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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-27436
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TITAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3171940
(State or other jurisdiction (I.R.S. employer identification number)
of incorporation or organization)
400 OYSTER POINT BLVD., SUITE 505, SOUTH SAN FRANCISCO, CALIFORNIA 94080
(Address of principal executive offices, including zip code)
(650) 244-4990
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
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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 twelve (12) months (or for such shorter period
that the registrant was required to file such report(s)), and (2) has been
subject to the filing requirements for the past ninety (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. / /
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $509 million, based on the last sales price
of the common stock as of March 23, 2001.
As of March 23, 2001, 27,529,367 shares of common stock, $.001 par
value, of the registrant were issued and outstanding.
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PART I
Statements in this Form 10-K that are not descriptions of historical
facts are forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth under "Risk
Factors" including, but not limited to, the results of research and development
efforts, the results of pre-clinical and clinical testing, the effect of
regulation by the United States Food and Drug Administration (FDA) and other
agencies, the impact of competitive products, product development,
commercialization and technological difficulties, the results of financing
efforts, the effect of our accounting policies, and other risks detailed in our
Securities and Exchange Commission filings.
Spheramine(R), CeaVac(R), TriAb(R), TriGem(TM), Pivanex(R) and CCM(TM)
are trademarks of Titan Pharmaceuticals, Inc. Zomaril(TM) is a trademark of
Novartis Pharma AG. This Form 10-K also includes trade names and trademarks of
companies other than Titan Pharmaceuticals, Inc.
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Titan Pharmaceuticals, Inc. is a biopharmaceutical company developing
proprietary therapeutics for the treatment of central nervous system (CNS)
disorders, cancer, and other serious and life threatening diseases. Our product
development programs focus on large pharmaceutical markets with significant
unmet medical needs and commercial potential. We currently have nine products in
development, seven of which are in clinical development, with two products in
expanded human trials for safety and efficacy, known as Phase III clinical
trials. We have five products in trials for preliminary efficacy and dosing and
in trials for initial human safety and evidence of efficacy, known as Phase II
and Phase I/II clinical trials, respectively. In addition to these programs, we
have two products in preclinical development. We are independently developing
our product candidates and also utilizing strategic partnerships, including
collaborations with Novartis Pharma AG and Schering AG, as well as
collaborations with several government-sponsored clinical cooperative groups.
These collaborations help fund product development and enable us to retain
significant economic interest in our products.
Titan was incorporated in Delaware in February 1992 and has been funded
through various sources, including an initial public offering in January 1996
and private placements of securities, as well as proceeds from warrant and
option exercises, corporate licensing and collaborative agreements, and
government sponsored research grants.
Some of our preclinical product development are conducted in our two
consolidated subsidiaries: Ingenex, Inc., and ProNeura, Inc. References to us
and our products throughout this document include the products under development
by the two subsidiaries.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
We operate in only one business segment, the development of
biopharmaceutical products.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
PRODUCT DEVELOPMENT PROGRAMS
ZOMARIL (ILOPERIDONE)--SCHIZOPHRENIA AND RELATED PSYCHOTIC DISORDERS
Our lead CNS therapeutic product candidate, Zomaril, is being developed
for the treatment of schizophrenia, the most common form of psychosis.
Approximately 2.5 million people in the U.S. are afflicted with the disease, and
in 2000, drug therapy for schizophrenia totaled over $5.0 billion in sales
worldwide. While efficacious in reducing psychotic symptoms and allowing
patients to function more normally, currently marketed drugs often cause one or
more side effects that limit their usefulness, including weight gain and
extrapyramidal symptoms such as involuntary muscle movements and rigidity, and
cardiac arrhythmia. Zomaril acts by selectively binding with serotonin and
dopamine receptors in the brain. This selective binding action helps to reverse
the neurotransmitter imbalance believed to be the cause of the symptoms of
schizophrenia. Novartis, our worldwide marketing partner in all countries except
Japan, is funding clinical trials and will pay us a royalty on net product
sales.
Zomaril is currently being evaluated in an extensive Phase III program
administered by Novartis comprising over 3,300 patients at 208 sites in 24
countries. Novartis has informed us that the first and second of three planned
efficacy studies have been completed, and the completion of the third study is
expected in the second quarter of 2001, with projected New Drug Application
(NDA) filing in the latter part of 2001. We have been advised by Novartis that
in both completed efficacy studies, Zomaril statistically significantly reduced
the symptoms of schizophrenia compared to placebo, and demonstrated an excellent
safety and tolerability profile. Zomaril is also being investigated in three
12-month safety studies, as well as in a study with elderly patients, all of
which have been completed and are in the final data analysis stage.
IMMUNOTHERAPEUTICS--CANCER THERAPY
We are engaged in the development of cancer immunotherapeutics
utilizing monoclonal antibody technology licensed from the University of
Kentucky Research Foundation. These monoclonal antibody therapeutics under
development mimic specific antigens that are primarily present on the targeted
cancer cell and are not commonly found on normal tissue. From a molecular
biological perspective, the antibody is structurally similar to the cancer
antigen. When injected into a patient, the vaccine acts as a trigger for the
normal immune system's response of producing anti-cancer antigen antibodies to
promote lymphocytes to attack cancer cells.
We are developing three such products that have collectively
demonstrated an immune response in humans against antigens associated with colon
cancer, breast cancer, ovarian cancer, small cell lung cancer, melanoma and
other cancers. We have established several collaborations with
government-sponsored clinical cooperative groups to help fund and develop our
cancer immunotherapy products. The products are:
- CEAVAC - We believe this product has potential utility in the
treatment of adenocarcinomas, notably, colorectal cancer,
non-small cell lung cancer, breast cancer, pancreatic cancer
and gastric cancer. The target, carcinoembryonic antigen
(CEA), is present in the largest group of cancers,
adenocarcinomas. We are sponsoring a randomized, double-blind,
Phase III trial in approximately 620 patients in Dukes D
colorectal cancer. Approximately 95% of the patients
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have been enrolled in this trial to date, which is evaluating
the ability of CeaVac to improve survival when administered in
combination with standard chemotherapy, consisting of
5-FU/Leucovorin. CeaVac will also be tested in a double-blind,
Phase III trial in approximately 1,400 patients with Dukes C
colorectal cancer, sponsored by the American College of
Surgeons Oncology Group. These trials are intended to
potentially serve as the basis for product license
applications in these indications if the results are
sufficiently positive. CeaVac in combination with TriAb will
also be tested in a Phase II trial in patients with non-small
cell lung cancer by the Radiation Therapy Oncology Group. We
are also pursuing additional clinical trials through
cooperative groups.
- TRIAB--We believe this product has potential utility in the
treatment of breast, ovarian, colon and non-small cell lung
cancer. TriAb is a monoclonal antibody that generates an
immune response to the Human Milk Fat Globule (HMFG) protein,
present on the aforementioned cancers, as well as other
cancers. Phase I/II trials of TriAb in patients with advanced
breast cancer have demonstrated strong immune response against
HMFG in the majority of patients. In addition, trials of TriAb
in patients with advanced breast cancer undergoing autologous
stem cell transplants have demonstrated prompt and vigorous
immune responses, and patients with good immune responses have
demonstrated a decrease in tumor relapse rates. Based on this
preliminary data, we are evaluating TriAb in Phase II studies
as a treatment for advanced breast cancer both as a single
agent as well as in combination with CeaVac and chemotherapy
or hormonal therapy.
- TRIGEM--We believe this product has potential utility in the
treatment of melanoma, small cell lung cancer and sarcoma.
TriGem is a novel monoclonal antibody that has demonstrated
the ability to generate an immune response in cancer patients
to the GD2 ganglioside, an antigenic glycosphingolipid present
in melanoma, lung cancer, and other cancers. Published
clinical trial data have demonstrated the ability of TriGem to
elicit strong anti-cancer immune responses in patients with
advanced malignant melanoma. This immune response was
associated with favorable survival and disease progression
compared to recent historical data in similar patient groups.
The Southwest Oncology Group and other cooperative groups have
expressed an interest in working with this product and we are
discussing clinical development plans with these groups.
- BIVALENT VACCINE (CEAVAC + TRIAB)--We believe this product
allows targeting of tumor cells expressing both the CEA and
HMFG tumor associated antigens without adding toxicity. We
have initiated studies with this combination vaccine in
conjunction with chemotherapy or hormonal therapy for patients
with metastatic breast cancer.
PIVANEX--ANTI-CANCER THERAPY BASED UPON CELLULAR DIFFERENTIATION
Pivanex is a novel analog of butyric acid and has demonstrated in
laboratory tests the ability to destroy cancer cells through the mechanism of
cellular differentiation. Traditional cytotoxic chemotherapeutics tend to kill
cancer cells preferentially because cancer cells divide more often and more
rapidly than most normal cells. Unfortunately, these agents may also kill
rapidly dividing normal cells, such as blood cells and cells of the intestine
lining, which leads to the common side effects of anemia, nausea, vomiting and
risk of infection. Unlike traditional cytotoxic chemotherapy, differentiation
therapy represents a relatively new direction in cancer research, and involves
the development of agents that, in contrast to the function of cytotoxic agents,
induce cancer cells to differentiate and undergo terminal cellular senescence.
Differentiation therapy may also lead to apoptosis, or what is known as normal
"programmed cell death,"
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resulting in the destruction of the cancer cells while sparing normal cells. We
are currently studying Pivanex in a Phase II clinical trial in patients with
non-small cell lung cancer, and are initiating a Phase II trial in patients with
liver tumors.
GALLIUM MALTOLATE--ANTI-CANCER THERAPY AND OTHER TREATMENTS
Gallium maltolate is an orally administered active form of gallium, a
semi-metallic element. Intravenously administered gallium has demonstrated
preliminary evidence of clinical activity in several cancers, including multiple
myeloma, lymphoma, urothelial carcinoma and prostate cancer. Intravenous
gallium, as gallium nitrate, received FDA approval in 1991 for hypercalcemia of
malignancy. Gallium combines the highly desirable properties of naturally
concentrating at sites of malignancy and then acting at these sites to inhibit
abnormal cell proliferation. Recently published data from laboratory experiments
suggest that gallium may also be effective in treating HIV infection. The
mechanism of action may relate to gallium's strong ability to inhibit
ribonucleotide reductase, an enzyme essential for DNA synthesis. Because gallium
acts on a human enzyme essential to viral replication rather than the virus
itself, the ability of the virus to develop drug resistance may be substantially
reduced.
Phase I single dose and multiple dose trials of gallium maltolate in
normal subjects have demonstrated a good safety profile while achieving
potential therapeutic serum drug levels. Observed pharmacokinetic parameters
suggest feasibility for once per day or twice per day oral dosing. A Phase II
clinical trial in prostate cancer and multiple myeloma is planned for initiation
in second quarter 2001. Additionally, we are planning to commence Phase I/II
trials in patients with lymphoma, bladder cancer, and in HIV-positive patients
late this year.
SPHERAMINE--PARKINSON'S DISEASE
We are engaged in the development of cell-based therapeutics for the
treatment of neurologic diseases. Our proprietary technology enables the
development of cell-based therapies for minimally-invasive, site-specific
delivery to the central nervous system of therapeutic factors precisely where
they are needed in order to treat the neurologic disease.
This cell-coated microcarrier (CCM) technology can facilitate
site-specific delivery of missing or deficient neurotransmitters and growth
factors to diseased or injured areas of the brain by increasing the survival and
successful engraftment of implanted cells. Our first product under development
based on this technology is Spheramine, consisting of microcarriers coated with
dopamine-producing human retinal pigment epithelial cells, for the treatment of
Parkinson's disease. Preliminary evidence of efficacy of Spheramine has been
demonstrated in a validated primate model of Parkinson's disease (MPTP monkey
model). Based on these promising results and successful initial safety testing
in primates, we initiated Phase I/II clinical testing of this product in an
open-label evaluation of safety and efficacy. This study is being performed at
Emory University. In January 2001, we announced treatment of the first cohort of
six patients with moderately severe to severe Parkinson's disease receiving
Spheramine. These patients have now been 3 to 11 months post treatment and
preliminary results from this Phase I/II study will be presented at the American
Academy of Neurology meeting in May 2001. Early results from our Phase I/II
study have been encouraging, and consistent with results seen in the preclinical
studies with the validated primate model.
In January 2000, we entered into an agreement with Schering AG, under
which Schering and Titan will collaborate on manufacturing and clinical
development of cell therapy for the treatment of Parkinson's disease. Under the
agreement, we will perform clinical development activities for which we will
receive funding. Schering will fully fund, and manage in collaboration with us,
all future pilot and pivotal clinical studies, and manufacturing and development
activities. Under this agreement, Schering received exclusive,
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worldwide development, manufacturing and commercialization rights, and, in
addition to the above payments and milestone payments, agreed to pay us a
royalty on product sales. Schering also retains the right to make an equity
investment in Titan, up to a specified amount, upon initiation of pivotal
clinical studies. In addition to the collaborative development of Spheramine for
Parkinson's disease, Titan and Schering may also mutually explore other
potential therapeutic applications of our CCM technology. Titan has continued to
investigate other potential applications of the CCM technology with various
different cells and disease states such as glioma, Alzheimer's disease, and stem
cell applications.
LONG-TERM DRUG DELIVERY SYSTEM
We are developing a sustained drug delivery technology with application
in the treatment of a number of neurologic disorders in which conventional
treatment is limited by variability of drug concentration in blood and poor
patient compliance. The technology, which has been licensed from the
Massachusetts Institute of Technology (MIT), consists of a polymeric drug
delivery system that potentially can provide controlled drug release over
extended periods (i.e., from three months to more than one year). The technology
involves imbedding the drug of interest in a polymer, which is then implanted
subcutaneously to provide systemic delivery as body fluids wash over the implant
and the drug is released. This results in a constant rate of release similar to
intravenous administration. We believe that such long-term, linear release
characteristics are highly desirable by avoiding peak and trough level dosing
that poses problems for many CNS and other therapeutic agents.
Additional pre-clinical experiments were completed during 2000 on a
product being developed for the potential treatment of drug addiction,
demonstrating long-term drug delivery using the proprietary polymeric drug
delivery system. This study, which was supported by an SBIR Phase I grant from
the National Institutes of Health (NIH), demonstrated proof of concept in animal
models by delivering sustained therapeutic drug levels for periods of greater
than three months, without systemic adverse effects.
We are conducting further pre-clinical evaluation, including toxicology
studies directed at filing an Investigational New Drug (IND) application for
pilot clinical trials in the treatment of drug addiction by late 2001, and we
are also developing products for the treatment of alcohol addiction and
Parkinson's disease.
GENE THERAPY PRODUCTS--CANCER
We are currently developing RB94, a gene therapy product for the
treatment of cancer, under an exclusive worldwide license from the Baylor
College of Medicine. RB94 combines a truncated variant (p94) of the RB gene, a
tumor suppressor gene, with a viral vector. We believe the form of the RB
protein encoded by the RB94 gene therapy product is more effective at causing
suppression of tumor cells than the full-length RB protein, based on data
demonstrating in vitro suppression of numerous tumor types tested to date,
including tumors of the bladder, prostate, cervix, bone, breast, lung and
fibrous tissue. In addition, preliminary experiments indicate the modified gene
is effective in suppressing some cancer cell lines in vitro that continue to
contain the functional native RB gene.
We are currently testing RB94 in pre-clinical studies of solid tumors
in mouse models, and expect to conduct additional pre-clinical testing in
preparation for pilot clinical trials in late 2001.
Through a cross-license agreement with Selective Genetics, we acquired
rights to develop cancer therapies using Selective's proprietary cancer cell
targeting technology in conjunction with RB94. We plan to combine these
technologies to potentially enable systemic anti-cancer gene therapy.
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SPONSORED RESEARCH AND LICENSE AGREEMENTS
We are a party to several agreements with research institutions,
companies, universities and other entities for the performance of research and
development activities and for the acquisition of licenses relating to such
activities.
ZOMARIL (ILOPERIDONE)
In January 1997, we acquired an exclusive worldwide license under U.S.
and foreign patents and patent applications relating to the use of iloperidone,
the scientific name for Zomaril, for the treatment of psychiatric and psychotic
disorders and analgesia from Aventis SA (formerly Hoechst Marion Roussel, Inc).
The Aventis agreement provides for the payment of royalties on net sales and
requires us to satisfy certain other terms and conditions in order to retain our
rights, all of which have been met to date. In November 1997, we granted a
worldwide sublicense, except Japan, to Novartis under which Novartis will
continue, at its expense, all further development of Zomaril. Novartis will make
our milestone payments to Aventis during the life of the Novartis agreement, and
will also pay to Aventis and Titan a royalty on net sales of the product,
providing Titan with a net royalty of 8% on the first $200 million sales
annually and 10% on all sales above $200 million on an annual basis.
IMMUNOTHERAPEUTICS
In May 1996, we acquired an exclusive, worldwide license under certain
United States and foreign patent and patent applications pursuant to a license
agreement with the University of Kentucky Research Foundation. These patent and
patent applications relate to the anti-idiotypic antibodies known as 3H1, 1A7
and 11D10 and their fragments, derivatives or analogs. The Kentucky agreement
requires us to fund research at the University of Kentucky at amounts agreed to
on an annual basis for the five-year period ending November 14, 2001. The
Kentucky agreement provides for the payment of certain license fees as well as
royalties based on net sales of licensed products by any sublicensees or us. We
must also pay all costs and expenses incurred in obtaining and maintaining
patents, and diligently pursue a vigorous development program for the products
in order to maintain our license rights under the Kentucky agreement.
In November 1998, we entered into an agreement with the Wistar
Institute of Anatomy and Biology, a not-for-profit organization in Philadelphia,
Pennsylvania, for a non-exclusive license under certain patents for the use of
anti-idiotypic antibodies for the treatment of tumors. The Wistar agreement
provides for the payment of certain license fees as well as royalties based on
net sales of licensed products by any sublicensees or us. Our minimum annual
royalty payment to Wistar is $30,000.
PIVANEX
We have acquired, from Bar-Ilan Research and Development Co. Ltd., in
Israel, an exclusive, worldwide license to an issued United States patent and
certain foreign patents, and patent applications covering novel analogs of
butyric acid owned by Bar-Ilan University and Kupat Hulim Health Insurance
Institution. The Bar-Ilan agreement provides for the payment by us to Bar-Ilan
of royalties based on net sales of products and processes incorporating the
licensed technology, subject to minimum annual amounts commencing in 1995, as
well as a percentage of any income derived from any sublicense of the licensed
technology. We must also pay all costs and expenses incurred in patent
prosecution and maintenance. Our minimum annual royalty is $60,000.
We must also satisfy certain other terms and conditions set forth in
the Bar-Ilan agreement in order
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to retain our license rights, including:
- the use of reasonable best efforts to bring any products
developed under the Bar-Ilan agreement to market,
- the timely commencement of toxicology testing on small and
large animals,
- the development of and compliance with a detailed business
plan, and
- the timely payment of royalty fees.
All of the above conditions have been met to date.
GALLIUM COMPLEXES
In August 2000, through the acquisition of GeoMed, Inc., we acquired an
exclusive worldwide license to make, use and sell products developed under the
patent rights to the compositions and application of gallium complexes. Under
this license agreement, we are required to make an annual license payment to Dr.
Lawrence Bernstein, technology inventor, of $50,000, as well as royalty payments
based on net sales of products and processes incorporating the licensed
technology. We must also pay all costs and expenses incurred in patent
prosecution and maintenance.
CELL THERAPY PRODUCTS
In November 1992, we acquired an exclusive, worldwide license under
certain U.S. and foreign patent applications relating to the CCM Technology
pursuant to a research and license agreement with New York University (NYU). The
NYU agreement provides for the payment of royalties based on net sales of
products and processes incorporating the licensed technology, as well as a
percentage of any income we receive from any sublicense thereof. We are also
obligated to reimburse NYU for all costs and expenses incurred by NYU in filing,
prosecuting and maintaining the licensed patents and patent applications. We
must satisfy certain other terms and conditions of the NYU agreement in order to
retain our license rights. These include, but are not limited to, the use of
best efforts to bring licensed products to market as soon as commercially
practicable and to diligently commercialize such products thereafter. In January
2000, we entered into an agreement with Schering AG, under which Schering and
Titan will collaborate on manufacturing and clinical development of cell therapy
for the treatment of Parkinson's disease. We will receive funding for
development activities, as well as potential reimbursement of certain prior
research and development expenses. Schering will fully fund, and manage in
collaboration with us, all future pilot and pivotal clinical studies, and
manufacturing and development activities. Schering may terminate this sublicense
for any reason by providing 90 days prior notice to us.
LONG-TERM DRUG DELIVERY SYSTEM
In October 1995, we acquired from MIT an exclusive worldwide license to
certain U.S. and foreign patents relating to the long-term drug delivery system.
The exclusive nature of the MIT license is subject to the condition that an IND
be filed with the FDA by December 31, 2001. We must also satisfy certain other
usual terms and conditions set forth in the MIT license in order to retain our
license rights, including payments of royalties based on sale of products and
processes incorporating the licensed technology, as well as a percentage of
income derived from sublicenses of the licensed technology.
GENE THERAPY PRODUCTS
In October 1992, we acquired an exclusive, worldwide license under
United States and foreign
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patent applications assigned to Baylor College of Medicine relating to the RB
gene, including its use in conferring senescence to tumors that form the basis
of RB94. The Baylor license provides for royalties based on net sales of
products and processes incorporating the licensed technology, subject to certain
minimum annual amounts and a percentage of sublicensing income arising from the
license of such products and processes. Under the Baylor license, we must:
- use reasonable best efforts to bring any products developed
under the Baylor license to market,
- develop and comply with a detailed business plan,
- fund research pursuant to the Baylor research agreement,
- commence a cancer therapy research program,
- make timely payment of royalty fees, and
- pay all costs and expenses incurred in patent filing,
prosecution and maintenance.
We are a party to several license agreements with the University of
Illinois at Chicago, which granted us the exclusive worldwide license under
certain issued patents and patent applications, including those relating to
methods for preventing multi-drug resistance and the human MDR1 gene. The
exclusive nature of the Chicago licenses is subject in certain instances to
certain reservations, including the use of all or part of the licensed
technology for research, education and other non-commercial purposes. In
addition, our rights under the MDR1 license are subject to a non-exclusive right
granted to Glaxo-Wellcome to transfect cell lines with the MDR1 gene, and to use
the transfectants for research purposes. Glaxo-Wellcome does not, however, have
the right to sell or transfer the transfectants or any derivatives thereof,
without the written authorization of the University of Illinois at Chicago.
In September 1999, we granted an exclusive worldwide sublicense to
GenTest Inc. for the right to manufacture, distribute and sell products
developed under the University of Illinois at Chicago patent rights related to
cDNA-expressed MDR1 protein. In July 2000, we granted an exclusive worldwide
sublicense to Epidauros Biotechnologies AG for the right to manufacture,
distribute and sell products developed under the University of Illinois at
Chicago patent rights related to the use of MDR1 gene in pharmacogenomics.
We acquired an exclusive license from MIT under an issued patent
relating to the use of MDR genes for creating and selecting drug resistant
mammalian cells. The MIT MDR license is subject to prior grants of:
- an irrevocable, royalty-free, non-exclusive license granted to
the United States government,
- non-exclusive licenses granted to Eli Lilly, Inc. and Genetics
Institute, Inc. for research purposes, and
- non-exclusive, commercial licenses that may be granted
pursuant to options granted to Eli Lilly and Genetics
Institute to use aspects of the licensed technology but only
to make products that do not incorporate genes claimed in the
patent, proteins expressed by such genes or antibodies and
inhibitors to such genes.
The MIT MDR license provides for the payment of royalties based on net
sales of products and processes incorporating the licensed technology, subject
to certain minimum annual amounts, a percentage of sublicensing income arising
from the license of such products and processes, and the issuance of Ingenex's
common stock to MIT. Under the MIT MDR license, we must also:
- use reasonable best efforts to bring any products developed
under the MIT MDR license to market,
- develop and comply with a detailed business plan and
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- make timely payment of license and royalty fees.
PATENTS AND PROPRIETARY RIGHTS
We have obtained rights to certain patents and patent applications
relating to our proposed products and may, in the future, seek rights from third
parties to additional patents and patent applications. We also rely on trade
secrets and proprietary know-how, which we seek to protect, in part, by
confidentiality agreements with employees, consultants, advisors, and others.
For risks we face with respect to patents and proprietary rights, see "Risk
Factors-We may be unable to protect our patents and proprietary rights."
ZOMARIL (ILOPERIDONE)
We hold a license from Aventis under one issued U.S. patent and certain
foreign patents relating to iloperidone and its methods of use. Our license is
exclusive for use in the treatment of psychiatric disorders, psychotic disorders
and analgesia. Unless its term is extended, the U.S. patent that covers certain
aspects of our Zomaril product and its use will expire in 2011. Prosecution of
various divisional and continuation applications and their foreign counterparts
continues satisfactorily; although it is uncertain whether additional patents
will be granted.
IMMUNOTHERAPEUTICS
We are the exclusive licensee under a license agreement with the
University of Kentucky Research Foundation of certain U.S. and foreign patents
and patent applications related to the anti-idiotype antibodies known as 3H1,
1A7 and 11D10 and their fragments, derivatives or analogs. U.S. patents have
been issued that relate to aspects of these technologies. Prosecution of patent
applications relating to these technologies continues satisfactorily, as does
prosecution of various divisional and continuation applications and their
foreign counterparts for all the antibodies, although it is uncertain whether
additional patents will be granted. Unless its term is extended, the U.S. patent
that covers certain aspects of CeaVac and its use will expire in 2015.
PIVANEX
We are the exclusive licensee under the Bar-Ilan agreement of an issued
U.S. patent and certain foreign patents, and patent applications relating to
certain aspects of our Pivanex product candidate. Prosecution of various
divisional and continuation applications and their foreign counterparts
continues satisfactorily, although it is uncertain whether additional patents
will be granted.
GALLIUM COMPLEXES
We are the exclusive licensee under the license agreement with Dr.
Lawrence Bernstein on several issued U.S. patents and patent applications
covering the pharmaceutical compositions, application and administration of
gallium complexes.
CELL THERAPY PRODUCTS
We are the exclusive licensee under a license agreement with NYU of
U.S. and foreign patent applications relating to our CCM technology. The Patent
and Trademark Office has issued three U.S. patents on the core subject material
underlying the NYU license. Unless its term is extended, the U.S.
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patents that cover certain aspects of our Spheramine product and its use will
expire between 2014 and 2017. An Australian patent on the core material of a
patent application underlying the NYU license was granted in May 1996.
Prosecution of various divisional and continuation applications and their
foreign counterparts continues satisfactorily, although it is uncertain whether
additional patents will be granted.
LONG-TERM DRUG DELIVERY SYSTEM
We are the exclusive licensee under the MIT license to three United
States and certain European patents relating to a long-term drug delivery
system.
GENE THERAPY PRODUCT--RB94
We are the exclusive licensee under the Baylor license of U.S. and
foreign patent applications relating to the RB gene, including its use in
conferring senescence to tumors that form the basis of RB94. We are aware of the
existence of a prior art reference, European Patent Application 0 259 031 (EP 0
259 031), which discloses a DNA sequence corresponding to the sequence of the
RB94 DNA molecule that is claimed in a U.S. patent licensed to us from Baylor
College of Medicine. The Baylor patent also contains claims directed to specific
expression vectors containing these DNA molecules. Although a patent is presumed
valid, we cannot assure that the claims of the Baylor patent, if challenged,
will not be found invalid.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies of all
sizes, including major pharmaceutical companies and specialized biotechnology
companies, are engaged in the development and commercialization of therapeutic
agents designed for the treatment of the same diseases and disorders targeted by
us. Many of our competitors have substantially greater financial and other
resources, larger research and development staffs and more experience in the
regulatory approval process. Moreover, potential competitors have or may have
patents or other rights that conflict with patents covering our technologies.
CENTRAL NERVOUS SYSTEM THERAPEUTICS
ZOMARIL
With respect to Zomaril, several products categorized as atypical
antipsychotics are already on the market. These products include Risperdal sold
by Janssen Pharmaceuticals, Zyprexa sold by Eli Lilly, Clozaril sold by
Novartis, Seroquel sold by AstraZeneca PLC, and Geodon sold by Pfizer.
Competition among these companies is already intense and Zomaril, expected to be
the fifth or sixth such product on the market, will face significant
competition. The success of Zomaril will depend on how it can be differentiated
from products already on the market on the basis of efficacy, side-effect
profile, cost, availability of formulations and dose requirements, among other
things.
SPHERAMINE
With regard to Spheramine, we are aware of several new drugs for
Parkinson's disease that are in preclinical and clinical development. Amgen is
pursuing clinical trials in Parkinson's patients with glial derived neurotraphic
factor (GDNF) and is collaborating with Medtronic, Inc. in its delivery to the
10
central nervous system. In addition, several well-funded public and private
companies are actively pursuing alternative cell transplant technologies,
including StemCells, Inc. and Diacrin, Inc. NeuroCell-PD, a product under
development by Diacrin, Inc. involves using antibodies to eliminate the need for
immunosuppression when transplanting fetal pig cells into Parkinson's patients,
and would directly compete with Spheramine.
LONG-TERM DRUG DELIVERY SYSTEM
With regard to our long-term drug delivery system, we are aware of an
implantable therapeutic system being developed by ALZA Corporation.
Additionally, companies such as Medtronic are developing implantable pumps that
could be used to infuse drugs into the central nervous system.
CANCER THERAPEUTICS
IMMUNOTHERAPEUTICS
With regard to our immunotherapeutic products, we are aware of several
companies involved in the development of cancer therapeutics that target the
same cancers as our products. Such companies include Progenics Pharmaceutical
Inc., Biomira Inc., AltaRex Corp., Genentech Inc., ImClone Systems Incorporated
and GlaxoSmithKline plc.
RB94
With regard to our gene therapy products, we are aware of several
development stage and established enterprises that are exploring the field of
human gene therapy or are actively engaged in research and development in this
area, including Genetix Pharmaceuticals, Inc. and two research organizations
receiving funding from the NIH. We are aware of other commercial entities that
have produced gene therapy products used in human trials. Further, it is
expected that competition in this field will intensify.
GALLIUM COMPLEXES
We are aware that intravenously administered gallium nitrate is
approved to treat hypercalcemia related to malignancy and may have potential for
treatment of certain cancers. Other intravenous products including the
bisphosphonates are available or are in development in the U.S. or Europe to
treat osteoporosis, Paget's disease, primary hyperparathyroidism, hypercalcemia
of malignancy and metastatic bone disease. Our product, gallium maltolate, is an
orally administered drug and may have potential advantages in the treatment of
cancer.
In addition to the foregoing, colleges, universities, governmental
agencies and other public and private research organizations are likely to
continue to conduct research and are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of technology
that they have developed, some of which may be directly competitive with the
technologies being developed by us.
See "Risk Factors-We face intense competition."
MANUFACTURING
We utilize contract manufacturing organizations to manufacture our
products for preclinical
11
studies and clinical trials. While we have not introduced any products on the
commercial market to date, at such time as we are ready to do so we will need to
allocate additional resources to the manufacture of the products for commercial
marketing. We do not have the facilities to manufacture these products in-house
nor do we intend to establish our own manufacturing operation at this time. We
currently plan to pursue collaborative arrangements regarding the manufacture of
any products that we may successfully develop.
GOVERNMENT REGULATION
In order to obtain FDA approval of a new drug, a company generally must
submit proof of purity, potency, safety and efficacy, among others. In most
cases, such proof entails extensive clinical and pre-clinical laboratory tests.
The procedure for obtaining FDA approval to market a new drug involves
several steps. Initially, the manufacturer must conduct pre-clinical animal
testing to demonstrate that the product does not pose an unreasonable risk to
human subjects in clinical studies. Upon completion of such animal testing, an
IND application must be filed with the FDA before clinical studies may begin. An
IND application consists of, among other things, information about the proposed
clinical trials. Among the conditions for clinical studies and IND approval is
the requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to current Good Manufacturing Practices (cGMP),
which must be followed at all times. Once the IND is approved (or if FDA fails
to act within 30 days), the clinical trials may begin.
Human clinical trials on drugs are typically conducted in three
sequential phases, although the phases may overlap. Phase I trials typically
consist of testing the product in a small number of healthy volunteers or
patients, primarily for safety in one or more doses. During Phase II, in
addition to safety, dose selection and efficacy of the product is evaluated in
up to several hundred patients and sometimes more. Phase III trials typically
involve additional testing for safety and confirmation of efficacy in an
expanded patient population at multiple test sites. The FDA may order the
temporary or permanent discontinuation of a clinical trial at any time.
The results of the pre-clinical and clinical testing on new drugs are
submitted to the FDA in the form of an NDA. The NDA approval process requires
substantial time and effort and there can be no assurance that any approval will
be granted on a timely basis, if at all. The FDA may refuse to approve an NDA if
applicable regulatory requirements are not satisfied. Product approvals, if
granted, may be withdrawn if compliance with regulatory standards is not
maintained or problems occur following initial marketing.
The FDA may also require post-marketing testing and surveillance of
approved products, or place other conditions on their approvals. These
requirements could cause it to be more difficult or expensive to sell the
products, and could therefore restrict the commercial applications of such
products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
With respect to patented products or technologies, delays imposed by the
governmental approval process may materially reduce the period during which we
will have the exclusive right to exploit such technologies.
In addition, our gene therapy product candidate is subject to
guidelines established by NIH, covering deliberate transfers of recombinant DNA
into human subjects conducted within NIH laboratories or with NIH funds, which
provide that such products must be approved by the NIH Director. The NIH has
established the Recombinant DNA Advisory Committee which sets forth guidelines
concerning approval of NIH-supported research involving the use of recombinant
DNA. Although the jurisdiction of the NIH
12
applies only when NIH-funded research or facilities are involved in any aspect
of the protocol, the Advisory Committee encourages all gene transfer protocols
to be submitted for its review. We intend to comply with the Advisory Committee
and NIH guidelines.
We believe we are in compliance with all material applicable regulatory
requirements. However, see "Risk Factors-We must comply with extensive
government regulations" for additional risks we face regarding regulatory
requirements and compliance.
FOREIGN REGULATORY ISSUES
Sales of pharmaceutical products outside the United States are subject
to foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority of a foreign country must generally be obtained
prior to the commencement of marketing in those countries. Although the time
required to obtain such approval may be longer or shorter than that required for
FDA approval, the requirements for FDA approval are among the most detailed in
the world and FDA approval generally takes longer than foreign regulatory
approvals.
EMPLOYEES
We currently have 46 full-time employees. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good. See "Risk Factors-We may
not be able to retain our key management and scientific personnel."
13
RISK FACTORS
Our business is subject to numerous risks.
WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NEVER BE PROFITABLE. From
our inception through December 31, 2000, we had an accumulated deficit of
approximately $84.2 million. We will continue to incur losses for the
foreseeable future as a result of the various costs associated with our
research, development, financial, administrative, regulatory, and management
activities. We may never achieve or sustain profitability.
OUR PRODUCTS ARE AT VARIOUS STAGES OF DEVELOPMENT AND MAY NOT BE
SUCCESSFULLY DEVELOPED OR COMMERCIALIZED. We do not currently have any products
being sold on the commercial market. Our proposed products are at various stages
of development, but all will require significant further capital expenditures,
development, testing, and regulatory clearances prior to commercialization. We
are subject to the risk that some or all of our proposed products:
- will be found to be ineffective or unsafe;
- will not receive necessary regulatory clearances;
- will be unable to get to market in a timely manner;
- will not be capable of being produced in commercial quantities
at reasonable costs;
- will not be successfully marketed; or
- will not be widely accepted by the physician community.
We may experience unanticipated problems relating to product
development, testing, regulatory compliance, manufacturing, marketing and
competition, and our costs and expenses could exceed current estimates. We
cannot predict whether we will successfully develop and commercialize any
products. Of our product candidates, Zomaril is furthest in development and any
significant delays in its development, regulatory approval or commercialization
may seriously harm our business.
Our Spheramine product is based upon new technology which may be risky
and fail to show efficacy. We are not aware of any other cell therapy products
for CNS disorders that have been approved by the FDA or any similar foreign
government entity and cannot assure you that we will be able to obtain the
required regulatory approvals for any products based upon such technology.
WE MUST COMPLY WITH EXTENSIVE GOVERNMENT REGULATIONS. Our research,
development, preclinical and clinical trial activities and the manufacture and
marketing of any products that we may successfully develop are subject to an
extensive regulatory approval process by the FDA and other regulatory agencies
in the U.S. and other countries. The process of obtaining required regulatory
approvals for drugs, including conducting preclinical and clinical testing to
determine safety and efficacy, is lengthy, expensive and uncertain. Even after
such time and expenditures, we may not obtain necessary regulatory approvals for
clinical testing or for the manufacturing or marketing of any products. We have
limited experience in obtaining FDA approval. Regulatory approval may entail
limitations on the indicated usage of a drug, which may reduce the drug's market
potential. Even if regulatory clearance is obtained, post-market evaluation of
the products, if required, could result in restrictions on a product's marketing
or withdrawal of the product from the market as well as possible civil and
criminal sanctions. We depend on third-party laboratories and medical
institutions conducting preclinical studies and clinical trials for our products
to maintain both good laboratory and good clinical practices, which are outside
our direct control. We will also depend upon third party manufacturers for the
production of any products we may successfully develop to comply with current
Good Manufacturing Practices, which are similarly outside our direct control.
14
Our regulatory submissions may be delayed or we may cancel plans to
make submissions for proposed products for a number of reasons, including:
- unanticipated preclinical testing or clinical trial reports;
- changes in regulations or the adoption of new regulations;
- unanticipated enforcement of existing regulations;
- unexpected technological developments; and
- developments by our competitors.
Consequently, we cannot assure you that we will make our submissions
promptly, or at all, or that our submissions will meet the approval from the
FDA. If our corporate partners and we are unable to obtain regulatory approval
for our products, our business will be seriously harmed.
In addition, we and our collaborative partners may be subject to
regulation under state and federal laws, including requirements regarding
occupational safety, laboratory practices, environmental protection and
hazardous substance control, and may be subject to other local, state, federal
and foreign regulation. We cannot predict the impact of such regulation on us,
although it could seriously harm our business.
WE FACE MANY UNCERTAINTIES RELATING TO OUR HUMAN CLINICAL TRIAL
STRATEGY AND RESULTS. In order to obtain the regulatory approvals that we need
to commercialize any of our product candidates, we must demonstrate that each
product candidate is safe and effective for use in humans for each target
indication. Several of our product candidates, including Zomaril and CeaVac, are
currently in Phase II and Phase III human clinical trials. We may not be able to
demonstrate that any of our product candidates will be safe or effective in
these advanced trials that involve larger numbers of patients. Our product
development programs may be curtailed, redirected or eliminated at any time for
some or all of the following reasons:
- unanticipated, adverse or ambiguous results;
- undesirable side effects which delay or extend the trials;
- our inability to locate, recruit and qualify a sufficient
number of patients for our trials;
- regulatory delays or other regulatory actions;
- difficulties in manufacturing sufficient quantities of the
particular product candidate or any other components needed
for our preclinical testing or clinical trials;
- change in the focus of our development efforts; and
- reevaluation of our clinical development strategy.
Accordingly, our clinical trials may not proceed as anticipated or
otherwise adequately support our applications for regulatory approval.
We face an inherent risk of clinical trial liability claims in the
event that the use or misuse of our product candidates results in personal
injury or death. Our clinical liability insurance coverage may not be sufficient
to cover claims that may be made against us. Any claims against us, regardless
of their merit, could severely harm our financial condition, strain our
management and other resources or adversely impact or destroy the prospects for
commercialization of the product which is the subject of any such claim.
WE MAY BE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS. Our
future success will depend to a significant extent on our ability to:
15
- obtain and keep patent protection for our products and
technologies on an international basis;
- enforce our patents to prevent others from using our
inventions;
- maintain and prevent others from using our trade secrets; and
- operate and commercialize products without infringing on the
patents or proprietary rights of others.
We cannot assure you that our patent rights will afford any competitive
advantages and these rights may be challenged or circumvented by third parties.
Further, patents may not be issued on any of our pending patent applications in
the U.S. or abroad. Because of the extensive time required for development,
testing and regulatory review of a potential product, it is possible that before
a potential product can be commercialized, any related patent may expire, or
remain in existence for only a short period following commercialization,
reducing or eliminating any advantage of the patent.
If we sue others for infringing our patents, a court may determine that
such patents are invalid or unenforceable. Even if the validity of our patent
rights is upheld by a court, a court may not prevent the alleged infringement of
our patent rights on the grounds that such activity is not covered by our patent
claims.
In addition, third parties may sue us for infringing their patents. In
the event of a successful claim of infringement against us, we may be required
to:
- pay substantial damages;
- stop using our technologies and methods;
- stop certain research and development efforts;
- develop non-infringing products or methods; and
- obtain one or more licenses from third parties.
If required, we cannot assure you that we will be able to obtain such
licenses on acceptable terms, or at all. If we are sued for infringement, we
could encounter substantial delays in development, manufacture and
commercialization of our product candidates. Any litigation, whether to enforce
our patent rights or to defend against allegations that we infringe third party
rights, will be costly, time consuming, and may distract management from other
important tasks.
We also rely in our business on trade secrets, know-how and other
proprietary information. We seek to protect this information, in part, through
the use of confidentiality agreements with employees, consultants, advisors and
others. Nonetheless, we cannot assure you that those agreements will provide
adequate protection for our trade secrets, know-how or other proprietary
information and prevent their unauthorized use or disclosure. To the extent that
consultants, key employees or other third parties apply technological
information independently developed by them or by others to our proposed
products, disputes may arise as to the proprietary rights to such information
which may not be resolved in our favor. Most of our consultants are employed by
or have consulting agreements with third parties and any inventions discovered
by such individuals generally will not become our property. There is a risk that
other parties may breach confidentiality agreements or that our trade secrets
become known or independently discovered by competitors, which could adversely
affect us.
WE FACE INTENSE COMPETITION. Competition in the pharmaceutical and
biotechnology industries is intense and is expected to increase. We face, and
will continue to face, competition from numerous companies that currently
market, or are developing, products for the treatment of the diseases and
disorders we have targeted. Many of these entities have significantly greater
research and development
16
capabilities, experience in obtaining regulatory approvals and manufacturing,
marketing, financial and managerial resources than we have. We also compete with
universities and other research institutions in the development of products,
technologies and processes, as well as the recruitment of highly qualified
personnel. Our competitors may succeed in developing technologies or products
that are more effective than the ones we have under development or that render
our proposed products or technologies noncompetitive or obsolete. In addition,
certain of such competitors may achieve product commercialization or patent
protection earlier than us. For example, with respect to Zomaril, several
competing products are already on the market and Zomaril, expected to be the
fifth or sixth such product, will face significant competition.
WE ARE DEPENDENT UPON OUR KEY COLLABORATIVE RELATIONSHIPS AND LICENSE
AND SPONSORED RESEARCH AGREEMENTS. As a company with limited resources, we rely
significantly on the resources of third parties to conduct research and
development and complete the regulatory approval process on our behalf. For
example, our ability to ultimately derive revenues from Zomaril is almost
entirely dependent upon Novartis conducting the Phase III trials and completing
the regulatory approval process and implementing the marketing program necessary
to commercialize Zomaril if the product is approved by the FDA. Beyond our
contractual rights, we cannot control the amount or timing of resources that
Novartis devotes to these matters. In addition, we receive substantial
government funding for our Spheramine and cancer immunotherapeutic programs. We
cannot assure you that we will continue to receive such governmental funding. If
such funds are no longer available, some of our current and future development
efforts may be delayed or seriously harmed. We depend on our ability to maintain
existing collaborative relationships, to develop new collaborative relationships
with third parties and to acquire or in-license additional products and
technologies for the development of new product candidates. We cannot assure you
that any such third-party technology will be available on acceptable terms, if
at all.
Conflicts with our collaborators and strategic partners could have an
adverse impact on our relationships with them and impair our ability to enter
into future collaborations, either of which could seriously harm our business.
Our collaborators have, and may, to the extent permitted by our agreements,
develop competing products, preclude us from entering into collaborations with
their competitors or terminate their agreements with us prematurely. Moreover,
disagreements could arise with our collaborators or strategic partners over
rights to our intellectual property and our rights to share in any of the future
revenues from products or technologies resulting from use of our technologies,
or our activities in separate fields may conflict with other business plans of
our collaborators. Schering AG, our collaborator for the development and
commercialization of Spheramine, may terminate their sublicense agreement with
us for any reason by providing 90 days prior notice to us.
WE MUST MEET PAYMENT AND OTHER OBLIGATIONS UNDER OUR LICENSE AND
SPONSORED RESEARCH AGREEMENT. Our license agreements relating to the
in-licensing of technology generally require the payment of up-front license
fees and royalties based on sales with minimum annual royalties, the use of due
diligence in developing and bringing products to market, the achievement of
funding milestones and, in some cases, the grant of stock to the licensor. Our
sponsored research agreements generally require periodic payments on an annual
or quarterly basis. Our failure to meet financial or other obligations under
license or sponsored research agreements in a timely manner could result in the
loss of our rights to proprietary technology or our right to have the applicable
university or institution conduct research and development efforts.
WE MAY BE DEPENDENT UPON THIRD PARTIES TO MANUFACTURE AND MARKET ANY
PRODUCTS WE SUCCESSFULLY DEVELOP. We currently do not have the resources or
capacity to commercially manufacture or directly market any of our proposed
products. Collaborative arrangements may be pursued regarding the manufacture
and marketing of any products that may be successfully developed. We may be
unable to
17
enter into additional collaborative arrangements to manufacture or market any
proposed products or, in lieu thereof, establish our own manufacturing
operations or sales force.
WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR GROWTH, WHICH COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Our success will depend on our
ability to expand and manage our growth. We may not be able to manage our
growth, to meet the staffing requirements of additional collaborative
relationships or successfully assimilate and train new employees. If we continue
to grow, our existing management skills and systems may not be adequate and we
may not be able to manage any additional growth effectively. If we fail to
achieve any of these goals, there could be a material adverse effect on our
business, financial condition or results of operations.
WE MAY NOT BE ABLE TO RETAIN OUR KEY MANAGEMENT AND SCIENTIFIC
PERSONNEL. As a small company with a limited number of personnel, we are highly
dependent on the services of Dr. Louis R. Bucalo, our Chairman, President and
Chief Executive Officer, as well as the other principal members of our
management and scientific staff. The loss of one or more of such individuals
could substantially impair ongoing research and development programs and could
hinder our ability to obtain corporate partners. Our success depends in large
part upon our ability to attract and retain highly qualified personnel. We
compete in our hiring efforts with other pharmaceutical and biotechnology
companies, as well as universities and nonprofit research organizations, and we
may have to pay higher salaries to attract and retain personnel.
WE MAY NEED ADDITIONAL FINANCING. At December 31, 2000, we had
approximately $117.5 million of cash, cash equivalents, and marketable
securities that we believe will enable us to fund our operations through 2005.
We may need to seek additional financing to continue our product development
activities, and will be required to obtain substantial funding to commercialize
any products that we may successfully develop. We do not have any funding
commitments or arrangements. If we are unable to generate adequate revenues,
enter into a corporate collaboration, complete a debt or equity offering, or
otherwise obtain any needed financing, we will be required to reduce, defer or
discontinue our product development programs. We may be required to obtain funds
on terms that are not acceptable, if at all.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY
IMPACT OUR STOCK PRICE. Future sales of our common stock by existing
stockholders pursuant to Rule 144 under the Securities Act, pursuant to an
effective registration statement or otherwise, could have an adverse effect on
the price of our securities.
OUR STOCK PRICE HAS BEEN AND WILL LIKELY CONTINUE TO BE VOLATILE.
Our stock price could fluctuate significantly due to a number of factors,
including:
- variations in our anticipated or actual operating results;
- sales of substantial amounts of our stock;
- announcements about us or about our competitors, including
introductions of new products;
- litigation and other developments relating to our patents or
other proprietary rights or those of our competitors;
- conditions in the pharmaceutical or biotechnology industries;
- governmental regulation and legislation; and
- change in securities analysts' estimates of our performance,
or our failure to meet analysts' expectations.
Many of these factors are beyond our control.
18
In addition, the stock markets in general, and the American Stock
Exchange and the market for pharmaceutical and biotechnological companies in
particular, have experienced extreme price and volume fluctuations recently.
These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. These broad market and industry
factors may adversely affect the market price of our common stock, regardless of
our actual operating performance.
In the past, companies that have experienced volatility in the market
prices of their stock have been the object of securities class action
litigation. If we were the object of securities class action litigation, it
could result in substantial costs and a diversion of management's attention and
resources.
ITEM 2. PROPERTIES
We have a four-year lease, expiring in June 2002, for approximately
10,000 square feet of office space in South San Francisco, California. We also
have a five-year lease, expiring in October 2003, for approximately 4,200 square
feet of office and laboratory space in Somerville, New Jersey.
ITEM 3. LEGAL PROCEEDINGS
In March 2000, a former investor relations consultant commenced an
action in the Supreme Court of the State of New York, New York County, alleging
that Titan purportedly breached an agreement dated February 24, 1997, by failing
to delivery certain warrants to the plaintiffs. We are vigorously defending the
pending action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) PRICE RANGE OF SECURITIES
Our common stock trades on the American Stock Exchange under the symbol
TTP. The table below sets forth the high and low sales prices of our common
stock as reported by the American Stock Exchange for the periods indicated.
HIGH LOW
Fiscal Year Ended December 31, 2000:
First Quarter......................................... $53.000 $15.000
Second Quarter........................................ $45.000 $18.875
Third Quarter......................................... $65.300 $33.000
Fourth Quarter........................................ $64.750 $31.400
Fiscal Year Ended December 31, 1999:
First Quarter......................................... $4.750 $3.250
Second Quarter........................................ $4.938 $2.750
Third Quarter......................................... $13.563 $4.313
Fourth Quarter........................................ $19.500 $6.750
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
The number of record holders of our common stock as of March 23, 2001
was approximately 175. Based on the last ADP search, we believe there are in
excess of 10,000 beneficial holders of the common stock.
(c) DIVIDENDS
We have never paid a cash dividend on our common stock and anticipate
that for the foreseeable future any earnings will be retained for use in our
business and, accordingly, do not anticipate the payment of cash dividends.
20
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below summarizes certain
financial data which has been derived from and should be read in conjunction
with our more detailed financial statements and footnotes thereto included in
the section beginning on page F-1. See also "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenue (1) $ 1,880 $ 337 $ - $ 17,500 $ 259
Operating expenses:
Research and development 16,744 9,429 7,813 9,310 5,567
Acquired in-process research and
development (2) 4,969 136 - 9,500 -
General and administrative 4,070 2,794 3,708 6,514 5,264
Other income (expense), net (3) 5,115 726 907 8,415 (2,294)
------------------------------------------------------------------------
Net (loss) income $ (18,788) $ (11,296) $ (10,614) $ 592 $ (12,856)
========================================================================
Basic net (loss) income per share $(0.73) $(0.70) $(0.81) $0.05 $(1.67)
Diluted net (loss) income per share $(0.73) $(0.70) $(0.81) $0.04 $(1.67)
Shares used in computing:
Basic net (loss) income per share 25,591 16,112 13,109 13,002 10,936
Diluted net (loss) income per share 25,591 16,112 13,109 13,477 10,936
- -----------
(1) Revenues for 1997 include $17.4 million from fees related to the
sublicense of Zomaril to Novartis.
(2) Acquired in-process research and development reflects the acquisition
of GeoMed in 2000, the acquisition of a minority interest in Theracell
in 1999, and the acquisition of an exclusive worldwide license for
iloperidone in 1997.
(3) Other income for 1997 includes a gain of $8.4 million from the sale of
a research technology.
AS OF DECEMBER 31,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents, and marketable
securities $117,523 $46,454 $11,655 $24,387 $1,377
Working capital 115,386 45,128 10,215 23,642 12,174
Total assets 118,442 47,362 12,228 25,594 16,366
Long-term debt - - - - 1,200
Total stockholders' equity 114,738 44,302 9,406 17,178 11,411
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto beginning on page F-1 in
this report.
The following discussion contains certain forward-looking statements,
within the meaning of the "safe harbor" provisions of the Private Securities
Reform Act of 1995, the attainment of which involves various risks and
uncertainties. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "believe,"
"estimate," "anticipate," "continue," or similar terms, variations of those
terms or the negative of those terms. Our actual results may differ materially
from those described in these forward-looking statements due to, among other
factors, the results of ongoing research and development activities and
pre-clinical testing, the results of clinical trials and the availability of
additional financing through corporate partnering arrangements or otherwise.
Spheramine(R), CeaVac(R), TriAb(R), TriGem(TM), Pivanex(R) and CCM(TM)
are trademarks of Titan Pharmaceuticals, Inc. Zomaril(TM) is a trademark of
Novartis Pharma AG.
OVERVIEW
We are a biopharmaceutical company developing proprietary therapeutics
for the treatment of central nervous system (CNS) disorders, cancer and other
serious and life-threatening diseases.
Our most advanced product candidate, Zomaril (iloperidone), is a novel
antipsychotic agent under development for the treatment of patients with
schizophrenia. Zomaril is currently in Phase III clinical testing through a
licensing and development agreement with Novartis Pharma AG. We have been
advised by Novartis that in two completed efficacy studies, Zomaril
statistically significantly reduced the symptoms of schizophrenia compared to
placebo, and demonstrated an excellent safety and tolerability profile. Also in
the CNS arena, we are developing a unique cell based therapeutic, Spheramine,
for the treatment of patients with Parkinson's disease. In January 2001, we
announced treatment of the first cohort of six patients with moderately severe
to severe Parkinson's disease receiving Spheramine. Preliminary results from
this Phase I/II study will be presented later in the year at scientific
meetings. We have entered into a collaboration with Schering AG for the
development, manufacture and commercialization of this treatment for Parkinson's
disease, and Schering is funding the manufacturing, development and further
clinical studies of the product and will make milestone payments and pay a
royalty on net product sales in exchange for worldwide commercialization rights.
Our cancer portfolio includes three therapeutic monoclonal antibodies-CeaVac,
TriAb, and TriGem-that are designed to stimulate a patient's immune system
against cancer cells. CeaVac is currently being evaluated in a large
multi-center double-blind placebo-controlled Phase III clinical trial in
patients with metastatic colorectal cancer. TriAb is currently being evaluated
in a double-blind placebo-controlled Phase II clinical study in patients with
breast cancer. TriGem is being studied in a Phase II trial of malignant
melanoma. We are also currently conducting a Phase II clinical trial with
Pivanex, a novel synthetic analog of butyric acid, for the treatment of patients
with non-small cell lung cancer. Gallium maltolate, an orally administered form
of gallium, will be tested in a Phase II study in patients with prostate cancer
and multiple myeloma. Additionally, we are planning a Phase I/II study with
gallium maltolate in HIV patients. Our other programs in pre-clinical
development include a cancer gene therapy product and a long-term drug delivery
technology.
22
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenues in 2000 were $1.9 million compared to $0.3 million for 1999,
an increase of $1.6 million. The increase in revenue is primarily due to our
corporate partnership with Schering AG for the development and commercialization
of Spheramine for the treatment of Parkinson's disease.
Ongoing research and development expenses for 2000 were $16.7 million,
compared to $9.4 million for 1999, an increase of $7.3 million. The planned
increase in ongoing research and development expenditures from 1999 to 2000 was
a result of the expansion of our randomized, placebo-controlled Phase III
clinical study of CeaVac in Dukes D colorectal cancer, commencement of our Phase
I/II clinical study of Spheramine in Parkinson's disease, advancement of our
preclinical development programs and increased manufacturing and development
activity for all of our product candidates. Also in year 2000 we recorded a $5.0
million acquired in-process research and development expense in connection with
the acquisition of gallium maltolate, a novel and proprietary agent for the
potential treatment of cancer and other conditions, including HIV infection. The
entire purchase price was charged to acquired in-process research and
development on the acquisition date in accordance with generally accepted
accounting principles. See Note 8 to the Consolidated Financial Statements
beginning on page F-1 in this report.
General and administrative expenses for 2000 were $4.1 million compared
to $2.8 million for 1999, an increase of $1.3 million. The increase was in
support of our expanded clinical operations, infrastructure development and
non-cash compensation charges related to stock options.
Other income, net, for 2000 was $5.1 million compared to $0.7 million
for 1999, an increase of $4.4 million. Other income, net, for 2000 and 1999
primarily consisted of interest income. The increase in interest income resulted
from a significantly larger cash and marketable securities position in 2000.
As a result of the foregoing, we had a net loss of $18.8 million in
2000 compared to a net loss of $11.3 million in 1999.
None of our products have been commercialized, and we do not expect to
generate any revenue from product sales or royalties until at least the fourth
quarter of 2002. With the advancement in clinical development of our products,
we anticipate research and development expenses will increase in the near
future, while general and administrative costs necessary to support such
research and development activities will increase at a controlled rate. We will
also seek to identify new technologies and/or product candidates for possible
in-licensing or acquisition. Accordingly, we expect to incur operating losses
for the foreseeable future. We cannot assure you that we will ever achieve
profitable operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues in 1999 of $0.3 million consisted primarily of U.S. government
grants. There were no revenues for 1998.
Research and development expenses for 1999 were $9.6 million, including
$0.1 million of acquired in-process research and development related to the
acquisition of the minority interest of Theracell, compared to $7.8 million for
1998, an increase of $1.8 million. The planned increase compared to 1998 was
attributable to patient enrollment in the clinical trial with CeaVac in
colorectal cancer and the final phases of the pre-clinical program for
Spheramine in preparation for Phase I/II clinical trial. General and
23
administrative expenses for 1999 were $2.8 million compared to $3.7 million for
1998, a decrease of $0.9 million. The decrease was attributable to ongoing
efforts to contain non-research operating costs.
Other income for 1999 was $0.7 million compared to $0.9 million for
1998, a decrease of $0.2 million. Other income for 1999 and 1998 primarily
consisted of interest income.
As a result of the foregoing, we had a net loss of $11.3 million in
1999 compared to a net loss of $10.6 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations since inception primarily through our
initial public offering and private placements of our securities, as well as
proceeds from warrant and option exercises, corporate licensing and
collaborative agreements, and government sponsored research grants. At December
31, 2000, we had $117.5 million of cash, cash equivalents, and marketable
securities.
In November 2000, we completed a private placement of 1.2 million
shares of our common stock for net proceeds of approximately $40.9 million,
after deducting fees and commissions and other expenses of the offering.
In March 2000, we completed a private placement of 1.2 million shares
of our common stock for net proceeds of approximately $38.8 million, after
deducting fees and commissions and other expenses of the offering.
In October 1999, we called for the redemption on November 19, 1999 (the
Redemption Date) of our outstanding Class A Warrants for cash at the redemption
price of $0.05 per warrant. Rather than surrendering the warrants for
redemption, warrant holders had the option to purchase our common stock by
exercising the warrant at a price of $6.02 per share before the Redemption Date.
The warrant call resulted in 7.1 million, or 99.4%, of our outstanding Class A
Warrants being exercised with net proceeds of $39.4 million, after deducting
advisory fees and other related expenses.
In January 1999, we completed a private placement of 2.3 million shares
of our common stock for net proceeds of $5.8 million, after deducting fees and
commissions and other expenses of the offering.
Our operating activities used $13.2 million, $10.9 million and $13.2
million of cash in 2000, 1999 and 1998, respectively. Uses of cash in operating
activities were primarily to fund product development programs and
administrative expenses. We have entered into various agreements with research
institutions, universities, and other entities for the performance of research
and development activities and for the acquisition of licenses related to those
activities. The aggregate commitments we have under these agreements, including
minimum license payments, for the next 12 months is approximately $0.7 million.
Certain of the licenses require us to pay royalties on future product sales, if
any. In addition, in order to maintain license and other rights while products
are under development, we must comply with customary licensee obligations,
including the payment of patent related costs and meeting project-funding
milestones. We also have lease commitments under non-cancelable operating leases
of $0.8 million until 2003.
We expect to continue to incur substantial additional operating losses
from costs related to continuation and expansion of product and technology
development, clinical trials, and administrative activities. We believe that we
currently have sufficient working capital to sustain our planned operations
through 2005.
24
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133." We are required to adopt SFAS 133 effective January
1, 2001. Because we do not hold any derivative instruments and do not engage in
hedging activities, management does not believe the adoption of SFAS 133 will
have an impact on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our portfolio of marketable securities creates an exposure to interest
rate risk. We adhere to an investment policy that requires us to limit amounts
invested in securities based on maturity, type of instrument, investment grade
and issuer. We satisfy liquidity requirements by investing excess cash in
securities with different maturities to match projected cash needs and limit
concentration of credit risk by diversifying our investments among a variety of
high credit-quality issuers. We do not use derivative financial instruments in
our investment portfolio.
The following table summarizes principal amounts and related
weighted-average interest rates by year of maturity on our interest-bearing
investment portfolio at December 31, 2000 (in thousands, except interest rate):
CASH EQUIVALENTS AND MARKETABLE ESTIMATED
SECURITIES: 2001 2002 2003 TOTAL FAIR VALUE
Variable rate securities....... $17,835 - - $17,835 $17,835
Average interest rate.......... 6.330% - - 6.330%
Fixed rate securities.......... $41,650 $39,225 $12,300 $93,175 $95,258
Average interest rate.......... 6.232% 6.874% 5.563% 6.414%
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included in a separate section of this
Report. See "Index to Consolidated Financial Statements" on Page F-1.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The following table sets forth the names, ages and positions of our
executive officers and directors.
NAME AGE POSITION
Louis R. Bucalo, M.D. (1)....................... 42 Chairman, President and Chief Executive Officer
Sunil Bhonsle................................... 51 Executive Vice President and Chief Operating Officer
Richard C. Allen, Ph.D.......................... 58 Executive Vice President, Cell Therapy
Robert E. Farrell............................... 51 Executive Vice President and Chief Financial Officer
Jan D. Wallace, M.D. ........................... 59 Executive Vice President, Clinical Development and
Regulatory Affairs
Victor Bauer, Ph.D.............................. 65 Executive Director, Corporate Development and Director
Ernst-Gunter Afting, M.D., Ph.D. (2)(3)......... 58 Director
Eurelio M. Cavalier (1)......................... 68 Director
Michael K. Hsu (2).............................. 51 Director
Hubert Huckel, M.D. (1)(2)(3)................... 69 Director
Ley S. Smith (1)................................ 66 Director
Konrad M. Weis, Ph.D. (1)(3).................... 72 Director
- -----------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Louis R. Bucalo, M.D. is a founder of Titan and has served as our
President and Chief Executive Officer since January 1993. Dr. Bucalo has served
as a director of Titan since March 1993 and was elected Chairman of the Board of
Directors in January 2000. From July 1990 to April 1992, Dr. Bucalo was
Associate Director of Clinical Research at Genentech, Inc., a biotechnology
company. Dr. Bucalo holds an M.D. from Stanford University and a B.A. in
biochemistry from Harvard University.
Sunil Bhonsle has served as our Executive Vice President and Chief
Operating Officer since September 1995. Mr. Bhonsle served in various positions,
including Vice President and General Manager-Plasma Supply and Manager-Inventory
and Technical Planning, at Bayer Corporation from July 1975 until April 1995.
Mr. Bhonsle holds an M.B.A. from the University of California at Berkeley and a
B.Tech. in chemical engineering from the Indian Institute of Technology.
Richard C. Allen, Ph.D., has served as our Executive Vice President,
Cell Therapy, since August 1995. From January 1995 until it was merged into
Titan in March 1999, he also served as President and Chief Executive Officer of
Theracell, Inc. From June 1991 until December 1994, Dr. Allen was Vice President
and General Manager of the Neuroscience Strategic Business Unit of
Hoechst-Roussel Pharmaceuticals, Inc. Dr. Allen holds a Ph.D. in medicinal
chemistry and a B.S. in pharmacy from the Medical College of Virginia.
Robert E. Farrell has served as our Executive Vice President and Chief
Financial Officer since September 1996. Mr. Farrell was employed by Fresenius
USA, Inc. from 1991 until August 1996 where he
26
served in various capacities, including Vice President Administration, Chief
Financial Officer and General Counsel. His last position was Corporate Group
Vice President. Mr. Farrell holds a B.A. from the University of Notre Dame and a
J.D. from Hastings College of Law, University of California.
Jan D. Wallace, M.D., has served as our Executive Vice President of
Clinical Development and Regulatory Affairs since March 2000. From March 1998
until joining Titan, Dr. Wallace served as Senior Vice President, Clinical and
Regulatory Affairs, for Elan Pharmaceuticals. From May 1992 until March 1998, he
served as Vice President, Clinical and Regulatory Affairs, of Athena
Neurosciences, Inc. Prior thereto, Dr. Wallace spent approximately five years at
Warner-Lambert/Parke Davis, employed in various executive positions.
Victor J. Bauer, Ph.D., has served on our Board of Directors since
November 1997. He joined Titan in February 1997 and currently serves as our
Executive Director of Corporate Development. From April 1996 until its merger
into Titan, Dr. Bauer also served as a director and Chairman of Theracell. From
December 1992 until February 1997, Dr. Bauer was a self-employed consultant to
companies in the pharmaceutical and biotechnology industries. Prior to that
time, Dr. Bauer was with Hoechst-Roussel Pharmaceuticals Inc., where he served
as President from 1988 through 1992.
Ernst-Gunter Afting, M.D., Ph.D., has served on our Board of Directors
since May 1996. He has served as the President of the GSF-National Center for
Environment and Health, a government research center in Germany, since 1995.
From 1984 until 1995, Dr. Afting was employed in various capacities by the
Hoechst Group, serving as Divisional Head of the Pharmaceuticals Division of the
Hoechst Group from 1991 to 1993 and as President and Chief Executive Officer of
Roussel Uclaf (a majority stockholder of Hoechst AG) in Paris from 1993 until
1995. He currently serves on the Board of Directors of Sequenom, Inc.
Eurelio M. Cavalier has served on our Board of Directors since
September 1998. He was employed in various capacities by Eli Lilly & Co. from
1958 until his retirement in 1994, serving as Vice President Sales from 1976 to
1982 and Group Vice President U.S. Pharmaceutical Business Unit from 1982 to
1993. Mr. Cavalier currently serves on the Board of Directors of ProSolv, Inc.
He serves on the Advisory Board of COR Therapeutics and Indiana Heart Institute.
Michael K. Hsu has served on our Board of Directors since March 1993.
He is currently a General Partner of EndPoint Merchant Group, a merchant bank
specializing in making investments into the healthcare and life science
industries. Mr. Hsu served as Director-Corporate Finance of National Securities
Corp. from November 1995 through April 1998, and from November 1994 through
October 1995 served with Coleman & Company Securities in the same capacity. Mr.
Hsu previously held various executive positions with Steinberg and Lyman Health
Care Company, Ventana Venture Growth Fund and Asian Pacific Venture Group
(Thailand).
Hubert Huckel, M.D. has served on our Board of Directors since October
1995. He served in various positions with The Hoechst Group from 1964 until his
retirement in December 1992. At the time of his retirement, Dr. Huckel was
Chairman of the Board of Hoechst-Roussel Pharmaceuticals, Inc., Chairman and
President of Hoechst-Roussel Agri-Vet Company and a member of the Executive
Committee of Hoechst Celanese Corporation. He currently serves on the Board of
Directors of Thermogenesis Corp. and Amarin Pharmaceuticals, plc and is a member
of their compensation committees.
Ley S. Smith, has served on our Board of Directors since July 2000. He
served in various positions with The Upjohn Company and Pharmacia & Upjohn from
1958 until his retirement in November 1997. From 1991 to 1993 he served as Vice
Chairman of the Board of The Upjohn Company,
27
and from 1993 to 1995 he was President and Chief Operating Officer of The Upjohn
Company. At the time of his retirement, Mr. Smith was Executive Vice President
of Pharmacia & Upjohn, and President of Pharmacia & Upjohn's U.S. Pharma Product
Center. He currently serves on the Board of Directors of BioStar, Inc., MDS,
Inc., Crescendo Pharmaceuticals, Illuminis and is a member of the Regional Board
of National City Corp.
Konrad M. Weis, Ph.D., has served on our Board of Directors since March
1993. He is the former President, Chief Executive Officer and Honorary Chairman
of Bayer Corporation. Dr. Weis serves as a director of PNC Equity Management
Company, Michael Baker Corporation, Visible Genetics, Inc. and Demegen, Inc.
Directors serve until the next annual meeting or until their successors
are elected and qualified. Officers serve at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment. See "Item
11. Executive Compensation-Employment Agreements."
DIRECTOR COMPENSATION
Directors are entitled to receive options pursuant to our Amended
1998 Stock Option Plan. During 2000, each of our current directors received a
bi-annual (i.e. every two years) option grant to purchase 15,000 shares of
our common stock at an exercise price of $43.625. In addition, each director
received an option grant to purchase 5,000 shares of our common stock at an
exercise price of $43.625 for each committee served. Upon being elected
director in July 2000, Mr. Ley S. Smith received an option grant to purchase
10,000 shares of our common stock at an exercise price of $33.75. Directors
are reimbursed for their expenses in attending Board of Directors meetings.
Directors are not precluded from serving us in any other capacity and
receiving compensation therefor.
We are a party to a consulting agreement with Dr. Afting pursuant to
which he receives fees of $7,000 annually.
We are a party to a consulting agreement with Dr. Jaffe, a former
director of Titan, pursuant to which he receives fees of $35,000 annually.
BOARD COMMITTEES AND DESIGNATED DIRECTORS
The Board of Directors has an Executive Committee, a Compensation
Committee and an Audit Committee. The Executive Committee exercises all the
power and authority of the Board of Directors in the management of Titan between
Board meetings, to the extent permitted by law. The Compensation Committee makes
recommendations to the Board concerning salaries and incentive compensation for
our officers and employees and administers our stock option plans. The Audit
Committee reviews the results and scope of the audit and other accounting
related matters.
The Board of Directors met four times during 2000 and also took
action by unanimous written consent. The Executive Committee met four times
and also took action by unanimous written consent, the Compensation Committee
met two times and also took action by unanimous written consent, and the
Audit Committee met one time. Each of our current directors attended at least
75% of the aggregate of (i) the meetings of the Board of Directors and (ii)
meetings of any Committees of the Board on which such person served which
were held during the time such person served, except that Mr. Smith attended
two out of three meetings held after he was appointed a director, and Mr.
Cavalier attended five out of seven meetings.
28
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers, directors and persons who beneficially own more
than 10% of a registered class of our equity securities to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities. Such
executive officers, directors, and greater than 10% beneficial owners are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
filed by such reporting persons.
Based solely on our review of such forms furnished to us and written
representations from certain reporting persons, we believe that all filing
requirements applicable to our executive officers, directors and greater than
10% beneficial owners were complied with, except as follows: Dr. Afting filed a
Form 4 three days late, Dr. Bauer filed a Form 4 approximately two weeks late,
and Mr. Smith filed a Form 3 and Form 4 several weeks late.
ITEM 11. EXECUTIVE COMPENSATION.
The following summary compensation table sets forth the aggregate
compensation awarded to, earned by, or paid to the Chief Executive Officer and
to executive officers whose annual compensation exceeded $100,000 for the fiscal
year ended December 31, 2000 (collectively, the "named executive officers") for
services during the fiscal years ended December 31, 2000, 1999 and 1998:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY
Louis R. Bucalo 2000 $261,891
President and Chief Executive Officer 1999 $222,013
1998 $243,100
Sunil Bhonsle 2000 $202,842
Executive Vice President and 1999 $180,100
Chief Operating Officer 1998 $194,800
Richard C. Allen 2000 $202,842
Executive Vice President 1999 $180,475
1998 $197,800
Robert E. Farrell 2000 $195,211
Executive Vice President and 1999 $173,425
Chief Financial Officer 1998 $190,400
Jan D. Wallace 2000 $232,929(1)
Executive Vice President
- -----------
(1) Dr. Wallace joined Titan in March 2000.
29
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option
grants made to the named executive officers during the fiscal year ended
December 31, 2000. No stock appreciation rights were granted to these
individuals during such year.
INDIVIDUAL GRANT
----------------------------------------------------
NAME NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES LAST EXERCISE OR BASE EXPIRATION
OPTIONS GRANTED FISCAL YEAR PRICE ($/SH) (1) DATE
Louis R. Bucalo............................. 20,000 3.32% $43.625 08/28/2010
Jan D. Wallace ............................. 230,000 38.14% $38.750 03/10/2010
- -----------
(1) The exercise price may be paid in cash, in shares of common stock
valued at the fair market value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchase
shares. We may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by
the optionee in connection with such exercise.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises
and option holdings for the fiscal year ended December 31, 2000 with respect to
the named executive officers. No stock appreciation rights were exercised during
such year or were outstanding at the end of that year.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT FY-END OPTIONS AT FY-END (1)
ACQUIRED ON -------------------------------------------------------------------------
NAME EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Louis R. Bucalo......... -0- 974,034 273,140 $27,678,361 $5,812,766
Sunil Bhonsle........... -0- 517,743 117,556 $15,199,672 $2,666,405
Richard C. Allen........ -0- 377,350 84,334 $11,690,184 $1,912,864
Robert E. Farrell....... 86,930 136,103 42,167 $3,702,325 $956,432
Jan D. Wallace.......... -0- 0 230,000 $0 $0
- -----------
(1) Based on the fair market value of our common stock at year-end, $35.37
per share, less the exercise price payable for such shares.
EMPLOYMENT AGREEMENTS
We are a party to an employment agreement with Dr. Bucalo expiring in
February 2004 that provides for a base annual salary of $210,000, subject to
annual increases of 5% and bonuses of up to 25% at the discretion of the Board
of Directors. In the event of the termination of the agreement with Dr. Bucalo,
other than for reasons specified therein, we are obligated to make severance
payments equal to his base annual salary for the greater of the balance of the
term of the agreement or 18 months.
Employment agreements with each of Dr. Allen, Mr. Bhonsle and Mr.
Farrell provide for a base annual salary of $185,000 subject to automatic annual
increases based on increases in the consumer price
30
index, and bonuses of up to 20% at the discretion of the Board of Directors. An
employment agreement with Dr. Wallace provides for a base annual salary of
$290,000 subject to automatic annual increases based on increases in the
consumer price index, and bonuses of up to 20% at the discretion of the Board of
Directors. In the event the employee's employment is terminated other than for
"good cause" (as defined), we are obligated to make severance payments equal to
the base annual salary for six months. All of the agreements contain
confidentiality provisions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 23, 2001, certain
information concerning the beneficial ownership of our common stock by (i) each
stockholder known by us to own beneficially five percent or more of our
outstanding common stock; (ii) each director; (iii) each executive officer; and
(iv) all of our executive officers and directors as a group, and their
percentage ownership and voting power.
PERCENT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES BENEFICIALLY OWNED (2) BENEFICIALLY OWNED
Louis R. Bucalo, M.D....................................... 1,334,125(3) 4.8%
Ernst-Gunter Afting, M.D., Ph.D............................ 41,166(4) *
Richard C. Allen, Ph.D..................................... 402,781(5) 1.5%
Victor J. Bauer, Ph.D...................................... 90,781(6) *
Sunil Bhonsle.............................................. 562,186(7) 2.0%
Eurelio M. Cavalier........................................ 23,333(8) *
Robert E. Farrell.......................................... 219,365(9) *
Michael K. Hsu............................................. 63,500(10) *
Hubert Huckel, M.D......................................... 104,399(11) *
Ley S. Smith............................................... 5,833(12) *
Jan D. Wallace, M.D........................................ 72,081(12) *
Konrad M. Weis, Ph.D....................................... 76,740(13) *
The TCW Group, Inc.
865 South Figueroa Street
Los Angeles, CA 90017................................. 1,458,323(14) 5.3%
The PNC Financial Services Group, Inc.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, PA 15222-2707.............................. 1,388,600(15) 5.0%
All executive officers and directors
as a group (12) persons................................ 2,996,290 10.9%
- -----------
* Less than one percent.
(1) Unless otherwise indicated, the address of such individual is c/o Titan
Pharmaceuticals, Inc., 400 Oyster Point Boulevard, Suite 505, South San
Francisco, California 94080.
(2) In computing the number of shares beneficially owned by a person and
the percentage ownership of a person, shares of our common stock
subject to options held by that person that are currently exercisable
or exercisable within 60 days are deemed outstanding. Such shares,
however, are not deemed outstanding for purposes of computing the
percentage ownership of each other person. Except as indicated in the
footnotes to this table and pursuant to applicable community property
laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock.
31
(3) Includes 1,033,894 shares issuable upon exercise of outstanding
options.
(4) Includes 9,666 shares issuable upon exercise of outstanding options.
(5) Includes 323,016 shares issuable upon exercise of outstanding options.
(6) Includes 75,781 shares issuable upon exercise of outstanding options.
(7) Includes 384,292 shares issuable upon exercise of outstanding options.
(8) Includes 8,333 shares issuable upon exercise of outstanding options.
(9) Includes 36,165 shares issuable upon exercise of outstanding options.
(10) Includes 43,499 shares issuable upon exercise of outstanding options.
(11) Includes 12,999 shares issuable upon exercise of outstanding options.
Includes 49,900 shares held by a family partnership for which Dr.
Huckel serves as general partner.
(12) Represents shares issuable upon exercise of outstanding options.
(13) Includes 46,283 shares issuable upon exercise of outstanding options.
(14) The given information is derived from a Schedule 13G filed by The TCW
Group, Inc. on February 12, 2001.
(15) The PNC Financial Services Group, Inc. includes the following
subsidiaries: PNC Bancorp, Inc; PNC Bank, National Association;
BlackRock Advisors, Inc.; and BlackRock Financial Management, Inc. The
foregoing information is derived from a Schedule 13G filed by The PNC
Financial Services Group, Inc. on February 12, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In January 1999, we completed a private placement of 2,254,545 shares
of our common stock. Dr. Hubert Huckel and Mr. Michael Hsu, directors of Titan,
participated in the offering by purchasing 100,000 and 5,272 shares,
respectively.
In February 2001, we loaned Robert E. Farrell, our Executive Vice
President and Chief Financial Officer, approximately $373,000 to finance
certain federal and state income tax liabilities incurred by Mr. Farrell in
connection with his exercise of stock options. The loan bears interest at a
rate of 8.50% per year and is due and payable in August 2001.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
An index to Consolidated Financial Statements appears on page F-1.
2. SCHEDULES
All financial statement schedules are omitted because they are not
applicable, not required under the instructions or all the information required
is set forth in the financial statements or notes thereto.
3. EXHIBITS
3.1 - Restated Certificate of Incorporation of the Registrant (1)
3.2 - Form of Amendment to Restated Certificate of Incorporation of the
Registrant (1)
3.3 - By-laws of the Registrant (1)
4.4 - Form of Underwriter's Unit Purchase Option (1)
4.5 - Form of Investor Rights Agreement between the Registrant and the
holders of Series A and Series B Preferred Stock (1)
4.6 - Form of Placement Agent's Unit Purchase Option (4)
4.7 - Certificate of Designation of Series C Preferred Stock (8)
10.1 - 1993 Stock Option Plan (1)
10.2 - 1995 Stock Option Plan (1)
10.3 - Employment Agreement between the Registrant and Louis Bucalo
dated February 1, 1993, amended as of February 3, 1994 (1)
10.4 - Employment Agreement between Registrant and Richard Allen dated
July 28, 1995 (1)
10.5 - Employment Agreement between Registrant and Sunil Bhonsle, dated
August 6, 1995 (1)
10.6 - Form of Indemnification Agreement (1)
+10.9 - MDR Exclusive License Agreement between Ingenex, Inc. (formerly
Pharm-Gen Systems Ltd.) and the Board of Trustees of the University of
Illinois dated May 6, 1992 (1)
+10.11 - License Agreement between Theracell, Inc. and New York
University dated November 20, 1992, as amended as of February 23, 1993
and as of February 25, 1995 (1)
+10.12 - License Agreement between the Registrant and the Massachusetts
Institute of Technology dated September 28, 1995 (1)
+10.14 - Exclusive License Agreement between Ingenex, Inc. and the
Board of Trustees of the University of Illinois, dated July 1, 1994 (1)
+10.15 - Exclusive License Agreement between Ingenex, Inc. and the
Board of Trustees of the University of Illinois, dated July 1, 1994 (1)
+10.16 - License Agreement between Ingenex, Inc. and the Massachusetts
Institute of Technology, dated September 11, 1992 (1)
+10.17 - License Agreement between Ingenex, Inc. and Baylor College of
Medicine, dated October 21, 1992(1)
10.18 - Lease for Registrant's facilities (2)
+10.19 - License Agreement between Theracell, Inc. and the University
of South Florida dated March 15, 1996 (3)
+10.20 - License Agreement between Trilex Pharmaceuticals, Inc.
(formerly Ascalon Pharmaceuticals, Inc.) and the University of Kentucky
Research Foundation dated May 30, 1996 (4)
+10.22 - License Agreement between the Registrant and Aventis SA
(formerly Hoechst Marion Roussel, Inc.) effective as of December 31,
1996 (5)
33
10.23 - Employment Agreement between Registrant and Robert E. Farrell
dated August 9, 1996 (5)
10.24 - Financing Agreement between the Registrant and Ansan
Pharmaceuticals, Inc. dated March 21, 1997 (6)
10.25 - Agreement for Purchase and Sale of Assets between the
Registrant and Pharmaceuticals Product Development, Inc. dated June 4,
1997 (6)
+10.27 - License Agreement between the Registrant and Bar-Ilan Research
and Development Company Limited effective November 25, 1997 (7)
10.28 - License Agreement between the Registrant and Ansan
Pharmaceuticals, Inc. dated November 24, 1997 (7)
10.29 - Stock Purchase Agreement between the Registrant and Ansan
Pharmaceuticals, Inc. effective November 25, 1997 (7)
+10.30 - Sublicense Agreement between the Registrant and Novartis
Pharma AG dated November 20, 1997 (7)
10.31 - 1998 Stock Option Plan, as amended (9)
+10.32 - License Agreement between the Registrant and Schering AG dated
January 25, 2000. (10)
10.33 - Employment Agreement between Registrant and Jan D. Wallace,
M.D. dated February 17, 2000.
10.34 - Agreement and Plan of Merger by and among the Registrant,
GeoMed Merger Sub Corp., GeoMed, Inc. and Dr. Lawrence Bernstein, Dr.
Neil Gesundheit, Leland Wilson and Dr. Virgil Place dated July 11, 2000 (11)
23.2 - Consent of Ernst & Young LLP, Independent Auditors.
- -----------
+ Confidential treatment has been granted with respect to portions of
this exhibit.
(1) Incorporated by reference from the Registrant's Registration Statement
on Form SB-2 (File No. 33-99386).
(2) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1995.
(3) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-QSB for the period ended March 31, 1996.
(4) Incorporated by reference from the Registrant's Registration Statement
on Form SB-2 (File No. 333-13469).
(5) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1996.
(6) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-QSB for the period ended March 31, 1997.
(7) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (File No. 333-42367).
(8) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
(9) Incorporated by reference from the Registrant's Definitive Proxy
Statement filed on July 28, 2000.
(10) Incorporated by reference from the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999.
(11) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 2000.
(b) REPORTS ON FORM 8-K
On November 15, 2000, we filed a current report on Form 8-K to announce
definitive purchase agreements for the sale of an aggregate of 1,200,000 shares
of our common stock to institutional investors.
34
TITAN PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors............... F-2
Consolidated Financial Statements
Consolidated Balance Sheets................................... F-3
Consolidated Statements of Operations......................... F-4
Consolidated Statement of Stockholders' Equity................ F-5
Consolidated Statements of Cash Flows......................... F-6
Notes to Consolidated Financial Statements.................... F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Titan Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Titan
Pharmaceuticals, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 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 consolidated financial position of
Titan Pharmaceuticals, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
February 20, 2001
F-2
TITAN PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------
2000 1999
--------- ---------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash and cash equivalents $ 20,300 $ 46,454
Marketable securities 97,223 -
License fees and grants receivable - 150
Prepaid expenses and other current assets 326 343
--------- ---------
Total current assets 117,849 46,947
Furniture and equipment, net 593 415
--------- ---------
$ 118,442 $ 47,362
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,304 $ 849
Accrued clinical trials expenses 432 437
Other accrued liabilities 727 533
--------- ---------
Total current liabilities 2,463 1,819
Commitments
Minority interest - Series B preferred stock of Ingenex, Inc. 1,241 1,241
Stockholders' Equity
Preferred stock, $0.001 par value per share; 5,000,000 shares
authorized, issuable in series:
Convertible Series C, 222,400 shares designated, 222,400
shares issued and outstanding, with an aggregate
liquidation value of $2,000 at December 31, 2000 and 1999 - -
Convertible Series D, 606,061 shares designated, none
outstanding at December 31, 2000; 606,061 shares issued
and outstanding at December 31, 1999 - 5,000
Common stock, at amounts paid in, $0.001 par value per share;
50,000,000 shares authorized, 27,233,754 and 22,891,912
shares issued and outstanding at December 31, 2000 and 1999,
respectively 190,763 98,266
Additional paid-in capital 8,744 6,955
Deferred compensation (1,254) (501)
Accumulated deficit (84,206) (65,418)
Accumulated other comprehensive income 691 -
--------- ---------
Total stockholders' equity 114,738 44,302
--------- ---------
$ 118,442 $ 47,362
========= =========
See accompanying notes.
F-3
TITAN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Revenue:
Contract revenue $ 1,194 $ 30 $ --
License revenue 415 50 --
Grant revenue 271 257 --
-------- -------- --------
Total revenue 1,880 337 --
Operating expenses:
Research and development 16,744 9,429 7,813
Acquired in-process research and development 4,969 136 --
General and administrative 4,070 2,794 3,708
-------- -------- --------
Total operating expenses 25,783 12,359 11,521
-------- -------- --------
Loss from operations (23,903) (12,022) (11,521)
Other income (expense):
Interest income 5,156 756 848
Other (expense) income (41) (30) 59
-------- -------- --------
Other income, net 5,115 726 907
-------- -------- --------
Net loss $(18,788) $(11,296) $(10,614)
-------- -------- --------
-------- -------- --------
Basic and diluted net loss per share $ (0.73) $ (0.70) $ (0.81)
-------- -------- --------
-------- -------- --------
Weighted average shares used in computing
basic and diluted net loss per share 25,591 16,112 13,109
-------- -------- --------
-------- -------- --------
See accompanying notes.
F-4
TITAN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
-------- -------- -------- -------- ---------- ------------
BALANCES AT DECEMBER 31, 1997 828 $ 5,000 13,053 $ 49,623 $ 6,521 $ (458)
Issuance of common stock upon
exercise of stock options 71 213
Release of guaranteed security
value -- 2,455
Increase in paid-in capital from
issuance of common stock by
Theracell, Inc. 3
Amortization of deferred
compensation 171
Net loss
-------- -------- -------- -------- -------- --------
Balances at December 31, 1998 828 5,000 13,124 52,291 6,524 (287)
Issuance of common stock in a
private placement, net of
issuance costs of $403 2,255 5,797
Issuance of common stock to
minority stockholders pursuant
to the Theracell Merger 33 136
Issuance of common stock upon
exercise of options and
warrants 396 650
Issuance of common stock upon
exercise of Class A Warrants,
net of issuance costs of $3,254 7,084 39,392
Deferred compensation related to
stock options 431 (431)
Amortization of deferred
compensation 217
Net loss
-------- -------- -------- -------- -------- --------
Balances at December 31, 1999 828 5,000 22,892 98,266 6,955 (501)
Comprehensive loss:
Net loss
Unrealized gain on marketable
securities
Comprehensive loss
Issuance of common stock in a
private placement in March
2000, net of issuance costs
of $2,591 1,200 38,809
Issuance of common stock upon
exercise of options and
warrants 1,181 4,252
Conversion of Series D preferred
stock to common stock (606) (5,000) 667 5,000
Issuance of common stock to acquire
a technology, net 94 3,522
Issuance of common stock in a
private placement in November 2000,
net of issuance costs of $2,886 1,200 40,914
Compensation related to stock
options 1,789 (1,324)
Amortization of deferred
compensation 571
-------- -------- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 2000 222 $ -- 27,234 $190,763 $ 8,744 $ (1,254)
======== ======== ======== ======== ======== ========
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
DEFICIT INCOME EQUITY
-------- ------------- -------------
BALANCES AT DECEMBER 31, 1997 $(43,508) $ -- $ 17,178
Issuance of common stock upon
exercise of stock options 213
Release of guaranteed security
value 2,455
Increase in paid-in capital from
issuance of common stock by
Theracell, Inc. 3
Amortization of deferred
compensation 171
Net loss (10,614) -- (10,614)
-------- -------- --------
Balances at December 31, 1998 (54,122) -- 9,406
Issuance of common stock in a
private placement, net of
issuance costs of $403 5,797
Issuance of common stock to
minority stockholders pursuant
to the Theracell Merger 136
Issuance of common stock upon
exercise of options and
warrants 650
Issuance of common stock upon
exercise of Class A Warrants,
net of issuance costs of $3,254 39,392
Deferred compensation related to
stock options --
Amortization of deferred
compensation 217
Net loss (11,296) -- (11,296)
-------- -------- --------
Balances at December 31, 1999 (65,418) -- 44,302
Comprehensive loss:
Net loss (18,788) (18,788)
Unrealized gain on marketable
securities 691 691
--------
Comprehensive loss (18,097)
Issuance of common stock in a
private placement in March
2000, net of issuance costs
of $2,591 38,809
Issuance of common stock upon
exercise of options and
warrants 4,252
Conversion of Series D preferred
stock to common stock --
Issuance of common stock to acquire
a technology, net 3,522
Issuance of common stock in a
private placement in November 2000,
net of issuance costs of $2,886 40,914
Compensation related to stock
options 465
Amortization of deferred
compensation 571
-------- -------- --------
BALANCES AT DECEMBER 31, 2000 $(84,206) $ 691 $114,738
======== ======== ========
See accompanying notes.
F-5
TITAN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (18,788) $ (11,296) $ (10,614)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 196 174 122
Acquired in-process research and development 4,969 -- --
Payment of guaranteed security value -- -- (3,044)
Non-cash compensation related to stock options 1,036 217 171
Issuance of common stock to acquire
minority interest of Theracell, Inc. -- 136 --
Other -- 13 13
Changes in operating assets and liabilities:
Receivables, prepaid expenses and other current assets 167 (337) 298
Accounts payable (931) 438 (405)
Accrued clinical trials and other liabilities 188 (200) 309
--------- --------- ---------
Net cash used in operating activities (13,163) (10,855) (13,150)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment, net (374) (185) (298)
Purchases of marketable securities (167,355) -- --
Proceeds from sales of marketable securities 70,823 -- 500
--------- --------- ---------
Net cash provided by (used in) investing activities (96,906) (185) 202
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 83,915 45,839 216
--------- --------- ---------
Net cash provided by financing activities 83,915 45,839 216
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26,154) 34,799 (12,732)
Cash and cash equivalents at beginning of year 46,454 11,655 24,387
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR 20,300 46,454 11,655
Marketable securities at end of year 97,223 -- --
--------- --------- ---------
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
AT END OF YEAR $ 117,523 $ 46,454 $ 11,655
--------- --------- ---------
--------- --------- ---------
SCHEDULE OF NON-CASH TRANSACTION:
Issuance of common stock to acquire a technology, net $ 3,522 $ -- $ --
--------- --------- ---------
--------- --------- ---------
See accompanying notes.
F-6
TITAN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND ITS SUBSIDIARIES
We are a biopharmaceutical company developing proprietary therapeutics
for the treatment of central nervous system disorders, cancer, and other serious
and life threatening diseases. We conduct a portion of our operations through
our two subsidiaries: Ingenex, Inc. and ProNeura, Inc. Another majority owned
subsidiary, Theracell, Inc., engaged in the development of cell-based therapies
for site-specific delivery to the central nervous system for treatment of
various neurologic disorders, was merged with and into Titan in March 1999 (the
Theracell Merger). Pursuant to the Theracell Merger, we issued 33,418 shares of
our common stock to the minority stockholders of Theracell and recorded an
in-process research and development expense of $136,000, which equals the value
of the common stock issued. In the third quarter of 2000 and in connection with
the acquisition of worldwide rights to gallium maltolate, a novel and
proprietary agent for the potential treatment of cancer and other conditions,
including HIV infection, we acquired GeoMed, Inc., a privately held California
corporation (See Note 8). We operate in one business segment, the development of
biopharmaceutical products.
INGENEX, INC.
Ingenex is engaged in the development of gene-based therapeutics for
the treatment of cancer. In September 1994, Ingenex issued shares of its Series
B convertible preferred stock to a third party for $1.2 million, net of issuance
costs. In June 1997, Ingenex sold a research technology and certain fixed assets
for $8.7 million in cash and the assumption of certain capital lease liabilities
and recognized a gain of $8.4 million. At December 31, 2000, we owned 81% of
Ingenex, assuming the conversion of all preferred stock to common stock.
PRONEURA, INC.
ProNeura is engaged in the development of cost effective, long-term
treatment solutions to neurologic and psychiatric disorders through an
implantable drug delivery system. At December 31, 2000, we owned 79% of
ProNeura.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Titan and our wholly and majority owned subsidiaries. All significant
intercompany balances and transactions are eliminated. The consolidated
financial statements are reformatted to present dollars in thousands. Certain
prior year balances have been reclassified to conform to the current year
presentation.
Through December 31, 1999, we were considered to be a developmental
stage company. In January 2000, we entered into a collaborative agreement with
Schering AG (see Note 7), under which we recorded research revenue. As a result
of this agreement, and with the potential of other collaborative partnership
agreements in the future, we are no longer considered to be in the developmental
stage.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted
F-7
in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Our cash and investment policy emphasizes liquidity and preservation of
principal over other portfolio considerations. We select investments that
maximize interest income to the extent possible given these two constraints. We
satisfy liquidity requirements by investing excess cash in securities with
different maturities to match projected cash needs and limit concentration of
credit risk by diversifying our investments among a variety of high
credit-quality issuers and limit the amount of credit exposure to any one
issuer. The estimated fair values have been determined using available market
information and commonly used valuation methodologies. We do not use derivative
financial instruments in our investment portfolio.
All highly liquid investments with insignificant interest rate risk
with original maturities of three months or less are considered to be cash
equivalents. Our marketable securities, consisting primarily of high-grade
debt securities, are classified as available-for-sale at time of purchase and
carried at fair value. Amortization of premiums and discounts, and realized
gains and losses are included as interest income. Unrealized gains and losses
are included as accumulated other comprehensive income, a separate component
of stockholders' equity. Cost of securities sold is based on specific
identification method.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets ranging from
three to five years.
REVENUE RECOGNITION
Revenue under collaborative agreements is recorded when earned as
defined under the terms of the respective agreements and collectibility is
reasonably assured. Payments for our research and development effort under
contractual arrangements are recognized as revenue ratably over the period in
which the related work is performed. Nonrefundable license fees, under which we
have no future performance obligations, are recognized upon receipt. Government
grants, which support our research effort in specific projects, generally
provide for reimbursement of approved costs as defined in the grant documents,
and revenue is recognized when subsidized project costs are incurred.
SPONSORED RESEARCH AND DEVELOPMENT COSTS
Research and development expenses under sponsored research arrangements
are recorded when related services are performed, generally ratably over the
period of the service agreements. License fees are expensed when paid, if we
have no alternative future use of the technology.
NET LOSS PER SHARE
We calculate basic net loss per share using the weighted average common
shares outstanding for the period. Diluted net income per share reflects the
impact of other dilutive equity instruments, primarily preferred stock, options
and warrants. For the years ended December 31, 2000, 1999 and 1998, we reported
net losses and, therefore, other dilutive securities were excluded from the
calculation as they would have been anti-dilutive. Had we been in a net income
position, shares used in calculating diluted earnings per share for 2000, 1999
and 1998 would have included the effect of an additional 3,915,734, 4,293,859
and 12,387,331 shares, respectively, related to our convertible preferred stock,
options and warrants, prior to the application of treasury stock method.
F-8
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). The only component of other comprehensive income
(loss) is unrealized gains and losses on our marketable securities.
Comprehensive loss for the year ended December 31, 2000 was $18.1 million.
Comprehensive loss was the same as our net loss for the years ended December 31,
1999 and 1998. Comprehensive loss has been disclosed in the Statement of
Stockholders' Equity for all periods presented.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." We are required to adopt SFAS 133 effective January
1, 2001. Because we do not hold any derivative instruments and do not engage in
hedging activities, management does not believe the adoption of SFAS 133 will
have an impact on our financial position or results of operations.
2. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of our available-for-sale securities at
December 31, 2000 (in thousands):
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- ------------- ------------- --------------
AVAILABLE-FOR-SALE SECURITIES:
Money market funds.................................. $17,835 $-- $-- $17,835
Securities of the U.S. government and its agencies.. 52,280 393 -- 52,673
Corporate notes and bonds........................... 42,289 296 -- 42,585
Commercial paper.................................... 3,957 2 -- 3,959
--------------- ------------- ------------- --------------
$116,361 $691 $-- $117,052
=============== ============= ============= ==============
CLASSIFIED AS:
Cash equivalents.................................... $19,829
Marketable Securities............................... 97,223
--------------
$117,052
==============
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 2000, by contractual maturity, are summarized below
(in thousands):
AMORTIZED ESTIMATED FAIR
COST VALUE
---------------------------------
Due within 1 year............................................. $30,116 $30,148
Due between 1 - 3 years....................................... 86,245 86,904
---------------------------------
$116,361 $117,052
=================================
Gross realized gains and losses on sales of marketable securities were
immaterial for the year ended December 31, 2000.
F-9
3. FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following at December 31 (in
thousands):
2000 1999
---- ----
At cost:
Furniture and office equipment........................................ $191 $96
Leasehold improvements............................................... 213 103
Laboratory equipment.................................................. 354 324
Computer equipment.................................................... 250 111
---------------------------
1,008 634
Less accumulated depreciation........................................... (415) (219)
---------------------------
Furniture and equipment, net............................................ $593 $415
===========================
Depreciation expense was $196,000, $174,000 and $122,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS
We have entered into various agreements with research institutions,
universities, and other entities for the performance of research and development
activities and for the acquisition of licenses related to those activities.
Expenses under these agreements totaled $1.5 million, $1.3 million and $1.6
million in the years ended December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000, the annual aggregate commitments we have under
these agreements, including minimum license payments, are as follows (in
thousands):
2001.................................................. $735
2002.................................................. 304
2003.................................................. 304
2004.................................................. 304
2005.................................................. 304
--------
$1,951
========
After 2005, we must make annual payments aggregating $304,000 per year
to maintain certain licenses. Certain licenses provide for the payment of
royalties by us on future product sales, if any. In addition, in order to
maintain these licenses and other rights during product development, we must
comply with various conditions including the payment of patent related costs and
obtaining additional equity investments.
5. AGREEMENT WITH AVENTIS SA
In January 1997, we entered into an exclusive license agreement with
Aventis SA (formerly Hoechst Marion Roussel, Inc.) The agreement gave us a
worldwide license to the patent rights and know-how related to the antipsychotic
agent iloperidone, including the ability to develop, use, sublicense,
manufacture and sell products and processes claimed in the patent rights.
Pursuant to the license, we paid a fee of $9.5 million consisting of: (i) $4
million in cash, and (ii) $5.5 million through the issuance of 594,595 shares of
common stock to Aventis. We were obligated to pay Aventis the difference between
$5.5 million and the net proceeds received by Aventis upon sale of such shares.
In February 1998, Aventis sold the shares for net proceeds of $2.5 million.
Accordingly, we paid to Aventis $3 million in cash and the remaining balance of
$2.5 million was transferred to stockholders' equity. We are required to make
F-10
additional benchmark payments as specific milestones are met. Upon
commercialization of the product, the license agreement provides that we will
pay royalties based on net sales.
6. ZOMARIL(TM) (ILOPERIDONE) SUBLICENSE TO NOVARTIS PHARMA AG
In November 1997, we entered into an agreement with Novartis Pharma AG,
pursuant to which we granted Novartis a sublicense for the worldwide (with the
exception of Japan) development, manufacturing and marketing of Zomaril(TM)
(iloperidone). Pursuant to the sublicense, Novartis paid us $20 million
consisting of a fee of $15 million and $5 million for the purchase of 606,061
shares of Series D convertible preferred stock. In addition, approximately $2.4
million in cash was paid by Novartis as reimbursement of research and
development costs incurred by us. The Novartis sublicense provides for future
payments by Novartis contingent upon the achievement of regulatory milestones as
well as a royalty on net sales, if any, of the product. Novartis has assumed the
responsibility for all clinical development, registration, manufacturing and
marketing of Zomaril(TM).
7. LICENSING AND COLLABORATIVE AGREEMENT WITH SCHERING AG
In January 2000, we entered into a licensing and collaborative
agreement with Schering AG, under which we will collaborate with Schering on
manufacturing and clinical development of our cell therapy product,
Spheramine(R), for the treatment of Parkinson's disease. Under the agreement, we
will perform clinical development activities for which we will receive funding.
As of December 31, 2000, we recognized $1.0 million of contract revenue under
this agreement. Schering will fully fund, and manage in collaboration with us,
all future pilot and pivotal clinical studies, and manufacturing and development
activities. We are entitled to certain payments upon the achievement of specific
milestones. Schering also retains the right to make an equity investment in
Titan, up to a specified amount, upon initiation of pivotal clinical studies.
The potential economic value of the agreement to us, including development
funding and equity investment, but not including funding of clinical trials and
product royalties, is approximately $26 million.
8. ACQUISITION OF A NOVEL AND PROPRIETARY AGENT
In July 2000, we announced the acquisition of worldwide,
royalty-bearing, exclusive license to a novel and proprietary agent, gallium
maltolate, for the potential treatment of cancer and other conditions, including
HIV infection. We obtained these rights through the acquisition of GeoMed, Inc.,
a privately held California corporation. Under this license agreement, we are
required to make an annual license payment to Dr. Lawrence Bernstein, technology
inventor, of $50,000, as well as royalty payments based on net sales of products
and processes incorporating the licensed technology. We completed the
acquisition in August 2000 by assuming $1.4 million of GeoMed's liabilities and
issuing an aggregate of 93,590 shares of Titan common stock valued at
approximately $3.6 million using the fair market value of our common stock at
the date of the agreement in accordance with generally accepted accounting
principles. The entire purchase price of approximately $5.0 million was charged
to acquired in-process research and development as the acquired technology was
in an early stage of development that, as of the acquisition date, technological
feasibility had not been reached and no alternative use existed.
9. LEASE COMMITMENTS
We lease facilities under operating leases that expire at various dates
through October 2003. Rent expense was $411,000, $331,000 and $328,000, for
years ended December 31, 2000, 1999 and 1998, respectively.
F-11
The following is a schedule of future minimum lease payments at
December 31, 2000 (in thousands):
2001....................................... $446
2002....................................... 257
2003....................................... 78
--------
$781
========
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In connection with the merger of our Trilex Pharmaceuticals, Inc.
subsidiary (Trilex) in October 1997, we issued 222,400 shares of Series C
convertible preferred stock (the Series C Preferred) to certain members of the
Trilex management team and to certain consultants of Trilex. The Series C
Preferred automatically converts to common stock, on a one-to-one basis, only if
certain development milestones are achieved within certain timeframes. Upon
achievement of the milestones, we would be required to value the technology
against the then fair market value of our common stock issuable upon conversion.
Holders of Series C Preferred are entitled to receive dividends, when, as and if
declared by the board of directors ratably with any declaration or payment of
any dividend on our common stock or other junior securities. The Series C
Preferred has a liquidation preference equal to $0.01 per share. No value was
assigned to the Series C Preferred in the accompanying financial statements.
In November 1997, we issued to Novartis 606,061 shares of Series D
convertible preferred stock (the Series D Preferred) pursuant to an agreement by
which we granted certain technology rights to Novartis (see Note 6). The Series
D Preferred were issued pursuant to a stock purchase agreement that provides for
conversion of such shares into our common stock at the option of Novartis at any
time after January 29, 1999. The conversion price equaled the market price
during a specified period within the first two fiscal quarters of 1999 and was
subject to a floor of $7.50 and a ceiling of $9.00. In March 2000, upon
satisfying the conditions for conversion and at the request of Novartis, all
outstanding Series D Preferred shares were converted into 666,667 shares of our
common stock.
COMMON STOCK
In January 1999, we completed a private placement of 2,254,545 shares
of our common stock for net proceeds of $5.8 million, after deducting fees and
commissions and other expenses of the offering.
In March 2000, we completed a private placement of 1.2 million shares
of our common stock for net proceeds of $38.8 million, after deducting fees and
commissions and other expenses of the offering.
In November 2000, we completed a private placement of 1.2 million
shares of our common stock for net proceeds of $40.9 million, after deducting
fees and commissions and other expenses of the offering.
WARRANTS
During 1996 in connection with the initial public offering (IPO),
repayment of a bridge financing and a private placement, we issued 7,091,000
Class A Warrants, each of which was exercisable for one share of common stock at
an adjusted exercise price of $6.02 at any time up to January 2001. The warrants
were subject to redemption on 30 days written notice if the closing bid price of
our common stock averaged in excess of $9.10 per share for 30 consecutive
trading days ending within 15 days of the date of notice of redemption.
F-12
In October 1999, upon satisfying the conditions for warrant redemption,
we called for the redemption on November 19, 1999 (the Redemption Date) of our
outstanding Class A Warrants for cash at the redemption price of $0.05 per
warrant. Rather than surrendering the warrants for redemption, warrant holders
had the option to purchase our common stock at a price of $6.02 per share before
the Redemption Date. The warrant call resulted in 7,083,711 of our then
outstanding Class A Warrants being exercised with net proceeds totaled $39.4
million, after deducting advisory fee and other related expenses.
UNIT PURCHASE OPTIONS
In connection with our IPO, the underwriter was granted an option to
acquire 320,000 units at a price of $6.50 per unit, and in connection with a
private placement, the placement agent was granted an option to purchase an
additional 321,065 units, as adjusted, at an adjusted exercise price of $9.97
per unit. Each unit consists of one share of common stock and one Class A
warrant. In 1999, 247,573 units were exercised, primarily on a cashless basis,
resulting in the issuance of 124,449 shares of our common stock. In 2000, all
remaining units were exercised, resulting in net proceeds of $2.3 million and
the issuance of 689,160 shares of our common stock.
SHARES RESERVED FOR FUTURE ISSUANCE
As of December 31, 2000, shares of common stock reserved by us for
future issuance consisted of the following (shares in thousands):
Warrants related to certain private financing transactions in 1995........................ 27
Stock options............................................................................. 4,824
Preferred stock........................................................................... 222
----------------
5,073
================
11. STOCK OPTION PLANS
Under our amended 1998 Stock Option Plan and predecessor option plans,
a total of 4.4 million shares of our common stock were reserved and authorized
for issuance. The option plans provide for the grant of incentive stock options
to employees, and non-qualified stock options to employees, directors and
consultants. Options granted under the option plans generally expire no later
than ten years from the date of grant, except when the grantee is a 10%
shareholder, in which case the maximum term is five years from the date of
grant. Options generally vest at the rate of one fourth after one year from the
date of grant and the remainder ratably over the subsequent three years,
although options with different vesting terms are granted from time-to-time. The
exercise price of incentive stock options, non-qualified stock options and
options granted to 10% stockholders, shall be at least 100%, 85% and 110%,
respectively, of the fair market value of the stock on the date of grant.
Our 1998 Option Plan provides for the automatic grant of non-qualified
stock options to our directors who are not 10% stockholders (Eligible
Directors). Each Eligible Director will be granted an option to purchase 10,000
shares of common stock on the date that such person is first elected or
appointed a director. Commencing on the day immediately following the later of
(i) the 2000 annual stockholders meeting, or (ii) the first annual meeting of
stockholders after their election to the Board, each Eligible Director will
receive an automatic bi-annual (i.e. every two years) grant of an option to
purchase 15,000 shares of common stock on the day immediately following the date
of each annual stockholders meeting, as long as such director is a member of the
Board of Directors. In addition, each Eligible Director will receive
F-13
an automatic annual grant of an option to purchase 5,000 shares of common stock
on the day immediately following the date of each annual stockholders meeting
for each committee of the Board on which they serve.
In November 1999 and in connection with the warrant call, we granted
813,000 non-qualified stock options outside of our stock option plans to our
executive officers, at an exercise price of $12.75, vesting equally over 36
months from the date of grant.
Activity under our stock option plans, as well as non-plan activity are
summarized below (shares in thousands):
SHARES NUMBER OF WEIGHTED
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
--------- ----------- --------------
Balance at December 31, 1997............ 123 1,817 $6.88
Increase in shares reserved........... 1,000 - -
Options granted....................... (1,102) 1,102 $6.82
Options exercised..................... - (71) $3.00
Options cancelled..................... 847 (924) $10.10
---------------------------------
Balance at December 31, 1998............ 868 1,924 $5.45
Increase in shares reserved........... 226 - -
Options granted....................... (784) 1,597 $8.12
Options exercised..................... - (147) $3.32
Options cancelled..................... 67 (70) $4.84
---------------------------------
Balance at December 31, 1999............ 377 3,304 $6.82
Increase in shares reserved........... 1,500 - -
Options granted....................... (748) 748 $36.20
Options exercised..................... - (353) $4.31
Options cancelled..................... 28 (33) $19.17
---------------------------------
Balance at December 31, 2000 1,157 3,666 $12.95
=================================
Our option plans allow for stock options issued as the result of a
merger or consolidation of another entity, including the acquisition of minority
interest of our subsidiaries, to be added to the maximum number of shares
provided for in the plan (Substitute Options). Consequently, Substitute Options
are not returned to the shares reserved under the plan when cancelled. During
2000, 1999 and 1998, 1,626, 3,165 and 77,222 Substitute Options, respectively,
were cancelled and are included as shares expired during the year.
In June 1998, we adopted an Option Exchange Program whereby certain
employee stock options that were previously granted at exercise prices greater
than $10.75 per share were exchanged for new options with an exercise price of
$7.50 per share. Notwithstanding the original vesting schedule, all exchanged
options vested as of the exchange date are considered vested under the new
options and the unvested portion will vest ratably over 24 months and have a
term of approximately eight years. A total of 820,135 options with a
weighted-average exercise price of $10.91 were exchanged and reflected as grants
and cancellations in the above summary table.
Options for 2,057,648 and 1,167,265 shares were exercisable at December
31, 1999 and 1998, respectively. The options outstanding at December 31, 2000
have been segregated into three ranges for additional disclosure as follows
(option shares in thousands):
F-14
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING WEIGHTED AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ------------ --------------- ----------- --------------
$0.08 - $5.69 1,153 6.41 $2.87 1,105 $2.80
$7.13 - $12.69 1,778 7.95 $9.87 1,253 $8.71
$12.75 - $46.50 735 9.42 $36.21 50 $35.72
---------- --------
3,666 7.76 $12.95 2,408 $6.56
========== ========
In addition, Ingenex has a stock option plan under which options to
purchase common stock of Ingenex have been and may be granted. No options had
been granted under such plan since 1997.
We have elected to follow APB 25 in accounting for our stock options
because the alternative fair value method of accounting prescribed by SFAS 123
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, no compensation expense is
recognized when the exercise price of our stock options equals the market price
of the underlying stock on the date of grant.
Pro forma net loss and net loss per share information required by SFAS
123 has been determined as if we had accounted for our employee stock options
granted subsequent to 1994 under the fair value method of SFAS 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions for 2000, 1999 and 1998:
weighted-average volatility factor of 0.9, 0.8 and 0.7, respectively; no
expected dividend payments; weighted-average risk-free interest rates in effect
of 5.0%, 6.0% and 5.5%, respectively; and a weighted-average expected life of
3.69, 2.52 and 2.86, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of our employee stock options.
Based upon the above methodology, the weighted-average fair value of
options granted during the years ended December 31, 2000, 1999 and 1998 was
$23.56, $4.83 and $1.87, respectively.
For purposes of SFAS 123 disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Our pro forma
information is as follows (in thousands, except per share amount):
DECEMBER 31
--------------------------------------
2000 1999 1998
---- ---- ----
Net loss as reported................................................ $(18,788) $(11,296) $(10,614)
Basic and diluted net loss per share as reported.................... $(0.73) $(0.70) $(0.81)
Pro forma net loss.................................................. $(27,569) $(13,487) $(11,355)
Pro forma basic and diluted net loss per share...................... $(1.08) $(0.84) $(0.87)
F-15
The consolidated pro forma net loss calculated above includes the
estimated fair value of the options granted by our subsidiaries in 2000, 1999
and 1998, calculated on substantially equivalent assumptions.
12. MINORITY INTEREST
The $1.2 million received by Ingenex upon the issuance of its Series B
convertible preferred stock has been classified as minority interest in the
consolidated balance sheet. As a result of the Series B preferred stockholders'
liquidation preference, the balance has not been reduced by any portion of the
losses of Ingenex.
Amounts invested by outside investors in the common stock of the
consolidated subsidiaries have been apportioned between minority interest and
additional paid-in capital in the consolidated balance sheets. Losses applicable
to the minority interest holdings of the subsidiaries' common stock have been
reduced to zero.
13. INCOME TAXES
As of December 31, 2000, we had net operating loss carryforwards for
federal income tax purposes of approximately $79.0 million which expire in the
years 2006 through 2020, and federal research and development tax credits of
approximately $1.5 million which expire in the years 2007 through 2020. We also
had net operating loss carryforwards for state income tax purposes of
approximately $22.0 million which expire in the years 2001 through 2020.
Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to ownership change limitations provided by
the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss
carryforwards before utilization.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows (in thousands):
DECEMBER 31,
-----------------------------
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards........................... $28,200 $21,000
Research credit carryforwards.............................. 2,000 1,400
Capitalized research and development....................... 2,900 2,300
Other, net................................................. 2,000 800
-----------------------------
Total deferred tax assets.................................... 35,100 25,500
Deferred tax liabilities:
Unrealized gain on investments............................ (200) -
Valuation allowance.......................................... (34,900) (25,500)
-----------------------------
Net deferred tax assets...................................... $- $-
=============================
Realization of deferred tax assets is dependent upon future earnings,
if any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $6.7 million and $4.3 million during 1999 and
1998, respectively. The valuation allowance at December 31, 2000 includes $2.8
million related to deferred tax assets arising from tax benefits associated with
stock option plans. This benefit, when realized, will be recorded as an increase
to stockholders' equity.
F-16
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
2000
Total revenue......................................... $335 $281 $695 $569
Net loss.............................................. $(3,648) $(2,423) $(8,711) $(4,006)
Basic and diluted net loss per share.................. $(0.15) $(0.09) $(0.34) $(0.15)
Cash, cash equivalents and marketable
securities............................................ $83,865 $82,515 $79,797 $117,523
1999
Total revenue......................................... $47 $- $52 $238
Net loss.............................................. $(2,820) $(3,106) $(2,445) $(2,925)
Basic and diluted net loss per share.................. $(0.19) $(0.20) $(0.16) $(0.15)
Cash, cash equivalents and marketable
securities............................................ $14,792 $11,813 $9,147 $46,454
F-17
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TITAN PHARMACEUTICALS, INC.
Date: March 30, 2001 By: /s/ Louis R. Bucalo
--------------------------------
Louis R. Bucalo, M.D.,
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ Louis R. Bucalo Chairman, President and Chief Executive Officer March 30, 2001
- ------------------------------ (principal executive officer)
Louis R. Bucalo, M.D.
/s/ Ernst-Gunter Afting Director March 30, 2001
- ------------------------------
Ernst-Gunter Afting, M.D., Ph.D.
/s/ Victor J. Bauer Director March 30, 2001
- ------------------------------
Victor J. Bauer, Ph.D.
/s/ Eurelio M. Cavalier Director March 30, 2001
- ------------------------------
Eurelio M. Cavalier
/s/ Michael K. Hsu Director March 30, 2001
- ------------------------------
Michael K. Hsu
/s/ Hubert E. Huckel Director March 30, 2001
- ------------------------------
Hubert E. Huckel, M.D.
/s/ Ley S. Smith Director March 30, 2001
- ------------------------------
Ley S. Smith
/s/ Konrad M. Weis Director March 30, 2001
- ------------------------------
Konrad M. Weis, Ph.D.
/s/ Robert E. Farrell Executive Vice President and Chief Financial March 30, 2001
- ------------------------------ Officer (principal financial and accounting officer)
Robert E. Farrell