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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15190
ONCOGENE SCIENCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3159796
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
106 CHARLES LINDBERGH BOULEVARD,
UNIONDALE, NEW YORK 11553
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (516) 222-0023
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
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. [ ]
As of November 29, 1996, the aggregate market value of the Registrant's
voting stock held by non-affiliates was $119,271,763. For purposes of this
calculation, shares of Common Stock held by directors, officers and stockholders
whose ownership exceeds five percent of the Common Stock outstanding at November
29, 1996 were excluded. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
As of November 29, 1996 there were 22,179,994 shares of the Registrant's
$.01 par value common stock outstanding.
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PART I
ITEM 1. BUSINESS
Oncogene Science, Inc., a leader in the innovation of drug discovery
technologies, combines core technologies in genetically engineered live-cell
assays, proprietary small molecule libraries, and discovery chemistry with high
throughput robotic screening to discover novel, small molecule pharmaceuticals.
Independently and in collaboration with Pfizer Inc. ("Pfizer"), Hoechst Marion
Roussel, Inc. ("HMRI"), Wyeth-Ayerst Laboratories Division of American Home
Products Corporation ("Wyeth"), BioChem Pharma (International) Inc. ("BioChem
Pharma") and Ciba-Geigy, Ltd. ("Ciba"), the Company is engaged in the discovery
and development of drugs for 28 target proteins in a wide range of disease
areas, including cancer, systemic and topical viral, bacterial, fungal diseases,
diabetes, atherosclerosis, arthritis, neurological disorders and chronic
anemias. These core capabilities and discovery and development programs have
positioned the Company as a leading fully integrated drug discovery company. In
April 1996, the Company completed a public offering of 3,118,750 shares of
common stock at a price of $9.125 per share. Concurrent with the public
offering, the Company sold an additional 500,000 shares at the same price to
BioChem Pharma. The net proceeds from these transactions of approximately $30.5
million are being used for research and development expenses, including
enhancement of the Company's drug discovery technologies, and for general
corporate purposes.
BACKGROUND
Since the early 1980s, major advances in molecular biology have increased
the scientific understanding of the complex regulatory and functional mechanisms
that operate within the cell. Among these advances is the ability to isolate and
manipulate the key genetic molecules DNA and RNA. Genes are composed of segments
of DNA, which are located within the cell nucleus. Each gene contains the
chemical information required for the production of a single protein. Generally,
several thousand of the 100,000 genes contained in a human cell are actively
involved in the production of specific proteins.
Proteins are molecules that either regulate or perform most of the
physiological and structural functions of the body. Abnormalities in the
cellular production or activity of proteins are the causes of many diseases.
Most drugs work by binding to specific proteins to change their activity
resulting in a therapeutic effect on the disease state.
Gene transcription is a key step in the production of proteins by the cell.
Gene transcription occurs when a segment of DNA containing the coding sequence
for an individual protein is copied into an intermediate template called
messenger-RNA ("mRNA"). The DNA within a gene is divided into at least two types
of sequences. Certain types of sequences encode the structural information for
mRNA while other sequences, called response elements, regulate the production of
mRNA. A subset of intra-cellular proteins, known as transcription factors,
interact with response elements to regulate the production of mRNA and,
therefore, the production of the corresponding protein. The conversion of mRNA
into its corresponding protein takes place in a process called translation.
Changes in gene transcription occur in response to a wide variety of
signals. Complex interactions between transcription factors and response
elements control the rate with which gene transcription is carried out in
response to these signals. The process by which the information contained in
these signals is transmitted into the nucleus is called signal transduction.
Activation of gene transcription increases the production of a protein while
inhibition of gene transcription decreases production of a protein. Drug
discovery at Oncogene Science is primarily focused on novel therapeutics which
target changes in either gene transcription or signal transduction, in addition
to other efforts focused on inhibiting key enzymes in live cells.
TRADITIONAL DRUG DISCOVERY
The traditional discovery method for small molecule pharmaceuticals
involves the random testing of thousands of compounds in drug screens. These in
vitro tests or assays typically employ single proteins, such as receptors, as
targets for discovery of drug candidates. For each drug screen, the target
protein is selected
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because the scientist believes a compound that binds with this target may have a
therapeutic benefit with respect to the disease under study. Lead compounds or
"hits" are defined as compounds that bind to a target protein and either inhibit
or stimulate its activity. Medicinal chemists then focus on optimizing these
initial lead compounds to improve potency and specificity. Nearly all drugs sold
today (with the exception of recombinant proteins) were either discovered in
drug screens or are derived from the lead compounds identified in such screens.
The simplified drug screens used in traditional drug discovery employ
isolated components of the cell and are an inadequate representation of the
complex, physiological environment that exists within living cells. Receptors,
signal transduction proteins and transcription factors, which are targets for
therapeutic intervention, do not exist in isolation in the cell, but occur as
large complexes of multiple proteins bound together with specific structures.
Lead compounds identified in the artificial environment of traditional drug
screens are frequently found to be either ineffective or toxic in live cells,
because these complex intra-cellular interactions are not reproduced in
conventional in vitro screens. Consequently, drug companies often devote
substantial resources to optimizing a traditional drug screen lead compound
which is subsequently found to be ineffective in the more complex environment of
live cells.
In addition, slow and labor intensive traditional screening methods have
traditionally limited the number and chemical diversity of the compounds that
can be tested in assays. Even though many millions of distinct chemical
structures exist, it is not unusual that only a small fraction of available
compounds are tested. This limitation of speed and scale often restricts both
the quality and quantity of lead compounds available for further testing and
development and hinders drug discovery.
The rising costs of health care and changes in health care management
policies are applying increasing competitive pressure on the pharmaceutical
industry, leading to an emphasis on the cost-effectiveness and quality of drug
candidates and the speed with which novel classes of pharmaceuticals can be
brought to the marketplace. In this environment, new discovery technologies that
improve the number and quality of lead compounds have become critical in order
to identify novel drug candidates and to conduct cost-effective clinical
development.
ONCOGENE SCIENCE'S TECHNOLOGY PLATFORM
The Company's technologies have been designed to solve many of the
limitations associated with conventional drug screens. The Company's technology
platform consists of applying its understanding of the molecular biology of gene
transcription and signal transduction to the development of proprietary
live-cell assays. These assays are used to test diverse compounds derived from
proprietary natural product sources and from medicinal chemistry libraries
belonging to the Company and its collaborative partners using automated, high
throughput robotic drug screening techniques. In addition, the Company has
expanded its capabilities in discovery chemistry to include combinatorial
chemistry, which allows for the rapid synthesis of analogs of lead compounds and
generation of new compound libraries for drug discovery. The Company's
technology platform is widely applicable to the identification of drug
candidates to treat many different diseases, including diseases due to mutations
or abnormalities in multiple genes. Utilizing its technology, the Company has
been able to identify lead compounds that are potent and selective, possess
minimal or no cellular toxicity and have activity in live cells and animal
models and that have progressed to clinical evaluation in humans.
LIVE-CELL ASSAYS AND GENE TRANSCRIPTION
The Company's drug screens utilize live cells that express proteins
believed to be associated with a particular disease. For any one target protein,
there are multiple sites within the cell where a drug can act to exert a
specific effect. Cell-based screens, therefore, provide multiple sites of
therapeutic intervention, such as receptors, signal transduction proteins and
transcription factors, which the Company believes increase the probability of
finding promising lead compounds. Furthermore, live-cell assays provide data on
the cytotoxicity and specificity of the compounds tested, allowing the Company
to define key properties of a lead compound earlier in the development process.
Therefore, the Company believes that its drug discovery technology fosters
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the generation of high quality leads that are more likely to progress into
clinical studies compared to lead compounds identified by traditional methods.
The Company believes its live-cell assays are effective in identifying
compounds that exert a therapeutic effect by altering transcription of
particular target genes. Gene transcription-based drugs act by increasing or
decreasing the amount of mRNA and, therefore, the amount of the corresponding
protein associated with a particular disease. It has been demonstrated in recent
years that a number of widely used drugs exert their primary clinical effect
through a gene transcription-based mechanism. These include oral contraceptives,
tamoxifen for breast cancer, retinoids for dermatology, cholesterol lowering
drugs, and even aspirin. These drugs were discovered and developed prior to an
understanding of gene transcription. Now that gene transcription is better
understood, the Company believes its gene transcription technology provides an
important mechanism for therapeutic intervention and a process through which
drug discovery assays can be designed.
HIGH THROUGHPUT ROBOTIC SCREENING TECHNOLOGY
Since 1988, Oncogene Science has been a pioneer in the development of high
throughput screening. High throughput screening is the practice of rapidly
testing hundreds of thousands of test compounds against a target protein, and
has become a major focus of leading pharmaceutical companies over the last few
years. Competitive pressures in the pharmaceutical industry are requiring
pharmaceutical companies to find ways to identify quality drug candidates more
quickly and cost effectively. The Company believes that worldwide efforts to map
and sequence the human genome will result in the identification of increasing
numbers of new target genes. Moreover, new technologies, such as combinatorial
chemistry, may generate millions of new compounds to test in in-vitro and
live-cell assays.
The Company has developed proprietary hardware and software systems to
automate the entire drug screening process, from the addition of the test
substances to the cells to the analysis of the data generated from the tests. In
its proprietary robotic screening facility, the Company can analyze up to
300,000 different test samples each week, depending on the complexity of the
assays. The Company's robotic systems are not limited to any particular assay
format and can be reconfigured to run a wide variety of assays. In addition to
transcription-based, live-cell assays, the Company's robotic systems can perform
conventional in-vitro assays and live-cell assays not focusing on gene
transcription.
In designing drug screens, the Company generally selects the most relevant
human cell line for the target protein. In order to confirm results obtained in
these cell lines, the Company subjects lead compounds to assays using primary
cells isolated from fresh tissues, which it believes are the most accurate cell
types to predict the activity of the test compounds. Traditionally, primary cell
assays have not been used in high throughput screens because the sensitivity of
the cells to small changes in temperature, humidity and carbon dioxide levels
make accurate quantitative data difficult to obtain. The Company has developed
proprietary environmental control chambers to tightly regulate these conditions
and allow the use of primary cells in high throughput screens. While the Company
often focuses on transcription-based screens, it has the ability to perform an
extensive portfolio of different screens depending on the targeted disease
indication.
DIVERSE COMPOUND LIBRARIES AND COMBINATORIAL CHEMISTRY
Access to large libraries of diverse compounds is an important aspect of
the Company's drug discovery efforts. The Company's collaborative partners have
provided large compound libraries to the Company pursuant to its collaborative
research programs. Certain collaborative partners have made their compound
libraries available for additional research by the Company outside the existing
collaborative programs and the Company owns its own libraries of small
molecules, including its unique and diverse collection of approximately 70,000
fungal organisms from which extracts are generated for high throughput
screening. The Company has developed robotic systems to format medicinal
compound and natural product libraries into microtiter plates for high
throughput screening and an advanced inventory control process incorporating a
bar code system to track these compounds. The Company has prepared and archived
several distinct medicinal compound libraries belonging to the Company's
pharmaceutical partners for screening applications. In excess
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of 800,000 samples are archived at the Company and over 300,000 of these can be
made available to the Company's proprietary discovery programs. For any compound
from the Company's collaborative partners' libraries that emerges as a lead in a
proprietary program, the partner typically will have the right of first refusal
to develop the compound or terminate its further development or to allow the
Company to commercialize the compound independently or with a third party in
exchange for royalty payments from the Company on product sales.
In addition to the medicinal chemistry compounds, the Company also makes
extensive use of natural product compounds in fungal fermentation extracts.
Fungi are a known source of novel pharmaceuticals, including penicillin,
cephalosporin, lovastatin, prevastatin and cyclosporin A. In April 1996, the
Company acquired MYCOsearch, Inc., a private company specializing in fungal
fermentation products and development of fungal extracts. For three years prior
to the acquisition, Oncogene and MYCOsearch collaborated in the development of
automated technology for extract production. Through this acquisition, the
Company has obtained more than 60,000 extracts of fungal samples for its
proprietary uses and is adding to this collection at the rate of 1,000 to 2,000
samples per week.
Regardless of whether a lead compound is obtained by traditional or live
cell-based assays, the pharmaceutical properties of that compound must be
optimized before clinical development begins. Traditional lead optimization
requires medicinal chemists to synthesize new analogs. This methodology is
usually limited to producing approximately five to 20 new analogs per week.
Combinatorial chemistry techniques, however, enable the rapid production of
hundreds of chemical analogs per week, per chemist. The Company is automating
its combinatorial chemistry synthesis program in order to produce analogs of
lead compounds more rapidly. The Company believes that the continued development
of this technology will not only provide for a rapid expansion in its
proprietary libraries of medicinal compounds, but also accelerate the Company's
ability to rapidly analog lead compounds from its screening programs. In
September 1996, the Company acquired Aston Molecules Ltd., a private United
Kingdom Company providing discovery and pharmaceutical development services to
the pharmaceutical industry. The Company believes that the combinatorial
chemistry technologies that have been jointly developed with Aston Molecules
Ltd. will add further to its ability to optimize lead compounds identified in
the Company's live cell-based high-throughput screening systems and will further
advance its position as a fully integrated drug discovery company. The two
companies have collaborated on medicinal chemistry projects since 1994.
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PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
The following table summarizes Oncogene Science's current product
development and research programs as of September 30, 1996. The table is
qualified in its entirety by reference to the more detailed descriptions
elsewhere in this report.
NO. OF
DRUG DISCOVERY PROTEIN PHASE PHASE
PROGRAM/PARTNERS TARGETS(1) DISCOVERY(1) PRECLINICAL(2) II(4) I(3)
----------------------- ------ -------- -------- --------- ---------
ONCOGENE SCIENCE..... Erythropoietin Inducers 1 --
Sickle Cell Disease 1 -- --
Muscular Dystrophy 1 --
CIBA-GEIGY, LTD. .... Wound Healing
(TGF-Beta3) 1 --
Oral Mucositis in
Cancer (TGF-Beta3) 1 --
HOECHST MARION....... Cardiovascular 4 -- --
ROUSSEL, INC. ....... Inflammatory Diseases 2 -- --
Alzheimer's 1 --
PFIZER INC. ......... Oncogene Inhibitors 4 -- -- --
Tumor Suppressor Genes 1 --
Angiogenesis 1 -- --
Apoptosis 2 --
WYETH-AYERST......... Diabetes 1 --
Osteoporosis 1 --
BIOCHEM PHARMA....... HIV 2 --
Hepatitis C 1 --
ANADERM.............. Skin Wrinkling 1 --
Skin Pigmentation 1 --
Hair Growth 1 --
TOTAL 28
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(1) For most of the Company's programs in the "Discovery" phase, the target
proteins are either undergoing high throughput screening or lead compounds
identified in these screens are being evaluated. Multiple lead compounds may
exist for any target protein. These lead compounds may be at different
stages of development, as indicated in the table above.
(2) In the "Preclinical" phase, the Company or its collaborative partners
optimize lead compounds and conduct laboratory pharmacology and toxicology
testing.
(3) "Phase I" clinical trials consist of small scale safety trials typically in
healthy human volunteers.
(4) "Phase II" clinical trials entail testing of compounds in humans for safety
and efficacy in a limited patient population.
SMALL MOLECULE COLLABORATIVE PROGRAMS
As part of its business strategy, Oncogene Science pursues collaborations
with pharmaceutical companies to combine the Company's drug discovery
capabilities with the collaborators' development and financial
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resources. Typically, the Company's collaborations provide for its partners to
make milestone and other payments in support of the Company's research programs
and to pay royalties on sales of any resulting products. The collaborative
partners generally retain manufacturing and marketing rights worldwide. In all
cases, the Company's collaborative partners give the Company access to their
compound libraries for screening against the target genes under their respective
collaborations. With its collaboration with BioChem Pharma, the Company
established a 50/50 joint venture, and thus it will commit greater resources in
exchange for greater commercialization rights. Generally, each collaborative
research agreement prohibits the Company from pursuing with any third party drug
discovery research relating to the target proteins being covered by research
under the collaboration. The Company is currently in discussions with several
pharmaceutical companies regarding potential collaborations or other ventures
related to the discovery or optimization of lead compounds or the clinical
development and commercialization of potential product candidates. There can be
no assurance, however, that current collaborations will be successful, any new
collaboration will be established, or if established, will be on terms favorable
to the Company. Failure to either maintain its existing, or enter into any new,
collaborations could limit the scope of the Company's drug discovery and
development activities, particularly if alternative sources of funding are
unavailable. Such failure could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's existing collaborations are as follows:
Pfizer Inc.
In April 1986, Pfizer and the Company entered into a collaborative research
agreement and several other related agreements. During the first five years of
the collaboration, the Company and Pfizer focused principally on understanding
the molecular biology of oncogenes. In 1991, Pfizer and the Company renewed the
collaboration for a second five-year term and expanded the resources and scope
of the collaboration to focus on the discovery and development of cancer
therapeutic products based on mechanism-of-action that target oncogenes and
anti-oncogenes. Oncogenes play a key role in the conversion of normal cells to a
cancerous state. Anti-oncogenes, or tumor suppressor genes, encode proteins that
generally function to block the proliferative growth of particular cell types. A
loss of function of certain tumor suppressor genes can result in uncontrolled
cell growth. Effective April 1, 1996, the Company and Pfizer renewed their
collaboration for a new five-year term by entering into new Collaborative
Research and License Agreements.
Currently, the Company's collaboration with Pfizer focuses on discovering
compounds that act upon various target proteins involved in cancer. The
Company's screening program has resulted in the identification of a proprietary
lead compound that inhibits a protein associated with a number of major cancers.
Pfizer is conducting pre-IND safety and toxicity studies on this compound. The
continued development of this compound depends on several factors outside the
control of the Company, including the amount and timing of resources devoted by
Pfizer, successful completion of safety and toxicity studies and successful
optimization of the compound. There can be no assurance that a drug will result
from this program.
All patent rights and patentable inventions derived from the research under
this collaboration are owned jointly by the Company and Pfizer. The Company is
obligated to file, prosecute and maintain such patents. The Company has granted
Pfizer an exclusive, worldwide license to make, use, and sell the therapeutic
products resulting from this collaboration in exchange for royalty payments.
This license terminates on the date of the last to expire of the Company's
relevant patent rights.
Pfizer will be responsible for the clinical development, regulatory
approval, manufacturing and marketing of any products derived from the
collaborative research program. However, the collaborative research agreement
does not obligate Pfizer to pursue these activities. Generally, the Company is
prohibited during the term of the contract from pursuing or sponsoring research
aimed at discovery of drugs for the treatment of cancer. If the Company becomes
aware of an opportunity to pursue such research, it must notify Pfizer of this
opportunity and negotiate in good faith for a period of 120 days. If the parties
fail to reach agreement to include this opportunity in their collaboration, the
Company may pursue the opportunity independently. Pfizer is subject to a similar
restriction to the extent it desires to pursue any opportunity with a third
party, but Pfizer is not prohibited from pursuing any cancer research on its
own. The collaborative research agreement will
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expire on April 1, 2001. However, it may be terminated earlier by either party
upon the occurrence of certain defaults by the other party. Any termination of
the collaboration resulting from a Pfizer default will cause a termination of
Pfizer's license rights. Pfizer will retain its license rights if it terminates
the agreement in response to a default by the Company. In addition, between July
1 and September 30, 1998, Pfizer may terminate the collaborative research
agreement, with or without cause, effective March 31, 1999. Furthermore, between
July 1 and September 30, 1999, Pfizer may terminate the collaborative research
agreement, with or without cause, effective March 31, 2000. Upon such early
termination by Pfizer, Pfizer will retain its license rights.
From 1986 to March, 1996, Pfizer paid an aggregate amount of $32.8 million
to the Company in research funding. In 1986, Pfizer purchased 587,500 shares of
the Company's common stock, which constitutes approximately 2.6% of the
Company's outstanding common stock, for an aggregate purchase price of
$3,525,000. Under the current collaborative research agreement, Pfizer has
committed to provide research funding to the Company in an aggregate amount of
approximately $18.8 million. Pursuant to a schedule set forth in the
collaborative research agreement, Pfizer will make annual research funding
payments to the Company, which will gradually increase from a maximum of
approximately $3.5 million in the first year of the five-year term to
approximately $4 million in the fifth year.
Hoechst Marion Roussel, Inc.
The Company is pursuing various areas jointly with HMRI. In July 1995, the
pharmaceutical operations of Marion Merrell Dow Inc. ("MMDI"), Hoechst Roussel
Pharmaceuticals, Inc. ("Hoechst Roussel") and Hoechst AG ("Hoechst") were
combined into one entity, HMRI. Prior to this date, the Company had
collaborative agreements with all three of these companies. The Company and HMRI
have agreed in principle to consolidate these agreements into one collaborative
program and are negotiating a definitive Amended and Restated Collaborative
Research and License Agreement. The Company believes that this consolidation
will result in a stronger, more flexible collaborative program, although it
expects the total level of funding from HMRI will be less than the aggregate
funding from the three previously separate entities. HMRI is responsible for
funding the costs of the Company's development efforts, and as of September 30,
1996, the Company had received or accrued an aggregate of $11.0 million in
research funding from HMRI and its predecessors.
The Company's current collaborations with HMRI are as follows:
Atherosclerosis. In December 1992, the Company entered into a five-year
collaborative research agreement with MMDI to discover and develop gene
transcription-based drugs to treat certain indications in cardiovascular
disease, focused principally on atherosclerosis. The Company completed screening
MMDI's compound library in its assays incorporating atherosclerosis targets,
which resulted in the identification of several lead compounds. HMRI later
requested that the Company screen the compound libraries formerly of Hoechst and
Hoechst Roussel against the same atherosclerosis targets to determine whether
additional lead compounds could be identified. The Company has completed this
additional screening and identified several more lead compounds.
Inflammation, Arthritis and Metabolic Diseases. The Company entered into a
six-year collaborative research agreement with Hoechst, effective January 1993.
This collaboration is focused on discovering drugs for the treatment of
inflammation, arthritis and metabolic diseases. The Company has completed the
screening of HMRI's compound libraries against all three targets in this
collaboration. The lead compounds identified in these screens are undergoing
further analysis, including evaluation in animal models by HMRI.
Alzheimer's. In October 1993, the Company entered into a six-year
collaborative research agreement with Hoechst Roussel pursuant to which it is
pursuing the discovery and development of gene transcription-based drugs to
treat Alzheimer's disease. The Company has completed screening HMRI's compound
libraries in cell-based assays and has identified a potential lead compound that
is undergoing further analysis.
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General. Under each of the Company's collaborative agreements with HMRI,
research committees were formed with equal representation from Oncogene Science
and HMRI. These committees, which meet at least three times a year, evaluate the
progress of the respective research programs, make priority and program
decisions, and prepare annual research plans identifying the drug targets to be
pursued and setting forth related research and budgeting information. The
Company is responsible for achieving its objectives in the annual research
plans. HMRI is responsible for assisting the Company in the pursuit of such
objectives, including advancing the pharmacological assessment of compounds
identified by the Company, determining the chemical structure of the selected
compounds, identifying and selecting development candidates, pursuing clinical
development and regulatory approval, and developing manufacturing methods and
pharmaceutical formulations for the selected candidates. HMRI, in its sole
discretion, may elect not to undertake one or more of these steps.
Generally, the Company is prohibited during the terms of the respective
contracts from pursuing or sponsoring research independent of HMRI on the
identified target proteins in the three areas of collaboration with HMRI. The
collaborative research agreements may be terminated early by either party upon
the occurrence of certain defaults by the other party. Any termination by the
Company resulting from an HMRI default will cause a termination of certain of
HMRI's license rights. HMRI will retain its license rights if it terminates an
agreement in response to a default by the Company.
The Company granted to HMRI, through its previous agreement with MMDI, an
exclusive, worldwide license with respect to, among other things, the use,
manufacture and sale of products resulting from their research collaboration.
HMRI also has the right to obtain an exclusive, worldwide license from the
Company with respect to any therapeutic product derived from the original
Hoechst and Hoechst Roussel research programs. In exchange for these licenses,
HMRI will pay royalties to the Company on sales of such products. The license
will become non-exclusive, and HMRI's obligation to pay royalties on sales will
terminate in each country, in the case of a patented product, when the patent
expires in such country, and in the case of a non-patented product, ten years
after the first commercial sale of such product in such country. The Company and
HMRI have mutually exclusive rights and obligations to prosecute and maintain
patent rights related to various specified areas of the research under the
original MMDI collaboration.
Wyeth-Ayerst Laboratories
In December 1991, the Company entered into a two-year collaborative
research agreement with Wyeth, which was extended for an additional three-year
term in December 1993. The purpose of the agreement is to discover and develop
transcription-based drugs for the treatment of diabetes, immune system
modulation, asthma and osteoporosis. This collaboration was successful in
identifying active compounds on all four protein targets. Wyeth is continuing
preclinical evaluation of compounds from two of these targets in osteoporosis
and diabetes. Wyeth is also responsible for selecting development candidates,
assessing the safety of the development candidates in animals and human patients
under conditions designed to meet FDA requirements, and developing manufacturing
methods and pharmaceutical formulations for those selected candidates. This
collaboration will be concluded on December 31, 1996 in accordance with the
terms of the collaborative research agreement.
The Company has granted to Wyeth an option which is valid until December
31, 1997, to obtain exclusive, worldwide licenses with respect to products
resulting from this collaboration in exchange for royalties to the Company on
sales of such products. Under the agreement, all technology and patent rights
will remain owned by the respective parties and each party has the right to
prosecute and maintain its own patents. Wyeth has funded the Company's drug
discovery efforts under this collaboration. As of September 30, 1996, Wyeth had
provided the Company with an aggregate of $6.1 million in research funding.
Anaderm Research Corporation
On April 23, 1996, in connection with the formation of Anaderm Research
Corp., a Delaware corporation ("Anaderm"), the Company entered into a
Stockholder's Agreement (the "Stockholders' Agreement") among the Company,
Pfizer, Anaderm, New York University ("NYU") and certain NYU faculty members
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(the "Faculty Members"), and a Collaborative Research Agreement (the "Research
Agreement") among the Company, Pfizer and Anaderm for the discovery and
development of novel compounds to treat conditions such as baldness, wrinkles
and pigmentation disorders. Anaderm has issued common stock to Pfizer and the
Company and options to purchase common stock to NYU and the Faculty Members. NYU
and the Faculty Members have exercised their options fully, and Pfizer holds
82%, the Company holds 14%, and NYU and the Faculty Members collectively hold
4%, of Anaderm's common stock. In exchange for its 14% of the outstanding shares
of Anaderm common stock, the Company will provide formatting for high-throughput
screens and will conduct compound screening for 18 months at its own expense
under the Research Agreement. The term of the Research Agreement is three years.
During the initial phase of the agreement (the first 18 months) the Company is
required to provide at its own cost formatting for high throughput screens and
perform screening of its own compounds and those compounds provided by Pfizer.
Upon the termination of the initial phase, the Board of Directors of Anaderm
will make a determination as to whether the initial phase was successfully
completed. If the board determines that the initial phase was unsuccessful, the
Research Agreement will then terminate. If the Anaderm Board of Directors, with
Pfizer's approval, determines the initial phase was successful, then the funded
phase will commence and will continue for the term of the Research Agreement.
During this phase, Anaderm will make payments to the Company equal to its
research costs, including overhead, plus 10%. Anaderm or Pfizer will pay
royalties to the Company on the sales of products resulting from this
collaboration.
BioChem Pharma (International) Inc.
Effective as of May 1, 1996, the Company entered into a Collaborative
Research, Development and Commercialization Agreement with BioChem Pharma. Under
this agreement, the parties will seek to discover and develop antiviral drugs
for the treatment of Hepatitis C virus and HIV, although the focus of the
collaborative efforts may change at the discretion of a joint steering
committee. This agreement provides that the Company and BioChem Pharma will
jointly commit resources to the collaborative program. The Company and BioChem
Pharma will share equally the commercialization rights in the U.S. and Europe
for any product resulting from the collaboration. BioChem Pharma will
exclusively own commercialization rights in Canada. The agreement is for a term
of five years, with automatic, successive one-year renewal periods thereafter.
After May 1, 1999, however, either party may terminate the agreement by giving
the other party six-months prior written notice. The agreement is also subject
to early termination of the event of certain defaults by either party.
Ciba-Geigy, Ltd.
In addition to its small molecule discovery programs, the Company has
developed the recombinant protein TGF-Beta3 for various indications. The
Company believes it was the first to isolate TGF-Beta3, a naturally occurring
human growth factor that exerts either stimulatory or inhibitory effects
depending upon the particular cell type to which it is applied. Topical or local
application of TGF-Beta3 in animal studies has been shown to enhance and
accelerate wound healing. Similarly, animal studies have shown that TGF-Beta3
can minimize the severity of ulcerative mucositis when administered prior to
chemotherapy.
The Company entered into an agreement with Ciba in April 1995 expanding the
scope of the two companies' prior collaborative efforts with respect to
TGF-Beta3. This agreement grants to Ciba an exclusive, worldwide license to
use and sell TGF-Beta3 products for oral mucositis and wound healing, as well
as certain other indications, including psoriasis, and an option to obtain
rights to all other indications of TGF-Beta3 currently held by the Company. In
addition, Ciba has the worldwide license to manufacture TGF-Beta3 for all
indications.
Oral Mucositis. Oral mucositis is a painful, often debilitating condition
characterized by mouth and throat lesions that frequently occur as a side effect
of chemotherapy. In the U.S., over one million new cases of cancer occur each
year, over half of which receive multiple treatments of chemotherapy.
Approximately 40% of chemotherapy patients exhibit some degree of oral
mucositis. Most chemotherapeutic agents exert their lethal effects primarily
against cancerous cells undergoing active division and growth. Chemotherapeutic
agents also attack normal cells that are subject to rapid division, such as the
epithelial cells lining the mouth.
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The Company and Ciba have developed topical formulations of TGF-Beta3 to
temporarily inhibit the high proliferative growth rate of certain normal cells
in the mouth. The Company's objective is to develop TGF-Beta3 to reduce the
toxicity associated with chemotherapeutic agents.
Under its agreement with Ciba, the Company and CIBA are funding Phase I
clinical trials of TGF-Beta3 for oral mucositis in the U.S. and Ciba is
funding Phase I clinical trials in Europe. Ciba will fund all further Phase II
and III clinical trials. An IND for this indication was filed by Ciba in January
1996. The Company commenced Phase I clinical trials in the U.S. in 1996. A
second Phase I study is being conducted by Ciba in Europe to demonstrate safety
and determine the maximum tolerated dose. In addition, Ciba has initiated a
Phase IIa trial in Europe and will initiate a similar Phase IIa trial in the
U.S. before the end of 1996. No assurance can be given that any of these
clinical trials will demonstrate safety or efficacy.
Wound Healing. In addition to its program for the development of
TGF-Beta3 to treat oral mucositis, the Company is collaborating with Ciba in
the development of TGF-Beta3 in an application to promote soft tissue wound
healing, including venous leg ulcers, decubitus ulcers (pressure sores),
diabetic foot ulcers and burns. Such chronic cutaneous ulcers afflict an
estimated three million people in the U.S. TGF-Beta3 is believed to promote
wound healing by recruiting inflammatory cells, such as neutrophils and
macrophages, and fibroblasts, and stimulating fibroblast proliferation and
extracellular matrix production. TGF-Beta3 is also believed to stimulate
angiogenesis (new blood vessel growth) at the wound site.
To date, Ciba has completed four Phase I safety studies, one in Europe
using a single dose of TGF-Beta3 applied to intact skin, one in the U.S. using
a multiple dose of TGF-Beta3 applied to intact skin, and two in Japan. In all
studies, the drug was found to be well tolerated with no adverse effects. Ciba
recently completed two Phase IIa safety/dose-finding studies, one in Europe,
involving a single dose administration to venous leg ulcer patients, the other
in the U.S., involving a single dose administration to decubitus ulcer patients.
The drug was found to be well tolerated in these patients. Ciba initiated a
clinical trial of venous leg ulcer patients in Europe, a clinical trial in
pressure sore patients in the U.S. and Canada and a venous ulcer, decubitus
ulcer and burn study in Japan during 1996. In addition, Ciba is conducting
additional Phase II venous leg ulcer, decubitus ulcer and burn wound clinical
trials in Japan. There can be no assurance that additional trials will
demonstrate safety and efficacy or will begin when planned, or at all in part
for the reasons discussed below.
General. In exchange for its exclusive license with respect to the wound
healing, oral mucositis and certain other indications for TGF-Beta3, Ciba will
make royalty payments to the Company on the sale of TGF-Beta3 products. Also,
Ciba purchased 909,091 shares of the Company's Common Stock at $5.50 per share
for an aggregate purchase price of $5 million in April 1995. If, and at the
time, Ciba decides to initiate Phase III clinical trials (or the equivalent in
Europe) for oral mucositis, Ciba will be required to make a $10 million payment
to the Company. In exchange for such payment, Ciba's license will be expanded to
cover all other indications for TGF-Beta3. Ciba has the option to make such
payment by purchasing $10 million of the Company's Common Stock at the higher of
$5.50 per share or the then current market price. In the absence of a decision
by Ciba to pursue such clinical trials, Ciba may nonetheless exercise an option
within four years from inception of the agreement, or by April 1999, to expand
its license under the agreement to cover all indications for TGF-Beta3 by
making the $10 million payment.
Ciba has the right to discontinue clinical development at any time, in
which case all of its license rights from the Company with respect to
TGF-Beta3 will be terminated and it will make available to the Company the
results of all clinical work up to the date such activity was discontinued.
Under the agreement, Ciba has the right to manufacture TGF-Beta3, and will
supply the Company and any licensee of the Company with all developmental and
commercial quantities of TGF-Beta3 required. With respect to the Company's
commercial requirements in the future, if any, Ciba and the Company have agreed
to negotiate terms pursuant to which Ciba will supply TGF-Beta3, subject to a
specified pricing formula should the parties fail to reach agreement. In the
past Ciba experienced delays in manufacturing TGF-Beta3 due to the failure of
its contract manufacturer's facilities to comply with GMP regulations. If Ciba
is unable or unwilling to scale up its capacity to supply TGF-Beta3 to the
Company or its licensees in sufficient quantities, Ciba will license to the
Company its technology relating to the production of TGF-Beta3 on terms to be
negotiated within specified parameters. There
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can be no assurance that the TGF-Beta3 program will not experience significant
delays as a result of Ciba's failure to supply TGF-Beta3 on a timely basis.
The Company's agreement with Ciba ends upon the expiration of the last
Company's patents relating to TGF-Beta3.
PROPRIETARY DRUG DISCOVERY AND DEVELOPMENT
In addition to its collaborative programs, the Company has undertaken
independent efforts to discover and develop gene transcription-based
therapeutics in various proprietary areas. The Company initiated its proprietary
programs in 1994 and is currently screening compounds against multiple target
proteins in live-cell assays associated with chronic anemias, virology and
muscle wasting disorders. The goal of these programs is to identify small
molecule, orally-active compounds that will regulate the expression of key
proteins associated with these diseases. Generally, the Company's objective with
respect to its proprietary programs is to identify lead compounds, progress them
through preclinical development and manage clinical development through
early-stage clinical trials. If its drug discovery efforts are successful, the
Company intends to partner with a large pharmaceutical firm for clinical and
commercial development of each potential proprietary product. There can be no
assurance that lead compounds identified in the Company's proprietary programs
will progress into clinical development, that any such compounds will proceed
successfully through clinical trials or that the Company will secure any
collaboration agreements with respect to any program or compound.
Chronic Anemias
Currently, the Company's proprietary discovery and development efforts are
focused principally on the protein erythropoietin ("EPO"). Injectable
recombinant EPO is widely used for the treatment of anemia due to chronic renal
failure and anemia associated with chemotherapy for AIDS and cancer. Sales of
EPO therapeutics generated worldwide revenues of over $2.0 billion in 1995. EPO
is also being tested for use in anemia resulting from other indications. The
Company believes that a significant market opportunity exists for an effective,
oral, small molecular weight compound that could induce the cellular production
of EPO. The Company's gene transcription screens have resulted in the
identification of several potent lead compounds that increase the expression of
EPO in cell lines and certain animal models. The Company is undertaking early
preclinical development, which involves medicinal chemistry and pharmacology, of
these lead compounds.
Sickle cell anemia and thalassemia are caused by genetic mutations which
result in the mutation, absence or decrease in the adult chain of hemoglobin
(the protein in red blood cells that binds oxygen). Currently available
treatments for both of these diseases are inadequate and expensive. The cost of
treating each sickle cell patient in the U.S. has been estimated to be in excess
of $60,000 annually. Regular blood transfusions are the mainstay of current
therapy for thalassemia. The Company's approach to address sickle cell anemia
and thalassemia is to discover a small molecule compound that increases
expression of the fetal hemoglobin ("HbF") gene to compensate for defects in the
adult chain of hemoglobin. The Company has developed an assay to determine the
ability of test compounds to induce the production of HbF.
Virology
The Company's virology program targets certain proteins which are believed
to be essential to viral pathogenesis. The current viral targets in this program
include herpes simplex virus, human hepatitis B virus ("HBV") and influenza
virus. For each of these diseases there is an unmet need for new effective,
anti-viral drugs. For example, HBV is a chronic infection that can progress to
cirrhosis and liver cancer, making HBV one of the most significant of all
infectious diseases.
The Company's principal drug discovery approach in its virology program
focuses on discovering small molecule compounds that affect transcription of
novel gene sequences in the virus. The Company has designed novel assays that
target these genes. In May 1996, the Company formed a 50/50 co-venture with
BioChem Pharma for certain virology targets. The Company is also in discussions
with a pharmaceutical company regarding a potential collaboration in influenza,
although there can be no assurance that a collaboration will be established.
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Muscle Wasting Disorders
Muscular Dystrophy. Duchenne's and Becker's muscular dystrophy are due to
defects of the dystrophin gene. The Company is developing multiple approaches in
its discovery efforts with respect to a drug for the treatment of muscular
dystrophy. A portion of the funding for this project has been provided by the
Association Francaise Contre Les Myopathies.
CANCER DIAGNOSTICS
The Company is engaged in the development of a series of cancer diagnostic
tests based on oncogenes, tumor suppressor genes and other gene targets whose
proteins are directly involved in tumor growth or metastasis. One line of these
tests utilizes immunoassays and monoclonal antibodies to detect these cancer
markers in urine and serum. The other line of diagnostic tests utilizes a series
of monoclonal antibodies capable of measuring the cancer markers in tissue
sections using immunohistochemistry techniques such as manual pathology
diagnostic tests and image analysis. Both of these lines of tests are designed
to aid oncologists in the confirmation, monitoring, staging, screening or
prognosis of human cancer. These tests may enable reference labs and physicians
to select more effective types of treatment, more easily monitor patients during
therapy, or diagnose cancer at an earlier stage. The current focus of the
Company's diagnostic development program is on breast and colon cancer, but the
Company believes that many of the cancer markers in its program may have
clinical utility for other human tumors, such as lung, prostate, ovarian and
stomach cancer. None of these diagnostic tests have completed clinical
development or received FDA clearance to be marketed in the U.S.
The Company has been pursuing serum and tissue based cancer diagnostic
products in collaboration with Becton under a collaborative program started in
October 1991 (after an earlier collaboration from 1984 to 1989). During 1995,
the Company and Becton agreed that Becton would narrow its focus in the program
exclusively to tissue-based diagnostic tests including immunohistochemistry and
that the Company would continue its development program in serum-based cancer
diagnostics. Accordingly, Becton reduced its funding under this program in
fiscal 1996, and provided no further funding for this program after it ended on
its scheduled expiration date of September 30, 1996. Pursuant to an agreement
entered into as of September 27, 1996, the Company has granted to Becton
world-wide licenses to make, use and sell tissue-based diagnostic products that
incorporate specified antibodies with respect to which the Company owns patent
or other proprietary rights. The Company has generally retained the rights with
respect to nontissue-based (i.e., serum-based) diagnostic products. Becton's
license in any particular country will terminate upon the last to expire of the
Company's patent rights in such country or, in the case of any product
incorporating non-patented technology, ten years after such product is first
sold in the United States. During the term of its licenses, Becton will either
source from the Company the antibodies incorporated in the products licensed
from the Company or it will pay the Company royalties on net sales.
The Company is continuing the development of serum-based cancer diagnostic
products in collaboration with Bayer Corporation ("Bayer") pursuant to a
Collaborative Research and License Agreement effective January 1, 1997. Under
this agreement, the Company has granted to Bayer licenses to manufacture, use
and sell clinical diagnostic products based on the Company's cancer diagnostics
technology in exchange for royalties on net sales. Bayer will own all
technology, and has the exclusive right to commercialize clinical diagnostic
products, derived from the collaboration. Bayer's license is perpetual with
respect to nonpatented technology and will terminate with respect to patented
technology upon the expiration of the last to expire of the Company's patents.
Bayer will provide funding for the Company's research under the collaboration in
the amount of $1.5 million for each of the first two years, and $1 million for
each subsequent year. The Company will be required to provide up to $500,000 in
annual funding for the collaboration to the extent the Company derives net
revenues from out-licensing any cancer diagnostics technology or the sale of any
clinical diagnostic or research products. The agreement will terminate on
December 31, 2002. Bayer has the right to terminate the agreement at any time
after December 31, 1999 upon 12 months' notice.
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INTELLECTUAL PROPERTY
The Company believes that patents and other proprietary rights are vital to
its business. The Company's policy is to protect its intellectual property
rights in technology developed by its scientific staff by a variety of means,
including applying for patents in the United States and other major
industrialized countries. The Company also relies upon trade secrets and
improvements, unpatented proprietary know-how and continuing technological
innovations to develop and maintain its competitive position. In this regard,
the Company seeks restrictions in its agreements with third parties, including
research institutions, with respect to the use and disclosure of the Company's
proprietary technology. The Company also has confidentiality agreements with its
employees, consultants and scientific advisors.
The Company currently owns 12 U.S. patents and 35 foreign patents. In
addition, the Company currently has pending 30 applications for United States
patents, 3 of which have been allowed, and 33 applications for foreign patents,
2 of which have been allowed. In addition, other institutions have granted
exclusive rights under their United States and foreign patents and patent
applications to the Company.
There can be no assurance that patents will issue based upon the Company's
pending patent applications or any applications which it may file in the future,
that any patent issued will adequately protect a commercially marketable product
or process or that any patent issued will not be circumvented or infringed by
others or declared invalid or unenforceable. Moreover, there can be no assurance
that others may not independently develop the same or similar technology or
obtain access to the Company's proprietary technology. The Company is aware of
patents issued to other entities with respect to technology potentially useful
to the Company and, in some cases, related to products and processes being used
or developed by the Company. The Company currently cannot assess the effect, if
any, that these patents may have on its operations in the future. The extent to
which efforts by other researchers resulted or will result in patents and the
extent to which the issuance of patents to other entities would have a material
adverse effect on the Company or would force the Company to seek licenses from
such other entities currently is unknown as is the availability to the Company
of licenses from such other entities, and whether, if available, such licenses
can be obtained on terms acceptable to the Company.
In the cancer diagnostics area, the Company has a U.S. patent relating to
an assay which the Company is seeking to develop for the detection of protein
encoded by the neu oncogene ("neu") in serum. The Company is aware that a patent
application relating to a similar assay was filed by a third party shortly after
the Company filed the application from which its U.S. patent issued. It is
possible that the Company may have to participate in an interference proceeding
with such third party to determine priority of invention, which could result in
substantial cost to the Company. The Company cannot predict whether such an
interference proceeding will occur, or if it does occur, whether the Company
will prevail. If the Company does not prevail, it may not be able to
commercialize its assay for neu in serum without a license from such third
party, which may not be available on acceptable terms or at all.
The Company is aware of several U.S. and foreign patents owned by
others who may allege infringement by products, including TGF-Beta 3, which
the Company is seeking to develop in collaboration with a partner. Genentech
has U.S. patents relating to certain recombinant materials and procedures for
producing members of the TGF-Beta family, including TGF-Beta 3, which the
Company is seeking to develop in collaboration with a partner. Genentech has
U.S. patents relating to certain recombinant materials and procedures for
producing members of the TGF-Beta family, including TGF-Beta 3, which the
Company is seeking to develop in collaboration with a partner. Genentech has
U.S. patents relating to certain recombinant materials and procedures for
producing members of the TGF-Beta family, including TGF-Beta 3. In addition,
the Company believes that Genentech has license rights under a United States
Government patent relating to work done at the National Institute of Health of
the U.S. Department of Health and Human Services involving the identification
and isolation of TGF-Beta 1.
The Company believes that the currently planned development by the Company
and Ciba, its collaborative partner for TGF-Beta 3, involving manufacture in
Europe by Ciba of TGF-Beta 3 in nonmammalian cells for subsequent distribution
in Europe and the United States does not infringe any valid claim of any patent
owned by Genentech or by the U.S. Government. The Company and Ciba have taken
and continue to
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take such actions, including the pursuit of opposition proceedings against
foreign patents, as they deem prudent to minimize the possibility of any charge
of patent infringement being validly raised against Ciba or the Company based on
such patents.
The Company has received communications from Sibia Neuroscience, Inc.
("Sibia") in which Sibia has stated the Company's live-cell assay technology may
infringe a patent issued to Sibia covering cell-based assays. The Company does
not believe that it is infringing any valid claim of Sibia's patent or of any
patents owned by any other third parties. However, there can be no assurance
that a contrary position will not be asserted, or that, if asserted, such a
position would not prevail. If a patent infringement lawsuit were brought
against the Company or its licensees, the Company could incur substantial costs
in defense of such a suit, which could have a material adverse effect on the
Company's business, financial condition and results of operation, regardless of
whether the Company were successful in the defense. Furthermore, if Sibia (or
any other third party) were to establish that the Company's assays infringe
Sibia's patent (or any patent of any other third party), then the Company would
be required to design non-infringing assays or take a license under Sibia's
patent. There can be no assurance the Company would successfully design such
assays or that such a license would be available on acceptable terms or at all.
Moreover, the Company's royalties may be reduced by up to 50% if its licensees
or collaborative partners are required to obtain licenses from third parties
whose patent rights are infringed by the Company's products, technology or
operations.
COMPETITION
The pharmaceutical, biotechnology and diagnostics industries are intensely
competitive. The Company faces, and will continue to face, intense competition
from organizations such as large pharmaceutical companies, biotechnology
companies, diagnostic companies, academic and research institutions and
government agencies. The Company is subject to significant competition from
industry participants who are pursuing the same or similar technologies as those
which constitute the Company's technology platform and from organizations that
are pursuing pharmaceutical products or therapies or diagnostic products that
are competitive with the Company's potential products. Most of the organizations
competing with the Company have greater capital resources, research and
development staffs and facilities, and greater experience in drug discovery and
development, obtaining regulatory approval and pharmaceutical product
manufacturing and marketing. The Company's major competitors include fully
integrated pharmaceutical companies, such as Merck & Co., Inc., Glaxo Wellcome
Inc. and SmithKline Beecham plc, that conduct extensive drug discovery efforts
and are developing novel small molecule pharmaceuticals, as well as numerous
smaller companies.
The Company's technology platform consists principally of utilizing
genetically engineered live cells, gene transcription technologies and high
throughput drug screening. Pharmaceutical and biotechnology companies and others
are active in all of these areas. Ligand Pharmaceuticals Inc., a publicly owned
company, employs live-cell assays, gene transcription, and high throughput
robotics in its drug discovery operations. Numerous other companies use one or
more of these technologies. Several private companies, including Tularik Inc.,
Signal Pharmaceuticals Inc. and Scriptgen Pharmaceuticals, Inc., pursue drug
discovery using gene transcription methods. Other organizations may acquire or
develop technology superior to that of the Company.
Companies pursuing different but related fields also present significant
competition for the Company. For example, research efforts with respect to gene
sequencing and mapping are identifying new and possibly superior target genes.
In addition, alternative drug discovery strategies, such as rational drug
design, may prove more effective than those pursued by the Company. Furthermore,
competing entities may have access to more diverse compounds for testing by
virtue of larger compound libraries or through combinatorial chemistry skills or
other means. These include Pharmacopeia, Inc., CombiChem, Inc. and ArQule, Inc.,
all of which have major collaborations with leading pharmaceutical companies.
There can be no assurance that the Company's competitors will not succeed in
developing technologies or products that are more effective than those of the
Company or that would render the Company's products or technologies obsolete or
noncompetitive.
With respect to the Company's small molecule drug discovery programs, other
companies have potential drugs in clinical trials to treat disease areas for
which the Company is seeking to discover and develop drug candidates. These
competing drug candidates may be further advanced in clinical development than
are any of
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the Company's potential products in its small molecule programs and may result
in effective, commercially successful products. Even if the Company and its
collaborative partners are successful in developing effective drugs, there can
be no assurance that the Company's products will compete effectively with such
products. No assurance can be given that the Company's competitors will not
succeed in developing and marketing products that either are more effective than
those that may be developed by the Company and its collaborative partners or are
marketed prior to any products developed by the Company or its collaborative
partners.
With respect to its efforts to develop TGF-Beta 3 for various indications,
the Company is aware of competing growth factor proteins in clinical trials, and
competing treatment regimens, for wound healing indications. Platelet derived
growth factor (PDGF) for diabetic skin ulcers, under development by Chiron
Corporation and Johnson & Johnson, has completed Phase III clinical trials in
the U.S. Chiron Corporation and Johnson & Johnson have announced that they
intend to file a Product Licensing Application ("PLA") for PDGF with the FDA in
1996. Fibroblast growth factor (FGF) for chronic dermal ulcers, under
development by Scios Nova Inc. and Kaken Pharmaceutical Co., Ltd., is in Phase
III clinical trials in Japan. TGF-Beta 2 for leg ulcers, under development by
Genzyme Corp. and Celtrix Pharmaceuticals, Inc., is in Phase II clinical trials
in the U.S. No assurance can be given that the Company and Ciba will
successfully develop TGF-Beta 3 for any indication, including wound healing.
Furthermore, if any of the competing growth factor product candidates listed
above or other growth factors proves to be effective for wound healing
indications, there can be no assurance that any product developed by the Company
will be able to compete effectively with such product or products.
Other competing approaches to the treatment of chronic wounds include
comprehensive service-based patient centers, which are dedicated to intensive
wound management. These centers may include the use of autologous growth factor
therapy, in which extracts prepared from the patient's own platelets are used to
treat the wounds. Surgical intervention is also frequently employed, which may
involve partial amputation and/or surgical revascularization. The use of skin
grafts to treat wounds, either autografts (skin from elsewhere on the same
patient) or cultured allografts, are also being investigated by several
companies, including Advanced Tissues Sciences, Inc. and Organogenesis, Inc. No
assurance can be given that TGF-Beta 3 will prove to be safe and effective or
will compete successfully against current and emerging therapies for any
particular clinical indication.
The Company believes that its ability to compete successfully will be based
on, among other things, its ability to create and maintain scientifically
advanced technology, attract and retain scientific personnel with a broad range
of expertise, obtain patent protection or otherwise develop proprietary products
or processes, enter into collaborative arrangements, and, independently or with
its collaborative partners, conduct clinical trials, obtain required government
approvals on a timely basis, and commercialize its products.
MANUFACTURING
Ciba has the exclusive right to, and the Company will rely on Ciba for, the
manufacture of TGF-Beta 3 for all of the Company's requirements for clinical
trials and commercial purposes. Oncogene Science believes that, if Ciba should
fail to meet its requirements, there are other companies that could manufacture
and supply TGF-Beta 3, although there can be no assurance that this could be
accomplished on a timely basis, or at all.
The Company is, and will remain, dependent on its collaborative partners
and third parties for the manufacture of all products. There can be no assurance
that the Company will be able to manufacture products that will meet the
Company's demands for quality, quantity, cost and timeliness or otherwise
contract for manufacturing capabilities on acceptable terms. The failure of the
Company to successfully contract for the manufacture of products that satisfy
its requirements for quality, quantity, cost and timeliness would prevent the
Company from conducting preclinical testing and clinical trials and
commercializing its products.
MARKETING AND SALES
The Company does not intend to develop its own marketing and sales
capabilities. Potential therapeutic products subject to the Company's
collaborative agreements with Pfizer, HMRI, Wyeth and Ciba, and potential
diagnostic products under the Company's collaboration with Becton, will be
marketed by those
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companies worldwide. The Company will receive royalties of up to 10% on net
sales of products, depending upon the nature of the product and the ownership of
the underlying technology. The Company expects that products resulting from
future collaborations in drug discovery and development and diagnostic product
development will be marketed under arrangements which are similar to these
agreements, although any collaborations established for products resulting from
proprietary programs may vary significantly.
GOVERNMENT REGULATION
The Company and its collaborative partners are, and any potential products
discovered and developed thereto, will be subject to comprehensive regulation by
the FDA in the United States and by comparable authorities in other countries.
These national agencies and other federal, state, and local entities regulate,
among other things, the preclinical and clinical testing, safety, effectiveness,
approval, manufacture, labeling, marketing, export, storage, record keeping,
advertising, and promotion of pharmaceutical and diagnostic products.
The process required by the FDA before pharmaceutical products may be
approved for marketing in the United States generally involves: (i) preclinical
laboratory and animal tests, (ii) submission to FDA of an investigational new
drug application, which must become effective before clinical trials may begin,
(iii) adequate and well controlled human clinical trials to establish the safety
and efficacy of the drug for its intended indication, (iv) submission to the FDA
of an NDA or, in the case of biological products, such as TGF-Beta 3, a PLA,
and (v) FDA review of the NDA or PLA in order to determine, among other things,
whether the drug is safe and effective for its intended uses. There is no
assurance that FDA review process will result in product approval on a timely
basis, if at all.
Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies, to assess the potential safety and
efficacy of the product. Certain preclinical tests are subject to FDA
regulations regarding current Good Laboratory Practices. The results of the
preclinical tests are submitted to the FDA as part of an IND and are reviewed by
the FDA prior to the commencement of clinical trials.
Clinical trials are conducted under protocols that detail such matters as
the objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND.
Clinical trials are typically conducted in three sequential phases, which
may overlap. During Phase I, when the drug is initially given to human subjects,
the product is tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion. Phase II involves studies in a limited patient
population to: (i) evaluate preliminarily the efficacy of the product for
specific, targeted indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. Pivotal or
Phase III trials are undertaken in order to further evaluate clinical efficacy
and to further test for safety within an expanded patient population. The FDA
may suspend or terminate clinical trials at any point in this process if it
concludes that clinical subjects are being exposed to an unacceptable health
risk.
FDA approval of the Company's and its collaborators' products, including a
review of the manufacturing processes and facilities used to produce such
products, will be required before such products may be marketed in the United
States. The process of obtaining approvals from the FDA can be costly, time
consuming and subject to unanticipated delays. There can be no assurance that
approvals of the Company's proposed products, processes or facilities will be
granted on a timely basis, if at all. Any failure to obtain or delay in
obtaining such approvals would have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, even if
regulatory approval is granted, such approval may include significant
limitations on indicated uses for which a product could be marketed.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's manufacturing procedures conform to Good
Manufacturing Practices ("GMP") requirements, which must be followed at all
times. In complying with those requirements, manufacturers (including a drug
sponsor's third-party contract manufacturers) must continue to expend time,
money and effort in the area of production and quality control to ensure
compliance. Domestic manufacturing establishments are subject to periodic
17
18
inspections by the FDA in order to assess, among other things, GMP compliance.
To supply products for use in the United States, foreign manufacturing
establishments must comply with GMP and are subject to periodic inspection by
the FDA or by regulatory authorities in certain countries under reciprocal
agreements with the FDA.
Both before and after approval is obtained, a product, its manufacturer and
the holder of the NDA for the product are subject to comprehensive regulatory
oversight. Violations of regulatory requirements at any stage, including the
preclinical and clinical testing process, the approval process, or thereafter
(including after approval) may result in various adverse consequences, including
the FDA's delay in approving or refusal to approve a product, withdrawal of an
approved product from the market, and the imposition of criminal penalties
against the manufacturer and NDA holder. In addition, later discovery of
previously unknown problems may result in restrictions on such product,
manufacturer or NDA holder, including withdrawal of the product from the market.
Also, new government requirements may be established that could delay or prevent
regulatory approval of the Company's products under development.
For marketing outside the United States, the Company and its collaborators
and the drugs developed thereby, if any, will be subject to foreign regulatory
requirements governing human clinical trials and marketing approval for drugs
and diagnostic products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country. In addition, before a new drug may be exported from the U.S., it must
be the subject of an approved NDA or comply with FDA regulations pertaining to
INDs.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
The Company's research and development involves the controlled use of hazardous
materials, chemicals and various radioactive compounds. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company.
Diagnostic tests undergo different FDA review processes depending whether
they are classified as "biologicals" or "medical devices." For medical devices,
a 510(k) application (for a product substantially equivalent to a product
already on the market) or a premarket approval ("PMA") application (generally, a
new product or method that is not substantially equivalent to an existing
product) must be filed with, and approved by, the FDA prior to
commercialization. Obtaining premarket approval is a costly and time-consuming
process, comparable to that for new drugs. There can be no assurance that the
Company's cancer diagnostic product candidates will be submitted for regulatory
approval, or if submitted, that the Company would not be required to seek
pre-market approval as opposed to filing a 510(k) application.
EMPLOYEES
The Company believes that its success will be largely dependent upon its
ability to attract and retain qualified personnel in scientific and technical
fields. As of September 30, 1996, the Company employed 142 persons, of whom 107
were primarily involved in research and development activities, with the
remainder engaged in executive and administrative capacities. Although the
Company believes that it has been successful to date in attracting skilled and
experienced scientific personnel, competition for such personnel is intense and
there can be no assurance that the Company will continue to be able to attract
and retain personnel of high scientific caliber. The Company considers its
employee relations to be good.
ITEM 2. PROPERTIES
The Company leases a 30,000 square foot facility located at 106 Charles
Lindbergh Boulevard, Uniondale, New York. This facility houses the Company's
principal executive offices and drug discovery laboratory. The Company also
leases an 11,000 square foot facility located at 80 Rogers Street/129 Binney
18
19
Street, Cambridge, Massachusetts. This facility contains the offices and
laboratories of the Company's diagnostic product operations. The Company also
has two wholly-owned subsidiaries, Aston Molecules Limited and MYCOsearch, Inc.,
each of which lease facilities which house their offices and drug discovery
laboratories. Aston Molecules Limited leases a 7,440 square foot facility
located at Hold Court, Phase V, Aston Science Park, Birmingham, England.
MYCOsearch, Inc. leases two facilities, one located at Five Oaks Office Park,
4905 Pine Cone Drive, Durham, North Carolina consisting of 4,280 square feet and
the other located at 2 University Place, Durham, North Carolina consisting of
8,000 square feet. The Company believes that its facilities will be adequate to
meet current requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1996.
19
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and is
included for quotation on the Nasdaq National Market under the symbol ONCS. The
following is the range of high and low sales prices by quarter for the Company's
common stock from the first quarter of fiscal 1995 through September 30, 1996 as
reported on the Nasdaq National Market:
1996 FISCAL YEAR HIGH LOW
---------------------------------------------------------- ----- ----
First Quarter............................................. $10 3/4 $5
Second Quarter............................................ 11 1/8 8
Third Quarter............................................. 12 1/2 8 7/8
Fourth Quarter............................................ 10 1/2 7 1/8
1995 FISCAL YEAR HIGH LOW
---------------------------------------------------------- ----- ----
First Quarter............................................. $3 3/8 $2 3/8
Second Quarter............................................ 3 3/8 2 3/8
Third Quarter............................................. 4 5/8 2 15/16
Fourth Quarter............................................ 7 1/8 3 1/2
As of November 30, 1996, there were approximately 715 holders of record of
the Company's common stock. The Company has not paid any dividends since its
inception and does not intend to pay any dividends in the foreseeable future.
Declaration of dividends will depend, among other things, upon future earnings,
the operating and financial condition of the Company, its capital requirements
and general business conditions.
20
21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data with
respect to the Company for each of the years in the five-year period ended
September 30, 1996. The information set forth below should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere herein.
YEARS ENDED SEPTEMBER 30
-------------------------------------------------------------------
1996(A) 1995(B) 1994(C) 1993(D) 1992(E)
----------- ----------- ----------- ----------- -----------
Statement of Operations Data:
Revenues...................... $ 9,718,437 $15,864,999 $16,299,489 $16,088,021 $11,094,175
Expenses:
Research and development... 13,918,968 13,523,043 12,125,210 10,659,806 8,127,466
Production................. 134,529 1,252,990 1,427,981 1,443,649 1,420,686
Selling, general and
administrative........... 6,314,697 7,140,208 7,487,090 6,429,701 5,219,606
Amortization of
intangibles.............. 1,452,755 1,696,561 1,745,163 1,745,713 1,745,694
Loss from operations.......... (12,102,512) (7,747,803) (6,485,955) (4,190,848) (5,419,277)
Other income, net............. 2,160,377 768,744 762,031 884,806 882,630
Gain on sale of Research
Products Business.......... -- 2,720,389 -- -- --
Net loss...................... (9,942,135) (4,258,670) (5,723,924) (3,306,042) (4,536,647)
Net loss per share............ (.50) (0.25) (0.35) (0.21) (0.31)
Weighted average number of
shares of common stock
outstanding................ 19,712,274 16,757,370 16,335,000 16,080,000 14,801,000
YEARS ENDED SEPTEMBER 30
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Cash and short-term
investments................ $47,542,745 $26,786,566 $18,157,891 $22,390,454 $18,897,238
Accounts receivable........... 2,031,950 1,320,015 3,032,839 3,146,990 2,094,464
Working capital............... 47,181,407 26,127,781 21,208,145 25,914,827 22,363,383
Total assets.................. 73,537,054 44,057,421 42,040,900 47,614,538 43,930,705
Stockholders' equity.......... 68,286,959 40,549,636 38,656,314 45,044,603 41,960,868
- ------------------
(a) During fiscal 1996, the Company acquired MYCOsearch, Inc. and Aston
Molecules, Ltd. and completed an offering of its common stock (See Notes 2
and 9(a) to the Consolidated Financial Statements.)
(b) During fiscal 1995, the Company sold its Research Products Business and also
sold shares of its common stock to Ciba-Geigy, Ltd. (See Notes 4 and 9(d) to
the Consolidated Financial Statements.)
(c) During fiscal 1994, the Company changed its method of accounting for
marketable securities to adopt the provisions of the Statement of Financial
Accounting Standards No.115, "Accounting for Certain Investments in Debt and
Equity Securities". (See Note 1(g) to the Consolidated Financial
Statements.)
(d) During fiscal 1993, the Company entered into collaborative agreements with
Marion Merrell Dow and Hoechst AG and also sold shares of its common stock
to Marion Merrell Dow (See Notes 5(b) and 9(c) to the Consolidated Financial
Statements.)
(e) During fiscal 1992, the Company acquired the cancer business of Applied
bioTechnology and completed an offering of its common stock.
21
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES
Total revenues of $9.7 million in fiscal 1996 decreased approximately $6.1
million or 39% compared to fiscal 1995 and total revenues of $15.9 million in
fiscal 1995 decreased approximately $434,000 or 3% compared to fiscal 1994. The
Company sold its Research Products Business for $6.0 million in cash plus other
considerations in August 1995, and accordingly there were no significant sales
of research products recorded after this date. In the sale agreement, the
Company agreed to indemnify the purchaser for a period of two years for certain
breaches of the agreement. Approximately 4.2 million of the decrease in total
revenues in fiscal 1996 was attributable to the sale of the Research Products
Business in fiscal 1995. Collaborative program revenues decreased by
approximately $1.3 million or 14% in fiscal 1996 largely due to a reduction in
revenue under the collaboration agreement with Hoechst Marion Roussel, Inc.
(HMRI) as compared to the total revenue in the prior year's periods from Marion
Merrell Dow Inc. (MMDI), Hoechst Roussel Pharmaceuticals, Inc. (Hoechst Roussel)
and Hoechst AG (Hoechst) as well as a reduction in the funding under the Becton
Dickinson Collaboration due to a narrowing of scope in that program.. The
balance of the decrease represents changes in the timing and amount of grant
awards.
The decrease in total revenues of $434,000 in fiscal 1995 compared to
fiscal 1994 was attributable to decreases of $651,000 in research product
revenues due to the sale of the Research Products Business in August 1995 and
$380,000 in certain grant programs. The decreases in research product sales and
certain grant programs, were offset by increases in collaborative program
revenues. These revenues increased by approximately $597,000 or 7% in fiscal
1995 due to the commencement of a research program with Hoechst in April 1994,
the expansion and extension of the collaborative research program with Wyeth in
March 1994 and increases in revenues under the Pfizer collaboration with respect
to anti-cancer drugs. These increases were offset by decreased funding from
Pfizer associated with the termination of Pfizer's participation in the
TGF-(LOGO)3 oral mucositis program in order to focus exclusively on its
collaborative programs with the Company related to the research and development
of small molecule anti-cancer drugs. Previously, Pfizer had funded the Company's
TGF-(LOGO)3 oral mucositis program in addition to its anti-cancer program. Under
a collaborative agreement with Ciba entered into in April 1995, the Company will
fund the development of TGF-(LOGO)3 for oral mucositis through the end of Phase
I clinical trials and Ciba will fund its subsequent clinical development. Other
research revenues decreased approximately $380,000 or 17% in fiscal 1995
compared to fiscal 1994, which was largely the result of the expiration of a
U.S. government grant.
EXPENSES
Research and development expenses increased by approximately $396,000 or 3%
in fiscal 1996 compared to fiscal 1995 and increased by approximately $1.4
million or 12% in fiscal 1995 compared to fiscal 1994. The increase in fiscal
1996 was due to an increase in expenditures in the Company's joint venture with
Biochem Pharma, and its technology development programs as well as additional
amortization expense on the newly acquired MYCOsearch assets. These increases
were partially offset by reductions in expenditures in the collaborative
programs, primarily with HMRI.
The increase in fiscal 1995 was due principally to the start during 1994 of
the new research program with Hoechst, the expansion and extension of the Wyeth
program and the increase in activities related to the Company's proprietary
programs in the area of medicinal and natural products chemistry and clinical
development of TGF-(LOGO)3 for oral mucositis.
Production expenses decreased approximately $1,118,000 and $175,000 for
fiscal 1996 and fiscal 1995 respectively, reflecting the sale of the Research
Products Business.
Selling, general and administrative expenses decreased approximately
$826,000 or 12% in fiscal 1996 compared to fiscal 1995. This decrease reflected
the reduction in sales and marketing expenses due to the sale of the Research
Products Business, partially offset by increases in expenses related to
corporate development activities. Selling, general and administrative expenses
decreased approximately $347,000 or 5% in fiscal 1995
22
23
compared to fiscal 1994. This decrease also reflected the reduction in sales and
marketing expenses due to the sale of the Research Products Business, offset by
increases in professional fees related to corporate development activities.
Amortization of intangibles in fiscal 1996, 1995, and 1994 represents
amortization of patents and goodwill that resulted from the acquisition of the
cancer diagnostics business of Applied bioTechnology. The decrease in
amortization expense in fiscal 1996 is due to the portion of goodwill which was
expensed in connection with the sale of the Research Products Business.
OTHER INCOME AND EXPENSE
Net investment income increased approximately $1,327,000 or 159% for fiscal
1996 compared to fiscal 1995. This increase was largely due to investment of the
proceeds from the Company's public offering of common stock in April 1996. Net
proceeds from the offering (along with the concurrent sale of 500,000 shares
directly to BioChem Pharma) were approximately $30.3 million.
Net investment income decreased approximately $24,000 or 3% for fiscal 1995
compared to fiscal 1994. Interest income earned in fiscal 1995 was higher than
in fiscal 1994 despite a lower average principal balance in fiscal 1995 due to
increased interest rates. However, this was offset in part by a net realized
loss on the sale of certain investments.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, working capital (representing primarily cash, cash
equivalents and short-term investments) aggregated approximately $47.2 million.
The Company has been, and will continue to be, dependent upon collaborative
research revenues, government research grants, interest income and cash balances
until products developed from its technology are commercially marketed. In April
1995, Ciba purchased 909,091 shares of the Company's common stock for an
aggregate purchase price of $5.0 million. In April 1996, the Company completed a
public offering of its common stock as well as the sale of 500,000 shares of
common stock to BioChem Pharma that provided total net proceeds of approximately
$30.3 million.
During 1995, the pharmaceutical operations of Hoechst, Hoechst Roussel and
MMDI were consolidated into HMRI. The Company is aware that HMRI is conducting a
review of all its research and development programs. The Company and HMRI have
jointly announced that they have entered into an agreement in principle to
continue their collaborative programs under one overall agreement through
December 31, 2000. In accordance with the agreement in principle, HMRI is
expected to provide up to $12.5 million in research funding over the term of the
renewal period. The Company will receive royalties on the sale of drugs derived
from the collaboration, if any. HMRI and the Company have not yet executed a new
definitive overall agreement.
The Company has been pursuing serum and tissue based cancer diagnostic
products in collaboration with Becton under a collaborative program started in
October 1991 (after an earlier collaboration from 1984 to 1989). During 1995,
the Company and Becton agreed that Becton would narrow its focus in the program
exclusively to tissue-based diagnostic tests including immunohistochemistry and
the Company would continue its development program in serum-based cancer
diagnostics. Accordingly, Becton reduced its funding under this program in
fiscal 1996, and provided no further funding for this program after it ended on
its scheduled expiration date of September 30, 1996. The Company is continuing
the development of serum-based cancer diagnostic products and is in negotiations
with a possible collaborative partner in this area.
The Company's collaboration with Wyeth will be concluded on December 31,
1996 in accordance with the collaborative research agreement. The Company has
received approximately $1.6 million annually in research and development funding
from Wyeth pursuant to this collaborative agreement. To the extent Wyeth
commercializes any products derived from this collaboration, it will pay certain
royalties to the Company on sales of such products, if any.
23
24
In April 1996, the Company purchased MYCOsearch, Inc., owner of a
collection of fungi and actinomycetes, for approximately $1.75 million in cash
and $3.4 million in common stock and warrants. On September 19, 1996, the
Company acquired all of the outstanding capital stock of Aston Molecules
Limited. (Aston), a privately held United Kingdom company. The consideration
paid for Aston included 283,981 shares of the Company's common stock having a
fair market value of approximately $2.4 million. In addition, the Company also
issued rights exercisable at the end of three and five years following the
closing date (for an aggregate exercise price of $7,500) to obtain a number of
shares of the Company's common stock having an aggregate value of $750,000
(based on the then current market value). The present value of this additional
consideration of $590,675 is reflected as deferred acquisition costs in the
accompanying balance sheet as of September 30, 1996. Other direct costs of the
acquisition approximated $635,000 resulting in a total acquisition cost of $3.6
million.
The Company believes that with the funding from its collaborative research
programs, government research grants, interest income, and cash balances, the
Company's financial resources are adequate for its operations for the
foreseeable future. However, the Company's capital requirements may vary as a
result of a number of factors, including competitive and technological
developments, funds required for expansion of the Company's technology platform,
including possible joint ventures, collaborations and acquisitions, the time and
expense required to obtain governmental approval of products, and any potential
indemnification payments to the purchaser of the Research Products Business,
some of which factors are beyond the Company's control. The Company intends to
substantially increase its expenditures and capital investment over the next
several years to enhance its drug discovery technologies, pursue internal
proprietary drug discovery programs, and to commit resources to new
collaborative ventures, such as the new programs with Anaderm and BioChem
Pharma. There can be no assurance that scheduled payments will be made by third
parties, that current agreements will not be canceled, that government research
grants will continue to be received at current levels or that unanticipated
events requiring the expenditure of funds will not occur. Further, there can be
no assurance that the Company will be able to obtain any additional required
funds, or, if such funds are available, that such funds will be available on
favorable terms. Failure to obtain additional funds when required would have a
material adverse effect on the Company's business financial condition and result
of operations.
FORWARD LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that are not historical or current facts deal with potential future
circumstances and developments. The discussion of such matters and subject areas
is qualified by the inherent risks and uncertainties surrounding future
expectations generally, and such discussion may materially differ from the
Company's actual future experience involving any one or more of such matters and
subject areas. An example of this is the discussion in this Item 7 describing
the Company's expectations with regard to renewal of its collaborative research
programs with HMRI. Factors that may arise in the future that prevent the
execution of a definitive overall agreement covering the Company's collaborative
programs with HMRI include possible technological developments by competitors
that render the compounds being pursued by HMRI and the Company less
commercially viable, shifts in strategic direction on the part of HMRI that
would de-emphasize the therapeutic areas or technologies in which the Company is
involved, and negative results in the Company's current programs with HMRI. The
forward looking statement described above, as well as all other discussions
contained herein that deal with potential future circumstances and developments,
are also subject generally to other risks and uncertainties that are described
from time to time in the Company's reports and registration statements filed
with the Securities and Exchange Commission.
24
25
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements:
PAGE
NUMBER
------
Independent Auditors' Report....................................... 26
Consolidated Balance Sheets -- September 30, 1996 and 1995......... 27
Consolidated Statements of Operations -- Years ended September 30,
1996, 1995 and 1994.............................................. 28
Consolidated Statements of Stockholders' Equity -- Years ended
September 30, 1996, 1995 and 1994................................ 29
Consolidated Statements of Cash Flows -- Years ended September 30,
1996, 1995 and 1994.............................................. 30
Notes to Consolidated Financial Statements......................... 31
25
26
INDEPENDENT AUDITORS' REPORT
The Stockholders
and Board of Directors
Oncogene Science, Inc.:
We have audited the accompanying consolidated balance sheets of Oncogene
Science, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended September-30, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Oncogene
Science, Inc. and subsidiaries at September 30, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Jericho, New York
December 3, 1996
26
27
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents....................................... $13,409,866 $17,919,609
Short-term investments.......................................... 34,132,879 8,866,957
Receivables, including trade receivables of $215,201 and
$163,132 at September 30, 1996 and 1995, respectively........ 2,031,950 1,320,015
Interest receivable............................................. 480,050 45,263
Grants receivable............................................... 331,014 433,530
Prepaid expenses................................................ 623,827 518,150
----------- -----------
Total current assets......................................... 51,009,586 29,103,524
=========== ===========
Property, equipment and leasehold improvements -- net............. 6,495,112 5,709,515
Fungi cultures -- net............................................. 5,048,584 --
Other receivable.................................................. -- 262,703
Loans to officers and employees................................... 37,342 25,516
Other assets...................................................... 300,949 325,582
Intangible assets -- net.......................................... 10,645,481 8,630,581
----------- -----------
$73,537,054 $44,057,421
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................... $ 3,686,638 $ 2,825,702
Current portion of unearned revenue............................. 141,541 150,041
Total current liabilities.................................... 3,828,179 2,975,743
Other liabilities:
Long-term portion of unearned revenue........................... 104,497 165,839
Loan payable.................................................... 83,244 --
Deferred acquisition costs...................................... 590,675 --
Accrued postretirement benefit cost............................. 366,203
643,500
Total liabilities............................................ 3,507,785 5,250,095
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized,
22,175,214 shares issued at September 30, 1996 and 17,683,047
shares issued at September 30, 1995.......................... 221,752 176,830
Additional paid-in capital...................................... 104,347,231 66,735,375
Accumulated deficit............................................. (36,071,476) (26,129,341)
Cumulative translation adjustments.............................. (5,355) (55,669)
Unrealized holding loss on short-term investments............... (205,193) (35,000)
----------- -----------
68,286,959 40,692,195
Less: treasury stock, at cost; 222,521 shares at September 30,
1995......................................................... --
----------- -----------
Total stockholders' equity................................... 68,286,959 40,549,636
----------- -----------
Commitments and contingencies..................................... $73,537,054 $44,057,421
=========== ===========
See accompanying notes to consolidated financial statements.
27
28
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Collaborative program revenues, principally from
related parties.................................... $ 8,347,560 $ 9,685,856 $ 9,089,295
Sales................................................. 105,356 4,286,540 4,937,917
Other research revenue................................ 1,265,521 1,892,603 2,272,277
9,718,437 15,864,999 16,299,489
Expenses:
Research and development.............................. 13,918,968 13,523,043 12,125,210
Production............................................ 134,529 1,252,990 1,427,981
Selling, general and administrative................... 6,314,697 7,140,208 7,487,090
Amortization of intangibles........................... 1,452,755 1,696,561 1,745,163
21,820,949 23,612,802 22,785,444
Loss from operations............................... (12,102,512) (7,747,803) (6,485,955)
Other income (expense):
Net investment income................................. 2,162,294 834,830 858,904
Other expense-net..................................... (1,917) (66,086) (96,873)
Gain on sale of Research Products Business............ -- 2,720,389 --
----------- ----------- -----------
Net loss................................................ $(9,942,135) $(4,258,670) $(5,723,924)
=========== =========== ===========
Weighted average number of shares of common stock
outstanding........................................... 19,712,274 16,757,370 16,335,000
=========== =========== ===========
Net loss per weighted average share of common stock
outstanding........................................... $ (.50) $ (.25) $ (.35)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
28
29
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
UNREALIZED
HOLDING
COMMON STOCK ADDITIONAL CUMULATIVE LOSS ON
------------------------ PAID-IN ACCUMULATED TRANSLATION SHORT-TERM TREASURY
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT INVESTMENTS STOCK
----------- ----------- ------------- ------------- ----------- ----------- -----------
Balance at September 30,
1993................... 16,551,941 $ 165,520 $61,167,618 $(16,146,747) $ 771 $ -- $(142,559)
Options exercised........ 10,700 107 25,724 -- -- -- --
Issuance of common stock
for employee purchase
plan................... 2,074 20 6,328 -- -- -- --
Unrealized holding
loss on short-term
investments.......... -- -- -- -- -- (654,000) --
Translation adjustment... -- -- -- -- (42,544) -- --
---------- --------- ----------- ----------- --------- --------- ---------
Net loss................. -- -- -- (5,723,924) -- -- --
Balance at September 30,
1994................... 16,564,715 165,647 61,199,670 (21,870,671) (41,773) (654,000) (142,559)
Options exercised........ 206,025 2,060 571,408 -- -- -- --
Issuance of common stock
for employee purchase
plan................... 3,216 32 10,523 -- -- -- --
Unrealized holding gain
on short-term
investments............ -- -- -- -- -- 619,000 --
Sale of common stock to
Ciba-Geigy............. 909,091 9,091 4,953,774 -- -- -- --
Translation adjustment... -- -- -- -- (13,896) -- --
Net loss................. -- -- -- (4,258,670) -- -- --
---------- --------- ----------- ----------- --------- --------- ---------
Balance at September 30,
1995................... 17,683,047 176,830 66,735,375 (26,129,341) (55,669) (35,000) (142,559)
Options exercised........ 491,544 4,915 1,640,653 -- -- -- --
Issuance of common stock
for employee purchase
plan................... 3,860 39 10,214 -- -- -- --
Unrealized holding loss
on short-term
investments............ -- -- -- -- -- (170,193) --
Sale of common stock..... 3,618,750 36,188 30,293,757 -- -- -- --
Issuance of common stock
and treasury stock for
acquisitions........... 378,013 3,780 5,667,232 -- -- -- 142,559
Translation adjustment... -- -- -- -- 50,314 -- --
Net loss................. -- -- -- (9,942,135) -- -- --
---------- --------- ----------- ----------- --------- --------- ---------
Balance at September 30,
1996................... 22,175,214 $ 221,752 $104,347,231 $(36,071,476) $ (5,355) $(205,193) $ --
========== ========= ============ ============ ========= ========= =========
See accompanying notes to consolidated financial statements.
29
30
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Cash flow from operating activities:
Net loss.................................................................... $(9,942,135) $(4,258,670) $(5,723,924)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of Research Products Business................................ -- (2,720,389) --
(Gain) loss on sale of investments........................................ (33,305) 118,141 --
Depreciation and amortization............................................... 1,837,873 1,037,044 1,165,809
Amortization of Fungi cultures.............................................. 458,962 -- --
Amortization of intangibles................................................. 1,452,755 1,696,561 1,745,163
Foreign exchange (gain) loss................................................ 50,314 (13,896) (26,649)
Changes in assets and liabilities, net of the effects of the sale of the
Research Products Business and acquisitions of MYCOsearch and Aston
Molecules:
Receivables............................................................. (412,935) 1,605,217 114,152
Inventory............................................................... -- 216,405 (197,570)
Interest receivable..................................................... (434,787) 101,959 (107,890)
Grants receivable....................................................... 102,516 226,091 105,895
Prepaid expenses........................................................ (105,677) (196,491) (98,068)
Other receivable........................................................ 262,703 162,817 92,090
Other assets............................................................ 41,051 (234,378) 23,863
Accounts payable and accrued expenses................................... 391,857 (586,276) 232,439
Unearned revenue........................................................ (69,842) (358,092) 415,972
Accrued postretirement benefit cost..................................... 277,297 177,760 78,568
----------- ----------- -----------
Net cash used by operating activities....................................... (6,123,353) (3,026,197) (2,180,150)
=========== =========== ===========
Cash flows from investing activities:
Additions to short-term investments..................................... (37,216,936) (3,723,180) (5,918,880)
Maturities and sales of short-term investments.......................... 11,814,126 13,192,665 9,135,823
Additions to property, equipment and leasehold improvements............. (2,421,040) (403,275) (1,512,543)
Payments for acquisition of MYCOsearch.................................... (1,889,960) -- --
Payments for acquisition of Aston Molecules............................... (635,441) -- --
Net change in loans to officers and employees ............................ (11,826) 10,400 (40,258)
Proceeds from sale of Research Products Business.......................... -- 6,000,000 --
Other..................................................................... -- -- (15,897)
Net cash provided by (used in) investing activities......................... (30,361,077) 15,076,610 1,648,245
Cash flows from financing activities:
Proceeds from issuance of common stock, net ............................ 30,329,945 4,962,865 --
Proceeds from exercise of stock options and employee stock stock
purchase plan......................................................... 1,655,821 584,023 32,180
Repayment of loan payable............................................... (11,079) -- --
----------- ----------- -----------
Net cash provided by financing activities................................... 31,974,687 5,546,888 32,180
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........................ (4,509,743) 17,597,301 (499,725)
Cash and cash equivalents at beginning of year ............................. 17,919,609 322,308 822,033
----------- ----------- -----------
Cash and cash equivalents at end of year.................................... $13,409,866 $17,919,609 $ 322,308
=========== =========== ===========
Non-cash investing activities:
Issuance of common stock, treasury stock and warrants for acquisition of
MYCOsearch and Aston Molecules.............................................. $ 5,816,736 -- --
=========== =========== ===========
Liabilities assumed from acquisition of MYCOsearch and AstonMolecules....... $ 563,402 -- --
=========== =========== ===========
Deferred purchase obligation incurred for acquisition of Aston Molecules.... $ 590,675 -- --
=========== =========== ===========
See accompanying notes to consolidated financial statements.
30
31
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of Oncogene Science, Inc. and its wholly-owned subsidiaries Applied
bioTechnology, Inc., MYCOsearch Inc., Aston Molecules, Inc., and Oncogene
Science S.A. All intercompany balances and transactions have been eliminated.
The Company is engaged in the research and development of biopharmaceutical
products for the treatment and diagnosis of cancer, cardiovascular and other
human diseases associated with abnormalities of cell growth and control.
(b) Revenue Recognition
Collaborative research revenues represent funding arrangements for the
conduct of research and development ("R&D") in the field of biotechnology and
are recognized when earned in accordance with the terms of the contracts and the
related development activities undertaken. Other research revenues are
recognized pursuant to the terms of grants which provide reimbursement of
certain expenses related to the Company's other R&D activities. Collaborative
and other research revenues are accrued for expenses incurred in advance of the
reimbursement and deferred for cash payments received in advance of
expenditures. Such deferred revenues are recorded as revenue when earned. (See
Note 5)
Revenue from the sale of diagnostic and research reagent products is
recognized at time of shipment.
(c) Patents and Goodwill
As a result of the Company's research and development programs, including
programs funded pursuant to the research and development funding agreements (See
Note 5), the Company has applied for a number of patents in the United States
and abroad. Such patent rights are of significant importance to the Company to
protect products and processes developed. Costs incurred in connection with
patent applications for the Company's research and development programs have
been expensed as incurred.
Patents and goodwill acquired in connection with the acquisition of Applied
bioTechnology's cancer business in October 1991 have been capitalized and are
being amortized on a straight-line basis over the remaining lives of the
respective patents, and over five years for goodwill. The goodwill acquired in
connection with the acquisition of Aston Molecules, Ltd. in September 1996 is
being amortized over five years (See Note 2). The Company continually evaluates
the recoverability of its intangible assets by assessing whether the unamortized
value can be recovered through expected future results.
(d) Research and Development Costs
Research and development costs are charged to operations as incurred and
include direct costs of research scientists and equipment and an allocation of
laboratory facility and central service. In fiscal years 1996, 1995, and 1994,
R&D activities include approximately $6,365,000, $5,696,000 and $3,516,000 of
independent R&D, respectively. Independent R&D represents those research and
development activities, including research and development activities funded by
government research grants, substantially all the rights to which the Company
will retain. The balance of research and development represents expenses under
the collaborative agreements with Pfizer Inc. (Pfizer), Becton Dickinson and
Co.(Becton), Wyeth-Ayerst, a division of American Home Products (Wyeth), Marion
Merrell Dow Inc. (Marion), Hoechst AG, Hoechst-Roussel Pharmaceuticals, Inc.
(Hoechst Roussel), BioChem Pharma International, Inc. (BioChem Pharma), and
Ciba-Geigy, Ltd. (Ciba). On July 18, 1995, Marion, Hoechst AG and
Hoechst-Roussel merged forming a new company named Hoechst Marion Roussel Inc.
(HMRI).
31
32
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(e) Depreciation and Amortization
Depreciation of equipment is provided over the estimated useful lives of
the respective asset groups on a straight-line basis. Leasehold improvements are
amortized on a straight-line basis over the lesser of the estimated useful lives
or the remaining term of their lease.
Amortization of the fungi cultures acquired in connection with the
acquisition of MYCOsearch, Inc. (See Note 2) is on a straight line base over
five years, which represents the estimated period over which the fungi cultures
will be used in the Company's R&D efforts.
(f) Income Taxes
Effective October 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 requires that the Company recognize deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under SFAS No.
109, deferred tax liabilities and assets are determined on the basis of the
difference between the tax basis of assets and liabilities and their respective
financial reporting amounts ("temporary differences") at enacted tax rates in
effect for the years in which the differences are expected to reverse.
The adoption of SFAS No. 109 did not have any impact on the financial
position or results of operations of the Company. The Company, in years prior to
fiscal 1994, accounted for income taxes in accordance with Accounting Principles
Board Opinion No. 11, "Accounting for Income Taxes."
(g) Investments
The Company adopted SFAS No. 115, "Accounting for Investments in Certain
Debt and Equity Securities," (SFAS No. 115) as of October 1, 1993. SFAS No. 115
requires securities classified as available for sale to be recorded at estimated
fair value. The Company's short-term investments, which include U.S. Treasury
obligations and corporate debt securities with original maturities in excess of
one year, are classified as securities available for sale based upon
management's current investment policy. Such investments, prior to the adoption
of SFAS No. 115, were recorded at the lower of cost or estimated market value
with aggregate declines in market value below amortized cost charged against
earnings. Under SFAS No. 115, changes in the net unrealized gains or losses of
available for sale securities are reported as a separate component in
stockholders' equity. The adoption of SFAS No. 115 had no material impact on the
Company's financial position.
(h) Loss Per Share
Loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding. Common share equivalents (stock
options) are not included in the computation since their inclusion would be
anti-dilutive.
(i) Cash and Cash Equivalents
The Company includes as cash equivalents reverse repurchase agreements,
treasury bills, and other time deposits with original maturities of three months
or less.
(j) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relative to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated
32
33
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(2) ACQUISITIONS
(a) MYCOsearch, Inc.
On April 11, 1996, the Company acquired all the outstanding shares of
MYCOsearch, Inc., a privately owned company, that specializes in the collection
of fungi cultures and the development of extracts derived therefrom. On the date
of the acquisition, MYCOsearch became a wholly-owned subsidiary of the Company.
Prior to the acquisition, the Company had purchased extracts and certain
services from MYCOsearch. Such expenses totaled $301,000, and $571,000, in
fiscal 1996 (through April 11, 1996) and fiscal 1995, respectively, which are
included in research and development expenses in the accompanying consolidated
statements of operations.
The purchase price paid by the Company to the shareholders of MYCOsearch
consisted of $1.75 million in cash, $2.95 million in common stock of the Company
(316,553 shares at $9.319 per share, of which 222,521 shares represented the
reissuance of shares held in treasury), and warrants to purchase 100,000 shares
of the Company's stock at $9.319 per share, valued at $483,000. The warrants are
exercisable for a three-year period starting on April 11, 1998. The Company also
incurred other direct costs totaling approximately $137,000 in connection with
the acquisition resulting in a total purchase price of $5.3 million.
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based on the fair values at the
date of acquisition. The purchase price was allocated as follows (in thousands):
Fungi cultures.............................................. $5,508
Fixed assets................................................ 21
Other assets................................................ 16
Other liabilities........................................... (225)
------
Purchase price.............................................. $5,320
======
The fungi cultures contain natural chemical structures that will be tested
against target proteins using the Company's drug screens. The Company will
amortize the fungi cultures on a straight-line basis over a five-year period and
will continually evaluate the recoverability of this asset based on the results
of its testing. Amortization of the fungi cultures totaling $459,000 is
reflected as research and development expense in the accompanying consolidated
statement of operations for the year ended September 30, 1996.
(b) Aston Molecules, Ltd.
On September 19, 1996, the Company completed the acquisition of all the
outstanding capital stock of Aston Molecules Ltd. (Aston), a privately held
United Kingdom company. On the date of the acquisition, Aston became a
wholly-owned subsidiary of the Company. Its operations and personnel will be
maintained at its present site in Birmingham, UK.
The consideration paid for Aston included 283,981 shares of the Company's
common stock having a fair market value of approximately $2.4 million. In
addition, the Company also issued rights exercisable at the end of three and
five years following the closing date (for an aggregate exercise price of
$7,500) to obtain a number of shares of the Company's common stock having an
aggregate value of $750,000 (based on the then current market value). The
present value of this additional consideration of $590,675 is reflected as
deferred acquisition costs in the accompanying consolidated balance sheet as of
September 30, 1996. Other direct costs of the acquisition approximated $635,000
resulting in a total acquisition cost of $3.6 million.
33
34
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based on the fair values at the
date of acquisition. The purchase price was allocated as follows (in thousands):
Goodwill.......................................... $3,468
Fixed assets...................................... 181
Other assets...................................... 299
Other liabilities................................. (338)
------
Purchase price.................................... $3,610
======
The goodwill resulting from the acquisition will be amortized on a
straight-line basis over a five year period. Prior to the acquisition, the
Company purchased certain chemistry services from Aston. Such expenses totaled
$879,000, and $302,000 in fiscal 1996 (through September 19, 1996) and fiscal
1995, respectively, which are included in research and development expenses in
the accompanying consolidated statements of operations.
Concurrent with the acquisition, the Company entered into employment
agreements with certain of Aston's executives and scientific personnel and
granted stock options covering an aggregate of 125,000 shares of its common
stock to such persons. The exercise price of $8.51 per share was based on the
fair market value of the Company's stock on the date of the grant.
(c) Pro Forma Information (Unaudited)
The operating results of MYCOsearch and Aston have been included in the
consolidated statements of operations from the respective dates of the
acquisitions. The following unaudited pro form information presents a summary of
consolidated results of operations for the years ended September 30, 1996 and
1995 assuming the acquisitions had taken place as of October 1, 1995 and 1994,
respectively.
1996 1995
---------- ----------
Revenues.................................... $10,566,000 $17,130,000
Net loss.................................... (12,108,000) (6,213,000)
Net loss per share.......................... (.61) (.36)
The pro forma results give effect to the amortization of the fungi cultures
and goodwill; elimination of intercompany sales; reduction of investment income;
and an increase in the number of common shares outstanding. The pro forma
financial information is not necessarily indicative of the results of operations
as they would have been had the acquisitions been affected on the assumed dates.
(3) INVESTMENTS
The Company invests its excess cash in U.S. Government securities and debt
instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification of
its investments and their maturities that should maintain safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. The Company uses the specific
identification method to determine the cost of securities sold.
The following is a summary of available-for-sale securities as of September
30, 1996 and 1995:
34
35
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
GROSS UNREALIZED
1996 COST (LOSSES) GAINS FAIR VALUE
- ------------------------------------------------ ---------- ---------------- -----------
US Treasury Securities and obligations of US
Government agencies........................... $22,212,207 $ (218,842) $21,993,365
Corporate debt securities....................... 12,125,865 13,649 12,139,514
----------- ---------- -----------
Total................................. $34,338,072 $ (205,193) $34,132,879
=========== ========== ===========
GROSS UNREALIZED
1995 COST (LOSSES) GAINS FAIR VALUE
- ------------------------------------------------- ---------- ---------------- -----------
US Treasury Securities and obligations of US
Government agencies............................ $6,232,027 $ (85,942) $ 6,146,085
Corporate debt securities........................ 2,669,930 50,942 2,720,872
---------- ---------- -----------
Total.................................. $8,901,957 $ (35,000) $ 8,866,957
========== ========== ===========
Net realized gains on sales of investments during fiscal 1996 were
approximately $33,000. Net realized losses on sales of investments during fiscal
1995 were approximately $118,000. The Company did not realize any significant
gains or losses on the sale of its investments during fiscal year 1994.
(4) SALE OF RESEARCH PRODUCTS BUSINESS
In August 1995, the Company sold certain assets and the business of the
Research Products Business (Business) to Calbiochem-Novabiochem International,
Inc. (Calbiochem) for $6.0 million in cash. The assets sold included the
Business' line of research products sold or intended for sale to the academic,
industrial and clinical research markets, existing inventory, property and
equipment and certain other assets. The Company retained the trade accounts
receivable and accounts payable outstanding on the date of sale. In connection
with the sale, the Company wrote off the unamortized goodwill related to the
Business of approximately $343,000. The sale resulted in a net gain of
approximately $2.7 million. In the sale agreement, the Company agreed to
indemnify the purchase for a period of two years for certain breaches of the
agreement.
The Company also signed a sublease agreement with Calbiochem relating to
the Cambridge facility for a term of three years, at an annual payment equal to
50% of the Company's fixed lease payment and related facility costs, plus
certain operating costs. Payments from Calbiochem totaling $417,000 and $0 for
the years ended September 30, 1996 and 1995, respectively, have been reflected
as an offset to selling, general and administrative expenses in the accompanying
consolidated statements of operations.
(5) PRODUCT DEVELOPMENT CONTRACTS
(a) Pfizer
Effective April 1, 1996, the Company and Pfizer renewed their ten-year-old
collaboration for a new five-year term by entering into new Collaborative
Research and License Agreements. Under these agreements, all patent rights and
patentable inventions derived from the research under this collaboration are
owned jointly by the Company and Pfizer. Under the collaborative research
agreement, Pfizer has committed to provide research funding to the Company in an
aggregate amount of approximately $18.8 million. Pursuant to a schedule set
forth in the collaborative research agreement, Pfizer will make maximum annual
research funding payments to the Company, which will gradually increase from
approximately $3.5 million in the first year of the five-year term to
approximately $4 million in the fifth year. The collaborative research agreement
will expire on April 1, 2001. However, it may be terminated earlier by either
party upon the occurrence of
35
36
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
certain defaults by the other party. Any termination of the collaboration
resulting from a Pfizer default will cause a termination of Pfizer's license
rights. Pfizer will retain its license rights if it terminates the agreement in
response to a default by the Company. In addition, between July 1 and September
30, 1998, Pfizer may terminate the collaborative research agreement, with or
without cause, effective March 31, 1999. Furthermore, between July 1 and
September 30, 1999, Pfizer may terminate the collaborative research agreement,
with or without cause, effective March 31, 2000. Upon such early termination by
Pfizer, Pfizer will retain its license rights. The Company also granted Pfizer
an exclusive, worldwide license to make, use, and sell the therapeutic products
resulting from this collaboration in exchange for royalty payments. This license
terminates on the date of the last to expire of the Company's relevant patent
rights.
(b) Hoechst Marion Roussel
Effective January 1, 1993, the Company and Marion entered into a
collaborative research and license agreement to identify and develop
transcription-based drugs to treat certain indications in the area of
cardiovascular disease. The agreement provided for payments to the Company of
$11 million in research funding and license fees over a five year period through
December 31, 1997. Marion also invested $6 million in common stock (See Note
9(c)). The payments with respect to 1997 and 1996 are being consolidated into a
proposed new research agreement with HMRI.
In January 1993, the Company and Hoechst AG entered into a collaborative
research agreement to jointly develop gene transcription-based drugs to treat
certain indications in the areas of inflammation, viral infection and metabolic
diseases. In April 1994, the Company and Hoechst-Roussel, a unit of Hoechst AG,
entered into a collaborative agreement to discover and develop gene
transcription-based drugs to treat Alzheimer's disease.
In July 1995, Marion was acquired by an affiliate of Hoechst AG and with
Hoechst Roussel, merged into one entity, HMRI. All of the Company's
collaborative agreements with Marion, Hoechst AG and Hoechst-Roussel have
continued under HMRI. The Company expects the related programs to continue under
one overall agreement in the future.
(c) Ciba-Geigy
In April 1995, the Company entered into an agreement with Ciba to expand
the scope of the companies' collaborative efforts with respect to the
development of TGF-Beta 3 for the treatment of oral mucositis and other
indications. Under the agreement, the Company will fund development through
Phase I clinical trials and Ciba will fund Phase II and III clinical trials.
Ciba will pay the Company $10 million if, and at the time, it decides to
initiate Phase IIB or III clinical trials or, at the option of Ciba, within four
years of the agreement date. The payment will be characterized, at Ciba's
option, as a milestone payment or a purchase of the Company's common stock at
the higher of $5.50 per share or the then current market price. In exchange for
such payment, Ciba's license will be expanded to include all other indications
for TGF-Beta 3.
(d) Becton Dickinson
On October 4, 1991, the Company and Becton established a collaborative
research program to develop cancer diagnostic products. The Company and Becton
shared equally the cost of discovery phase and pre-clinical research and
development. This collaborative research program expired on September 30, 1996
and was not renewed. To the extent Becton commercializes any products derived
from this program, it will pay certain royalties to the Company on sales of such
products, if any.
36
37
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(e) Wyeth-Ayerst
Effective December 31, 1991, the Company entered into a collaborative
research agreement with Wyeth. This agreement was extended and expanded in
January 1994 for an additional 3 years through December 31, 1996 to provide for
additional funding of approximately $4.3 million. The Company receives
approximately $1.6 million annually in research and development funding from
Wyeth pursuant to this collaborative agreement. The Company anticipates that the
research collaboration will expire on December 31, 1996 and not be extended. To
the extent Wyeth commercializes any products derived from this collaboration, it
will pay certain royalties to the Company on sales of such products, if any.
(f) Anaderm Research
In April 1996, in connection with the formation of Anaderm Research Corp.,
(Anaderm), the Company entered into a Stockholders' Agreement (Stockholders'
Agreement) among the Company, Pfizer, Anaderm, New York University (NYU) and
certain NYU faculty members (Faculty Members), and a Collaborative Research
Agreement (Research Agreement) among the Company, Pfizer and Anaderm. Anaderm
issued common stock to Pfizer and the Company and options to purchase common
stock to NYU and the Faculty Members. NYU and the Faculty Members have exercised
their options fully, and Pfizer holds 82%, the Company holds 14%, and NYU and
the Faculty Members collectively hold 4% of Anaderm's common stock. In exchange
for its 14% of the outstanding shares of Anaderm common stock, the Company will
provide formatting for high-throughput screens and will conduct compound
screening for 18 months at its own expense under the Research Agreement. The
term of the Research Agreement is three years. During the initial phase of the
agreement (the first 18 months) the Company is required to provide at its own
cost formatting for high throughput screens and perform screening of its own
compounds and those compounds provided by Pfizer. Upon the termination of the
initial phase, the Board of Directors of Anaderm will make a determination as to
whether the initial phase was successfully completed. If the board determines
that the initial phase was unsuccessful, the Research Agreement will then
terminate. If the board, with Pfizer's approval, determines the initial phase
was successful, then the funded phase will commence and will continue for the
term of the Research Agreement. During this phase, Anaderm will make payments to
the Company equal to its research costs, including overhead, plus 10%. Anaderm
or Pfizer will pay royalties to the Company on the sales of products resulting
from this collaboration.
The estimated total cost of the initial Phase is approximately $1.8
million. As of September 30, 1996, the Company has expended approximately
$329,000 on the initial phase. This cost has been capitalized as the cost of the
Company's 14% interest in Anaderm. This capitalized cost has been offset by the
Company's interest in the loss of Anaderm as of September 30, 1996 of
approximately $193,000. The Company's net investment in Anaderm at September 30,
1996 of $136,000 is included in other assets in the accompanying consolidated
balance sheet.
(g) BioChem Pharma
Effective May 1, 1996, the Company entered into a Collaborative Research,
Development and Commercialization Agreement with BioChem Pharma. Under this
agreement, the parties will seek to discover and develop antiviral drugs for the
treatment of Hepatitis C virus and HIV, although the focus of the collaborative
efforts may change at the discretion of a joint steering committee. This
agreement provides that the Company and BioChem Pharma will jointly commit
resources to the collaborative program. The Company and BioChem Pharma will
share equally the commercialization rights in the U.S. and Europe for any
product resulting from the collaboration. BioChem Pharma will exclusively own
commercialization rights in Canada. The agreement is for a term of five years,
with automatic, successive one-year renewal periods thereafter. After May 1,
1999, however, either party may terminate the agreement by giving the other
party six-months
37
38
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
prior written notice. The agreement is also subject to early termination in the
event of certain defaults by either party.
(h) Other
Under the terms of aforementioned collaborative research agreements, the
collaborative partners will pay the Company royalties ranging from 2% to 10% of
net sales of products resulting from these research programs. To date, the
Company has not received any royalties pursuant to these agreements. The Company
or its collaborative partners may terminate each of the collaborative research
programs upon the occurrence of certain events.
The Company does not intend to conduct late-stage clinical trials,
manufacturing or marketing activities with respect to any of its product
candidates in the foreseeable future. The Company is dependent on the companies
with which it collaborates for the preclinical testing, clinical development,
regulatory approval, manufacturing and marketing of potential products developed
under its collaborative research programs. The Company's collaborative
agreements allow its collaborative partners significant discretion in electing
to pursue or not to pursue any of these activities. The Company cannot control
the amount and timing of resources its collaborative partners devote to the
Company's programs or potential products. If any of the Company's collaborative
partners were to breach or terminate its agreements with the Company or
otherwise fail to conduct its collaborative activities successfully in a timely
manner, the preclinical or clinical development or commercialization of product
candidates or research programs could be delayed or terminated. Any such delay
or termination could have a material adverse effect on the Company's business,
financial condition and results of operations.
Total collaborative research revenues under the aforementioned agreements are as
follows:
YEARS ENDED SEPTEMBER 30,
------------------------------------
1996 >1995 1994
---------- ---------- ----------
Related Parties:
Pfizer..................................................... $3,208,077 $3,505,427 $3,373,573
HMRI....................................................... 2,439,358 3,405,335 3,026,532
Becton..................................................... 1,150,125 1,400,094 1,392,314
---------- ---------- ----------
Total Related Parties...................................... 6,797,560 8,310,856 7,792,419
Wyeth...................................................... 1,550,000 1,375,000 1,296,876
---------- ---------- ----------
Total...................................................... $8,347,560 $9,685,856 $9,089,295
========== ========== ==========
38
39
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(6) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost and
consist of the following:
ESTIMATED SEPTEMBER 30,
LIFE -----------------------
(YEARS) 1996 1995
-------------- ---------- ----------
Laboratory equipment..................................... 5-15 $8,079,536 $6,765,012
Office furniture and equipment........................... 5-10 2,357,247 1,622,524
Automobile equipment..................................... 3 35,954 12,697
Leasehold improvements................................... Life of lease 4,879,814 4,176,290
---------- ---------
15,352,551 12,576,523
Less: accumulated depreciation and amortization.......... 8,857,439 6,867,008
---------- ---------
Net property, equipment and leasehold
improvements........................................... $6,495,112 $5,709,515
========== ==========
(7) INTANGIBLE ASSETS
The components of intangible assets are as follows:
SEPTEMBER 30,
------------------------
1996 1995
----------- ----------
Patents.............................................................. $ 7,177,825 $7,945,038
Goodwill............................................................. 3,467,656 685,543
----------- ----------
$10,645,481 $8,630,581
=========== ==========
The above amounts reflect accumulated amortization of $7,260,874 and
$5,808,119 at September 30, 1996 and 1995, respectively. During fiscal 1996,
goodwill increased $3,467,656 in connection with the acquisition of Aston
Molecules, Ltd. (See Note 2). As of September 30, 1996, the goodwill related to
the acquisition of Applied bioTechnology has been fully amortized.
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at September 30, 1996 and 1995 are
comprised of:
SEPTEMBER 30,
------------------------
1996 1995
--------- ---------
Accounts payable................................... $2,081,031 $1,497,601
Accrued future lease escalations................... 417,614 355,516
Accrued payroll and employee benefits.............. 462,958 243,073
Accrued incentive compensation..................... 285,370 424,705
Accrued expenses................................... 439,665 304,807
---------- ----------
$3,686,638 $2,825,702
========== ==========
39
40
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(9) STOCKHOLDERS' EQUITY
(a) Stock Offering
In April 1996, the Company completed a public offering for 3,118,750 shares
of common stock. The sale price was $9.125 per share. Concurrent with the public
offering, the Company sold 500,000 shares at $9.125 per share directly to
BioChem Pharma. The proceeds to the Company from these sales, net of
underwriting commissions and other costs, were approximately $30.3 million. The
net proceeds were added to the Company's general funds and are to be used for
research and development expenses, including funds for enhancing the Company's
drug discovery technologies, and for general corporate purposes.
(b) Stock Option Plans
The Company has established three stock option plans for its employees,
officers, directors and consultants. The Plans are administered by the
Compensation Committee of the Board of Directors, which may grant either
non-qualified or incentive stock options. The Committee determines the exercise
price and vesting schedule at the time the option is granted. Options vest over
various periods and may expire no later than 10 years from date of grant. The
total authorized shares under these plans is 3,400,000.
The following table summarizes changes in the number of common shares
subject to options in the stock option plans:
YEARS ENDED SEPTEMBER 30
----------------------------------
1996 1995 1994
-------- -------- --------
Beginning of year......................... 2,021,279 2,048,325 1,644,945
Granted -- $7.88 to $9.32 per share in
1996; $3.50 to $4.13 per share in 1995;
$4.00 to $4.75 per share in 1994; 776,000 803,000 475,500
Exercised................................. (491,544) (206,025) (10,700)
Canceled.................................. (87,678) (624,021) (61,420)
-------- --------- ---------
End of year -- $1.75 to $9.32 per share... 2,218,057 2,021,279 2,048,325
========= ========= =========
Exercisable............................... 872,513 952,883 1,081,874
========= ========= =========
At September 30, 1996, the Company has reserved 2,218,057 shares of its
authorized common stock for all shares issuable under option.
On March 22, 1995, the Company granted the right to current option holders
to surrender their current options in exchange for replacement options on the
basis of three replacement options for four options surrendered. The exercise
price of the replacement options was $3.50 per share, which was greater than the
market price on the date of exchange. The replacement options vested 25% upon
grant with the remaining 75% vesting pro rata on a monthly basis over the
following three years. Option holders surrendered 606,000 options in exchange
for 454,500 replacement options.
(c) Sale of Common Stock and Warrant to Marion Merrell Dow
In December 1992, the Company entered into the common stock purchase and
common stock warrant purchase agreements with Marion. The Company issued
1,090,909 shares of common stock at $5.50 per share and a warrant to purchase up
to 500,000 additional shares at $5.50 per share which is exercisable during the
period December 1994 to December 1999. The proceeds to the Company were $6
million.
40
41
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(d) Sale of Common Stock to Ciba-Geigy
On April 19, 1995, Ciba purchased 909,091 shares of the Company's common
stock at $5.50 per share for an aggregate purchase price of $5 million.
(e) Employee Stock Purchase Plan
On May 1, 1993, the Company adopted an Employee Stock Purchase Plan under
which eligible employees may contribute up to 10% of their base earnings toward
the quarterly purchase of the Company's common stock. The employees purchase
price is derived from a formula based on the fair market value of the common
stock. No compensation expense is recorded in connection with the plan. During
fiscal 1996, 1995 and 1994, 3,860, 3,216 and 2,074 shares were issued with 34,
18 and 13 employees participating in the plan, respectively.
(10) INCOME TAXES
There is no provision (benefit) for federal or state income taxes, since
the Company has incurred operating losses since inception and has established a
valuation allowance equal to the total deferred tax asset.
The tax effect of temporary differences, net operating loss carry forwards
and research and development tax credit carry forwards as of September 30, 1996
and 1995 are as follows:
SEPTEMBER 30
--------------------------
1996 1995
---------- -----------
Deferred tax assets:
Net operating loss carry forwards................ $12,252,652 $ 8,122,444
Research and development credits................. 792,980 554,838
Intangible assets................................ 1,028,148 1,274,336
Other............................................ 678,849 469,396
----------- -----------
14,752,629 10,421,014
Valuation allowance.............................. (14,752,629) (10,421,014)
----------- -----------
$ -- $ --
=========== ===========
As of September 30, 1996, the Company has available federal net operating
loss carry forwards of approximately $36 million which will expire in various
years from 1999 to 2011, and may be subject to certain annual limitations. The
Company's research and development tax credit carry forwards noted above expire
in various years through from 1999 to 2011.
(11) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company leases office, operating and laboratory space under various
lease agreements.
Rent expense was approximately $727,000, $750,000, and $743,000, for the
fiscal years ended September 30, 1996, 1995, and 1994, respectively.
41
42
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
The following is a schedule by fiscal years of future minimum rental
payments required as of September 30, 1996, assuming expiration of the lease for
the Uniondale facility on June 30, 2006, the Cambridge facility on December 31,
2003, the Durham facility on October 31, 2004, and the Birmingham facility on
April 30, 2000.
1997............................................................................. $ 867,489
1998............................................................................. 860,358
1999............................................................................. 881,046
2000............................................................................. 882,084
2001............................................................................. 816,678
2002 and thereafter.............................................................. 3,233,196
----------
$7,540,851
==========
(b) Contingencies
The Company has received several letters from other companies and
universities advising the Company that various products being marketed and
research being conducted by the Company may be infringing on existing patents of
such entities. These matters are presently under review by management and
outside counsel for the Company. Where valid patents of other parties are found
by the Company to be in place, management will consider entering into licensing
arrangements with the universities and/or other companies or modify the conduct
of its research. The Company's royalties may be reduced by up to 50% if its
licensees or collaborative partners are required to obtain licenses from third
parties whose patent rights are infringed by the Company's products, technology
or operations. Management believes that the ultimate outcome of these matters
will not have a material adverse effect on the financial position of the
Company.
(12) RELATED PARTY TRANSACTIONS
Effective January 1, 1993, the Company compensates its independent outside
directors on a $1,000 retainer per month. This amount increased to $1,500
effective January 1, 1995. For the years ended September 30, 1996, 1995 and
1994, such fees amounted to $108,000, $99,000, and $66,000, respectively. The
Company also has compensated four directors for consulting services performed.
Two directors have consulting agreements, the other two were paid on a per diem
basis. For the years ended September 30, 1996, 1995 and 1994, consulting
services in the amounts of $100,000, $90,000 and $85,000 respectively, were paid
by the Company pursuant to these arrangements.
One director is a partner in a law firm which represents the Company on its
patent and license matters. Fees paid to this firm for the years ended September
30, 1996, 1995 and 1994 were approximately $413,000, $260,000 and $372,000,
respectively.
(13) EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company sponsors an Employee Savings and Investment Plan under Section
401(k) of the Internal Revenue Code. The plan allows employees to defer from 2%
to 10% of their income on a pre-tax basis through contributions into designated
investment funds. For each dollar the employee invests up to 6% of his or her
earnings, the Company will contribute an additional 50 cents into the funds. For
the years ended September 30, 1996, 1995, and 1994, the Company's expenses
related to the plan were approximately $164,000, $180,000, and $168,000
respectively.
42
43
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(14) EMPLOYEE RETIREMENT PLAN
On November 10, 1992, the Company adopted a plan which provides
postretirement medical and life insurance benefits to eligible employees, board
members and qualified dependents. Eligibility is determined based on age and
service requirements. These benefits are subject to deductibles, co-payment
provisions and other limitations.
The Company utilizes SFAS No. 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions" to account for the benefits to be
provided by the plan. Under SFAS No. 106 the cost of post retirement medical and
life insurance benefits is accrued over the active service periods of employees
to the date they attain full eligibility for such benefits. As permitted by SFAS
No. 106, the Company elected to amortize over a 20 year period the accumulated
postretirement benefit obligation related to prior service costs.
Net postretirement benefit cost for the years ended September 30, 1996,
1995 and 1994 includes the following components:
1996 1995
---------- ---------
Service cost for benefits earned during the period $161,800... $ 107,175 $ 65,830
Interest cost on accumulated postretirement
benefit obligation 89,300................................ 47,181 15,591
Amortization of unrecognized net loss (gain) 18,700......... 5,855 (20,402)
Amortization of initial benefits attributable to past
service 17,500........................................... 17,549 17,549
---------- ---------
Net postretirement benefit cost $287,300.................... $ 177,760 $ 78,568
========== =========
The accrued postretirement benefit cost at September 30, 1996 and 1995 were
as follows:
1996 1995
---------- ---------
Accumulated postretirement benefit obligation-fully eligible
active plan participants................................. $1,306,300 $ 790,437
Unrecognized cumulative net loss............................ (377,600) (121,517)
Unrecognized transition obligation.......................... (285,200) (302,717)
---------- ---------
Accrued postretirement benefit cost......................... $ 643,500 $ 366,203
========== =========
The accumulated postretirement benefit obligation was determined using a
discount rate of 8 percent in 1996 and 7.5 percent in 1995 and a health care
cost trend rate of approximately 9 percent in 1996, decreasing down to 5 percent
in year 2000. Increasing the assumed health care cost trend rates by one
percentage point in each year and holding all other assumptions constant would
increase the accumulated postretirement benefit obligation as of September 30,
1996 by approximately $233,000 and the net postretirement benefit cost by
approximately $55,000.
(15) NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" was issued which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain intangibles to be disposed of. SFAS No. 121 requires that long-lived
assets and certain intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying
43
44
ONCOGENE SCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
amount of the asset may not be recoverable. SFAS No. 121 must be implemented no
later than fiscal 1997. The adoption of SFAS No. 121 is not expected to have
material impact on the Company's consolidated financial position or operating
results.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation",
was issued which establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, SFAS No. 123 would permit the
Company to continue to measure compensation costs for its stock option plans
using the intrinsic value based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees". If the Company elected to
remain with its current accounting, the Company must make pro forma disclosures
of net income and earnings (loss) per share as if the fair value based method of
accounting had been applied. SFAS No. 123 must be implemented no later than
fiscal 1997. The Company has not yet determined the valuation method it will
employ or the effect on operating results of implementing SFAS No. 123.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's Proxy Statement for its 1997 Annual
Meeting to be filed with the Securities and Exchange Commission not later than
120 days after September 30, 1996. (The "1997 Proxy")
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 1997 Proxy.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 1997 Proxy.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 1997 Proxy.
45
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements are included in
Part II, Item 8 of this report:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) All schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes.
(3) The exhibits listed in the Exhibit Index on pages 48 and 49 hereof
are attached hereto or incorporated herein by reference and filed
as a part of this report.
(b) Reports on Form 8-K
None.
46
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ONCOGENE SCIENCE, INC.
By: /s/ GARY E. FRASHIER
------------------------
Gary E. Frashier
Chief Executive Officer
December 23, 1996
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the days indicated.
SIGNATURE TITLE(S) DATE
- --------------------------------------------- ---------------------------- ------------------
/s/ GARY E. FRASHIER Chief Executive Officer and December 23, 1996
- --------------------------------------------- Director
Gary E. Frashier
President and Director
- ---------------------------------------------
Steven M. Peltzman
/s/ ROBERT L. VAN NOSTRAND Vice President and December 23, 1996
- --------------------------------------------- Administration (Principal
Robert L. Van Nostrand Financial Officer
/s/ EDWIN A. GEE, PH.D Director December 23, 1996
- ---------------------------------------------
Edwin A. Gee, Ph.D
/s/ G. MORGAN BROWNE Director December 23, 1996
- ---------------------------------------------
G. Morgan Browne
/s/ JOHN H. FRENCH, II Director December 23, 1996
- ---------------------------------------------
John H. French, II
/s/ DARRYL GRANNER M.D. Director December 23, 1996
- ---------------------------------------------
Darryl Granner M.D.
/s/ WALTER M. LOVENBERG, PH.D. Director December 23, 1996
- ---------------------------------------------
Walter M. Lovenberg, Ph.D.
/s/ GARY TAKATA Director December 23, 1996
- ---------------------------------------------
Gary Takata
/s/ JOHN P. WHITE Director December 23, 1996
- ---------------------------------------------
John P. White, Esquire
47
48
INDEX TO EXHIBITS
EXHIBITS
- ------------
3.2 -- Certificate of Incorporation, as amended (1)
3.2 -- Bylaws, as amended (1)
10.1 -- 1985 Stock Option Plan (filed as an exhibit to the Company's registration statement
on Form S-1 (file no. 33-3148) and incorporated herein by reference)
10.2 -- 1989 Incentive and Non-Qualified Stock Option Plan (filed as an exhibit to the
Company's registration statement on Form S-8 (file no. 33-38443) and incorporated
herein by reference)
10.3* -- 1993 Incentive and Non-Qualified Stock Option Plan, as amended
10.4 -- 1993 Employee Stock Purchase Plan (filed as an exhibit to the Company's
registration statement on Form S-8 (file no. 33-60182) and incorporated herein by
reference)
10.5* -- Employment Agreement dated as of February 9, 1990 between the Company and Gary E.
Frashier
10.6* -- Employment Agreement dated as of August 27, 1991 between the Company and Steven M.
Peltzman, which is substantially identical in all material respects to the
Employment Agreement dated as of April 28, 1993 between the Company and Colin
Goddard, Ph.D.
10.7 -- Agreement dated as of February 18, 1987 between The University of Massachusetts and
Applied bioTechnology, Inc. (2)
10.8 -- Letter Agreement dated October 1, 1991 among AbT Acquisition Corp., the Company and
E. I. duPont de Nemours and Company(2)
10.9*+ -- Agreement dated September 27, 1996 between the Company and Becton, Dickinson and
Company
10.10+ -- Collaborative research Agreement dated April 1, 1996 between the Company and Pfizer
Inc. (3)
10.11+ -- License Agreement dated April 1, 1996 between the Company and Pfizer Inc. (3)
10.12+ -- Stockholders' Agreement dated April 23, 1996 among Anaderm Research Corp., the
Company, Pfizer Inc., New York University and certain individuals (3)
10.13+ -- Collaborative Research Agreement dated April 23,1996 amount the Company, Pfizer
Inc. and Anaderm Research Corp. (3)
10.14 -- Registration Rights Agreement dated April 11, 1996 among the Company and the former
stockholders of MYCOsearch, Inc. and their designees (3)
10.15 -- Form of Warrants issued by the Company to the former stockholders of MYCOsearch,
Inc. and their designees covering an aggregate of 100,000 shares of common stock
(3)
10.16 -- Employment Agreement dated April 11, 1996 between the Company and Dr. Barry Katz
(3)
10.17+ -- Collaborative Research Agreement dated as of December 31, 1991 between the Company
and American Home Products Corporation (4)
10.18+ -- Amendatory Agreement dated as of December 31, 1993 between the Company and American
Home Products Corporation (4)
10.19+ -- Collaborative Research Agreement dated as of January 4, 1993 between the Company
and Hoechst AG (4)
10.20+ -- Collaborative Research Agreement dated as of October 1, 1993 between the Company
and Hoechst Roussel Pharmaceuticals, Inc. (4)
10.21 -- Common Stock Purchase Warrant granted to Marion Merrell Dow, Inc. dated December
11, 1992 (5)
10.22 -- Collaborative Research and License Agreement dated December 11, 1992 between the
Company and Marion Merrell Dow, Inc. (5)
48
49
EXHIBITS
- ------------
10.23 -- Collaborative Agreement dated as of April 19, 1995 between the Company and
Ciba-Geigy Limited (6)
10.24 -- Letter Agreement dated as of April 19, 1995 between the Company and Ciba-Geigy
Limited (6)
10.25 -- Registration Rights Agreement dated as of April 19, 1995 between the Company and
Ciba-Geigy Limited (6)
10.26 -- Asset Purchase Agreement dated June 26, 1995 among the Company, Calbiochem-Novabi-
ochem International, Inc. and Calbiochem-Novabiochem Corporation (7)
10.27 -- New Product License Right of First Refusal Agreement dated August 2, 1995 between
the Company and Calbiochem-Novabiochem Corporation (7)
21* -- Subsidiaries of the Company
23* -- Consent of KPMG Peat Marwick, LLP, independent public accountants
27* -- Financial Data Schedule
- ---------------
* Filed herewith.
+ Portions of this exhibit have been redacted and are subject to a
confidential treatment request filed with the Secretary of the Securities
and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended.
(1) Filed as an exhibit to the Company's registration statement on Form S-3
(file no. 333-937) and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's registration statement on Form S-2,
as amended (file no. 33-42369), and incorporated herein by reference.
(3) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended March 31, 1996, as amended, and incorporated herein by
reference.
(4) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended December 31, 1995, as amended, and incorporated herein
by reference.
(5) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1992 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1995, as amended, and incorporated herein by
reference.
(7) Filed as an exhibit to the Company's current report on Form 8-K dated August
2, 1995 and incorporated herein by reference.
49