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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-12574
TEXAS BIOTECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3532643
(State of Incorporation) (I.R.S. Employer
Identification Number)
7000 FANNIN, 20TH FLOOR
HOUSTON, TEXAS 77030
(713) 796-8822
(Address and telephone number of principal executive offices and zip code)
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
----------------------------------------- ----------------------
Common Stock, $.005 par value American Stock Exchange
Redeemable common stock purchase warrants American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: NONE
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 [ ]
The approximate aggregate market value of voting stock held by
nonaffiliates of the registrant is $246,831,000 as of March 15, 2001.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares outstanding of each of the registrant's classes of
common stock as of March 15, 2001:
TITLE OF CLASS NUMBER OF SHARES
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Common Stock, $.005 par value 43,768,959
Documents incorporated by reference:
DOCUMENT FORM 10-K PARTS
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Definitive Proxy Statement, to be filed within III
120 days of December 31, 2000
(specified portions)
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in and incorporated by reference into this Form 10-K are
forward-looking statements. These forward-looking statements include, without
limitation, statements regarding our estimate of the sufficiency of our existing
capital resources and our ability to raise additional capital to fund cash
requirements for future operations, and regarding the uncertainties involved in
the drug development process and the timing of regulatory approvals required to
market these drugs. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we can not give any assurance that
such expectations reflected in these forward-looking statements will prove to
have been correct.
When used in this Form 10-K, the words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate" and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. Because these forward-looking statements
involve risks and uncertainties, actual results could differ materially from
those expressed or implied by these forward-looking statements for a number of
important reasons, including those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Additional Risk
Factors" and elsewhere in this Form 10-K.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. You should be aware that the occurrence of any of
the events described in the risk factors and elsewhere in this Form 10-K could
substantially harm our business, results of operations and financial condition
and that upon the occurrence of any of these events, the trading price of our
common stock could decline, and you could lose all or part of your investment.
We cannot guarantee any future results, levels of activity, performance or
achievements. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this Form 10-K after the date of this
Form 10-K.
This Form 10-K may contain trademarks and service marks of other companies.
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PART I
ITEM 1 -- BUSINESS
OVERVIEW
Texas Biotechnology Corporation was incorporated in Delaware in 1989 and is
sometimes referred to in this Report as TBC, we or us. We are a
biopharmaceutical company focused on the discovery, development and
commercialization of novel, synthetic, small molecule compounds for the
treatment of a variety of cardiovascular, vascular and related inflammatory
diseases. Our research and development programs are focused on inhibitors (also
referred to as antagonists or blockers) that can interrupt certain disease
processes. Our programs seek to address unmet medical needs in cardiovascular
diseases, thrombocytopenia, pulmonary hypertension, heart failure and
inflammatory diseases such as asthma.
Argatroban is our first marketed product. Argatroban was approved by the
U.S. Food and Drug Administration ("FDA") in 2000, is indicated for prophylaxis
or treatment of thrombosis in patients with heparin-induced thrombocytopenia
("HIT") and began shipping in November 2000 . GlaxoSmithKline, plc ("GSK") is
our development, manufacturing and marketing partner for Argatroban. We have
initiated a Phase II human clinical trial for the indication of acute ischemic
stroke and are evaluating the use of Argatroban in hemodialysis patients and for
use in percutaneous coronary intervention ("PCI").
Presently, we have five major product development programs.
o The Vasospasm/Hypertension Program. We are developing sitaxsentan as an
endothelin(A) receptor antagonist, or ET(A), for the treatment of heart
failure, hypertension and pulmonary hypertension. During June 2000, we
formed a partnership with ICOS Corporation ("ICOS") to develop and
commercialize ET(A) receptor antagonists. ICOS-TBC expects to initiate
Phase IIb/III clinical trials in pulmonary hypertension with sitaxsentan
and is conducting Phase I clinical trials for TBC3711, a second generation
ET(A) receptor antagonist that may be developed for essential hypertension
and/or heart failure.
o The Vascular Inflammation Program. We are developing a selectin antagonist,
TBC1269, for the treatment of asthma and psoriasis. The intravenous form of
the drug has been tested in Phase II clinical trials. Inhaled and topically
applied TBC1269 are currently in the preclinical stage for the treatment of
asthma and psoriasis. During 2000, we formed Revotar, a majority owned
German subsidiary located in Berlin, to further the development of this
program. We are also conducting research with respect to vascular cell
adhesion molecules, or VCAM, and very late stage antigen 4, or VLA-4, a
member of the integrin family, chemokine receptors, such as CCR1 and CCR3,
and other integrins, such as (alpha)4(beta)7 antagonists for the treatment
of asthma, rheumatoid arthritis, multiple sclerosis and inflammatory bowel
disease. We have signed a collaboration and license agreement for the VCAM
program with Schering-Plough LTD and Schering-Plough Corporation
(collectively "Schering-Plough") and are currently conducting research on
VLA-4 antagonists for Schering-Plough under this agreement.
o Apoptosis Program. We are conducting research into the development of
inhibitors of apoptosis. Apoptosis involves programmed cell death and is
believed to play a role in many vascular and inflammatory diseases.
Currently, we have three different groups of inhibitors of apoptosis -
caspase antagonists that could be useful in preventing cell death following
ischemic stroke or congestive heart failure; tumor necrosis factor (alpha),
or TNF(alpha) antagonist, that could be useful in treating rheumatoid
arthritis; and a receptor for age-dependent glycation end-products, that
may be useful in preventing certain complications of diabetes due to cell
death in the blood vessels.
o Angiogenesis Program. We are conducting research on angiogenesis which
involves the formation of new blood vessels from existing vessels and is
associated with a number of diseases including tumor growth, rheumatoid
arthritis, atherosclerosis, various retinopathies and certain skin
diseases. Our research is focused on the development of small molecule
inhibitors of vascular endothelial growth factor, or VEGF, for the
treatment of cancer and diabetic retinopathy.
o Vascular Proliferation Disease Program. We are also conducting research on
smooth muscle cells in the blood vessel which proliferate in response to
injury to a blood vessel and is the cause of blood vessel thickening. Our
research program for this area is focused on identifying an antagonist to
fibroblast growth factor, or FGF, to interrupt its role in causing blood
vessels to narrow due to excessive smooth muscle growth. We believe our FGF
antagonist could be useful in the treatment of coronary restenosis that may
occur as a result of vessel injury during angioplasty.
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BUSINESS STRATEGY
The key elements of our business strategy are as follows:
Maximize sales of Argatroban by expanding indications for its use
Our marketing, manufacturing and distribution partner GSK, began selling
Argatroban during November 2000 as an anticoagulant for prophylaxis or treatment
of thrombosis in patients with HIT. In addition:
o we filed a supplemental new drug application, or sNDA, for Argatroban for
use in HIT patients undergoing angioplasty;
o we filed a Canadian New Drug Submission for patients with HIT and we expect
a response from Canadian regulatory authorities in the first half of 2001;
o we have initiated a Phase II human clinical trial to evaluate the use of
Argatroban for use in acute ischemic stroke, an indication for which
Argatroban is approved for use and sold in Japan by a licensee of
Mitsubishi-Tokyo Pharmaceuticals ("Mitsubishi"), the licensor of
Argatroban; and
o we are evaluating the use of Argatroban for use in hemodialysis patients
and for use in percutaneous coronary intervention .
Focus on the identification and development of new drugs for the treatment of
diseases involving the vascular endothelium
Injury to the vascular endothelium is a common cause of many of the most
profound diseases affecting patients today, such as ischemic heart disease,
hypertension, congestive heart failure, and asthma. By concentrating on this
area, we can be relatively efficient in our drug discovery, development and
commercialization efforts. This efficiency extends to the following areas:
o Research -- Our efforts are predominantly devoted toward the treatment and
prevention of interrelated diseases of the vascular endothelium, and we
employ a large group of vascular biologists;
o Computer aided drug design -- We utilize computers to rapidly develop drug
candidates derived from our vascular biological efforts and to identify new
targets from information discovered by the Human Genome Project;
o Regulatory -- Diseases of the vascular endothelium involve substantial
morbidity and mortality and may allow us to receive fast-track review by
the FDA; and
o Clinical investigators and consultants -- We work with key opinion leaders
and consultants experienced in diseases of the vascular endothelium to
assist in clinical development, product planning and the regulatory
approval process.
Focus on the identification and development of small molecule drug candidates
Small molecule therapeutics have some advantages over large molecules, such
as proteins, peptides and monoclonal antibodies. Small molecules can frequently
be administered orally on an outpatient basis. By contrast, to date, large
molecule therapeutics can very rarely be formulated to accommodate oral
outpatient administration. Since small molecules generally are not immunogenic,
use of small molecules avoids the potential for immune reactions that can occur
with protein therapeutics. In addition, small molecules can typically be
protected with composition-of-matter patents that generally provide a large
degree of intellectual property protection. Our emphasis on small molecule
therapeutics means that our drug candidates can be produced by conventional
pharmaceutical manufacturing methods with the potential for modest cost of goods
sold.
Participate in the sales and marketing in the United States and Canada of the
drugs we develop
In the biopharmaceutical industry, a substantial percentage of the profits
generated from successful drug development are typically retained by the entity
directly involved in the sales and marketing of the drug. Licensing our drug
candidates to a third party who will complete development and provide sales and
marketing resources in exchange for upfront payments, milestone payments and a
royalty on sales may reduce some of our risks, particularly for diseases outside
our strategic interest or in territories outside of the United States and
Canada. However, in the future, we may decide that the risk-return profile
favors developing and then marketing and selling products on a co-promotion
basis or by ourselves. Therefore, when and if we deem it appropriate, we intend
to participate in the sales and marketing of our products in the United States
and Canada. Our participation in ICOS-TBC will allow us to participate in
commercialization of products that may result from our endothelin antagonist
program.
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THERAPEUTIC PROGRAMS AND PRODUCTS IN DEVELOPMENT
The following table summarizes the potential therapeutic indications and
development status for certain of our clinical, preclinical and research product
candidates and is qualified in its entirety by the more detailed information
appearing elsewhere in this Form 10-K.
TARGET COMPOUND/ POTENTIAL
PROGRAM DOSE FORM INDICATION STATUS(1)
- ----------------------- -------------------------- -------------------------------- -------------------------------
THROMBOSIS ARGATROBAN
Intravenous Anticoagulant therapy for Approved in 2000 and shipments
prophylaxis or treatment of began in November 2000.
patients with HIT.
Intravenous Anticoagulant therapy in HIT for sNDA filed with the FDA
patients undergoing angioplasty
Intravenous Anticoagulant therapy for Phase II
patients with ischemic stroke
- ---------------------------------------------------------------------------------------------------------------------------
VASOSPASM/ ENDOTHELIN(A) RECEPTOR
HYPERTENSION ANTAGONIST
Sitaxsentan (TBC11251)
Intravenous Congestive Heart Failure Phase II
Oral Pulmonary Hypertension Phase IIb/III
Congestive Heart Failure Phase II
TBC3711
Oral Congestive Heart Failure Phase I
Hypertension Phase I
TBC3214
Oral Cancer Preclinical
- ---------------------------------------------------------------------------------------------------------------------------
VASCULAR SELECTIN ANTAGONIST
INFLAMMATION TBC1269
Intravenous Asthma Phase II
Inhaled Asthma Preclinical
Topical Psoriasis Preclinical
VCAM/VLA-4 ANTAGONIST
TBC4257
Oral Asthma Research
Rheumatoid Arthritis Research
CCR 1 ANTAGONIST Multiple Sclerosis Research
CCR 3 ANTAGONIST
TBC4095
Oral Asthma Research
(ALPHA)4(BETA)7 ANTAGONIST
TBC3804
Oral Inflammatory Bowel Disease Research
- ---------------------------------------------------------------------------------------------------------------------------
APOPTOSIS CASPASE INHIBITOR
TBC4521 Acute Myocardial Infarction Research
Ischemic Stroke Research
TNF(ALPHA) ANTOGONIST Rheumatoid Arthritis Research
- ---------------------------------------------------------------------------------------------------------------------------
ANGIOGENESIS VEGF ANTAGONIST
TBC2576 Cancer and Diabetic Retinopathy Research
- ---------------------------------------------------------------------------------------------------------------------------
VASCULAR FGF ANTAGONIST
PROLIFERATIVE DISEASE TBC1635 Post-Angioplasty Coronary Research
Restenosis
- ----------
(1) Preclinical compounds are compounds undergoing toxicology and pharmaceutical
development in preparation for human clinical testing. Research compounds
are compounds undergoing basic evaluation and optimization to establish a
lead clinical candidate.
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THROMBOSIS PROGRAM
ARGATROBAN
Background. Thrombosis, the lodging of a blood clot in a vessel, causes
various vascular diseases, depending on the location of the clot. An arterial
clot may lead to heart attack if lodged in a coronary artery, or stroke if
lodged in an artery that supplies oxygen to the brain. Venous clots occur
principally in the arms or legs (deep vein thrombosis), and may cause local
inflammation, chronic pain and other complications. In some cases, a venous clot
can cause lung injury (pulmonary embolism) by migrating from the veins to the
lungs.
Thrombosis can be treated surgically or through drug therapy with
anticoagulant and thrombolytic drugs. Anticoagulant drugs, which prevent clots
from forming, are characterized as either antithrombotic or antiplatelet drugs.
Antithrombotic drugs block the action of the blood protein thrombin and may be
used to treat both arterial and venous clots. Antiplatelet drugs prevent
platelets from clumping together and are only effective in treating arterial
clots. Heparin and aspirin are the most widely-used antithrombotic and
antiplatelet drugs, respectively.
Heparin, first discovered over 80 years ago, is the most widely used
injectable anticoagulant. In the U.S., approximately ten million patients
annually receive therapeutic heparin to treat a variety of conditions that
require inhibition of the body's natural clotting mechanism. Each year over
300,000 of these patients develop a profound immunological reaction to heparin
that is known as heparin-induced thrombocytopenia. The condition is
characterized by a strong tendency to clot that puts the patient at risk of
major complications such as acute myocardial infarction, ischemic stroke,
amputation or death. It is also very difficult to administer heparin dosages.
Current Therapies. In conjunction with GSK, we obtained approval for
Argatroban as an anticoagulant for prophylaxis or treatment of thrombosis in
patients with HIT in the U.S. GSK began marketing Argatroban for the approved
indication in November 2000. Argatroban is a synthetic direct thrombin inhibitor
that directly and selectively binds to and inactivates thrombin in the blood
plasma. Argatroban is manufactured and marketed in Japan by Mitsubishi where it
is approved as a treatment for ischemic stroke, peripheral arterial occlusion
and hemodialysis in patients with antithrombin III deficiency, a clotting
disorder that does not respond to heparin. Since the product's introduction in
1990, approximately 100,000 patients have been treated with Argatroban in Japan.
Other measures, such as inline filters, are sometimes used to remove clots, but
are highly invasive and involve patient trauma. Simply stopping heparin alone
may be insufficient, as a significant number of patients will progress to
experience severe outcomes. Clinical studies that we conducted in the U.S. have
shown a significant correlation between the administered dose of Argatroban and
the degree of anticoagulation achieved. This is potentially important as it
suggests that the relationship between dose and effect of Argatroban is
generally very predictable over the expected dose-range. As a result, we believe
there is little risk of either insufficient or excessive anticoagulation
occurring from small dose changes of Argatroban. Other product advantages for
Argatroban include a rapid onset of action, a relatively short half-life and an
absence of immunogenicity.
Clinical Trial Status. Currently, we are conducting a multi-center,
placebo-controlled Phase II clinical trial to evaluate the safety and efficacy
of Argatroban in patients with acute ischemic stroke.
Competition in HIT. Primary competitors for Argatroban in its initial
indication are Refludan(R) (lepirudin), manufactured by Aventis S.A., Orgaran(R)
(danaparoid sodium), manufactured by N.V. Orgaran, a unit of Akzo Nobel, and
Angiomax (R) (bivalirudin) manufactured by The Medicines Company.
Refludan(R) (lepirudin, Aventis). This product received approval in Europe
in 1997 and in the U.S. in 1998 for anticoagulation in patients with HITTS to
prevent further thromboembolic (clotting) complications. Refludan(R) has been
associated with the development of an adverse immune response in up to 40% of
patients receiving that drug. Although the full clinical impact of development
of these antibodies is unknown, we understand that the anticoagulant effects of
Refludan(R) may become unpredictable in patients developing these antibodies.
Based on certain information from clinical trials, we also believe Argatroban
has a significantly better safety profile than Refludan(R).
Orgaran(R) (danaparoid, Organon). This product is a low molecular weight
heparinoid, a heparin-like compound extracted from pigs. The product has been
approved in the U.S. for prevention of deep venous thrombosis following hip
surgery. However, approximately one in ten HIT patients receiving Orgaran(R)
will develop the HIT syndrome exactly as if the patient received heparin.
Orgaran(R) is not approved for HIT and is used on an off-label basis only.
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Angiomax(R) (bivalirudin, The Medicines Company). This product received approval
in the United States in 2001 for use as an anticoagulant in patients with
unstable angina undergoing percutaneous translumial coronary angioplasity
(PTCA). Angiomax(R) represents the third direct thrombin inhibitor approved in
the United States. Angiomax(R) is not approved for the treatment of HIT but has
data from an uncontrolled, open label trial.
Competition in Ischemic Stroke. The only approved therapy for ischemic
stroke is Activase(R) ("tPA"), which is manufactured and sold by Genentech, Inc.
However, tPA is only indicated for use within three hours of the onset of an
ischemic stroke event. We are evaluating Argatroban for use in ischemic stroke
patients within twelve hours of the onset of an ischemic stroke event. In
addition, the mechanism of action of Argatroban is different than tPA.
Other Indications. Argatroban may be useful in other disease settings where
predictable anticoagulation is desired. Argatroban may be effective in
hemodialysis, particularly in patients who are problematic when given heparin.
Competition for Argatroban in Other Indications. Competitors for Argatroban
in other applications include other direct thrombin inhibitors with the same
mechanism of action:
o Revasc(R) (desirudin, Aventis/Novartis A.G.), recombinant hirudin, is
approved in Europe for the prevention of deep vein thrombosis
following hip surgery, but has been associated with intracranial
hemorrhage and antibody production;
o Angiomax(R) (bivalirudin, The Medicines Company) is approved for use
in patients with unstable angina undergoing percutaneous translumial
coronary angioplasity ("PTCA"); and
o Melagatran (AstraZeneca plc) is in Phase III trials and is being
developed as a treatment for deep vein thrombosis.
VASOSPASM/HYPERTENSION PROGRAM
ICOS-TBC
Background. Smooth muscle cells in the blood vessel are responsible
directly for mediating vessel diameter. The regulation of blood flow depends on
a delicate balance between physical and chemical stimuli that cause smooth
muscle cells to relax (vasodilatation) or contract (vasoconstriction). Chronic
periods of excessive vasoconstriction in the peripheral circulation can lead to
disturbances in blood pressure (hypertension) or heart function (congestive
heart failure), whereas acute episodes of intense vasoconstriction (vasospasm)
can restrict blood flow leading to severe tissue damage and organ failure
(myocardial infarction or kidney failure). Recently, it has been determined that
the vascular endothelium (innermost lining) plays a pivotal role in maintaining
normal blood vessel tone, including blood flow, by producing substances that
regulate the balance between vasodilatation and vasoconstriction.
Endothelins are a family of three peptides that are believed to play a
critical role in the control of blood flow. It has been determined that the
multiplicity of endothelin actions on different cell types can be explained by
endothelins' interactions with two distinct receptors, ET(A) and ET(B), on cell
surfaces. In general, ET(A) receptors are associated with vasoconstriction,
while ET(B) receptors are primarily associated with vasodilatation. There is
substantial evidence that endothelins are involved in a variety of diseases
where blood flow is important. These include vasospasm, congestive heart failure
and certain types of hypertension.
Current Therapies. Congestive heart failure, or CHF, and systemic
hypertension are currently treated with a combination of drugs depending on the
severity of the disease. CHF therapy may include diuretics to lower fluid
volume, digoxin and beta-blockers to improve heart performance and angiotensin
converting enzyme inhibitors (ACE inhibitors), which lower blood pressure. Even
with these existing therapies, five year mortality rates for CHF are greater
than 50%. Endothelin antagonists have been demonstrated to provide additional
benefits to animals and patients when used with these existing therapies. In the
case of hypertension, similar existing therapies are used; however, not all
patients respond to currently available drugs. The only approved therapy for
severe pulmonary hypertension is Flolan(R), a drug marketed by GlaxoWellcome
plc, which is an intravenous form of prostacyclin. Patients must wear a
continuous delivery infusion pump and the cost of therapy is quite high. No drug
is currently approved for moderately ill patients with pulmonary hypertension.
An oral endothelin antagonist, if successful, may provide a significant benefit
to these patients.
Partnership. During 2000, we formed a partnership with ICOS Corporation,
ICOS-TBC L.P., to co-develop and commercialize endothelin antagonist compounds.
The partnership is allowing us to apply additional scientific and financial
resources to the research and development of our endothelin program that
includes sitaxsentan and TBC3711, a second-generation endothelin antagonist
compound. The partners are equally funding the cost of research and development
and will share equally in
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the profits from this worldwide collaboration. ICOS has made an upfront payment
and will make milestone payments to ICOS-TBC, which will, in turn distribute
these payments to TBC, that together could be as much as $55.5 million. The
partnership is currently planning a Phase IIb/III clinical trial to evaluate
sitaxsentan in pulmonary hypertension and is conducting Phase I clinical trials
of TBC3711 for possible use in heart failure and/or hypertension.
Product Candidate -- TBC11251-Sitaxsentan. Our research program in the
vasospasm/hypertension area is aimed at developing small molecules that inhibit
the binding of ET to its cell surface receptors. Our scientists believe that
specific agents for each receptor subtype may provide the best clinical utility
and safety. Our initial focus has been to develop a highly potent and selective
small molecule based ET(A) receptor antagonist. An antagonist, or inhibitor,
blocks the effects of a ligand at its receptor. A ligand is a chemical messenger
which binds to a specific site on a target molecule or cell. Our scientists have
discovered a novel class of low molecular weight compounds, having a molecular
weight of less than 500 daltons that antagonize ET binding to the ET(A) receptor
with high potency. These compounds block ET binding at low compound
concentration. We identified lead compounds, which mimicked the ability of ET to
bind to the ET(A) receptor. We then used further optimization techniques to
develop more potent compounds until the current series of lead candidates were
identified. In addition to their ability to block ET, binding to its receptor,
these compounds functionally inhibit ET action on isolated blood vessels in
vitro acting as full, competitive antagonists. The lead compounds in this series
have been shown to exhibit in vivo efficacy using various animal models.
Pulmonary hypertension afflicts approximately 100,000 people in the U.S.
annually.
Product Candidate -- TBC3711, the second endothelin antagonist compound has
been selected as the next clinical candidate. We believe TBC3711 is more
selective and more potent than sitaxsentan and that a substantial market
opportunity for TBC3711 exists for the treatment of CHF and hypertension.
Clinical Trial Status. We filed an investigational new drug application,
also referred to as an IND, with the FDA for sitaxsentan in late 1996. To date,
three Phase IIA clinical trials have been completed, one in congestive heart
failure patients, one in essential hypertension patients and one in pulmonary
hypertension patients. Based on these positive results, ICOS-TBC is moving
forward with a Phase IIb/III trial in pulmonary hypertension. We have initiated
Phase I clinical studies with TBC3711 and anticipate pursuing either essential
hypertension or heart failure initially.
Other Indications. We believe endothelin antagonist compounds may provide
therapeutic value in several other indications. Our endothelin antagonist,
TBC3214, which is still undergoing preclinical development, is a potential
candidate for the indication of prostate cancer.
Competition. A number of companies including Abbott Laboratories, Knoll
Pharmaceuticals, Ltd., Bristol-Meyers Squibb Company and Tanabe Seiyaku Co.,
Ltd., have ET(A) receptor selective antagonist compounds in Phase I/II clinical
development. ET(A) receptor-selective compounds from Abbott and Knoll are in
early Phase II development in indications of interest to us. We believe our
compounds are competitive with those from the other companies in terms of
bioavailability (how much reaches the appropriate body system), half-life (how
long the drugs last in the body) and potency. Several companies have
non-selective ET antagonists in development. In particular, Actelion Ltd., a
biotechnology company located in Switzerland, and Genentech, Inc. are developing
bosentan, a non-selective ET blocker in-licensed from Roche Holding, Ltd. for
pulmonary hypertension and late stage chronic heart failure. Actelion submitted
an NDA to the FDA and to the European Union for marketing authorization for
Tracleer (TM) (bosentan) for the treatment of pulmonary arterial hypertension.
Actelion is believed to be completing enrollment of a second Phase III trial to
support the NDA filing. We believe that selective ET blockers like sitaxsentan
will be preferred therapy by physicians and patients for cardiopulmonary
diseases since selective ET(A) blockers are likely to block the negative effects
of endothelin by blocking the ET(A) receptor while preserving the beneficial
effects of endothelin by not inhibiting the ET(B) receptor. Non-selective
antagonists block both the ET(A) and the ET(B) receptors. GSK's development of
Enrasentan (dual acting Et) for heart failure has generated negative data. It is
not known if the negative clinical data is due to a class effect, dual trial
design or specific to the compound itself.
VASCULAR INFLAMMATION PROGRAM
Background. Inflammation is the body's natural defense mechanism that fends
off bacterial, viral and parasitic infections. The inflammatory response
involves a series of events by which the body attempts to limit or destroy a
foreign agent. These steps include the production of proteins that attract white
blood cells, or leukocytes, to the site of inflammation, the production of
chemicals to destroy the foreign agent and the removal of the resulting debris.
This process is normally self-limiting and not harmful to the individual.
However, in certain instances, the process may be overly active, such as during
an acute asthma attack where an immediate inflammatory reaction occurs. In
addition, in diseases such as atherosclerosis or rheumatoid arthritis, the
inflammatory reaction leads to a build up of white blood cells and debris at the
inflammation site that causes tissue damage over longer periods of time.
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The initial interaction between white blood cells and the endothelial cell
layer is mediated by a group of adhesion molecules known as selectins. The
selectins are a family of three proteins, two of which are found on inflamed
endothelium, which bind to the carbohydrate sialyl Lewis x, also referred to as
sLe(X), found on the surface of white blood cells. White blood cells are able to
migrate into inflamed areas because sLe(X) present on the surface of white blood
cells binds to selectin molecules present on activated endothelium. This binding
slows the flow of white blood cells or leukocytes through the bloodstream. This
is one of the first steps in the movement of white blood cells from the blood
into the tissue. The second step in this process is vascular cell adhesion
molecule, referred to as VCAM, mediated white blood cell attachment and
migration which helps to localize white blood cells in areas of injury or
infection. The presence of VCAM at sites of endothelial injury leads to an
accumulation at these sites of the integrin very late antigen-4, or VLA-4, which
are contained in white blood cells. Such accumulation can provoke an
inflammatory response.
Current Therapies. The major anti-inflammatory compounds are steroids,
leukotriene blockers and immunosuppressants such as cyclosporin. While
effective, the time to onset of action of these compounds may be significant.
Steroids also have significant side effects including growth suppression in
children, cataract formation, and general intolerance. The antagonist compounds
we are developing may provide efficacy with fewer of these side effects.
Product Candidate -- TBC1269. Our scientists have developed a computer
model of the selectin/sLe(X) complex and used it to produce a novel class of
synthetic, small molecule compounds that inhibit the selectin-mediated cellular
adhesion that occurs during inflammation. The lead compound in the series,
TBC1269, has shown efficacy both in cell-based and biochemical assays, and in
animal models of inflammation. A Phase IIA clinical trial for TBC1269's
intravenous use in asthma was completed in 1998. Results of this trial, which
involved 21 patients, demonstrated significant reductions in cellular
inflammation and allowed improved breathing. The inhaled form of TBC1269 is in
preclinical trials for use in the treatment of asthma (estimated 14 million U.S.
patients) and the topical form is in preclinical trials for use in the treatment
of psoriasis (estimated 5.5 million U.S. patients).
German Subsidiary -- Revotar Biopharmaceuticals, AG. During 2000, we formed
Revotar Biopharmaceuticals, AG ("Revotar"), a German subsidiary that is 55.2%
owned by TBC. With headquarters in Berlin, German, Revotar was formed to perform
research and development of novel small molecule compounds and to develop and
commercialize selectin antagonists that TBC licensed to Revotar. Upon formation,
Revotar received certain development and commercialization rights to the
Company's selectin antagonist compounds as well as rights to certain other TBC
research technology for use in certain territories. Revotar also received
approximately $5 million in funding from three German venture capital funds and
has access to certain government scientific grants and loan program. Revotar is
currently conducting toxicology studies and beginning clinical development of an
inhaled formulation of TBC1269 for asthma and a topical formulation for possible
use in psoriasis.
Product Candidate -- VCAM/VLA-4 Antagonists. We have also identified
antagonists for the VCAM-dependent intercellular adhesion observed in asthma,
which block the ability of white blood cells to interact through VCAM and VLA-4.
VLA-4 antagonists represent a new class of compounds that has shown promise in
multiple preclinical animal models of asthma. These lead compounds are being
modified in an attempt to develop an orally available clinical candidate. In
preclinical animal studies, our scientists have demonstrated that a small
molecule VLA-4 antagonist can be effective in blocking acute inflammation,
suggesting that VCAM/VLA-4 plays a role in this disease process. We expect to
elect a clinical candidate during 2001.
Product Candidate -- (alpha)4(beta)7 Antagonists. The integrin
(alpha)4(beta)7, which is closely related to VLA-4, is present on leukocytes
which locate in the gastrointestinal system. Inhibitors of (alpha)4(beta)7 may
be useful in treating inflammatory conditions of the gut such as inflammatory
bowel disease (estimated 300,000 U.S. patients).
Research Collaboration with Schering-Plough -- On June 30, 2000, we entered
into a worldwide research collaboration and license agreement to discover,
develop and commercialize VLA-4 antagonists with Schering-Plough. The primary
focus of the collaboration will be to discover orally available VLA-4
antagonists as treatments for asthma. Under the terms of the agreement,
Schering-Plough obtains the exclusive worldwide rights to develop, manufacture
and market all compounds from TBC's library of VLA-4 antagonists, as well as the
rights to a second integrin antagonist. TBC will be responsible for optimizing a
lead compound and additional follow-on compounds. Schering-Plough will support
research at TBC and will be responsible for all costs associated with the
worldwide product development program and commercialization of the compound. In
addition to reimbursing research costs, Schering-Plough paid an upfront license
fee and will pay development milestones and royalties on product sales resulting
from the agreement. Total payments to TBC for both the VLA-4 and an additional
program, excluding royalties, could reach $87.0 million.
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Product Candidate -- Chemokine Receptor Antagonists. Chemokines, such as
MIP1(alpha) and eotaxin, are proteins which attract white blood cells to sites
of inflammation. They act by binding to the cell surface receptors CCR1 and
CCR3. Inhibitors of this action could be beneficial in treating inflammatory
diseases such as asthma and multiple sclerosis (estimated 300,000 U.S.
patients). We have identified small molecule lead inhibitors, which are being
optimized prior to selecting a clinical candidate.
Competition. TBC1269 is the only small molecule selectin antagonist in
clinical development for asthma and other inflammatory conditions. Several
companies have programs aimed at inhibiting chemokines, like MIP1(alpha) and
eotaxin, and integrins, like (alpha)4(beta)7 and VCAM/VLA-4. We are not aware of
any competing product antagonists of these classes, which are currently in
clinical development.
APOPTOSIS PROGRAM
Background. Over the past few years it has become evident that cells have a
built-in mechanism for programmed death, termed apoptotic death, which is
important in the formation, organization and remodeling of tissues during
development. This mechanism contrasts with necrotic death, which is often the
result of hypoxic injury to tissues. There appear to be certain conditions,
however, where apoptosis appears to contribute to the progression of a disease
state. In particular, much of the tissue damage which develops over time
following an ischemic stroke (resulting from a blood clot) or a heart attack is
thought to be the result of apoptotic death occurring in the tissue.
Additionally, diseases such as rheumatoid arthritis may have components of
apoptosis. In this case, the death of certain cells in a joint, in combination
with over-proliferation of other cells, contributes to the local irritation that
is observed. Evidence suggests this process may be stimulated by inflammatory
cells in the tissue. Thus, inhibitors of apoptosis may be useful in treating a
number of disease conditions.
Current Therapies. There are currently no therapies that prevent apoptotic
cell death. The current therapies for treating ischemic stroke include treatment
with tPA to reopen arteries, but only if the patient arrives at the hospital
within three hours of the onset of the stroke. Otherwise, symptomatic treatment
is all that can be done. For acute myocardial infarction, treatments include
thrombolytic therapy, angioplasty, and coronary artery bypass grafts. These
procedures are useful at restoring blood flow to the heart. However, they do not
address the role of apoptotic death in the growth of the necrotic area.
Product Candidates -- Caspase Inhibitors and TNF(alpha) Antagonist. Our
research in this area is focused on the identification of factors which
contribute to apoptotic death in the heart and brain following a heart attack or
stroke, which occur in approximately 1.5 million and approximately 450,000
patients, respectively, in the U.S. annually. One of the factors which has been
identified as being important in these and other disease settings is tumor
necrosis factor, or TNF(alpha). Our scientists have identified small molecule
antagonists of this factor which block TNF(alpha)'s ability to bind to and kill
cells in vitro. These compounds are currently undergoing additional optimization
prior to selection of a clinical candidate. In addition to use in acute
myocardial infarction or ischemic stroke, we estimate that there are
approximately two million rheumatoid arthritis patients in the U.S. that could
utilize a TNF(alpha) antagonist. Caspases are proteases which are responsible
for mediating the cell death signal in various cell types. We have identified
lead inhibitors of caspases which may be useful in preventing cell death
following ischemic stroke or acute myocardial infarction.
Competition. Although there are no competing small molecule drugs currently
approved, we are aware of many research programs into apoptosis. To the extent
one of these projects reaches the market ahead of ours, our sales results, if
any, in this program could be materially adversely affected. Two TNF(alpha)
antagonists, EMBREL(R) and REMICADE(R), have been approved for use in rheumatoid
arthritis and Crohn's disease. These are recombinant proteins. If and when
developed, our small molecule drugs may prove to have advantages over these
approved products because recombinant proteins cannot be administered orally and
are difficult to manufacture.
ANGIOGENESIS PROGRAM
Background. Angiogenesis, the formation of new blood vessels from
pre-existing vessels, depends on a delicate balance of local physical and
chemical stimuli acting on the vascular endothelium. Angiogenesis is associated
with numerous physiological processes, including embryogenesis, wound healing,
organ regeneration, and the female reproductive cycle. However, angiogenesis
also plays a major role in the pathogenesis of tumor growth, rheumatoid
arthritis, atherosclerosis, various retinopathies and certain skin diseases. One
of the key factors required for angiogenesis is Vascular Endothelial Growth
Factor, often referred to as VEGF. Increases in VEGF expression may be a common
mechanism underlying diverse, yet interrelated pathologies such as tumor growth,
retinal neovascularization (new blood vessel development in the back of the eye)
and rheumatoid arthritis where tissue hypoxia (loss of oxygen) is a central
component. The VEGF protein is produced by smooth muscle cells and other
tissues, including tumor cells, and is essential for the formation of the new
blood vessels. Antagonists to VEGF may be useful for the prevention of the
vascular complications of diabetes and for limiting the growth of solid tumors.
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Current Therapies. For solid tumors, current therapy includes tumor
removal, radiation therapy and chemotherapy aimed at eliminating the tumor mass.
Depending on the type of tumor, these therapies have a variable degree of
effectiveness, from highly effective to completely ineffective.
Product Candidate -- VEGF Antagonist. Our research program is directed
toward the development of small molecule inhibitors of VEGF. VEGF is a member of
the heparin binding growth factor family. Our lead compound has been shown to
effectively prevent VEGF function in vitro. The compound also prevents the
vascular actions of VEGF in rodent models of angiogenesis. We are currently
attempting to further optimize our VEGF inhibitor to identify a clinical
candidate. We estimate that approximately 700,000 diabetic retinopathy cases and
approximately three million solid organ cancer patient cases occur in the U.S.
annually which could utilize a VEGF antagonist in their treatment.
Competition. While there are many competitive programs aimed at preventing
angiogenesis, we believe that a selective, orally available VEGF blocker, which
is the type we are seeking to develop, may have significant advantages.
VASCULAR PROLIFERATIVE DISEASE PROGRAM
Background. Smooth muscle cells in the blood vessel wall proliferate in
response to injury to the vessel. When the endothelial cell layer is damaged,
platelets attach to the vessel surface. Platelets and other cells begin to
release cellular growth factors, including the proteins FGF, platelet-derived
growth factor and thrombin. In response to these growth factors, specific genes
are activated in the smooth muscle cells. The products of these genes stimulate
the smooth muscle cells to move and divide. When the initial damage is slight,
the proliferation is limited to endothelial cell repair. If the damage is more
extensive, the smooth muscle cells continue to proliferate. Eventually, the
proliferation process thickens the vessel wall, reduces the interior size of the
blood vessel and produces stenosis. This stenosis is comprised primarily of
smooth muscle cells and protein called fibroproliferative material. The process
of producing this fibroproliferative material is referred to as the
fibroproliferative response. Fibroproliferative stenosis differs from stenosis
produced by atherosclerotic plaque, which contains smooth muscle cells, fatty
deposits and macrophages (a type of white blood cell). As with atherosclerotic
plaque stenosis, however, blood flow is restricted, and the tissue served by the
vessel is deprived of oxygen. If the stenosis occurs in a coronary artery, the
heart muscle is deprived of oxygen, and an acute myocardial infarction may
result.
Fibroproliferative material is generally produced in response to extensive
damage to the blood vessel wall as a result of a mechanical injury. Mechanical
injury sufficient to produce the fibroproliferative response often occurs during
procedures designed to repair blood vessels that are occluded by plaque or
thrombus material, such as mechanical reopening of arteries (angioplasty) and
coronary artery bypass graft surgery. Other surgical procedures, including vein
grafts and organ transplants, can also produce fibroproliferative stenosis. When
fibroproliferative stenosis occurs following the removal of the stenosis by
surgical or other means, it is referred to as restenosis. Irrespective of how
the injury is produced, the conditions which lead to the fibroproliferative
response are termed vascular proliferative diseases.
Current Therapies. There is currently no effective treatment to prevent
post angioplasty coronary restenosis.
Product Candidate -- FGF Antagonist. Our research program for vascular
proliferative disease is focused on identifying the factors that activate cell
proliferation and on developing small molecule antagonists to these factors.
Using their knowledge of the signaling pathways through which these factors
stimulate cells to proliferate, our scientists seek to develop compounds that
disrupt the signaling process between cells and prevent unnecessary smooth
muscle cell proliferation. We have focused on FGF because of a growing body of
evidence that points to its central role in blood vessel formation. Thus far,
our research has shown that some components of the signaling pathways used by
FGF are important for smooth muscle cell proliferation. Our current focus on FGF
involves the development of small molecules designed to prevent activation of
latent FGF and to block FGF receptor targets. These compounds are currently
undergoing additional optimization prior to selection of a clinical candidate.
We estimate that approximately 685,000 annual patient cases exist in the U.S.
which could utilize an FGF antagonist in the treatment of coronary restenosis.
Competition. Many companies are developing strategies for blocking FGF.
However, we are not aware of any FGF antagonists which have entered clinical
development.
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RESEARCH AND DEVELOPMENT COLLABORATIONS AND LICENSING AGREEMENTS
We have established, and intend to continue to establish, collaborations
with a number of corporations, research institutions and scientists to further
our research and development objectives and expedite the commercialization of
our products. These collaborations are generally conducted pursuant to
agreements that:
o grant us a license to, or the option to license, technology; or
o grant other companies the right to develop and market certain
technology, patent rights or material that may be valuable to us and
our collaborators.
Our major licensing and collaboration agreements are summarized below:
Mitsubishi-Tokyo Pharmaceuticals ("Mitsubishi"). We have entered into an
agreement with Mitsubishi to license Mitsubishi's rights and technology relating
to Argatroban and to license Mitsubishi's own proprietary technology developed
with respect to Argatroban (the "Mitsubishi Agreement"). Under the agreement
with Mitsubishi, we have an exclusive license to use and sell Argatroban in the
U.S. and Canada for all cardiovascular, renal, neurological and immunological
purposes other than use for the coating of stents. We are required to pay
Mitsubishi specified royalties on net sales of Argatroban by us and our
sublicensees after its commercial introduction in the U.S. and Canada. Either
party may terminate the agreement with Mitsubishi on 60 days notice if the other
party defaults in its material obligations under the agreement, declares
bankruptcy or becomes insolvent, or if a substantial portion of its property is
subject to levy. Unless terminated sooner, the agreement with Mitsubishi expires
on the later of termination of patent rights in a particular country or 20 years
after first commercial sale of products in a particular country. Under the
Mitsubishi Agreement, we have access to an improved formulation patent granted
in the U.S. in 1993 which expires in 2010 and a use patent in the U.S. which
expires in 2009. We have agreed to pay a consultant involved in the negotiation
of this agreement a royalty based on net sales of Argatroban. During 2000, we
signed an additional agreement with Mitsubishi that provides us with royalties
on sales of Argatroban in certain European countries, up to a total
of $5.0 million in milestones for the development of ischemic stroke and
certain other provisions.
GlaxoSmithKline. In connection with our development and commercialization
of Argatroban, on August 5, 1997, we entered into an agreement with GSK whereby
GSK was granted an exclusive sublicense in the U.S. and Canada for the
indications of Argatroban that we have licensed from Mitsubishi. GSK has paid
$8.5 million in upfront license fees and $12.5 million in milestone payments and
has agreed to pay up to an additional $7.5 million in additional milestone
payments based on the clinical development and FDA approval of Argatroban for
the acute myocardial infarction indication. At this time, GSK is not
participating in the development work for the ischemic stroke indication and
there are no plans to conduct additional development work in acute myocardial
infarction. We are evaluating the feasibility of development of Argatroban for
other indications including use in hemodialysis and PCI.
The agreement with GSK provides for the formation of a joint development
committee to analyze the development of additional Argatroban indications (such
as ischemic stroke) covered by our license from Mitsubishi. The joint
development is to be funded 60% by GSK, except Phase IV trials are paid 100% by
GSK. Except as discussed below, GSK has the exclusive right to commercialize all
products arising out of the collaboration, subject to the obligation to pay
royalties on net sales to us and our rights to co-promote these products through
our own sales force in certain circumstances. We will retain the rights to any
indications that GSK determines it does not wish to pursue, subject to the
requirement that we may not grant marketing rights to any third parties, and
must use our own sales force to commercialize any such indications. Any
indications that we and GSK elect not to develop will be returned to Mitsubishi,
subject to the rights of GSK and us to commercialize these indications at their
election, with GSK having the first opportunity to commercialize. Mitsubishi may
also request the joint development committee to develop new indications inside
or outside the licensed field of use, and if the joint development committee
determines that it does not want to proceed with any such indication, all rights
under the agreement with Mitsubishi regarding such indication will revert to
Mitsubishi subject to our and GSK's right to commercialize the indication, with
GSK having the first opportunity to commercialize.
The agreement with GSK generally terminates on a country by country basis
upon the earlier of the termination of our rights under the agreement with
Mitsubishi, the expiration of applicable patent rights, or in the case of
certain royalty payments, the commencement of substantial third-party
competition. GSK also has the right to terminate the agreement on a country by
country basis by giving us at least three months written notice that the
commercial profile of the product in question would not justify continued
development or marketing in that country. In addition, either party may
terminate the agreement on 60 days notice if the other party defaults in its
obligations under the agreement, declares bankruptcy or becomes insolvent. We
agreed to pay an agent
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involved in the negotiation of this agreement a fee based on a percentage of all
consideration we receive, including royalties, from sales of Argatroban.
At present, Mitsubishi is the only manufacturer of Argatroban, and has
entered into an agreement with GSK to supply Argatroban in bulk to meet GSK's
and our needs. Should Mitsubishi fail during any consecutive nine-month period
to supply GSK at least 80% of its requirements, and such requirements cannot be
satisfied by existing inventories, the agreement provides for the nonexclusive
transfer of the production technology to GSK. If GSK cannot commence
manufacturing of Argatroban in a timely manner or if alternate sources of supply
are unavailable or uneconomic, our results of operations would be harmed.
In connection with the execution of our agreement with GSK, GSK purchased
176,922 shares of common stock for $1.0 million and an additional 400,000 shares
of common stock for $2.0 million in connection with the secondary public
offering which closed on October 1, 1997.
ICOS-TBC L.P. On June 6, 2000, we entered into a limited partnership
agreement with ICOS Corporation to form ICOS-Texas Biotechnology, L.P. The
partnership was formed to develop and globally commercialize endothelin-A
receptor antagonists from the TBC endothelin antagonist program. ICOS-TBC has
made an upfront license fee payment and will make milestone payments to us that
together could be as much as $55.5 million for the development and
commercialization of products resulting from the collaboration. See Footnote 8
to the Consolidated Financial Statements for a discussion of this transaction.
Schering-Plough. On June 30, 2000, we and Schering-Plough entered into a
worldwide research collaboration and license agreement to discover, develop and
commercialize VLA-4 antagonists and Schering-Plough has rights on a second
integrin antagonist. In addition to funding research costs, Schering-Plough paid
us an upfront license fee and will pay us development milestones and royalties
on product sales resulting from the agreement. Total payments to us for both
programs, excluding royalties, could reach $87.0 million. See Footnote 8 to the
Consolidated Financial Statements for a discussion of this transaction.
LG Chemical. On October 10, 1996, we signed a strategic alliance agreement
with LG Chemical, Ltd ("LG Chemical") to develop and market compounds derived
from our endothelin receptor and selectin antagonist programs in Korea, China,
India and certain other Asian countries, excluding Japan for certain disease
indications. LG Chemical has committed to pay a total of $10.7 million in
research payments. In conjunction with the agreement with ICOS-TBC, we assigned
one-half of the remaining payments to ICOS-TBC. LG Chemical has the right to
terminate future research payments if we fail to meet certain milestones, which
milestones will be established by the parties in accordance with the agreement.
LG Chemical will pay us royalties, based on net sales, in those geographic areas
covered by the agreement. See Footnote 7 to the Consolidated Financial
Statements for a discussion of this transaction.
Revotar Biopharmaceuticals, AG. During September 2000, we founded Revotar
and transferred to Revotar certain development and commercialization rights to
our selectin antagonist program as well as rights to other proprietary
technology. See Footnote 9 to the Consolidated Financial Statements for a
discussion of this transaction. The primary focus of Revotar has been on the
design and initiation of a Phase I trial for TBC1269 using the inhaled
formulation of the drug, which is scheduled to begin in the first half of 2001.
Also Dr. Gunter Rosskamp, formerly with the Industrial Investment Council of
Germany and Schering AG, joined Revotar as Chief Operating Officer.
Our operating results have fluctuated significantly during each year, and
we anticipate that such fluctuations, which are largely attributable to varying
research and development commitments and expenditures, will continue for the
next several years.
LICENSES AND PATENTS
Because of the substantial length of time and expense associated with
developing new pharmaceutical products, the biotechnology industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Our policy is to file patent applications
to protect technology, inventions and improvements that are important to the
development of our business. We have 24 pending U.S. patent applications and 24
issued U.S. patents covering compounds including selectin inhibitors, endothelin
antagonists and VCAM/VLA-4 antagonists. In addition, we have exclusive licenses
to three patents covering rational drug design technology. We have also filed
patent applications in certain foreign jurisdictions covering projects that are
the subject of U.S. applications and intend to file additional patent
applications as our research projects develop. We in-licensed the U.S. and
Canadian rights to Argatroban in 1993, which included access to an improved
formulation patent granted in 1993 which expires in 2010 and a use patent which
expires in 2009. Argatroban received FDA approval on June 30, 2000 and we have
applied for a patent term extension of approximately two years for the
formulation patent. Although we believe that the expiration of the Argatroban
patents will not have a material adverse effect on the commercialization of
Argatroban, we cannot assure you that we will be able to take advantage of the
patent term extension
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provisions of the Waxman/Hatch Act. Moreover, even if we receive either a patent
term extension or NDA exclusivity, we cannot assure you that generic
pharmaceutical manufacturers will not ultimately enter the market and compete
with us.
The patent positions of biopharmaceutical firms, including us, are
uncertain and involve complex legal and factual questions. Consequently, we do
not know whether any of its applications will result in the issuance of patents
or, if any patents are issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the U.S. are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lags behind actual
discoveries, we cannot be certain that we were the first creator of inventions
covered by our pending patent applications or that we were the first to file
patent applications for such inventions. Moreover, we may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office,
commonly known as the PTO, to determine priority of invention, which could
result in substantial cost to us, even if the eventual outcome is favorable to
us. We have no interference proceedings pending which involve compounds not
currently of commercial interest to us. We cannot assure you that our patents,
if issued, would be held valid by a court of competent jurisdiction. An adverse
outcome could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require us to cease using
such technology.
The development of therapeutic products for cardiovascular applications is
intensely competitive. Many pharmaceutical companies, biotechnology companies,
universities and research institutions have filed patent applications or
received patents in this field. Some of these applications or patents may be
competitive with our applications or conflict in certain respects with claims
made under our applications. Such conflict could result in a significant
reduction of the coverage of our patents, if issued. In addition, if patents are
issued to other companies that contain competitive or conflicting claims and
such claims are ultimately determined to be valid, we cannot assure you that we
would be able to obtain licenses to these patents at a reasonable cost or
develop or obtain alternative technology.
We also rely upon trade secret protection for our confidential and
proprietary information. We cannot assure you that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets or disclose such technology, or that
we can meaningfully protect our trade secrets.
We require our employees, consultants, members of our scientific advisory
board, outside scientific collaborators and sponsored researchers and certain
other advisors to enter into confidentiality agreements with us that contain
assignment of invention clauses. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of our employees,
the agreements provide that all inventions conceived by the employee are our
exclusive property. We cannot assure you, however, that these agreements will
provide meaningful protection or adequate remedies for our trade secrets in the
event of unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
The research, testing, manufacture and marketing of drug products are
extensively regulated by numerous governmental authorities in the United States
and other countries. In the United States, drugs are subject to rigorous
regulation by the FDA. The Federal Food, Drug and Cosmetic Act, and other
federal and state statutes and regulations, govern, among other things, the
research, development, testing, manufacture, storage, recordkeeping, labeling,
promotion and marketing and distribution of pharmaceutical products. Failure to
comply with applicable regulatory requirements may subject a company to
administrative or judicially imposed sanctions such as:
o warning letters;
o civil penalties;
o criminal prosecution;
o injunctions;
o product seizure;
o product recalls;
o total or partial suspension of production; and
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o FDA refusal to approve pending New Drug Application ("NDA")
applications or NDA supplements to approved applications.
The steps ordinarily required before a new pharmaceutical product may be
marketed in the United States include:
o preclinical laboratory tests, animal tests and formulation studies;
o the submission to the FDA of an IND, which must become effective
before clinical testing may commence;
o adequate and well-controlled clinical trials to establish the safety
and effectiveness of the drug for each indication;
o the submission of an NDA to the FDA; and
o FDA review and approval of the NDA prior to any commercial sale or
shipment of the drug.
Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal trials to assess the potential safety and
efficacy of the product. Preclinical tests must be conducted in compliance with
Good Laboratory Practice regulations and compounds for clinical use must be
formulated according to compliance with Good Manufacturing Practice, or cGMP,
requirements. The results of preclinical testing are submitted to the FDA as
part of an IND.
A 30-day waiting period after the filing of each IND is required prior to
the commencement of clinical testing in humans. If the FDA has not commented on
or questioned the IND within this 30-day period, clinical trials may begin. If
the FDA has comments or questions, the questions must be answered to the
satisfaction of the FDA before initial clinical testing can begin. In addition,
the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If
the FDA imposes a clinical hold, clinical trials cannot commence or recommence
without FDA authorization and then only under terms authorized by the FDA. In
some instances, the IND application process can result in substantial delay and
expenses.
Clinical trials involve the administration of the investigational new drug
to healthy volunteers or patients under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with Good Clinical
Practice, under protocols detailing the objectives of the trial, the parameters
to be used in monitoring safety and the effectiveness criteria to be evaluated.
Each protocol must be submitted to the FDA as part of the IND. The study
protocol and informed consent information for patients in clinical trials must
also be approved by the institutional review board at each institution where the
trials will be conducted.
Clinical trials to support NDAs are typically conducted in three sequential
phases, but the phases may overlap. In Phase I, the initial introduction of the
drug into healthy human subjects or patients, the drug is tested to assess
metabolism, pharmacokinetics and pharmacological actions and safety, including
side effects associated with increasing doses. Phase II usually involves trials
in a limited patient population to:
o determine dosage tolerance and optimal dosage;
o identify possible adverse effects and safety risks; and
o preliminarily support the efficacy of the drug in specific, targeted
indications.
If a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluation, Phase III trials are undertaken to further
evaluate clinical efficacy and to further test for safety within an expanded
patient population at geographically dispersed clinical trial sites. There can
be no assurance that Phase I, Phase II or Phase III testing of our product
candidates will be completed successfully within any specified time period, if
at all.
After completion of the required clinical testing, generally an NDA is
prepared and submitted to the FDA. FDA approval of the NDA is required before
marketing may begin in the United States. The NDA must include the results of
extensive clinical and other testing and the compilation of data relating to the
product's chemistry, pharmacology and manufacture. The cost of an NDA is
substantial.
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The FDA has 60 days from its receipt of the NDA to determine whether the
application will be accepted for filing based on the threshold determination
that the NDA is sufficiently complete to permit substantive review. Once the
submission is accepted for filing, the FDA begins an in-depth review of the NDA.
Currently, the FDA takes approximately twelve months in which to review the NDA
and respond to the applicant. In 1997, Congress enacted the Food and Drug
Administration Modernization Act, in part, to ensure the availability of safe
and effective drugs by expediting the FDA review process for new products. This
act establishes a statutory program for the approval of fast track products.
Under this act, the FDA has six months in which to review the NDA and respond to
the applicant. The review process is often significantly extended by FDA
requests for additional information or clarification regarding information
already provided in the submission. The FDA typically will refer the application
to the appropriate advisory committee, typically a panel of clinicians, for
review, evaluation and a recommendation as to whether the application should be
approved. The FDA is not bound by the recommendation of an advisory committee.
If FDA evaluations of the NDA and the manufacturing facilities are
favorable, the FDA may issue an approval letter, or, in some cases, an
approvable letter followed by an approval letter. Both letters usually contain a
number of conditions that must be met in order to secure final approval of the
NDA. When and if those conditions have been met to the FDA's satisfaction, the
FDA will issue an approval letter. The approval letter authorizes commercial
marketing of the drug for specific indications. As a condition of NDA approval,
the FDA may require postmarketing testing and surveillance to monitor the drug's
safety or efficacy, or impose other conditions, commonly referred to as Phase IV
clinical trials.
If the FDA's evaluation of either the NDA submission or manufacturing
facilities is not favorable, the FDA may refuse to approve the NDA or issue a
not approvable letter. The not approvable letter outlines the deficiencies in
the submission and often requires additional testing or information.
Notwithstanding the submission of any requested additional data or information
in response to an approvable or not approvable letter, the FDA ultimately may
decide that the application does not satisfy the regulatory criteria for
approval. Once granted, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or problems occur following initial
marketing.
Manufacturing. Each domestic drug manufacturing facility must be registered
with FDA. Domestic drug manufacturing establishments are subject to periodic
inspection by the FDA and must comply with cGMP. Further, we or our third party
manufacturer must pass a preapproval inspection of its manufacturing facilities
by the FDA before obtaining marketing approval of any products. To supply
products for use in the United States, foreign manufacturing establishments must
comply with cGMP and are subject to periodic inspection by the FDA or
corresponding regulatory agencies in countries under reciprocal agreements with
the FDA. We use and will continue to use third party manufacturers to produce
our products in clinical and commercial quantities. There can be no guarantee
that future FDA inspections will proceed without any compliance issues requiring
the expenditure of money or other resources.
Foreign Regulation of Drug Compounds. Whether or not FDA approval has been
obtained, approval of a product by comparable regulatory authorities may be
necessary in foreign countries prior to the commencement of marketing of the
product in those countries. The approval procedure varies among countries and
can involve additional testing. The time required may differ from that required
for FDA approval. Although there are some procedures for unified filings for
some European countries with the sponsorship of the country which first granted
marketing approval, in general each country has its own procedures and
requirements, many of which are time consuming and expensive. Thus, there can be
substantial delays in obtaining required approvals from foreign regulatory
authorities after the relevant applications are filed.
In Europe, marketing authorizations may be submitted at a centralized, a
decentralized or a national level. The centralized procedure is mandatory for
the approval of biotechnology products and provides for the grant of a single
marketing authorization which is valid in all European Union member states. As
of January 1995, a mutual recognition procedure is available at the request of
the applicant for all medicinal products which are not subject to the
centralized procedure. We will choose the appropriate route of European
regulatory filing to accomplish the most rapid regulatory approvals. There can
be no assurance that the chosen regulatory strategy will secure regulatory
approvals on a timely basis or at all.
Hazardous Materials. Our research and development processes involve the
controlled use of hazardous materials, chemicals and radioactive materials and
produce waste products. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and waste products. Although we believe that our safety
procedures for handling and disposing of hazardous materials comply with the
standards prescribed by laws and regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated completely. In
the event of an accident, we could be held liable for any damages that result.
This liability could exceed our resources or not be covered by our insurance.
Although we believe that we are in compliance in all material respects with
applicable environmental laws and regulations, there can be no assurance that we
will not be required to incur significant costs to comply with environmental
laws and regulations in
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the future. There can also be no assurance that our operations, business or
assets will not be materially adversely affected by current or future
environmental laws or regulations.
COMPETITION
The development and sale of new drugs for the treatment of vascular and
inflammatory diseases is highly competitive and we will face intense competition
from major pharmaceutical companies and biotechnology companies all over the
world. Competition is likely to increase as a result of advances made in the
commercial application of technologies and greater availability of funds for
investment in these fields. Companies that complete clinical trials, obtain
required regulatory approvals and initiate commercial sales of their products
before their competitors may achieve a significant competitive advantage. In
addition, significant research in biotechnology and vascular medicine may occur
in universities and other nonprofit research institutions. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. They also compete with us in recruiting talented
scientists.
We believe that our ability to compete successfully will depend on our
ability to create and maintain scientifically-advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other protection for our products, obtain required regulatory approvals and
manufacture and successfully market products through other companies, through
co-promotion agreements or alone. Many of our competitors have substantially
greater financial, marketing, and human resources than we do. We expect to
encounter significant competition.
MANUFACTURING AND MARKETING
We rely on our internal resources and third-party manufacturers to produce
compounds for preclinical development. Currently, we have no manufacturing
facilities for either the production of biochemicals or the manufacture of final
dosage forms. We believe small molecule drugs are less expensive to manufacture
than protein-based therapeutics, and that all of our existing compounds can be
produced using established manufacturing methods, including traditional
pharmaceutical synthesis.
We have established supply arrangements with third-party manufacturers for
certain clinical trials and have established and will establish supply
arrangements ultimately for commercial distribution, although there can be no
assurance that such arrangements will be established on reasonable terms. Our
long-range plan may involve establishing internal manufacturing of small
molecule therapeutics, including the ability to formulate, fill, label, package
and distribute our products. However, for the foreseeable future we plan to
outsource such manufacturing. We do not anticipate developing an internal
manufacturing capability for some time, nor are we able to determine which of
our potential products, if any, will be appropriate for internal manufacturing.
The primary factors we will consider in making this determination are the
availability and cost of third-party sources, the expertise required to
manufacture the product and the anticipated manufacturing volume. Pursuant to
our agreement with GSK, GSK entered into an agreement with Mitsubishi regarding
the manufacture and supply of Argatroban, and we will not, therefore, have any
direct responsibility regarding the manufacture and supply of Argatroban as it
relates to the agreement with GSK.
EMPLOYEES
As of December 31, 2000, we employed 88 individuals. Of our work force, 71
employees are engaged directly in research and development activities and 17 in
general and administrative positions. None of our employees are represented by a
labor union. We have experienced no work stoppages and believe that relations
with our employees are good. We also maintain consulting agreements with a
number of scientists at various universities and other research institutions. We
intend to increase our scientific, clinical and administrative staff to
approximately 120 persons during the next twelve months due to the requirements
of ongoing research and clinical programs.
SCIENTIFIC ADVISORY BOARD AND CONSULTANTS
We have assembled a scientific advisory board composed of distinguished
professors from some of the most prestigious medical schools. The scientific
advisory board assists us in identifying research and development opportunities,
in reviewing with management the progress of our projects and in recruiting and
evaluating scientific staff. Although we expect to receive guidance from the
members of our scientific advisory board, all of its members are employed on a
full-time basis by others and, accordingly, are able to devote only a small
portion of their time to us. Management expects to meet with its scientific
advisory board members as a group approximately once each year and individually
from time to time on an informal basis. We have entered into a consulting
agreement with each member of the scientific advisory board. The Scientific
Advisory Board includes James T. Willerson, M.D., as Chairman, and the following
scientists.
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Ferid Murad, M.D., Ph.D. is Professor and Chairman of the Department of
Integrative Biology and Pharmacology at the University of Texas-Houston Medical
School and the Director of the Institute of Molecular Medicine. Dr. Murad has
received many honors including the Nobel Prize in Medicine in 1998, the Ciba
Award in 1988 and the Albert and Mary Lasker Award in Basic Medical Research in
1996. He is also a member of many professional and honorary societies and is the
author or co-author of more than 300 scientific articles.
Joseph F. Sambrook, Ph.D. is a Professor of Pathology at Melbourne
University, Australia and Director of Research at Peter MacCallum Cancer
Institute. He is a member of various honorary and professional societies,
editorial boards and is the author of more than 150 scientific articles.
Professor Sambrook previously worked for 20 years in the U.S. where he served on
many blue ribbon government and non-government committees.
Ajit Varki, M.D. has been a Professor of Medicine since 1991 and is
currently serving in that position as well as leader of the glycobiology program
at the University of California, San Diego. Dr. Varki served as Instructor in
Medicine at Washington University School of Medicine from 1980 to 1982. He also
served as Assistant Professor of Medicine from 1982 to 1987 and as Associate
Professor of Medicine from 1987 to 1991 at the University of California, San
Diego. In 1975, Dr. Varki received an M.D. from Christian Medical College and
his Post-Doctorate in Biochemistry from Washington University from 1979 to 1982.
He is a member of various professional societies and has won numerous awards
since 1969. He is currently president of the American Society for Clinical
Investigation. Dr. Varki is the author or co-author of 160 scientific
publications.
Denton Cooley, M.D., Surgeon-in-Chief of the Texas Heart Institute, acts as
an advisory director to us.
We also have agreements with various outside scientific consultants who
assist us in formulating our research and development strategy. All of our
consultants and advisors are employed by other employers and may have
commitments to or consulting or advisory contracts with other entities that may
affect their ability to work with us.
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ADDITIONAL RISK FACTORS
Stockholders and potential investors in shares of our stock should
carefully consider the following risk factors, in addition to other information
in this Form 10-K. We are identifying these risk factors as important factors
that could cause our actual results to differ materially from those contained in
any written or oral forward-looking statements made by or on behalf us. We are
relying upon the safe-harbor for forward-looking statements and any such
statements made by or on behalf of us are qualified by reference to the
following cautionary statements, as well as to those set forth elsewhere in this
Form 10-K.
RISKS RELATED TO OUR BUSINESS, INDUSTRY AND STRATEGY
THERE IS UNCERTAINTY IN THE DEVELOPMENT OF OUR PRODUCTS AND IF WE DO NOT
SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE WILL NOT BE PROFITABLE.
We have just begun to market our first product, Argatroban, through our
agreement with GSK. However, the royalties produced to date by Argatroban are
not enough to make us profitable. To date, the majority of our resources have
been dedicated to the research and development of Argatroban and other small
molecule drugs for certain vascular and related inflammatory diseases. We have
developed lead compounds in our vasospasm/ hypertension and vascular
inflammation programs. The commercial applications of our product candidates
will require further investment, research, development, preclinical and clinical
testing and regulatory approvals, both foreign and domestic. We cannot assure
you that we will be able to develop, produce at reasonable cost, or market
successfully, any of our product candidates. Further, these product candidates
may require complex delivery systems that may prevent or limit their commercial
use. All of our products will require regulatory approval before they may be
commercialized. Products, if any, resulting from our research and development
programs other than Argatroban, are not expected to be commercially available
for a number of years, and we cannot assure you that any successfully developed
products will generate substantial revenues or that we will ever be profitable.
WE FACE SUBSTANTIAL COMPETITION THAT MAY RESULT IN OTHERS DEVELOPING AND
COMMERCIALIZING PRODUCTS MORE SUCCESSFULLY THAN WE DO.
The biopharmaceutical industry is highly competitive. Our success will
depend on our ability to develop products and apply technology and to establish
and maintain a market for our products. Potential competitors in the U.S. and
other countries include major pharmaceutical and chemical companies, specialized
biotechnology firms, universities and other research institutions. Many of our
competitors have substantially greater research and development capabilities and
experience and greater manufacturing, marketing and financial resources than we
do. Accordingly, our competitors may develop products or other novel
technologies that are more effective, safer or less costly than any that have
been or are being developed by us or may obtain FDA approval for products more
rapidly than we are able.
We expect significant competition for Argatroban for the treatment of HIT.
The products that compete with Argatroban include:
o Refludan(R), which was approved by the FDA in 1997 for the treatment
of HITTS; and
o Orgaran(R), which is a low molecular weight heparinoid that has been
approved for the treatment of deep vein thrombosis, but is believed to
be used without an approved indication ("off-label") for the treatment
of HIT.
o Angiomax(R), is approved for use in the U.S. for use as an
anticoagulant in patients with unstable angina undergoing percutaneous
translumial coronary angioplasity; and
We may also face competition for Argatroban in indications other than HIT,
when and if such indications are approved by the FDA, including:
o Revasc(R), which is used in the treatment of deep vein thrombosis
following hip surgery and has received regulatory approval in Europe;
o Angiomax(R), which is in Phase III clinical trials for acute coronary
syndromes and conducting clinical trials in HIT patients; and
o Melagatran, which is being developed as a treatment for deep vein
thrombosis and is in Phase III trials.
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We cannot assure you that technological development by others will not
render our products or product candidates uncompetitive or that we will be
successful in establishing or maintaining technological competitiveness.
WE ARE DEPENDENT ON GSK, MITSUBISHI AND OTHER THIRD PARTIES TO FUND, MARKET
AND DEVELOP OUR PRODUCTS, INCLUDING ARGATROBAN.
We rely on strategic relationships with our corporate partners to provide
the financing, marketing and technical support and, in certain cases, the
technology necessary to develop and commercialize certain of our product
candidates. We have entered into an agreement with Mitsubishi to license rights
and technology relating to Argatroban in the U.S. and Canada for specified
therapeutic indications. Either party may terminate the Mitsubishi agreement on
60 days notice if the other party defaults in its material obligations under the
agreement, declares bankruptcy or becomes insolvent, or if a substantial portion
of its property is subject to levy. Unless terminated sooner due to the above
described termination provisions, the agreement with Mitsubishi expires on the
later of the termination of patent rights in a particular country or 20 years
after the first commercial sale of products in a particular country.
We also entered into an agreement with GSK in 1997 whereby we granted an
exclusive sublicense to GSK relating to the continued development and
commercialization of Argatroban. This agreement provides for the payment of
royalties and certain milestone payments upon the completion of various
regulatory filings and receipt of regulatory approvals. The agreement generally
terminates on a country by country basis upon the earlier of the termination of
our rights under the agreement with Mitsubishi, the expiration of applicable
patent rights, or in the case of certain royalty payments, the introduction of a
substantial competitor for Argatroban by another pharmaceutical company. GSK
also has the right to terminate the agreement on a country by country basis by
giving us at least three months written notice based on a reasonable
determination by GSK that the commercial profile of the therapeutic indication
in question would not justify continued development or marketing in that
country. In addition, either we or GSK may terminate our agreement on 60 days
notice if the other party defaults in its obligations under the agreement,
declares bankruptcy or becomes insolvent.
Our participation in ICOS-TBC is a fifty percent partnership with ICOS
Corporation that has the responsibility for developing endothelin antagonist
compounds from our research program. Should the partners not be able to
successfully conduct the research and clinical development of the compounds, we
could be adversely affected. There is no guarantee that the partnership will
have adequate funds to pursue its research and clinical goals or that the effort
will be successful.
LG Chemical has the right to terminate our strategic alliance if we fail to
meet milestones that were established by the parties, in accordance with the
agreement, on an ongoing basis. Our collaboration and license agreement with
Schering-Plough contains a provision that allows for termination of the research
program upon one hundred eighty days written notice to us.
Our success will depend on these and any future strategic alliances. There
can be no assurance that we will satisfy the conditions required to obtain
additional research or milestone payments under the existing agreements or that
we can prevent the termination of these agreements. We cannot assure you that we
will be able to enter into future strategic alliances on acceptable terms. The
termination of any existing strategic alliances or the inability to establish
additional collaborative arrangements may limit our ability to develop our
technology and may have a material adverse effect on our business or financial
condition.
RISKS RELATING TO CLINICAL AND REGULATORY MATTERS
THE REGULATORY APPROVAL PROCESS IS COSTLY AND LENGTHY AND WE MAY NOT BE
ABLE TO SUCCESSFULLY OBTAIN ALL REQUIRED REGULATORY APPROVALS.
The preclinical development, clinical trials, manufacturing, marketing and
labeling of pharmaceuticals are all subject to extensive regulation by numerous
governmental authorities and agencies in the U.S. and other countries. We must
obtain regulatory approval for each of our product candidates before marketing
or selling any of them. It is not possible to predict how long the approval
processes of the FDA or any other applicable federal, state or foreign
regulatory authority or agency for any of our products will take or whether any
such approvals ultimately will be granted. Positive results in preclinical
testing and/or early phases of clinical studies offer no assurance of success in
later phases of the approval process. Generally, preclinical and clinical
testing of products can take many years, and require the expenditure of
substantial resources, and the data obtained from these tests and trials can be
susceptible to varying interpretation that could delay, limit or prevent
regulatory approval. Any delay in obtaining, or failure to obtain, approvals
could adversely affect the marketing of our products and our ability to generate
product revenue.
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The risks associated with the approval process include:
o delays or rejections in the regulatory approval process based on the
failure of clinical or other data to meet expectations, or the failure
of the product to meet a regulatory agency's requirements for safety,
efficacy and quality; and
o regulatory approval, if obtained, may significantly limit the
indicated uses for which a product may be marketed.
OUR CLINICAL TRIALS COULD TAKE LONGER TO COMPLETE AND COST MORE THAN WE
EXPECT, WHICH MAY RESULT IN OUR DEVELOPMENT PLANS BEING SIGNIFICANTLY
DELAYED.
We will need to conduct clinical studies of all of our product candidates.
These studies are costly, time consuming and unpredictable. Any unanticipated
costs or delays in our clinical studies could cause us to expend substantial
additional funds or to delay or modify our plans significantly, which would harm
our business, financial condition and results of operations. The factors that
could contribute to such cost, delays or modifications include:
o the cost of conducting human clinical trials for any potential
product. These costs can vary dramatically based on a number of
factors, including the order and timing of clinical indications
pursued and the development and financial support from corporate
partners; and
o intense competition in the pharmaceutical market, which may make it
difficult for us to obtain sufficient patient populations or clinician
support to conduct our clinical trials as planned.
EVEN IF WE OBTAIN MARKETING APPROVAL, OUR PRODUCTS WILL BE SUBJECT TO
ONGOING REGULATORY OVERSIGHT WHICH MAY AFFECT THE SUCCESS OF OUR PRODUCTS.
Any regulatory approvals that we receive for a product may be subject to
limitations on the indicated uses for which the product may be marketed or
contain requirements for potentially costly post-marketing follow-up Phase IV
studies. After we obtain marketing approval for any product, the manufacturer
and the manufacturing facilities for that product will be subject to continual
review and periodic inspections by the FDA and other regulatory authorities. The
subsequent discovery of previously unknown problems with the product or with the
manufacturer or facility, may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecution.
RISKS RELATING TO FINANCING OUR BUSINESS
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, AND WE
MAY NOT BE SUCCESSFUL IN RAISING ADDITIONAL FUNDS IN THE FUTURE.
We have been unprofitable to date and expect to incur operating losses for
the next several years as we invest in product research and development,
preclinical and clinical testing and regulatory compliance. We will require
substantial additional funding to complete the research and development of our
product candidates, to establish commercial scale manufacturing facilities, if
necessary, and to market our products. We have accumulated approximately $105.6
million in net losses through December 31, 2000. Estimates of our future capital
requirements will depend on many factors, including:
o market acceptance and commercial success of Argatroban;
o expenses and risks associated with clinical trials to expand the
indications for Argatroban;
o continued scientific progress in our drug discovery programs;
o the magnitude of these programs;
o progress with preclinical testing and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
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o the costs involved in filing, prosecuting and enforcing patent claims;
o competing technological and market developments and changes in our
existing research relationships;
o our ability to maintain and establish additional collaborative
arrangements; and
o effective commercialization activities and arrangements.
Subject to these factors, we anticipate that our existing capital resources
and other revenue sources, should be sufficient to fund our cash requirements in
the foreseeable future without considering the impact of revenues from
Argatroban. Notwithstanding revenues, which may be produced through sales of
potential future products if approved, we anticipate that we will need to secure
additional funds to continue the required levels of research and development to
reach our long-term goals. We intend to seek such additional funding through
collaborative arrangements and/or through public or private financings.
We cannot assure you that additional financing will be available, or, if
available, that it will be available on acceptable terms. If additional funds
are raised by issuing securities, further dilution of the equity ownership of
existing stockholders will result. If adequate funds are not available, we may
be required to delay, scale back or eliminate one or more of our drug discovery
or development programs or obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to certain of our
technologies, product candidates or products that we would not otherwise
relinquish.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR OPERATING RESULTS.
We have historically experienced, and expect to continue to experience for
the foreseeable future, significant fluctuations in our operating results. These
fluctuations are due to a number of factors, many of which are outside of our
control, and may result in volatility of our stock price. Future operating
results will depend on many factors, including:
o demand for our products;
o regulatory approvals for our products;
o the timing of the introduction and market acceptance of new products
by us or competing companies; and
o the timing and magnitude of certain research and development expenses.
RISKS RELATED TO ONGOING OPERATIONS
WE ARE DEPENDENT ON QUALIFIED PERSONNEL.
Our success is highly dependent on our ability to attract and retain
qualified scientific and management personnel. The loss of the services of the
principal members of our management and scientific staff including David B.
McWilliams, our President and Chief Executive Officer, and Richard A.F. Dixon,
Ph.D., our Senior Vice President, Research and Chief Scientific Officer, may
impede our ability to bring products to market. In order to commercialize
products, we must maintain and expand our personnel as needs arise in the areas
of research, clinical trial management, manufacturing, sales and marketing. We
face intense competition for such personnel from other companies, academic
institutions, government entities and other organizations. We cannot assure you
that we will be successful in hiring or retaining qualified personnel. Managing
the integration of new personnel and our growth in general could pose
significant risks to our development and progress.
We also rely on consultants and advisors to assist us in formulating our
research and development strategy. All our consultants and advisors are either
self-employed or employed by other organizations, and they may have other
commitments such as consulting or advisory contracts with other organizations
that may affect their ability to contribute to us.
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THE HAZARDOUS MATERIAL WE USE IN OUR RESEARCH AND DEVELOPMENT COULD RESULT
IN SIGNIFICANT LIABILITIES, WHICH MAY EXCEED OUR INSURANCE COVERAGE.
Our research and development activities involve the use of hazardous
materials. While we believe that we are currently in substantial compliance with
federal, state and local laws and regulations governing the use of these
materials, accidental injury or contamination may occur. Any such accident or
contamination could result in substantial liabilities, which could exceed the
policy limits of our insurance coverage and financial resources. Additionally,
the cost of compliance with environmental and safety laws and regulations may
increase in the future.
WE MAY BE SUED FOR PRODUCT LIABILITY, WHICH MAY PREVENT OR INTERFERE WITH
THE DEVELOPMENT OR COMMERCIALIZATION OF OUR PRODUCTS.
Because our products and product candidates are new treatments, with
limited, if any, past use on humans, serious undesirable and unintended side
effects may arise. We may be subject to product liability claims that are
inherent in the testing, manufacturing, marketing and sale of pharmaceutical
products. These claims could expose us to significant liabilities that could
prevent or interfere with the development or commercialization of our products
and seriously impair our financial position. Product liability insurance is
generally expensive for biopharmaceutical companies such as ours. We maintain
product liability insurance coverage for claims arising from the use of our
products in clinical trials prior to FDA approval. Under the agreements with
Mitsubishi and GSK, we maintain product liability insurance to cover claims that
may arise from the sale of Argatroban. Our existing coverage will not be
adequate as we further develop products and continue to sell Argatroban. We
cannot assure you that we will be able to maintain our existing insurance
coverage or obtain additional coverage on commercially reasonable terms for
liability arising from the use of our other products in the future. Also, this
insurance coverage and our resources may not be sufficient to satisfy any
liability resulting from product liability claims and a product liability claim
may have a material adverse effect on our business, financial condition or
results of operations.
RISKS RELATING TO PRODUCT MANUFACTURING AND SALES
WE HAVE NO MANUFACTURING, MARKETING OR SALES EXPERIENCE.
We have no manufacturing, marketing or product sales experience. If we
develop any additional commercially marketable products, we cannot assure you
that contract manufacturing services will be available in sufficient capacity to
supply our product needs on a timely basis. If we decide to build or acquire
commercial scale manufacturing capabilities, we will require additional
management and technical personnel and additional capital.
If in the future, we decide to perform sales and marketing activities
ourselves, we would face a number of additional risks, including:
o we may not be able to attract and build a significant marketing or
sales force;
o the cost of establishing a marketing or sales force may not be
justifiable in light of product revenues; and
o our direct sales and marketing efforts may not be successful.
WE CANNOT ASSURE YOU THAT THE RAW MATERIALS NECESSARY FOR THE MANUFACTURE
OF OUR PRODUCTS WILL BE AVAILABLE IN SUFFICIENT QUANTITIES OR AT A
REASONABLE COST.
Complications or delays in obtaining raw materials or in product
manufacturing could delay the submission of products for regulatory approval and
the initiation of new development programs, each of which could materially
impair our competitive position and potential profitability. We can give no
assurance that we will be able to enter into any other supply arrangements on
acceptable terms, if at all.
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WE ARE DEPENDENT ON A SINGLE SUPPLIER OF ARGATROBAN.
At the present time, Mitsubishi is the only manufacturer of Argatroban in
bulk form. Mitsubishi has entered into a supply agreement with GSK to supply
Argatroban in bulk to meet GSK's and our needs. Should Mitsubishi fail during
any consecutive nine-month period to supply GSK with at least 80% of its
requirements, and such requirements cannot be satisfied by existing inventories,
the supply agreement with Mitsubishi provides for the nonexclusive transfer of
the production technology to GSK. However, in the event Mitsubishi terminates
manufacturing Argatroban or defaults in its supply commitment, we cannot assure
you that GSK will be able to commence manufacturing of Argatroban in a timely
manner or that alternate sources of bulk Argatroban will be available at
reasonable cost, if at all. If GSK cannot commence the manufacturing of
Argatroban or alternate sources of supply are unavailable or are not available
on commercially reasonable terms, it could harm our profitability. In addition,
finishing and packaging has only been arranged with one manufacturing facility
in the U.S.
OUR PRODUCTS, EVEN IF APPROVED BY THE FDA OR FOREIGN REGULATORY AGENCIES,
MAY NOT BE ACCEPTED BY HEALTH CARE PROVIDERS, INSURERS OR PATIENTS.
If any of our products, including Argatroban, after receiving FDA or other
foreign regulatory approval, fail to achieve market acceptance, our ability to
become profitable in the future will be adversely affected. We believe that
market acceptance will depend on our ability to provide acceptable evidence of
safety, efficacy and cost effectiveness. In addition, market acceptance depends
on the effectiveness of our marketing strategy and the availability of
reimbursement for our products.
THE SUCCESSFUL COMMERCIALIZATION OF OUR PRODUCTS IS DEPENDENT ON
PHARMACEUTICAL PRICING AND THIRD-PARTY REIMBURSEMENT.
In recent years, there have been numerous proposals to change the health
care system in the United States. Some of these proposals have included measures
that would limit or eliminate payments for medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. In addition,
government and private third-party payors are increasingly attempting to contain
health care costs by limiting both the coverage and the level of reimbursement
of drug products. Consequently, the reimbursement status of newly approved
health care products is highly uncertain, and there can be no assurance that
third-party coverage will be available or that available third-party coverage
will enable us to maintain price levels sufficient to realize an appropriate
return on our investment in product development. Our long-term ability to market
products successfully may depend in part on the extent to which reimbursement
for the cost of such products and related treatment will be available.
Third-party payors are increasingly challenging the prices of medical products
and services. Furthermore, inadequate third-party coverage may reduce market
acceptance of our products. Significant changes in the health care system in the
United States or elsewhere could have a material adverse effect on our business
and financial performance.
RISKS RELATING TO INTELLECTUAL PROPERTY
WE MAY NOT BE ABLE TO PROTECT PROPRIETARY INFORMATION AND OBTAIN PATENT
PROTECTION.
We actively seek patent protection for our proprietary technology, both in
the U.S. and in other areas of the world. However, the patent positions of
pharmaceutical and biotechnology companies, including us, are generally
uncertain and involve complex legal, scientific and factual issues. Intellectual
property is an uncertain and developing area of the law that is potentially
subject to significant change. Our success will depend significantly on our
ability to:
o obtain patents;
o protect trade secrets;
o operate without infringing upon the proprietary rights of others; and
o prevent others from infringing on our proprietary rights.
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We cannot assure you that patents issued to or licensed by us will not be
challenged, invalidated or circumvented, or that the rights granted will provide
competitive advantages to us. We cannot assure you that our patent applications
or pending patent applications, if and when issued, will be valid and
enforceable and withstand litigation. We cannot assure you that others will not
independently develop substantially equivalent or superseding proprietary
technology or that an equivalent product will not be marketed in competition
with our products, thereby substantially reducing the value of our proprietary
rights. We may experience a significant delay in obtaining patent protection for
our products as a result of a substantial backlog of pharmaceutical and
biotechnology patent applications at the PTO. Because patent applications in the
U.S. are maintained in secrecy until patents issue, other competitors may have
filed or maintained patent applications for technology used by us or covered by
pending applications without our being aware of these applications. In addition,
patent protection, even if obtained, is affected by the limited period of time
for which a patent is effective.
We could also incur substantial costs in defending any patent infringement
suits or in asserting any patent rights, including those granted by third
parties, in a suit with another party. The PTO could institute interference
proceedings involving us in connection with one or more of our patents or patent
applications, and such proceedings could result in an adverse decision as to
priority of invention. The PTO or a comparable agency in a foreign jurisdiction
could also institute re-examination or opposition proceedings against us in
connection with one or more of our patents or patent applications and such
proceedings could result in an adverse decision as to the validity or scope of
the patents.
We may be required to obtain licenses to patents or other proprietary
rights from third parties. We cannot assure you that any licenses required under
any patents or proprietary rights would be made available on acceptable terms,
if at all. If we are unable to obtain required licenses, we could encounter
delays in product introductions while we attempt to design around blocking
patents, or we could find that the development, manufacture or sale of products
requiring such licenses could be foreclosed.
IF WE ARE UNABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND
INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US.
We rely significantly on trade secrets, know-how and continuing
technological advancement to maintain our competitive position. We try to
protect this information by entering into confidentiality agreements with our
employees and consultants, which contain assignment of invention provisions.
Notwithstanding these agreements, others may gain access to these trade secrets,
such agreements may not be honored and we may not be able to protect effectively
our rights to our unpatented trade secrets. Moreover, our trade secrets may
otherwise become known or independently developed by our competitors.
RISKS RELATED TO OUR COMMON STOCK OUTSTANDING
OUR STOCK PRICE COULD BE VOLATILE.
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In particular, the market price of our common stock, like
that of the securities of other biopharmaceutical companies, has been and may be
highly volatile. Factors such as announcements concerning technological
innovations, new commercial products or procedures by us or our competitors,
proposed governmental regulations and developments in both the U.S. and foreign
countries, disputes relating to patents or proprietary rights, publicity
regarding actual or potential medical results relating to products under
development by us or our competitors, public concern as to the safety of
biotechnology products, and economic and other external factors, as well as
period-to-period fluctuations and financial results, may have a significant
effect on the market price of our common stock and public warrants.
From time to time, there has been limited trading volume with respect to
our common stock. In addition, there can be no assurance that there will
continue to be a trading market or that any securities research analysts will
continue to provide research coverage with respect to our common stock. It is
possible that such factors will adversely affect the market for our common
stock.
THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE,
INCLUDING WARRANTS WHICH ARE CURRENTLY EXERCISABLE, COULD ADVERSELY AFFECT
THE MARKET PRICE OF OUR STOCK.
As of December 31, 2000, substantially all of our outstanding shares of
common stock were eligible for immediate sale in the public market. We also
issued approximately 2.4 million freely tradable shares of common stock in
January 2001 when our publicly traded warrants were exercised.
As of December 31, 2000, we have reserved approximately 7.0 million shares
of common stock for issuance under outstanding options, warrants (including the
publicly traded warrants) and other contingent agreements. Approximately 6.6
million
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of these shares of reserved common stock are registered for sale or resale on
currently effective registration statements, and substantially all of the
remaining shares of reserved common stock are entitled to registration rights.
The issuance of a significant number of shares of common stock upon the exercise
of stock options and warrants, or the sale of a substantial number of shares of
common stock under Rule 144 or otherwise, could adversely affect the market
price of the common stock.
CERTAIN ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND
DELAWARE LAW MAY DETER OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY, EVEN
IF THAT CHANGE WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Our Certificate of Incorporation and the provisions of Section 203 of the
Delaware General Corporation Law contain certain provisions that may delay or
prevent an attempt by a third party to acquire control of us. In addition, the
severance provisions of employment agreements with certain members of management
could impede an attempted change of control by a third party.
ITEM 2 -- PROPERTIES
We lease 37,500 square feet of office and laboratory space in Houston,
Texas, including a 19,121 square foot laboratory facility and a 3,909 square
foot animal facility. The remaining area is being used for clinical development,
computer modeling, administrative and marketing offices, storage space and
additional offices for scientists. Our lease expires in December 2005.
Additionally, we lease 658 square feet in the building for use as storage space
on a monthly basis. We may require additional space to accommodate future
research and laboratory needs as necessary to bring products into development
and clinical trials. We are expanding our research laboratories to accommodate
current requirements and are planning further expansion of facilities in the
future.
ITEM 3 -- LEGAL PROCEEDINGS
None
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the fourth
quarter of our fiscal year ended December 31, 2000.
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PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the American Stock Exchange under the symbol
"TXB". Our publicly traded common stock purchase warrants expired on December
31, 2000 and the last date to exercise was January 2, 2001. The following table
sets forth, for the periods indicated, the high and low sale prices for the
common stock and redeemable common stock purchase warrants as reported by the
consolidated transaction reporting system.
COMMON STOCK PUBLIC WARRANTS
---------------- -------------------
HIGH LOW HIGH LOW
------ ------- ------- -------
YEAR ENDED DECEMBER 31, 1999
First Quarter ....................... 5.125 3.625 .75 .3125
Second Quarter ...................... 4.8125 3.50 .625 .3125
Third Quarter ....................... 5.063 3.500 .75 .25
Fourth Quarter ...................... 7.937 3.687 2.00 .375
YEAR ENDED DECEMBER 31, 2000
First Quarter ....................... 23.75 6.375 15.00 1.500
Second Quarter ...................... 19.875 8.75 11.375 2.25
Third Quarter ....................... 19.50 13.875 11.00 6.00
Fourth Quarter ...................... 17.39 7.80 8.58 .01
YEAR ENDED DECEMBER 31, 2001
First Quarter (through March 15) .... 10.90 5.30 (1) (1)
As of March 15, 2001 there were approximately 460 holders of record of our
common stock and approximately 18,500 beneficial owners.
(1) The last day of trading of the public warrant on the American Stock
Exchange was December 29, 2000 and the last date to exercise the warrant
was January 2, 2001.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We intend to
retain any future earnings to finance our growth strategy and ongoing business.
Payment of future dividends, if any, will be at the discretion of the board of
directors after reviewing various factors, including our financial condition and
operating results, current and anticipated cash needs and restrictions which may
be in effect in any future financing agreement.
RECENT SALES OF UNREGISTERED SECURITIES
In November 2000, we issued an aggregate of 140,698 shares of common stock
to certain individuals pursuant to the exercise of outstanding warrants for an
aggregate purchase price of $507,874. In December 2000, we issued 2000 shares of
common stock to a consultant as payment for services and recorded a non-cash
expense of $15,801. The issuance of common stock was exempt from registration
under Section 4 (2) of the Securities Act of 1933 as amended. The warrants and
the common stock underlying the warrants may not be sold in the United States
absent registration or an applicable exemption from registration requirements.
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ITEM 6 -- SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected financial data set forth below for each of the years in the
five-year period ended December 31, 2000 are derived from our audited
consolidated financial statements. The selected financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our 2000, 1999 and 1998
financial statements and notes thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ........................................ $ 15,692 $ 2,083 $ 2,252 $ 16,908 $ 5,406
Expenses:
Research and development ...................... 13,011 12,793 14,123 16,833 22,252
Charge for purchase of in-process research
and development ............................ -- -- 134 1,075 --
Amortization expense .......................... 52 -- -- -- --
General and administrative .................... 7,001 5,799 4,597 5,760 4,068
Equity in loss of affiliate ................... 3,488 -- -- -- --
Restructuring and impairment of intangible
assets ..................................... -- -- -- -- 421
-------- -------- -------- -------- --------
Total expenses ........................ 23,552 18,592 18,854 23,668 26,741
-------- -------- -------- -------- --------
Operating loss .................................. 7,860 (16,509) (16,602) (6,760) (21,335)
-------- -------- -------- -------- --------
Investment income, net ........................ 4,362 1,212 2,088 1,123 898
Other ......................................... -- -- -- 2 --
-------- -------- -------- -------- --------
Net loss before minority interest ............... (3,498) (15,297) (14,514) (5,635) (20,437)
Minority interest in loss of Revotar ............ 209 -- -- -- --
-------- -------- -------- -------- --------
Net loss before cumulative effect of
change in accounting principle ............... (3,289) (15,297) (14,514) (5,635) (20,437)
Cumulative effect of change in
accounting principle ......................... (2,366) -- -- -- --
-------- -------- -------- -------- --------
Net loss ........................................ (5,655) (15,297) (14,514) (5,635) (20,437)
Preferred dividend requirement ................ -- -- (2) 1,153 --
-------- -------- -------- -------- --------
Net loss applicable to common shares ............ $ (5,655) $(15,297) $(14,516) $ (6,788) $(20,437)
======== ======== ======== ======== ========
Net loss per share basic and diluted ............ $ (0.14) $ (0.45) $ (0.43) $ (0.24) $ (0.87)
======== ======== ======== ======== ========
Weighted average common shares used to
compute basic and diluted net loss per
share ......................................... 39,149 34,226 33,930 27,746 23,616
======== ======== ======== ======== ========
DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short and
long-term investments ......................... $ 92,533 $ 15,170 $ 30,376 $ 43,707 $ 13,390
Working capital ................................. 85,041 14,477 27,907 42,815 10,110
Total assets .................................... 98,968 20,805 36,106 48,798 18,180
Shareholders' equity ............................ 84,027 18,590 33,236 46,167 13,627
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ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes to the financial statements included elsewhere
in this Form 10-K.
Since our inception in 1989, we have primarily devoted our resources to
funding drug discovery research and development. We have been unprofitable to
date and expect to incur substantial operating losses for the next several years
as we invest in product research and development, preclinical and clinical
testing and regulatory compliance. We have sustained net losses of approximately
$105.6 million from the date of our inception to December 31, 2000. We have
primarily financed our operations to date through:
o private placements of common stock, which raised an aggregate of $34.3
million in net proceeds;
o our initial public offering, which raised an aggregate of $24.2
million in net proceeds including the over-allotment sold in January
1994;
o a private placement of 5% preferred stock on March 14, 1997, which
raised approximately $6.0 million in net proceeds, and;
o subsequent public offerings, one of which closed during October 1997
and raised approximately $26.7 million and one of which closed during
April 2000 and raised approximately $65.2 million in net proceeds; and
o exercise of public warrants for an aggregate of approximately $21.6
million in net proceeds through January 2, 2001.
On July 25, 1994, we acquired all of the outstanding stock of
ImmunoPharmaceutics in exchange for 1,599,958 shares of our common stock, and
later issued an additional 1,399,917 shares of our common stock upon
satisfaction of certain research milestones. ImmunoPharmaceutics' financial
results have been included in our financial statements since August 1, 1994. In
March 1996, ImmunoPharmaceutics' remaining operations in California were
consolidated into our Houston operations.
During October 1996, we signed a research and common stock purchase
agreement with LG Chemical. LG Chemical purchased 1,250,000 shares of our common
stock for $5.0 million and committed to pay us up to $10.7 million over a five
year period to develop two compounds in clinical development. Of this amount,
$8.1 million has been paid and $1.3 million will be paid on June 30 and December
31, 2001. We assigned one-half of the remaining research payments to ICOS-TBC in
conjunction with the ICOS-TBC agreement
In August 1997, we entered into an agreement with GSK whereby we granted
GSK the exclusive right to work with us in the development and commercialization
of Argatroban in the U.S. and Canada for specified indications. Upon execution
of the agreement, GSK paid an $8.5 million license fee, a $5.0 million milestone
payment in October 1997, a $7.5 million milestone payment in June 2000 and has
also committed to pay up to a total of $7.5 million in additional milestone
payments based on the clinical development and FDA approval of Argatroban for
the indications of HIT and acute myocardial infarction. Future milestone
payments for the acute myocardial infarction indication are subject to GSK's
agreement to market Argatroban for the acute myocardial infarction indication.
At this time, GSK has no plans to conduct development work for the acute
myocardial infarction and stroke indications. We are currently conducting a
clinical trial for the use of evaluating the feasibility of developing
Argatroban for ischemic stroke and considering evaluating other indications. In
connection with the agreement, GSK purchased 176,922 shares of our common stock
for $1.0 million and an additional 400,000 shares of our common stock for $2.0
million in conjunction with our public offering, which closed during October
1997.
On June 6, 2000, we and ICOS entered into the ICOS-TBC limited partnership
agreement. The partnership will seek to develop and globally commercialize ET(A)
receptor antagonists. As a result of our contribution of technology, ICOS-TBC
paid a license fee to us in June 2000, and will make additional milestone
payments to us that together could be as much as $55.5 million for the
development and commercialization of products resulting from the collaboration.
See footnote 8 to the Consolidated Financial Statements for a discussion of this
transaction.
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On June 30, 2000, we and Schering-Plough entered into a worldwide research
collaboration and license agreement to discover, develop and commercialize VLA-4
antagonists. In addition to research costs, Schering-Plough paid an upfront
license fee and is committed to make future milestone payments and royalty
payments on product sales resulting from the agreement. Total payments to us for
the programs included in the agreement, excluding royalties, could be as much as
$87 million. See footnote 8 to the Consolidated Financial Statements for a
discussion of this transaction.
In September 2000, we founded Revotar Biopharmaceuticals, AG, a German
corporation, and transferred to Revotar certain development and
commercialization rights to our selectin antagonist program as well as rights to
other proprietary technology. See Footnote 9 to the Consolidated Financial
Statements for a discussion of this transaction.
Our operating results have fluctuated significantly during each quarter and
year, and we anticipate that such fluctuations, which are largely attributable
to varying research and development commitments and expenditures, will continue
for the next several years.
RESULTS OF OPERATIONS
Revenues were $15.7 million, $2.1 million and $2.3 million during 2000,
1999 and 1998, respectively. For the years ended December 31, 2000, 1999 and
1998, revenues included $15.5 million, $2.0 million and $2.3 million
respectively from research agreements, commercialization agreements and
collaborations with various other companies. In mid-November, 2000, GSK began
the sale of Argatroban, for which the Company received royalties of $234,000,
net of commissions. Because the FDA first approved Argatroban in June 2000,
there were no comparable sales or royalties in the prior years.
The Company implemented on October 1, 2000, effective January 1, 2001,
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB101"), promulgated by the United States Securities and Exchange Commission
("SEC") in December 1999. Pursuant to the requirements of SAB101, receipts of
license fees and milestone payments, which in prior years had been recognized
upon receipt, are now recognized as revenues over the developmental period. As a
result of the adoption of SAB101, revenues in the year 2000 were reported under
a different basis of accounting than the prior two years, and are not directly
comparable. The adoption of SAB101 in the year 2000 resulted in a decrease in
revenues of $2,872,000 due to the amortization of license fees and milestones
received in 2000 into future periods, partially offset by the cumulative effect
of a change in accounting principle of $2,366,000 for upfront license fees and
milestone payments, received in 1997, and now amortized over the developmental
period, which ended June 30, 2000. For further discussion of SAB101 see Footnote
1 to the Consolidated Financial Statements, included herein.
In addition to the research payments from LG Chemical, which are included
in the three years presented, Research agreement revenue in year 2000 includes
research payments from Schering-Plough pursuant to the agreement discussed
above. Collaborative research and development from related party of $1,123,035
in year 2000 is comprised of payments received from ICOS-TBC pursuant to the
limited partnership agreement, discussed above. License fee and milestone income
in year 2000 of $10,445,938 is comprised of a portion of license fees received
from ICOS-TBC and Schering-Plough, pursuant to the agreements discussed above,
the cumulative effect of a change in accounting principle of $2,366,000 for
upfront license fees and milestone payments received from SmithKline in 1997,
discussed above, and a milestone payment from SmithKline in July 2000, upon
approval by the FDA for the marketing of Argatroban in the U.S. for the
indication of HIT. See Footnotes 7 and 8 to the Consolidated Financial
Statements, included herein.
Research and development expenses increased approximately 2% to $13.0
million in 2000, as compared to $12.8 million in 1999. The increase is due to
the research and development activities of Revotar, which are included in the
consolidated results of year 2000, partially offset by general reductions in
research and development costs resulting from the collaborative efforts begun in
2000 with ICOS-TBC. Research and development expenses decreased 9% from $14.1
million in 1998 to $12.8 million in 1999. The decrease from 1998 to 1999 was due
primarily to the completion of certain Phase II clinical trials related to
sitaxsentan (TBC11251) and the selectin antagonist programs net of expenses
incurred during 1998 for the NDA submission for Argatroban.
A non-cash charge for the purchase of in-process research and development
in 1998 of $0.1 million was the result of common stock issued under a research
collaboration agreement signed in 1998.
In June 2000, we issued 71,429 shares of Common Stock to Genentech as a
final payment on a license agreement. Previously, issuances under the agreement
were charged to in-process research and development expense. This payment was
required due to the approval of Argatroban and therefore the value of $966,000
has been recorded as an intangible asset and is being amortized over the
estimated useful life of the asset. Amortization expense recorded in 2000 was
approximately $53,000 and will be approximately $106,000 annually in future
periods.
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General and administrative expenses increased approximately 21%, to $7.0
million in 2000 as compared with $5.8 million in 1999. The increase is primarily
the result of higher employment expenses and costs associated with the
recruiting of additional senior staff, the addition of Revotar in 2000, and
costs associated with the management of the Company's collaborative efforts,
partially offset by reduced patent legal expenses related to endothelin, which
are now the responsibility of ICOS-TBC. General and administrative expenses also
increased approximately 26% from $4.6 million in 1998 to $5.8 million in 1999.
The increase in 1999 over 1998 was due primarily to approximately $187,500
accrued for settlement of a lawsuit, increased patent legal fees and increased
consulting fees related to Argatroban incurred in 1999.
Rent and related building service expense, which is a component of both
research and development and general and administrative expenses, was
approximately $1.1 million, $1.0 million and $1.0 million in the years ended
December 31, 2000, 1999 and 1998, respectively. The approximate $100,000
increase in 2000 as compared with 1999 was due to the added cost of additional
space leased in late 1999. The increase of approximately $69,000 in 1999 from
1998 was due primarily to an increase in leased space during 1999.
The Company's proportionate share in losses incurred by ICOS-TBC in 2000
was $3.5 million. There were no comparable amounts in the years 1998 and 1999,
as ICOS-TBC was formed in June 2000.
Investment income in 2000 of $4.4 million increased $3.2 million from 1999,
primarily as a result of the increase in funds available for investment in 2000,
resulting from the license fees and milestone payments received in 2000, and
proceeds of the sale of common stock in a public offering in April 2000, all as
discussed above. Investment income in 1998 was higher than 1999 due to the
investment of funds received in conjunction with the agreement with SmithKline
and a secondary public offering of common stock competed in October 1997,
discussed above.
The interest of the minority shareholders of Revotar, who collectively hold
approximately 45% of the Revotar common stock, in Revotar's loss was $209,000
for the year 2000, reducing the Company's consolidated net loss.
As discussed above, the Company implemented SAB101 on October 1, 2000,
effective January 1, 2000. The adoption of SAB101 resulted in a cumulative
increase in the Company's losses for the years 1997 through 1999 of $2.4 million
resulting from the amortization of license fees and milestone payments, received
in 1997, through the development period, which ended June 30, 2000, reported in
the year 2000 as cumulative effect of change in accounting principle. Revenues
in year 2000 include the $2.4 million deferred from 1997, as discussed above.
See Note 1 to the Consolidated Financial Statements, included herein.
We incurred net losses applicable to common shares of $5.7 million, $15.3
million and $14.5 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The net loss of $5.7 million in year 2000 includes the $2.4
million non-cash cumulative effect of the change in accounting principle,
discussed above. The reduction in the Company's net loss in 2000, as compared
with 1999, is due to the increased revenues and investment income, partially
offset by increased expenses in 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our research and development activities to date
principally through:
o our initial public offering and subsequent public offerings of our
common stock;
o private placements of our common and preferred stock;
o issuances of common stock in conjunction with acquisitions, research
and collaboration agreements and upon exercises of stock options and
warrants including our publicly traded warrants;
o milestone and research payments received in conjunction with research
and collaborative agreements; and
o investment income, net of interest expense.
At December 31, 2000 we had cash, cash equivalents and short-term and
long-term investments of $92.5 million including the cash of Revotar. On January
2, 2001, approximately 2.4 million public warrants were exercised which provided
us with approximately $20.1 million in additional cash.
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We expect to incur substantial research and development expenditures as we
design and develop biopharmaceutical products for the prevention and treatment
of cardiovascular and other diseases. We anticipate that our operating expenses
will increase during 2001 and subsequent years because:
o We will incur significant expenses in conjunction with the ICOS-TBC
partnership for endothelin antagonists and clinical trial costs for
sitaxsentan and TBC1269 compounds and expect to begin to incur costs
for clinical trials related to additional compounds. These costs
include:
- hiring personnel to direct and carry out all operations related
to clinical trials;
- hospital and procedural costs;
- services of a contract research organization; and
- purchasing and formulating large quantities of the compound to be
used in such trials.
o There will be additional costs in future periods related to Argatroban
in complying with ongoing FDA requirements and possible clinical trial
expenditures for additional therapeutic indications.
o Our administrative costs and costs to commercialize our products will
increase as our products are further developed and marketed.
We have been unprofitable to date and expect to incur operating losses for
the next several years as we invest in product research and development,
preclinical and clinical testing and regulatory compliance. We will require
substantial additional funding to complete the research and development of our
product candidates, to establish commercial scale manufacturing facilities, if
necessary, and to market our products. We have accumulated approximately $105.6
million in net losses through December 31, 2000. Estimates of our future capital
requirements will depend on many factors, including:
o market acceptance and commercial success of Argatroban;
o expenses and risks associated with clinical trials to expand the
indications for Argatroban;
o continued scientific progress in our drug discovery programs;
o the magnitude of these programs;
o progress with preclinical testing and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs involved in filing, prosecuting and enforcing patent claims;
o competing technological and market developments and changes in our
existing research relationships;
o our ability to maintain and establish additional collaborative
arrangements; and
o effective commercialization activities and arrangements.
Subject to these factors, we anticipate that our existing capital resources
and other revenue sources, should be sufficient to fund our cash requirements in
the foreseeable future without considering the impact of revenues from
Argatroban. Notwithstanding revenues, which may be produced through sales of
potential future products if approved, we anticipate that we will need to secure
additional funds to continue the required levels of research and development to
reach our long-term goals. We intend to seek such additional funding through
collaborative arrangements and/or through public or private financings.
We cannot assure you that additional financing will be available, or, if
available, that it will be available on acceptable terms. If additional funds
are raised by issuing securities, further dilution of the equity ownership of
existing stockholders will result. If
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adequate funds are not available, we may be required to delay, scale back or
eliminate one or more of our drug discovery or development programs or obtain
funds through arrangements with collaborative partners or others that may
require us to relinquish rights to certain of our technologies, product
candidates or products that we would not otherwise relinquish.
Our ability to raise additional funding is contingent upon a number of
factors which include:
o the market acceptance and commercial success of Argatroban and
expanded use of Argatroban for other indications;
o the ongoing cost of research and development activities;
o the attainment of research and clinical goals of product candidates;
o the timely approval of our product candidates by appropriate
governmental and regulatory agencies;
o the presence and effect of competitive products;
o our ability to manufacture and market products commercially;
o the retention of key personnel; and
o conditions in the capital markets.
IMPACT OF INFLATION AND CHANGING PRICES
The pharmaceutical research industry is labor intensive, and wages and
related expenses increase in inflationary periods. The lease of space and
related building services for the Houston facility contains a clause that
escalates rent and related services each year based on the increase in building
operating costs and the increase in the Houston Consumer Price Index,
respectively. To date, inflation has not had a significant impact on our
operations.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RISK
We are exposed to market risk primarily from changes in foreign currency
exchange rates. The following describes the nature of this risk that is not
believed to be material to us.
We have a majority-owned subsidiary in Berlin, Germany and consolidate the
results of operations into our consolidated financial results. Although not
significant to date, our reported expenses and cash flows from this
subsidiary are exposed to changing exchange rates. We had an intercompany
receivable from our Berlin subsidiary at December 31, 2000; however this
amount is denominated in U.S. dollars and is not exposed to exchange risk.
We have contracts with entities in other areas outside the U.S. that are
denominated in a foreign currency. To date, the currencies of these
countries have not fluctuated materially. At this time, we have not deemed
it cost effective to engage in a program of hedging the effect of foreign
currency fluctuations on our operating results using derivative financial
instruments.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements we are required to include in this Item 8 are set
forth in Item 14 of this Form 10-K.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their respective ages and
positions as of December 31, 1999, are as follows:
NAME AGE POSITION
---- --- --------
John M. Pietruski(1)(2)......................... 68 Chairman of the Board of Directors
David B. McWilliams(1).......................... 57 President, Chief Executive Officer and
Director
Richard A. F. Dixon, Ph.D.(1)................... 47 Senior Vice President, Research and Chief
Scientific Officer and Director
Stephen L. Mueller.............................. 53 Vice President, Finance and
Administration, Secretary and Treasurer
Pamela M. Murphy................................ 50 Vice President, Corporate
Communications
Joseph M. Welch................................. 60 Vice President, Business Development
James T. Willerson, M.D.(1)(3).................. 61 Chairman of the Scientific Advisory
Board and Director
Ron J. Anderson, M.D.(3)........................ 54 Director
Frank C. Carlucci(2)............................ 70 Director
Robert J. Cruikshank(3)......................... 70 Director
Suzanne Oparil, M.D.(3)......................... 59 Director
James A. Thomson, Ph.D.(2)...................... 56 Director
- ----------
(1) Member, Executive Committee of the Board of Directors
(2) Member, Compensation and Personnel Committee of the Board of Directors
(3) Member, Audit Committee of the Board of Directors
The additional information requested by this item will be contained on the
Company's definitive Proxy Statement ("Proxy Statement") for its 2001 Annual
Meeting of Stockholders to be held on May 30, 2001 and is incorporated by
reference from the sections titled "Election of Directors" and "Other
Information -- Executive Officers and -- Section 16(a) Beneficial Ownership
Reporting Compliance". Such Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days subsequent to December 31, 2000.
ITEM 11 -- EXECUTIVE COMPENSATION
The information requested by this item is incorporated by reference from
the section titled "Other Information -- Executive Compensation" in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on May 30, 2001.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information requested by this item is incorporated by reference from
the section titled "Other Information -- Principal Stockholders" in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on May 30, 2001.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information requested by this item is incorporated by reference from
the sections titled "Other Information -- Compensation Committee Interlocks and
Insider Participation" in the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 30, 2001.
33
35
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements, the reports
thereon, and the notes thereto commencing at Page F-1 of this Annual Report
on Form 10-K. Set forth below is an index to such Financial Statements .
PAGE
----
Independent Auditors' Report...................................... F-1
Consolidated Balance Sheets....................................... F-2
Consolidated Statements of Operations and Comprehensive Loss...... F-3
Consolidated Statements of Stockholders' Equity................... F-4
Consolidated Statements of Cash Flows............................. F-6
Notes to Consolidated Financial Statements........................ F-7
2. INDEX TO EXHIBITS
Information with respect to this Item is contained in the attached Index to
Exhibits.
The Company will furnish a copy of any one or more of these exhibits to a
shareholder who so requests upon receipt of payment for the costs of
duplication and mailing the requested item.
(b) REPORTS ON FORM 8-K
One report on Form 8-K dated December 16, 2000 was filed during the quarter
ended December 31, 2000, regarding the expiration date and last date to
exercise the Company's redeemable common stock purchase warrants.
Three reports on Form 8-K were filed after December 31, 2000 but prior to
the filing of this Form 10-K. A report on Form 8-K dated January 2, 2001
was filed regarding the number of publicly traded common stock purchase
warrants that were exercised in total and the amount of proceeds received.
A report on Form 8-K dated February 27, 2001 was filed regarding year end
financial results for the year 2000 and a summary of major year 2000
achievements. A report on Form 8-K dated March 14, 2001 was filed regarding
the commencement of enrollment of a Phase II clinical trial to evaluate the
use of Argatroban in ischemic stroke.
All schedules have been omitted since the information is not required or is
not material to require submission of the schedule, or because the
information is included in the financial statements or the notes thereto.
34
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Houston
and State of Texas on the 2nd day of April, 2001.
TEXAS BIOTECHNOLOGY CORPORATION
By: /s/ STEPHEN L. MUELLER
-------------------------------
Stephen L. Mueller
Vice President, Finance and Administration,
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons and in the capacities
indicated on the 2nd day of April, 2001.
SIGNATURE TITLE
/s/ JOHN M. PIETRUSKI Chairman of the Board of Directors
- ----------------------------------
John M. Pietruski
/s/ DAVID B. MCWILLIAMS Director, President and Chief Executive
- ---------------------------------- Officer (Principal Executive Officer)
David B. McWilliams
/s/ RICHARD A.F. DIXON Director and Senior Vice President, Research and
- ---------------------------------- Chief Scientific Officer
Richard A.F. Dixon, Ph.D.
/s/ STEPHEN L. MUELLER Vice President, Finance and Administration,
- ---------------------------------- Secretary and Treasurer (Principal Financial
Stephen L. Mueller and Accounting Officer)
/s/ RON J. ANDERSON Director
- ----------------------------------
Ron J. Anderson, M.D.
/s/ FRANK C. CARLUCCI Director
- ----------------------------------
Frank C. Carlucci
/s/ ROBERT J. CRUIKSHANK Director
- ----------------------------------
Robert J. Cruikshank
/s/ SUZANNE OPARIL, M.D. Director
- ----------------------------------
Suzanne Oparil, M.D.
/s/ JAMES A. THOMSON Director
- ----------------------------------
James A. Thomson, Ph.D.
/s/ JAMES T. WILLERSON Director
- ----------------------------------
James T. Willerson, M.D.
35
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Texas Biotechnology Corporation:
We have audited the accompanying consolidated balance sheets of Texas
Biotechnology Corporation and subsidiaries (the "Company") as of December 31,
2000 and 1999, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 Texas
Biotechnology Corporation and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Houston, Texas
February 26, 2001
F-1
38
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31,
------------------------------
2000 1999
------------- -------------
Current assets:
Cash and cash equivalents .................................................... $ 48,469,646 $ 2,804,270
Short-term investments ....................................................... 39,067,999 11,366,066
Accounts receivable .......................................................... 237,411 --
Other current receivables .................................................... 626,109 1,067,738
Receivable from related party under collaborative arrangement ................ 882,157 --
Prepaid expenses ............................................................. 1,349,264 1,453,090
------------- -------------
Total current assets ................................................. 90,632,586 16,691,164
Long-term investments .......................................................... 4,995,000 1,000,000
Equipment and leasehold improvements, net ...................................... 2,367,965 2,998,431
Intangible and other assets .................................................... 972,869 115,096
------------- -------------
Total assets ......................................................... $ 98,968,420 $ 20,804,691
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 942,013 $ 556,664
Accounts expenses ............................................................ 3,620,517 1,657,706
Deferred revenue ............................................................. 1,029,176 --
------------- -------------
Total current liabilities ............................................ 5,591,706 2,214,370
Liability to related party ..................................................... 1,376,303 --
Deferred revenue from related party ............................................ 1,209,302 --
Deferred revenue from unrelated parties ........................................ 2,181,816 --
Other deferred credit .......................................................... 2,620,010 --
Minority interest in Revotar ................................................... 1,962,273 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.005 per share. At December 31, 2000,
5,000,000 shares authorized; none outstanding. At December 31,
1999, 5,000,000 shares authorized; none outstanding ....................... -- --
Common stock, par value $.005 per share. At December 31,
2000, 75,000,000 shares authorized; 41,203,197 shares
issued and outstanding. At December 31, 1999,
75,000,000 shares authorized; 34,392,909 shares issued and outstanding .... 206,016 171,964
Additional paid-in capital ................................................... 189,390,790 118,317,599
Other comprehensive loss ..................................................... (15,341) --
Accumulated deficit .......................................................... (105,554,455) (99,899,242)
------------- -------------
Total stockholders' equity ........................................... 84,027,010 18,590,321
------------- -------------
Total liabilities and stockholders' equity ........................... $ 98,968,420 $ 20,804,691
============= =============
See accompanying notes to consolidated financial statements.
F-2
39
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
Research agreements ..................................... $ 3,889,596 $ 2,082,924 $ 2,251,681
Collaborative research and development from
related party ..................................... 1,123,035 -- --
License fee and milestone income ........................ 10,445,938 -- --
Royalty income, net ..................................... 233,850 -- --
------------ ------------ ------------
Total revenues .................................. 15,692,419 2,082,924 2,251,681
------------ ------------ ------------
Expenses:
Research and development ................................ 13,011,374 12,793,282 14,122,671
Charge for purchase of in-process research and
development .......................................... -- -- 133,875
Amortization expense
52,692 -- --
General and administrative .............................. 7,001,254 5,798,966 4,597,014
Equity in loss of affiliate ............................. 3,487,500 -- --
------------ ------------ ------------
Total expenses .................................. 23,552,820 18,592,248 18,853,560
------------ ------------ ------------
Operating loss .................................. (7,860,401) (16,509,324) (16,601,879)
Investment income, net .................................. 4,362,262 1,211,981 2,087,707
------------ ------------ ------------
Net loss before minority interest ............... (3,498,139) (15,297,343) (14,514,172)
Minority interest in loss of Revotar .................... 209,160 -- --
------------ ------------ ------------
Net loss before cumulative effect of
change in accounting principle .............. (3,288,979) (15,297,343) (14,514,172)
Cumulative effect of change in accounting principle ..... (2,366,234) -- --
------------ ------------ ------------
Net loss ........................................ (5,655,213) (15,297,343) (14,514,172)
Preferred dividend requirement ............................ -- -- (1,690)
------------ ------------ ------------
Net loss applicable to common shares ............ $ (5,655,213) $(15,297,343) $(14,515,862)
============ ============ ============
Other comprehensive loss:
Unrealized loss on investment in securities ............. $ (10,330) $ -- $ --
Foreign currency translation adjustments ................ (5,011) -- --
------------ ------------ ------------
Total other comprehensive loss .................. (15,341) -- --
Comprehensive loss .............................. $ (5,670,554) $(15,297,343) $(14,515,862)
============ ============ ============
Net loss per share basic and diluted ...................... $ (0.14) $ (0.45) $ (0.43)
============ ============ ============
Weighted average common shares used to compute basic
and diluted net loss per share ....................... 39,149,882 34,226,224 33,930,276
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
40
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
PREFERRED STOCK COMMON STOCK
--------------- -------------------- ADDITIONAL TOTAL
SHARES SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- -------- ------------ ------------- -------------
Balance at January 1, 1998 ............... 300 $ 2 33,585,919 $167,929 $116,085,172 $ (70,086,037) $ 46,167,066
Issuance of common stock for
stock option exercises ................. -- -- 127,947 640 322,141 -- 322,781
Issuance of common stock for
warrant exercises ...................... -- -- 304,850 1,524 1,091,335 -- 1,092,859
Issuance of common stock in
lieu of board fees ..................... -- -- 4,506 23 21,876 -- 21,899
Conversion of preferred stock
into common shares ..................... (300) (2) 64,795 324 13,280 -- 13,602
Issuance of common stock to Hedral
Therapeutics, Inc. pursuant to
contract .............................. -- -- 40,000 200 133,675 -- 133,875
Net loss ................................. -- -- -- -- -- (14,514,172) (14,514,172)
Preferred dividends ...................... -- -- -- -- -- (1,690) (1,690)
----- ----- ---------- -------- ------------ ------------- -------------
Balance at December 31, 1998 ........... -- $ -- 34,128,017 $170,640 $117,667,479 $ (84,601,899) $ 33,236,220
Issuance of common stock for
stock option exercises ................. -- -- 257,720 1,289 514,541 -- 515,830
Issuance of common stock for
warrant exercises ...................... -- -- 1,400 7 11,809 -- 11,816
Issuance of common stock in
lieu of board fees ..................... -- -- 5,772 28 23,877 -- 23,905
Compensation expense related to
stock options .......................... -- -- -- -- 99,893 -- 99,893
Net loss ................................. -- -- -- -- -- (15,297,343) (15,297,343)
----- ----- ---------- -------- ------------ ------------- -------------
Balance at December 31, 1999 ........... -- $ -- 34,392,909 $171,964 $118,317,599 $ (99,899,242) $ 18,590,321
(Continued)
F-4
41
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
PREFERRED STOCK COMMON STOCK
--------------- -------------------- ADDITIONAL OTHER
SHARES SHARES PAID-IN COMPREHENSIVE ACCUMULATED
ISSUED AMOUNT ISSUED AMOUNT CAPITAL CAPITAL DEFICIT
------ ------ ---------- -------- ------------ ------------- -------------
Balance at December 31, 1999 ............. -- $ -- 34,392,909 $171,964 $118,317,599 $ -- $ (99,899,242)
Issuance of common stock in
public offering ....................... -- -- 5,584,591 27,923 65,205,984 -- --
Issuance of common stock for
stock option exercises ................. -- -- 618,904 3,095 2,318,788 -- --
Issuance of common stock for
warrant exercises ...................... -- -- 531,128 2,656 2,537,112 -- --
Issuance of common stock in
lieu of board fees ..................... -- -- 2,236 11 29,903 -- --
Issuance of common stock in
payment for consulting services ........ -- -- 2,000 10 15,791 -- --
Issuance of common stock in
payment for research and development ... -- -- 71,429 357 965,613 -- --
Net loss ................................. -- -- -- -- -- -- (5,655,213)
Change in other comprehensive loss ....... -- -- -- -- -- (15,341) --
----- ----- ---------- -------- ------------ ------------- -------------
Balance at December 31, 2000 ............. -- $ -- 41,203,197 $206,016 $189,390,790 $ (15,341) $(105,554,455)
===== ===== ========== ======== ============ ============= =============
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance at December 31, 1999 ............. $ 18,590,321
Issuance of common stock in
public offering ....................... 65,233,907
Issuance of common stock for
stock option exercises ................. 2,321,883
Issuance of common stock for
warrant exercises ...................... 2,539,768
Issuance of common stock in
lieu of board fees ..................... 29,914
Issuance of common stock in
payment for consulting services ........ 15,801
Issuance of common stock in
payment for research and development ... 965,970
Net loss ................................. (5,655,213)
Change in other comprehensive loss ....... (15,341)
-------------
Balance at December 31, 2000 ............. $ 84,027,010
=============
See accompanying notes to consolidated financial statements.
F-5
42
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $ (5,655,213) $ (15,297,343) $ (14,514,172)
Adjustments to reconcile net loss to net cash
provided by (used in) in operating activities:
Depreciation and amortization ................................ 998,628 890,822 806,251
Equity in loss of affiliate .................................. (3,487,500) -- --
Minority interest in loss of Revotar ......................... (209,160) -- --
Charge for purchase of in-process research and
development ................................................ -- -- 133,875
Expenses paid with stock ..................................... 45,715 23,905 21,899
Compensation expense related to stock options ................ -- 99,893 --
Preferred dividends payable not included in net loss ......... -- -- 11,912
Loss on disposition of fixed assets .......................... 8,241 227 11,620
Change in operating assets and liabilities:
(Increase) in accounts receivable ............................ (237,411) -- --
(Increase) decrease in prepaid expenses ...................... 103,826 (489,500) (410,005)
(Increase) decrease in other current receivables ............. 441,629 359,221 (251,679)
(Increase) decrease in receivable from related
party under collaborative agreement ....................... (882,157) 10,400 --
(Increase) decrease in other assets .......................... 55,505 (55,505) --
Increase (decrease) in accounts payable and
accrued expenses .......................................... 2,348,160 (655,390) 238,544
Increase in liability to related party ....................... 4,863,803 -- --
Increase in deferred revenue from unrelated parties .......... 2,727,273 -- --
Increase in deferred revenue from related party .............. 1,693,021 -- --
------------- ------------- -------------
Net cash provided by (used in) operating activities ..... 2,814,360 (15,113,270) (13,951,755)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold
improvements ................................................. (323,711) (620,773) (798,247)
Proceeds from disposition of equipment and
leasehold improvements ....................................... -- 731 3,000
Purchase of investments ......................................... (104,142,593) (17,184,214) (54,391,953)
Maturity of investments ......................................... 72,995,633 30,826,040 57,455,360
Decrease (increase) in interest receivable included
in short-term and long-term investments ...................... (565,314) 191,199 121,293
------------- ------------- -------------
Net cash provided by (used in) investing activities ..... (32,035,985) 13,212,983 2,389,453
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution from minority interest in consolidated subsidiary .... 4,791,443 -- --
Proceeds from sale of common stock, net .......................... 65,233,907 -- --
Proceeds from issuance of common stock and option
and warrant exercises, net ................................... 4,861,651 527,646 1,415,640
------------- ------------- -------------
Net cash provided by financing activities ............... 74,887,001 527,646 1,415,640
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents .... 45,665,376 (1,372,641) (10,146,662)
Cash and cash equivalents at beginning of year .................... 2,804,270 4,176,911 14,323,573
------------- ------------- -------------
Cash and cash equivalents at end of year .......................... $ 48,469,646 $ 2,804,270 $ 4,176,911
============= ============= =============
Supplemental schedule of noncash financing
activities: Issuance of Common Stock for research
and development, license fee and services ....................... $ 1,011,685 $ 23,905 $ 155,774
============= ============= =============
See accompanying notes to consolidated financial statements.
F-6
43
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Texas Biotechnology Corporation (the "Company" or "TBC"), a Delaware
Corporation, is a biopharmaceutical company focused on the discovery,
development and commercialization of novel synthetic small molecule compounds
for the treatment of a variety of cardiovascular, vascular and related
inflammatory diseases. Since its formation in 1989, the Company has been engaged
principally in research and drug discovery programs and clinical development of
certain drug compounds. On July 25, 1994, the Company acquired all of the
outstanding common stock of ImmunoPharmaceutics, Inc. ("IPI") in exchange for
common stock, par value $.005 per share (the "Common Stock"), of the Company. On
June 6, 2000, TBC, through its wholly owned subsidiary, TBC-ET, Inc., a Delaware
Corporation, and ICOS Corporation, a Delaware Corporation, ("ICOS") entered into
an agreement and formed ICOS-Texas Biotechnology L.P., a Delaware limited
partnership ("ICOS-TBC"), to develop and globally commercialize endothelin-A
receptor antagonists. TBC and ICOS are both 50% owners in ICOS-TBC. During the
third quarter of 2000, TBC formed Revotar Biopharmaceuticals AG ("Revotar"), a
German corporation, to conduct research and development for novel small molecule
compounds and to develop and commercialize TBC's selectin antagonists. The
Company retained a majority interest in Revotar. The Company is presently
working on a number of long-term development projects that involve experimental
and unproven technology, which may require many years and substantial
expenditures to complete, and which may be unsuccessful. Sales of the Company's
first product, for which it receives royalty income, Argatroban, began during
November 2000.
(b) Basis of Consolidation
The Company's consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries, IPI and TBC-ET, Inc., and its majority
controlled subsidiary, Revotar. All material intercompany balances and
transactions have been eliminated.
(c) Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments
Cash equivalents are considered to be those securities or instruments with
original maturities, when purchased, of three months or less. At December 31,
2000, approximately $993,550 was invested in demand and money market accounts.
Short-term investments are those investments which have an original maturity of
less than one year and greater than three months at the purchase date. At
December 31, 2000, the Company's short-term investments consisted of
approximately $5,000,000 in government agency discount bonds and $30,957,000 in
corporate commercial paper and loan participations. Long-term investments
consist of approximately $4,995,000 in government agency discount bonds with a
remaining maturity of one year or more. Cash equivalents, short-term and
long-term investments are stated at cost plus accrued interest, which
approximates market value. Interest income is accrued as earned. The Company
classifies all short-term and long-term investments as held to maturity.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation of furniture and equipment is
provided on the straight-line method over the estimated useful lives of the
respective assets (3 to 10 years). Amortization of leasehold improvements is
provided on the straight-line method over the remaining minimum lease term.
(e) Investment in ICOS-TBC
ICOS-TBC is accounted for using the equity method. Accordingly, the
investment is recorded at cost, adjusted for the Company's share of income or
loss of the entity and amortization of revenues for upfront and milestone
payments. See Note 8 below.
F-7
44
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(f) Research and Development Costs
All research and development costs are expensed as incurred and include
salaries of research and development employees, certain rent and related
building services, research supplies and services, clinical trial expenses and
other associated costs. With respect to research and development, salaries and
benefits for the years ended December 31, 2000, 1999 and 1998, totaled
approximately $8,010,000, $6,781,000 and $6,286,000, respectively, of which
approximately $5,474,000, $5,129,000 and $4,725,000, respectively, was charged
to research and development. Payments related to the acquisition of in-process
research and development are expensed as incurred.
(g) Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the net loss
applicable to common shares after preferred dividend requirements by the
weighted average number of common and common equivalent shares outstanding
during the period. For the years 2000, 1999 and 1998, there were no potential
common shares used in the calculation of weighted average common shares
outstanding. For the years ended December 31, 2000, 1999 and 1998, the weighted
average common shares used to compute basic net loss per common share totaled
39,149,882, 34,226,224 and 33,930,276, respectively. Securities convertible into
Common Stock comprised of stock options and warrants totaling 5,924,687,
7,985,191 and 7,989,266 shares at December 31, 2000, 1999 and 1998 respectively,
were not assumed in the calculation of diluted net loss per common share because
the effect would have been antidilutive.
(h) Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform with the December 31, 2000 presentation with no effect on
net loss previously reported.
(i) Revenue Recognition
Revenue from service contracts is recognized as services are performed.
Royalty revenue is recognized as products are sold by a licensee. As a result of
the Company's adoption at October 1, 2000, effective January 1, 2000, of Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB101"), promulgated by the United States Securities and Exchange Commission
("SEC") in December 1999, the Company defers the recognition of milestone
payments related to contractual agreements which are still in the developmental
stage. Such deferred revenues are amortized into income over the estimated
remaining developmental period. Milestone payments received under contractual
agreements which have completed the developmental stage are evaluated, and
either recognized into income when earned, or amortized over a future period,
depending upon whether or not the Company continues to have obligations under
the terms of the arrangement. License fees received under the terms of licensing
agreements for the Company's intellectual property are similarly deferred, and
amortized into income over the estimated developmental period of the licensed
item or items. Revenue from grants is recognized as earned under the terms of
the related grant agreements. Amounts received in advance of services being
performed under contracts are recorded as deferred revenue, and recognized as
services are performed.
(j) Patent Application Costs
Costs incurred in filing for patents are expensed as incurred.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.
(l) Intangible Assets
Intangible assets consist of purchased technologies and are amortized on a
straight-line basis over their estimated useful lives. The Company periodically
reviews the useful lives of its intangible and long-lived assets, which may
result in future adjustments to the amortization periods. Related amortization
expense for the year ended December 31, 2000 was $52,692. Amortization of
F-8
45
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
purchased technologies is included in amortization expense in the consolidated
statements of operations and comprehensive loss. As circumstances dictate, the
Company evaluates the recoverability of its intangible and long-lived assets by
comparing the projected undiscounted net cash flows associated with such assets
against their respective carrying values. Impairment, if any, is based on the
excess of the carrying value over the fair value.
(m) New Accounting Pronouncements
In December 1999, the SEC issued SAB101 Revenue Recognition in Financial
Statements. SAB101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company implemented SAB101 in the fourth quarter of the year
ended December 31, 2000. The adoption of SAB101 resulted in the deferral of
revenues of $2,872,000, comprised of license fees and milestone payment received
in the year ended December 31, 2000, which previously would have been recognized
when received. The effect on revenues in the current year was partially offset
by the additional loss totaling $2,366,000 from the cumulative effect, at
January 1, 2000, of the change in accounting principle resulting from the
deferred of certain license fees and milestone payments received in 1997. The
adoption of SAB101 also resulted in an increase in the Company's cumulative loss
for the years 1997 through 1999 of $2,366,000.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN44"), Accounting for Certain Transactions
involving Stock Compensation. The provisions of FIN44 which were effective July
1, 2000 have not had a material effect on the Company's financial position or
results of operations.
In June 1998, the FASB issued FASB Statement No. 133 ("SFAS 133"),
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS
No. 137 and SFAS No. 138. SFAS 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. We adopted
SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have a
material effect on our financial condition or results of operation because we,
historically, have not entered into derivative or other financial instruments
for trading or speculative purposes nor do we use or intend to use derivative
financial instruments or derivative commodity instruments.
(2) CAPITAL STOCK
In December 1993, the Company completed an initial public offering
comprised of 4,082,500 units, each unit consisting of one share of Common Stock
(par value $.005 per share) and one warrant to purchase one share of Common
Stock. Proceeds to the Company were approximately $24.2 million, net of selling
expenses of approximately $3.3 million. The securities included in the unit
subsequently separated into its Common Stock and warrant components. The
warrants are exercisable at $8.44 per share. On December 13, 1998, the
expiration date of the warrants was extended from December 14, 1998 to September
30, 1999 for those warrant holders electing such extension. On September 13,
1999, the expiration date of the warrants was further extended to December 31,
2000. There are 2,386,645 warrants outstanding as of December 31, 2000 which
were exercised on January 2, 2001 for proceeds of approximately $20.1 million.
The underwriter received approximately $2.9 million in commissions and expense
reimbursement and purchased options to purchase 355,000 units at an exercise
price of $11.14. These options were sold for $.001 each and expired on December
15, 1998.
In February 1996, the Company completed a private placement of Common
Stock. The Company issued 6,550,990 shares of Common Stock at $2.125 per share
with proceeds of approximately $13.0 million, net of selling commissions and
expenses of approximately $900,000. In connection with the private placement,
the Company paid selling commissions of $759,283 and issued 730,461 warrants to
purchase Common Stock. These warrants expired on February 13, 2001. The resale
of the underlying Common Stock is subject to certain registration rights.
On October 10, 1996 the Company signed a strategic alliance agreement and
Common Stock purchase agreement with LG Chemical, Ltd. ("LG Chemical"), a Korean
corporation. In conjunction with the agreement, LG Chemical purchased 1,250,000
shares of Common Stock for $4.00 per share for a total of $5 million. The
Company's agents in the contract negotiations received $420,000 in commissions
and 113,636 warrants to purchase Common Stock, expiring on October 10, 2001,
exercisable at $4.40 per share with the resale of the underlying Common Stock
being subject to certain piggyback registration rights.
On March 14, 1997, the Company completed a $6.0 million private placement
of 5% Cumulative Convertible Preferred Stock ("the 5% Preferred"), which
provided net proceeds to the Company of approximately $5.9 million. The 5%
Preferred was
F-9
46
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
convertible into Common Stock at discounts ranging from 6% to 17% from the
average of the daily low trading price of the Common Stock for the ten
consecutive trading days immediately preceding the conversion date. A total of
6,000 shares of 5% Preferred were sold at a price of $1,000 per share to two
institutional investors. During 1997 and 1998, all 6,000 shares of the 5%
Preferred and accrued dividends of $144,166 on such shares were converted into
1,408,944 shares of Common Stock.
During August 1997, the Company sold 176,992 shares of Common Stock for $1
million less commissions and expenses of approximately $34,000 pursuant to a
commercialization agreement. These shares are subject to certain registration
rights. See note 10.
In October 1997, the Company sold 5,750,000 shares of Common Stock for
$5.00 per share pursuant to an underwritten secondary public offering. The net
proceeds to the Company for the 5,750,000 shares sold were approximately $26.7
million after deducting selling commissions and expenses of approximately $2.1
million related to the offering.
In addition, during October 1997 the Company issued 214,286 shares of
Common Stock and a warrant to purchase 142,858 shares of Common Stock
exercisable at $14.00 per share until October 9, 2004, pursuant to a license
agreement. These shares are subject to certain registration rights. See Note 9.
In April 2000, the Company sold 5,750,000 shares of Common Stock for $12.50
per share in an underwritten public offering. The net proceeds to the Company
from this offering were approximately $65.2 million after deducting selling
commissions and expenses of approximately $4.6 million related to the offering
and approximately $2.1 million in proceeds allocable to selling shareholders.
On January 3, 2001, the Company issued an additional 2,386,645 shares as a
result of the exercise of public warrants issued in the initial public offering,
for which we received approximately $20.1 million.
(3) STOCK OPTIONS AND WARRANTS
The Company has in effect the following stock option plans:
The Amended and Restated 1990 Incentive Stock Option Plan ("1990 Plan")
allows for the issuance of incentive and non-qualified options to employees,
directors, officers, non-employee independent contractors and non-employee
directors, pursuant to which 190,495 shares of Common Stock are reserved for
issuance out of authorized but unissued shares of the Company.
The Amended and Restated 1992 Incentive Stock Option Plan ("1992 Plan")
allows for the issuance of incentive and non-qualified options to employees,
directors, officers, non-employee independent contractors and non-employee
directors, pursuant to which 910,029 shares of Common Stock are reserved for
issuance out of authorized but unissued shares of the Company.
The Amended and Restated Stock Option Plan for Non-Employee Directors
("Director Plan") allows for the issuance of non-qualified options to
non-employee directors, pursuant to which 34,242 shares of Common Stock are
reserved for issuance out of authorized but unissued shares of the Company to be
issued to non-employee members of the Board of Directors of the Company based on
a formula. No new issuances are being made under the Director Plan.
The Amended and Restated 1995 Stock Option Plan ("1995 Plan") allows for
the issuance of incentive and non-qualified options, shares of restricted stock
and stock bonuses to employees, officers, and non-employee independent
contractors, pursuant to which 1,619,636 shares of Common Stock are reserved for
issuance out of authorized but unissued shares of the Company.
The Amended and Restated 1995 Non-Employee Director Stock Option Plan
("1995 Director Plan") allows for the issuance of non-qualified options to
non-employee directors, pursuant to which 462,724 shares of Common Stock are
reserved for issuance out of authorized but unissued shares of the Company to be
issued to non-employee members of the Board of Directors of the Company based on
a formula. The Company's shareholders approved, at the annual shareholders
meeting in June 2000, an amendment to the 1995 Director Plan which increased the
number of shares of Common Stock reserved for issuance to 500,000 shares from
300,000 shares.
The 1999 Stock Incentive Plan ("1999 Plan") allows for the issuance of
incentive and non-qualified options, shares of restricted stock and stock
bonuses to directors, employees, officers and non-employee independent
contractors, pursuant to which 1,000,000 shares of Common Stock are reserved for
issuance out of authorized but unissued shares of the Company. During 2001, the
Board of Directors amended the 1999 Plan to allow a total of 3,000,000 shares of
Common Stock to be reserved for issuance.
F-10
47
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The amendment is subject to approval of the stockholders at the Company's annual
meeting in 2001.
A summary of stock options as of December 31, 2000, follows:
EXERCISE PRICE EXERCISED/ AVAILABLE
STOCK OPTION PLANS PER SHARE AUTHORIZED OUTSTANDING OTHER EXERCISABLE FOR GRANT
------------------ --------------- ---------- ----------- ---------- ----------- ---------
1990 Plan............ $ 1.38 - $21.59 285,715 190,495 95,220 140,495 --
1992 Plan............ $ 1.41 - $21.59 1,700,000 908,213 789,971 659,934 1,816
Director Plan........ $ 3.50 - $ 4.54 71,429 34,242 37,187 34,242 --
1995 Plan............ $ 1.31 - $21.59 2,000,000 1,579,270 380,364 1,125,606 40,366
1995 Director Plan... $ 1.38 - $11.31 500,000 259,096 37,276 207,096 203,628
1999 Plan............ $ 20.13 1,000,000 181,000 -- -- 819,000
---------- ----------- ---------- ---------- ---------
TOTALS........ 5,557,144 3,152,316 1,340,018 2,167,373 1,064,810
========== =========== ========== ========== =========
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans. Had compensation costs for the Company's
stock-based compensation plans been determined consistent with SFAS No. 123, the
Company's pro forma net loss and pro forma net loss applicable to common shares
for the year ended December 31, 2000 would have been $8,604,873 and $0.22,
respectively, for December 31, 1999, would have been $17,178,428 and $0.50,
respectively and for December 31, 1998 would have been $16,758,119 and $0.49,
respectively.
The fair value of options granted during the years ended December 31, 2000,
1999 and 1998 for employee services were estimated on the date of grant using
the Black-Scholes Pricing Model with the following weighted average assumptions:
risk-free interest rate of between 4.45 and 6.63 percent, expected life of
between 2 and 7 years, expected volatility of between 57 and 77 percent and no
dividends.
A summary of the status of the Company's stock option plans as of December
31, 2000, 1999 and 1998 and the changes during the years then ended is presented
below:
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
Outstanding at January 1, 1998 ...... 2,862,016 $ 3.85
Granted ........................... 850,025 6.41
Canceled .......................... (250,800) 5.60
Exercised ......................... (127,947) 2.52
---------
Outstanding at December 31, 1998 .... 3,333,294 4.42
Granted ........................... 441,050 4.27
Canceled .......................... (292,405) 5.13
Exercised ......................... (257,720) 2.51
---------
Outstanding at December 31, 1999 .... 3,224,219 4.53
---------
Granted ........................... 624,160 18.66
Canceled .......................... (77,159) 9.13
Exercised ......................... (618,904) 3.75
---------
Outstanding at December 31, 2000 .... 3,152,316 $ 7.36
=========
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Weighted-average fair value of options granted during
the period at an exercise price equal to market at
issue date............................................... $12.26 $2.16 $4.06
F-11
48
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following tables summarize information about the Company's stock
options outstanding as of December 31, 2000, 1999 and 1998, respectively:
WEIGHTED WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE
OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE
EXERCISE PRICE AS OF 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/00 OF EXERCISABLE
- --------------- -------------- ---------------- -------------- -------------- --------------
$ 1.31 - $ 3.50 638,719 2.86 $ 2.64 637,886 $ 2.64
$ 3.51 - $ 5.88 1,459,624 6.09 $ 4.83 1,208,453 $ 4.98
$ 5.89 - $ 8.13 451,146 7.17 $ 7.19 297,282 $ 7.19
$ 8.14 - $21.59 602,827 9.36 $ 18.63 23,752 $ 13.86
-------------- --------------
$ 1.31 - $21.59 3,152,316 6.22 $ 7.36 2,167,373 $ 4.69
============= ==============
WEIGHTED WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE
OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE
EXERCISE PRICE AS OF 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/99 OF EXERCISABLE
- --------------- -------------- ---------------- -------------- -------------- --------------
$ 1.31 - $ 3.50 890,096 3.77 $ 2.33 888,430 $ 2.33
$ 3.51 - $ 5.88 1,793,473 6.92 $ 4.81 1,187,886 $ 4.93
$ 5.89 - $ 8.13 540,650 8.17 $ 7.20 205,741 $ 7.20
-------------- -------------
$ 1.31 - $ 8.13 3,224,219 6.26 $ 4.53 2,282,057 $ 4.12
============== =============
WEIGHTED WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE
OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE
EXERCISE PRICE AS OF 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/98 OF EXERCISABLE
- --------------- -------------- ---------------- -------------- -------------- --------------
$ 1.31 - $ 3.50 1,141,454 4.27 $ 2.23 1,126,954 $ 2.21
$ 3.51 - $ 5.88 1,640,190 7.21 $ 5.01 976,128 $ 4.95
$ 5.89 - $ 8.13 551,650 9.17 $ 7.20 38,167 $ 7.19
-------------- -------------
$ 1.31 - $ 8.13 3,333,294 6.53 $ 4.42 2,141,249 $ 3.55
============== =============
The fair value of warrants issued during the year ended December 31, 1999
for other than employee services was estimated on the date of grant using the
Black-Scholes Pricing Model with the following weighted average assumptions:
risk-free interest rate of between 6.12 and 6.63 percent, expected life of
between 3 and 7 years, expected volatility of between 57 and 75 percent and no
dividends. Several existing warrants were exchanged by the original holder for
the benefit of a new holder with terms identical to those of the original.
F-12
49
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the status of the Company's warrants as of December 31, 2000,
1999 and 1998, and changes during the years then ended is presented below:
WEIGHTED-AVERAGE
WARRANTS EXERCISE PRICE
---------- ----------------
Outstanding at January 1, 1998 ...... 5,084,304 $7.80
Issued ............................ -- --
Forfeited ......................... (40,662) 3.50
Canceled .......................... (4,366,218) 8.14
Exercised ......................... (304,850) 3.58
Reissued .......................... 4,283,398 8.13
----------
Outstanding at December 31, 1998 .... 4,655,972 8.10
Issued ............................ 105,000 4.25
Forfeited ......................... -- --
Canceled .......................... (54,773) 3.60
Exercised ......................... (1,400) 8.44
Reissued .......................... 56,173 3.60
----------
Outstanding at December 31, 1999 .... 4,760,972 8.01
Issued ............................ -- --
Forfeited ......................... -- --
Canceled .......................... (1,457,473) 8.37
Exercised ......................... (531,128) 4.76
Reissued .......................... -- --
----------
Outstanding at December 31, 2000 .... 2,772,371 $8.33
==========
On November 12, 1998, the Company announced an extension of the exercise
period of the Company's publicly traded redeemable common stock purchase
warrants from December 14, 1998 to September 30, 1999 for those warrant holders
electing such extension. On September 13, 1999, the expiration date of the
warrants was further extended to December 31, 2000. These publicly traded
warrants comprise 2,386,645 of the 2,772,371 warrants outstanding at December
31, 2000. The exercise price of $8.44 remained unchanged. On January 3, 2001,
publicly traded warrants to purchase 2,386,645 shares were exercised and the
Company received cash proceeds of $20,143,000.
The warrants issued in 1999 were granted in connection with non-employee
services at an exercise price equal to market price at issue date.
(4) INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-13
50
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 2000 and 1999, the net deferred tax asset, representing
primarily net operating loss carryforwards and start-up costs deferred for tax
purposes, totaled approximately $39,234,000 and $35,235,000, respectively. The
Company has established a valuation allowance for the full amount of these
deferred tax assets, as management believes that it is not more likely than not
that the Company will recover these assets. The Company did not incur any tax
expense in any year due to operating losses and the related increase in the
valuation allowance.
At December 31, 2000, 1999 and 1998, the Company had net operating loss
carryforwards of approximately $68,955,000, $64,443,000 and $54,255,000,
respectively, for federal income tax return purposes. Utilization of the
Company's net operating loss carryforwards is subject to certain limitations due
to specific stock ownership changes which have occurred or may occur. To the
extent not utilized, the carryforwards will expire during the years beginning
2002 through 2020.
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Laboratory and office equipment ................... $6,069,207 $5,760,113
Leasehold improvements ............................ 3,923,687 3,974,942
---------- ----------
9,992,894 9,735,055
Less accumulated depreciation and amortization .... 7,624,929 6,736,624
---------- ----------
$2,367,965 $2,998,431
========== ==========
(6) COMMON STOCK RESERVED
The Company has reserved Common Stock for issuance as of December 31, 2000
as follows:
Stock option plans........................ 4,217,126
Publicly traded warrants outstanding...... 2,386,645
Other warrants outstanding................ 385,726
---------
Total shares reserved........... 6,989,497
=========
(7) RESEARCH AGREEMENTS
On October 10, 1996, the Company signed a strategic alliance agreement with
LG Chemical, a Korean corporation, to develop and market compounds derived from
the Company's endothelin receptor antagonist and selectin antagonist programs
for certain disease indications. Upon consummation of the transaction, LG
Chemical purchased 1,250,000 shares of Common Stock for $4.00 per share for a
total of $5 million. In addition, LG Chemical has committed to pay $10.7 million
in research payments. Of this amount, $8.1 million has been paid and $1.3
million will be paid on June 30 and December 31, 2001. Effective June 6, 2000,
the Company assigned one-half of the research payment to ICOS-TBC which amounts
to $577,000, before commissions, during the year 2000. LG Chemical has the right
to terminate future research payments if TBC fails to meet certain milestones,
which milestones will be established by the parties from time to time in
accordance with the agreement. LG Chemical will pay royalties to TBC, based on
net sales, in those geographic areas covered by the agreement, which include
Korea, China, India and certain other Asian countries, excluding Japan. The
Company will pay its agents in the contract negotiations, a commission on all
future research payments as well as a royalty on net sales.
During 1998, the Company entered into an agreement to license rights to
certain technology related to the research programs licensed from Hedral
Therapeutics, Inc. Upon execution of the agreement, the Company paid a license
fee of 40,000 shares of restricted Common Stock valued at $133,875. The
agreement includes a total of 40,000 additional shares of Common Stock to be
paid upon reaching certain milestones and cash royalty payments based on net
sales in the event a product is developed and commercialized under this
agreement.
F-14
51
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under the terms of the Company's agreement with ICOS-TBC, the Company will
provide, and be reimbursed for, research and development activities conducted on
behalf of ICOS-TBC. During the year ended December 31, 2000, the Company
incurred direct research and development costs of $4,623,000 and, pursuant to
its agreement with ICOS-TBC, billed such costs to ICOS-TBC. The Company's
revenues for the year ended December 31, 2000 included $1,123,000 of TBC
personnel time charged to ICOS-TBC. The remaining $3,500,000 of such costs was
recorded as a receivable from a related party under a collaborative arrangement
of which $882,000 remains at December 31, 2001. Also see Note 8, License
Agreements, below.
The Company also receives reimbursement for certain research costs pursuant
to its agreements with GlaxoSmithKline ("GSK") (Note 10), Schering-Plough (Note
8) and Revotar (Note 9).
(8) LICENSE AGREEMENTS
Mitsubishi-Tokyo Pharmaceuticals Agreement
TBC has entered into an agreement with Mitsubishi-Tokyo Pharmaceuticals
("Mitsubishi") to license Mitsubishi's rights and technology relating to
Argatroban and to license Mitsubishi's own proprietary technology developed with
respect to Argatroban (the "Mitsubishi Agreement"). Under the Mitsubishi
Agreement, the Company has an exclusive license to use and sell Argatroban in
the U.S. and Canada for all specified indications. The Company is required to
pay Mitsubishi specified royalties on net sales of Argatroban by the Company and
its sublicensees after its commercial introduction in the U.S. and Canada.
Either party may terminate the Mitsubishi Agreement on 60 days notice if the
other party defaults in its material obligations under the agreement, declares
bankruptcy or is insolvent, or if a substantial portion of its property is
subject to levy. Unless terminated sooner pursuant to the above described
termination provisions, the Mitsubishi Agreement expires on the later of
termination of patent rights in a particular country or 20 years after first
commercial sale of products. Under the Mitsubishi Agreement, TBC has access to
an improved formulation patent granted in 1993 which expires in 2010 and a use
patent which expires in 2009. During 2000, we signed an additional agreement
with Mitsubishi that provides TBC with royalties on sales of Argatroban in
certain European countries, up to a total of $5.0 million in milestones for
the development of ischemic stroke and certain other provisions. In conjunction
with the Mitsubishi Agreement, a consulting firm involved in negotiations
related to the agreement will receive a percentage of net sales received as a
result of the agreement.
Mitsubishi further agreed to supply the Company with its requirements of
bulk Argatroban throughout the term of the Mitsubishi Agreement for TBC's
clinical testing and commercial sales of Argatroban in the U.S. and Canada. In
the event Mitsubishi should discontinue the manufacture of Argatroban,
Mitsubishi and TBC have agreed to discuss in good faith the means by which, and
the party to whom, Argatroban production technology will be transferred. The
transferee may be a person or entity other than TBC. At present, Mitsubishi is
the only manufacturer of Argatroban. See Note 10.
In exchange for the license to the Genentech, Inc, (the "Former Licensor")
Argatroban technology, TBC issued the Former Licensor 285,714 shares of Common
Stock during 1993 and issued an additional 214,286 shares of Common Stock on
October 9, 1997, after acceptance of the filing of the first New Drug
Application ("NDA") with the United States Food and Drug Administration (the
"FDA") for Argatroban. On June 30, 2000, the Company issued an additional 71,429
shares of Common Stock to Genentech in conjunction with the approval of the NDA
for Argatroban in patients with HIT. The value of $965,970 has been recorded as
an intangible asset and is being amortized over the estimated useful life of the
asset. Amortization expense recorded in 2000 was $52,692 and will be
approximately $106,000 annually in future periods. Additionally, on October 9,
1997, upon acceptance of the filing of the first NDA for Argatroban with the
FDA, the Company granted the Former Licensor a warrant to purchase an additional
142,858 shares of Common Stock at an exercise price of $14.00 per share, subject
to adjustment, which expires on October 9, 2004. TBC has also granted the Former
Licensor demand and piggyback registration rights with regard to shares of
Common Stock issued to the Former Licensor.
During the third quarter of 1997, the Company sublicensed certain rights to
Argatroban to GSK. In conjunction with this agreement, the Company agreed to
make certain payments to Mitsubishi, which are included in research and
development expense, to pay an additional royalty to Mitsubishi, beginning
January 1, 2002 and to provide access to certain Argatroban clinical data to
Mitsubishi in certain circumstances. In certain circumstances, Mitsubishi and
TBC will share equally in all upfront payments and royalties should Mitsubishi
use TBC's regulatory documents and data for registration in certain territories.
See Note 10.
F-15
52
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ICOS Corporation Partnership
Pursuant to the terms of the limited partnership agreement for ICOS-TBC,
TBC and ICOS will equally fund the cost of research and development of
sitaxsentan and second-generation endothelin antagonist compounds, commercialize
resulting products, and share equally in the profits from this worldwide
collaboration. ICOS made an upfront payment and will make milestone payments to
ICOS-TBC that together could be as much as $55.5 million for the development and
commercialization of products resulting from the collaboration. The immediate
focus of ICOS-TBC will be to initiate a Phase IIb/III pulmonary hypertension
clinical trial for sitaxsentan, continue clinical development for sitaxsentan in
chronic heart failure, and explore applications for second-generation endothelin
antagonists including TBC3711.
On June 6, 2000, ICOS and the Company entered into the ICOS-TBC limited
partnership agreement. The partnership will seek to develop and globally
commercialize ET(A) receptor antagonists. As a result of our contribution of
technology, ICOS-TBC paid a license fee to us in June 2000, and will make
additional milestone payments to us that together could be as much as $55.5
million for the development and commercialization of products resulting from the
collaboration. The license fee is being amortized over the estimated development
period of the licensed technology and the Company recognized approximately
$307,000 of it as revenue during 2000.
Pursuant to the terms of the limited partnership agreement, ICOS-TBC has
been initially capitalized by a cash contribution from ICOS and the Company's
contribution of intellectual property associated with sitaxsentan sodium. The
intellectual property contributed by the Company to ICOS-TBC had no basis for
financial reporting purposes and, accordingly, the Company assigned no value to
the transfer of technology. Upon the transfer of its technology to ICOS-TBC, the
Company received a license fee, which is being amortized into revenue over the
expected developmental period of sitaxsentan sodium. See Note 1 (i), Revenue
Recognition, above.
During the year ended December 31, 2000, the Company recognized a loss of
$3,487,500, representing the Company's proportionate share of the losses of
ICOS-TBC, including amounts billed by the Company to ICOS-TBC of $4,623,000, as
discussed in Note 7, Research Agreements, above. The loss of ICOS-TBC also
includes, and is partially offset by, the assignment by the Company to ICOS-TBC
of $577,000 in research reimbursement funds from LG Chemical.
On June 30, 2000, TBC and Schering-Plough entered into a worldwide research
collaboration and license agreement to discover, develop and commercialize VLA-4
antagonists. VLA-4 antagonists represent a new class of compounds that has shown
promise in multiple preclinical animal models of asthma. The primary focus of
the collaboration will be to discover orally available VLA-4 antagonists as
treatments for asthma.
Schering-Plough Research Collaboration and License Agreement
Under the terms of the agreement, Schering-Plough obtains the exclusive
worldwide rights to develop, manufacture and market all compounds from TBC's
library of VLA-4 antagonists, as well as the rights to a second integrin
antagonist. TBC will be responsible for optimizing a lead compound and
additional follow-on compounds. Schering-Plough is supporting research at TBC
and will be responsible for all costs associated with the worldwide product
development program and commercialization of the compound. In addition to
reimbursing research costs, Schering-Plough paid an upfront license fee and will
pay development milestones and royalties on product sales resulting from the
agreement. This upfront license fee is being amortized into revenue over the
expected development period. Total payments to TBC for both programs, excluding
royalties, could reach $87.0 million.
(9) FOREIGN SUBSIDIARY
During the third quarter 2000, TBC formed Revotar to conduct research and
development of novel small molecule compounds and to develop and commercialize
selectin antagonists. Upon formation, Revotar received certain development and
commercialization rights to the Company's selectin antagonist compounds as well
as rights to certain other TBC research technology. Revotar also received
approximately $5 million in funding from three German venture capital funds. The
Company retained ownership of approximately 55% of the outstanding common stock
of Revotar and has consolidated the financial results of Revotar into TBC's
consolidated financial statements. Since the developmental and commercialization
rights contributed by the Company to Revotar had no basis for financial
reporting purposes, the Company assigned no value to its contribution of
intellectual property rights. The Company's equity in the originally contributed
assets by the minority shareholders is reported as a deferred credit of
$2,620,010 on the consolidated balance sheet at December 31, 2000. The minority
interest in Revotar at
F-16
53
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2000, was $1,962,273. The Company's consolidated net loss for the
year ended December 31, 2000 was reduced $209,160 by the Revotar minority
shareholders' approximately 45% interest in Revotar's loss.
(10) COMMERCIALIZATION AGREEMENT
In connection with TBC's development and commercialization of Argatroban,
in August 1997, TBC entered into a Product Development, License and CoPromotion
Agreement with GSK (the "SmithKline Agreement") whereby GSK was granted
exclusive rights to work with TBC in the development and commercialization of
Argatroban in the U.S. and Canada for specified indications. GSK paid $8.5
million in upfront license fees during August 1997, a $5 million milestone
payment in October 1997, and a $7.5 million milestone payment in June 2000.
Additional milestone payments may be earned upon the clinical development and
FDA approval for the acute myocardial infarction indication. Future milestone
payments for the acute myocardial infarction indication are subject to GSK's
agreement to market Argatroban for such indication. The parties have also formed
a joint development committee to analyze the development of additional
Argatroban indications to be funded 60% by GSK except for certain Phase IV
trials which shall be funded entirely by GSK. At this time, GSK has no plans to
conduct development work for the acute myocardial infarction and stroke
indications. TBC began a Phase II clinical trial in March 2001 to evaluate the
use of Argatroban for ischemic stroke. GSK has the exclusive right to
commercialize all products arising out of the collaboration, subject to the
obligation to pay royalties on net sales to TBC and to the rights of TBC to
co-promote these products through its own sales force in certain circumstances.
TBC will retain the rights to any indications which GSK determines it does not
wish to pursue, subject to the requirement that TBC must use its own sales force
to commercialize any such indications. Any indications which TBC elects not to
pursue will be returned to Mitsubishi. In conjunction with the GSK Agreement, a
consulting firm involved in negotiations related to the agreement will receive a
percentage of all consideration received by TBC as a result of the agreement.
At present, Mitsubishi is the only manufacturer of Argatroban, and has
entered into the Mitsubishi Supply Agreement with GSK to supply Argatroban in
bulk in order to meet GSK and TBC's needs under the GSK Agreement. Should
Mitsubishi fail during any consecutive nine-month period to supply GSK at least
80% of its requirements, and such requirements cannot be satisfied by existing
inventories, the Mitsubishi Supply Agreement provides for the nonexclusive
transfer of the production technology to GSK. If GSK cannot commence
manufacturing of Argatroban or alternate sources of supply are unavailable or
uneconomic, the Company's results of operations would be materially and
adversely affected.
The GSK Agreement generally terminates on a country by country basis upon
the earlier of the termination of TBC's rights under the Mitsubishi Agreement,
the expiration of applicable patent rights or, in the case of royalty payments,
the commencement of substantial third-party competition. GSK also has the right
to terminate the agreement on a country by country basis by giving TBC at least
three months written notice at any time before GSK first markets products in
that country based on a reasonable determination by GSK that the commercial
profile of the product in question would not justify continued development in
that country. GSK has similar rights to terminate the GSK Agreement on a country
by country basis after marketing has commenced. In addition, either party may
terminate the GSK Agreement on 60 days notice if the other party defaults in its
obligations under the agreement, declares bankruptcy or is insolvent.
In connection with the execution of the GSK Agreement, GSK purchased
176,992 shares of TBC's Common Stock for $1.0 million and additional 400,000
shares of Common Stock for $2.0 million in connection with the secondary public
offering, which closed on October 1, 1997.
(11) REGULATORY FILING
On, June 30, 2000, FDA issued an approval letter to the Company to market
Argatroban as an anticoagulant for prophylaxis or treatment of thrombosis in
patients with HIT.
(12) 401(k) PLAN
The Company adopted a 401(k) plan which became effective on September 1,
1993. Under the plan, all employees with three months of service are eligible to
participate in the plan and may contribute up to 15 percent of their
compensation, with a maximum of $10,500 per employee in 2000. Effective on
January 1, 2001, the Compensation Committee of the Board of Directors approved
an employer matching contribution of $0.50 on the dollar of employee
contributions up to 6% of salaries and the 401(k) plan was amended effective
January 1, 2001. Costs associated with administering the plan totaled
approximately $10,000 in 2000.
F-17
54
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) COMMITMENTS AND CONTINGENCIES
(a) Employment Agreements
Since inception, the Company has entered into employment agreements with
certain officers and key employees. The Company has signed agreements with five
of its officers to provide certain benefits in the event of a "change of
control" as defined in these agreements and the occurrence of certain other
events. The agreements provide for a lump-sum payment in cash equal to eighteen
months to three years of annual base salary and annual bonus, if any. The base
salary portion of the agreements would aggregate approximately $3.1 million at
the current rate of compensation. In addition, the agreements provide for
gross-up for certain taxes on the lump-sum payment, continuation of certain
insurance and other benefits for periods of eighteen months to three years and
reimbursement of certain legal expenses in conjunction with the agreements.
These provisions are intended to replace compensation continuation provisions of
any other agreement in effect for an officer if the specified event occurs.
(b) Lease Agreements
The Company renewed its lease agreement for the period January 1, 2001
through December 31, 2005. For the years ended December 31, 2000, 1999, and
1998, rent and related building services totaled approximately $1,101,000,
$1,027,000 and $958,000, respectively, of which approximately $945,000, $863,000
and $820,000, respectively, was charged to research and development expense.
Total committed annual lease payments from January 1, 2001 through the
expiration of the lease on December 31, 2005 equal $927,000 per year, subject to
adjustments based on certain variable building operating expenses. The Company
also leases parking spaces during the lease at the facility established rate
charged, which currently approximates $73,000 per annum. The lease also includes
a provision for the Company to pay certain additional charges to obtain
utilities and building services during off-business hours. Currently, the amount
of these charges is approximately $286,000 per annum, payable in monthly
installments. These charges are subject to annual adjustments based on the local
consumer price index.
(c) Foreign Currency Exchange Risk
The Company is exposed to market risk primarily from changes in foreign
currency exchange rates.
The Company has a majority-owned subsidiary in Berlin, Germany and
consolidates the results of operations into its consolidated financial results.
Although not significant to date, the Company's reported expenses and cash flows
from this subsidiary are exposed to changing exchange rates. The Company had an
intercompany receivable from our Berlin subsidiary at December 31, 2000; however
this amount is denominated in U.S. dollars and is not exposed to exchange risk.
The Company contracts with entities in other areas outside the U.S. that are
denominated in a foreign currency. To date, the currencies of these countries
have not fluctuated materially. At this time, management has not deemed it cost
effective to engage in a program of hedging the effect of foreign currency
fluctuations on the Company's operating results using derivative financial
instruments.
F-18
55
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data is summarized as follows:
Quarter Ended
----------------------------------------------------------------- Year Ended
March 31, June 30, September 30, December 31, December 31,
2000 2000 2000 2000 2000
------------ ------------ ------------ ------------ ------------
Total revenues $ 522,608 $ 11,249,147 $ 1,649,573 $ 2,271,091 $ 15,692,419
Net income (loss) before cumulative effect
of change in accounting principle (4,986,858) 5,997,529 (1,908,730) (3,304,198) (4,202,257)
Cumulative effect of change in
accounting principle -- -- -- (2,366,234) (2,366,234)
Net income (loss) $ (4,986,858) $ 5,997,529 $ (1,908,730) $ (5,670,432) $ (6,568,491)
============ ============ ============ ============ ============
Net income (loss) per common share:
basic $ (0.14) $ 0.15 $ (0.05) $ (0.14) $ (0.17)
and diluted $ (0.14) $ 0.14 $ (0.05) $ (0.14) $ (0.17)
Weighted average common shares
used to compute basic and 34,612,293 40,033,069 40,880,185 41,034,259 39,149,882
diluted net income (loss) per share 34,612,293 43,261,069 40,880,185 41,034,259 39,149,882
Adjustments to previously reported net
income (loss):
Reversal of charge for purchase
of in-process research and development -- 965,970 -- -- 965,970
Amortization expense -- -- (26,346) (26,346) (52,692)
Adjusted net income (loss) (4,986,858) 6,963,499 (1,935,076) (5,696,778) (5,655,213)
Adjusted net income (loss) per common share
basic $ (0.14) $ 0.17 $ (0.05) $ (0.14) $ (0.14)
and diluted $ (0.14) $ 0.16 $ (0.05) $ (0.14) $ (0.14)
Quarter Ended
----------------------------------------------------------------- Year Ended
March 31, June 30, September 30, December 31, December 31,
1999 1999 1999 1999 1999
------------ ------------ ------------ ------------ ------------
Total revenues $ 534,925 $ 495,130 $ 516,262 $ 536,607 $ 2,082,924
Net loss $ (3,578,837) $ (3,855,626) $ (3,898,236) $ (3,964,644) $(15,297,343)
============ ============ ============ ============ ============
Net loss per common share,
basic and diluted $ (0.10) $ (0.11) $ (0.11) $ (0.12) $ (0.45)
Weighted average common shares
used to compute basic and
diluted net loss per share 34,168,310 34,216,941 34,237,568 34,280,433 34,226,224
The Company implemented SAB101 on October 1, 2000. See Note 1, Revenue
Recognition.
In June 2000, we issued 71,429 shares of Common Stock to Genentech, Inc. as
a final payment on the license agreement for Argatroban. The value of the Common
Stock, $965,970, was charged to in-process research and development expense on
June 30, 2000, and was included in operating expenses in the statements of
operations and comprehensive loss in the quarterly reports on Form 10-Q for the
periods ended June 30 and September 30, 2000. Subsequently, the Company
determined that because Argatroban was no longer in the research and development
phase for the approved indication the value is more appropriately recorded as an
intangible asset which is being amortized over its estimated useful life.
Amortization expense recorded in each of the three months ended September 30 and
December 31, 2000 was $26,346 and will be approximately $106,000 per year in
future years. The information above shows the effect of this adjustment. See
Note 1
F-19
56
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(1) -- Certificate of Incorporation, as amended
3.2(1) -- By-laws, as amended
3.3(1) -- Amendment to Article IV of By-laws
3.4(6) -- Amendment to the Certificate of Incorporation dated
November 30, 1993
3.5(6) -- Amendment to the Certificate of Incorporation dated May
20, 1994
3.6(15) -- Certificate of Amendment of Certificate of
Incorporation
3.7(16) -- Amended and Restated By-laws of Texas Biotechnology
Corporation
3.8(17) -- Amendment to Article II of By-laws
10.3(1) -- Employment Agreement with Dr. Richard A.F. Dixon dated
July 15, 1990
10.6(1) -- Consulting Agreement with Mr. John M. Pietruski dated
January 1, 1992
10.11(2) -- Employment Agreement with David B. McWilliams dated
July 15, 1992
10.12(3) -- Consulting Agreement with Hennessey & Associates, Ltd.
10.17(4)(5)* -- Sublicense and License Agreement dated May 27, 1993
between Company and Genentech, Inc., together with
exhibits.
10.18(4)* -- Stock Agreement dated May 27, 1993 between the Company
and Genentech, Inc.
10.31(7) -- Lease Agreement dated, February 24, 1995 between Texas
Biotechnology Corporation and Doctors Center, Inc.
10.33(7) -- Amended and Restated 1990 Incentive Stock Option Plan
10.34(7) -- Amended and Restated 1992 Incentive Stock Option Plan
(as of March 3, 1995)
10.39(8) -- Amended and Restated Stock Option Plan for Non-Employee
Directors
10.40(8) -- 1995 Stock Option Plan
10.46(9) -- Employee Agreement with Stephen L. Mueller and Texas
Biotechnology Corporation dated July 1, 1995.
10.47(9) -- Employee Agreement with David B. McWilliams and Texas
Biotechnology Corporation dated July 1, 1995.
10.48(9) -- Employee Agreement with Richard A. F. Dixon, Ph.D. and
Texas Biotechnology Corporation dated July 1, 1995.
10.50(9) -- Employee Agreement with Joseph M. Welch and Texas
Biotechnology Corporation dated July 1, 1995.
10.54(10) -- Form of Indemnification Agreement between Texas
Biotechnology Corporation and its officers and
directors dated May 3, 1996
10.55(10) -- Amended and Restated 1995 Non-Employee Director Stock
Option Plan (as amended by the Board of Directors on
June 30, 1996)
10.56(11)* -- Strategic Alliance Agreement between Texas
Biotechnology Corporation and LG Chemical, Ltd. dated
October 10, 1996
10.57(11) -- Common Stock Purchase Agreement between Texas
Biotechnology Corporation and LG Chemical, Ltd. dated
October 10, 1996
10.62(12) -- Amendment to the 1995 Stock Option Plan of Texas
Biotechnology Corporation dated March 4, 1997
10.63(13) -- Amendment to the 1995 Non-Employee Director Stock
Option Plan of Texas Biotechnology Corporation dated
March 4, 1997
10.66(14) -- Agreement between Joseph M. Welch and Texas
Biotechnology Corporation dated June 1, 1993.
10.68(15) -- Employment Agreement with Pamela M. Murphy and Texas
Biotechnology Corporation dated February 26, 1998.
57
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.69(15) -- Employee Agreement between Pamela M. Murphy and Texas
Biotechnology Corporation dated March 2, 1999.
10.71(15) -- Texas Biotechnology Corporation 1999 Stock Incentive
Plan.
10.73(16) -- Amendment to Lease Agreement between Texas
Biotechnology Corporation and the University of Texas
Health Science Center at Houston, dated April 1, 1999.
10.74* -- License and Research and Development Agreement dated
July 21, 2000 between Revotar Biopharmaceuticals AG and
Texas Biotechnology Corporation.
10.75 -- Fifth amendment dated January 1, 2000 to Consulting
Agreement with John M. Pietruski dated January 1, 1992.
10.76 -- Notice to the University of Texas Health Science Center
at Houston of exercise of renewal option in Lease
Agreement.
10.77 -- Amendment to Lease Agreement dated January 1, 2001
between Texas Biotechnology Corporation and the Board
of Regents of The University of Texas System.
99.1(13) -- Agreement between Mitsubishi Chemical Corporation,
Texas Biotechnology Corporation and GSK dated February
26, 1998.
99.2(13) -- Product Development License and Co-Promotion Agreement
between Texas Biotechnology Corporation and SmithKline
Beecham plc dated August 5, 1997.
99.3(13) -- Common Stock Purchase Agreement between Texas
Biotechnology Corporation and SmithKline Beecham plc
dated August 5, 1997.
99.4(17) -- Agreement of Limited Partnership of ICOS-Texas
Biotechnology L.P. among ICOS-ET-LP LLC and Texas
Biotechnology Corporation, as Limited Partners, and
ICOS-ET-GP LLC and and TBC-ET, Inc., as General
Partners dated June 6, 2000.
99.5(17)* -- Endothelin License Agreement by and between Texas
Biotechnology Corporation and ICOS-Texas Biotechnology
L.P. dated June 6, 2000.
99.6(17)* -- Formation and Performance Agreement by and between ICOS
Corporation and Texas Biotechnology Corporation dated
June 6, 2001.
99.7(17)* -- Research and Development Service Agreement by and
between ICOS Corporation, Texas Biotechnology
Corporation and ICOS-Texas Biotechnology L.P. dated
June 6, 2000.
99.8(17)* -- Research Collaboration and License Agreement by and
between Texas Biotechnology Corporation and
Schering-Plough LTD. dated June 30, 2000.
99.9(17)* -- Research Collaboration and License Agreement by and
between Texas Biotechnology Corporation and Schering
Corporation dated June 30, 2000.
99.10(18) -- Amendment to Amended and Restated 1995 Non-Employee
Director Stock Option Plan, dated March 6, 2000.
22.0 -- Subsidiaries of the Registrant
23.1 -- Independent Auditors' Consent
- ----------
* The Company has omitted certain portions of these agreements in reliance on
Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.
(1) Filed as an exhibit to the Company's Form 10 (File No. 0-20117) effective
June 26, 1992 (as amended) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the
quarter ended June 30, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the
quarter ended September 30, 1992 and incorporated herein by reference.
58
(4) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the
quarter ended June 30, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Form 10-Q/A-1 (File No. 0-20117) for
the quarter ended June 30, 1993 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) filed
with the Commission on November 14, 1994.
(7) Filed as an exhibit to the Company's Form 10-K (File No. 0-20117) for the
year ended December 31, 1994 and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the
quarter ended June 30, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended September 30, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended June 30, 1996 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended September 30, 1996 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended June 30, 1997 with the Commission on August 14, 1997 and
incorporated herein by reference.
(13) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) with the
Commission on August 25, 1997 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Form 10-K (File No. 1-12574) with the
Commission on March 25, 1999 and incorporated herein by reference.
(15) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
Quarter ended March 31, 1999 with the Commission on May 13, 1999 and
incorporated herein by reference.
(16) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
Quarter ended September 30, 1999 with the Commission on November 15, 1999
and incorporated herein by reference.
(17) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File
No. 000-20117) for the quarter ended June 30, 2000 with the commission on
August 14, 2000, and incorporated herein by reference.
(18) Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-41864) with the commission on July 20, 2000, and incorporated
herein by reference.