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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, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20117
ENCYSIVE PHARMACEUTICALS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3532643
(State of Incorporation) (I.R.S. Employer
Identification
Number)
6700 WEST LOOP, 4TH FLOOR
BELLAIRE, TEXAS 77401
(713) 796-8822
(Address and telephone number of principal executive offices and zip code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.005 PER SHARE
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TITLE OF CLASS
PREFERRED STOCK PURCHASE RIGHTS
-------------------------------
TITLE OF CLASS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |
The approximate aggregate market value of voting stock held by
nonaffiliates of the registrant is $211,850,000 as of June 30, 2003.
The number of shares outstanding of each of the registrant's classes of
common stock as of March 1, 2004:
TITLE OF CLASS NUMBER OF SHARES
-------------- ----------------
Common Stock, $.005 par value 52,642,748
Documents incorporated by reference:
DOCUMENT FORM 10-K PARTS
--------------------------------------- ----------------
Definitive Proxy Statement, to be filed III
within
120 days of December 31, 2003
(specified portions)
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1
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 cannot 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Additional 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.
As used in this Form 10-K, the words "we," "our," "us," "Encysive," and
the "Company" refer to Encysive Pharmaceuticals Inc., its predecessors and
subsidiaries, except as otherwise specified. This Form 10-K may contain
trademarks and service marks of other companies.
2
PART I
ITEM 1 -- BUSINESS
OVERVIEW
Encysive Pharmaceuticals is a biopharmaceutical company engaged in the
discovery, development and commercialization of novel, synthetic, small molecule
compounds to address unmet medical needs. Our research and development programs
are predominantly focused on the treatment and prevention of interrelated
diseases of the vascular endothelium and exploit our expertise in the area of
the intravascular inflammatory process, referred to as the inflammatory cascade,
and vascular diseases. We have successfully developed one Food and Drug
Administration, or FDA, approved drug, Argatroban, for the treatment of
heparin-induced thrombocytopenia, or HIT, that is marketed by GlaxoSmithKline,
PLC, also referred to as GlaxoSmithKline or GSK. Our lead drug candidate,
Thelin(TM) (sitaxsentan), is an endothelin receptor antagonist in Phase III
clinical trials for the treatment of pulmonary arterial hypertension, or PAH.
In addition, we have earlier stage clinical product candidates in development
including TBC3711, a next generation endothelin receptor antagonist, and
bimosiamose, being developed by our majority-owned German affiliate, Revotar
Biopharmaceuticals AG, or Revotar. Our executive offices are located at 6700
West Loop South, 4th Floor, Bellaire, Texas 77401. Our telephone number is
(713) 796-8822.
Thelin(TM)
Thelin(TM) is being developed as a treatment for PAH, a life-threatening
disease characterized by the constriction of blood vessels leading to the lungs.
This constriction leads to very high blood pressure in the pulmonary arteries as
the heart struggles to pump blood to the lungs. PAH patients suffer from extreme
shortness of breath and, as the disease progresses, are less able to perform the
daily activities of living. Over time, PAH leads to right ventricular failure
(heart failure) and death. PAH may be a primary condition, perhaps caused by
genetic factors, or secondary to other diseases like autoimmune diseases (such
as scleroderma or lupus), congenital heart disease, HIV infection or cirrhosis
of the liver. PAH is an orphan disease (defined in the U.S. as a prevalence of
less than 200,000 patients) that industry research analysts estimate to afflict
approximately 80,000 to 100,000 individuals worldwide, mostly women.
It has been determined that the vascular endothelium plays a pivotal role
in maintaining normal blood vessel tone, including blood flow, by producing
substances such as endothelin that regulate the balance between vasoconstriction
and vasodilation. The vascular actions of endothelin can be explained by its
interactions on cell surfaces with two distinct receptors, endothelin-A, or ETA,
and endothelin-B, or ETB. In general, ETA receptors on vascular smooth muscle
cells are associated with vasoconstriction, while ETB receptors, predominantly
found on endothelial cells, are primarily associated with vasodilation.
Thelin(TM) is 6,500 times more selective for ETA receptors than for ETB
receptors. We believe that selective endothelin antagonists, like Thelin(TM),
will be preferred by physicians because ETA receptor antagonists block the
negative vasoconstrictive effects of endothelin at the ETA receptor, but do not
block the beneficial vasodilative effects of endothelin at ETB receptors present
on endothelial cells. In addition, Thelin(TM) has other favorable
characteristics including oral administration and once daily dosing.
We believe available treatments for PAH are inadequate. Patients with
moderate disease are treated with calcium channel blockers, diuretics and
anticoagulants. As the disease progresses, the standard treatment for the
disease consists of systemic prostacyclins, which require continuous 24-hour
intravenous or subcutaneous infusions. An orally-administered endothelin
receptor antagonist, bosentan (Tracleer(R)), is also available. Bosentan is
administered twice daily and is a non-selective endothelin receptor antagonist.
The cost of prostacyclin therapy currently averages over $100,000 annually per
patient while bosentan therapy costs approximately $33,000 per patient annually
in the United States and approximately 41,000 Euros per patient annually in
Europe.
These treatments have been shown to more than double median survival time
of PAH patients. However, there is an ongoing need for additional
pharmacological alternatives for the treatment of PAH due to the fact that PAH
patients respond differently to the range of currently available therapies and
the limitations of these therapies. We believe Thelin(TM)'s selectivity to ETA
as well as its once daily dosing will represent advantages to PAH patients.
3
In 2002, we successfully completed and announced results of our STRIDE 1
Phase IIb/III pivotal study in PAH with Thelin(TM). We have initiated and are
currently enrolling a Phase III pivotal clinical trial, STRIDE 2. In June 2003,
we received a Special Protocol Assessment, also referred to as an SPA, which is
a binding written agreement between a clinical trial sponsor and the FDA on the
design of pivotal trials, confirming that, if successful, the STRIDE 2 trial
results, together with the results from STRIDE 1 and planned supportive trials,
will be sufficient for the submission to the FDA of Thelin(TM)'s new drug
application, or NDA.
STRIDE 2 is a 240-patient trial enrolling patients with Class II-IV PAH,
as classified by the World Health Organization, or WHO, of primary or secondary
causes. STRIDE 2 is of 18 weeks duration and tests two doses of Thelin(TM) (100
mg and 50 mg), versus placebo, dosed once daily in a double-blind fashion. In
addition, a randomized bosentan arm is included. A total of 50 to 70 centers
worldwide will participate. The primary endpoint of STRIDE 2 is six-minute walk
distance, and secondary endpoints include change in functional class, shortness
of breath and the occurrence of clinical deterioration events. We anticipate
enrollment will be completed in the spring of 2004 with results available in the
second half of 2004. We anticipate that the NDA submission may occur between the
end of 2004 and the first quarter of 2005.
We have worldwide commercialization rights to Thelin(TM). Upon regulatory
approval we intend to commercialize Thelin(TM) in North America through our own
specialty sales force. We are seeking a marketing partner or partners for sales
in the rest of the world.
Argatroban
Argatroban, licensed from Mitsubishi Pharma Corporation or Mitsubishi and
developed in North America by Encysive, is a synthetic direct thrombin
inhibitor approved by the FDA in 2000. It is indicated for prophylaxis or
treatment of thrombosis for patients with HIT, a profound allergic reaction to
anticoagulation therapy with heparin, and for use in HIT patients undergoing
precutaneous coronary intervention. Argatroban was approved in Canada in 2002
for use as an anticoagulant therapy in patients with HIT syndrome. GSK markets
Argatroban in the U.S. and Canada, and has Waxman Hatch market exclusivity in
the U.S. until June 2005. A pediatric study is underway which could prolong
exclusivity in the U.S. to the end of 2005. In 2003, Encysive earned royalties
from the sales of Argatroban totaling $5.4 million and expects to earn
royalties of $6.7-7.6 million in 2004.
Other Development Programs
In addition to Thelin(TM) and Argatroban, we have a number of projects in
clinical and preclinical development. TBC3711, a next generation ETA receptor
antagonist, has completed Phase I clinical development for the treatment of PAH.
TBC3711 is more selective and more potent than Thelin(TM).
Our majority-owned German affiliate, Revotar, is developing bimosiamose, a
selectin antagonist discovered in Encysive's laboratories, that is designed to
block inflammatory cells from leaving the vascular space to travel to tissue
sites of inflammation. Revotar recently initiated Phase IIa clinical trials
evaluating the use of topical bimosiamose for the treatment of psoriasis and
atopic dermatitis. An inhaled version of bimosiamose has completed a 12-patient
proof-of-concept study in asthma that demonstrated a statistically significant
improvement in the late asthmatic response, the same target addressed by inhaled
steroid use in asthma. Revotar plans to seek a licensing partner for inhaled
bimosiamose.
We have entered into a worldwide research collaboration and license
agreement with Schering-Plough Corporation and Schering-Plough LTD, which are
collectively referred to as Schering-Plough to discover, develop and
commercialize VLA-4 antagonists. Schering-Plough is in the final stages of
pre-clinical development with TBC4746, an oral VLA-4 antagonist. If this work
is successful, the next development step would be to initiate studies in human
volunteers. VLA-4 is a potential target in the inflammatory cascade taking
place within the vasculature. TBC4746 has the potential to address a number of
diseases, including asthma and multiple sclerosis.
Encysive's Research Programs
Our research efforts are concentrated on targets within the vasculature,
and the potential indications of our drug candidates include cardiovascular
diseases and a potentially wide variety of inflammatory diseases involving two
complementary sets of targets. The first set of targets relate to vascular
G-protein coupled receptors, or GPCRs. Historically, GPCRs have been some of the
most amenable targets for developing commercially successful pharmaceuticals,
such as beta-blockers, antihistamines, and most anti-psychotics and
anti-depressants. Endothelin receptors, targeted by Thelin(TM) and TBC3711, are
examples of GPCRs.
4
Encysive also has developed expertise in pharmacologically intervening in
the intravascular inflammatory cascade, representing a second set of
intravascular targets. Bimosiamose and TBC4746 are examples of drug candidates
that we designed to target two distinct steps in this cascade, the selectins and
VLA-4, respectively. Some of the targets in this cascade are GPCRs. Thus, our
focus on endothelial cell and related vascular biology has opened up a broad
range of disease targets with high unmet medical need.
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/ COMMERCIALIZATION
PROGRAM DOSE FORM INDICATION STATUS(1) RIGHTS(2)
------- --------- ---------- --------- ---------
THROMBOSIS ARGATROBAN
Intravenous Anticoagulant therapy for Marketed product GlaxoSmithKline
prophylaxis or treatment of
patients with HIT
Intravenous Anticoagulant therapy for Marketed product GlaxoSmithKline
patients, with or at risk for
HIT, undergoing PCI
VASOSPASM/ ENDOTHELIN(A) RECEPTOR
HYPERTENSION ANTAGONIST
Thelin(TM) (Sitaxsentan)
Oral Pulmonary Arterial Hypertension Phase III Encysive
TBC3711
Oral Pulmonary Arterial Hypertension Phase I completed Encysive
UROTENSIN RECEPTOR Various Research Encysive
ANTAGONIST
OTHER GPCRS Various Research Encysive
VASCULAR SELECTIN ANTAGONIST (BEING
INFLAMMATION DEVELOPED BY REVOTAR)
Bimosiamose
Inhaled Asthma Phase IIa Revotar
Topical-North America Psoriasis and atopic dermatitis Phase IIa Encysive
Topical-Outside North America Psoriasis and atopic dermatitis Phase IIa Revotar
VCAM/VLA-4 ANTAGONIST
TBC4746
Oral Asthma Preclinical Schering Plough
Multiple Sclerosis Preclinical Schering Plough
Rheumatoid Arthritis Preclinical Schering Plough
(ALPHA)4(BETA)7 ANTAGONIST
TBC3804
Oral Inflammatory Bowel Disease Research Schering Plough
OTHER CELL ADHESION MOLECULES Various Research Encysive
(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.
(2) Royalties are paid to Mitsubishi for sales of Argatroban and could
possibly be paid to Revotar for bimosiamose, but we receive royalties for
Argatroban from GlaxoSmithKline. There is a possibility that in the future
we could receive royalties from Revotar and Schering Plough.
5
VASOSPASM/HYPERTENSION PROGRAM
THELIN(TM)
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 (vasodilation) 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). 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 vasodilation and vasoconstriction.
Endothelin is a peptide that is believed to play a critical role in the
control of blood flow. The action of endothelin can be explained by its
interactions on cell surfaces with two distinct receptors, endothelin-A and
endothelin-B. In general, ETA receptors are associated with vasoconstriction,
while ETB receptors are primarily associated with vasodilation. There is
substantial evidence that endothelin is involved in a variety of diseases where
blood flow is important. These include vasospasm, congestive heart failure and
certain types of hypertension.
Our research program in the vasospasm/hypertension area is aimed at
developing small molecules that inhibit the binding of endothelin 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 ETA 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 that antagonize endothelin binding to the ETA
receptor with high potency. We identified lead compounds that mimic the ability
of endothelin to bind to the ETA 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 endothelin
binding to its receptor, these compounds functionally inhibit endothelin action
on isolated blood vessels outside the body acting as full, competitive
antagonists. The lead compounds in this series have been shown to exhibit
efficacy inside the body using various animal models. In addition, Thelin(TM)
and bosentan have demonstrated efficacy in human clinical trials, including
patients with pulmonary hypertension.
Current Therapies. Current treatments for PAH remain unsatisfactory and
new treatments are needed. At present, epoprostenol (Flolan(R) owned by GSK),
bosentan (Tracleer(R) owned by Actelion), and treprostinil (Remodulin(R) owned
by United Therapeutics) are treatments currently approved by the FDA for
patients with PAH.
Epoprostenol, a vasodilator requiring continuous infusion through a
central venous catheter and special infusion pump, is costly, is associated with
significant adverse events including those related to its delivery, and is
typically reserved by clinicians for patients with the most severe symptoms, New
York Heart Association (NYHA) functional class IV status. Bosentan, a
nonselective ET-1 receptor antagonist, is the first oral agent approved for the
treatment of PAH, and is indicated in patients with moderate to severe NYHA/WHO
functional class III and IV symptoms. Bosentan is also associated with
significant potential for hepatotoxicity, teratogenicity, and reduction of male
fertility. Treprostinil, a prostaglandin analog requiring administration through
a chronic subcutaneous pump, is associated with a high incidence of local
injection site reactions. A selective oral endothelin antagonist, if successful,
may provide a significant benefit to these patients.
Product Candidate -- sitaxsentan - Thelin(TM). Our lead endothelin
antagonist, Thelin(TM), is being developed for the indication of PAH. PAH is a
disease with high mortality and an average survival time of approximately four
years from the time of diagnosis. Thelin(TM), a highly selective endothelin-A
receptor antagonist, may provide a distinct advantage over current therapies
including the non-selective endothelin receptor antagonist Tracleer(R).
6
Clinical Trial Status. -- To date, we have conducted Phase II studies with
Thelin(TM) in three diseases -- congestive heart failure, essential hypertension
and PAH. In the first Phase II study of Thelin(TM) in PAH patients, Thelin(TM)
demonstrated significant benefits in six-minute walking distance, certain key
hemodynamic measurements and change in NYHA functional class. In a follow-on
extension to this trial, two patients developed treatment-related hepatitis and
one of these patients died. Following analysis of this trial and its extension
and subsequent discussion with the FDA, in the second quarter of 2001, Encysive,
L.P. initiated a second Phase IIb/III clinical trial (STRIDE 1) of Thelin(TM) in
PAH patients, but at lower doses than previously studied. The results from
STRIDE 1 were encouraging and were the basis for continued development. In June
2003, we received a SPA confirming that the results from STRIDE 1 and a proposed
Phase III pivotal clinical trial, STRIDE 2, together with planned supportive
trials, would be sufficient for the submission to the FDA of an NDA for
Thelin(TM).
We have initiated, and are currently enrolling patients into STRIDE 2.
STRIDE 2 is a 240-patient trial enrolling patients with mild to severe NYHA/WHO
Class II-IV PAH, of various causes. STRIDE 2 is of 18 weeks duration and tests
two doses of Thelin(TM) (100 mg and 50 mg), versus placebo, dosed once daily in
a double-blind fashion. In addition, a randomized, single-blind bosentan arm is
included. A total of 50 to 70 centers worldwide are participating. The primary
endpoint of STRIDE 2 is a six-minute walk distance, and secondary endpoints
include change in functional class, shortness of breath and the occurrence of
clinical deterioration events. We anticipate enrollment will be completed in the
spring of 2004 with results available in the second half of 2004. Assuming
STRIDE 2 is successful, we anticipate that the NDA submission may occur between
the end of 2004 and the first quarter of 2005.
Product Candidate -- TBC3711. TBC3711 is our second endothelin antagonist
compound and has been selected as the next clinical candidate. We believe
TBC3711 is more selective and more potent than Thelin(TM) and that a potential
market opportunity for TBC3711 exists for the treatment of PAH and other
diseases. Encysive, L.P. has completed Phase I clinical studies with TBC3711 and
is evaluating the development plan for the compound.
Other Indications. We believe endothelin antagonist compounds may provide
therapeutic value in several other indications.
Competition. A number of companies including Abbott Laboratories, and
Myogen, Inc., have selective ETA receptor antagonist compounds in clinical
development. Selective ETA receptor compounds from Abbott and Myogen are in
Phase III development. Abbott has reported mixed results from a Phase III trial
in severe hormone resistant prostate cancer patients, and they are conducting
additional studies in other cancer groups. Myogen has begun a Phase III trial
for ambrisentan in PAH and a Phase II trial of darusentan in refractory
essential hypertension. 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 endothelin antagonists in
development. Actelion Ltd., a biotechnology company located in Switzerland, and
Genentech, Inc. received approval from the FDA to market Tracleer (R) (bosentan)
for the treatment of PAH during 2001. We believe that selective endothelin
blockers like Thelin(TM) will be preferred by physicians since selective ETA
blockers block the negative effects of endothelin at the ETA receptor, and do
not block the beneficial effects of endothelin at the ETB receptor.
Non-selective antagonists block both the ETA and the ETB receptors.
In addition to endothelin antagonists, Pfizer is conducting clinical
trials of Viagra (R) in PAH. If Viagra (R) demonstrates a benefit in PAH
patients, we believe it will be used as additive therapy with endothelin
antagonists.
THROMBOSIS PROGRAM
ARGATROBAN
Background. In clinical use for over 50 years, heparin is an important and
widely used anticoagulant for the prevention, or prophylaxis or treatment of
thromboembolic disease and numerous other applications. Unfortunately, heparin
can cause serious adverse events. One of the most important of these is HIT. HIT
was first identified in the 1970s and emerged in the 1990s as one of the
foremost immunohematologic issues confronting physicians.
HIT is a potentially devastating prothrombotic disease that is caused by
heparin-dependent antibodies that can develop after a patient has been on
heparin for five or more days or may develop sooner if there has been previous
heparin exposure. The most devastating consequence of HIT is the paradoxical
thrombotic state and potential for generation of blood clots that develops as a
result of being treated with heparin. All patients exposed to heparin, given by
any route or at any dose, are at risk of developing HIT. This includes patients
receiving unfractionated heparin (at full therapeutic doses and low prophylactic
doses, including the minute amounts in heparin flushes and on heparin-coated
catheters) as well as low-molecular-weight heparin.
Thrombosis can be treated surgically or through drug therapy with
anticoagulant and thrombolytic drugs. Anticoagulant drugs prevent clots from
forming. Heparin and aspirin are the most widely used antithrombotic drugs.
7
Current Therapies. Argatroban is a synthetic direct thrombin inhibitor
developed in response to the urgent clinical need for a safe and effective
alternative to heparin in HIT with or without thrombosis. Argatroban meets the
requirements of the ideal anticoagulant for both the prophylaxis and treatment
of HIT and associated thrombotic complications. As the first and only direct
thrombin inhibitor approved for both the prophylaxis and treatment of thrombosis
in HIT, Argatroban provides physicians with an effective anticoagulant that does
not interact with heparin-dependent antibodies, offers a predictable
dose-response relationship and is minimally monitored.
Clinical Trial Status. During 2002, we completed ARGIS-I, a multi-center,
placebo-controlled Phase II clinical trial for the use of Argatroban, as
monotherapy, in patients with ischemic stroke. During February 2003, we reported
the Phase II trial results that met the primary endpoint related to safety. In
light of a lack of an overall efficacy trend, and the high risk and high costs
associated with stroke trials, it is unlikely that we will proceed independently
with a full Phase III program. However, given the relatively positive safety
outcome, and the high rate of stroke occurrence in HIT patients, some physicians
may choose to use Argatroban in place of heparin in some patient populations.
Argatroban is approved and sold in Japan by Mitsubishi, the licensor of
Argatroban, as mono-therapy for an indication of acute ischemic stroke.
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 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.
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 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
corticosteroids, leukotriene blockers and immunosuppressants such as
cyclosporin. While effective, the time to onset of action of these compounds may
be significant. Corticosteroids 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 -- Bimosiamose is being developed by Revotar, our
majority owned affiliate. 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, bimosiamose, has
shown efficacy both in cell-based and biochemical assays, and in animal models
of inflammation.
German Affiliate -- Revotar Biopharmaceuticals, AG. During 2000, Revotar
Biopharmaceuticals, AG, a German company, was formed and we retained a 55.2%
ownership percentage. With headquarters in Berlin, Germany, Revotar was formed
to perform research and development of novel small molecule compounds and to
develop and commercialize selectin antagonists that we licensed to Revotar. Upon
formation, we licensed to Revotar certain development and commercialization
rights to Encysive's selectin antagonist compounds as well as rights to certain
other Encysive 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 German government scientific grants. We amended
our license and research agreement with Revotar during 2003 to better reflect
the commercial priorities of each company. Under the amended agreement, Revotar
will have exclusive worldwide rights to bimosiamose for the treatment of asthma
and other inflammatory indications as well as rights outside of North America
for topical indications. Encysive will have exclusive worldwide rights for the
use of bimosiamose in organ transplant as well as exclusive North American
rights to all topical indications. Under the amended agreement, each party has
certain revenue sharing and royalty obligations.
8
In 2002, the stockholders of Revotar executed an agreement to provide
Revotar approximately $4.5 million in unsecured loans, of which our commitment
was approximately $3.4 million. Under the loan agreement, we have advanced
approximately $2.2 million and Revotar's minority shareholders have advanced
approximately $1.5 million to Revotar as of December 31, 2003. Revotar's
management has informed us that they intend to borrow the remaining Encysive
commitment of $1.2 million in early 2004. We believe that Revotar's existing
funds, the remaining commitments under the loan agreement and proceeds under
German government scientific grants will be sufficient to fund Revotar into the
first quarter of 2005. In order to continue to operate beyond that time, Revotar
will need to seek additional funding through collaborative arrangements and/or
through public or private financings in the future. During 2004, to conserve
cash, Revotar terminated a research agreement regarding macrophage migration
inhibitory factor with the Fraunhofer Institute in Stuttgart, Germany.
Clinical Trial Status. - A Phase IIa clinical trial with an inhaled form
of bimosiamose was completed in the second quarter of 2003 and positive
preliminary results were released in August 2003. A Phase IIa clinical trial in
psoriasis and atopic dermatitis commenced during the fourth quarter of 2003
using a topical formulation of biosiamose.
Product Candidate -- VCAM/VLA-4 Antagonists. We have also identified
antagonists for the VCAM-dependent intercellular adhesion observed in asthma,
which blocks 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.
During 2002, TBC4746 was nominated as a clinical candidate and pursuant to our
agreement with Schering-Plough, we received a milestone payment.
Product Candidate -- (alpha)4(beta)7 Antagonists. The integrin
(alpha)4(beta)7, which is closely related to VLA-4, is present on white blood
cells 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 1,200,000 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 is 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 Encysive's library of VLA-4 antagonists, as well
as the rights to a second integrin antagonist. Encysive is responsible for
optimizing a lead compound and additional follow-on compounds. Schering-Plough
is supporting research at Encysive 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 Encysive for both
the VLA-4 and an additional program, excluding royalties, could reach $87.0
million. During 2002, TBC4746 was nominated as a clinical candidate and pursuant
to our agreement with Schering-Plough, we received a milestone payment. If not
extended, our research on additional follow-on compounds and research funding
from Schering-Plough will terminate on June 30, 2004.
Competition. Several companies have programs aimed at inhibiting cell
adhesion molecules and integrins, like (alpha)4(beta)7 and VCAM/VLA-4. Biogen
Idec, Inc. and Elan Corporation plc have obtained positive data in human trials
of multiple sclerosis and inflammatory bowel disease with Antegren(R), a
monoclonal antibody against VLA-4.
VASCULAR DISEASE
Background and current status. Many disease processes involve changes in
blood vessels and heart tissue. There are numerous mediators, like endothelin,
which may contribute to the development of these diseases. Several of these act
though GPCRs, to carry out their action. We are conducting research on urotensin
and other GPCRs to identify inhibitors that could be useful in treating diseases
including chronic heart failure, ischemic stroke and acute myocardial
infarction. There are numerous companies studying these and other GPCRs. We
believe our projects are competitive with these other programs.
9
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. Our major licensing and collaboration agreements are summarized
below:
Mitsubishi Pharma Corporation. We 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 agreement provides us 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. GSK is also obligated to pay Mitsubishi royalties on sales of
Argatroban. As of December 31, 2003, we had paid Mitsubishi approximately
$483,000 in royalty payments under the agreement. We have also paid Mitsubishi a
$500,000 milestone payment under the agreement, and no additional milestone
payments are payable to Mitsubishi under the agreement. Either party may
terminate the 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, the agreement 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. If our agreement with Mitsubishi is
terminated, we would lose all rights to Argatroban including our right to
receive revenues from the sale of Argatroban. Under the agreement, we have
access to a formulation patent granted in the U.S. in 1993, which expires in
2012, and a process patent that expires in 2017. 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 and up to a total of $5.0 million in milestones for the
development of ischemic stroke and certain other provisions. During 2001, we
received $2.0 million of these milestones less certain Japanese withholding
taxes. Additional milestones are dependent on further development of
Argatroban in the indication of ischemic stroke. During 2002, we completed a
Phase II human clinical trial for Argatroban as a monotherapy treatment for
acute ischemic stroke. The clinical trial met the primary safety endpoint and
showed positive results in the secondary safety endpoint. In light of a lack of
an overall efficacy trend and the high risk and high costs associated with
stroke trials, it is unlikely that we will proceed independently with a full
Phase III program.
GlaxoSmithKline. In connection with our development and commercialization
of Argatroban, in August 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. No additional
license fees or milestone payments are payable to us by GSK under the agreement.
We are evaluating with GSK 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 PCI) 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. As of December 31, 2003, we had received
approximately $10.7 million in royalty payments from GSK under the agreement. We
will retain the rights to any indications that GSK determines it does not wish
to pursue (such as ischemic stroke), 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 GSK and Encysive elect
not to develop will be returned to Mitsubishi, subject to the rights of GSK and
Encysive to commercialize these indications at Encysive's 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. If
our agreement with GSK is terminated, we would no longer receive royalties from
GSK's sales of Argatroban and we may experience delays and incur expenses in
attempting to commercialize Argatroban. We agreed to pay an agent 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
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
10
manner or if alternate sources of supply are unavailable or uneconomical, our
results of operations would be harmed. GSK has informed us that they will be
finishing and packaging in a GSK facility in the future.
Encysive L.P. In June 2000, we entered into a limited partnership
agreement with ICOS to form ICOS-TBC, L.P., also referred to as ICOS-TBC. The
partnership was formed to develop and globally commercialize endothelin-A
receptor antagonists from the Encysive endothelin antagonist program. ICOS-TBC
made an upfront license fee payment and milestone payment for the development
and commercialization of products resulting from the collaboration and the
partners equally funded the cost of research and development through the end of
2002. In January 2003, ICOS informed us that they had reached a conclusion that
joint development of the endothelin receptor antagonist program should not
continue, and Encysive agreed to be responsible for all costs of the program
thereafter. In April 2003, we purchased ICOS's interest in ICOS-TBC and changed
the name of ICOS-TBC to Encysive, L.P. The results of Encysive, L.P. are
included in our consolidated financial statements for all periods subsequent to
April 2003.
Schering-Plough. In June 2000, Encysive and Schering-Plough entered into a
worldwide research collaboration and license agreement to discover, develop and
commercialize VLA-4 antagonists, with Schering-Plough having rights to a second
integrin antagonist target. In addition to funding research costs,
Schering-Plough paid Encysive an aggregate of $4 million in upfront license fees
and milestone payments, and may pay us additional development milestones of $39
million regarding the development of VLA-4 antagonists, and $38 million
regarding the development of a second integrin antagonist. We are not currently
developing the second integrin antagonist. Schering-Plough will also pay us
royalties on product sales resulting from the agreement. Total payments to us
for both programs, excluding royalties, could reach $87.0 million. As of
December 31, 2003, we had received approximately $11.8 million in research
payments from Schering-Plough under the agreement. See Note 9 to the
Consolidated Financial Statements for a discussion of this transaction. Although
we and Schering-Plough agreed to extend the agreement through June 2004,
Schering-Plough can terminate the research program upon 180 days written notice
to us. If this agreement is terminated, we will lose Schering-Plough's funding
for the research costs in addition to development milestones and royalties on
product sales resulting from the agreement.
Revotar Biopharmaceuticals, AG. During September 2000, Revotar was formed
and we transferred to Revotar certain development and commercialization rights
to our selectin antagonist program as well as rights to other proprietary
technology. See Note 10 to the Consolidated Financial Statements for a
discussion of this transaction. Currently, Revotar has exclusive worldwide
rights to bimosiamose for the treatment of asthma and other inflammatory
indications as well as rights outside of North America for topical indications.
We have exclusive worldwide rights for the use of bimosiamose in organ
transplant as well as exclusive North American rights to all topical
indications. The primary focus of Revotar has been on the design and initiation
of a Phase I trial for bimosiamose using the inhaled formulation of the drug,
which was completed during 2001. A Phase IIa clinical trial was completed in
Germany utilizing an injectable form of bimosiamose as a proof-of-concept for
psoriasis, and demonstrated activity. A Phase IIa clinical trial with an inhaled
form of bimosiamose was completed in the second quarter of 2003 and positive
preliminary results were released in August 2003. A Phase IIa clinical trial in
psoriasis and atopic dermatitis commenced during the fourth quarter of 2003
using a topical formulation.
Our license agreement with Revotar provides that we will receive royalties
from Revotar based on sales of products by Revotar or its licensees, and in
certain events, we will receive a portion of royalties, license fees and
milestones received by Revotar from its licensees, if any. Revotar will also
receive royalties on sales of products by us and our licensees.
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 8 pending U.S. patent applications and 40
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 a formulation patent granted in 1993, which expires
in 2012, and a process patent that expires in 2017. The Mitsubishi composition
of matter patent on Argatroban has expired. We have access to other patents
held by Mitsubishi, however, these are not being utilized currently. Argatroban
received FDA approval on June 30, 2000. Under the agreement, Mitsubishi has the
right to bring any suit or action for infringement of the patent rights granted
thereunder; provided,
11
however, if Mitsubishi fails to take action with respect to any infringement, we
have the right the bring any appropriate suit or action against the infringer
based upon any patent with the patent rights granted thereunder that has a claim
that specifically covers a licensed product. GSK currently markets Argatroban
and enjoys market exclusivity pursuant to the Waxman/Hatch Act that provides
protection from competition until June 30, 2005. We can obtain an extension
under Waxman/Hatch until December 31, 2005 under certain circumstances
pertaining to submission of pediatric data. Argatroban is currently marketed in
a formulation that is covered under a formulation patent that expires 2012 and a
process patent that expires in 2017. Following expiration of Waxman/Hatch
protection, it is possible that generic manufacturers may be able to produce
Argatroban without violating the formulation or process patents.
Other patents relevant to our key therapeutic programs are discussed in
the following table:
Program Product US Patent No. Expiration Relevance
------- ------- ------------- ---------- ---------
Inflammation Bimosiamose US 5,622,937 April 29, 2014 Composition of matter patent
(TBC1269) for TBC1269 (bimosiamose)
Bimosiamose US 5,712,387 May 20, 2016 Process patent for
(TBC1269) bimosiamose synthesis
Integrin/VLA-4 US 6,262,084 April 15, 2019 Composition of matter patents
for integrin antagonists
Integrin/VLA-4 US 6,194,448 April 16, 2018 Composition of matter patents
for integrin antagonists
Integrin/VLA-4 US 6,096,773 April 15, 2019 Composition of matter patents
for integrin antagonists
Pulmonary Thelin(TM) US 6,342,610 November 5, 2013 Composition of matter patent
Hypertension for endothelin antagonists
Thelin(TM) US 6,432,994 April 28, 2017 Composition of matter patent
for endothelin antagonists
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 our 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. 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.
12
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, record keeping, 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:
- warning letters;
- civil penalties;
- clinical hold;
- criminal prosecution;
- injunctions;
- product seizure;
- product recalls;
- total or partial suspension of production; and
- FDA refusal to approve pending 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:
- preclinical laboratory tests, animal tests and formulation studies;
- the submission to the FDA of an Investigational New Drug application
(IND), which must become effective before clinical testing may
commence;
- adequate and well-controlled clinical trials to establish the safety
and effectiveness of the drug for each indication;
- the submission of an NDA to the FDA; and
- 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 guidelines and compounds for clinical use must be
formulated according to compliance with current Good Manufacturing Practice, or
cGMP, requirements. The results of preclinical testing are submitted to the FDA
as part of the IND and NDA.
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
13
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 guidelines, and 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, which 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:
- determine dosage tolerance and optimal dosage;
- identify possible adverse effects and safety risks; and
- 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.
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, for a standard review, the FDA takes approximately twelve months 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 certain new
products. This act establishes a statutory program for the approval of fast
track products (those drugs which address unmet medical needs for serious and
life-threatening conditions). Under this act, the FDA has six months 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 may 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. The approvable letter may
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 post-marketing testing and
surveillance to monitor the drug's safety or efficacy, or impose other
conditions, commonly referred to as Phase IV 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 and 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.
14
Manufacturing. Each domestic drug manufacturing facility must be
registered with the 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 our or 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 is
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 have not had any claims to
date on our general liability insurance relative to hazardous materials and
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 financial
resources or not be covered by our general liability insurance, which has a
policy limit of $7 million. 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 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 and business professionals.
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 and other 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.
15
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 compounds 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. In anticipation of the assumed successful
completion of STRIDE 2 and approval of Thelin(TM) by the FDA and other
regulatory bodies, we have initiated preparations for an eventual product
launch, through activities such as conducting market research, preparation of
educational materials, and planning for additional clinical trials for
Thelin(TM).
EMPLOYEES
As of December 31, 2003, we employed 92 individuals in the U.S. 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.
AVAILABLE INFORMATION
Our Internet website can be found at www.encysive.com. We make available
free of charge, or through the "Investor Relations" section of our Internet
website at www.encysive.com, access to our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after such material is filed, or furnished to the
Securities and Exchange Commission.
16
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 of 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.
In November 2000, we began to market our first product, Argatroban,
through our agreement with GSK. However, the royalties produced to date by
Argatroban have not made 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. 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 need to be
delivered by means other than orally, such as intraveneous or inhalation, which
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 may
not be commercially available for a number of years, if at all, and we cannot
assure you that any successfully developed products will generate substantial
revenues or that we will ever be profitable.
WE HAVE A HISTORY OF OPERATING AND NET LOSSES AND WE MAY NEVER BECOME
PROFITABLE.
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, regulatory compliance and commercialization.
At December 31, 2003, we had an accumulated deficit of approximately $183.5
million, and for the fiscal years ended December 31, 2003, 2002 and 2001 we have
incurred net losses of approximately $35.3 million, $23.5 million and, $19.1
million, respectively. We will require substantial additional funding to
complete the research and development of our product candidates, to establish
commercial scale manufacturing facilities, if necessary, to market our products.
To become profitable, we, either alone or with our collaborators, must
successfully develop, manufacture and market our product candidates, or continue
to identify, develop, acquire, manufacture and market other new product
candidates. We may never have any significant revenues or become profitable.
IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL WHEN NEEDED, WE WILL BE
UNABLE TO CONDUCT OUR OPERATIONS AND DEVELOP OUR POTENTIAL PRODUCTS.
We have financed our research and development activities and other
operations primarily through public and private offerings of our common stock
and from funds received through our development and funding collaborations,
research agreements and partnerships. We also have received royalty revenue from
sales of Argatroban. In December 2003, we sold 7,475,000 shares of common stock
in a public offering and realized net proceeds of approximately $45.4 million.
As of December 31, 2003, we had cash, cash equivalents and investments in
marketable securities of approximately $85.5 million.
We expect to continue 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 also
anticipate that our operating expenses will increase in subsequent years
because:
- we expect to incur significant expenses in conjunction with
additional clinical trial costs for Thelin(TM) and research and
clinical trial costs for development of bimosiamose and expect to
begin to incur costs for clinical trials related to additional
compounds; and
- we expect to incur additional costs in future periods related to
Argatroban in complying with ongoing FDA requirements and possible
clinical trial expenditures for additional therapeutic indications,
and
- If Thelin(TM) receives regulatory approval, we will incur
significant commercialization expenses.
17
We anticipate that our existing capital resources and other revenue
sources, should be sufficient to fund our cash requirements into the third
quarter of 2005. We also anticipate that we will need to secure additional funds
to continue the required levels of research and development to complete the
development and submit an NDA for Thelin(TM) and to reach our other current
long-term goals. We anticipate that the NDA submission may occur between the end
of year 2004 and first quarter of 2005. We intend to seek such additional
funding through collaborative arrangements and/or through public or private
financings, if required. Our strategy for managing our capital requirements
includes seeking to license rights to Thelin(TM) for select markets, while
preferably retaining North American rights. We cannot assure you that such
funding or licensing arrangements will be available on acceptable terms. As we
review our research and development programs, we may also consider various
measures to reduce our costs in order to effectively utilize our capital
resources. In early 2003, we implemented changes to reduce our operating costs,
including reducing our research and administration staff. If we are unable to
successfully access additional funding, we may be forced to take further cost
reduction measures. These adjustments may include scaling back, delaying or
terminating one or more research or development programs, curtailing capital
expenditures or reducing business development and other operating activities. We
may also consider seeking collaborators for our product candidates at an earlier
stage than otherwise would be desirable and on terms that are less favorable
than might otherwise be available or relinquishing, licensing or otherwise
disposing of rights to technologies, product candidates or products that we
would otherwise seek to develop or commercialize ourselves on terms that are
less favorable than might otherwise be available.
OUR DECISION TO CONTINUE TO DEVELOP AND GLOBALLY COMMERCIALIZE
ENDOTHELIN-A RECEPTOR ANTAGONISTS WITHOUT ICOS COULD ADVERSELY AFFECT OUR
FINANCIAL POSITION AND OUR COMMERCIAL PROSPECTS.
In June 2000, we entered into an agreement with ICOS to form ELP to
develop and globally commercialize endothelin-A receptor antagonists. In April
2003, we purchased ICOS' share of ELP for $4 million paid at closing, and $4
million and $2 million to be paid 12 and 18 months after closing, respectively,
plus interest. ICOS concluded its participation in the endothelin development
program as part of its commitment to focusing ICOS' development efforts on its
other drug candidates. As a result, we are currently responsible for all costs
and expenses of ELP, and our endothelin development program, incurred after
December 31, 2002. These costs and expenses will be significant and we will need
to seek additional funding and/or find a suitable collaborator to continue the
development and commercialization of endothelin-A receptor antagonists,
including Thelin(TM) and TBC3711.
ENDOTHELIN ANTAGONISTS AS A CLASS MAY GENERATE LIVER ABNORMALITIES
Liver and fetal abnormalities have previously been recognized as
complications related to the endothelin antagonist class of drug. Fetal
abnormalities with respect to this class of drug have been detected in animal
studies. Liver abnormalities in the STRIDE 1 trial reversed in all cases with
discontinuation of the drug. The most frequent adverse events that occurred in
patients receiving Thelin(TM) and that were more common than in placebo-treated
patients, were headache, peripheral edema, nasal congestion and dizziness. We
have initiated STRIDE 2, a pivotal Phase III trial in PAH. In June 2003, we
received a SPA from the FDA confirming that STRIDE 2, together with the results
of STRIDE 1 and planned supportive trials will be sufficient for filing an NDA.
We cannot assure you that similar liver abnormalities will not occur in
STRIDE 2 or other clinical studies related to our endothelin development program
or in commercial usage after approval. If we are unable to clearly demonstrate
that Thelin(TM) provides an acceptable risk-benefit profile as compared to
currently approved therapies, we are not likely to receive regulatory approval
to market Thelin(TM), which could prevent us from generating meaningful revenue
or achieving profitability.
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:
- demand for our products;
- regulatory approvals for our products;
- the timing of the introduction and market acceptance of new products
by us or competing companies; and
- the timing and magnitude of certain research and development
expenses.
18
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 have significant competition for Argatroban for the treatment of HIT.
The products that compete with Argatroban include:
- Refludan(R), which was approved by the FDA in 1997 for the treatment
of HIT;
- 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 in the U.S.; and
- Angiomax(R), which is approved for use in the U.S. as an
anticoagulant in patients with unstable angina undergoing
percutaneous transluminal coronary angioplasty.
We may also face competition for Argatroban in indications other than HIT,
when and if such indications are approved by the FDA, including:
- Revasc(R), which is used in the treatment of deep vein thrombosis
following hip surgery and has received regulatory approval in
Europe;
- Angiomax(R), which is in Phase III clinical trials for acute
coronary syndromes and conducting clinical trials in HIT patients;
- Arixtra(R), which is approved for the prevention of deep vein
thrombosis and pulmonary embolism; and
- Melagatran, which is being developed as a treatment for deep vein
thrombosis, has completed Phase III trials and is under regulatory
review.
A number of companies, including Abbott Laboratories and Myogen, Inc.,
have ETA compounds in clinical development and while Abbott Laboratories'
compound is presently being evaluated for treatment of cancer, we cannot assure
you that it will not compete with Thelin(TM). If Myogen, Inc.'s compound
receives regulatory approval, it will be in competition with Thelin(TM). Myogen
has begun two Phase III trials for its ETA compound in PAH. Several companies
have non-selective endothelin antagonists in development. Actelion Ltd., a
biotechnology company located in Switzerland, and Genentech, Inc. received
approval from the FDA to market Tracleer(R) (bosentan) for the treatment of PAH
during 2001. In addition to endothelin antagonists, Pfizer is conducting
clinical trials with Viagra(R) for use in treating PAH. If phosphodiesterase 5
inhibitors such as Viagra(R) demonstrate a benefit in PAH patients, we believe
they will be used as additive therapy with endothelin antagonists.
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.
19
WE ARE DEPENDENT ON 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 on 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. If
our agreement with Mitsubishi is terminated, we will lose all rights to
Argatroban including our right to receive revenues from the sale of Argatroban,
which would have a material adverse effect on our business and financial
condition.
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 on its obligations under the agreement,
declares bankruptcy or becomes insolvent. If our agreement with GSK is
terminated, we will no longer receive royalties from GSK's sales of Argatroban
and we may experience delays and incur expenses in attempting to commercialize
Argatroban.
As previously discussed, we entered into a worldwide research
collaboration and license agreement to discover, develop and commercialize VLA-4
antagonists with Schering-Plough. Under the terms of the agreement,
Schering-Plough obtained the exclusive worldwide rights to develop, manufacture
and market all compounds from our library of VLA-4 antagonists, as well as the
rights to a second integrin antagonist. We are responsible for optimizing a lead
compound and additional follow-on compounds. Schering-Plough is supporting our
research and reimburses us for 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 us for both the VLA-4 and an additional program,
excluding royalties, could reach $87.0 million. Although we and Schering-Plough
have recently agreed to extend the agreement for another year, through June
2004, Schering-Plough can terminate the research program upon 180 days written
notice to us. If this agreement is terminated, we will lose Schering-Plough's
funding for the research costs in addition to development milestones and
royalties on product sales resulting from the agreement.
Our success will depend on these and any future strategic alliances. We
cannot assure you 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 also 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 and
financial condition.
IF REVOTAR IS UNABLE TO OBTAIN ADDITIONAL FUNDING, INCLUDING THE
ADDITIONAL FUNDING THAT WE ARE OBLIGATED TO PROVIDE, WE MAY LOSE OUR
RIGHTS TO COMMERCIALIZE BIMOSIAMOSE.
Revotar is developing a selectin antagonist, bimosiamose, for the
treatment of asthma and psoriasis. Currently, Revotar has exclusive worldwide
rights to bimosiamose for the treatment of asthma and other inflammatory
indications as well as rights outside of North America for topical indications.
We have exclusive worldwide rights for the use of bimosiamose in organ
transplant as well as exclusive North American rights to all topical
indications. In 2002, we and the other stockholders of Revotar executed an
agreement to provide approximately $4.5 million in unsecured loans, of which our
commitment was approximately $3.4 million. Under the loan agreement, we advanced
approximately $2.2 million to Revotar as of December 31, 2003, and Revotar's
minority shareholders advanced approximately $1.5 million in 2003. We are not
obligated to advance any funds to Revotar in excess of our $3.4 million
commitment, and we have no present intention of advancing any other funds to
Revotar in excess of such commitment. We believe that Revotar's existing funds,
the remaining $1.2 million commitment under the loan agreement and proceeds
under German government scientific grants will be sufficient to fund Revotar
into the first quarter of 2005. In order to continue to operate beyond that
time, Revotar will need to seek additional funding through collaborative
arrangements and/or through public or private financings in the future. We
cannot assure you that such funding will be available
20
on acceptable terms. Revotar is actively seeking a partner or partners for the
inhaled indications of bimosiamose, however if Revotar is unable to obtain
additional funding, Revotar will no longer be able to continue its operations,
and may have to consider various methods of maximizing shareholder value,
including the sale or liquidation of its assets to its stockholders or third
parties.
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. For example, we licensed rights to Argatroban in 1993, and
incurred costs, including preclinical research studies and clinical trials costs
of approximately $43 million prior to its approval by the FDA in June 2000. Any
delay in obtaining, or failure to obtain, approvals could adversely affect the
marketing of our products and our ability to generate product revenue.
The risks associated with the approval process include:
- 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;
- regulatory approval, if obtained, may significantly limit the
indicated uses for which a product may be marketed; and
- reliance on FDA guidance in our development plans.
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:
- 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
- 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. Many
factors affect patient enrollment, including the size of the patient
population, the proximity of patients to clinical sites, the
eligibility criteria for the trial, competing clinical trials and
new drugs approved for the conditions we are investigating. Other
companies are conducting clinical trials and have announced plans
for future trials that are seeking or likely to seek patients with
the same diseases as those we are studying. Competition for patients
in cardiovascular disease trials is particularly intense because of
the limited number of leading cardiologists and the geographic
concentration of major clinical centers. Our Phase III clinical
trial program for Thelin(TM), STRIDE 2, includes a placebo control
group, which may also decrease the pace of enrollment. As a result
of all of these factors, our trials may take longer to enroll
patients than we anticipate.
21
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. We have not
incurred any material expenses related to the post-marketing review of
Argatroban; however, it is likely that post-marketing expenses for Thelin(TM)
could be more significant than those incurred with Argatroban.
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 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 Bruce D.
Given, M.D., 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. Drs. Given and Dixon, as well as
other members of our management team and scientific staff, have employment
agreements with us, which provide for initial one-year terms that renew
automatically for successive additional one-year periods unless either party
provides notice at least sixty days before the scheduled expiration. We do not
maintain key person insurance on any members of our management team and
scientific staff. Our success is also dependent on our maintaining and expanding
our personnel as needs arise in the areas of research, clinical trial
management, manufacturing, sales and marketing in order to commercialize
products. 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.
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 our
financial resources or not be covered by our general liability insurance, which
has a policy limit of $7 million. Additionally, the cost of compliance with
environmental and safety laws and regulations may increase in the future.
22
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. Under the
agreements with Mitsubishi and GSK, we also maintain product liability insurance
to cover claims that may arise from the sale of Argatroban. Our existing
coverage has policy limits of up to $15 million for claims arising from clinical
trials or from the sale of Argatroban. Our existing coverage will not be
adequate as we further develop products and as sales of Argatroban continue. 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 or sale 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 VERY LIMITED MANUFACTURING, MARKETING AND SALES EXPERIENCE.
We have very limited manufacturing, marketing and 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.
Upon regulatory approval, we intend to commercialize Thelin(TM) in North
America through our own specialty sales force. As a result, we would face a
number of additional risks, including:
- we may not be able to attract and build a significant marketing or
sales force;
- the cost of establishing a marketing or sales force may not be
justifiable in light of product revenues; and
- 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 cannot assure
you that we will be able to enter into any other supply arrangements on
acceptable terms, if at all.
WE ARE DEPENDENT ON A SINGLE SUPPLIER OF ARGATROBAN.
At the present time, Mitsubishi is the only supplier 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 percent 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
supplying 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. GSK
has informed us that they will be finishing and packaging in a GSK facility
sometime in the future.
23
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 we cannot assure you 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.
Thelin(TM) belongs to a class of drug called endothelin antagonists, which
may cause liver and fetal abnormalities. Tracleer(R) (bosentan), a product of
Actelion, Inc., also belongs to this class of drug, and the FDA, as a condition
for the approval of Tracleer(R), required that Actelion distribute Tracleer(R)
via a limited access program. A limited access program is a distribution system
which seeks to manage the post marketing risk of an approved medication through:
(i) limited distribution of the medication through a number of specialty
distributor pharmacies; (ii) registration of all practitioners prescribing the
medication; (iii) registration of all patients receiving the medication; (iv)
written certification by the practitioner that the medication is being
prescribed for a medically appropriate use; (v) review of safety warnings with
the patient by the practitioner; and (vi) an ongoing comprehensive program to
monitor, collect, track and report adverse event and other safety related
information from patients receiving the medication. We believe that since
Thelin(TM) belongs to the same class of drug as Tracleer(R), the FDA will
require that Thelin(TM) be distributed though a limited access program that may
make patient access and reimbursement more difficult.
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:
- obtain patents;
- protect trade secrets;
- operate without infringing upon the proprietary rights of others;
and
- prevent others from infringing on our proprietary rights.
24
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, generic 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 U.S.
Patent and Trademark Office, also referred to as the PTO. Other competitors may
have filed or maintained patent applications for technology used by us or
covered by pending applications. In addition, patent protection, even if
obtained, is affected by the limited period of time for which a patent is
effective.
GSK currently markets Argatroban and enjoys market exclusivity pursuant to
the Waxman/Hatch Act that provides protection from competition until June 30,
2005. We can obtain an extension under Waxman/Hatch until December 31, 2005
under certain circumstances pertaining to submission of pediatric data.
Argatroban is currently marketed in a formulation that is covered under a
formulation patent that expires in 2012 and a process patent that expires in
2017. Following expiration of Waxman/Hatch protection, it is possible that
generic manufacturers may be able to produce Argatroban without violating the
formulation or process patents.
We could also incur substantial costs in filing and prosecuting patent
claims, 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. As of the date of this
report, there are no suits, interference proceedings, re-examination proceedings
or opposition proceedings, pending or, to our knowledge, threatened against us,
with respect to patents issued to or licensed by us or with respect to any
patent applications filed by us.
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.
WE RELY ON COMPOUNDS AND TECHNOLOGY LICENSED FROM THIRD PARTIES AND
TERMINATION OF ANY OF THOSE LICENSES WOULD RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS.
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. Under the
agreement, Mitsubishi has the right to bring any suit or action for infringement
of the patent rights granted thereunder; provided, however, if Mitsubishi fails
to take action with respect to any infringement, we have the right the bring any
appropriate suit or action against the infringer based upon any patent with the
patent rights granted thereunder that has a claim that specifically covers a
licensed product. The agreement provides us 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.
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. During 2001, we received $2.0 million of these
milestones less certain Japanese withholding taxes. Additional milestones are
dependent on further development of Argatroban in the indication of ischemic
stroke. During 2002, we completed a Phase II human clinical trial for Argatroban
as a monotherapy treatment for acute ischemic stroke. The clinical trial met the
primary safety endpoint and showed positive results in the secondary safety
endpoint. In light of a lack of an overall efficacy trend and the high risk and
high costs associated with stroke trials, it is unlikely that we will proceed
independently with a full Phase III program. 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. We
are currently in compliance with respect to the material obligations under the
agreement. 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. If our
agreement with Mitsubishi is terminated, we will lose the rights to Argatroban
including our right to receive revenues from the sale of Argatroban, which would
have a material adverse effect on our business and financial condition.
25
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 IS 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. During the period from January 1, 2002 to December 31, 2003,
our stock price has ranged from a low of $0.72 per share (on February 20, 2003)
to a high of $9.10 per share (on December 31, 2003). Further information
regarding the trading price of our common stock is included herein in Item 5.
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 of financial results, may have a significant
effect on the market price of our common stock.
From time to time, there has been limited trading volume with respect to
our common stock. In addition, we cannot assure you 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.
ISSUANCE OF SHARES IN CONNECTION WITH FINANCING TRANSACTIONS OR UNDER
STOCK PLANS AND OUTSTANDING WARRANTS WILL DILUTE CURRENT STOCKHOLDERS.
Pursuant to our stock plans, our management is authorized to grant stock
awards to our employees, directors and consultants. In addition, we also have
warrants outstanding to purchase shares of our common stock. You will incur
dilution upon exercise of any outstanding stock awards or warrants. In addition,
if we raise additional funds by issuing additional common stock, or securities
convertible into or exchangeable or exercisable for common stock, further
dilution to our existing stockholders will result, and new investors could have
rights superior to existing stockholders.
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 the date of this report, we have reserved approximately 6.8 million
shares of common stock for issuance under outstanding options and warrants.
Approximately 6.7 million of these shares of common stock are registered for
sale or resale on currently effective registration statements, and the holders
of substantially all of the remaining shares of 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 AND OUR RIGHTS PLAN, AND SEVERANCE PROVISIONS OF OUR
EMPLOYMENT AGREEMENTS MAY DETER OR PREVENT A CHANGE IN CONTROL OF OUR
COMPANY AND RESULT IN THE ENTRENCHMENT OF MANAGEMENT, EVEN IF THAT CHANGE
WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Our Certificate of Incorporation and 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. These provisions in our Certificate
of Incorporation include:
- authorizing the issuance of "blank check" preferred stock;
26
- limiting the ability of stockholders to call a special meeting of
stockholders by requiring the written request of the holders of at
least 51% of our outstanding common stock; and
- establishing advance notice requirements for nominations for
election to the Board of Directors or for proposing matters that can
be acted upon at stockholder meetings.
We are subject to Section 203 of the Delaware General Corporation Law,
which generally prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with an interested stockholder for a period of
three years following the date on which the stockholder became an interested
stockholder.
In January 2002, we adopted a Rights Plan that may delay or prevent such
attempt by a third party to acquire control of us without obtaining our
agreement to redeem the rights; if our agreement to redeem the rights is not
obtained, the third party would suffer substantial dilution. In addition, the
severance provisions of employment agreements with certain members of management
could impede an attempted change of control by a third party and result in the
entrenchment of management. These provisions include:
- the lump-sum payment to certain members of our management team of up
to one year's annual base salary and a prorata bonus in the event of
a termination by us without "cause" or by the management team member
for "good reason;"
- the continued vesting and exercisability of all stock options and
restricted stock during specified periods after the termination by
us without "cause" or by the management team member for "good
reason;"
- the lump-sum payment to certain members of our management team of up
to three year's annual base salary and bonus in the event of a
termination within two years of a "change in control" of us;
- gross-up payments for certain income taxes on lump-sum payments; and
- the continuation of certain other benefits for periods of up to
three years.
In the event of the termination of all of these members of management
within two years of a "change in control" of us, the base salary and annual
bonus portions of these employment agreements would aggregate approximately $4.9
million at the current rate of compensation.
ITEM 2 -- PROPERTIES
We lease 15,490 square feet of office space in Bellaire, Texas for our
administrative, marketing, clinical development and regulatory departments. The
lease expires July 31, 2005 and, at our option we can elect to extend the lease
to December 31, 2005, provided we give ninety (90) days prior written notice.
We also lease 31,359 square feet of office and laboratory space in a
building in Houston, Texas for our research department, including a 21,621
square foot laboratory facility and a 3,909 square foot animal facility. The
remaining area is being used for clinical development, computer modeling,
storage space and additional offices for scientists. Our lease expires in
December 2007. Additionally, we lease 658 square feet in the building for use as
storage space on a monthly basis.
Revotar leases 10,700 square feet of office and laboratory space in
Berlin, Germany. Their lease expires in September 2006.
We may require additional space to accommodate future research and
laboratory needs as necessary to bring products into development and clinical
trials.
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, 2003.
27
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock began trading on The Nasdaq National Market on June 19,
2001 under the symbol "TXBI", which was changed to "ENCY" in May 2003 when we
changed our name. Previous to June 19, 2001, our common stock was traded on the
American Stock Exchange under the symbol "TXB".
The following table sets forth, for the periods indicated, the high and
low sale prices for the common stock as reported by the consolidated transaction
reporting system.
COMMON STOCK
---------------------------
HIGH LOW
---------- ----------
YEAR ENDED DECEMBER 31, 2002
First Quarter...................................... $ 7.10 $ 5.03
Second Quarter..................................... 6.10 2.94
Third Quarter...................................... 3.71 1.80
Fourth Quarter..................................... 3.08 1.30
YEAR ENDED DECEMBER 31, 2003
First Quarter...................................... 1.57 0.72
Second Quarter..................................... 4.94 1.16
Third Quarter...................................... 6.72 3.02
Fourth Quarter..................................... 9.10 5.85
As of March 1, 2004 there were approximately 475 holders of record of our
common stock and approximately 14,600 beneficial owners.
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
None.
28
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, 2003 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 2003, 2002 and 2001
financial statements and notes thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues .......................................... $ 11,557 $ 10,433 $ 8,917 $ 15,692 $ 2,083
Expenses:
Research and development ....................... 29,421 20,066 17,861 13,513 13,080
Charge for purchase of in-process research
and development .............................. 8,363 -- -- -- --
Equity in loss of affiliate .................... 2,386 8,557 9,450 3,487 --
General and administrative ..................... 9,133 8,976 6,733 6,552 5,512
-------- -------- -------- -------- --------
Total expenses ............................. 49,303 37,599 34,044 23,552 18,592
-------- -------- -------- -------- --------
Operating loss .................................... (37,746) (27,166) (25,127) (7,860) (16,509)
Investment income, net ......................... 1,228 2,472 5,236 4,362 1,212
-------- -------- -------- -------- --------
Loss before minority interest and cumulative
effect of change in accounting principle ..... (36,518) (24,694) (19,891) (3,498) (15,297)
Minority interest in loss of Revotar .............. 1,225 1,225 749 209 --
-------- -------- -------- -------- --------
Loss before cumulative effect of
change in accounting principle ............... (35,293) (23,469) (19,142) (3,289) (15,297)
Cumulative effect of change in accounting principle -- -- -- (2,366) --
-------- -------- -------- -------- --------
Net loss applicable to common shares ........... $(35,293) $(23,469) $(19,142) $ (5,655) $(15,297)
======== ======== ======== ======== ========
Net loss per share basic and diluted .............. $ (0.80) $ (0.54) $ (0.44) $ (0.14) $ (0.45)
======== ======== ======== ======== ========
Weighted average common shares used to
compute basic and diluted net loss per share ... 44,072 43,741 43,637 39,150 34,226
======== ======== ======== ======== ========
DECEMBER 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short and
long-term investments ........................... $ 85,488 $ 68,005 $ 95,427 $ 92,533 $ 15,170
Working capital ................................... 71,935 44,965 52,322 85,041 14,477
Total assets ...................................... 94,398 77,792 104,362 98,969 20,805
Stockholders' equity .............................. 74,856 62,078 84,237 84,207 18,590
29
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. This discussion contains forward-looking statements based on
current expectations that are subject to risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. When used in
this discussion, 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. Our actual results and the timing of events could
differ materially from those anticipated or implied by the forward-looking
statements discussed here as a result of various factors, including, among
others, those set forth under the "Cautionary Note Regarding Forward-Looking
Statements" herein. You should not place undue reliance on these forward-looking
statements, which speak only as of the date of this report. Except as required
by law, we undertake no obligation to update any of the forward-looking
statements in this discussion after the date of this report.
Encysive Pharmaceuticals is a biopharmaceutical company engaged in the
discovery, development and commercialization of novel, synthetic, small molecule
compounds to address unmet medical needs. Our research and development programs
are predominantly focused on the treatment and prevention of interrelated
diseases of the vascular endothelium and exploit our expertise in the area of
the intravascular inflammatory process, referred to as the inflammatory cascade,
and vascular diseases. We have successfully developed one FDA approved drug,
Argatroban, for the treatment of HIT, that is marketed by GSK. Our lead drug
candidate, Thelin(TM), is an endothelin receptor antagonist in Phase III
clinical trials for the treatment of PAH. In addition, we have earlier stage
clinical product candidates in development including TBC3711, a next generation
endothelin receptor antagonist, and bimosiamose, being developed by our
majority-owned German affiliate, Revotar.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
- We recognize revenue from service contracts as services are
performed.
- Royalty revenue is recognized as products are sold by a licensee and
we have received sufficient information to record a receivable. Our
royalty revenue is based on net sales of product, that is, sales net
of discounts, returns and allowances. We have estimated a percentage
of gross sales, based on recent experience, as an allowance for
future returns, however there can be no assurance that our estimate
will be accurate. We believe, however, that differences between
estimated and actual future returns will not have a material effect
upon our results of operations or financial condition.
- Revenue from collaborative research and development activities is
recognized as services are performed.
- We defer the recognition of milestone payments related to
contractual agreements which are still in the development stage.
Such deferred revenues are amortized into income over the estimated
remaining development period. Milestone payments received under
contractual agreements which have completed the development stage
are evaluated, and either recognized into income when earned, or
amortized over a future period, depending upon whether we continue
to have obligations under the terms of the arrangement.
- License fees received under the terms of licensing agreements for
our intellectual property are deferred, and amortized into income
over the estimated development period of the licensed item or items.
- Revenue from grants is recognized as earned under the terms of the
related grant agreements, typically as expenses are incurred.
Amounts received in advance of services being performed under contracts
are recorded as deferred revenue, and recognized as services are performed. We
periodically evaluate our estimates of remaining development periods, and adjust
the recognition of remaining deferred revenues over the adjusted development
period remaining. At December 31, 2003, remaining deferred revenue was
approximately $2.2 million, of which we expect to recognize approximately $0.6
million over the next 12 months. A future change in our estimate of development
periods could accelerate or decelerate the timing of future recognition of
deferred revenue.
30
Stock Options
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations ("APB 25") in accounting for
our stock option plans and apply FASB Statement No. 123, "Accounting for
Stock-Based Compensation," and related interpretations ("FAS 123") in reporting
for our stock option plans. APB 25 utilizes the "intrinsic value" of stock
options, defined as the difference between the exercise price of an option and
the market price of the underlying share of common stock, on the "measurement
date" which is generally the date of grant. Since the exercise price of employee
stock options issued under our plans is set to match the market price of our
common stock, there is generally no compensation expense recognized upon grant
of employee stock options. Options granted to non-employees, if any, are valued
at the fair value of the option as defined by FAS 123, utilizing the
Black-Scholes option pricing model. We record compensation expense for the fair
value of options granted to non-employees. The pro forma effect of recognizing
the fair value of stock option grants to employees on our consolidated results
of operations is discussed in Note 1(m), Stock Based Compensation.
RESULTS OF OPERATIONS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. 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. 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 $183.5 million from the date of our inception to December 31,
2003. We have primarily financed our operations to date through a series of
private placements and public offerings of our common stock and several
collaborative agreements with third parties to jointly pursue product research
and development. See discussion of "Liquidity and Capital Resources" below. See
also "Additional Risk Factors" in Item 1 "Business" herein.
In April 2003, we acquired the interest of ICOS in ELP in a transaction
also referred to as the Acquisition. For more information about the Acquisition,
see Note 7 to the Consolidated Financial Statements. Of the $10 million purchase
price, $4 million was paid at closing, and the remaining $6 million is subject
to the terms of a note to ICOS requiring a $4 million payment in April 2004 and
a $2 million payment in October 2004. Deferred revenue of $1.6 million, arising
from previous payments received by us from ELP for a license fee and milestones,
was recognized as an offset to the purchase price, resulting in a charge for the
purchase of in-process research and development of $8.4 million in 2003.
From its inception in June 2000 through December 31, 2002, we and ICOS
shared equally in the costs of ELP. ICOS informed us, however, that it had
reached the conclusion that joint development of the endothelin receptor
antagonist program through ELP should not continue. As a result, from January
2003 until the Acquisition, we agreed to be responsible for 100% of the costs of
ELP under the terms of a letter agreement, which expired upon the Acquisition.
From its inception in June 2000 through March 31, 2003, we accounted for
our investment in ELP under the equity method. As a result of the Acquisition,
we now include the accounts of ELP in our consolidated financial statements. A
result of the consolidation of ELP into our financial statements is that the
revenue item, "Collaborative research and development from Encysive, L.P." and
the expense item, "Equity in loss of Encysive, L.P." are eliminated and the
operating expenses of ELP are included in our operating expenses. Following the
Acquisition, we changed the name of ICOS-TBC to Encysive, L.P.
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
REVENUES
Revenues in year 2003 increased to $11.6 million from $10.4 million
compared with year 2002. Royalties earned on sales of Argatroban by GSK
increased $1.9 million, or approximately 54% in 2003 compared with 2002, due to
higher net sales of Argatroban in the current year. In 2002, GSK created a
hospital based sales force and initiated programs to increase the sales effort
on Argatroban in the U.S. and Canada, which we believe contributed to the
increase in Argatroban sales and in our royalty revenues. The increase in
royalties was partially offset by the elimination of collaborative research and
development from related party revenues, due to the Acquisition. Collaborative
research and development from related party was $0.7 million in year 2003,
compared with $1.1 million in year 2002, a decrease of $0.4 million. Research
agreement income decreased $0.5 million in year 2003, compared with year 2002.
Research agreement revenues are primarily comprised of payments received from
Schering-Plough for research on VLA-4 antagonists. Following the naming of a
clinical candidate, and receipt of a milestone payment from
31
Schering-Plough in June 2002, we are continuing research on backup VLA-4
antagonists , however fewer resources are devoted to the program than in earlier
periods. If the research agreement is not extended, it will expire in June 2004,
and our research agreement revenues will end.
RESEARCH AND DEVELOPMENT EXPENSE
The endothelin receptor antagonist program has been conducted within ELP
from its inception in June 2000. Prior to December 31, 2002, we included our 50%
share of ELP's losses in our financial results under the caption equity in loss
of ELP. As discussed above, in April 2003, we acquired ICOS's interest in ELP
and as a result, from January 2003 until the Acquisition, we agreed to be
responsible for 100% of the costs of ELP under the terms of a letter agreement,
which expired upon the Acquisition.
Total research and development expenses in year 2003 increased $9.4
million, or approximately 47%, compared with year 2002. The net increase is
primarily comprised of the following items:
- Costs of Thelin(TM) development included in research and development
expenses in year 2003 totaled $13.6 million. Our 50% share of
Thelin(TM) development costs in year 2002 were included in our
equity in loss of Encysive, L.P.
- Clinical trials costs other than for Thelin(TM) development declined
$2.6 million in year 2003, compared to 2002. Year 2002 clinical
trials costs were primarily related to our study of Argatroban as a
potential treatment for ischemic stroke.
- Other research costs in year 2003 declined $1.7 million compared to
2002, primarily due to our restructuring of our research programs in
January 2003.
PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT
On the date of the Acquisition the partnership had no assets other than
its rights to the in-process research and development of the endothelin receptor
antagonist program. Under the terms of the purchase agreement, we agreed to pay
to ICOS a purchase price of $10 million, of which $4 million was paid on
closing. The remaining $6 million is subject to a secured promissory note. See
Note 8 to the Consolidated Financial Statements.
Since the only asset acquired was in-process research and development, we
recorded a charge for in-process research and development of $10.0 million less
unamortized deferred revenues of $1.6 million. The unamortized deferred revenues
of $1.6 million relate to the previous payments received from ELP that were
being amortized into income over the estimated remaining development period. Due
to the short-term nature of the note and the associated interest rate, the note
was not discounted when calculating the in-process research and development
charge.
EQUITY IN LOSS OF ENCYSIVE, L.P.
Our equity in loss of ELP in year 2002 of $8.6 million was comprised of
our 50% share of the partnership's expenses, all of which were related to the
Thelin(TM) development program. As discussed above, year 2003 equity in loss of
Encysive, L.P. of $2.4 million is comprised of 100% of the Thelin(TM)
development program costs through the date of the Acquisition. Thelin(TM)
development costs incurred subsequent to the Acquisition are consolidated in our
financial statements.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses increased $0.2 million in year 2003,
compared with year 2002. Year 2003 expenses, however, include expenses related
to the Thelin(TM) development program, primarily consisting of patent legal
costs, totaling $0.8 million. General and administrative expenses other than
those related to the Thelin(TM) development program decreased approximately $0.6
million in 2003 compared to 2002.
OPERATING LOSS
Operating loss increased $10.6 million in year 2003, compared with year
2002. The increase is primarily comprised of the $8.4 million charge resulting
from the Acquisition, discussed above, and increased costs of the Thelin(TM)
development program in year 2003.
32
INVESTMENT INCOME
Investment income declined $1.2 million in year 2003 compared with year
2002. The decrease is primarily due to lower levels of funds available for
investment throughout year 2003, and to lower prevailing market interest rates
in year 2003.
MINORITY INTEREST IN LOSS OF REVOTAR
The minority interest in loss of Revotar, comprised of 44.8% of the net
loss of Revotar, was unchanged between the two year periods. Under accounting
principles generally accepted in the U.S., it is likely that the cumulative
losses of Revotar will exceed the equity interest of its minority shareholders
during 2004, and we will reflect 100% of its losses in our consolidated net
income or loss thereafter.
NET LOSS
Net loss increased $11.8 million in year 2003, primarily due to the $8.4
million charge resulting from the Acquisition, and increased costs of the
Thelin(TM) development program in year 2003.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
REVENUES
Revenues in the year ended December 31, 2002 increased $1.5 million,
compared with the year ended December 31, 2001. The increase was primarily
attributable to increased royalty income earned on sales of Argatroban by GSK
and increased license fees, milestones and grants, partially offset by reduced
research and development revenues, discussed below.
Royalties earned on sales of Argatroban in 2002 were $3.5 million, an
increase of $1.9 million over year 2001. We earn royalties based upon sales by
GSK to drug wholesalers. In October 2002, GSK initiated a broad-based HIT
disease education media campaign designed to increase awareness of HIT, the
life-threatening reaction to heparin for which Argatroban is approved. As
medical education is key to growing Argatroban sales, we believe this
initiative, along with increased selling efforts, are likely to have a positive
impact on Argatroban sales.
License fees, milestones and grants increased $0.7 million in 2002,
compared with 2001. Revotar was awarded research grants from the German
government and earned approximately $0.3 million in year 2002. In addition to
the grants received by Revotar, the increase in license fees, milestones and
grants in 2002 was primarily comprised of revenues related to the milestone
payment received from Mitsubishi in May 2001, the milestone payment received
from ICOS in July 2001, and the milestone payment received from Schering-Plough
in June 2002. See Note 9 to the Consolidated Financial Statements.
Research agreement revenues, resulting from our collaborative efforts with
unrelated parties, declined $0.8 million in 2002, compared with 2001, primarily
resulting from reduced research and development effort under the Schering-Plough
agreement during 2002. Most of our efforts toward development of an initial
candidate for clinical development had been completed late in 2001. As discussed
above, we received a milestone payment under the Schering-Plough agreement as a
result of the nomination of an initial candidate for Schering-Plough's further
development in the second quarter of 2002.
Collaborative research and development revenues received from ELP declined
$0.4 million in 2002, compared with 2001. The involvement of our research and
development staff in the endothelin receptor antagonist program has been
dependent upon the activities being performed by the partnership in any
particular period, and was expected to fluctuate from quarter to quarter and
year to year.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses increased $2.2 million in 2002, compared
with 2001. The increase was primarily due to costs of clinical trials which
began to incur significant expenses early in year 2002 and were ongoing during
year 2002. Trials ongoing during year 2002 included a Phase II study of
Argatroban in ischemic stroke and a Phase II study of Argatroban in patients
undergoing PCI. During 2002, Revotar completed a Phase IIa proof-of-concept
clinical trial of bimosiamose in psoriasis, and completed a Phase I clinical
trial for asthma utilizing an inhaled form of bimosiamose. See also the
discussion of our ongoing research and development programs, in Item 1,
"Business" herein.
EQUITY IN LOSS OF ENCYSIVE, L.P.
Our equity in the loss of ELP, primarily consisting of research and
development expenses, declined $0.9 million in 2002, compared with 2001. The
principle activity of the partnership, a Phase IIb/III trial of Thelin(TM) for
PAH, completed enrollment in July 2002.
33
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $2.2 million in 2002,
compared with 2001. Insurance costs, particularly product liability and general
liability policies, increased both due to insurance market conditions, and as a
result of increased sales of Argatroban. General and administrative expenses in
2002 included costs associated with the retirement, recruiting and hiring of key
personnel, including a non-cash charge in the first quarter of 2002 of
approximately $0.2 million in compensation expense arising from modifications
made to stock options previously issued to our retiring CEO.
INVESTMENT INCOME
Investment income declined $2.8 million in 2002, compared with 2001. The
decline is due to a combination of lower prevailing interest rates during 2002,
compared with 2001, and to reduced funds available for investment during year
2002.
MINORITY INTEREST IN LOSS OF REVOTAR
The interest of Revotar's minority shareholders in its losses increased
approximately $0.5 million in 2002, compared with 2001. Revotar's expenses
increased in 2002, primarily due to the costs of clinical trials conducted in
2002.
NET LOSS
Our net loss in 2002 increased $4.3 million in 2002, compared with 2001.
The increase is due primarily to higher operating expenses and lower investment
income during 2002, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Year 2003 and 2002
At December 31, 2003, we had cash, cash equivalents and investment
securities of $85.5 million, compared with $68.0 million at December 31, 2002.
We used $26.6 million in cash on operating activities in year 2003, compared to
cash used by operating activities of $25.8 million in 2002. The primary
operating uses of cash in 2003 and 2002 were to fund our general operating
expenses and the ongoing research and development programs conducted by
Encysive, Revotar and ELP, reduced by cash received from investment income,
milestones, and research payments from our collaborative partners.
Investing activities are primarily comprised of our investments in debt
securities. Cash is generated from investment activities when marketable
securities mature, and the resulting cash is utilized, primarily to fund
operating activities. Cash used in investing activities includes a $4 million
payment to ICOS in 2003 upon the Acquisition, and purchases of equipment. In
2003, we initiated programs to reduce expenses and to conserve cash, and as a
result capital expenditures declined $1.8 million in year 2003 compared with
year 2002, In 2003 and 2002, Revotar received grants from the German government
toward the purchase of eligible equipment of approximately $0.2 million per
year.
Cash generated by financing activities in year 2003 was $48.6 million,
compared with cash generated in year 2002 of $0.5 million. Financing activities
in year 2003 primarily consisted of funds raised in a public offering in
December 2003 of $45.4 million, $1.5 million borrowed by Revotar from its
minority shareholders and proceeds from the exercise of stock options of $1.8
million. During 2002, we generated $0.5 million in cash from the proceeds of
employee purchases of stock and employee stock option exercises.
Contractual Obligations
Our material contractual obligations are comprised of (i) a note payable
to ICOS arising from the Acquisition (See Note 8 to the Consolidated Financial
Statements), (ii) amounts borrowed by Revotar from its minority shareholders
(see Note 8), (iii) obligations under our operating lease agreements (see Note
13 to the Consolidated Financial Statements), and (iv) under one research
agreement we could be obligated to pay the other party a termination fee in the
event that we elect to terminate the project prior to completion (see Note 13 to
the Consolidated Financial Statements).
34
The Company had contractual obligations as follows (in thousands):
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
Long-term debt $ 7,610 $ 6,000 --- $1,610 --
Operating leases 5,782 1,704 $ 4,078 -- --
Purchase obligations 600 600 -- -- --
--------- --------- -------- ------ -----
Total $ 13,992 $ 8,304 $ 4,078 $1,610 --
Outlook for 2004
In 2004, we expect to have the following results:
Royalties...................................... $6.7 to $7.6 million
Revenues (including royalties)................. $9.0 to $10.0 million
Expenses (net of Revotar minority interest).... $55.0 to $58.0 million
Investment income.............................. $0.8 to $1.0 million
Net loss....................................... $(46.0) to $(48.0) million
Cash and investments at year end............... $32.0 to $34.0 million
These expectations are based upon various assumptions, which are subject
to certain risks, trends and uncertainties that could cause actual results to
differ materially from those projected. Among these risks, trends and
uncertainties are timing and cost of our clinical trials, attainment of research
and clinical goals and milestones of product candidates, and sales levels of
Argatroban. We have assumed that sales trends of Argatroban over the previous
year will continue. While we do not sell Argatroban, our revenues include a
royalty from GSK, which is based on sales and will, accordingly, vary with
sales. Our actual royalty revenues could vary from our assumptions to the extent
that GSK's actual sales of Argatroban differ from assumed levels.
Projected revenues contain continued amortization of deferred license fees
and milestones previously received from Schering-Plough, which are being
deferred over the estimated development period of the respective compound or
program. We periodically review our estimates of development periods, and actual
recognized revenues could increase or decrease to the extent that we decrease or
increase our estimated development periods. We have not assumed research
agreement revenues from Schering-Plough beyond June 30, 2004.
Projected operating expenses are based upon our approved operating budget
for the year. In the budgeting process, we have not assumed significant changes
in the number of employees during year 2004, and have assumed continued
development of Thelin(TM). Our budgeted expenses also include basic research
efforts on our other programs, and levels of administrative support we believe
to be necessary.
Projected investment income assumes that the rate of return on invested
funds of approximately 2% on an average of approximately $50 million in funds
available for investment throughout the year.
Cash and investments at year-end is projected based upon our projected
sources and uses of cash during the year. In projecting our end of year cash and
investment balances, we have not assumed additional financing or collaborative
arrangements other than those in place at this time.
The range of estimated net loss is based upon our projected revenues and
expenses, as discussed above.
Longer-Term Outlook
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 in subsequent years because:
35
- - We expect to incur significant expenses in conjunction with additional
clinical trial costs for Thelin(TM) and research and clinical trial costs
for development of bimosiamose 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.
- - There may be additional costs in future periods related to Argatroban in
complying with ongoing FDA requirements.
- - Our administrative costs and costs to commercialize our products will
increase as our products are further developed and marketed.
- - If Thelin(TM) receives regulatory approval, we will incur significant
commercialization expenses.
We have been unprofitable to date and expect to incur operating losses for
the next several years as we invest in 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. Estimates of our future capital
requirements will depend on many factors, including:
- market acceptance and commercial success of Argatroban;
- expenses and risks associated with clinical trials to expand the
indications for Thelin(TM);
- continued scientific progress in our drug discovery programs;
- the magnitude of these programs;
- progress with preclinical testing and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the costs involved in filing, prosecuting and enforcing patent
claims;
- competing technological and market developments and changes in our
existing research relationships;
- our ability to maintain and establish additional collaborative
arrangements; and
- 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 into the third quarter of 2005. 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. Upon regulatory approval, we intend to
commercialize Thelin(TM) in North America through our own specialty sales force.
We are seeking a marketing partner or partners for sales in the rest of the
world.
In 2002, the stockholders of Revotar executed an agreement to provide
approximately $4.5 million in unsecured loans, of which our commitment was
approximately $3.4 million. Under the loan agreement, we have advanced
approximately $2.2 million to Revotar as of December 31, 2003, and we expect to
advance an additional $1.2 million to Revotar in 2004. We believe that Revotar's
existing funds, the remaining commitment under the loan agreement and proceeds
under German government scientific grants will be sufficient to fund Revotar
into the first quarter of 2005. In order to continue to operate beyond that
time, Revotar
36
will need to seek additional funding through collaborative arrangements and/or
through public or private financings in the future. Revotar is actively seeking
a partner or partners to develop the inhaled indications of bimosiamose.
Off-Balance Sheet Arrangements
We do not engage in off-balance sheet financing arrangements.
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 affiliate in Berlin, Germany and consolidate the
results of operations into our consolidated financial results. Although not
material to date, our reported expenses and cash flows from this affiliate are
exposed to changing exchange rates. We also have contracts with entities in
other areas outside the U.S. that are denominated in a foreign currency. To
date, these currencies have not fluctuated materially. At December 31, 2003,
Revotar had entered into a foreign-exchange forward contract with a bank to
mitigate the effect of foreign currency fluctuations on approximately $1.2
million in future loan payments from us.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements we are required to include in this Item 8 are set
forth in Item 15 of this Form 10-K.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A -- CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management carried
out an evaluation, with the participation of our principal executive officer
(the "CEO") and our principal financial officer (the "CFO"), of the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15
of the Securities Exchange Act of 1934. Based on those evaluations, the CEO and
CFO believe:
(i) that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure; and
(ii) that our disclosure controls and procedures are effective.
Changes in Internal Controls Over Financial Reporting
There have been no significant changes in our internal controls over
financial reporting during the period covered by this report that has materially
affected, or are reasonably likely to materially affect, our control over
financial reporting.
37
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to Encysive's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on May 11, 2004.
ITEM 11 -- EXECUTIVE COMPENSATION
Incorporated herein by reference to Encysive's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on May 11, 2004.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to Encysive's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on May 11, 2004.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to Encysive's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on May 11, 2004.
ITEM 14 -- PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated herein by reference to Encysive's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on May 11, 2004.
38
PART IV
ITEM 15 -- 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. FINANCIAL STATEMENT SCHEDULES
All other 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.
3. 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
Five reports on Form 8-K were filed during the quarter ended
December 31, 2003. A report on Form 8-K dated October 9, 2003 was filed
regarding Encysive's majority-owned affiliate, Revotar Biopharmaceuticals
AG, initiating two phase IIa clinical trials in psoriasis and atopic
dermatitis. A report on Form 8-K dated November 6, 2003 was filed
regarding Encysive's financial results for third quarter 2003. A report on
Form 8-K dated December 3, 2003 was filed regarding the public offering of
Encysive's common stock. A report on Form 8-K dated December 17, 2003 was
filed regarding an underwriting agreement with SG Cowen Securities
Corporation, RBC Dain Rauscher Inc. and Needham & Company, Inc. in
connection with the offering of 6,500,000 shares of Encysive's common
stock A report on Form 8-K dated December 23, 2003 was filed regarding the
closing of the previously announced offering of 6,500,000 shares of common
stock in an underwritten offering by SG Cowen Securities Corporation, RBC
Dain Rauscher Inc. and Needham & Company, Inc.
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.
39
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
Bellaire and State of Texas on the 15th day of March, 2004.
ENCYSIVE PHARMACEUTICALS INC.
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 15th day of March, 2004.
SIGNATURE TITLE
--------- -----
/s/ JOHN M. PIETRUSKI Chairman of the Board of Directors
- --------------------------------------------
John M. Pietruski
/s/ BRUCE D. GIVEN Director, President and Chief Executive Officer
- -------------------------------------------- (Principal Executive Officer)
Bruce D. Given, M.D.
/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
Stephen L. Mueller (Principal Financial 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 Director
- --------------------------------------------
Suzanne Oparil, M.D.
/s/ WILLIAM R. RINGO, JR. Director
- --------------------------------------------
William R. Ringo, Jr.
/s/ JAMES A. THOMSON Director
- --------------------------------------------
James A. Thomson, Ph.D.
/s/ JAMES T. WILLERSON Director
- --------------------------------------------
James T. Willerson, M.D.
40
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Encysive Pharmaceuticals Inc.:
We have audited the accompanying consolidated balance sheets of Encysive
Pharmaceuticals Inc. and subsidiaries (the Company) as of December 31, 2003
and 2002, 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, 2003. 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 Encysive
Pharmaceuticals Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Houston, Texas
February 19, 2004
F-1
ENCYSIVE PHARMACEUTICALS INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS DECEMBER 31,
----------------------
2003 2002
--------- ---------
Current assets:
Cash and cash equivalents ............................................... $ 65,302 $ 21,228
Short-term investments .................................................. 11,218 26,533
Short-term investments pledged as collateral for letter of credit ....... 7,011 --
Accounts receivable ..................................................... 1,834 1,098
Other current receivables ............................................... 712 473
Receivable from related party under collaborative arrangement ........... -- 393
Prepaids ................................................................ 727 1,482
--------- ---------
Total current assets ................................................ 86,804 51,207
Long-term investments ........................................................ 1,957 20,244
Equipment and leasehold improvements, net .................................... 4,980 5,579
Intangible and other assets, net of accumulated amortization of $368 and $263 657 762
--------- ---------
Total assets ........................................................ $ 94,398 $ 77,792
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 2,404 $ 950
Accrued expenses ........................................................ 5,904 3,774
Deferred revenue from related party ..................................... -- 591
Deferred revenue from unrelated parties ................................. 561 927
Current maturities on long-term debt .................................... 6,000 --
--------- ---------
Total current liabilities ........................................... 14,869 6,242
Liability to related party ................................................... -- 2,664
Deferred revenue from related party .......................................... -- 1,181
Deferred revenue from unrelated parties ...................................... 1,680 3,019
Long-term debt, less current maturities ...................................... 1,610 --
Minority interest in Revotar ................................................. 1,383 2,608
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.005 per share. 5,000,000 shares authorized;
none issued or outstanding .............................................. -- --
Common stock, par value $.005 per share. At December 31, 2003,
75,000,000 shares authorized; 52,457,167 shares issued, 52,244,167
outstanding ..........................................................
At December 31, 2002, 75,000,000 shares authorized,
44,015,364 shares issued, 43,802,364 outstanding ...................... 262 220
Additional paid-in capital .............................................. 259,761 211,847
Deferred compensation expense ........................................... (185) (223)
Treasury stock, 213,000 shares at December 31, 2003 and 2002 ............ (1,602) (1,602)
Accumulated other comprehensive income .................................. 78 1
Accumulated deficit ..................................................... (183,458) (148,165)
--------- ---------
Total stockholders' equity .......................................... 74,856 62,078
--------- ---------
Total liabilities and stockholders' equity .......................... $ 94,398 $ 77,792
========= =========
See accompanying notes to consolidated financial statements.
F-2
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
-------- -------- --------
Revenues:
Research agreements ...................................... $ 3,024 $ 3,570 $ 4,342
Collaborative research and development from Encysive, L.P. 664 1,090 1,442
Royalty income ........................................... 5,411 3,514 1,586
License fees, milestones and grants ...................... 2,458 2,259 1,547
-------- -------- --------
Total revenues ....................................... 11,557 10,433 8,917
-------- -------- --------
Expenses:
Research and development ................................. 29,421 20,066 17,861
Purchase of in-process research and development .......... 8,363 -- --
Equity in loss of Encysive, L.P. ......................... 2,386 8,557 9,450
General and administrative ............................... 9,133 8,976 6,733
-------- -------- --------
Total expenses ....................................... 49,303 37,599 34,044
-------- -------- --------
Operating loss ....................................... (37,746) (27,166) (25,127)
Investment income, net ........................................ 1,228 2,472 5,236
-------- -------- --------
Loss before minority interest .................. (36,518) (24,694) (19,891)
Minority interest in loss of Revotar .......................... 1,225 1,225 749
-------- -------- --------
Net loss applicable to common shares ................. $(35,293) $(23,469) $(19,142)
======== ======== ========
Other comprehensive income (loss):
Unrealized income (loss) on foreign currency translation . 77 300 (284)
-------- -------- --------
Comprehensive loss ................................... $(35,216) $(23,169) $(19,426)
======== ======== ========
Net loss per share basic and diluted .......................... $ (0.80) $ (0.54) $ (0.44)
======== ======== ========
Weighted average common shares used to compute
net loss per share basic and diluted ....................... 44,072 43,741 43,637
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
($ IN THOUSANDS)
ACCUMULATED
OTHER TOTAL
COMMON STOCK ADDITIONAL DEFERRED COMPREHENSIVE STOCK-
--------------------- PAID-IN COMPENSATION TREASURY INCOME ACCUMULATED HOLDERS'
SHARES AMOUNT CAPITAL EXPENSE STOCK (LOSS) DEFICIT EQUITY
----------- ------- ---------- --------- --------- -------- --------- ---------
Balance at January 1, 2001........ 41,203,197 $ 206 $ 189,390 $ -- $ -- $ (15) $(105,554) $ 84,027
Issuance of common stock for
stock option exercises...... 12,268 -- 52 -- -- -- -- 52
Issuance of common stock for
warrant exercises........... 2,511,558 12 20,581 -- -- -- -- 20,593
Issuance of common stock in
payment of expenses......... 56,615 -- 530 -- -- -- -- 530
Compensation expense related to
stock options............... -- -- 63 -- -- -- -- 63
Purchase of treasury shares
(213,000 shares)............ -- -- -- -- (1,602) -- -- (1,602)
Net loss.......................... -- -- -- -- -- -- (19,142) (19,142)
Other comprehensive loss.......... -- -- -- -- -- (284) -- (284)
----------- ------- ---------- --------- --------- -------- --------- ---------
Balance at December 31, 2001...... 43,783,638 $ 218 $ 210,616 $ -- $ (1,602) $ (299) $(124,696) $ 84,237
----------- ------- ---------- --------- --------- -------- --------- ---------
Issuance of common stock for
stock option exercises...... 129,860 1 454 -- -- -- -- 455
Issuance of common stock for
warrant exercises........... 500 -- -- -- -- -- -- ---
Sale of unregistered
common stock................ 5,000 -- 31 -- -- -- -- 31
Issuance of common stock in
payment of expenses......... 51,429 1 271 -- -- -- -- 272
Compensation expense related to
stock options............... -- -- 202 -- -- -- -- 202
Amortization of deferred
compensation expense........ -- -- -- 85 -- -- -- 85
Deferred compensation expense
related to issuance of stock 50,000 -- 308 (308) -- -- -- ---
Cancellation of restricted shares. (5,063) -- (35) -- -- -- -- (35)
Net loss.......................... -- -- -- -- -- -- (23,469) (23,469)
Other comprehensive income........ -- -- -- -- -- 300 -- 300
----------- ------- ---------- --------- --------- -------- --------- ---------
Balance at December 31, 2002...... 44,015,364 $ 220 $ 211,847 $ (223) $ (1,602) $ 1 $(148,165) $ 62,078
----------- ------- ---------- --------- --------- -------- --------- ---------
(Continued)
F-4
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
($ IN THOUSANDS)
ACCUMULATED
OTHER TOTAL
COMMON STOCK ADDITIONAL DEFERRED COMPREHENSIVE STOCK-
--------------------- PAID-IN COMPENSATION TREASURY INCOME ACCUMULATED HOLDERS'
SHARES AMOUNT CAPITAL EXPENSE STOCK (LOSS) DEFICIT EQUITY
----------- ------- ---------- --------- --------- -------- --------- ---------
Balance at December 31, 2002...... 44,015,364 $ 220 $ 211,847 $ (223) $ (1,602) $ 1 $(148,165) $ 62,078
Issuance of common stock for
stock option exercises...... 419,242 2 1,759 -- -- -- -- 1,761
Issuance of common stock for
warrant exercises........... 67,261 -- -- -- -- -- -- ---
Issuance of common stock in
payment of expenses......... 363,419 2 373 -- -- -- -- 375
Compensation expense related to
stock options............... -- -- 86 -- -- -- -- 86
Deferred compensation expense
related to issuance of stock 130,250 1 251 (252) -- -- -- ---
Amortization of deferred
compensation expense........ -- -- -- 290 -- -- -- 290
Compensation expense related
to modification of
warrants.................... -- -- 207 -- -- -- -- 207
Cancellation of restricted shares. (13,369) -- (76) -- -- -- -- (76)
Issuance of common stock in
public offering............. 7,475,000 37 45,314 -- -- -- -- 45,351
Net loss.......................... -- -- -- -- -- -- (35,293) (35,293)
Other comprehensive income........ -- -- -- -- -- 77 -- 77
---------- -------- ---------- ---------- -------- -------- --------- --------
Balance at December 31, 2003...... 52,457,167 $ 262 $ 259,761 $ (185) $ (1,602) $ 78 $(183,458) $ 74,856
========== ======== ========== ========== ========= ======== ========== ========
See accompanying notes to consolidated financial statements
F-5
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (35,293) $ (23,469) $ (19,142)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ....................... 1,068 1,071 913
Equity in loss of Encysive, L.P. .................... 2,386 8,557 9,450
Purchase of in-process research and development ..... 8,363 -- --
Minority interest in loss of Revotar ................ (1,225) (1,225) (749)
Expenses paid with stock ............................ 375 272 530
Stock based compensation expense .................... 507 252 63
Loss on disposition of fixed assets ................. 77 -- 12
Decrease in interest receivable included in
short-term and long-term investments ........... 459 265 131
Changes in operating assets and liabilities:
Accounts receivable ................................. (736) (443) (417)
Prepaids ............................................ 757 (128) (4)
Other current receivables ........................... (183) 144 6
Receivable from related party
under collaborative arrangement ................... 350 751 (262)
Accounts payable and accrued expenses ............... 3,375 (1,460) 1,533
Liability to related party .......................... (5,051) (9,426) (7,293)
Deferred revenue from unrelated parties ............. (135) 157 1,062
Deferred revenue from related party ................. (1,705) (1,109) 1,187
--------- --------- ---------
Net cash used in operating activities ............. (26,611) (25,791) (12,980)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements ....... (377) (2,193) (2,757)
Grants received for purchases of equipment .............. 185 167 --
Purchase of in-process research and development ......... (4,000) -- --
Purchase of investments ................................. (17,929) (85,608) (154,272)
Maturity of investments ................................. 44,061 123,985 112,760
--------- --------- ---------
Net cash provided by (used in) investing activities 21,940 36,351 (44,269)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock ........................... -- -- (1,602)
Borrowings from minority shareholders of Revotar ........ 1,469 -- --
Proceeds from sale of common stock in public offering ... 45,351 -- --
Proceeds from option and warrant exercises, net ......... 1,761 486 20,645
--------- --------- ---------
Net cash provided by financing activities ......... 48,581 486 19,043
--------- --------- ---------
Effect of exchange rate changes on cash ...................... 164 96 (178)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .... 44,074 11,142 (38,384)
Cash and cash equivalents at beginning of year ............... 21,228 10,086 48,470
--------- --------- ---------
Cash and cash equivalents at end of year ..................... $ 65,302 $ 21,228 $ 10,086
========= ========= =========
Supplemental schedule of noncash financing activities:
Deferred compensation expense ........................... $ 290 $ 85 --
Issuance of common stock for expenses ................... 375 272 530
Note issued upon acquisition of partnership interest .... 6,000 -- --
Stock-based compensation expense upon
modification and exercise of warrant.................. 207 -- --
Interest paid ........................................... 123 3 --
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Encysive Pharmaceuticals Inc. (the "Company" or "Encysive"), 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,
Encysive, 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. Encysive and ICOS were
both 50% owners in ICOS-TBC, and shared equally in the costs of ICOS-TBC.
In April 2003, the Company acquired the ownership interest of ICOS in
ICOS-TBC, and changed the name of the partnership to Encysive, L.P.,
("ELP") and the name of TBC-ET, Inc. to EP-ET, LLP, a Delaware limited
partnership. For further discussion of the Encysive, L.P. partnership, see
Note 7. During the third quarter of 2000, Encysive formed Revotar
Biopharmaceuticals AG ("Revotar"), a German corporation, to conduct
research and development for novel small molecule compounds and to develop
and commercialize Encysive's selectin antagonists. The Company retains 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 or may not be successful. 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, ELP, IPI and EP-ET, Inc.,
and its majority owned subsidiary, Revotar. All material intercompany
balances and transactions have been eliminated.
F-7
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 and are recorded at cost. Short-term investments consist of debt
securities with original maturities of less than one year and greater than
three months at the purchase date. Long-term investments consist of debt
securities with a remaining maturity of one to four years. The Company
classifies all short-term and long-term investments as held-to-maturity.
Held-to-maturity securities are those securities in which the Company has
the ability and intent to hold the security until maturity. Short-term and
long-term investments are stated at amortized cost plus accrued interest.
Interest income is accrued as earned. The Company evaluates the carrying
value of its securities by comparing the carrying values of the securities
to their market values. In the event that the fair value of a security
were to decline below its carrying cost, and in the opinion of management
such decline were other than temporary, the Company would record a loss
and reduce the carrying value of such instrument to its fair value.
Composition of cash and investments was as follows (in thousands):
December 31, December 31,
2003 2002
------- -------
Cash and cash equivalents:
Demand and money market accounts $ 1,043 $ 609
Corporate commercial paper 64,259 20,619
------- -------
Total cash and cash equivalents $65,302 $21,228
======= =======
Investments at December 31, 2003 and 2002 were as follows:
As of December 31, 2003
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Short-term investments, held-to-maturity: $ 2,010 $ -- $ (9) $ 2,001
U.S. Government agency securities
Corporate commercial paper 10,057 19 (2) 10,074
Corporate debt securities 6,162 -- (61) 6,101
------- ------- ------- -------
Total short-term investments, held-to-maturity $18,229 $ 19 $ (72) $18,176
======= ======= ======= =======
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Long-term investments, held-to-maturity:
Corporate commercial paper $ 956 $ 36 $ -- $ 992
Corporate debt securities 1,001 -- (1) 1,000
------- ------- ------- -------
Total long-term investments, held-to-maturity $ 1,957 $ 36 $ (1) $ 1,992
======= ======= ======= =======
As of December 31, 2002
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Short-term investments, held-to-maturity:
U.S. Government agency securities $ 4,017 $ 63 $ -- $ 4,080
Corporate commercial paper 20,231 -- (70) 20,161
Corporate debt securities 2,285 -- (13) 2,272
------- ------- ------- -------
Total short-term investments, held-to-maturity $26,533 $ 63 $ (83) $26,513
======= ======= ======= =======
F-8
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Long-term investments, held-to-maturity:
U.S. Government agency securities $12,102 $ 62 $ -- $12,164
Corporate commercial paper 5,052 126 -- 5,178
Corporate debt securities 3,090 65 (8) 3,147
------- ------- ------- -------
Total long-term investments,held-to-maturity $20,244 $ 253 $ (8) $20,489
======= ======= ======= =======
(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 Encysive, L.P.
Prior to the purchase of the ownership interest of ICOS in Encysive,
L.P. in April 2003, the Company accounted for the investment in Encysive,
L.P. using the equity method. Because the Company had no basis in the
technology transferred to Encysive, L.P. as the Company's original
investment, the Company did not record an amount for its original
investment. The Company recorded its share of the Encysive, L.P. loss as a
liability to related party until the Company funded its portion of the
loss.
Encysive, L.P. paid a license fee and a milestone payment to the
Company in 2000 and 2001, respectively. Because the Company had continuing
obligations to Encysive, L.P., the Company deferred these amounts and
amortized them into revenue over the estimated developmental period of the
underlying technology.
The Company's consolidated financial statements include the results
of Encysive, L.P. following the Company's purchase of the ownership
interest of ICOS. See Note 7.
(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, 2003,
2002 and 2001, of approximately $8,932,000, $9,283,000 and $7,296,000,
respectively, were 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 by the weighted average number of common
and common equivalent shares outstanding during the period. For the years
2003, 2002 and 2001, there were no potential common equivalent shares used
in the calculation of weighted average common shares outstanding as the
effect would be antidilutive due to net losses.
Year Ended December 31,
------------------------------------------
2003 2002 2001
---------- ---------- ----------
Weighted average shares used
To compute basic and diluted
net loss per common share 44,072,380 43,741,258 43,636,548
========== ========== ==========
F-9
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
--------- ---------- ----------
Securities convertible into common
stock, not used because the
effect would be antidilutive:
Stock options 4,609,992 5,012,500 4,131,252
Unvested restricted stock 529,334 -- --
Warrants 142,858 246,586 247,858
---------- ---------- ----------
Total 5,282,184 5,259,086 4,379,110
========== ========== ==========
(h) Revenue Recognition
Revenue from service contracts is recognized as services are
performed. Royalty revenue is recognized as products are sold by a
licensee and the Company has received sufficient information to record a
receivable. The Company defers the recognition of milestone payments
related to contractual agreements which are still in the development
stage. Such deferred revenues are amortized into income over the estimated
remaining development period. Milestone payments received under
contractual agreements which have completed the development stage are
evaluated, and either recognized into income when earned, or amortized
over a future period, depending upon whether 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 development period of the licensed item or items. The Company
periodically evaluates its estimates of remaining development periods, and
adjusts the recognition of remaining deferred revenues over the adjusted
development period remaining. Revenue from grants is recognized as earned
under the terms of the related grant agreements, typically as expenses are
incurred. Amounts received in advance of services being performed under
contracts are recorded as deferred revenue, and recognized as services are
performed.
(i) Patent Application Costs
Costs incurred in filing for, defending and maintaining patents are
expensed as incurred.
(j) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America.
Actual results could differ from these estimates.
(k) Intangible and Other Assets
Intangible and other assets primarily consists of an amount paid for
products approved by the United States Food and Drug Administration
("FDA"), which is being amortized on a straight-line basis over its
estimated useful life. 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 was
$105,000 in each of the years ended December 31, 2003, 2002 and 2001, and
expects it to be approximately $105,000 per year thereafter. Amortization
of intangible assets is included in research and development expense in
the consolidated statements of operations and comprehensive loss.
(l) Treasury Stock
Treasury stock is recorded at cost. On May 3, 2001, the Company
announced a stock repurchase program to buy up to 3 million shares, or
approximately 7 percent of the Company's outstanding Common Stock over an
18 month period. Pursuant to the stock repurchase program, the Company
repurchased 213,000 shares for net payments of approximately $1,602,000
during the year ended December 31, 2001. No shares were repurchased during
the years ended December 31, 2003 and 2002.
(m) Stock Based Compensation
At December 31, 2003, the Company has six stock-based compensation
plans for employees and non-employee directors, which are described more
fully in Note 3. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. Net loss in
the year ended December 31, 2003 included stock-based compensation expense
resulting from the grant of shares of
F-10
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
restricted stock and from the grant of options subject to the approval of
stockholders of a motion to increase the authorized shares in the Amended
and Restated 1999 Stock Incentive Plan, which approval was obtained in May
2003. Net loss in the years ended December 31, 2002 and 2001 included
stock-based compensation expense as a result of modifications made to
certain options previously issued to retiring employees. Net loss in the
year ended December 31, 2002 also includes stock-based compensation
expense related to the grant of shares of restricted stock to the
Company's CEO. No other stock-based employee compensation expense is
reflected in net loss, however, as all options granted under those plans
had an exercise price equal to the market price of the underlying common
stock on the date of grant. The following table illustrates the effect on
net loss and loss per share if the Company had applied the fair value
recognition provisions of FASB Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," (SFAS123) to
stock-based employee compensation ($ in thousands, except for per share
data).
YEAR ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
Net loss, as reported $(35,293) $(23,469) $(19,142)
Add: Stock-based employee
compensation expense included
in reported net loss 300 252 63
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards (2,896) (4,238) (4,118)
-------- -------- --------
Pro forma net loss $(37,889) $(27,455) $(23,197)
======== ======== ========
Loss per share:
As reported, basic and diluted $ (0.80) $ (0.54) $ (0.44)
======== ======== ========
Pro forma, basic and diluted $ (0.86) $ (0.63) $ (0.53)
======== ======== ========
The per-share weighted average fair value of stock options granted
during 2003, 2002 and 2001 was $1.02, $3.45 and $3.62, respectively, on
the grant date using the Black-Scholes option pricing model with the
following assumptions:
YEAR ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
------- ------- -------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 2.6% 2.8% 4.2%
Expected volatility 73.9% 74.3% 78.0%
Expected life in years 4.50 4.54 4.83
(n) 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-11
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(o) Impairment of Long-lived Assets
As circumstances dictate, the Company evaluates the recoverability
of its long-lived tangible and intangible 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.
(p) New Accounting Pronouncements
The FASB issued FASB Interpretation No. 46 in January 2003, which
was revised in December 2003 ("FIN No. 46R"), "Consolidation of Variable
Interest Entities." FIN No. 46R requires a company to consolidate a
variable interest entity if it is designated as the primary beneficiary of
that entity even if the company does not have a majority of voting
interests. A variable interest entity is generally defined as an entity
where its equity is unable to finance its activities or where the owners
of the entity lack the risk and rewards of ownership. The adoption of FIN
No. 46R by the Company did not have an impact upon its financial condition
or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," ("SFAS150"). The
Company's adoption of SFAS150 did not have an impact on its financial
condition or results of operations.
In December 2003, the FASB issued the revised Statement of Financial
Accounting Standards No. 132, "Employers Disclosures about Pensions and
Other Postretirement Benefits - an amendment of FASB Statements No. 87,
88, and 106,"("SFAS132") which requires additional disclosures about the
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other postretirement plans. The adoption of
SFAS132 by the Company did not have an impact upon its financial condition
or results of operations.
(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 were exercisable at $8.44 per share.
There were 2,386,645 warrants outstanding as of December 31, 2000 which
were exercised on January 3, 2001 for proceeds of approximately $20.1
million.
In December 2003, the Company sold 7,475,000 shares of Common Stock
for $6.50 per share in an underwritten public offering. The net proceeds
to the Company from this offering were approximately $45.4 million after
deducting selling commissions and expenses of approximately $3.2 million
related to the offering.
The Company has reserved Common Stock for issuance as of December
31, 2003 as follows:
Stock option plans.................. 6,703,921
Warrants outstanding................ 142,858
-----------
Total shares reserved......... 6,846,779
===========
Shareholders' Rights Plan
In January 2002, the Company adopted a shareholder rights plan under
which the Board of Directors declared a dividend of one preferred stock
purchase right ("Right") for each outstanding share of the Company's
common stock held of record as of the close of business on January 22,
2002. Each Right initially entitles a shareholder to purchase a one
one-thousandth fraction of a share of Preferred Stock - Junior
Participating Series A (the "Preferred Stock") for $55.00. Each such
fraction of a share of Preferred Stock has terms designed to make it
essentially equivalent to one share of Common Stock. The Rights will
become exercisable only in the event a person or group acquires 15% or
more of the Company's Common Stock or commences a tender or exchange offer
which, if consummated, would result in that person or group owning 15% of
the Common Stock. Prior to such an event, the Rights will be evidenced by
and traded in tandem with the Common Stock.
F-12
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If a person or group acquires a 15% or larger position in the
Company, each Right (except those held by the acquiring party) will then
entitle its holder to purchase, fractional shares of Preferred Stock
having twice the value of the $55 exercise price, with each fractional
Preferred Share valued at the market price of the Common Stock. Also, if
following an acquisition of 15% or more of the Company's Common Stock, the
Company is acquired by that person or group in a merger or other business
combination transaction, each Right would then entitle its holder to
purchase Common Stock of the acquiring company having a value of twice the
$55.00 exercise price. The effect would be to entitle the Company's
shareholders to buy stock in the acquiring company at 50% of its market
price.
The Company may redeem the Rights at $.001 per Right at any time on
or prior to the tenth business day following the acquisition of 15% or
more of its Common Stock by a person or group or commencement of a tender
offer for such 15% ownership. The Rights expire on January 2, 2012.
(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 61,919 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 367,240 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 19,954 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 1,503,368 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 716,195 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 Amended and Restated 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 4,035,245 shares
of Common Stock are reserved for issuance out of authorized but unissued
shares of the Company.
F-13
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock options as of December 31, 2003, follows:
EXERCISE PRICE EXERCISED/ AVAILABLE
STOCK OPTION PLANS PER SHARE AUTHORIZED OUTSTANDING OTHER EXERCISABLE FOR GRANT
------------------ --------- ---------- ----------- ----- ----------- ---------
1990 Plan............ $1.38 - $21.59 285,715 61,919 223,796 61,919 --
1992 Plan............ $1.41 - $21.59 1,700,000 367,240 1,332,760 367,240 --
Director Plan........ $3.50 - $4.54 71,429 19,954 51,475 19,954 --
1995 Plan............ $0.93 - $21.59 2,000,000 1,307,614 496,632 1,257,864 195,754
1995 Director Plan... $1.38 - $11.31 800,000 446,596 83,805 386,596 269,599
1999 Plan............ $0.93 - $20.13 4,750,000 2,406,669 714,755 907,382 1,628,576
------------ ----------- ---------- --------- ---------
TOTALS........ 9,607,144 4,609,992 2,903,223 3,000,955 2,093,929
============ =========== ========= ========= =========
A summary of the status of the Company's stock option plans as of
December 31, 2003, 2002 and 2001 and the changes during the years then
ended is presented below:
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding at January 1, 2001........................ 3,152,316 $7.36
Granted............................................ 1,042,700 5.69
Canceled........................................... (51,496) 13.77
Exercised.......................................... (12,268) 4.15
----------
Outstanding at December 31, 2001...................... 4,131,252 6.87
Granted............................................ 1,272,225 5.74
Canceled........................................... (261,117) 5.97
Exercised.......................................... (129,860) 3.50
----------
Outstanding at December 31, 2002...................... 5,012,500 6.72
Granted............................................ 749,830 1.68
Canceled........................................... (691,796) 6.96
Exercised.......................................... (460,542) 4.48
----------
Outstanding at December 31, 2003...................... 4,609,992 $6.09
==========
F-14
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize information about the Company's stock
options outstanding as of December 31, 2003, 2002 and 2001, respectively:
WEIGHTED WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE
OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE
EXERCISE PRICE AS OF 12/31/2003 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2003 OF EXERCISABLE
-------------- ---------------- ---------------- -------------- ---------------- --------------
$ 0.93 - $ 4.19 1,176,107 6.73 $ 2.07 528,780 $ 3.10
$ 4.20 - $ 5.63 1,633,849 6.05 $ 5.24 1,080,472 $ 5.14
$ 5.64 - $ 7.19 1,297,005 5.27 $ 6.39 888,672 $ 6.47
$ 7.20 - $ 21.59 503,031 5.92 $ 17.45 503,031 $ 17.45
--------------- ---------------
$ 0.93 - $ 21.59 4,609,992 5.99 $ 6.09 3,000,955 $ 7.24
=============== ===============
WEIGHTED WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE
OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE
EXERCISE PRICE AS OF 12/31/2002 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2002 OF EXERCISABLE
-------------- ---------------- ---------------- -------------- ---------------- --------------
$ 1.31 - $ 4.53 1,261,140 3.74 $ 3.53 1,195,140 $ 3.53
$ 4.54 - $ 5.63 1,749,644 6.24 $ 5.49 647,472 $ 5.37
$ 5.64 - $ 7.19 1,400,222 5.93 $ 6.41 845,222 $ 6.56
$ 7.20 - $ 21.59 601,494 6.69 $ 17.68 440,517 $ 17.45
--------------- ---------------
$ 1.31 - $ 21.59 5,012,500 5.84 $ 6.72 3,128,351 $ 6.69
=============== ===============
WEIGHTED WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE
OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE
EXERCISE PRICE AS OF 12/31/2001 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2001 OF EXERCISABLE
-------------- ---------------- ---------------- -------------- ---------------- --------------
$ 1.31 - $ 4.19 1,050,454 3.68 $ 3.21 951,041 $ 3.11
$ 4.20 - $ 5.51 1,526,834 6.44 $ 5.17 734,486 $ 4.80
$ 5.52 - $ 11.31 1,035,970 6.07 $ 6.85 909,478 $ 6.79
$ 11.32 - $ 21.59 517,994 8.02 $ 19.36 194,418 $ 19.37
--------------- ---------------
$ 1.31 - $ 21.59 4,131,252 5.84 $ 6.87 2,789,423 $ 5.89
=============== ===============
In 2003, 2002 and 2001, the Company granted, out of the 1999 Plan
and the 1995 Director Plan, shares of restricted Common Stock as
compensation to certain of its employees and non-employee directors. Such
grants vest over the three year period subsequent to grant. Shares
granted, and the weighted-average fair values in years 2003, 2002 and 2001
were as follows:
Shares Fair Value
------ ----------
Granted in year 2001 56,615 $9.37
Granted in year 2002 101,429 5.71
Granted in year 2003 493,669 1.27
F-15
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In years 2003 and 2002, 13,369 and 5,063 shares of unvested
restricted stock grants were cancelled, respectively, upon the termination
of the respective grantee's employment.
In years 2003, 2002 and 2001, the Company recorded stock-based
compensation expense related to grants of stock (net of cancellations) of
$587,000, $321,000 and $530,000, respectively.
Warrants
A summary of the status of the Company's warrants as of December 31,
2003, 2002 and 2001, and changes during the years then ended is presented
below:
WEIGHTED-AVERAGE
WARRANTS EXERCISE PRICE
----------- --------------
Outstanding at January 1, 2001............. 2,772,371 $ 8.33
Forfeited............................... (12,955) 4.40
Exercised............................... (2,511,558) 8.20
-----------
Outstanding at December 31, 2001........... 247,858 9.87
Exercised............................... (1,272) 4.25
-----------
Outstanding at December 31, 2002........... 246,586 9.90
Exercised............................... (103,728) 2.27
-----------
Outstanding at December 31, 2003........... 142,858 $ 14.00
===========
On January 3, 2001, the Company's publicly traded warrants to
purchase 2,386,645 shares were exercised and the Company received cash
proceeds of $20,143,000. In February 2001, warrants to purchase 124,913
shares at a weighted-average exercise price of $3.60, originally issued in
1996, were exercised for total cash proceeds of $450,000.
In September 2003, the Company settled a dispute with a former
consultant and agreed to modify the exercise price of certain warrants
issued to such former consultant to purchase 103,728 shares, from $4.25
per share to $2.25 per share. Those warrants were then exercised in a
cashless exercise, pursuant to which the Company issued 67,261 shares of
common stock, and recorded stock based compensation expense of
approximately $207,000, which is included in general and administrative
expenses in year 2003.
At December 31, 2003, the Company's only outstanding warrant is a
warrant to purchase 142,858 shares issued to Genentech in 1997. The
Genentech warrant expires in October 2004, and has an exercise price of
$14.00 per share.
F-16
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) INCOME TAXES
The Company did not incur any tax expense in any year due to
operating losses and the related increase in the valuation allowance.
The reconciliation of income taxes at the statutory rate of 35%
applied to income before taxes is as follows ($ in thousands):
DECEMBER 31,
------------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Computed "expected" tax expense $ (12,353) $ (8,214) $ (6,700)
Effect of:
Permanent differences (185) 893 525
Increase in valuation allowance 12,538 7,321 6,175
--------------- --------------- ---------------
Tax expense $ -- $ -- $ --
=============== =============== ===============
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets as of December 31, 2003
and 2002 are as follows ($ in thousands):
DECEMBER 31,
------------------------------
2003 2002
------------- -------------
Loss carryforwards $ 57,692 $ 41,946
Start-up costs 5,228 8,001
Property, plant and equipment 797 (71)
Deferred revenue 784 2,053
Other 1,013 1,047
------------- ---------------
Gross deferred tax assets 65,514 52,976
Valuation allowance (65,514) (52,976)
------------- ---------------
Net deferred tax assets $ -- $ --
============= ===============
At December 31, 2003 and 2002, the Company had net operating loss
carryforwards of $164.8 million and $118.4 million, respectively. The
Company has established a valuation allowance for the full amount of the
resulting deferred tax assets as management does not believe that it is
more likely than not that the Company will recover these assets.
Utilization of the Company's net operating loss carryforwards is subject
to certain limitations due to specific stock ownership changes which have
occurred or may occur. To the extent not utilized, the carryforwards will
expire during the years beginning 2005 through 2023.
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following ($ in
thousands):
DECEMBER 31,
---------------------------------
2003 2002
--------------- --------------
Furniture and equipment.................................. $ 11,167 $ 10,667
Leasehold improvements................................... 4,311 4,311
------------- ------------
15,478 14,978
Less accumulated depreciation and amortization........... 10,498 9,399
------------- ------------
$ 4,980 $ 5,579
============= ============
F-17
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) ENTITY-WIDE GEOGRAPHIC DATA
The Company operates in a single business segment that includes
research and development of pharmaceutical products. The following table
summarizes the Company's long-lived assets in different geographic
locations ($ in thousands):
DECEMBER 31,
---------------------------------------
2003 2002
----------------- -----------------
Long-lived assets:
United States $ 4,327 $ 4,884
Germany 1,310 1,457
----------------- -----------------
Total $ 5,637 $ 6,341
================= =================
The following table summarizes the Company's revenues in different
geographic locations ($ in thousands):
YEAR ENDED,
----------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
Revenues:
United States $ 10,952 $ 10,130 $ 8,917
Germany 605 303 --
----------------- ----------------- -----------------
Total $ 11,557 10,433 $ 8,917
================= ================= =================
The Company's revenues are primarily derived from several customers
each of whom represent a significant percentage of total revenues. The
following table summarizes the Company's sources of revenues from its
principal customers:
YEAR ENDED,
----------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
Customers:
GSK $ 5,411 $ 3,514 $ 1,417
Schering-Plough 3,585 4,026 4,967
Encysive, L.P. 813 2,194 2,259
Other 1,748 699 274
----------------- ----------------- -----------------
Total $ 11,557 10,433 $ 8,917
================= ================= =================
(7) ACQUISITION OF PARTNERSHIP INTEREST
On April 22, 2003, the Company and ICOS executed a purchase and sale
agreement (the "Acquisition Agreement") pursuant to which the Company purchased
the partnership interest of ICOS and its subsidiaries in ELP (the
"Acquisition.") The partnership had no assets other than its rights to the
in-process research and development of the endothelin receptor antagonist
program. Under the Acquisition Agreement, the Company agreed to pay to ICOS a
purchase price of $10,000,000, of which $4,000,000 was paid on April 22, 2003.
The remaining $6,000,000 is subject to a secured promissory note (the "Note"),
see Note 8.
Since the only asset acquired was in-process research and development, the
Company recorded a charge for in-process research and development of $10,000,000
less unamortized deferred revenues of $1,637,000. The unamortized deferred
revenues of $1,637,000 relate to the previous payments received from ELP that
were being amortized into income over the estimated remaining development
period. Due to the short-term nature of the Note and the associated interest
rate, the Note was not discounted when calculating the in-process research and
development charge.
The following unaudited pro forma summary of operations for the years
ended December 31, 2003, 2002 and 2001 are based upon the historical financial
statements of the Company and ELP after giving effect to the Acquisition, as if
the combination had occurred on January 1, 2001. Amounts are in thousands,
except per-share data.
F-18
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2003
Pro Forma
Historical Adjustment Pro Forma
Revenues $ 11,557 $ (799) $ 10,758
Net Loss (35,293) 8,228 (27,065)
Net Loss Per Share
Basic and Diluted $ (.80) -- (.61)
Year Ended December 31, 2002
Pro Forma
Historical Adjustment Pro Forma
Revenues $ 10,433 $ (2,199) $ 8,234
Net Loss (23,469) (9,668) (33,137)
Net Loss Per Share
Basic and Diluted $ (.54) -- (.76)
Year Ended December 31, 2001
Pro Forma
Historical Adjustment Pro Forma
Revenues $ 8,917 $ (2,255) $ 6,662
Net Loss (19,142) (10,263) (29,405)
Net Loss Per Share
Basic and Diluted $ (.44) -- (.67)
Pro forma adjustments include eliminating the $8,363,000 charge for
purchase of in-process research and development upon the Acquisition,
elimination of intercompany revenues between the Company and ELP, elimination of
recognition of license fee and milestone received by the Company from ELP, and
recognition of ICOS's share of partnership expenses in each of the pro forma
periods presented.
(8) LONG-TERM DEBT
The Company is party to a Note arising from the Acquisition (See Note 7).
The Note requires a payment of $4,000,000 on April 22, 2004, and a payment of
$2,000,000 on October 22, 2004. The outstanding principal balance of the Note
accrues interest at a rate which approximates the three-month London interbank
offering rate for U.S. Dollars ("LIBOR") plus 1.5%. The interest rate was
established on April 22, 2003 at approximately 2.82%, and then was adjusted on
the first business day of July to approximately 2.78%, and on the first day of
October to approximately 2.64%. The next LIBOR adjustment date is the first
business day of January, 2004. Interest is payable on or before the tenth day
after each LIBOR adjustment date. The Company's obligations under the Note are
secured with an irrevocable standby letter of credit, for which the Company has
pledged marketable securities with an amortized cost of $7,011,000.
The Company and the other stockholders of Revotar have executed an
agreement to provide approximately $4.5 million in unsecured loans, of which the
Company's commitment is approximately $3.4 million. The terms of the loans
require quarterly interest payments and repayment of all principal on or before
April 1, 2007. The interest rate for the first two years will be seven percent,
after which the interest rate will be reset to the U.S. prime rate plus 2.5% if
such rate is higher than seven percent. Pursuant to such agreement, the Company
has advanced approximately $2.2 million to Revotar as of December 31, 2003. As
of December 31, 2003, the minority shareholders of Revotar have advanced
approximately $1.5 million to Revotar. Revotar's management has informed the
Company that they anticipate Revotar will borrow the remaining commitment of
approximately $1.2 million from the Company in early 2004. The loan from the
Company is denominated in U.S. dollars.
The Company's obligations under long-term debt at December 31, 2003 were
as follows:
Obligation
----------
Note to ICOS Corporation $6,000,000
Borrowing by Revotar from minority shareholders 1,610,186
---------
Total 7,610,186
Less current maturity of long-term debt 6,000,000
---------
Long-term debt 1,610,186
F-19
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) RESEARCH AND LICENSE AGREEMENTS
Under the terms of the Company's agreement with ELP prior to the
Acquisition, the Company provided, and was reimbursed for, research and
development activities conducted on behalf of Encysive, L.P..
The Company also receives reimbursement for certain research costs
pursuant to its agreements with GlaxoSmithKline, plc ("GSK") (Note 11),
Schering-Plough LTD. and Schering-Plough Corporation (collectively
"Schering-Plough") and Revotar (Note 10).
Mitsubishi-Pharma Agreement
Encysive has entered into an agreement with Mitsubishi Pharma
Corporation, formerly Mitsubishi-Tokyo Pharmaceuticals, Inc.
("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. GSK is also obligated to pay
Mitsubishi royalties on sales of Argatroban. As of December 31, 2003, the
Company had paid Mitsubishi approximately $483,000 in royalty payments
under the Mitsubishi Agreement. The Company has also paid Mitsubishi a
$500,000 milestone payment under the Mitsubishi Agreement, and no
additional milestone payments are payable to Mitsubishi under the
Mitsubishi Agreement. 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. If the Mitsubishi Agreement is terminated, the Company would
lose all rights to Argatroban including its right to receive revenues from
the sale of Argatroban. Under the Mitsubishi Agreement, Encysive has
access to a formulation patent granted in 1993, which expires in
2012 and a process patent that expires in 2017. The Mitsubishi composition
of matter patent on Argatroban has expired. During 2000, Encysive signed
an additional agreement with Mitsubishi that provides Encysive 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. The Company began enrolling patients in a
clinical trial for ischemic stroke in April 2001, and received a $2.0
million milestone payment in May 2001, which was being recognized as
revenues over the expected development period, and accordingly, revenues
in years 2002 and 2001 include approximately $382,000 and $274,000,
respectively, related to such milestone payment. In light of a lack of a
positive overall efficacy trend and the high risk and high costs
associated with stroke trials, management determined that it was unlikely
that the Company would proceed independently with a full Phase III program
and, accordingly, recognized the remaining deferred revenue related to the
milestone payment from Mitsubishi during 2003. License fees, milestones
and grants in year 2003 includes $1,145,000 related to the milestone
payment from Mitsubishi. 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 the Company'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 Encysive 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 the Company. At present, Mitsubishi is
the only manufacturer of Argatroban. See Note 11.
In exchange for the license to the Genentech, Inc. (the "Former
Licensor") Argatroban technology, the Company 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 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 heparin-induced thrombocytopenia
("HIT"). The value of $965,000 has been recorded as an intangible asset
and is being amortized over the estimated useful life of the asset.
Amortization expense recorded in each of the years 2003, 2002 and 2001 was
$105,000 per year and will be approximately $105,000 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
F-20
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock at an exercise price of $14.00 per share, subject to
adjustment, which expires on October 9, 2004. Encysive 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 Encysive will share equally in all
upfront payments and royalties should Mitsubishi use Encysive's regulatory
documents and data for registration in certain territories. See Note 11.
Schering-Plough Research Collaboration and License Agreement
On June 30, 2000, Encysive 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.
Under the terms of the agreement, Schering-Plough obtains the
exclusive worldwide rights to develop, manufacture and market all
compounds from Encysive's library of VLA-4 antagonists, as well as the
rights to a second integrin antagonist. Encysive will be responsible for
optimizing a lead compound and additional follow-on compounds.
Schering-Plough is supporting research at Encysive and will be responsible
for all costs associated with the worldwide product development program
and commercialization of the compound. In addition to funding research
costs, Schering-Plough paid Encysive an aggregate of $4 million in upfront
license fees and milestone payments, and will pay the Company additional
development milestones of $39 million regarding the development of VLA-4
antagonists, and $38 million regarding the development of a second
integrin antagonist. The Company is not currently developing the second
integrin antagonist. Schering-Plough will also pay the Company royalties
on product sales resulting from the agreement. The upfront license fee is
being amortized into revenue over the expected development period, and the
Company recognized $382,000, $366,000 and $456,000 of the license fee as
revenues in years 2003, 2002 and 2001, respectively. Total payments to
Encysive for both programs, excluding royalties, could reach $87.0
million. As of December 31, 2003, the Company had received approximately
$11.8 million in research payments from Schering-Plough under the
agreement. Schering-Plough can terminate the research program upon 180
days written notice to the Company. If the agreement is terminated,
Encysive will lose Schering-Plough's funding for the research costs in
addition to development milestones and royalties on product sales
resulting from the agreement.
In June 2002, the Company achieved a milestone under the
Schering-Plough agreement as a result of the nomination of an initial
candidate for Schering-Plough's further development. This milestone
payment will be recognized into revenue over the expected development
period, and approximately $179,000 and $104,000 was recognized as revenue
during 2003 and 2002, respectively.
(10) FOREIGN SUBSIDIARY
During the third quarter 2000, Encysive 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 Encysive research
technology. Currently, Revotar has exclusive worldwide rights to
bimosiamose for the treatment of asthma and other inflammatory indications
as well as rights outside of North America for topical indications. The
Company has exclusive worldwide rights for the use of bimosiamose in organ
transplant as well as exclusive North American rights to all topical
indications. The Company's license agreement with Revotar provides that
the Company will receive royalties from Revotar based on sales of products
by Revotar or its licensees, and in certain events, the Company will
receive a portion of royalties, license fees and milestones received by
Revotar from its licensees, if any. Revotar will also receive royalties on
sales of products by the Company and its licensees.
Revotar received approximately $5 million in funding from three
German venture capital funds. The Company retains ownership of
approximately 55% of the outstanding common stock of Revotar and has
consolidated the financial results of Revotar into Encysive's consolidated
financial statements. Since the development and commercialization rights
contributed
F-21
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 stockholders is included with the minority interest in Revotar on
the consolidated balance sheets at December 31, 2003 and 2002. The
minority interest in Revotar at December 31, 2003 and December 31, 2002,
was $1,383,000 and $2,608,000, respectively. The Company's consolidated
net loss for the years ended December 31, 2003, 2002 and 2001 was reduced
$1,225,000, $1,225,000 and $749,000, respectively, by the Revotar minority
stockholders' approximately 45% interest in Revotar's losses.
(11) COMMERCIALIZATION AGREEMENT
In connection with Encysive's development and commercialization of
Argatroban, in August 1997, Encysive entered into a Product Development,
License and CoPromotion Agreement with GSK (the "GSK Agreement") whereby
GSK was granted exclusive rights to work with Encysive 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. 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 Encysive and to the rights of Encysive to
co-promote these products through its own sales force in certain
circumstances. As of December 31, 2003, the Company had received
approximately $10.7 million in royalty payments from GSK under the GSK
Agreement. Encysive will retain the rights to any indications which GSK
determines it does not wish to pursue (such as ischemic stroke), subject
to the requirement that Encysive must use its own sales force to
commercialize any such indications. Any indications which Encysive 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
Encysive 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 Encysive'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 Encysive'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 Encysive 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. If the GSK Agreement is terminated, the
Company would no longer receive royalties from GSK's sales of Argatroban.
In connection with the execution of the GSK Agreement, GSK purchased
176,992 shares of Encysive'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.
F-22
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
60% of their compensation, with a maximum of $12,000 per employee in 2003.
The Compensation Committee of the Board of Directors approved an employer
matching contribution of $0.50 for each dollar of employee contributions
up to 6% of salaries and the 401(k) plan was amended effective January 1,
2001. The Compensation Committee approved matching contributions on the
catch-up contribution made by employees 50 years of age or older by the
end of the plan year and the 401(k) plan was amended effective January 1,
2002. Total cost of the employer match was $161,000, $197,000 and $158,000
in 2003, 2002 and 2001, respectively.
(13) COMMITMENTS AND CONTINGENCIES
(a) Employment agreements
The Company has entered into employment agreements with certain
officers and key employees. Additionally, the Company has signed
agreements with eleven 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 twelve months to three years of annual base
salary and annual bonus, if any. The base salary and annual bonus portion
of the agreements would aggregate approximately $5.7 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 twelve months to three
years and reimbursement of certain legal expenses in conjunction with the
agreements.
(b) Lease Agreements
In April 2002, the Company leased a facility in Bellaire, Texas,
that houses the Company's administrative, marketing, clinical development
and regulatory staff. Under the terms of the lease, which expires on July
31, 2005, the Company is obligated to pay for base rent, related building
services and parking. The Company has the right to extend the term of this
lease agreement under the same terms and conditions to December 31, 2005,
upon notice to the lessor. The Company could be subject to additional
charges for related building services in years 2003 and thereafter, based
upon increases in actual building costs, not to exceed six percent
annually.
In December 2003, the Company agreed to extend the term of its lease
on the laboratory facility in Houston, Texas to December 31, 2007. The
Company also leases parking spaces at the facility established rate. The
lease includes a provision for the Company to pay certain additional
charges to obtain utilities and building services during off-business
hours, which are subject to annual adjustments based on the local consumer
price index.
Revotar, the Company's majority-owned subsidiary, leases a 10,700
square foot office and laboratory facility in Berlin, Germany. The lease
expires on September 2, 2006. Under the terms of the lease, base rent will
increase at three percent per year on the anniversary date of the lease.
In addition to the base rent and parking, the Company is obligated to pay
for related building services. The charge for related building services is
subject to annual adjustments, based upon actual increases in costs, up to
six percent per year. Since amounts payable under the lease agreement are
denominated in Euros, the Company's actual expense may vary, depending
upon variations in foreign exchange rates.
For the years ended December 31, 2003, 2002 and 2001, rent and
related building services totaled approximately $1,700,000, $1,600,000 and
$1,200,000, respectively.
At December 31, 2003, the Company's minimum aggregate commitments
under long-term, non-cancelable operating leases are as follows ($ in
thousands):
2004.............................................. $ 1,704
2005.............................................. 1,592
2006.............................................. 1,337
2007.............................................. 1,149
-------------
$ 5,782
=============
F-23
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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 its German
subsidiary at December 31, 2003; however this amount was denominated in
U.S. dollars and was 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. Through December 31, 2003, 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. At December 31, 2003, Revotar had
entered into a foreign-exchange forward contract with a bank to mitigate
the effect of foreign currency fluctuations on approximately $1.2 million
in future loan payments from Encysive.
(d) Other Contingencies
Under the terms of one of the Company's contracts with a third party
service provider, the Company could be obligated to pay a termination fee
in the event that the Company elects to terminate the project prior to
completion. The amount of the termination fee declines as work is
completed under the contract, and in any event would not exceed $600,000.
Like other biopharmaceutical companies, the Company is subject to
other contingencies, including legal proceedings and claims arising out of
its business that cover a wide range of matters, including, among others,
environmental matters, contract and employment claims, and product
liability. The Company may be involved in legal actions from time to time.
The Company has used various substances in its research and development
which have been or may be deemed to be hazardous or dangerous, and the
extent of its potential liability, if any, under environmental, product
liability and workers' compensation statutes, rules, regulations and case
law is unclear.
F-24
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------------------------------
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Total revenues $ 3,216 $ 2,228 $ 3,413 $ 2,700
Operating loss $ (5,543) $ (14,697) $ (8,013) $ (9,493)
Net loss $ (4,980) $ (14,120) $ (7,481) $ (8,712)
============ ============ ============ ===========
Net loss per share data:
Basic and diluted $ (0.11) $ (0.32) $ (0.17) $ (0.19)
YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------------------------
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Total revenues $ 2,593 $ 2,626 $ 2,405 $ 2,809
Operating loss $ (7,774) $ (7,057) $ (6,760) $ (5,575)
Net loss $ (6,750) $ (6,221) $ (5,840) $ (4,658)
============ ============ ============ ===========
Net loss per share data:
Basic and diluted $ (0.15) $ (0.14) $ (0.13) $ (0.11)
Because of the method used in calculating per share data, the
quarterly per share data will not necessarily total to the per share data
as computed for the year.
F-25
INDEX TO EXHIBITS
EXHIBIT NO DESCRIPTION OF EXHIBIT
---------- ----------------------
3.1 -- Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Form 10 (Commission
File No. 000-20117) effective June 26, 1992 (as amended)).
3.2 -- Amendment to the Certificate of Incorporation dated November
30, 1993 (incorporated by reference to Exhibit 3.4 to the
Company's Form 10-Q (Commission File No. 000-20117) filed with
the Commission on November 14, 1994).
3.3 -- Amendment to the Certificate of Incorporation dated May 20,
1994 (incorporated by reference to Exhibit 3.5 to the
Company's Form 10-Q (Commission File No. 000-20117) filed with
the Commission on November 14, 1994).
3.4 -- Certificate of Amendment of Certificate of Incorporation dated
May 3, 1996 (incorporated by reference to Exhibit 3.6 to the
Company's Form 10-Q (Commission File No. 000-20117) for the
quarter ended June 30, 1996).
3.5 -- Amended and Restated By-laws of Encysive Pharmaceuticals Inc.
adopted September 6, 1996 (incorporated by reference to
Exhibit 3.7 to the Company's Form 10-Q (Commission File No.
000-20117) for the quarter ended September 30, 1996).
3.6 -- Amendment to Article II of By-laws adopted June 29, 2000
(incorporated by reference to Exhibit 3.8 to the Company's
Quarterly Report on Form 10-Q (Commission File No. 000-20117)
for the quarter ended June 30, 2000 filed with the Commission
on August 14, 2000).
3.7 -- Certificate of Designations, Preferences, Limitations and
Relative Rights of The Series A Junior Participating Preferred
Stock of Encysive Pharmaceuticals Inc. (incorporated by
reference to Exhibit 2 to the Company's Form 8-A (Commission
File No. 000-20117) filed with the Commission on January 3,
2002).
3.8 -- Amendment to Certificate of Incorporation dated May 16, 2003
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on From 10-Q (Commission File No. 000-20117)
for the quarter ended June 30, 2003 filed with the Commission
on August 13, 2003.
4.1 -- Rights Agreement, dated as of January 2, 2002, between
Encysive Pharmaceuticals Inc. and The Bank of New York, as
Rights Agent, including exhibits thereto. (incorporated by
reference to Exhibit 1 to the Company's Form 8-A (Commission
File No. 000-20117) filed with the Commission on January 3,
2002).
4.2 -- Form of Rights Certificate (incorporated by reference to
Exhibit 3 to the Company's Form 8-A (Commission File No.
000-20117) filed with the Commission on January 3, 2002).
10.1 -- Consulting Agreement with John M. Pietruski dated January 1,
1992 (incorporated by reference to Exhibit 10.6 to the
Company's Form 10 (Commission File No. 000-20117) effective
June 26, 1992 (as amended)).
10.2 -- Sixth amendment dated January 1, 2003 to Consulting Agreement
with John M. Pietruski dated January 1, 1992 (incorporated by
reference to Exhibit 10.2 to the Company's 10-K (Commission
File No. 000-20117) for the year ended December 31, 2002 filed
with the Commission on March 28, 2003).
10.3 -- Termination Agreement between Encysive Pharmaceuticals Inc.
and Bruce D. Given, M.D. dated March 21, 2003 (incorporated by
reference to Exhibit 10.5 to the Company's 10-K (Commission
File No. 000-20117) for the year ended December 31, 2002 filed
with the Commission on March 28, 2003).
10.4 -- Termination Agreement between Encysive Pharmaceuticals Inc.
and Richard A. F. Dixon dated March 17, 2003 (incorporated by
reference to Exhibit 10.6 to the Company's 10-K (Commission
File No. 000-20117) for the year ended December 31, 2002 filed
with the Commission on March 28, 2003).
10.5 -- Termination Agreement between Encysive Pharmaceuticals Inc.
and Stephen L. Mueller dated March 20, 2003 (incorporated by
reference to Exhibit 10.7 to the Company's 10-K (Commission
File No. 000-20117) for the year ended December 31, 2002 filed
with the Commission on March 28, 2003).
10.6 -- Form of Termination Agreement between Encysive Pharmaceuticals
Inc. and Tom Brock, Heather Giles, Pam Mabry, Dan Thompson,
and Patrick Ward (incorporated by reference to Exhibit 10.8 to
the Company's 10-K (Commission File No. 000-20117) for the
year ended December 31, 2002 filed with the Commission on
March 28, 2003).
10.7 -- Termination Agreement dated as of September 10, 2003 made by
and between Encysive Pharmaceuticals Inc. and Terrance C.
Coyne, M.D. incorporated by reference to exhibit 99.2 to
Report on Form 8-K (Commission File no. 000-20117) dated
September 11, 2003.
10.8 -- Termination Agreement dated as of June 2, 2003 made by and
between Encysive Pharmaceuticals Inc. and Derek J. Maetzold,
incorporated by reference to exhibit 99.3 to Report on Form
8-K (Commission File no. 000-20117) dated September 11, 2003.
10.9 -- Form of Indemnification Agreement between Encysive
Pharmaceuticals Inc. and its officers and directors dated
March 12, 2002 (incorporated by reference to Exhibit 10.27 to
the Company's Form 10-K (Commission File No. 000-20117) for
the year ended December 31, 2001 filed with the Commission on
March 29, 2002).
10.10 -- Amended and Restated 1990 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.33 to the Company's
Form 10-K (Commission File No. 000-20117) for the year ended
December 31, 1994).
10.11 -- Amended and Restated 1992 Incentive Stock Option Plan (as of
March 3, 1995) (incorporated by reference to Exhibit 10.34 to
the Company's Form 10-K (Commission File No. 000-20117) for
the year ended December 31, 1994).
10.12 -- Amended and Restated Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.39 to the
Company's Form 10-Q (Commission File No. 000-20117) for the
quarter ended June 30, 1995).
10.13 -- 1995 Stock Option Plan (incorporated by reference to Exhibit
10.40 to the Company's Form 10-Q (Commission File No.
000-20117) for the quarter ended June 30, 1995).
10.14 -- Amendment to the 1995 Stock Option Plan of Encysive
Pharmaceuticals Inc. dated March 4, 1997 (incorporated by
reference to Exhibit 10.62 to the Company's Form 10-Q
(Commission File No. 000-20117) for the quarter ended June 30,
1997 filed with the Commission on August 14, 1997).
10.15 -- Amended and Restated 1995 Non-Employee Director Stock Option
Plan (as amended by the Board of Directors on June 30, 1996)
(incorporated by reference to Exhibit 10.55 to the Company's
Form 10-Q (Commission File No. 000-20117) for the quarter
ended June 30, 1996).
10.16 -- Amendment to the 1995 Non-Employee Director Stock Option Plan
of Encysive Pharmaceuticals Inc. dated March 4, 1997
(incorporated by reference to Exhibit 10.63 to the Company's
Form 10-Q (Commission File No. 000-20117) for the quarter
ended June 30, 1997 filed with the Commission on August 14,
1997).
10.17 -- Amendment to Amended and Restated 1995 Non-Employee Director
Stock Option Plan, dated March 6, 2000 (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (Commission File No. 333-41864) filed
with the commission on July 20, 2000).
10.18 -- Amendment to the Encysive Pharmaceuticals Inc. Amended and
Restated 1995 Non-Employee Director Stock Option Plan
(incorporated herein by reference to Appendix B of the Proxy
Statement on Schedule 14A (Commission File No. 000-20117)
filed April 14, 2003).
10.19 -- Encysive Pharmaceuticals Inc. 1999 Stock Incentive Plan
(incorporated by reference to Exhibit 10.71 to the Company's
Form 10-Q (Commission File No. 000-20117) for the Quarter
ended March 31, 1999 filed with the Commission on May 14,
1999)
10.20 -- Amendment to the 1999 Stock Incentive Plan adopted on March
13, 2001 (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (Commission File
No. 333-72468) filed with the commission on October 30, 2001).
10.21 -- Amendment to the Encysive Pharmaceuticals Inc. Amended and
Restated 1999 Stock Incentive Plan (incorporated herein by
reference to Appendix A of the Proxy Statement on Schedule 14A
(Commission File No. 000-20117) filed April 14, 2003).
10.22 -- Lease Agreement dated, February 24, 1995 between Encysive
Pharmaceuticals Inc. and Doctors Center, Inc. (incorporated by
reference to Exhibit 10.31 to the Company's Form 10-K
(Commission File No. 000-20117) for the year ended December
31, 1994)
10.23 -- Third Amendment to Lease Agreement dated January 1, 2003
between Encysive Pharmaceuticals Inc. and the Board of Regents
of The University of Texas System (incorporated by reference
to Exhibit 10.21 to the Company's 10-K (Commission File No.
000-20117) for the year ended December 31, 2002 filed with the
Commission on March 28, 2003).
10.24 -- Lease Agreement dated February 20, 2002 between Encysive
Pharmaceuticals Inc. and FRM West Loop Associates #6, LTD
(incorporated by reference to Exhibit 10.22 to the Company's
10-K (Commission File No. 000-20117) for the year ended
December 31, 2002 filed with the Commission on March 28,
2003).
10.25* -- Sublicense and License Agreement dated May 27, 1993 between
Company and Genentech, Inc., together with exhibits
(incorporated by reference to Exhibit 10.17 to the Company's
Form 10-Q (Commission File No. 000-20117) for the quarter
ended June 30, 1993 and incorporated by reference to Exhibit
10.17 to the Company's Form 10-Q/A-1 (Commission File No.
0-20117) for the quarter ended June 30, 1993)
10.26 -- Agreement between Mitsubishi Chemical Corporation, Encysive
Pharmaceuticals Inc. and SmithKline Beecham plc dated August
5, 1997 (incorporated by reference to Exhibit 99.1 to the
Company's Form 8-K (Commission File No. 000-20117) filed with
the Commission on August 25, 1997).
10.27* -- Product Development License and Co-Promotion Agreement between
Encysive Pharmaceuticals Inc. and SmithKline Beecham plc dated
August 5, 1997 (incorporated by reference to Exhibit 99.2 to
the Company's Form 8-K (Commission File No. 000-20117) filed
with the Commission on August 25, 1997).
10.28* -- Amended and Restated License and Research Development
Agreement dated January 24, 2003 between Revotar
Biopharmaceuticals AG and Encysive Pharmaceuticals Inc.
(incorporated by reference to Exhibit 10.28 to the Company's
10-K (Commission File No. 000-20117) for the year ended
December 31, 2002 filed with the Commission on March 28,
2003).
10.29* -- Research Collaboration and License Agreement by and between
Encysive Pharmaceuticals Inc. and Schering-Plough LTD. dated
June 30, 2000. (incorporated by reference to Exhibit 99.8 to
the Company's Quarterly Report on Form 10-Q (Commission File
No. 000-20117) for the quarter ended June 30, 2000 filed with
the Commission on August 14, 2000).
10.30* -- Research Collaboration and License Agreement by and between
Encysive Pharmaceuticals Inc. and Schering Corporation dated
June 30, 2000. (incorporated by reference to Exhibit 99.9 to
the Company's Quarterly Report on Form 10-Q (Commission File
No. 000-20117) for the quarter ended June 30, 2000 filed with
the Commission on August 14, 2000).
10.31 Purchase and Sale Agreement dated as of April 22, 2003, made
by and between Encysive Pharmaceuticals Inc., TBC-ET, Inc.,
ICOS Corporation, ICOS-ET-LP LLC, ICOS-ET-GP LLC, and ICOS
Technology Services LLC (incorporated by reference to Exhibit
99.2 to the Company's Current Report on Form 8-K (Commission
File No. 000-20117) filed with the Commission on April 23,
2003).
10.32 Secured Promissory Note of Encysive Pharmaceuticals Inc. dated
as of April 22, 2003, in the principal amount of $6,000,000
(incorporated by reference to Exhibit 99.3 to the Company's
Current Report on Form 8-K (Commission File No. 000-20117)
filed with the Commission on April 23, 2003).
21.1+ -- Subsidiaries of the Registrant
23.1+ -- Independent Auditors' Consent of KPMG LLP, Houston, Texas
31.1+ -- Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities
Exchange Act of 1934, as amended.
31.2+ -- Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities
Exchange Act of 1934, as amended.
32.1+ -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+ -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
* The Company has omitted certain portions of these agreements in reliance
on Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
+ Filed herewith