to $63.5 million based on
completing development and marketing objectives for Xolair, $18.5 million
of which we have already received. We may also receive payments of up to
$14.0 million based on completing development objectives for a potential
second generation drug, E26, $1.0 million of which we have already
received.
.. Royalties and Profit Sharing. We may receive royalties based on net sales
of Xolair and other selected anti-IgE products in the United States and a
share of Novartis' profits on these sales. We also may receive royalties on
net sales of Xolair and other selected anti-IgE products in Europe and the
rest of the world (except for China, Hong Kong, Korea, Singapore and
Taiwan) and an equal share of Novartis' profits from sales of Xolair and
other selected anti-IgE products in China, Hong Kong, Korea, Singapore and
Taiwan. We expect that the net amount Tanox will receive from Xolair will
be approximately in the range of 8% to 12% of net sales depending on
geographic distribution of Xolair sales.
9
Our rights to the full amount of the milestone payments and royalties
that we receive could be affected by the on-going legal proceedings with our
former attorneys described under "Item 3. Legal Proceedings."
Either Novartis or Genentech may withdraw from the collaboration on
short notice. If either Novartis or Genentech withdraws, rights to Xolair and
any other products developed by the collaboration (including by the withdrawing
partner) revert to us and the remaining collaborator and, if Genentech is the
withdrawing party, to Roche if Roche exercises its option to do so. If the
collaboration is dissolved in its entirety, we would continue to retain rights
to develop anti-IgE antibodies under the terms of separate agreements with
Novartis and Genentech.
In addition to the collaboration agreements, we and Genentech entered
into a cross-license agreement under which each party has an option to license
the other party's patents relating to the development of anti-IgE antibodies for
use in developing specific products. This option may be exercised at any time if
either party chooses to independently develop a product as permitted under the
collaboration agreements, if our collaboration with Novartis and Genentech
terminates or if we and Genentech may mutually agree.
Other Collaborations and License Agreements
Biogen. In 1998, we entered into an agreement to license from Biogen
its anti-CD4 monoclonal antibody and intellectual property on an exclusive
worldwide basis with limited sublicense rights. Biogen owns issued U.S.,
European and Australian patents and has pending applications in Canada and
Japan, which cover our TNX-355 product. We paid Biogen a license fee and agreed
to make additional development milestone payments and royalty payments to Biogen
based on annual net sales revenue levels. Additionally, we agreed to make
milestone payments to Biogen that increase as product development continues and
if specified corporate development events occur. In addition to royalty
payments, we may make up to an aggregate of $10.4 million in product development
milestone payments under this agreement, of which we have paid $100,000. The
license terminates on a country-by-country basis on the later of the expiration
of 12 years following the first commercial product sale or the expiration or
invalidity of applicable patents. The licensed patents expire in Europe in 2011
and in the United States in 2016, subject to extensions.
Chiron License. In 1995, our European subsidiary Tanox Pharma, B.V.
entered into an agreement to license from Chiron exclusive research and
development rights (except as to Chiron) to Chiron's murine monoclonal
antibodies against CD40. Subject to Tanox Pharma's obligations to develop an
anti-CD40 product and, under certain circumstances, pay maintenance fees, the
agreement granted Tanox Pharma an option to obtain a commercial license to
Chiron's anti-CD40 antibodies, patents and technology for Europe and Japan.
Tanox Pharma exercised this option in March 2000. Chiron retains its commercial
rights in the United States and the rest of the world. Additionally, Chiron has
an option to obtain a commercial license for the United States and the rest of
the world outside Europe and Japan to use anti-CD40 patents and technology that
Tanox Pharma develops. Chiron has four awarded U.S. patents relating to such
anti-CD40 antibodies and has patents pending in Europe, Japan and Canada.
Upon registering a product in Japan, the United Kingdom, France or
Germany, Tanox Pharma has agreed to pay Chiron a fee of $1.0 million and
royalties based on Tanox Pharma's European and Japanese sales. Chiron has agreed
to pay Tanox Pharma royalties based on Chiron's sales in the United States and
the rest of the world. The license terminates on the later of the expiration of
10 years following the first commercial product sale or the expiration of the
last to expire of licensed patents (currently, 2017, subject to extensions).
10
Patents and Proprietary Rights
We pursue patent protection for our proprietary technology and products
and have either been granted patents, have patent applications pending, or are
licensed under patents and patent applications that relate to our products. We
file patent applications in various countries, including in the United States,
Japan, Canada, Australia and certain countries in Europe and Asia.
We have at least five U.S. patents that cover and/or relate to the use
of anti-IgE and other allergy/asthma products. We also hold patents in Europe,
Canada, Japan, Singapore, Hong Kong and Australia covering such products. We
have additional anti-IgE patents pending in the United States and
internationally. Some of our patents are co-owned with Novartis. We also cross
license Genentech's patents covering anti-IgE products. Our patents covering
anti-IgE products expire between 2009 and 2013.
We also have filed U.S. and corresponding national patent applications
relating to anti-Factor D antibodies. We have a number of other U.S. and foreign
patents covering certain other proprietary technology and products, with over
fifty U.S. patents granted to date.
In September 2000, we purchased at auction from LXR Biotechnology, Inc.
its patent portfolio related to apoptosis. This portfolio includes the following
technologies: (i) Bak, a bcl-2 homologue and gene product, known to be a potent
inducer of apoptosis and cell death (5 U.S. patents, as well as several pending
applications in the U.S., Europe, Canada, and Japan); (ii) SARPs (secreted
apoptosis-regulating proteins), which constitute a family of proteins that
regulate the life and death of cells in the body (several pending applications
in the U.S., Europe, Canada, and Japan); (iii) Fas(DELTA)TM, a
naturally-occurring soluble form of the death receptor protein also known as
Fax, CD95, or APO-1, which is believed to be involved in the signaling pathway
for apoptosis induction in many tissues and organs (2 U.S. patents); and (iv)
patents directed to in vitro apoptosis drug screening critical for future
discovery, diversification and optimization of apoptosis regulating drugs. The
patents expire between 2014 and 2019. In addition to the patents, we succeeded
to various related license agreements that LXR had executed, and we have
continued to negotiate and enter into out-licenses of these technologies. We
have also in-licensed a series of patents and patent applications relating to a
new pro-apoptotic member of the Bcl-2 gene family known as BOK.
Patenting biotechnology-related products and processes can involve
uncertain and complex legal and factual questions and, to date, policies
regarding the breadth of claims allowed in biotechnology patents are not
necessarily consistent. Patents, if issued, may be challenged, invalidated,
limited in their scope of coverage, circumvented, or held unenforceable. We
cannot assure you that one or more of the patents noted above would not be held
invalid, successfully opposed, revoked, narrowed, or held unenforceable. Thus,
any patents that we own or license from third parties may not provide any
protection against competitors. Pending patent applications, future patent
applications filed, or patent applications that we license from third parties
may not result in patents. Also, patent rights may not provide proprietary
protection or competitive advantages against competitors with similar technology
or different technology. Furthermore, others may independently develop similar
technologies or duplicate any technology that we have developed. Moreover, the
laws of certain foreign countries do not protect our intellectual property
rights to the same extent as the laws of the United States.
Litigation may be necessary to enforce any patents issued or licensed
to us or to determine the scope and validity of these patents. We could incur
substantial costs and divert technical and management personnel's time and
attention if we participate in litigation or if we defend ourselves against
patent suits against us. If the outcome of litigation is adverse to us, third
parties may be able to use our patented inventions without paying us. Moreover,
we cannot assure you that our patents will not be infringed or successfully
avoided through design innovation. Any of these events may materially and
adversely affect our business.
11
In addition, other companies, some of which may be our competitors,
have filed applications for or have been issued patents, and may obtain
additional patents and proprietary rights, relating to products or processes
used in, necessary to, competitive with or otherwise related to our patents and
products. These products and processes include, among other items, patents
covering technology relating to the type of humanized monoclonal antibodies that
we anticipate developing. Protein Design Labs, Inc. owns certain patents and
patent applications relating to these humanized antibodies. We acquired the
right to take non-exclusive licenses to these patents and patent applications
for up to four of our products, excluding Xolair, for which we paid $2.5 million
in license fees (in addition to $1.5 million that we paid Protein Design Labs
under a previous agreement). In addition, we will pay approximately $4.0 million
if we exercise our option to license all four antibodies, plus maintenance fees
and continuing royalties. We do not know if licenses from Protein Design Labs
will be available for our other antibody products. The Medical Research Council
also owns patents relating to humanized antibodies, for which we hold a
non-exclusive license. Our license permits us to humanize our murine monoclonal
antibodies, and we are obligated to pay royalties on net sales of our products
incorporating licensed technology. We have also obtained licenses from other
parties holding patents or other intellectual property relating to technologies,
which we deem necessary or desirable for the manufacture, use or sale of our
products. These licenses generally require us to pay royalties on product sales,
and may also require the payment of milestones.
We may also develop products that are chimeric antibodies. Genentech
owns a patent (Cabilly 1) relating to chimeric antibodies and instituted suit
against us in 1994 claiming that we infringed this patent. We settled the
lawsuit and, pursuant to the settlement, we secured rights to acquire a
non-exclusive license to: Cabilly 1; another patent relating to antibody chain
co-expression (Cabilly 2); and other Genentech patents (or patents to which
Genentech has a license and is free to grant a sublicense), for our anti-IgE
antibody products. We also have certain rights to acquire a non-exclusive
license from Genentech for Cabilly 1, Cabilly 2 and certain other Genentech
patents for other products; provided these products are not exclusively licensed
by Genentech to a third party or would not compete with an existing product of
Genentech or its affiliates or a product that they are actively researching or
developing. We cannot assure you that we will be successful in securing licenses
from Genentech under these patents for products and product candidates that we
have in research and development. In addition, other parties also own patents
covering chimeric or deimmunized antibodies or processes applicable to making
these antibodies.
The scope, enforceability and validity of third party patents, the
extent to which we must obtain licenses under such patents or under other
proprietary rights and the cost and availability of licenses are unknown, but
these factors may limit our ability to market our products. Moreover, even if a
license were available, the payments that would be required could render
uneconomic our efforts to market certain of our products. If we elect to
manufacture or market these products without either a license or a favorable
result in litigation, damages could be assessed that could be materially adverse
to us. Further, failure to obtain a license could result in an injunction
prohibiting us from manufacturing or selling the affected lines of products.
In addition to patents, we rely on trade secrets and proprietary
know-how to protect our technology and products. We seek protection, in part,
through confidentiality and proprietary information agreements. These agreements
may not provide meaningful protection or adequate remedies for our technology if
unauthorized use or disclosure of this information occurs. Furthermore, our
trade secrets may otherwise become known to or be independently developed by our
competitors.
We require our employees, consultants, advisors, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements on commencing an employment, consulting, or other
contractual relationships with us. These agreements provide that all
confidential information developed or made known to the individual during the
course of the relationship is to be kept confidential and not disclosed to third
parties except in specific circumstances. In the case of employees
12
and certain other parties, the agreements provide that all employment related
inventions conceived by the individual shall be our exclusive property. We
cannot assure you, however, that these agreements will provide meaningful
protection for our confidential information or trade secrets against or in the
event of unauthorized use or disclosure of such information.
Government Regulation
The manufacture and marketing of our products and our research and
development activities are subject to regulations relating to product safety and
efficacy by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous FDA regulation.
The Federal Food, Drug and Cosmetic Act and other federal and state statutes and
regulations govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our products. The lengthy process of seeking drug approvals, and
the subsequent compliance with applicable statutes and regulations, require the
expenditure of substantial resources. Failure to comply with applicable
regulations can result in refusal by the FDA to approve product license
applications. The FDA also has the authority to revoke previously granted
product approvals.
Before we may market a pharmaceutical product in the United States, the
FDA requires us to complete a series of preclinical and human clinical tests.
Other countries have similar regulations. Preclinical tests include laboratory
evaluation of product chemistry and animal studies to assess the potential
safety and efficacy of the product and its formulations. The results of these
studies must be submitted to the FDA as part of the investigational new drug
application (IND). Human clinical trials cannot begin until the FDA approves the
IND application. Clinical testing involves a three-phase process. In Phase I, a
small number of patients or healthy volunteers are tested with the drug to
assess its safety profile (adverse effects), dosage tolerance, metabolism,
distribution, excretion and clinical pharmacology. In Phase II, clinical trials
are conducted with groups of patients afflicted with a specified disease in
order to provide enough data to evaluate the preliminary efficacy, optimal dose
regimen and expanded evidence of safety. In Phase III, the drug is tested in
large number of patients with a target disease to provide enough data to
statistically evaluate the efficacy and safety of the product. We cannot assure
you that we will successfully complete clinical testing of our products within
any specified time period, if at all. The results of the preclinical and
clinical testing of the product are then submitted to the FDA in the form of a
biological license application (BLA) or new drug application (NDA), for
marketing approval. In responding to a BLA or NDA, the FDA may grant marketing
approval, request additional testing or information (either before or after
approval) or deny the application if it determines that the application does not
provide sufficient evidence of safety and efficacy for approval. We cannot
assure you that FDA approval will be obtained on a timely basis, if at all, for
any of our products.
In addition, the FDA requires the registration of each drug and
approval of each manufacturing establishment. Since any approval granted by the
FDA is both site and process specific, any material change in the manufacturing
process, equipment or location necessitates additional FDA review and approval.
For our monoclonal antibody products we are subject to the procedure for
biological products. Domestic manufacturing establishments are subject to FDA
inspection and must comply with current good manufacturing practices (cGMP) for
pharmaceutical products. To supply products for use in the United States,
foreign manufacturing establishments must comply with cGMP and are subject to
periodic FDA or other regulatory authority inspection under reciprocal
agreements with the FDA.
For marketing outside the United States, we also are subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country. Whether or not we obtain FDA approval, we must obtain approval of a
product by the comparable regulatory authorities of foreign countries before
manufacturing or marketing the product in
13
those countries. The approval process varies from country to country and the
time required for these approvals may differ substantially from that required
for FDA approval. We cannot assure you that clinical trials conducted in one
country will be accepted by other countries or that approval in one country will
result in approval in any other country.
In recent years, there have been numerous proposals to change the
healthcare system in the United States. Some of these proposals have included
measures that would limit or eliminate payments for medical procedures and
treatments or subject pharmaceutical product pricing to government control. In
addition, as a result of marketplace pressures, third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new drug products. Consequently, significant
uncertainty exists as to the reimbursement status of newly-approved healthcare
products. If we or any of our collaborators succeed in bringing one or more of
our products to market, we cannot assure you that third-party payors will
consider them cost effective or allow reimbursement to the consumer at price
levels sufficient for us to realize an appropriate return on our investment in
product development or to even realize a profit. Significant changes in the
healthcare system in the United States or elsewhere, including changes resulting
from adverse trends in third-party reimbursement programs, could materially
reduce our profitability. Such changes could also significantly harm our ability
to raise the capital we would need to continue our operations. Furthermore, if
these proposals affect our collaborators, the proposals may harm our ability to
commercialize the products we develop jointly with them.
In addition to FDA regulations, we are subject to regulation under the
Occupational Safety and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
present and future federal, state or local regulations.
Competition
The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies, including
major pharmaceutical and chemical companies, as well as specialized
biotechnology companies, perform activities similar to Tanox's. Many of these
companies have substantially greater financial and other resources, larger
intellectual property estates, larger research and development staffs, and
greater capabilities and experience in preclinical testing, human clinical
trials, regulatory affairs, manufacturing and marketing. We chose to enter into
the collaboration agreements with Novartis and Genentech, in part, to secure the
benefit of their experience in these areas, as well as the contribution of their
greater financial resources. In addition, colleges, universities, governmental
agencies and other public and private research organizations conduct research
and may market commercial products on their own or through joint ventures. These
institutions are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for using technology that they have developed.
We compete with these institutions in recruiting and retaining highly qualified
scientific personnel.
The diseases that we have targeted, including asthma, allergy,
inflammation and other diseases affecting the human immune system, are intensely
competitive areas targeted by both pharmaceutical companies and other
biotechnology companies, including Novartis and Genentech. All of these
companies may have competitive products on the market, may be testing their
products in clinical trials or may be focusing on product approaches that could
prove to be superior to our approaches. For instance, we are aware that some of
these companies, which may be our competitors, have filed applications for or
have been issued patents and may obtain additional patent and proprietary rights
relating to products or processes used in, necessary to, competitive with or
otherwise related to, our products or processes. These patents include, among
other items, patents relating to humanized monoclonal antibodies.
Our competition will be determined in part by the potential indications
for which our antibodies
14
are developed and ultimately approved by regulatory authorities. For some of our
potential products, an important factor in competition may be the timing of
market introduction of our products or competitive products. Accordingly, we
expect the relative speed with which we develop our products, complete the
necessary approval processes and are able to generate and market commercial
quantities of the products to be important competitive factors. We expect that
competition among products approved for sale will be based, among other factors,
on product efficacy and safety, timing and scope of regulatory approval, product
availability, advantages over alternative treatment methods, price and
cost-effectiveness, development, distribution and marketing capabilities,
third-party reimbursement and patent position.
We are aware that several companies, including Novartis, have existing
products that will compete with Xolair, if it is approved for sale, including
corticosteriods, beta-agonists, antihistamines, leukotriene inhibitors, PDE4
inhibitors and allergen immunotherapy. In addition, several companies have
products in development that may compete with Xolair. These companies include,
but are not limited to, IDEC (Anti-CD23), CellTech/Schering-Plough (Anti-IL5),
GlaxoSmithKline (Anti-IL5), Protein Design Labs (Anti-IL2) and Amgen (Anti-IL1).
Our TNX-355 program will face competitions from existing HIV therapies
and particularly new viral entry inhibitors, such as Fuzeon and T-1249
(Roche/Trimeris), PRO-542 and PRO-140 (Progenics) and SCH-D (Schering-Plough).
Our competitive position also depends upon our ability to:
.. attract and retain qualified personnel;
.. develop proprietary products or processes for which we can obtain patent
protection and secure necessary licenses under third party patents;
.. discover and successfully develop new therapeutic products that
successfully treat human diseases;
.. secure sufficient capital resources to complete product development and
regulatory processes;
.. build or secure manufacturing capacity and to manufacture efficiently;
.. build or obtain a sales organization; and
.. achieve profitable commercial production of our products.
Manufacturing
We have a small-scale production and purification facility in which we
have produced our products for use in Phase 1 and Phase 2 clinical trials. With
funding from Novartis, we constructed a pilot manufacturing facility that we may
use for larger-scale process development and cGMP production of culture derived
products. The facility includes a 1,500L bioreactor system and purification
facility and occupies approximately 14,000 square feet of space. During 2002, we
produced clinical trial materials for TNX-901 until October, when our
development of TNX-901 was halted. We expect to reactivate the pilot plant in
2003 to produce clinical materials for our other products, including TNX-355.
Under our agreements with Novartis and Genentech, they must manufacture
Xolair and any other anti-IgE products selected by the collaboration partners
for development, but Tanox has retained the right to manufacture and supply up
to 50% of the worldwide requirements for Xolair and any other selected products.
Novartis has announced that it intends to supply Xolair from a facility that has
a capacity of
15
producing more than one metric ton of active substance per year.
Our current facility will not be adequate for commercial scale
manufacturing requirements if we successfully develop one or more of our
products. We are evaluating alternatives for commercial manufacturing capacity,
including the possible construction or acquisition of a plant or entering into a
contract manufacturing agreement. If we decide to establish a full-scale
manufacturing facility, we will require substantial additional funds and must
hire and train significant numbers of employees and comply with the extensive
FDA regulations applicable to such a facility.
Research and Development
Company-sponsored research and development expenses were $22.7 million,
$21.7 million and $18.3 million in 2002, 2001 and 2000, respectively. We expect
that research and development expenses will continue to increase as we seek to
identify new product opportunities and expand development of our current and
future product pipeline.
Marketing and Sales
Under our collaboration agreements, Novartis and Genentech have
responsibility for marketing Xolair. Novartis and Genentech share U.S. marketing
rights, and Novartis has marketing rights in Europe (with Roche retaining the
option to participate in Europe). Novartis can market these products in the rest
of the world, including China, Hong Kong, Korea, Singapore and Taiwan, where we
will share costs and profits with Novartis.
To effectively serve the worldwide markets, we intend to continue to
collaborate with major pharmaceutical companies or prominent pharmaceutical
sales and distribution organizations that can successfully market our products
on a worldwide basis or within specific geographic territories. As we pursue
strategic collaborations, we intend to reserve marketing rights for our
products, to the extent commercially reasonable, including rights in the United
States and selected Asian countries. We will focus initially on markets for
which our products have a clear advantage over other therapies or which we may
target using a relatively small sales force. We currently do not have an
internal sales and marketing capability. If we elect to retain marketing rights,
we will have to build a sales and marketing infrastructure.
Employees
At December 31, 2002, we had 127 full-time employees, 124 of whom are
based in the United States and 3 of whom are based in Taiwan. One hundred three
of our employees are engaged in, or directly support, research and product
development activities. Forty-three employees hold Ph.D. or M.D. degrees, and 20
employees hold other advanced degrees. We consider our relations with employees
to be good, and none of our employees are covered by a collective bargaining
agreement. We enter into confidentiality agreements with all of our employees
and consultants. We do not currently maintain key employee life insurance on any
of our personnel.
Corporate History
We were incorporated in Delaware in 2000 as the successor to a
corporation formed in 1986 under the laws of the State of Texas.
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Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available free of charge at our internet website at http://www.tanox.com. These
filings are also available to the public at the Securities and Exchange
Commission's (SEC) Public Reference Room at 450 Fifth Street, NW, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. Electronic filings with the
SEC are also available on the SEC internet website at http://www.sec.gov.
Forward-Looking Statements
Some of the information in this Annual Report on Form 10-K contains
forward-looking statements. We typically identify forward-looking statements by
using terms such as "may," "will," "should," "could," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or
similar words, although we express some forward-looking statements differently.
You should be aware that actual events could differ materially from those
suggested in the forward-looking statements due to a number of factors,
including:
.. the ability to develop safe and efficacious drugs;
.. failure to achieve positive results in preclinical and toxicology studies
in animals and clinical trials in humans;
.. failure to economically manufacture sufficient amounts of our products for
clinical trials and commercialization activities;
.. failure to receive, or delay in receiving, marketing approval for our
products;
.. failure to successfully commercialize our products, including gaining
market acceptance;
.. relationships with our collaboration partners;
.. our ability to obtain, maintain and successfully enforce patent and other
proprietary rights protection of our products;
.. the outcome of pending legal disputes;
.. variability of royalty, license and other revenues;
.. our ability to enter into future collaboration agreements to support our
research and development activities;
.. drug withdrawal from the market due to rare adverse reactions caused by the
marketed drug;
.. our ability to secure licenses from third parties holding patents that may
affect the manufacture or marketing of our products;
.. competition and technological change; and
17
.. existing and future regulations affecting our business, including the
content, timing of submissions and decisions made by the FDA and other
regulatory agencies.
Factors that could cause our actual results to differ from those set
forth in the forward-looking statements include those set forth below, as well
as those discussed elsewhere in this Form 10-K.
Factors That May Affect Our Future Results
Regulatory Risks
If We Do Not Receive Regulatory Approvals for Xolair, We Would Be
Significantly Harmed and Our Stock Price Would Drop Sharply.
Xolair is our lead product candidate, and our success will depend, to a
great degree, on the success of Xolair. To successfully commercialize Xolair,
our collaborators, Novartis and Genentech, must be able to obtain regulatory
approvals for Xolair.
Although Xolair has been approved for marketing in Australia, neither
the FDA nor any European regulatory agency has approved Xolair. In June 2000,
Novartis and Genentech filed a BLA with the FDA for both seasonal allergic
rhinitis and allergic asthma and also filed a submission for marketing approval
with health authorities in the EU, Switzerland, Australia, and New Zealand. In
July 2001, Genentech and Novartis announced that they had received a Complete
Response Letter with respect to Xolair, in which the FDA requested additional
preclinical and clinical data analyses, as well as information confirming that
the pharmacokinetics of the Xolair drug substance were consistent throughout the
development program. Based on subsequent discussions with the FDA and expansion
of the safety data base, our collaboration partners filed an amendment to the
BLA in December 2002. This amendment responded to the FDA's request for
additional information (which Genentech and Novartis supplied from existing
trials) and limited the proposed initial label claim to moderate-to-severe
asthma in adults and adolescents at least 12 years of age.
Additionally, Novartis has announced that it will propose a label
change in Europe from allergic asthma to "at risk" asthma patients, defined as
persons who, during the previous year, experienced an overnight hospitalization,
underwent an intensive care unit stay, were intubated, or needed to visit an
emergency room, in each case, due to asthma. Novartis has initiated a new study
in this population and expects that the results will be submitted to the EMEA in
the first half of 2004.
We cannot assure you that Xolair will be approved by the FDA, the EMEA
or any other regulatory authorities in a timely manner or at all. If our
collaborators fail to successfully obtain additional regulatory approvals for
Xolair, our business, financial condition and results of operations will be
materially harmed. Moreover, a setback of this nature would cause a sharp drop
in our stock price, which would severely restrict our ability to raise
additional funds through secondary offerings or to enter into corporate
transactions.
If We Do Not Receive and Maintain Regulatory Approvals, We Will Not Be
Able to Market Our Products.
With the exception of Xolair in Australia, neither the FDA nor any
regulatory authority has approved any of our products. We must receive FDA
approval to manufacture and market our products in the United States. The
process that pharmaceutical products must undergo to receive this approval is
extensive, and includes preclinical testing and clinical trials to demonstrate
safety and efficacy and a review of the manufacturing process to ensure
compliance with cGMP. This process can last many years, be very costly and still
be unsuccessful. The FDA can delay, limit or not grant approval for many
18
reasons, including:
.. their belief that a product candidate is not safe and effective;
.. their interpretation of data from preclinical testing and clinical trials
in different ways than we interpret it;
.. failure of our manufacturing processes or facilities or those of our
collaboration partners to meet cGMP standards; and
.. change in its approval policies and guidelines or adoption of new
regulations.
We may also experience development delays due to slow patient
enrollment in clinical trials, unexpected manufacturing issues or requests from
the FDA for additional clinical data.
The process of obtaining approvals to manufacture and market our
products in foreign countries is subject to delay and failure for the same
reasons.
Our products other than Xolair require significant additional
laboratory development or clinical trials before they can be commercialized. We
have limited capacity to conduct and manage clinical trials and rely on third
parties, potentially including collaborative partners and contract research
organizations, to assist us these efforts. Our reliance on third parties may
result in delays in completing, or failing to complete, clinical trials if our
collaborators fail to perform under our agreements with them.
Continued approval of a product candidate could also depend on
post-marketing studies. In addition, any marketed product and its manufacturer
continue to be subject to strict regulation after approval. Any unforeseen
problems with an approved product or any violation of regulations could result
in restrictions on the product, including its withdrawal from the market.
Delays in receiving or failing to receive regulatory approvals, or
losing previously received approvals, would delay or prevent product
commercialization, which would adversely affect our business, financial
condition and results of operations.
Our Preclinical and Clinical Testing Results Are Uncertain. If Trial
Results Are Negative, We May Be Forced to Stop Developing Products Important to
Our Future.
We must demonstrate through preclinical studies and clinical trials
that our products are safe and effective for use in each target indication
before we can obtain regulatory approvals to sell our products commercially.
These studies and trials may be very costly and time consuming. The results of
preclinical studies and initial clinical trials of our products do not
necessarily predict the results from later-stage clinical trials, which must
demonstrate the desired safety and efficacy traits. We cannot assure you that
the data collected from clinical trials of our products will be sufficient to
support FDA or other regulatory approvals.
The speed with which we are able to enroll patients in clinical trials
is an important factor in determining how quickly we may complete clinical
trials. Many factors affect patient enrollment, including the size of the
patient population, the proximity of patients to clinical sites, the eligibility
criteria for the study, whether the drug will continue to be made available to
the patient following completion of the trial, and other ongoing trials directed
at the same indication. We may target our clinical trial protocols at
indications that have small patient populations, which may make it difficult for
us to enroll enough patients to complete the trials. Delays in patient
enrollment in the trials will result in increased costs and program delays,
which could slow down our product development and approval process, and could
materially harm our business and results of operations.
19
Administering any product we develop to humans may produce undesirable
side effects. These side effects could interrupt or delay clinical trials of
products and could result in the FDA or other regulatory authorities denying
approval of our products for any or all targeted indications. The FDA, other
regulatory authorities or we may suspend or terminate clinical trials at any
time. Even if we receive FDA and other regulatory approvals, our products may
later exhibit adverse effects that limit or prevent their widespread use or that
force us to withdraw those products from the market.
We Are Subject to the Uncertainty Related to Reimbursement Policies and
Healthcare Reform Measures.
In recent years, there have been numerous proposals to change the
healthcare system in the United States. Some of these proposals have included
measures that would limit or eliminate payments for medical procedures and
treatments or subject pharmaceutical product pricing to government control. In
addition, as a result of marketplace pressures, third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new drug products. Consequently, significant
uncertainty exists as to the reimbursement status of newly-approved healthcare
products. If we or any of our collaborators succeed in bringing one or more of
our products to market, we cannot assure you that third-party payors will
consider them cost effective or allow reimbursement to the consumer at price
levels sufficient for us to realize an appropriate return on our investment in
product development or to even realize a profit.
Significant changes in the healthcare system in the United States or
elsewhere, including changes resulting from adverse trends in third-party
reimbursement programs, could materially reduce our potential profitability.
Such changes could also significantly harm our ability to raise the capital we
would need to continue our operations. Furthermore, if these proposals affect
our collaborators, the proposals may harm our ability to commercialize the
products we develop jointly with them.
Risks Relating to our Industry, Business and Strategy
We Face Intense Competition and Rapid Technological Change That Could
Result in Products That Are Superior to the Products We Are Developing.
The biotechnology and pharmaceutical industries are subject to rapid
and significant technological change. We have numerous competitors in the United
States and abroad, including, among others, major pharmaceutical and chemical
companies, specialized biotechnology firms, universities and other research
institutions. These competitors may develop technologies and products that are
more effective or less costly than any of our current or future products and
that could render our technologies and products obsolete or noncompetitive. Many
of these competitors have substantially more resources and product development,
production and marketing capabilities than we do. In addition, many of our
competitors have significantly greater experience than we do in undertaking
preclinical testing and clinical trials of new or improved pharmaceutical
products and obtaining FDA and other regulatory approvals of products for use in
health care. We also will be competing in manufacturing efficiency and, if we
succeed in achieving commercial sales of our products, marketing capability,
areas in which we have limited or no experience. Furthermore, our competitors
may obtain FDA approval for products sooner or be more successful in
manufacturing and marketing their products than are we or our collaborators.
Products currently exist in the market that will compete directly with
the products that we seek to develop. Any product candidate that we develop and
that obtains regulatory approval must then compete for market acceptance among
physicians, patients, healthcare payors and the medical community, as well as
for market share. Significant factors in determining whether we will be able to
compete successfully
20
include:
. relative efficacy and safety of our products;
. timing and scope of regulatory approval;
. product availability;
. potential advantages over alternative treatment methods;
. development, marketing, distribution and manufacturing
capabilities and support of our collaborators;
. reimbursement coverage from insurance companies and others;
. price and cost-effectiveness of our products; and
. patent protection.
If our products are not competitive based on these or other factors,
our business, financial condition and results of operations will be materially
harmed.
Failure to Secure Future Collaboration Partners for Our Other Products
and Failure by Those Partners to Develop, Manufacture, Market or Distribute
Those Products May Delay or Significantly Impair Our Ability to Generate
Revenues or Profit.
We may rely on future collaboration partners to develop, manufacture,
commercialize, market or distribute our other products. Many of our competitors
are similarly seeking to develop or expand their collaboration and license
arrangements with pharmaceutical companies. The success of these efforts by our
competitors could have an adverse impact on our ability to form future
collaboration arrangements. We cannot assure you that we will be able to
negotiate acceptable collaboration agreements in the future or that efforts
under any collaboration agreements will succeed. To the extent that we choose
not to or are unable to enter into future collaboration agreements, we would
encounter increased capital requirements to undertake research, development and
marketing at our own expense. In addition, we may experience significant delays
in introducing our product candidates or find that the absence of these
collaboration agreements adversely affects our ability to develop, manufacture
or sell our product candidates.
Our reliance on collaboration partners poses the following additional
risks:
. disputes with our partners may arise, delaying or terminating our
product candidates' research, development or commercialization or
resulting in significant litigation or arbitration;
. contracts with our partners may fail to provide significant
protection or may become unenforceable if one of these partners
fails to perform;
. our partners may not commit enough capital or other resources to
successfully develop, market or distribute our products; and
. our partners may not continue to develop and commercialize products
resulting from our collaborations.
21
If any of these risks occur, our product development and productivity
may suffer, and our business, financial condition and results of operations
would be materially harmed.
We Are Involved in Litigation and Arbitration Proceedings With Novartis
and Genentech That May Be Very Costly to Us.
We are a party to arbitrations and a related federal district court
lawsuit with our collaboration partners Novartis and Genentech, relating to our
rights to develop TNX-901 and other issues in connection with our collaboration
agreements. In October 2002, an arbitration panel ruled that we do not have the
right to independently develop TNX-901 and, accordingly, we halted further
development of the drug. We have offered the drug to Novartis and Genentech for
three-way collaborative development, and they have agreed to consider whether
TNX-901 should be further developed for peanut allergy. We cannot assure you
that Novartis and Genentech will determine to further develop anti-IgE therapies
(whether TNX-901 or Xolair) for peanut allergy or that our development efforts
to date in this indication area will yield any financial return for us.
Also at issue in these legal proceedings are claims by the parties of
breach of contract, theft of trade secrets, misappropriation, conversion and
tortious interference with contract, among others. These proceedings have been
ongoing for a number of years and have cost us substantial amounts of money, as
well as management time. In addition, if these proceedings are resolved
adversely to us, we could incur substantial damages that would harm our
financial position. Even if we succeed, we expect these proceedings to continue
to consume substantial amounts of our financial and managerial resources.
Further, because of the extensive discovery required in connection with this
type of dispute, there is a risk that disclosure might compromise some of our
confidential information.
We are Involved in Legal Proceedings With Our Former Attorneys That May
Be Very Costly to Us.
We have been involved in an arbitration regarding a fee dispute with
our former attorneys who represented us in our 1993 lawsuit against Genentech
and Roche and its affiliates, and a 1994 lawsuit filed against us by Genentech.
The arbitration panel issued an award which entitled those attorneys to receive
(i) approximately $3.5 million, including interest, (ii) payments ranging from
33-1/3% to 40% of any future milestone payments received by us from Genentech
following product approval and (iii) 10% of the royalties that we receive on
sales of anti-IgE products. We sought a court order vacating the arbitration
award. However, a judgment was entered confirming the award. We appealed that
decision, without success, in the Court of Appeals and intend to seek review by
the Texas Supreme Court.
We may not be successful in this proceeding. If this proceeding
continues to result in decisions unfavorable to us, we could lose substantial
value from our collaboration with Novartis and Genentech by virtue of the legal
fees awarded by the panel, which could negatively affect our stock price and
harm our business, financial condition and results of operations.
Failure to Attract and Retain Key Personnel and Principal Members of
Our Scientific and Management Staff Could Materially Harm Our Business,
Financial Condition and Results of Operations.
Our success depends greatly on our ability to attract and retain
qualified scientific and technical personnel, as well as to retain the services
of our existing technical management staff. To pursue our research and
development programs and product development plans, we will be required to hire
additional qualified scientific and technical personnel. There is intense
competition for qualified staff, and we cannot assure you that we will be able
to attract and retain the necessary qualified staff to develop our business. The
failure to attract and retain key scientific and technical personnel and
management staff or the loss of any of our current management team could
materially harm our business and financial condition.
22
We May Experience Difficulties in Achieving or Managing Growth, Which
Could Materially Harm Our Business, Financial Condition and Results of
Operations.
If our product development efforts and the product development efforts
of our collaborators succeed, our growth could strain our operations, product
development and other managerial and operating resources. Future growth will
impose significant added responsibilities on members of management, including
the need to identify, recruit, maintain and integrate additional employees,
including management. In the future, our financial performance and our ability
to compete effectively will depend, in part, on our ability to manage any future
growth effectively. To that end, we must be able to:
. manage our research and development efforts effectively;
. expand the capacity, scalability and performance of our product
development infrastructure;
. enhance our administrative, accounting and management information
systems and controls;
. improve coordination among our research, clinical development, process
development, finance, manufacturing and other operations personnel; and
. hire and train additional qualified personnel.
Our failure to accomplish any of these tasks could materially harm our
business, financial condition and results of operations.
We Are Exposed to Product Liability Claims, and It is Uncertain That We
Can Obtain Insurance Against These Claims at a Reasonable Rate in the Future.
Our business exposes us to potential product liability risks, which are
inherent in testing, manufacturing, marketing and selling pharmaceutical
products. We may be held liable if any product we develop, or any product that
uses or incorporates any of our technologies, causes injury or is found
otherwise unsuitable during product testing, manufacturing, marketing or sale.
We cannot assure you that we will be able to avoid product liability exposure.
Product liability insurance for the biopharmaceutical industry is
generally expensive. Although we currently maintain product liability insurance
covering our products in amounts we believe to be commercially reasonable, we
cannot assure you that our coverage is adequate or that continued coverage will
be available at acceptable costs. In addition, some of our license and
collaboration agreements require us to obtain product liability insurance.
Future license and collaboration agreements may also include such a requirement.
Our inability to obtain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent or
inhibit us or our collaborators from commercializing our products. A successful
claim in excess of our insurance coverage could materially harm our business,
financial condition and results of operations.
We Deal With Hazardous Materials and Must Comply With Environmental
Laws and Regulations, Which Can Be Expensive and Restrict How We Do Business.
Our research and development work and manufacturing processes involve
the controlled use of hazardous materials, including chemical, radioactive and
biological materials. Our operations also produce hazardous waste products. We
are subject to federal, state and local laws and regulations governing how we
use, manufacture, store, handle and dispose of these materials. Although we
believe that we comply in all material respects with applicable environmental
laws and regulations, we cannot assure you that we will not incur significant
costs to comply with environmental laws and regulations in
23
the future. In addition, current or future environmental laws and regulations
may impair our research, development or production efforts.
We Could be Liable for Damages, Penalties or Other Forms of Censure If
We Are Involved in a Hazardous Waste Spill or Other Accident.
Despite precautionary procedures that we implement for handling and
disposing of hazardous materials, we cannot eliminate the risk of accidental
contamination or discharge or any resultant injury from these materials. If a
hazardous waste spill or other accident occurs, we could be liable for damages,
penalties or other forms of censure. In addition, we may be sued for injury or
contamination that results from our use or the use by third parties of these
materials, and our liability could exceed our total assets.
Risks Associated with Manufacturing and Marketing
Failure to Receive Market Acceptance for and Successfully Commercialize
Xolair Would Have a Significant Adverse Effect on Us.
Even if the FDA approves Xolair, we cannot be certain that physicians,
patients, insurers or other third-party payors will accept Xolair as a treatment
for its approved indication in the United States or in any foreign markets. A
number of factors may affect the rate and level of Xolair's market acceptance,
including:
. regulatory developments related to manufacturing or using Xolair;
. Xolair's price relative to other products or competing treatments;
. the effectiveness of Novartis' and Genentech's sales and marketing
efforts;
. the perception by physicians and other members of the healthcare
community of Xolair's safety, efficacy and benefits compared to those
of competing products or therapies;
. the willingness of physicians to adopt a new asthma treatment regimen;
. the availability of third-party reimbursement; and
. unfavorable publicity concerning Xolair or comparable products or
therapies.
If Xolair is not accepted as a safe and effective drug and we are
unable to successfully commercialize it, our business, financial condition and
results of operations will be materially harmed.
We Have Limited Experience and Capability in Manufacturing and May
Encounter Manufacturing Problems or Delays That Could Result in Lost Revenue or
Delaying Clinical Trials.
To commercialize our products successfully, we and our collaboration
partners must manufacture our products in commercial quantities in compliance
with regulatory requirements and at an acceptable cost. If the manufacturing
facilities used to produce our products cannot pass a pre-approval or periodic
plant inspection, the FDA may not approve our products or it may delay or bar
their sale. Although Novartis and Genentech have indicated that they wish to
manufacture and supply Xolair, we have reserved the right to manufacture up to
50% of the worldwide requirements. While we have successfully produced our
products for Phase 1 and Phase 2 clinical trials, we have no experience in
manufacturing commercial quantities of antibodies and currently have limited
manufacturing capacity.
24
In order to obtain regulatory approvals and to create capacity to
produce our products in sufficient quantities for commercial sale at an
acceptable cost, we will have to develop or acquire additional technology for
commercial scale manufacturing and build or otherwise obtain access to adequate
facilities, which will require substantial additional funds. We will also be
required to demonstrate to the FDA and corresponding foreign authorities our
ability to manufacture our products using controlled, reproducible processes. We
cannot assure you that we can develop the necessary manufacturing technology or
that we will be able to fund or build an adequate commercial manufacturing
facility necessary to obtain regulatory approvals and to produce adequate
commercial supplies of our potential products on a timely basis.
We cannot assure you that we, operating alone or with the assistance of
others, will be able to successfully make the transition to commercial
production. In addition, as more of our products move into the clinic, we cannot
assure you that we will be able to continue to produce sufficient quantities of
our product to timely supply our clinical requirements. Any failure to produce
these clinical requirements, either as a result of our limited manufacturing
capacity or otherwise, can delay the commencement of, or ability to continue our
ongoing, clinical trials.
We Lack Sales and Marketing Experience, Which Makes Us Depend on Third
Parties for Their Expertise in this Area.
Under our current collaboration agreement, Novartis and Genentech have
exclusive marketing rights to Xolair and other selected anti-IgE products.
However, commercialization rights may revert back to us if either we or our
collaborators terminate our relationship. We currently have no sales, marketing
or distribution capabilities. Any revenues we receive from our Xolair
collaboration will depend primarily on the efforts of our collaboration
partners. We intend to retain marketing rights in the United States and selected
Asian countries for products that we can develop and sell effectively with a
small, targeted sales force. If we elect to market products directly, we would
require significant additional expenditures and management resources to develop
an internal marketing and sales force. We cannot assure you that we would be
able to establish a successful sales force should we choose to do so.
Risks Related to Financial Results and Need for Financing
We Have a History of Net Losses; We Expect to Continue to Incur Net
Losses and We May Never Achieve or Maintain Profitability.
We have incurred net losses since our inception. As of December 31,
2002, we had an accumulated deficit of approximately $78.9 million, including a
net loss of approximately $26.0 million for the year ended December 31, 2002.
Our losses have primarily been the result of costs incurred in our research and
development programs and from our general and administrative costs.
We have not earned any revenues from commercial sales of our
therapeutic products, and such sales may not commence until 2003, if at all. We
have funded our operations principally from licensing fees and milestone
payments under our current or former collaborations, as well as with proceeds
from private placements and an initial public offering of our common stock. As
we increase our research and development, manufacturing, clinical trial and
administrative activities, we expect to continue to incur substantial operating
losses until such time, if ever, that we are able to generate sufficient revenue
from milestone payments, royalties on Xolair and, potentially, profits from an
additional product or products to cover our expenses.
Our ability to achieve and maintain long term profitability depends to
a significant extent on obtaining regulatory approval for and successfully
commercializing Xolair, and also on successfully completing preclinical and
clinical trials, obtaining required regulatory approvals and successfully
25
developing, manufacturing and marketing our other current and future product
candidates. We cannot assure you that we will be able to achieve any of the
foregoing or that we will be profitable even if we successfully commercialize
our products.
Failure by Novartis or Genentech to Develop, Manufacture, Market or
Distribute Xolair May Delay or Significantly Impair Our Ability to Generate
Revenues.
Under the terms of our collaboration agreements, Novartis and Genentech
are responsible for developing, obtaining regulatory approval for,
manufacturing, marketing and distributing Xolair. We expect for the extended
future that Novartis and Genentech will manufacture, market and distribute
Xolair, if it receives marketing approval. Our ability to profit from the
products covered by our collaboration agreements with Genentech and Novartis
depends in large part on their performance. We cannot control the amount and
timing of resources Novartis and Genentech will devote to any of our products.
If Novartis or Genentech experiences manufacturing or distribution difficulties,
does not actively market Xolair or other selected anti-IgE products or does not
otherwise perform under our collaboration agreements, our potential for revenue
from those products will be dramatically reduced. Novartis and Genentech may
terminate our collaboration agreements on short notice. If Novartis or Genentech
terminates our collaboration, we would experience increased capital requirements
to undertake development and marketing at our expense, and we cannot assure you
that we would be able to develop Xolair or our other anti-IgE products on our
own.
We May Need Additional Financing, But Our Access to Capital Funding is
Uncertain.
Our current and anticipated development projects require substantial
additional capital. While we expect that our cash on hand, together with our
revenue from operations, will sufficiently fund our operations for the next four
years, our future capital needs will depend on many factors, including
successfully commercializing Xolair, receiving milestone payments from our
collaboration partners, and making progress in our research and development
activities. Our capital requirement may also depend on the progress and level of
unreimbursed costs associated with preclinical studies and clinical trials, the
costs associated with acquisitions, the costs of preparing, filing, prosecuting,
maintaining and enforcing patent claims and other intellectual property rights,
competing technological and market developments, changes in or terminations of
existing collaboration and licensing arrangements, the establishment of
additional collaboration and licensing arrangements, and the cost of
manufacturing scale-up and development of marketing activities, if undertaken by
us. We do not have committed external sources of funding and we cannot assure
you that we will be able to obtain additional funds on acceptable terms, if at
all. If adequate funds are not available, we may be required to:
. delay, reduce the scope of or eliminate one or more of our development
programs;
. obtain funds through arrangements with collaboration partners or others
that may require us to relinquish rights to technologies, product
candidates or products that we would otherwise seek to develop or
commercialize ourselves; or
. license rights to technologies, product candidates or products on terms
that are less favorable to us than might otherwise be available.
If we raise additional funds by issuing additional stock, further
dilution to our stockholders may result, and new investors could have rights
superior to existing stockholders. If funding is insufficient at any time in the
future, we may be unable to develop or commercialize our products, take
advantage of business opportunities or respond to competitive pressures.
26
The Market Price of Our Common Stock has been Volatile.
Like other stocks of biopharmaceutical companies, the market price for
our common stock has been and may continue to be volatile. During the last two
years, our stock price ranged from $8.93 to $40.00. Factors that contributed to
the volatility of our stock during this period included:
. Regulatory developments or delays concerning Xolair;
. Important rulings and other developments in our various legal disputes;
. Results of clinical trials; and
. General market conditions, including particularly in the biotechnology
company segment.
Risks Relating to Intellectual Property
The Patentability, Validity, Enforceability and Commercial Value of Our
Patents Are Highly Uncertain. If Our Intellectual Property Positions are
Challenged, Invalidated or Circumvented and We Fail to Prevail in Resulting
Intellectual Property Litigation, Our Business Could be Adversely Affected.
Our success depends in part on obtaining, maintaining and enforcing
patents and maintaining trade secrets. While we file and prosecute patent
applications to protect our inventions, our pending patent applications may not
result in the issuance of valid patents and our issued patents may not provide
competitive advantages. Also, our patents may not prevent others from developing
competitive products using related technology. We cannot assure you that pending
patent applications developed by or licensed to us will result in patents being
issued or that, if issued, the patents will give us an advantage over
competitors with similar technology.
We own or have licenses to certain issued patents. The patents we own
that are most material to our business are five U.S. patents and six foreign
patents relating to anti-IgE antibodies. However, the patent position of
biotechnology and pharmaceutical firms is highly uncertain and involves many
complex legal and technical issues. There is no clear policy involving the
breadth of claims allowed or the degree of protection afforded under such
patents. Issued patents can be challenged in litigation in the courts and in
proceedings in the United States Patent and Trademark Office and in courts and
patent offices in foreign countries. Issuance of a patent is not conclusive as
to its validity, enforceability or the scope of its claim. We cannot assure you
that our patents will not be successfully challenged as to enforceability,
invalidated or limited in the scope of their coverage. Moreover, litigation to
uphold the validity of patents and to prevent infringement can be very costly
and can result in diverting technical and management personnel's time and
attention, which may materially harm our business, financial condition and
results of operations. If the outcome of litigation is adverse to us, third
parties may be able to use our patented technology without paying us. Moreover,
we cannot assure you that our patents will not be infringed or successfully
avoided through design innovation. Any of these events may materially and
adversely affect our business.
In addition to the intellectual property rights described above, we
also rely on unpatented technology, trade secrets and confidential information.
We cannot assure you that others will not independently develop substantially
equivalent information and techniques or otherwise gain access to our technology
or disclose such technology, or that we can effectively protect our rights in
unpatented technology, trade secrets and confidential information. We require
each of our employees, consultants and advisors to execute a confidentiality
agreement at the commencement of an employment or consulting relationship with
us. We cannot assure you, however, that these agreements will provide effective
protection if an unauthorized use or disclosure of this confidential information
occurs.
27
If We Fail To Obtain Any Required Patent License From Third Parties,
Our Product Development Efforts Could Be Limited.
Our success also depends on our ability to license the rights to
patents and patent applications owned by others and to operate without
infringing the proprietary rights of third parties. There may be patent rights
belonging to others that require us to alter our products, pay licensing fees or
cease certain activities. If our products conflict with patent rights of others,
the owners of those patent rights could bring legal actions against us claiming
damages and seeking to stop us from manufacturing and marketing the affected
products. If these legal actions are successful, in addition to any potential
liability for damages, we could be required to obtain a license in order to
continue to manufacture or market the affected products. We cannot assure you
that we would prevail in any such action or that any license required under any
such patent would be made available on acceptable terms or at all. Any of these
events may materially harm our business, financial condition and results of
operations.
Researching, developing and commercializing a biopharmaceutical product
often involves alternative development and optimization routes that are
presented at various stages in the development process. We cannot predict the
preferred routes at the outset of a research and development program, because
they will depend on subsequent discoveries and test results. There are numerous
third-party patents in our field, and it is possible that, to pursue the
preferred development route of one or more of our products, we will need to
obtain a license to a patent, which would decrease the ultimate profitability of
the applicable product. If we cannot negotiate a license, we might have to
pursue a less desirable development route or terminate the program altogether.
We are aware that other groups have claimed discoveries similar to
those covered by our patent applications. In addition, other companies, some of
which may be our competitors, have filed applications for or have been issued
patents and may obtain additional patents and proprietary rights relating to
products or processes used in, necessary to, competitive with or otherwise
related to our patents and products. These products and processes include, among
other items, patents covering technology relating to humanized monoclonal
antibodies that we anticipate developing. Protein Design Labs, Inc. owns certain
patents and patent applications relating to such humanized antibodies. We have
acquired the right to take a non-exclusive licenses to these patents for up to
four of our products. Additionally, Genentech owns patents relating to antibody
chain co-expression. We have certain rights to acquire a non-exclusive license
from Genentech for these patents for products that are not exclusively licensed
by Genentech to a third party and that would not compete with an existing
product of Genentech or its affiliates or a product that they are actively
researching or developing. We cannot assure you that we will be able to obtain
licenses from Protein Design Labs for our other antibody products, of that we
will be successful in securing licenses from Genentech for products and product
candidates that we have in research or development.
We must make substantial cash payments, achieve certain milestones
and satisfy certain conditions, including filing investigational new drug
applications, obtaining product approvals and introducing products, to maintain
our rights under certain of our licenses, including our licenses from Chiron and
Biogen. We cannot assure you that we will be able to maintain our rights under
these licenses. If any of these licenses terminate, we may be unable to
commercialize any related product.
28
Executive Officers of Tanox
Our executive officers and their ages and positions with Tanox are:
Name Age Position
---- --- --------
Nancy T. Chang, Ph.D. ................ 53 Chairman of the Board, President and
Chief Executive Officer
Jeffrey W. Organ . ................... 49 Chief Operating Officer
William R. Shanahan, Jr., M.D. ....... 54 Chief Medical Officer
Matthew Moyle, Ph.D. ................. 42 Vice President of Research
Gregory P. Guidroz, C.P.A. ........... 50 Vice President of Finance
Katie-Pat Bowman ..................... 48 Vice President, General Counsel and Secretary
Nancy T. Chang, Ph.D., is one of our co-founders and has served as our
President and Chairman of the Board of Directors since our organization in March
1986. Dr. Chang has served as our Chief Executive Officer since June 1990. From
1986 to 1992, Dr. Chang served as an Associate Professor at Baylor College of
Medicine in the Division of Molecular Virology. Between 1981 and 1986, Dr. Chang
was employed by Centocor, Inc., serving as the Director of Research, Molecular
Biology Group, from 1984 to 1986. From 1980 to 1981, she was employed by Roche
Institute of Molecular Biology. Dr. Chang received her Ph.D. in biological
chemistry from Harvard University.
Jeffrey W. Organ has served as our Chief Operating Officer since May
2002. Prior to joining Tanox, from March 2000 to April 2002, Mr. Organ served as
an independent consultant to product and service companies in the healthcare and
pharmaceutical industries. From 1997 to 2000, Mr. Organ served as Vice President
of Marketing & Sales at Bridge Medical, a start-up company developing drug
delivery and patient safety systems. From February 1996 to January 1997, he held
the position of Senior Vice President of Marketing with IMED Corporation, a
leading provider of intravenous drug delivery systems. Prior to that, Mr. Organ
was President of Major Pharmaceuticals, a distributor of pharmaceuticals to
retail and institutional pharmacies, worked at Fujisawa Pharmaceuticals as
Vice President and General Manager for Multisource products, and worked at
American Hospital Supply in a variety of sales and marketing positions. He
received a BA from the University of Missouri and an MBA from Pepperdine
University.
William R. Shanahan, Jr., M.D., has served as our as Chief Medical
Officer since August 2000. From 1994 to August 2000, he served as Vice
President, Drug Development of Isis Pharmaceuticals, a leader in antisense
technology, and, prior to that, he was Director of Clinical Research at Pfizer
Central Research where he directed the clinical development of new
anti-inflammatory pharmacologic agents. At Searle Research and Development, he
held Associate Director and Director of Clinical Research positions where he
developed and monitored clinical studies related to anti-inflammatory,
gastroprotective, anti-HIV, and antineoplastic pharmacologic agents. In
addition, at the University of Connecticut School of Medicine he held various
positions in the Division of Rheumatology including Clinical Associate
Professor. Dr. Shanahan graduated from the University of California - San
Francisco with a Doctorate in Human Medicine in 1974, and from Loyola University
of Chicago with a Juris Doctorate in 1992.
Matthew Moyle, Ph.D., joined us as Vice President of Research in
January 2001. Prior to that, he held various positions with Amgen, Inc., a
biotechnology company, since October 1995, including most recently Department
Head of Expression Profiling and Pharmacogenomics. From July 1991 to September
1995 he held senior research positions with Corvas, Inc. where he was involved
in the discovery and development of two biological agents that are currently in
clinical testing. While at Amgen and Corvas, Dr. Moyle was actively involved in
recruiting scientists and establishing multi-disciplinary
29
project teams. He also participated in licensing transactions. Dr. Moyle
received both his Ph.D. and B.Sc. degrees in Biochemistry from the University of
Toronto.
Gregory P. Guidroz, C.P.A., has served as our Vice President of Finance
since July 2002. Prior to joining Tanox, Mr. Guidroz served as Chief Financial
Officer for Integrated Diagnostic Centers, Inc., a diagnostic imaging center
company, from July 1999 until July 2002. He was Co-Founder and Chief Financial
Officer for NPPA of America, Inc., a multi-state provider of nurse practitioner
and physician assistant services, from April 1998 until March 1999 when it was
acquired. From June 1995 until March 1998, he was a Principal with Healthcare
Solutions, Inc., a healthcare management consulting firm. From November 1975
until May 1995, Mr. Guidroz held Chief Financial Officer or Controller positions
in various healthcare and software corporations. He began his career on the
audit staff of Arthur Andersen after receiving a BBA from Lamar University. Mr.
Guidroz has been a Partner with Tatum CFO Partners, LLP since July 1999.
Katie-Pat Bowman has served as our Vice President, General Counsel and
Secretary since July 2000. Prior to that she was Senior Corporate Counsel and
Assistant Secretary for Lyondell Chemical Company from September 1999 until July
2000. She was Vice President and General Counsel for Daniel Industries Inc., a
pipeline equipment manufacturer, from September 1997 until September 1999, when
it was acquired by Emerson Electric Company. Prior to that, she practiced law
with Houston-based law firms Haynes & Boone LLP and Fulbright & Jaworski, L.L.P.
since 1987. Ms. Bowman, a CPA, practiced public accounting and worked in
industry as an accountant from 1977 through 1987. She received both a Juris
Doctorate and BBA from the University of Houston.
Scientific Advisors
An important component of our scientific strategy is to establish
collaborative relationships with leading researchers in our fields of interest.
Certain of our scientific advisors attend periodic meetings and provide us with
specific expertise in both research and clinical development. In addition, we
have collaborative research relationships with certain individual advisors. We
do not employ our scientific advisors, and they may have commitments to or
consulting or advisory agreements with other entities that may limit their
availability to us. These companies may also compete with us. Several of our
advisors have, from time to time, devoted significant time and energy to our
affairs. In general, our scientific advisors may hold stock options, own our
stock and/or receive financial remuneration for their services.
Our scientific advisors are:
Name Title and Affiliation
- ---- ---------------------
John Atkinson, M.D. .......................... Professor, Department of Medicine & Medical
Microbiology, Washington University School of Medicine
K. Frank Austen, M.D.* ....................... Director, Inflammation and Allergic Diseases, Brigham and
Women's Hospital
Donald MacGlashan, Jr., M.D., Ph.D. .......... Associate Professor of Medicine, Johns Hopkins Asthma
and Allergy Center
Robert T. Schooley, M.D. ..................... Chief of Division of Infectious Diseases, University of
Colorado Health Science Center
Ethan M. Shevach, M.D ........................ Chief, Cellular Immunology Section, National Institute of
Allergy and Infectious Disease
_______________________________
* Chairman
30
ITEM 2. Properties
Our research and manufacturing operations are conducted in a 43,560
square foot building in Houston, Texas. We had leased this building, which
also houses our pilot manufacturing facility, and acquired it in September 2002.
Also in 2002, we acquired a 68,000 square foot office and warehouse building
adjacent to our research and manufacturing facility, which we currently intend
to renovate into a research and administrative office facility during 2003 and
2004. We also own approximately 28 acres of land near our present facility. Our
corporate administrative offices currently occupy approximately 13,100 square
feet of leased space in Houston, Texas, under a lease that expires in September
2003, with options for two six-month extensions. We expect to extend the lease
for one year. We also lease approximately 6,500 square feet of space in the
Hsinchu Science Based Industrial Park in Taiwan.
ITEM 3. Legal Proceedings
Dispute with Former Attorneys. We are arbitrating a fee dispute with
the law firms that represented us in connection with a lawsuit involving
Genentech and Roche relating to, among other things, the intellectual property
rights of the parties surrounding the development of anti-IgE technology. We
settled the lawsuit contemporaneously with the formation of our collaboration
with Genentech.
We initiated the arbitration proceeding in August 1996, after we and
our attorneys, Akin, Gump, Strauss, Hauer and Feld, L.L.P., The Robinson Law
Firm and Williams, Birnberg & Anderson, could not reach agreement on the fee
owed pursuant to the terms of our written fee agreement. The arbitration panel
issued an award entitling the attorneys to receive (i) approximately $3.5
million, including interest, (ii) payments ranging from 33-1/3% to 40% of the
future milestone payments received by us from Genentech under the collaboration
following product approval and (iii) 10% of the royalties that we receive on
sales of anti-IgE products.
We sought a court order vacating the arbitration award, but a judgment
was entered confirming the award. We appealed the District Court's decision to
the Court of Appeals, 14th District of Texas, and, in August 2002, the Court of
Appeals affirmed the judgment of the District Court. We intend to appeal this
decision to the Texas Supreme Court.
If this proceeding continues to result in decisions unfavorable to us,
we could lose substantial value from our collaboration with Novartis and
Genentech by virtue of the legal fees awarded by the panel, which could
negatively affect our stock price and harm our business, financial condition and
results of operations.
Dispute With Genentech and Novartis Over Independent Development Rights
and Other Matters. For the last several years, we had been pursuing clinical
development of TNX-901 to determine its potential in treating peanut-induced
anaphylaxis independently of Novartis and Genentech. Novartis and Genentech had
disputed our right to pursue development of TNX-901 independently, but we
believed our agreements with Novartis and Genentech permitted this activity.
In an effort to resolve this dispute, we initiated an arbitration with
Novartis in March 1999 pursuant to our Development and Licensing Agreement (D&L
Agreement) with Novartis. In the arbitration, we are seeking, among other
things, to confirm our rights to independently develop certain anti-IgE
products, including TNX-901, and to use know-how we received from Novartis in
our development activities. Novartis initially claimed that the dispute was not
subject to arbitration and that our claimed rights to independently develop
TNX-901 do not exist. Novartis also claimed damages arising from our actions.
In response to the arbitration we initiated against Novartis, Novartis
and Genentech jointly filed
31
suit against us in April 1999 in the U.S. District Court for the Northern
District of California. In the lawsuit, Novartis and Genentech initially sought
declarations that we cannot develop TNX-901 independently, that we cannot use
confidential and proprietary information obtained from Novartis or Genentech for
independent product development, and that we cannot pursue separate arbitrations
on these matters against both Novartis and Genentech. Novartis and Genentech
also claim undetermined actual and punitive damages resulting from our
independent development of TNX-901, and seek a permanent injunction stopping our
TNX-901 development and preventing us from continuing with our arbitrations on
these matters.
In July 1999, we initiated an arbitration proceeding against Genentech,
seeking, among other things, confirmation that Genentech expressly acknowledged
our independent development rights in our agreement with them and that Genentech
agreed to allow us to use and disclose their confidential and proprietary
information for purposes contemplated by our separate agreement with Novartis.
Genentech asserted that their disputes with us are not subject to arbitration
and should remain in Federal court and, further, that our arbitration with
Novartis should be joined with Genentech's arbitration.
In September 1999, the U.S. District Court Judge issued an order
staying virtually all proceedings in the lawsuit and both arbitrations, and
ordered the parties to mediation. The mediation took place in November 1999, and
concluded unsuccessfully. In September 2000, and without lifting the stay on the
arbitrations, the U.S. District Court Judge indicated that the litigation should
continue and that discovery be had on an accelerated basis to determine certain
contractual issues. In October 2001, the Court ruled on motions for summary
judgment filed by each of the parties and granted summary judgment in our favor,
finding that, pursuant to the D&L Agreement with Novartis, we have independent
development rights, and that nothing in the Outline of Terms among Tanox,
Genentech and Novartis superseded those rights. In addition, the Court noted
that we may proceed with the development of TNX-901 and that we may use
information acquired under our tripartite agreement with Genentech and Novartis
in connection with our development of TNX-901. The Court also lifted the stays
on the two arbitration proceedings.
Thereafter, Novartis and Genentech continued to dispute Tanox's right
to independently develop TNX-901 and, on December 10, 2001, the Court stayed the
litigation and directed the parties to return to the arbitrations originally
initiated by Tanox to resolve remaining issues with respect to TNX-901 and the
other issues being disputed by the parties. In August 2002, the arbitration
panel in the Tanox-Novartis arbitration heard issues relating to whether or not
Tanox had the right under the D&L Agreement to independently develop TNX-901
and, in October 2002, ruled that Tanox does not. While this ruling seems to
conflict with the earlier summary judgment, Tanox has suspended further plans to
develop TNX-901 pending its discussions with Novartis and Genentech regarding
options for using anti-IgE as a treatment for persons suffering from severe
peanut allergy. The panel further ruled that Novartis is obligated to share its
Xolair knowledge with Tanox. The second phase of the arbitration, which will
focus on Tanox's claim that Novartis improperly excluded Tanox from
collaboration know-how and participation and otherwise breached the contracts
between the two parties, is scheduled to take place in May 2003.
We are currently in arbitration with Genentech on similar issues. We
have claimed breach of contract, conversion, tortuous interference, unjust
enrichment and unfair competition by Genentech. Genentech has counterclaimed for
breach of contract, theft of trade secrets, misappropriation, breach of
confidence, interference with contract, and interference with economic
expectancies by Tanox. Additional proceedings, to the extent necessary, may also
be conducted in the District Court.
Dispute Regarding Contingent Payment for Tanox Pharma. In March 1998,
we acquired all of the outstanding shares of Tanox Pharma B.V. (formerly known
as PanGenetics B.V.) The purchase price was payable in three installments of
cash and Tanox common stock, and payment of the total consideration was
contingent on the satisfaction of certain conditions. One of the conditions to
be satisfied was the origination of three new projects prior to March 8, 2001,
by the former shareholders of
32
Tanox Pharma (Pan Resources International N.V., Andries deNooij B.V., M. deBoer,
J.W. Larrick, J.S. Price, R.F. Balint, M.T. denHartog, L. Boon (Former
Shareholders)). Based on a determination that only one project was originated,
we reduced the total consideration payable to the Former Shareholders by 20%,
and the third installment of cash and stock was accordingly reduced.
In March, 2001, we sought a declaratory judgment from the District
Court of Harris County that we fulfilled our obligations under the agreement.
The former shareholders have counterclaimed for breach of contract, common law
and statutory fraud, conversion and malice. The Former Shareholders claim that
the total consideration should not have been reduced and, further, that Tanox
should issue additional shares of common stock to the Former Shareholders
because we declared a stock dividend on February 1, 2000. Thus, the Former
Shareholders claim that they are entitled to an additional $200,000 and 181,552
shares of common stock. The Former Shareholders also claim that, because of the
alleged failure by Tanox to tender the third installment, we must pay them the
value of 51% of the stock of Tanox Pharma. Messrs. DeBoer, Larrick and Price
make similar claims against Tanox and Tanox Pharma in an action brought by them
in Haarlem, the Netherlands.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of 2002.
33
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters
Market Price and Dividends
Our common stock trades on The Nasdaq Stock Market under the symbol
TNOX. The table below provides the high and low sales prices of our common stock
for the periods indicated, as reported by The Nasdaq Stock Market.
High Low
---- ---
Year Ended December 31, 2001:
First quarter .............................. $ 40.00 $ 17.25
Second quarter ............................. 34.09 16.75
Third quarter .............................. 30.91 12.00
Fourth quarter ............................. 22.24 13.18
Year Ended December 31, 2002:
First quarter .............................. $ 18.46 $ 12.95
Second quarter ............................. 14.10 9.25
Third quarter .............................. 13.49 8.93
Fourth quarter ............................. 11.91 9.03
On March 25, 2003, the last reported sale price of our common stock on
the Nasdaq National Market was $11.16. As of March 25, 2003, there were
43,747,741 shares of common stock outstanding and 137 shareholders of record of
our common stock, one of which is Cede & Co., a nominee for Depository Trust
Company (or DTC). All of the shares of Common Stock held by brokerage firms,
banks and other financial institutions as nominees for beneficial owners are
deposited into participant accounts at DTC, and therefore considered to be held
of record by Cede & Co. as one stockholder.
We have never declared or paid any cash dividends on our common stock
and do not anticipate paying such cash dividends in the foreseeable future. We
currently anticipate that we will retain all of our future earnings for use in
our research and product development activities and for general corporate
purposes. Any determination to pay dividends in the future will be at the
discretion of our Board of Directors and will depend upon our results of
operations, financial condition and other factors as the Board of Directors, in
its discretion, deems relevant.
Use of IPO Proceeds
On April 6, 2000, the SEC declared effective our Registration Statement
on Form S-1, Commission File No. 333-96025, registering the sale of 8,568,000
shares of our common stock (including the over-allotment option) for net
proceeds of $225.8 million. Prior to 2002, none of the proceeds from this
offering had been used. For the year ended December 31, 2002, we have used
approximately $28.6 million of those proceeds as follows (in thousands):
Research and development activities, general corporate
purposes and working capital $ 23,887
Capital expenditures (net of bank loan) 4,667
--------
$ 28,554
The remaining portion of the net offering proceeds has been invested in
cash equivalents and held-to-maturity investments.
34
ITEM 6. Selected Financial Data
The information below was derived from the audited consolidated
financial statements included in this report and in reports we have previously
filed with the SEC. This information should be read together with those
consolidated financial statements and the notes to the consolidated financial
statements. These historical results are not necessarily indicative of the
results to be expected in the future.
Year Ended December 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------- ------------ ------------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues ........................................... $ 560 $ 419 $ 12,748 $ 1,405 $ 2,422
------------ ------------ ------------- ------------ ------------
Research and development ........................... 22,651 21,683 18,325 17,163 11,933
General and administrative ......................... 10,677 8,349 7,683 8,582 3,431
Restructuring charge ............................... (268) 3,860 -- -- --
------------ ------------ ------------- ------------ ------------
Total operating costs and expenses ................. 33,060 33,892 26,008 25,745 15,364
------------ ------------ ------------- ------------ ------------
Loss from operations ............................... (32,500) (33,473) (13,260) (24,340) (12,942)
Other income, net .................................. 6,478 12,096 13,128 1,028 1,240
------------ ------------ ------------- ------------ ------------
Loss before income taxes ........................... (26,022) (21,377) (132) (23,312) (11,702)
(Provision) benefit of income taxes ................ -- -- (915) (34) 1,533
------------ ------------ ------------- ------------ ------------
Net loss ........................................... $ (26,022) $ (21,377) $ (1,047) $ (23,346) $ (10,169)
============ ============ ============= ============ ============
Loss per share - basic and diluted ................. $ (0.59) $ (0.49) $ (0.03) $ (0.75) $ (0.35)
============ ============ ============= ============ ============
Shares used in computing loss per share -
basic and diluted .................................. 43,911 44,010 40,258 31,113 29,105
============ ============ ============= ============ ============
December 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------- ------------ ------------
(In thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and investments [1] ......... $ 227,990 $ 261,102 $ 275,921 $ 47,254 $ 33,735
Working capital .................................... 127,592 198,092 175,309 42,718 34,323
Total assets ....................................... 251,211 277,534 290,978 55,328 43,422
Long term debt ..................................... 15,000 10,000 10,000 10,000 10,000
Accumulated deficit ................................ (78,907) (52,885) (31,508) (30,461) (7,115)
Total stockholders' equity ......................... 225,516 256,441 272,774 40,007 31,540
[1] Includes restricted cash and investments of $14,441 in 2002.
35
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Tanox discovers and develops therapeutic monoclonal antibodies to
address significant unmet medical needs in the areas of asthma, allergy,
inflammation and other diseases affecting the human immune system. Tanox's
products are genetically engineered antibodies that target a specific molecule,
or antigen. In 1987, we discovered a novel approach for treating allergies and
asthma by using anti-immunoglobulin E, or anti-IgE, antibodies capable of
blocking IgE, a causative agent of the allergy pathway, thus preventing the
onset of disease symptoms. Xolair, our most advanced product, is a humanized
monoclonal antibody that blocks IgE. Its therapeutic effect has been validated
through clinical trials in patients suffering from allergic asthma, seasonal
allergic rhinitis (hay fever) and perennial allergic rhinitis. We are
developing Xolair in collaboration with Novartis and Genentech. In June 2000,
our collaboration partners filed a BLA with the FDA and a submission for
marketing approval with health authorities in the EU, Switzerland, Australia,
and New Zealand for allergic asthma and hay fever in adults, adolescents and
children. Following receipt of a Complete Response Letter from the FDA in
July 2001 and treatment of additional patients to expand the safety database,
our collaboration partners submitted an amendment to the BLA in December 2002
for moderate-to-severe allergic asthma in adults and adolescents. The FDA's
Pulmonary-Allergy Drugs Advisory Committee is scheduled to review the BLA on
May 15, 2003. In June 2002, Xolair was approved for marketing in adolescents
and adults with moderate allergic asthma in Australia.
Using our knowledge of the human immune system, we are building a
diverse pipeline of monoclonal antibody product candidates. TNX-901, a humanized
anti-IgE monoclonal antibody distinct from Xolair, was tested in a double
blinded, placebo controlled Phase 2 clinical trial in peanut allergy patients:
after four months of treatment, significant decreases in sensitivity to peanuts
was demonstrated by oral food challenge. Following an adverse arbitration ruling
in October 2002, we halted further development of TNX-901 pending further
discussions with Genentech and Novartis. TNX-355, an anti-CD4 antibody, is
currently in a Phase 1b trial for treating HIV-infected patients: The Phase 1a
study was completed in 2002 and demonstrated clinically important (greater than
one log/10/) decreases in viral load. TNX-224, a complement factor D inhibiting
antibody, is in preclinical studies for treating complement mediated diseases.
We are also conducting target discovery and target validation research on
several new targets implicated in allergies and other immune-mediated disorders.
We currently have no products available for sale. We are focusing our
efforts on research and product development activities necessary to advance our
product opportunities, including process development and clinical trial
activities for products that are currently in the clinic or will commence
clinical development in the future. We have incurred substantial losses since
inception and incurred an accumulated deficit through December 31, 2002, of
$78.9 million. We expect to continue to incur substantial operating losses for
the foreseeable future, particularly as we expand our research and development
activities, produce clinical material and initiate additional clinical trials.
We expect that losses will continue until such time, if ever, that we generate
sufficient revenue from Xolair and potentially from another marketed product or
products.
Historically, we have earned revenues primarily from milestone
payments, license fees and sponsored research under our collaboration
agreements. Over the next several years, we expect our principal revenues will
be milestone payments, royalties and profit-sharing payments from Novartis and
Genentech. We may also receive royalties from Roche should it participate in
selling Xolair in Europe. Our revenues will depend particularly on the success
of our collaboration partners in developing, manufacturing, obtaining regulatory
approvals for and marketing Xolair. Because a substantial portion of our
revenues for the foreseeable future will depend on achieving development and
commercialization milestones, we anticipate that our results of operations will
vary substantially from year to year and even quarter to quarter.
36
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and footnotes thereto. Actual results may differ from those
estimates.
Cash, Cash Equivalents and Investments
Cash and cash equivalents consist of all highly-liquid investments with
original maturities of three months or less. Management determines the
appropriate classification of its cash equivalents, short-term investments and
long-term investments at the time of purchase. Investments consist of investment
grade corporate bonds, commercial paper, assets backed securities, and
government agency securities with maturities of less than two years from the
balance sheet date. All investments are classified as held-to-maturity and
carried at amortized cost in the accompanying financial statements with the
exception of one available-for-sale investment, which is stated at fair value
based on the quoted market price of the security. Unrealized gains and losses on
such securities are reported as other comprehensive income (loss), which is a
separate component of stockholders' equity. At December 31, 2002, the carrying
value of our available-for-sale security approximated fair value, and
accordingly there was no unrealized gain or loss.
We are required to maintain restricted cash or investments to
collateralize borrowings under Tanox's line of credit and its irrevocable letter
of credit. Additionally, we have cash deposited with the District Court in
connection with the pending appeal of an unfavorable arbitration award (see Note
12). As of December 31, 2002, Tanox had restricted cash and
investments of $14.4 million.
At December 31, 2002, we held investments with a net carrying value of
$207.2 million and a fair market value of $209.5 million. At any point in time,
amortized cost may be greater or less than fair market value. If investments are
sold prior to maturity, we could incur a realized gain or loss based on the fair
market value of the investments at the date of sale. Additionally, we could
incur future losses on investments if the investment issuer becomes impaired or
the investment is down graded.
Research and Development
Research and development costs, including incidental patent costs, are
expensed as incurred. Research and development costs include estimates for
clinical trial costs, which are based on patient enrollment and clinical trial
progress. Actual costs may differ from estimates.
Contingent Liabilities
We are currently involved in certain legal proceedings as discussed in
the "Commitments and Contingencies" note in the Notes to Consolidated Financial
Statements. We have accrued our estimate of litigation related liabilities in
consultation with outside counsel handling our cases. The estimate is based on
the facts and circumstances of these matters known to us at this time. The
actual liability may be more or less than the amount of our current estimates,
depending on the outcome of these matters.
Stock-based Compensation
Deferred stock-based compensation and related amortization represents
the difference between the exercise price of stock options granted to our
consultants and the fair value of our common stock at the applicable date of
grant. Stock-based compensation is amortized as research and development
37
expense or general and administrative expense, as appropriate, over the vesting
period of the individual stock options for which it was recorded, generally four
years. The amount of stock-based compensation expense to be recorded in future
periods may decrease if unvested stock options for which deferred stock-based
compensation has been recorded are subsequently canceled or forfeited or may
increase if additional stock options are granted to individuals other than
employees or directors.
Recent Accounting Developments
In December 2002, the FASB issued Statement of Financial Accounting
Standards, or SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized in the period in which the liability is incurred. The provisions of
this statement are effective for exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS No. 146 will not have a material impact
on Tanox's results of operations and financial position.
In December 2002, the FASB issued Statement of Financial Accounting
Standards, or SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." This statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
accounting for employee compensation and the effect of the method used on
reported results. Tanox is currently evaluating whether to adopt the fair value
based method. The additional disclosures required under SFAS No. 148 are
effective for fiscal year ending after December 15, 2002, and have been provided
in Notes to the Consolidated Financial Statements.
38
Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues. Revenues increased to $560,000 in 2002 from $419,000 in 2001.
Revenues in 2002 represented licensing fees associated with non-exclusive patent
licenses. Revenues in 2001 were primarily grants.
Research and Development Expenses. Research and development expenses
increased to $22.7 million in 2002 from $21.7 million in 2001. The increase was
associated with staffing growth and increased spending in clinical manufacturing
and clinical trials for the TNX-901 and TNX-355 programs. This increase was
partially offset by cost savings from closing down our Tanox Pharma B.V.
(formerly known as PanGenetics B.V.) research facility. In addition,
depreciation expense increased by $467,000, due to capital expenditures made in
previous periods for research, clinical manufacturing equipment and facilities
improvement.
General and Administrative Expenses. General and administrative
expenses increased to $10.7 million in 2002 from $8.3 million in 2001. The
increase relates primarily to higher legal costs associated with increased
litigation activities and higher personnel costs.
Restructuring Charge. In June 2001, the Company recorded a $3.9 million
restructuring charge associated with the closure of the research operations of
Tanox Pharma, B.V. The Company has settled most of the restructuring liabilities
except the severance dispute with the former managing director of Tanox Pharma,
B.V. and legal cost accruals related to ongoing litigation with the former
PanGenetics shareholders. As of December 31, 2002, the Company estimated that
$293,000 in restructuring liabilities still remain and is classified as an
accrued liability on the balance sheet.
Other Income (Expense). Other income decreased to $6.5 million in 2002
from $12.1 million in 2001. This decrease was principally due to reduced
interest income in 2002 resulting from lower interest rates and lower cash and
investment balances, and a $784,000 decline in the fair value of an
available-for-sale investment.
Income Taxes. There was no provision for income taxes in 2002, due to
the pre-tax loss of $26.0 million. This pre-tax loss generated a tax benefit,
which was fully offset by an increase in Tanox's valuation allowance.
Net Loss. The net loss increased to $26.0 million or $0.59 per share in
2002, as compared to $21.4 million or $0.49 per share in 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues. Revenues decreased to $419,000 in 2001 from $12.7 million in
2000. The $12.3 million decrease in revenues in 2001 resulted primarily from
$12.0 million in milestone revenues earned in June 2000 under our collaborative
agreements with Novartis and Genentech when the BLA for Xolair was submitted to
the FDA. The collaborative agreements with Novartis and Genentech accounted for
none of the revenues in 2001 and 95% of total revenues in 2000. Other revenues
in both years consisted of grants, government subsidies and technology licensing
revenue.
Research and Development Expenses. Research and development expenses
increased to $21.7 million in 2001 from $18.3 million in 2000. In 2001, we
incurred higher salary and related costs from increased staffing, increased
expenses related to process development and manufacturing feasibility studies,
and an in-process research and development charge of $1.1 million related to the
1998 acquisition
39
of Tanox Pharma B.V. The increase was partially offset by a reduction in 2001
operating expenses due to the closure of Tanox Pharma B.V., a $2.5 million
charge in 2000 to acquire the right to non-exclusive licenses to patents and
patent applications owned by Protein Design Labs, Inc. and a $600,000 charge in
2000 to acquire certain technologies from LXR Biotechnology, Inc.
General and Administrative Expenses. General and administrative
expenses increased to $8.3 million in 2001 from $7.7 million in 2000. The
increase relates primarily to higher legal costs associated with increased
litigation activity and higher infrastructure costs.
Restructuring Charge. In June 2001 we implemented a plan to consolidate
our research operations in Houston, Texas. In connection with the plan, we
closed our facility in Amsterdam and recorded a restructuring charge of $3.9
million. The restructuring charge primarily consisted of $624,000 for severance
and related costs, $886,000 of goodwill impairment, $778,000 for the write-down
of assets, $1.1 million for agreement terminations and $458,000 for other exit
costs.
Other Income. Other income decreased to $12.1 million in 2001 from
$13.1 million in 2000. The decrease was principally due to a decrease in
interest income in 2001 resulting from lower interest rates.
Income Taxes. There was no provision for income taxes in 2001, due to
the pre-tax loss of $21.4 million. This pre-tax loss generated a tax benefit,
which was fully offset by an increase in Tanox's valuation allowance. Our
effective tax rate in 2000 significantly differed from the U.S. federal
statutory rate. The provision for income taxes was $915,000, due to income
generated in the U.S. and losses from foreign subsidiaries that were not tax
deductible in the U.S., and did not offset the U.S. tax provision. In addition,
we generated a tax benefit from non-qualified stock option exercises in 2000.
The benefit was reflected as a reduction to additional paid-in capital in the
accompanying financial statements.
Net Loss. As a result of the above factors, the net loss for the year
ended December 31, 2001 was $21.4 million or $0.49 per share on both a basic and
fully diluted basis, compared with a net loss in 2000 of $1.0 million or $0.03
per share on both a basic and fully diluted basis.
Liquidity and Capital Resources
We have financed our operations since inception primarily through sales
of equity securities, collaboration and grant revenues, interest income and
equipment financing agreements. During the year ended December 31, 2000, we sold
8,568,000 shares of common stock at $28.50 in an initial public offering and
received net proceeds of $225.8 million. As of December 31, 2002, we had $228.0
million in cash, cash equivalents and investments, of which $134.4 million were
classified as current assets. At December 31, 2002, $14.4 million of cash and
investments was pledged against the Company's outstanding borrowings under its
line of credit and its irrevocable letter of credit or was deposited with the
District Court in connection with our appeal of an unfavorable arbitration
ruling.
During the year ended December 31, 2002, we used proceeds from
investment maturities and sales, interest income, proceeds from stock option
exercises and proceeds from bank borrowings, together with cash and cash
equivalents on hand at December 31, 2001, to fund operating activities, capital
expenditures and the repurchase of 474,700 shares of our Common Stock. The
combination of the above items and the increase in short and long-term
investment securities resulted in a net decrease in cash, cash equivalents and
investments of $33.1 million (including the restricted amount of $14.4 million)
for the year ended December 31, 2002.
During 2002, we sold two corporate securities with a total book value
of $2.5 million prior to their stated maturity for a net gain of $12,000, which
is included in the interest income on the
40
consolidated income statement. The decision to sell these securities was based
upon the decline in their credit rating, which no longer conformed to our
investment policy.
In September 2002, we entered into a $16.0 million Revolving Line of
Credit Note Agreement with a bank. Under the terms of the Agreement, Tanox may
secure advances up to the aggregate principal amount of $16.0 million, the
proceeds of which can be used to finance the Company's working capital
requirements, as well as the purchase of property, plant and equipment. The
outstanding principal balance is payable in full on September 27, 2006, and
advances bear interest at the lesser of the Prime Rate or LIBOR, the London
Interbank Offered Rate, plus 1%. Accrued interest is payable on the last day of
each month. As of December 31, 2002, the Company had borrowed $5.0 million under
the Agreement.
From 1994 through 1998, Novartis advanced Tanox $10.0 million, pursuant
to a loan agreement, to finance its pilot manufacturing facility. Tanox has
pledged all of the assets of the pilot manufacturing facility as security for
the loan. The loan bears interest at the LIBOR rate plus 2%. Through December
31, 2001, Novartis has agreed to forgive interest on the loan. Subject to
modifications agreed to in principle concurrent with completion of the
tripartite collaboration among Tanox, Novartis and Genentech in July 1996, the
principal and future interest payments may be partially or totally forgiven by
Novartis based on the future use of the facility. Under the loan agreements,
upon activation of the facility for production, Tanox is required to make
principal and interest payments on the loan in amounts equal to 75% of net cash
flow, if any, from the facility. If the net cash flow payments during the ten
years following the date the facility first became operational are not
sufficient to repay the principal and accrued interest on the loan, Novartis has
agreed to forgive the remaining principal and accrued interest. The facility was
activated in 2002 and, until October 2002, produced clinical trial materials for
TNX-901. Accordingly, we have accrued interest of $373,000 on the loan for 2002.
We expect to reactivate the pilot plant to produce clinical trial materials for
our other products in 2003.
On September 16, 2002, we purchased a 68,000 square foot office and
warehouse building adjacent to our research and manufacturing facility for $2.2
million. We currently intend to renovate the building, at an estimated cost of
approximately $9.0 million, sometime in 2003 or 2004 into a research and
administrative office facility at which point we will relocate our corporate
office and members of our research staff to the facility. On September 30, 2002,
we purchased the 43,560 square foot research and pilot manufacturing facility in
Houston, Texas that we had been leasing, together with approximately 15 acres of
adjacent land, for $5.0 million. The $5.0 million purchase price was funded
under the bank line of credit described above. The draw is collateralized with
cash and investments at the bank. We intend to pursue permanent financing
options, including a possible sale and lease back for both buildings.
Additionally, during the year ended December 31, 2002, we invested approximately
$2.5 million in equipment and facility improvements, primarily to support the
expansion of our research and product development activities.
Tanox has future minimum lease obligations of $502,000 under
non-cancelable leases at December 31, 2002, of which approximately $307,000 will
be paid in 2003.
Our current and anticipated development projects will require
substantial additional capital to complete. We anticipate that the amount of
cash we need to fund operations, including research and development,
manufacturing and other costs, and for capital expenditures, will grow in the
future as our projects move from clinical development to commercialization. We
also expect that we will need to expand our clinical development, manufacturing
capacity, facilities, business development and marketing activities to support
the future development of our programs. We expect that cash on hand and revenue
from operations will be sufficient to fund our operations for the next three to
four years. However, our future capital needs will depend on many factors,
including the successful commercialization of Xolair, receiving payments from
our collaboration partners, progress in our research and development activities,
commercialization activities, the costs and magnitude of product or technology
acquisitions, the cost of preparing, filing, prosecuting, maintaining and
enforcing patent claims and other intellectual property
41
rights, competing technological and market developments, changes in or
terminations of existing collaboration and licensing arrangements, establishing
additional collaboration and licensing arrangements, and manufacturing scale-up
costs and marketing activities, if we undertake those activities. Consequently,
we may need to raise substantial additional funds. We do not have committed
external sources of funding and we cannot assure that we will be able to obtain
additional funds on acceptable terms, if at all. If adequate funds are not
available, we may be required to:
. delay, reduce the scope of or eliminate one or more of our
programs;
. obtain funds through arrangements with collaboration partners or
others that may require us to relinquish rights to technologies,
product candidates or products that we would otherwise seek to
develop or commercialize ourselves; or
. license rights to technologies, product candidates or products on
terms that are less favorable to us than might otherwise be
available.
We are currently engaged in litigation relating to a fee dispute with
the law firms that represented us in litigation with Genentech relating to,
among other things, the intellectual property rights surrounding the development
of anti-IgE technology. An arbitration panel issued an award entitling the
attorneys to receive (i) approximately $3.5 million (including interest), (ii)
payments ranging from 33-1/3% to 40% of the future milestone payments we would
receive from Genentech following product approval, and (iii) 10% of the
royalties that we would receive on all sales of anti-IgE products. Tanox sought
a court order vacating this arbitration award, but a judgment was entered
confirming the award. We appealed the District Court's decision to the Court of
Appeals, 14th District of Texas, and on August 29, 2002, the Court of Appeals
affirmed the judgment of the District Court. We intend to appeal this decision
to the Texas Supreme Court. During the appeals process, we are required to post
a bond or place amounts in escrow to secure payment of the award. We posted a
$4.1 million supersedeas bond with the Court to continue the appeals process and
to secure payment of the award.
If Tanox is ultimately required to pay all or part of the award to the
attorneys, Tanox could be required to pay up to $3.5 million, plus accrued
interest that would become due, and the award would effectively reduce future
milestone payments from Genentech by up to 40% and reduce future royalties from
the Three-Party Collaboration by 10%. Accordingly, Tanox's future revenues,
result of operations, cash flow and financial condition could be materially
adversely affected.
42
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks, including foreign currency
exchange fluctuations and changes in interest rates. In the normal course of
business, we have established policies and procedures to manage these risks.
Foreign Currency Exchange Rates. For the year ended December 31, 2002,
our balance sheet reflects a cumulative foreign currency translation adjustment
of $168,000. We are subject to foreign currency exchange risk because:
. we invest in our foreign subsidiaries;
. we incur a portion of our revenues and expenses in the local
currencies of the countries where we do business; and
. we finance part of the cost of our subsidiaries' operations through
dollar denominated inter-company loans and equity investments that
are recorded on their books in the respective local currencies.
Fluctuations in exchange rates have not had a material impact on our
revenues or costs and expenses, but have affected the value of our equity
investments and intercompany loans. As a result of our international operations
and our current financing approach, fluctuations in exchange rates of the local
currencies versus the U.S. dollar impact our operating results. We are primarily
exposed to gains and losses with respect to Euros, Dutch guilders and Taiwan
dollars because our subsidiaries conduct business or have conducted business in
these currencies. To date, we have not implemented a program to hedge our
foreign currency risk, but we may do so in the future.
Interest Rate Risk. Cash, cash equivalents and investments were
approximately $228.0 million (including the restricted cash and investments of
$14.4 million) at December 31, 2002. These assets were primarily invested in
investment grade corporate bonds and commercial paper with maturities of less
than two years, which we have the ability and intent to hold to maturity. We do
not invest in derivative securities. Although our portfolio is subject to
fluctuations in interest rates and market conditions, no gain or loss on any
security would actually be recognized in earnings unless we sell the asset. In
addition, our bank line of credit and our loan from Novartis are based on a
premium over LIBOR. As such, if general interest rates increase, our interest
costs will increase.
43
ITEM 8. Financial Statements and Supplementary Data
Tanox, Inc.
Index to Consolidated Financial Statements
PAGE
----
Report of Independent Auditors ...................................................................... 45
Report of Independent Public Accountants ............................................................ 46
Consolidated Balance Sheets as of December 31, 2002 and 2001 ........................................ 47
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2002, 2001 and 2000 .............................................................. 48
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001
and 2000. ..................................................................................... 49
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 .......... 50
Notes to Consolidated Financial Statements. ......................................................... 51
44
Report of Independent Auditors
To the Board of Directors and Stockholders
of Tanox, Inc.:
We have audited the accompanying consolidated balance sheet of Tanox,
Inc. and subsidiaries (the Company) as of December 31, 2002, and the related
consolidated statement of operations and comprehensive loss, stockholders'
equity and cash flows for the year then ended. 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 audit. The financial
statements of the Company as of December 31, 2001, and for each of the two years
in the period then ended were audited by other auditors who have ceased
operations and whose report dated March 8, 2002 expressed an unqualified opinion
on those statements before the reclassification adjustment and conforming
disclosures described in Note 2.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tanox,
Inc. as of December 31, 2002, and the consolidated results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
As discussed above, the financial statements of the Company as of
December 31, 2001, and for each of the two years in the period then ended were
audited by other auditors who have ceased operations. As described in Note 2,
these financial statements have been revised. We audited the reclassification
adjustment and conforming disclosures described in Note 2 that were applied to
revise the 2001 financial statements. In our opinion, such reclassification
adjustment and conforming disclosures are appropriate and have been properly
applied. However, we were not engaged to audit, review or apply any procedures
to the 2001 and 2000 financial statements of the Company other than with respect
to such reclassification adjustment and conforming disclosures and, accordingly,
we do not express an opinion or any other form of assurance on the 2001 and 2000
financial statements taken as a whole.
/s/ Ernst & Young LLP
Houston, Texas
February 3, 2003
45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Tanox, Inc.:
We have audited the accompanying consolidated balance sheets of Tanox,
Inc., a Delaware corporation, and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations and comprehensive loss,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tanox, Inc.,
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 8, 2002
THIS IS A COPY OF THE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ISSUED BY ARTHUR
ANDERSEN LLP IN CONNECTION WITH THE ANNUAL REPORT ON FORM 10-K OF TANOX, INC.
FOR THE YEAR ENDED DECEMBER 31, 2001. THIS REPORT HAS NOT BEEN REISSUED BY
ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS ANNUAL REPORT ON FORM 10-K. SEE
EXHIBIT 23.2 FOR FURTHER INFORMATION.
46
TANOX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
---------------------------------------------
2002 2001
-------------------- -------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 15,968 $ 142,883
Restricted cash .......................................................... 4,795 --
Short-term investments, including restricted amounts of $4,083 in 2002 ... 113,640 62,720
Interest receivable ...................................................... 3,230 2,722
Other receivables ........................................................ 322 110
Prepaid and other ........................................................ 332 750
-------------------- -------------------
Total current assets ........................................... 138,287 209,185
-------------------- -------------------
LONG-TERM INVESTMENTS, including restricted amounts of $5,563 in 2002 ......... 93,587 55,499
-------------------- -------------------
PROPERTY AND EQUIPMENT:
Land ..................................................................... 4,332 1,619
Building ................................................................. 2,556 --
Laboratory and office equipment .......................................... 13,014 12,089
Leasehold improvements ................................................... 6,797 4,135
Furniture and fixtures ................................................... 706 779
-------------------- -------------------
27,405 18,622
Less-Accumulated depreciation and amortization ........................... (8,208) (7,024)
-------------------- -------------------
Net property and equipment ..................................... 19,197 11,598
-------------------- -------------------
OTHER ASSETS .................................................................. 140 1,252
-------------------- -------------------
Total assets ................................................... $ 251,211 $ 277,534
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 1,111 $ 1,624
Accrued liabilities ...................................................... 5,510 5,566
Accrued arbitration award ................................................ 4,074 3,903
-------------------- -------------------
Total current liabilities ...................................... 10,695 11,093
-------------------- -------------------
LONG-TERM LIABILITIES:
Note payable to bank .......................................................... 5,000 --
Note payable to related party ................................................. 10,000 10,000
-------------------- -------------------
Total long-term liabilities .................................... 15,000 10,000
-------------------- -------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
none outstanding ...................................................... -- --
Common stock, $.01 par value; 120,000,000 shares authorized;
44,301,641 and 44,156,601 shares issued; 43,746,941 shares
and 44,076,601 shares outstanding in 2002 and 2001, respectively ...... 443 442
Additional paid-in capital ............................................... 310,073 309,892
Treasury stock, at cost; 554,700 and 80,000 shares in 2002 and 2001,
respectively .......................................................... (6,261) (1,009)
Deferred compensation .................................................... -- (83)
Accumulated other comprehensive loss, cumulative translation
adjustment .................................................................... 168 84
Accumulated deficit ...................................................... (78,907) (52,885)
-------------------- -------------------
Total stockholders' equity ..................................... 225,516 256,441
-------------------- -------------------
Total liabilities and stockholders' equity ..................... $ 251,211 $ 277,534
==================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
47
TANOX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
For the Year Ended December 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
REVENUES:
Development agreements and licensing fees $ 560 $ 419 $ 10,738
Development agreement with related party -- -- 2,010
------------- ------------- -------------
Total revenues 560 419 12,748
------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Research and development 22,651 21,683 18,325
General and administrative 10,677 8,349 7,683
Restructuring charge (268) 3,860 --
------------- ------------- -------------
Total operating costs and expenses 33,060 33,892 26,008
------------- ------------- -------------
LOSS FROM OPERATIONS (32,500) (33,473) (13,260)
------------- ------------- -------------
OTHER INCOME (EXPENSES):
Interest income 7,865 12,769 14,050
Interest expense (595) (714) (846)
Other, net (792) 41 (76)
------------- ------------- -------------
Total other income 6,478 12,096 13,128
------------- ------------- -------------
LOSS BEFORE INCOME TAXES (26,022) (21,377) (132)
Income tax provision -- -- 915
------------- ------------- -------------
NET LOSS $ (26,022) $ (21,377) $ (1,047)
============= ============= =============
LOSS PER SHARE - Basic and diluted $ (0.59) $ (0.49) $ (0.03)
============= ============= =============
SHARES USED IN COMPUTING LOSS PER SHARE
Basic and diluted 43,911 44,010 40,258
============= ============= =============
COMPREHENSIVE LOSS:
Net loss $ (26,022) $ (21,377) $ (1,047)
Foreign currency translation adjustment 84 (112) 25
------------- ------------- -------------
TOTAL COMPREHENSIVE LOSS $ (25,938) $ (21,489) $ (1,022)
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
48
TANOX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands, except share data)
Additional
Common Stock Paid-in Treasury Deferred
------------------------
Shares Par Value Capital Stock Compensation
---------- ---------- ---------- --------- -------------
BALANCES, December 31, 1999 ............................. 33,324,402 $ 333 $ 71,701 $ -- $ (651)
Issuance of common stock for cash, $28.50 per share,
net of issuance costs .............................. 8,568,000 86 225,752 -- --
Exercise of stock options, net ........................ 1,711,553 17 4,732 -- --
Income tax benefit from stock options exercised ....... -- -- 915 -- --
Capital contribution from forgiveness of interest by
related party ...................................... -- -- 845 -- --
Deferred compensation related to stock options ........ -- -- 702 -- (496)
Amortization of deferred compensation related to stock
options ............................................ -- -- -- -- 592
Loans receivable from employees ....................... -- -- -- -- --
Repayment of employee loans ........................... -- -- -- -- --
Foreign currency translation adjustment ............... -- -- -- -- --
Net loss .............................................. -- -- -- -- --
---------- -------- --------- -------- ----------
BALANCES, December 31, 2000 ............................. 43,603,955 $ 436 $ 304,647 $ -- $ (555)
Exercise of stock options, net ........................ 492,128 5 2,929 -- --
Issuance of common stock for acquisition .............. 60,518 1 1,817 -- --
Repurchase of 80,000 shares of common stock at cost ... -- -- -- (1,009) --
Capital contribution from forgiveness of interest by
related party ...................................... -- -- 556 -- --
Cancelled stock options ............................... -- -- (335) -- 335
Amortization of deferred compensation related to stock
options ............................................ -- -- -- -- 137
Stock option compensation to non-employees ............ -- -- 278 -- --
Repayment of employee loans ........................... -- -- -- -- --
Foreign currency translation adjustment ............... -- -- -- -- --
Net loss .............................................. -- -- -- -- --
---------- -------- --------- -------- ----------
BALANCES, December 31, 2001 ............................. 44,156,601 $ 442 $ 309,892 $ (1,009) $ (83)
Exercise of stock options, net ........................ 145,040 1 371 -- --
Repurchase of 474,700 shares of common stock at cost .. -- -- -- (5,252) --
Amortization of deferred compensation related to stock
options ............................................. -- -- -- -- 83
Stock option compensation to non-employees ............ -- -- (190) -- --
Foreign currency translation adjustment ............... -- -- -- -- --
Net loss .............................................. -- -- -- -- --
---------- -------- --------- -------- ----------
BALANCES, December 31, 2002 ............................. 44,301,641 $ 443 $ 310,073 $ (6,261) $ -
========== ======== ======== ======== ==========
Accumulated
Other
Comprehensive
Loans Loss-
Receivable Cumulative Total
From Translation Accumulated Stockholders'
Employees Adjustment Deficit Equity
---------- ------------- ------------ ------------
BALANCES, December 31, 1999 ............................. $ (1,086) $ 171 $ (30,461) $ 40,007
Issuance of common stock for cash, $28.50 per share,
net of issuance costs .............................. -- -- -- 225,838
Exercise of stock options, net ........................ -- -- -- 4,749
Income tax benefit from stock options exercised ....... -- -- -- 915
Capital contribution from forgiveness of interest
by related party ................................... -- -- -- 845
Deferred compensation related to stock options ........ -- -- -- 206
Amortization of deferred compensation related
to stock options ...................................... -- -- -- 592
Loans receivable from employees ....................... (1,188) -- -- (1,188)
Repayment of employee loans ........................... 1,832 -- -- 1,832
Foreign currency translation adjustment ............... -- 25 -- 25
Net loss .............................................. -- -- (1,047) (1,047)
--------- ------------ --------- -----------
BALANCES, December 31, 2000 ............................. $ (442) $ 196 $ (31,508) $ 272,774
Exercise of stock options, net ........................ -- -- -- 2,934
Issuance of common stock for acquisition .............. -- -- -- 1,818
Repurchase of 80,000 shares of common stock at cost ... -- -- -- (1,009)
Capital contribution from forgiveness of
interest by related party ............................. -- -- -- 556
Cancelled stock options ............................... -- -- -- --
Amortization of deferred compensation related to stock
options ............................................ -- -- -- 137
Stock option compensation to non-employees ............ -- -- -- 278
Repayment of employee loans ........................... 442 -- -- 442
Foreign currency translation adjustment ............... -- (112) -- (112)
Net loss .............................................. -- -- (21,377) (21,377)
--------- ------------ --------- -----------
BALANCES, December 31, 2001 ............................. $ -- $ 84 $ (52,885) $ 256,441
Exercise of stock options, net ........................ -- -- -- 372
Repurchase of 474,700 shares of common stock at cost .. -- -- -- (5,252)
Amortization of deferred compensation related to stock
options ............................................ -- -- -- 83
Stock option compensation to non-employees ............ -- -- -- (190)
Foreign currency translation adjustment ............... -- 84 -- 84
Net loss .............................................. -- -- (26,022) (26,022)
--------- ------------ --------- -----------
BALANCES, December 31, 2002 ............................. $ -- $ 168 $ (78,907) $ 225,516
========= ============ ========= ===========
The accompanying notes are an integral part of these consolidated financial
statements
49
TANOX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Year Ended December 31,
-----------------------------------------------------
2002 2001 2000
------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................. $ (26,022) $ (21,377) $ (1,047)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities -
Depreciation and amortization .................................... 2,057 1,585 1,173
Interest expense forgiven by related party ....................... -- 556 845
Impairment of available-for-sale investment ...................... 784 -- --
Restructuring charge ............................................. (268) 1,664 --
Compensation expense related to stock options .................... (107) 415 798
Non-cash income tax provision .................................... -- -- 915
In-process research and development .............................. -- 1,066 --
Other, net ....................................................... 68 -- --
Changes in operating assets and liabilities -
Decrease (increase) in receivables and other
operating assets ......................................... (270) 1,260 (4,444)
Increase (decrease) in current liabilities ................... (129) 2,755 2,883
------------- ------------- -------------
Net cash provided by (used in) operating activities ...... (23,887) (12,076) 1,123
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments .............................................. (161,011) (79,349) (559,645)
Maturity of investments .............................................. 72,231 207,787 316,001
Purchases of property and equipment .................................. (9,657) (4,998) (2,740)
Restricted cash ...................................................... (4,795) -- --
Decrease (increase) in other assets .................................. -- -- (973)
------------- ------------- -------------
Net cash provided by (used in) investing activities ...... (103,232) 123,440 (247,357)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................... 372 2,934 230,587
Repayments of employee loans, net .................................... -- 442 644
Proceeds from note payable ........................................... 5,000 -- --
Purchase of treasury stock ........................................... (5,252) (1,009) --
------------- ------------- -------------
Net cash provided by financing activities ................ 120 2,367 231,231
------------- ------------- -------------
IMPACT OF EXCHANGE RATES ON CASH ......................................... 84 (112) 25
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... (126,915) 113,619 (14,978)
CASH AND CASH EQUIVALENTS, beginning of year ............................. 142,883 29,264 44,242
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year ................................... $ 15,968 $ 142,883 $ 29,264
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash investing and financing activities -
Capital contribution from forgiveness of interest by a
related party ............................................ -- 556 845
Common stock issued for acquisition .............................. -- 1,818 --
Retirement of property and equipment ............................. 874 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
50
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements
1. ORGANIZATION, BUSINESS AND RISK FACTORS:
Tanox, Inc. (Tanox) is a biotechnology company that discovers and
develops therapeutic monoclonal antibodies to address significant unmet medical
needs in the areas of asthma, allergy, inflammation and other diseases affecting
the human immune system. Tanox was formerly known as Tanox Biosystems, Inc. and
was incorporated as a Texas corporation on March 19, 1986. Tanox was
reincorporated in January 2000 as a Delaware corporation.
Tanox engages in research and development activities which involve a
high degree of risk and uncertainty. Tanox has not yet generated any revenues
from product sales, nor is there any assurance of future revenues from product
sales. The ability of Tanox to successfully develop, manufacture and market its
products is dependent upon many factors. These factors could include, but are
not limited to, the need for additional financing, the resolution of ongoing
legal proceedings and the ability to develop or obtain manufacturing, sales and
marketing capabilities or collaborative arrangements. Additional factors could
include uncertainties as to patents and proprietary technologies, efficacy and
safety of its products, competition, governmental regulations and regulatory
approval.
Tanox entered into a development and licensing agreement with the
predecessor to Novartis Pharma AG (Novartis) in May 1990, in which Tanox and
Novartis agreed to jointly develop, produce and market certain products for
IgE-mediated diseases, including asthma and allergy. Tanox received an initial
payment upon signing the agreement and has received additional milestone
payments and reimbursement of designated expenses. Under separate agreements,
Novartis purchased 6,373,732 shares of Tanox common stock and loaned Tanox $10
million for the construction of a pilot manufacturing facility. Because the $10
million loan is still outstanding and the shares owned by Novartis represent
approximately 14.4% of Tanox's outstanding common stock at December 31, 2002,
Novartis is considered a related party in Tanox's financial statements.
Tanox, Novartis and Genentech entered into a binding
agreement-in-principle (Three-Party Collaboration) in July 1996 to combine their
existing anti-IgE antibody programs into a cooperative effort to develop and
commercialize selected anti-IgE antibodies. Xolair, whose therapeutic effects
have been validated in clinical trials in patients suffering from allergic
asthma, hay fever and perennial allergic rhinitis, is Tanox's most advanced
product in development and is being developed under the Three-Party
Collaboration agreement. In June 2002, Xolair was approved for treating adults
and adolescents with moderate allergic asthma in Australia. Genentech submitted
an amendment to the BLA for Xolair to the U.S. FDA in December 2002. Tanox has
received and will receive additional milestone payments upon the occurrence of
specified subsequent events, and royalty payments on net sales of Xolair
pursuant to the Three-Party Collaboration.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Tanox and its wholly owned subsidiaries, Tanox Pharma International, Inc.,
Tanox Pharma B.V. and TanAsia Pharma, Ltd. Intercompany transactions and
balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally
51
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results may differ from those estimates.
Revenue Recognition
Revenues from development agreements which include rights to license
and sublicense Tanox's technology or product rights are recognized when contract
terms are completed. Revenues from development agreements also include payments
for milestone achievements and sponsored research. Milestone payments are
received under best efforts contracts, are not refundable and are recognized
when the milestones are achieved and there are no remaining performance
obligations. Revenues for sponsored research are recognized as Tanox completes
its obligations related to such research. Any revenue contingent upon future
performance is deferred and recognized as the performance is completed.
Under the Three-Party Collaboration agreements described in Note 1,
Tanox recognized revenues of $12.0 million during 2000 for milestone payments.
No revenues were recognized in 2002 or 2001 under the Three-Party Collaboration.
Cash, Cash Equivalents, Short-term and Long-term Investments
Cash and cash equivalents consist of all highly-liquid investments with
original maturities of three months or less. Management determines the
appropriate classification of its cash equivalents, short-term investments and
long-term investments at the time of purchase. Investments consist of investment
grade corporate bonds, commercial paper, assets-backed securities, and
government agency securities with maturities of less than two years from the
balance sheet date. All investments are classified as held-to-maturity and
carried at amortized cost in the accompanying financial statements with the
exception of one available-for-sale investment, which is stated at fair value
based on the quoted market price of the security. Unrealized gains and losses on
available-for-sale securities are reported as other comprehensive income (loss),
which is a separate component of stockholders' equity. At December 31, 2002, the
carrying value of the Company's available-for-sale security approximated fair
value, and accordingly there was no unrealized gain or loss.
Restricted Cash and Investments
Tanox is required to maintain restricted cash or investments to
collateralize borrowings under Tanox's line of credit and its irrevocable letter
of credit. Additionally, Tanox has cash deposited with the District Court in
connection with the pending appeal of an unfavorable arbitration award (see Note
12). As of December 31, 2002, Tanox had restricted cash and
investments of $14.4 million.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents and short-term investments approximate fair
value due to their short maturities. Based on borrowing rates currently
available to the Company for loans with similar terms, the carrying value of the
Company's debt obligations approximates fair value.
52
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash, cash equivalents and
investments in marketable securities. Cash equivalents and marketable securities
consist of money market funds, taxable commercial paper, corporate bonds with
high credit quality and U.S. government agency obligations. All cash, cash
equivalents and marketable securities are maintained with financial institutions
that management believes are creditworthy. The Company's investment policy,
approved by the Board of Directors, limits the amount the Company may invest in
any one type of investment, thereby reducing credit risk concentrations.
Property and Equipment
Property and equipment is carried at cost and depreciated on a
straight-line basis over the estimated useful economic lives of the assets or,
in the case of leasehold improvements, over the remaining term of the lease. The
estimated useful lives used in computing depreciation are 3 to 7 years for
laboratory and office equipment, 5 to 7 years for furniture and fixtures, the
lesser of 9 years or the remaining lease term for leasehold improvements and 20
years for building and improvements. When property is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is included in other income/expenses. Maintenance
and repairs are charged to expense when incurred.
Impairment of Long-Lived Assets
Management periodically reviews long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the carrying amount of the asset is greater than its
undiscounted future operating cash flow, an impairment loss would be recognized.
Other Assets
At December 31, 2001, other assets included a $1.0 million investment
in a privately held biotechnology company, which management believed
approximated the fair market value at that time. In March 2002, the privately
held company merged with a public company, and the equity investment was
reclassified to an available-for-sale investment and carried at fair market
value. At December 31, 2002, the fair market value of this investment was
$216,000 and was included in short-term investments.
Research and Development
Research and development costs, including incidental patent costs, are
expensed as incurred. Research and development costs include estimates for
clinical trial costs, which are based on patient enrollment and clinical trial
progress. Actual costs may differ from estimates.
Income Taxes
Tanox accounts for income taxes using the liability method prescribed
by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under this method, deferred income tax assets and liabilities
reflect the impact of temporary differences between the financial accounting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
53
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
Foreign Currency Transactions and Translations
The balance sheet accounts of Tanox's foreign subsidiaries are
translated into U.S. dollars at exchange rates in effect on reporting dates.
Foreign currency translation adjustments are reflected in other comprehensive
loss. Income statement items are translated at average exchange rates in effect
during the financial statement period. Gains and losses resulting from foreign
currency transactions denominated in currency other than the functional currency
are classified as other income /expenses.
Loss Per Share
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic
and diluted earnings per share (EPS). Basic EPS is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year. Diluted EPS is computed in the same manner as basic
EPS, except that diluted EPS reflects the potential dilution that would occur if
outstanding options and warrants were exercised. Tanox incurred net losses for
the years ended December 31, 2002, 2001 and 2000; therefore, all options
outstanding for each of the years were excluded from the computation of diluted
EPS because they would have been antidilutive (see Note 11).
Segment Information
The Company currently operates in one business segment, that being the
development and commercialization of novel antibody drugs. The Company is
managed and operated as one business. The entire business is comprehensively
managed by a single management team that reports to the Chief Executive Officer.
The Company does not operate separate lines of business or separate business
entities with respect to its products or product candidates. Accordingly, the
Company does not accumulate discrete financial information with respect to
separate product areas and does not have separately reportable segments as
defined by SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information."
Stock-Based Compensation
As further discussed in Note 11, Tanox has four stock-based
compensation plans, which are accounted for under the recognition and
measurement provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees, and Related Interpretations." Under
the intrinsic value method described in APB Opinion No. 25, no compensation
expense is recognized if the exercise price of the employee stock option equals
the market price of the underlying stock on the date of grant. Tanox recognized
$83,000, $137,000 and $592,000 of stock-based compensation during the years
ended December 31, 2002, 2001 and 2000, respectively, which was primarily
related to the grant of options to its Scientific Advisory Board members.
54
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
Assuming the compensation cost for the stock option plans had been
determined pursuant to the fair value method under SFAS No. 123 "Accounting for
Stock Based Compensation," Tanox's pro forma net loss would have been as follows
(in thousands, except per share data):
Year ended December 31,
--------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Net loss -
As reported .................... $ (26,022) $ (21,377) $ (1,047)
Stock option compensation
expense .................... (4,745) (4,709) (1,275)
------------- ------------- -------------
Pro forma net loss ............. $ (30,767) $ (26,086) $ (2,322)
============= ============= =============
Loss per share - Basic and diluted
As reported .................... $ (0.59) $ (0.49) $ (0.03)
Pro forma ...................... $ (0.70) $ (0.59) $ (0.06)
Recent Accounting Pronouncements
In December 2002, the FASB issued Statement of Financial Accounting
Standards, or SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized in the period in which the liability is incurred. The provisions of
this statement are effective for exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS No. 146 will not have a material impact
on Tanox's result of operations and financial position.
In December 2002, the FASB issued Statement of Financial Accounting
Standards, or SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." This statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
accounting for employee compensation and the effect of the method used on
reported results. Tanox is currently evaluating whether to adopt the fair value
based method. The additional disclosures required under SFAS No. 148 are
effective for the fiscal year ending after December 15, 2002, and have been
provided in Note 2.
Reclassification and Conforming Disclosures
In the accompanying balance sheet as of December 31, 2001, Tanox has
reclassified the amount of accounts payable into a separate line item to conform
with the current year presentation. Further, Tanox included disclosures at
December 31, 2001 in a table in Note 3 to conform the prior year information to
the current year presentation.
55
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
3. INVESTMENTS:
Short-term and long-term investments at December 31, 2002 consist of the
following (in thousands):
Gross Gross
Book Unrealized Unrealized Estimated Fair
Value Gain Loss Value
------------ ----------- ------------- ---------------
Negotiable CD's:
Greater than 1 Year and less than 2 Years $ 3,130 $ 20 $ -- $ 3,150
Commercial Paper:
One Year or less 7,882 3 -- 7,885
Asset-Backed Securities:
One Year or less 4,171 51 -- 4,222
Greater than 1 Year and less than 2 Years 2,454 50 -- 2,504
Government/Agency Securities:
One Year or less 16,855 52 -- 16,907
Greater than 1 Year and less than 2 Years 51,100 927 -- 52,027
Corporate Securities:
One Year or less 84,516 581 (5) 85,092
Greater than 1 Year and less than 2 Years 36,903 568 (2) 37,469
------------ ----------- ------------ -----------
Total Securities held to maturity 207,011 2,252 (7) 209,256
Available-for-sale security 216 -- -- 216
------------ ----------- ------------ -----------
Total short- and long-term investments at
December 31, 2002 $ 207,227 $ 2,252 $ (7) $ 209,472
============ =========== ============= ===========
During 2002, we sold two corporate securities with a total book value
of $2.5 million prior to their stated maturity for a net gain of $12,000, which
is included in interest income on the consolidated statement of operations. The
decision to sell these securities was based upon the decline in the credit
rating of such securities, which no longer conformed to our investment policy.
Short-term and long-term investments at December 31, 2001 consist of the
following (in thousands):
Gross Gross Estimated
Book Unrealized Unrealized Fair
Value Gain Loss Value
------------ ----------- ------------ -----------
Asset-Backed Securities:
One Year or less $ 15,156 $ 144 $ -- $ 15,300
Greater than 1 Year and less than 3 Years 3,226 1 (3) 3,224
Corporate Securities:
One Year or less 47,564 570 -- 48,134
Greater than 1 Year and less than 3 Years 52,273 209 (284) 52,198
------------ ----------- ------------ -----------
Total securities held to maturity at
December 31, 2001 $ 118,219 $ 924 $ (287) $ 118,856
============ ============== ============== ===========
4. ACQUISITION OF TANOX PHARMA B.V.:
In March 1998, Tanox acquired the common stock of Tanox Pharma B.V.
(formerly PanGenetics B.V.), a biotechnology company located in Amsterdam, The
Netherlands. Tanox recorded the transaction for accounting purposes as a
purchase, and the consolidated financial statements include the operations of
56
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
Tanox Pharma B.V. subsequent to the acquisition date through June 30, 2001, when
the Amsterdam facility was closed (see Note 5 below.) Under the terms of the
agreement, Tanox purchased Tanox Pharma B.V. for an initial cash payment of
$508,000 and 226,409 shares of common stock, valued at $11.25 per share, for a
total initial consideration of $3.1 million. In addition, Tanox agreed to pay
future consideration, in two installments, upon occurrence of specified future
events. These events include originating at least three additional research
projects within a three-year period, retaining the services of two individuals
for 36 months and maintaining a certain level of government grants and
subsidies. Any additional consideration would be paid to all former shareholders
in proportion to their ownership at the acquisition date. In September 1999,
Tanox made the second installment payment of $333,000 in cash and 242,075 shares
of common stock valued at $12.50 per share, for a total additional consideration
of $3.4 million.
Tanox management believes that certain events upon which full payment
of the third installment was dependent did not occur and, in accordance with the
stock purchase agreement, the total consideration should be reduced by 20%. The
third installment payment was recorded in the second quarter of 2001 and
consisted of $133,000 in cash and 60,518 shares of common stock, totaling $2.0
million, which reflects a 20% reduction in total consideration.
5. RESTRUCTURING CHARGE:
In connection with a periodic review and assessment of its research
programs, Tanox made the decision to streamline its research activities and to
consolidate the Dutch and U.S. research operations into a single site at the
Company's headquarters in Houston. In June 2001, management approved a formal
restructuring plan (the Plan) to close Tanox's research facility in Amsterdam.
Tanox recorded a restructuring charge for the Plan of $3.9 million or $0.09 per
share in June 2001, which includes a restructuring accrual for cash expenses of
$2.2 million and non-cash charges of $1.7 million for impairment of goodwill and
write-down of assets.
The Plan's activity, as it relates to cash expenses for the year ended
December 31, 2002, was as follows (in thousands):
Balance at Estimate Balance at
December 31, 2001 Revision Amount Paid December 31, 2002
----------------- ------------- -------------- -----------------
Severance and related costs ..... $ 300 $ 51 $ (159) $ 192
Termination of government
grants and subsidies ........ 646 (246) (400) -
Termination of leases and
research agreements ......... 444 (22) (422) -
Other exit costs ................ 294 (51) (142) 101
----------------- ------------- ------------- -----------------
Total ................... $ 1,684 $ (268) $ (1,123) $ 293
================= ============= ============= =================
Included in the restructuring charge were incremental costs to
terminate 17 employees and exit licensing, research and office lease
arrangements. As of December 31, 2001, all employees had been terminated.
The Company expects to substantially complete the Plan by April 30,
2003. The remainder of the accrual represents management's best estimate of
identifiable and quantifiable costs that the Company will incur as a result of
the Plan. The actual expenses may differ from the estimates, and any adjustments
57
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
will be reflected in future results.
6. ACCRUED LIABILITIES:
Accrued liabilities at December 31, 2002 and 2001, consist of the
following (in thousands):
2002 2001
----------- -----------
Accrued payroll ................................... $ 743 $ 547
Accrued vacation .................................. 309 370
Accrued taxes ..................................... 785 400
Accrued restructuring ............................. 293 1,684
Accrued legal and professional fees ............... 1,582 590
Accrued clinical trial costs ...................... 339 1,463
Accrued litigation related liabilities ............ 653 --
Other ............................................. 806 512
----------- -----------
$ 5,510 $ 5,566
=========== ===========
See Notes 12 and 5, respectively, for a discussion of the accrued
arbitration award and the accrued restructuring as of December 31, 2002.
7. NOTES PAYABLE:
Note Payable to Bank. Tanox borrowed $5.0 million in September 2002
from a bank under a $16.0 million Revolving Line of Credit Note Agreement. Under
the term of the Agreement, Tanox may secure advances up to the aggregate
principal amount of $16.0 million, the proceeds of which can be used to finance
the purchase of property, plant and equipment, as well as working capital
requirements. The outstanding balance is payable in full on September 27, 2006,
and advances bear interest at the lesser of the Prime Rate or LIBOR plus 1%,
which at December 31, 2002 was 2.5%. The Note is collateralized with cash and
investments equal to or greater than 100% of the outstanding principal balance
of the Note.
Note Payable to Related Party. Novartis loaned Tanox $10.0 million
pursuant to the agreement discussed in Note 1 to finance a pilot manufacturing
facility. The loan bears interest at LIBOR plus 2%, which at December 31, 2002
and 2001 was 3.5% and 5.6%, respectively. Tanox has pledged all of the assets of
the pilot manufacturing facility as security for the loan. Subject to
modifications agreed to in principle concurrent with formation of the
Three-Party Collaboration, the principal and future interest payments may be
partially or totally forgiven by Novartis based on the future use of the
facility. Through December 31, 2001, Novartis has agreed to forgive interest on
the loan. For the years ended December 31, 2001 and 2000, the interest forgiven
by Novartis of $556,000 and $845,000, respectively, has been recorded as
interest expense and a capital contribution. For the year ended December 31,
2002, Tanox has a liability of $373,000 for accrued interest expense. Tanox will
be obligated to make interest and principal payments on the loan in amounts
equal to 75% of net cash flow from the facility. If the net cash flow payments
during the ten years following the date the facility first becomes operational
are not sufficient to repay the principal and accrued interest on the loan,
Novartis has agreed to forgive the remaining principal and accrued interest.
58
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
8. LICENSE AGREEMENT WITH PROTEIN DESIGN LABS, INC.:
During March 2000, Tanox entered into an agreement with Protein Design
Labs, Inc. (PDL) to acquire the right to secure non-exclusive licenses to
patents and patent applications owned by PDL for up to four of the Company's
antibodies. Under the agreement, Tanox paid an initial fee to PDL of $2.5
million. Tanox also agreed to pay $1.0 million per antibody, plus maintenance
fees, to PDL if Tanox exercises its option to acquire the license. In addition,
Tanox agreed to pay royalties on future sales if a product using the PDL
technology is successfully commercialized. During the first quarter of 2000,
Tanox recorded a research and development expense of $2.5 million, representing
the cost of the initial option payment. Tanox has not exercised its option
related to this agreement.
9. INCOME TAXES:
Tanox's pretax income (loss) consists of the following (in thousands):
2002 2001 2000
------------- ------------- ------------
U.S. ................. $ (20,084) $ (24,451) $ 5,742
Foreign .............. (5,938) 3,074 (5,874)
------------ ------------ -----------
$ (26,022) $ (21,377) $ (132)
============ ============ ===========
The components of the provision for income taxes are as follows (in
thousands):
2002 2001 2000
------------- ------------- ------------
Current .............. $ -- $ -- $ 915
Deferred ............. -- -- --
------------- ------------- -----------
$ -- $ -- $ 915
============= ============= ============
For 2002, 2001 and 2000 the effective income tax provision varied from
that computed at the statutory federal income tax rate of 35% primarily due to
an increase in the valuation allowance and nondeductible foreign losses.
59
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
Significant components of Tanox's deferred tax assets at December 31
are as follows (in thousands):
2002 2001
----------- -----------
Federal NOL carryforwards ................................ $ 26,085 $ 19,482
In-process research and development ...................... 1,335 1,335
Foreign NOL carryforwards ................................ 4,490 2,412
Deferred compensation related to stock options ........... 2,268 2,268
Research and development tax credit ...................... 2,824 1,713
Alternative minimum tax credit ........................... 20 248
Accruals not currently deductible ........................ 2,254 1,550
Capitalized research ..................................... 875 875
Other, net ............................................... 213 223
---------- ----------
Total deferred tax assets ........................... 40,364 30,106
Differences in book and tax depreciation ................. (587) (474)
Deferred tax valuation allowance ......................... (39,777) (29,632)
---------- ----------
Net deferred taxes .................................. $ -- $ --
========== ==========
At December 31, 2002, Tanox had federal regular tax NOL carryforwards
and alternative minimum tax NOL carryforwards of approximately $74.5 million and
$82.2 million, respectively, which will begin to expire in 2019. Tanox also had
a foreign NOL carryforward of approximately $12.8 million which will be
available to offset the separate company taxable income of certain foreign
subsidiaries. Additionally, Tanox has an unused U.S. research and development
tax credit carryforward at December 31, 2002, of approximately $2.8 million,
which began to expire in 2002. Tanox also has alternative minimum tax credit
carryforwards of approximately $20,000 as of December 31, 2002. As Tanox has
incurred cumulative losses to date and there is no assurance of future taxable
income, a valuation allowance has been established to fully offset the net
deferred tax asset at December 31, 2002 and 2001. Tanox's valuation allowance
increased to $39.7 million at December 31, 2002, from $29.6 million at December
31, 2001, primarily due to Tanox's increase in NOL carryforwards. Approximately
$13.1 million of the valuation allowance relates to tax benefits for stock
option deductions included in the net operating loss carryforward, which when
realized will be allocated directly to contributed capital to the extent the
benefits exceed amounts attributable to deferred compensation expense.
10. LEASE OBLIGATIONS:
Tanox leases office equipment and office space (for its corporate
headquarters) under non-cancelable operating leases. These leases expire at
various dates through March 2004. Future minimum lease obligations under
non-cancelable leases at December 31, 2002, are as follows (in thousands):
Year ending December 31-
2003 ....................................... $ 307
2004 ....................................... 195
-----------
Total ................................ $ 502
===========
60
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
Tanox incurred rent expense of $598,000, $572,000 and $425,000 in 2002,
2001 and 2000, respectively. In September 2002, Tanox purchased the 43,560
square feet research and pilot manufacturing facility it had previously leased.
11. CAPITAL STOCK:
Preferred Stock
Tanox is authorized to issue up to 10,000,000 shares of $.01 par value
preferred stock. The board of directors has the authority to issue these shares
in one or more series and to establish the rights, preferences and dividends for
the shares. No shares of preferred stock have been issued.
Stock Split
On February 1, 2000, Tanox declared a stock dividend to effect a stock
split that provided 0.6 of a share of Tanox common stock for every one share of
Tanox common stock held by stockholders of record as of January 31, 2000. The
aggregate par value of the dividend was transferred from additional paid-in
capital to common stock. The stock split has been retroactively reflected in the
accompanying consolidated financial statements.
Stockholder Rights Agreement
On July 27, 2001, the board of directors of Tanox declared a dividend
of one right for each outstanding share of the common stock of record at the
close of business on August 10, 2001. Each right entitles the registered holder
to purchase a unit consisting of one one-hundredth of a share (a Fractional
Share) of Series A Junior Participating Preferred Stock, par value $0.01 per
share, at a purchase price of $140 per Fractional Share, subject to adjustment.
The rights generally become exercisable if an acquiring party accumulates 20% or
more of the common stock and, in such event, the holders of the rights (other
than the acquiring person) would be entitled to purchase either Tanox's stock or
shares in an acquiring entity at half of market value. Tanox is generally
entitled to redeem the rights at $0.01 per right at any time until the tenth day
following the time the rights become exercisable. The rights will expire on
August 10, 2011.
Treasury Stock
In September 2001, the board of directors of Tanox authorized the
repurchase, at management's discretion, of up to $4.0 million of Tanox common
stock. In June 2002, the board authorized the purchase of an additional $3.0
million pursuant to the stock repurchase program. As of December 31, 2002, the
Company has purchased a total of 554,700 shares at an aggregate cost of $6.3
million. The average repurchased share price was $11.29.
Stock Options
In 1987, Tanox established the 1987 Stock Option Plan (the 1987 Plan)
covering key employees, officers and directors of Tanox. Under the terms of the
1987 Plan, as amended, the number of shares of common stock eligible for
issuance was 4,320,000. Options issued under the 1987 Plan were generally
granted at a purchase price equal to the fair market value at the date of grant
and are generally exercisable beginning two years after the date of grant for
40% of the shares, with the balance to become exercisable cumulatively in three
installments of 20% each year thereafter. Options expire ten years after the
date of
61
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
grant. At December 31, 2002, options to purchase 341,760 shares of common stock
were outstanding under the 1987 Plan. The 1987 Plan expired June 24, 1997, and
no more shares may be granted under this plan.
Tanox established the 1997 Stock Plan (the 1997 Plan) in November 1997.
Under the terms of the 1997 Plan, Tanox may grant options to purchase up to
8,000,000 shares of common stock to employees, directors, advisors and
consultants. The 1997 Plan also provides for several types of grants including
incentive stock options, non-qualified stock options, stock appreciation rights,
stock awards, stock purchases and performance units. Incentive stock options
provide the right to purchase common stock at a price not less than 100% of the
fair value of common stock on the date of the grant. Non-qualified stock options
provide the right to purchase common stock at a price not less than 50% of the
fair value of the common stock on the date of the grant. The options granted
under the 1997 Plan generally expire ten years after date of grant and are
generally completely exercisable five years after the grant date. At December
31, 2002, options to purchase 1,563,999 shares of common stock were outstanding
under the 1997 Plan, and 6,108,530 shares were available for future grants. The
1997 Plan will expire on October 31, 2007.
In January 1992, Tanox established the 1992 Non-Employee Directors
Stock Options Plan (the 1992 Directors Plan) and reserved 480,000 shares of
common stock for issuance upon the exercise of options granted pursuant to the
1992 Directors Plan. Unless otherwise provided, options granted under the 1992
Directors Plan will vest one-third annually from the date of grant. The exercise
price of the options granted will be determined by a committee appointed by
Tanox's board of directors. At December 31, 2002, options to purchase 127,800
shares of common stock were outstanding under the 1992 Directors Plan. The 1992
Directors Plan expired on January 10, 2002, and no more shares may be granted
under this plan.
In February 2000, Tanox established the 2000 Non-Employee Directors'
Stock Option Plan (the 2000 Directors Plan) and reserved 500,000 shares of
common stock for issuance under the plan. Under the original Plan, non-employee
directors joining the board after April 6, 2000, automatically received a stock
option to purchase 15,000 shares upon initial election or appointment. Each such
director also received a stock option to purchase an additional 5,000 shares
upon their re-election to the board. The 2000 Directors Plan was amended in May
2001. As amended, the plan provides that non-employee directors joining the
board after May 31, 2001, automatically receive an option to purchase an
equivalent number of shares of common stock having a Black-Scholes model value
of $200,000. Non-employee directors also receive, immediately following any
annual meeting of stockholders at which directors are elected (beginning with
the 2002 annual meeting), an option to purchase an equivalent number of shares
of common stock having a Black-Scholes model value of $80,000, provided that the
director did not receive an initial grant under the plan within the prior six
months. All grants under the 2000 Directors Plan have a term of ten years, are
issued at fair market value and vest 1/36 per month from the date of grant over
three years. At December 31, 2002, options to purchase 44,200 shares of common
stock were outstanding under the 2000 Directors Plan, and 455,800 shares were
available for future grants.
In addition to the plans discussed above, Tanox had entered into
various stock option agreements with certain outside consultants and advisors.
At December 31, 2002, no options were outstanding under such agreements.
62
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
Reserved Shares
The Company has reserved shares of common stock for future issuance of
stock options under plans, all of which have been approved by stockholders, as
follows at December 31, 2002:
Outstanding options 2,077,759
Reserved for future grants 6,591,330
-----------
8,669,089
===========
The following table summarizes stock option transactions since December
31, 1999:
Number of Weighted Average
Shares Exercise Price Exercise Price
-------------- ----------------- ----------------
Outstanding, December 31, 1999 ........... 3,183,920 $ 0.21 - 12.50 $ 4.39
Granted ............................. 686,500 12.50 - 48.00 36.14
Exercised ........................... (1,720,742) 0.21 - 12.50 2.86
Canceled ............................ (169,041) 7.50 - 12.50 8.52
------------- ---------------- -------------
Outstanding, December 31, 2000 ........... 1,980,637 0.63 - 48.00 16.38
Granted ............................. 750,800 12.74 - 36.31 22.25
Exercised ........................... (492,128) 0.63 - 12.50 5.96
Canceled ............................ (226,713) 3.75 - 38.50 9.59
------------- ---------------- -------------
Outstanding, December 31, 2001 ........... 2,012,596 0.83 - 48.00 21.88
Granted ............................. 751,675 9.54 - 18.50 13.34
Exercised ........................... (145,040) 0.83 - 12.50 2.38
Canceled ............................ (541,472) 11.53 - 31.55 28.52
------------- ---------------- -------------
Outstanding, December 31, 2002 ........... 2,077,759 1.04 - 48.00 18.42
============= ================= =============
Exercisable, December 31, 2002 ........... 757,981 $ 1.04 - 48.00 $ 15.78
============= ================= =============
The following table summarizes information about fixed-price stock
options outstanding at December 31, 2002:
Options Outstanding at Options Exercisable at
December 31, 2002 December 31, 2002
-------------------------------------------------- ------------------------------
Weighted No. of
No. of Average Weighted Shares Weighted
Shares Remaining Average Subject to Average
Subject to Contractual Exercise Exercisable Exercise
Range of Exercise Prices Options Life(in Yrs) Price Options Price
- ------------------------ ------------- ---------------- -------------- -------------- -------------
$ 0.83 - 9.60 ......... 450,320 4.0 $ 6.28 439,240 $ 6.23
$ 9.60 - 19.20 ......... 1,112,091 8.1 13.98 129,239 14.50
$19.20 - 28.80 ......... 60,348 4.7 24.18 27,183 25.48
$28.80 - 38.40 ......... 258,000 7.6 35.93 79,520 35.69
$38.40 - 48.00 ......... 197,000 6.9 46.47 82,799 46.09
------------- --------------
2,077,759 7.0 18.42 757,981 15.78
============= ==============
Tanox follows SFAS No. 123, which requires a fair value based method of
accounting for employee stock options or allows an entity to continue to account
for its employee stock options using the intrinsic value based method of
accounting prescribed by APB No. 25. SFAS No. 123 requires Tanox to disclose the
income statement effect of the alternative fair value method assuming Tanox was
required to record compensation expense for stock options equal to the assumed
fair value on the grant date.
63
Tanox, Inc. and Subsidiaries
Notes to consolidated Financial Statements - (Continued)
Tanox uses APB No. 25, and recognizes as compensation expense the
excess of the estimated fair value of the common stock issuable upon exercise of
such options over the aggregate exercise price of such options on the
measurement date. This compensation expense is amortized over the vesting period
of each option. Amortization expense for such options, net of reversals for
terminations, was $83,000, $137,000 and $592,000 during the years ended December
31, 2002, 2001 and 2000, respectively.
The proforma information regarding net loss required by SFAS No. 123
has been included in Note 2. The fair value of each option grant is estimated
using the Black-Scholes option-pricing model. The Black-Scholes model uses grant
prices, as stated in the option agreements, market price as established by stock
sales and deemed market prices established by the Compensation Committee of
Tanox's board of directors prior to Tanox's initial public offering (IPO) and
fair market value established by closing prices on the Nasdaq Stock Market
following the IPO. The following assumptions were used in the Black-Scholes
option-pricing model:
2002 2001 2000
--------- --------- ----------
Expected dividend yield ............. -- -- --
Expected price volatility ........... 80.0% 51.0% 46.0%
Risk-free interest rate ............. 2.21% 3.00% 4.25%
Expected life of option ............. 4 years 5 years 5 years
Expected turnover ................... 7.0% 5.0% 2.0%
The number and weighted average fair value of options granted in 2002,
2001 and 2000 is as follows:
2002 2001 2000
----------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Fair Value Shares Fair Value Shares Fair Value
--------- ----------- -------- ----------- -------- -----------
Option exercise price equals
fair market value .................. 727,025 $ 13.26 727,972 $ 10.59 627,000 $ 17.43
Option exercise price greater
than fair market value ............. 7,500 11.05 22,828 7.83 -- --
Option exercise price less than
fair market value .................. 17,150 $ 17.41 -- -- 59,500 17.65
In April 1999, Tanox loaned 12 employees approximately $1,086,000,
payable in full by September 2001, to enable the employees to exercise options
to purchase 1,738,320 shares of Tanox common stock. In March 2000, Tanox loaned
an additional $1,188,000, payable in full by September 2001, to eight of the
employees to enable them to pay federal income tax associated with the 1999
exercise of stock options. At December 31, 2001, the loans were paid in full.
64
Tanox, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
12. COMMITMENTS AND CONTINGENCIES
Arbitrations and Litigation
Tanox is currently engaged in litigation and arbitration relating to a fee
dispute with the law firms that represented Tanox in a lawsuit with Genentech
relating to, among other things, the intellectual property rights surrounding
the development of anti-IgE technology. An arbitration panel issued an award in
1999 entitling the attorneys to receive (i) approximately $3.5 million,
including interest, (ii) payments ranging from 33-1/3% to 40% of the future
payments that Tanox may receive from Genentech following product approval and
(iii) 10% of the royalties that Tanox may receive on sales of anti-IgE products.
Tanox sought a court order vacating this arbitration award. However, a judgment
was entered confirming the award, and, in August 2002, the Texas Court of
Appeals for the 14th District in Houston affirmed the District Court's order.
Tanox intends to pursue all available remedies, including appealing the decision
to the Texas Supreme Court. If Tanox is ultimately required to pay all or part
of the award to the attorneys, Tanox's future revenues, results of operations,
cash flow and financial condition could be materially adversely affected. During
the appeals process, Tanox is required to post a bond or place amounts in escrow
to secure payment of the award. Tanox posted a $4.1 million supersedeas bond
with the court to continue the appeals process and to secure payment of the
award. In July 2002, the Company executed an irrevocable letter of credit (LOC)
with a bank for the posted bond, which is collateralized with long term
investments held at the bank. On September 27, 2002, the Company requested that
the Court accept a cash deposit in lieu of the supersedeas bond and deposited
$4.1 million with the District Court to be maintained in an interest-bearing
custodial account pending the final outcome of the litigation. Once the bond is
released by the Court, it and the related LOC will be cancelled and any unearned
fees will be returned to the Company.
Tanox is also engaged in a dispute with Novartis and Genentech over matters
relating to the collaborative agreements, including Tanox's right to
independently develop TNX-901. Following a favorable summary judgment from a
Federal district court regarding certain key issues in the dispute, Tanox and
Novartis returned to arbitration as instructed by the district court. In October
2002, the arbitration panel ruled that Tanox does not have the right to
independently develop TNX-901 under the terms of the Development and Licensing
Agreement between the two parties. In light of that determination, Tanox has
halted its plans to further develop the drug independently. Remaining issues are
yet to be heard in the Novartis-Tanox arbitration, and Tanox and Genentech are
also seeking resolution of remaining issues in a separate arbitration.
In connection with Tanox's acquisition of Tanox Pharma B.V. in March 1998,
Tanox paid initial consideration of $508,000 and 226,409 shares of its common
stock, and agreed to pay future consideration, in two installments, subject to
the occurrence of specified events. Tanox believes that certain events did not
occur, and, in accordance with the terms of the stock purchase agreement, the
total consideration payable was reduced by 20%. The former stockholders of Tanox
Pharma B.V. have disputed this position, and Tanox sought a declaratory judgment
in state court in Harris County, Texas to resolve the dispute. The former
stockholders have brought counterclaims in the Texas lawsuit sounding in breach
of contract, common law and statutory fraud, and conversion, as well as claims
in a parallel litigation in the Netherlands. They assert that the total
consideration should not have been reduced and demand payment of the full amount
of the third installment, as well as the value of 51% of the stock of Tanox
Pharma, B.V. The full amount of the third installment under the stock purchase
agreement is $333,336 in cash and 151,294 shares of common stock. In addition,
the former stockholders have asserted that they are entitled to additional
shares because Tanox declared a stock dividend in February 2000. Tanox also
disagrees with this assertion. The former shareholders allege breach of
contract, fraud and conversion. Tanox does not believe that the outcome of this
litigation will have a material adverse
65
Tanox, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
effect on its financial position or liquidity.
From time to time Tanox is a defendant in other lawsuits incidental to its
business. Management believes that the outcome of these lawsuits will not be
material to Tanox's financial statements.
Milestones and Royalties
Tanox has agreements with various companies and institutions that call for
payments upon the achievement of milestones by Tanox and royalty payments based
upon a percentage of product sales.
401(k) Plan
Effective January 1, 1992, Tanox adopted a qualified retirement plan (the
401(k) Plan) covering all of Tanox's U.S. employees who are at least 21 years of
age and have completed at least 90 days of service with Tanox. Pursuant to the
401(k) Plan, employees may elect to reduce their current compensation by up to
the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional matching contributions by Tanox on behalf of all participants in the
401(k) Plan. Tanox's matching contributions to the 401(k) Plan totaled
approximately $337,000, $208,000 and $83,000 in 2002, 2001 and 2000,
respectively.
13. GEOGRAPHIC AREAS:
Tanox operates in a single business segment. Tanox's operations by
geographic area for the years ended December 31, 2002, 2001 and 2000, are
presented below (in thousands):
Total Net Income Identifiable
Revenues (Loss) Assets
------------- ------------- --------------
Year Ended December 31, 2002-
Americas ........................ $ 560 $ (25,723) $ 262,134
Europe .......................... -- (23) 553
Asia ............................ -- (276) 672
Interarea eliminations .......... -- -- (12,148)
------------- ------------- --------------
$ 560 $ (26,022) $ 251,211
============= ============= ==============
Year Ended December 31, 2001-
Americas ........................ $ 235 $ (16,409) $ 288,259
Europe .......................... 184 (4,670) 636
Asia ............................ -- (298) 788
Interarea eliminations .......... -- -- (12,149)
------------- ------------- --------------
$ 419 $ (21,377) $ 277,534
============= ============= ==============
Year Ended December 31, 2000-
Americas ........................ $ 14,502 $ 3,127 $ 298,027
Europe .......................... 666 (3,746) 1,358
Asia ............................ -- (428) 1,178
Interarea eliminations .......... (2,420) -- (9,585)
------------- ------------- --------------
$ 12,748 $ (1,047) $ 290,978
============= ============= ==============
66
Tanox, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
14. QUARTERLY FINANCIAL DATA (Unaudited) (in thousands except per share data):
Three Months Ended
----------------------------------------------------------------------------
2002 March 31 June 30 September 30 December 31
---------------- ---------------- ---------------- ----------------
Revenues ....................... $ 3 $ 153 $ 253 $ 151
Loss from operations ........... (7,218) (7,490) (8,862) (8,930)
Net loss ....................... (5,449) (5,591) (7,652) (7,330)
Loss per share:
Basic and diluted ........ (0.12) (0.13) (0.17) (0.17)
Three Months Ended
----------------------------------------------------------------------------
2001 March 31 June 30 September 30 December 31
---------------- ---------------- ---------------- ----------------
Revenues ....................... $ 121 $ 163 $ 3 $ 132
Loss from operations ........... (6,855) (12,119) (6,710) (7,789)
Net loss ....................... (2,971) (8,315) (3,698) (6,393)
Loss per share:
Basic and diluted ........ (0.07) (0.19) (0.08) (0.15)
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On May 17, 2002, the board of directors of Tanox, upon the recommendation
of its Audit Committee, approved the dismissal of Arthur Andersen LLP (Andersen)
as our independent auditors. The Board appointed Ernst & Young LLP as
independent auditors for 2002 on June 24, 2002.
Andersen's reports on the Company's consolidated financial statements for
the years ended December 31, 2001 and 2000 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During the years ended December 31, 2001 and 2000 and through May 17, 2002
(the "Relevant Period"), there were no disagreements with Andersen on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to Andersen's satisfaction,
would have caused them to make reference to the subject matter in connection
with their report on the Company's consolidated financial statements for such
years; and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K. We provided Andersen with a copy of the foregoing disclosures.
Attached as Exhibit 16 to our Current Report on Form 8-K filed with the SEC on
May 23, 2002, is a copy of Andersen's letter, dated May 23, 2002, stating its
agreement with those statements.
During the Relevant Period, neither we nor anyone acting on our behalf
consulted with Ernst & Young LLP regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our consolidated financial statement,
or (ii) any matters or reportable events as set forth in Items 304(a)(1)(iv) and
(v), respectively, of Regulation S-K.
67
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information regarding directors that is required by this item is
incorporated by reference from the discussion in the Proxy Statement captioned
"Proposal 1 - Election of Directors" and "Beneficial Ownership Table".
Information concerning our executive officers is set forth under Part I of this
Form 10-K.
ITEM 11. Executive Compensation
The information that is required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned "Executive Compensation".
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information that is required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned "Beneficial Ownership
Table".
ITEM 13. Certain Relationships and Related Transactions
The information that is required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned "Other Transactions".
ITEM 14. Controls and Procedures
Tanox's Chief Executive Officer and Vice President of Finance have
concluded that Tanox's disclosure controls and procedures (as defined in
Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c) and
15d-14(c)) are sufficiently effective to ensure that the information required to
be disclosed by Tanox in the reports it files under the Securities Exchange Act
is gathered, analyzed and disclosed with adequate timeliness, accuracy and
completeness, based on an evaluation of such controls and procedures conducted
within 90 days prior to the date hereof.
Subsequent to Tanox's evaluation, there were no significant changes in
internal controls or other factors that could significantly affect internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
68
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Index to Financial Statements.
Report of Independent Auditors
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations and Comprehensive Loss for the
years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December
31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
All schedules are omitted because they are not applicable or
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits.
3(i).1 -- Amended and Restated Certificate of Incorporation of
the Registrant, as amended. (1)
3(i).2 -- Certificate of Designations of Series A Junior
Participating Preferred Stock (5)
3(ii).1 -- Bylaws of the Registrant, as currently in effect. (1)
4.1 -- Specimen of Common Stock Certificate, $.01 par value,
of the Registrant. (1)
10.1 -- Form of Indemnification Agreement between the
Registrant and its officers and directors. (1) (7)
10.2 -- 1987 Stock Option Plan of the Registrant, as amended.
(1) (7)
10.3 -- 1992 Non-employee Directors Stock Option Plan of the
Registrant. (1) (7)
10.4 -- 1997 Stock Plan of the Registrant. (1) (7)
10.5 -- Stock Purchase Agreement, dated July 14, 1987, by and
among the Registrant and Tse Wen Chang, Nancy T. Chang,
Alafi Capital Company, Shireen Alafi, Joseph Heskel,
Trustee for Christopher Alafi, and Invitron
Corporation. (1)
10.6 -- License for Winter Patent, dated June 26, 1989, by and
between Medical Research Council and the Registrant.
(1)
10.7 -- Amendment to the License for Winter Patent, dated
February 9, 1990, by and between Medical Research
Council and the Registrant. (1)
10.8 -- Development and Licensing Agreement, dated May 11,
1990, by and between the Registrant and Ciba-Geigy
Limited. (1)
10.9 -- Term Sheet for Secured Loan, dated December 14, 1994,
by and between the Registrant and Ciba-Geigy Limited.
(1)
10.10 -- Chiron-PanGenetics Research and Development License and
Options for Commercial License, dated September 25,
1995, by and between PanGenetics, B.V., Panorama
Research, Inc. and Chiron Corporation. (1)
10.11 -- Stock Purchase Agreement, dated as of March 12, 1998,
by and between the Registrant and the holders of shares
of PanGenetics, B.V. (1)
69
10.12 -- License Agreement, dated June 1, 1998, by and between Biogen, Inc.
and the Registrant. (1)
10.13 -- Outline of Terms for Settlement of the Litigations Among
Genentech, Inc., Genentech International, Ltd., the Registrant and
Ciba-Geigy Limited Relating to Anti-IgE Inhibiting Monoclonal
Antibodies, dated July 8, 1996. (1)
10.14 -- Supplemental Agreement between the Registrant and Ciba-Geigy
Limited, dated July 8, 1996. (1)
10.15 -- Settlement and Cross-Licensing Agreement, dated July 8, 1996, by
and between the Registrant and Genentech, Inc. and Genentech
International Limited. (1)
10.16 -- Settlement and Participation Agreement, dated July 8, 1996, by and
between the Registrant and F. Hoffman-La Roche, Ltd.,
Hoffman-La Roche, Inc., Roche Holding Ltd. and Roche Holdings,
Inc. (1)
10.17 -- Patent License Agreement, dated June 30, 1998, by and between
Protein Design Labs, Inc. and the Registrant. (1)
10.18 -- Amendment to Patent License Agreement, dated June 28, 1999, by and
between Protein Design Labs, Inc. and the Registrant. (1)
10.19 -- G-CSF Receptor Non-exclusive License Agreement, dated January 11,
2000, by and between Immunex Corporation and the Registrant. (1)
10.20 -- 2000 Non-Employee Directors' Stock Option Plan. (1) (7)
10.21 -- Master Agreement, dated March 17, 2000, by and between the
Registrant and Protein Design Labs, Inc. (1)
10.22 -- First Amendment to the Tanox, Inc. 1997 Stock Plan. (2) (7)
10.23 -- First Amendment to the 2000 Non-Employee Directors' Stock Option
Plan (3)(7)
10.24 -- Rights Agreement dated as of July 27, 2001 between Tanox, Inc. and
American Stock Transfer & Trust Company, as Rights Agent, which
includes as Exhibit A the form of Rights Certificate and as
Exhibit B the Summary of Rights to Purchase Common Stock. (4)
10.25 -- Credit Agreement dated September 27, 2002, by and between Wells
Fargo Bank Texas, National Association and the Registrant. (6)
21.1 -- List of Subsidiaries of the Registrant.
23.1 -- Consent of Independent Auditors
23.2 -- Information regarding consent of Arthur Andersen LLP
__________________________________
(1) Filed as an exhibit to our Registration Statement on Form S-1 (no.
333-90625) and incorporated herein by reference.
(2) Filed as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, and incorporated herein by
reference.
(3) Filed as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, and incorporated herein by reference.
(4) Filed as an exhibit to our Current Report on Form 8-K dated August
2, 2001.
(5) Filed as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, and incorporated herein by reference.
(6) Filed as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, and incorporated herein by
reference.
(7) Management contract or compensatory plan.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
2002.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TANOX, INC.
By: /s/ Nancy T. Chang
-------------------------------
Nancy T. Chang
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Nancy T. Chang President, Chief Executive Officer March 26, 2003
------------------------ and Chairman of the Board
Nancy T. Chang
/s/ Gregory P. Guidroz Vice President of Finance March 26, 2003
------------------------ (Principal Financial and
Gregory P. Guidroz Accounting Officer)
/s/ Heinz W. Bull
------------------------ Director March 26, 2003
Heinz W. Bull
/s/ Tse Wen Chang
----------------------- Director March 26, 2003
Tse Wen Chang
/s/ William J. Jenkins
----------------------- Director March 26, 2003
William J. Jenkins
/s/ Osama Mikhail
----------------------- Director March 26, 2003
Osama Mikhail
71
CERTIFICATIONS
I, Nancy T. Chang, certify that:
1. I have reviewed this annual report on Form 10-K of Tanox, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Tanox, Inc. as of, and for, the periods presented in
this annual report;
4. Tanox's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Tanox, Inc. and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of Tanox, Inc.'s disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date")' and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. Tanox's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Tanox, Inc.'s
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in Tanox, Inc.'s
internal controls; and
6. Tanox's other certifying officers and I have indicated in this annual
report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 26, 2003 By: /s/ Nancy T. Chang
-----------------------
Nancy T. Chang
President and Chief Executive Officer
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CERTIFICATIONS
I, Gregory P. Guidroz, certify that:
1. I have reviewed this annual report on Form 10-K of Tanox, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Tanox, Inc. as of, and for, the periods presented in
this annual report;
4. Tanox's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Tanox, Inc. and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of Tanox, Inc.'s disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date")' and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. Tanox's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect Tanox, Inc.'s
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management or
other employees who have a significant role in Tanox, Inc.'s
internal controls; and
6. Tanox's other certifying officers and I have indicated in this annual
report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 26, 2003 By: /s/ Gregory P. Guidroz
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Gregory P. Guidroz
Vice President of Finance
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