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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 [No Fee Required]
For the Fiscal Year Ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
Commission File Number: 1-12574
TEXAS BIOTECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-3532643
(State of Incorporation) (I.R.S. Employer
Identification Number)
7000 Fannin, Suite 1920
Houston, Texas 77030
(713) 796-8822
(Address and telephone number of principal executive offices and zip code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Stock, $.005 par value American Stock Exchange
Redeemable common stock purchase warrants American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.005 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The approximate aggregate market value of voting stock held by
nonaffiliates of the registrant is $239,943,604 as of March 2, 1998.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares outstanding of each of the registrant's classes of
common stock as of March 2, 1998:
Title of Class Number of Shares
-------------- ----------------
Common Stock, $.005 par value 33,680,872
Documents incorporated by reference:
Document Form 10-K Parts
-------- ---------------
Definitive Proxy Statement, to be filed within 120 days of III
December 31, 1997 (specified portions)
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Report includes "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical fact included in this Report are forward looking statements. Such
forward looking statements include, without limitation, statements under (a)
Statements in "Business" regarding Texas Biotechnology Corporation's
expectations for future drug discovery and development and related expenditures
and (b) "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" - regarding TBC's estimate of
sufficiency of existing capital resources and its ability to raise additional
capital to fund cash requirements for future operations. Although TBC believes
that the expectations reflected in such forward looking statements are
reasonable, it can give no assurance that such expectations reflected in such
forward looking statements will prove to have been correct. The ability to
achieve TBC's expectations is contingent upon a number of factors which include
(i) ongoing cost of research and development activities, (ii) cost of clinical
development of product candidates, (iii) attainment of research and clinical
goals of product candidates, (iv) timely approval of TBC's product candidates by
appropriate governmental and regulatory agencies, (v) effect of any current or
future competitive products, (vi) ability to manufacture and market products
commercially, (vii) retention of key personnel and (viii) capital market
conditions.
This Form 10-K may contain trademarks and service marks of other companies.
PART I
ITEM 1. BUSINESS
Texas Biotechnology Corporation ("TBC" or the "Company"), a
biopharmaceutical company, applies innovative drug discovery techniques and its
specialized knowledge of the role of vascular cell biology in vascular
diseases to the design and development of novel pharmaceutical compounds. The
Company was incorporated in Delaware in August 1989 under the name Cardiology
Institute of Texas, Ltd., and its name was changed to Texas Biotechnology
Corporation in October 1990. As of December 31, 1997, the Company had 79
employees, 67 of whom were engaged in research and development. References to
TBC or the Company include its subsidiary ImmunoPharmaceutics, Inc. ("IPI")
unless otherwise indicated.
The Company's research and development programs are currently focused on
inhibitors (also referred to as antagonists or blockers) of thrombosis,
vasospasm/hypertension, vascular inflammation, vascular proliferative disease,
angiogenesis and apoptosis. The Company has filed a new drug application ("NDA")
with the United States ("U.S.") Food and Drug Administration (the "FDA") for its
lead product candidate, NOVASTAN(R) (argatroban) for use as an anticoagulant in
patients with heparin-induced thrombocytopenia ("HIT"). This NDA has been
granted priority review status by the FDA, and a decision on approval from the
FDA is anticipated by the end of the second quarter of 1998. NOVASTAN(R) is also
in Phase II clinical trials for the treatment of acute myocardial infarction
("AMI"). The Company completed its initial Phase IIa clinical trial for TBC
11251 (TBC's lead compound for vasospasm/hypertension) in congestive heart
failure ("CHF"). In treatment of patients with moderate to severe congestive
heart failure, the TBC 11251 treated group demonstrated a statistically
significant improvement versus placebo in the primary objective of improving
central hemodynamics, particularly pulmonary artery pressure. In addition,
positive trends were observed in other important cardiovascular measures. These
results will allow the Company to proceed with the program using additional
dosing regimes in additional Phase II studies. The Company also began Phase II
clinical trials for TBC 1269 (TBC's lead compound for vascular inflammation) in
allergic asthma during the third quarter of 1997. TBC has licensed the U.S. and
Canadian rights to NOVASTAN(R) from Mitsubishi Chemical Corporation
("Mitsubishi"). The Company has entered into a collaboration with SmithKline
Beecham plc ("SmithKline") regarding the commercialization and development of
NOVASTAN(R) and has entered into collaborations with Synthelabo S.A., the
pharmaceutical division of L'Oreal S.A. ("Synthelabo"), and LG Chemical, Ltd.
("LG Chemical") regarding other compounds, as described below.
The Company's lead product candidate is NOVASTAN(R), a direct thrombin
inhibitor that is being developed for various indications as an anticoagulant
alternative to heparin. Approximately 275,000 patients treated with heparin in
the U.S. annually develop the immunological reaction known as HIT which may lead
to a potentially life-threatening thrombosis (blood clot). Because there is no
current drug treatment for HIT in the U.S., the Company
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has initially focused on the therapeutic and commercial potential of NOVASTAN(R)
in this indication. In addition, TBC is developing NOVASTAN(R) for patients who
have an AMI and receive thrombolytic therapy (approximately 250,000 patients in
the U.S. annually). NOVASTAN(R) is marketed in Japan for ischemic stroke,
peripheral arterial occlusion and hemodialysis in patients with antithrombin III
deficiency. Approximately 133,000 patients have been treated with NOVASTAN(R) in
Japan since its introduction in 1990.
TBC's internal research has produced several small molecule product
candidates in the areas of vasospasm, hypertension and vascular inflammation.
The Company's lead compound for the treatment of congestive heart failure
("CHF") is TBC 11251, a synthetic small molecule receptor antagonist that
selectively blocks endothelinA receptors which are believed to be associated
with vasoconstriction (constriction of blood flow through blood vessels). In the
area of vascular inflammation (which can result in asthma, reperfusion injury,
or psoriasis), the Company has identified several compounds, including TBC 1269,
which in preclinical studies have shown efficacy in inhibiting acute
inflammation. The Company is currently conducting Phase II clinical trials for
TBC 11251 in CHF and for TBC 1269 in allergic asthma.
Additionally, in the vascular inflammation area, the Company has identified
vascular cell adhesion molecule ("VCAM") antagonists for the intercellular
adhesion observed in atherosclerosis. The Company is conducting research in the
vascular proliferative disease area (which can result in coronary restenosis
after angioplasty) to identify antagonists that block fibroblast growth factor
("FGF"), a protein which triggers growth of smooth muscle cells in blood
vessels, and is continuing to optimize lead VCAM compounds to obtain a clinical
candidate. The Company is also conducting research into treatments for the
consequences of excess angiogenesis (the formation of new blood vessels from
pre-existing blood vessels) and apoptosis (programmed cell death). The Company
has identified a number of compounds which are undergoing further optimization
prior to selection of clinical candidates.
TBC has developed an approach to rational drug discovery, the
PHARMACEUTICAL TOOLBOX(TM), that permits the conversion of bioactive peptides,
oligosaccharides or proteins into small molecule drugs. The PHARMACEUTICAL
TOOLBOX(TM) is comprised of a number of proprietary and non-proprietary
components including rational drug design and focused compound libraries. TBC
has refined its rational drug design approach to take advantage of
pharmacological information already present in these biologically active
molecules to develop inhibitors to their actions. This information is used in
parallel with other inhibitor design technology, where appropriate, to
accelerate the selection of lead compounds. The PHARMACEUTICAL TOOLBOX(TM) was
used in the design of TBC 11251 and TBC 1269. The Company intends to continue
the use and development of the PHARMACEUTICAL TOOLBOX(TM), and will also
consider commercial applications such as licensing of this technology system to
third parties.
The TBC strategy is to identify proprietary value-added candidates for
targeted indications, and to selectively commercialize those candidates through
collaborations with other pharmaceutical and biotechnology companies. In the
future, the Company intends to directly commercialize its compounds for acute
indications by establishing a targeted hospital-based sales force, and intends
to out-license the compounds in territories outside its targeted markets, as
well as the rights to any non-strategic use of its compounds.
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PRODUCTS IN DEVELOPMENT AND RESEARCH
The following table summarizes the potential indications and the current
status of TBC's compounds in development and research. A more detailed
description of these compounds follows the table.
COMPOUND PIPELINE
- ------------------------------------------------------------------------------------------------------------------------
TARGET COMPOUND/ CORPORATE
PROGRAM DOSE FORM POTENTIAL INDICATION PARTNERS STATUS(1)
- ------------ ------------------ ------------------------------------------ ----------------------- ----------------
THROMBOSIS NOVASTAN(R)
Intravenous Anticoagulant Therapy in HIT patients Mitsubishi & NDA Filed(3)
SmithKline Beecham
Intravenous Acute Myocardial Infarction(2) Mitsubishi & Phase II
SmithKline Beecham
- ------------------------------------------------------------------------------------------------------------------------
VASOSPASM/ ENDOTHELIN(A)
HYPERTENSION RECEPTOR ANTAGONIST
TBC 11251
Intravenous Congestive Heart Failure LG Chemical Phase II
Oral Congestive Heart Failure LG Chemical Phase I
Chronic Obstructive Pulmonary Disease LG Chemical Phase I
Subarachnoid Hemorrhage LG Chemical Phase I
TBC 3214
Intravenous Congestive Heart Failure (acute) Preclinical
Oral Primary Pulmonary Hypertension Preclinical
Congestive Heart Failure Preclinical
Hypertension Preclinical
TBC 2576
Topical Glaucoma Research
- ------------------------------------------------------------------------------------------------------------------------
VASCULAR SELECTIN ANTAGONIST
INFLAMMATION
TBC 1269
Intravenous Asthma LG Chemical Phase II(4)
Inhaled Asthma LG Chemical Preclinical
TBC 427
Oral Asthma Research
VCAM/VLA-4 Rheumatoid Arthritis Research
- ------------------------------------------------------------------------------------------------------------------------
VASCULAR FGF ANTAGONIST Coronary Restenosis Post-Angioplasty Synthelabo Research
PROLIFERATIVE
DISEASE
- ------------------------------------------------------------------------------------------------------------------------
ANGIOGENESIS VEGF ANTAGONIST Diabetic Retinopathy Research
Cancer Research
- ------------------------------------------------------------------------------------------------------------------------
APOPTOSIS TNFA ANTAGONIST Rheumatoid Arthritis Research
CASPASE INHIBITOR Stroke Research
Acute Myocardial Infarction Research
(1) See "Government Regulation."
(2) For patients who are receiving thrombolytics.
(3) The Company filed the NDA in August 1997, and has been granted priority
review status. The FDA extended the priority review period by 90 days
during January, 1998. A decision on approval by the FDA is anticipated by
the end of the second quarter of 1998.
(4) A Phase II trial for this product began October 1997.
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PRODUCT PIPELINE
THROMBOSIS PROGRAM
Background. Thrombosis, is the formation of a blood clot in a vessel, and
causes various vascular diseases, depending on the location of the clot. An
arterial clot may lead to heart attack if lodged in a coronary artery, or to
stroke if lodged in an artery that supplies oxygen to the brain. Venous clots
occur principally in the arms or legs (deep vein thrombosis), and may cause
local inflammation, chronic pain and other complications. In some cases, a
venous clot can cause lung injury (pulmonary embolism) by migrating from the
veins to the lungs.
Thrombosis can be treated with anticoagulants, thrombolytic drugs or
surgically. Anticoagulant drugs, which prevent clots from forming, are
characterized as either antithrombotic or antiplatelet drugs. Antithrombotic
drugs block the action of the blood protein thrombin and may be used to treat
both arterial and venous clots. Antiplatelet drugs prevent platelets from
clumping together and are only effective in treating arterial clots. Heparin and
aspirin are the most widely-used antithrombotic and antiplatelet drugs,
respectively. Thrombolytic drugs dissolve existing clots in veins or arteries,
but do not block the formation of new blood clots. Tissue plasminogen activator
("t-PA") and streptokinase ("SK") are the most commonly used thrombolytic drugs.
A combination of an anticoagulant and a thrombolytic often achieves the best
therapeutic effect.
Heparin, first discovered over 80 years ago, is the most widely used
injectable anticoagulant. In the U.S., approximately five million patients
annually receive therapeutic heparin to treat a variety of conditions that
require inhibition of the body's natural clotting mechanism. Each year
approximately 275,000 patients develop a profound immunological reaction to
heparin which is known as HIT for which there is no drug treatment. This
reaction may lead to a potentially life threatening thrombosis (blood clot).
Heparin is marketed by many companies and is relatively inexpensive.
However, the Company believes heparin therapy contains many hidden costs,
including those associated with monitoring the level of anticoagulation, those
incurred because of bleeding complications (estimated to occur in up to five
percent of patients treated with heparin) and the costs of treatment failures or
delays in achieving therapeutic anticoagulation. In one study, only 66% of
patients had achieved "therapeutic anticoagulation" within 24 hours of starting
heparin treatment and only 81% had achieved this target within 48 hours.
Generally, "therapeutic anticoagulation" is desired as quickly as possible.
Thrombolytics such as t-PA and SK are commonly prescribed for the treatment
of AMI, the blockage of blood vessels in the heart. It is estimated that
approximately 250,000 people per year in the U.S. receive t-PA or SK in the
course of treatment of AMI.
Product Candidate - NOVASTAN(R). TBC's lead compound, NOVASTAN(R), is a
non-protein, synthetic small molecule thrombin inhibitor that directly and
selectively binds to and inactivates thrombin in the blood plasma. NOVASTAN(R)
is also effective against thrombin that is bound in blood clots. NOVASTAN(R) is
manufactured and marketed in Japan by Mitsubishi where it is approved for the
treatment of ischemic stroke, peripheral arterial occlusion and hemodialysis in
patients with antithrombin III deficiency. Since introduction in 1990,
approximately 133,000 patients have been treated with NOVASTAN(R) in Japan. TBC
is developing NOVASTAN(R) as an anticoagulant alternative to heparin for the
U.S. and Canadian markets in conjunction with SmithKline. See "-- Research and
Development Collaborations and Licensing Agreements."
In studies conducted by TBC in the U.S., as well as by Mitsubishi in Japan
and Synthelabo in Europe, a significant correlation was identified between the
administered dose of NOVASTAN(R) and the degree of anticoagulation achieved.
Moreover, these studies suggest that the relationship between dose and effect
may be generally predictable over the expected dose-range. As a result, the
Company believes the risk of either insufficient or excessive anticoagulation
associated with small dose changes, as is the case with heparin, should be
reduced. TBC further believes that NOVASTAN(R) could have a superior profile, as
compared with heparin, for efficacy, ease of dosing, speed of achieving
"therapeutic anticoagulation", risk of bleeding and total economic costs of
anticoagulation.
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Indication - HIT/HITTS. Because NOVASTAN(R) does not invoke the immune
reaction caused by heparin, the Company believes it should provide a safe and
effective anticoagulant for patients diagnosed with HIT. The Company conducted a
multicenter Phase III study ("ARG-911") that compared 304 patients treated with
NOVASTAN(R) for up to 14 days (160 with HIT and 144 with HIT with thrombosis
syndrome ("HITTS"), with 217 historical control patients. The results of ARG-911
demonstrated statistical significance in the primary efficacy endpoint, assessed
by an overall composite index. The index included evaluation of development of
new thrombosis, amputation and death. The index was improved by 18% in the HIT
population (p=0.038) and by 20% in the HITTS population (p=0.001). The trial
demonstrated that NOVASTAN(R) was effective in resolving the clinically
significant thrombocytopenia by producing increases in platelet counts of 129%
(p=<0.001) in HIT patients. Platelet counts in HITTS patients improved by 198%
(p=<0.001). The thrombotic composite index, a measurement of the development of
new thrombosis, amputation due to ischemic complications and death due to
thrombosis, was improved in the treated population by 73% (p=<0.001) in HIT
patients and 44% (p=<0.001) in HITTS patients. Development of new thrombosis, a
component of the thrombotic composite index, was reduced by 74% (p=<0.001) and
54% (p=<0.001) in the HIT and HITTS populations, respectively. A second
component of the thrombotic composite index, death due to thrombosis, was
reduced by 100% (p=<0.013) in the HIT population and by 86% (p=0.002) in the
HITTS population. There was no change in the number of amputations due to
ischemic complications, the third major component of the thrombotic composite
index. However, the data indicate that the majority of amputations were deemed
necessary prior to a patient entering the trial. The thrombotic composite
endpoint demonstrated greater improvement than the overall composite index
because the overall composite index was impacted negatively by the overall
patient population being substantially more compromised than the historical
control group. While FDA approval will be based on both indices, TBC believes
that the thrombotic composite index more accurately reflects the effects of
NOVASTAN(R). In addition, there was no increase in major bleeding, the most
common side effect of anticoagulant therapy, in the NOVASTAN(R)-treated
population. Minor bleeding, which was reported as slightly higher in the treated
population, was quickly resolved and not considered serious.
In August 1997, the Company filed an NDA with the FDA for NOVASTAN(R) as
anticoagulant therapy for HIT/HITTS patients. The FDA has granted priority
review status to the Company's NDA. The FDA formally accepted the filing during
October, 1997, and commenced a further review regarding final approval of the
NDA which was originally anticipated to take approximately 6 months. The
priority review period was extended by 90 days by the FDA during January, 1998,
and a decision on approval from the FDA is anticipated by the end of the second
quarter of 1998.
Indication - Adjunctive Therapy to Thrombolytics in AMI. In light of its
ability to inhibit clot-bound thrombin, the Company believes that NOVASTAN(R)
may also prove effective in treating AMI when used in conjunction with
thrombolytics such as t-PA and SK. In contrast to heparin, NOVASTAN(R) is
effective at inhibiting thrombin trapped within blood clots. This activity may
reduce reocclusion, a continuing problem in therapy for AMI. To evaluate the
benefits of NOVASTAN(R) in conjunction with thrombolytic therapy, the Company
and Synthelabo, the European licensee of NOVASTAN(R), designed a clinical trial
program which encompassed a total of 2,400 patients with each party responsible
for 1,200 patients. The Company and Synthelabo have also agreed to exchange
certain data from these trials.
The results of the Phase II ARG-231 trial evaluating NOVASTAN(R) as
adjunctive therapy to the thrombolytic agent t- PA demonstrated a safety benefit
and a 29% improvement (p=0.02) in coronary artery reperfusion at the highest
dose as compared to heparin based on the TIMI Frame Count, an objective measure
of artery reperfusion. The trial, which included 120 patients, evaluated the
potential of NOVASTAN(R) to accelerate reperfusion in coronary arteries, in a
double-blind, randomized angiographic reperfusion study of NOVASTAN(R) as
adjunctive therapy with t-PA. A companion angiographic trial (ARG-230A) of the
same design with SK in 180 patients, demonstrated improvement of coronary artery
reperfusion by 34% compared to placebo within a six-hour therapeutic window, and
by 52% (p=0.03) if given within three hours of symptom onset.
The results of the ARG-230 trial demonstrated no evidence of increased
bleeding risk (stroke, major bleeding) versus placebo. This randomized,
double-blind, placebo-controlled trial included 900 patients and was designed to
assess safety, as well as effect on a 30-day composite endpoint index which
measured recurrent myocardial infarction ("MI"), urgent angioplasty ("PTCA"),
coronary bypass, shock/congestive heart failure and death.
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In ARG-230, a trend toward improvement in clinical outcomes (death,
recurrent MI, new onset congestive heart failure/shock, need for urgent PTCA or
bypass surgery) was observed at the 3.0 mcg/kg/ minute dose of NOVASTAN(R) for
patients treated within the first three hours. The positive trends in the
individual endpoints or composite endpoints, while encouraging (ranging from 13%
to 55%), did not achieve statistical significance due to the small sample size
of the trial. In particular, these trends were accompanied by improvements in
the left ventricular function, an important clinical correlate of reduction in
death and other adverse outcomes. The improvements in left ventricular function
may indicate a reduction in infarct size when thrombolytic therapy is combined
with NOVASTAN(R). This may be due to more rapid reperfusion as was shown by the
improvement in TIMI Frame Counts in ARG-231.
The Company has been notified by Synthelabo that the results of the
Synthelabo 1,200 patient ARGAMI-2 trial demonstrated the safety of NOVASTAN(R)
in the therapy of AMI with effectiveness comparable to heparin. The Company and
SmithKline are conducting an evaluation of AMI and additional indications for
NOVASTAN(R), beyond the first indication of heparin-induced thrombocytopenia, in
order to maximize the commercial value of the compound.
VASOSPASM/HYPERTENSION PROGRAM
Background. Smooth muscle cells in the blood vessel, via a series of
biochemical and morphological events, are responsible directly for mediating
changes in vessel diameter. The regulation of blood flow depends on a delicate
balance between physical and chemical stimuli that cause smooth muscle cells to
relax (vasodilatation) or contract (vasoconstriction). Chronic periods of
excessive vasoconstriction in the peripheral circulation can lead to
disturbances in blood pressure (hypertension) or heart function (congestive
heart failure), whereas acute episodes of intense vasoconstriction (vasospasm)
can restrict blood flow leading to severe tissue damage and loss of function
(myocardial infarction or kidney failure). An essential component of blood
vessels is the vascular endothelium, which are the cells comprising the
innermost lining of all blood vessels. Recently, it has been determined that the
vascular endothelium plays a pivotal role in maintaining normal blood vessel
tone, including blood flow, by producing substances that regulate the balance
between vasodilatation and vasoconstriction.
Endothelins are a family of three peptides that are believed to play a
critical role in the control of blood flow. It has been determined that this
multiplicity of endothelin actions on different cell types can be explained by
endothelins' interactions with two distinct receptors, ET(A) and ET(B), on cell
surfaces. In general, ET(A) receptors are associated with vasoconstriction and
disorders of the cardiovascular and renal systems, while ET(B) receptors are
primarily associated with vasodilatation and disorders of the central nervous
system. There is substantial evidence that endothelins are involved in a variety
of diseases where blood flow is important. These include vasospasm, myocardial
infarction, congestive heart failure, renal disease, subarachnoid hemorrhage,
and certain types of hypertension.
Product Candidate - TBC 11251. The Company's research program in the
vasospasm/hypertension area is aimed at developing small molecules that inhibit
the binding of ET to its cell surface receptors. The Company believes that
specific agents for each receptor subtype may provide the best clinical utility
and safety. The Company's initial focus has been to develop a highly potent and
selective small-molecule based ET(A) receptor antagonist. An antagonist (or
inhibitor) blocks the effects of a ligand at its receptor. A ligand is a
chemical messenger which binds to a specific site on a target molecule or cell.
TBC scientists have discovered a novel class of low molecular weight compounds
(molecular weight of less than 500 daltons) that antagonize ET binding to the
ET(A) receptor with high potency (these compounds block ET binding at low
compound concentration). The Company identified lead compounds which mimicked
the ability of ET to bind to the ET(A) receptor. Further optimization was then
used to develop more potent compounds until the current series of leads was
identified. In addition to their ability to block receptor binding, these
compounds functionally inhibit ET action on isolated blood vessels in vitro
acting as full, competitive antagonists. The lead compounds in this series have
been shown to exhibit in vivo efficacy using various animal models.
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TBC 11251, a selective ET(A) inhibitor, has been identified as the
Company's lead compound in this program. The Company believes that a substantial
market opportunity for TBC 11251 exists for the treatment of CHF, which is
currently estimated to affect approximately five million people in the U.S.
annually. TBC filed an investigational new drug application ("IND") with the FDA
for TBC 11251 in late 1996 and has completed the first of its planned Phase II
clinical trials, which was terminated early due to the achievement of
statistical significance with only 24 of the planned 45 patients. The Company
plans to conduct additional Phase II studies using additional dosing regimes. In
treatment of patients with moderate to severe CHF, the TBC 11251 treated group
demonstrated a statistically significant improvement verses placebo in the
primary objective of improving central hemodynamics, particularly pulmonary
artery pressure. In addition, positive trends were observed in other important
cardiovascular measures. These results will allow the Company to proceed with
the program using additional dosing regimes. The Company also initiated Phase I
clinical trial work with the oral form of TBC 11251 during the third quarter of
1997.
Other Indications. The Company believes endothelin antagonist compounds may
have other indications. For example, an endothelin antagonist may be used to
treat chronic obstructive pulmonary disease, primary and secondary pulmonary
hypertension, systemic hypertension and glaucoma. The Company intends to license
these non-strategic indications to third parties, although no assurance can be
given that the Company will be successful in entering into any such license.
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 an
injurious agent. These steps include the production of proteins that attract
white blood cells, or leukocytes, to the site of inflammation, the production of
chemicals to destroy the injurious 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, as
during an acute inflammatory reaction leading to a build up of white blood cells
and debris at the inflammation site that causes tissue damage.
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 (sLex) found on the
surface of white blood cells. White blood cells are able to migrate into
inflamed areas because sLex present on the surface of white blood cells binds to
selectin molecules present on activated endothelium. This binding slows the flow
of leukocytes through the bloodstream, which 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 ("VCAM") mediated white blood
cell attachment and migration which helps to localize white blood cells in areas
of injury or infection.
The selectins may be involved in acute and chronic inflammatory diseases
such as reperfusion injury (tissue injury caused when blood flow is restored
following removal of an obstruction) and asthma, both primary areas of interest
for the Company. The Company estimates that there are approximately 675,000
patient cases of coronary reperfusion injury in the U.S. annually and that
between fourteen and fifteen million persons in the U.S. suffer from asthma. The
presence of VCAM at sites of endothelial injury leads to an accumulation at
these sites of Very Late Antigen-4 ("VLA-4")-containing white blood cells.
Diseases that are associated with chronic inflammation include asthma,
atherosclerosis or the accumulation of fatty deposits in the artery, psoriasis
and rheumatoid arthritis.
Product Candidate - TBC 1269. The Company has developed a computer model of
the selectin/sLex 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, TBC 1269, has
shown efficacy both in cell-based and biochemical assays, and in animal models
of inflammation. TBC filed an IND with the FDA for TBC 1269 in August 1997 and
during October 1997, initiated Phase IIA clinical trials in allergic asthma.
Product Candidate - VCAM/VLA-4. TBC has also identified VCAM antagonists
for the intercellular adhesion observed in atherosclerosis. The Company's
initial lead compounds block the ability of white blood cells to interact
through VCAM and VLA-4. These lead compounds are being modified in an attempt to
improve efficacy. TBC has
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demonstrated efficacy of its lead cyclic peptide in an animal model of acute
inflammation, suggesting that VCAM/VLA-4 plays a role in this disease process.
TBC chemists have also identified small molecule antagonists of the VCAM/VLA-4
interaction. These compounds are still in research.
Other Indications. The Company believes these anti-inflammatory compounds
may have applicability in other indications. For example, a selectin antagonist
may be used to treat psoriasis, or a VCAM antagonist may be used to treat
asthma, rheumatoid arthritis and multiple sclerosis. The Company intends to
license these non-cardiovascular indications to third parties, although no
assurance can be given that the Company will be successful in entering into any
such license.
VASCULAR PROLIFERATION DISEASE PROGRAM
Background. Smooth muscle cells in the blood vessel wall proliferate in
response to injury to the vessel. When the endothelial cell layer is damaged,
platelets attach to the vessel surface. Platelets and other cells begin to
release cellular growth factors, including the proteins FGF, platelet-derived
growth factor and thrombin. In response to these growth factors, specific genes
are activated in the smooth muscle cells. The products of these genes stimulate
the smooth muscle cells to move and divide. When the initial damage is slight,
the proliferation is limited to endothelial cell repair. If the damage is more
extensive, the smooth muscle cells continue to proliferate. Eventually, the
proliferation process thickens the vessel wall, reduces the interior size of the
blood vessel and produces a stenosis (a blood vessel with reduced lumen
diameter). This stenosis is comprised primarily of smooth muscle cells and
protein called fibroproliferative material. The process of producing this
fibroproliferative material is referred to as the fibroproliferative response.
Fibroproliferative stenosis differs from stenosis produced by atherosclerotic
plaque, which contains smooth muscle cells, fatty deposits and macrophages (a
type of white blood cell). As with atherosclerotic plaque stenosis, however,
blood flow is restricted, and the tissue served by the vessel is deprived of
oxygen. If the stenosis occurs in a coronary artery, the heart muscle is
deprived of oxygen, and a heart attack may result.
Fibroproliferative material is generally produced in response to extensive
damage to the blood vessel wall as a result of a mechanical injury. Mechanical
injury sufficient to produce the fibroproliferative response often occurs during
procedures designed to repair blood vessels that are occluded by plaque or
thrombus material, such as mechanical reopening of arteries (angioplasty) and
coronary artery bypass graft surgery. Other surgical procedures, including vein
grafts and organ transplants, can also produce fibroproliferative stenosis. When
fibroproliferative stenosis occurs following the removal of the stenosis by
surgical or other means, it is referred to as restenosis. Irrespective of how
the injury is produced, the conditions which lead to the fibroproliferative
response are termed vascular proliferative diseases.
Product Candidate - FGF Antagonist. The Company's research program for
vascular proliferative disease is focused on identifying the factors that
activate cells to proliferate and developing small molecule antagonists to these
factors. Using its knowledge of the signaling pathways through which these
factors stimulate cells to proliferate, the Company seeks to develop compounds
that disrupt the signaling process between cells and prevent unnecessary smooth
muscle cell proliferation.
The Company has focused on FGF because of a growing body of evidence as to
its central role in blood vessel formation. The Company's research has shown
that some components of the signaling pathways used by FGF are important for
smooth muscle cell proliferation. TBC's current effort on FGF involves the
development of small molecules designed to prevent activation of latent FGF, and
to block FGF receptor targets. These compounds are currently undergoing
additional optimization prior to selection of a clinical candidate. The Company
estimates that approximately 425,000 annual patient cases exist in the U.S.
which could utilize an FGF antagonist in the treatment of coronary restenosis.
Other Applications. The Company believes an FGF antagonist may have other
applications. For example, an FGF antagonist might be developed to treat
rheumatoid arthritis or cancer. The Company intends to license any non-
cardiovascular indications to third parties, although no assurance can be given
that the Company will be successful in entering into any such license.
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ANGIOGENESIS PROGRAM
Background. Angiogenesis, the formation of new blood vessels from
pre-existing vessels, depends on a delicate balance of local physical and
chemical stimuli acting on the vascular endothelium. Angiogenesis is associated
with numerous physiological processes, including embryogenesis, wound healing,
organ regeneration, and the female reproductive cycle. However, angiogenesis
also plays a major role in the pathogenesis of tumor growth, rheumatoid
arthritis, atherosclerosis, various retinopathies, certain skin diseases and
gingivitis. One of the key factors required for angiogenesis is Vascular
Endothelial Growth Factor ("VEGF"). Increases in VEGF expression may be a common
mechanism underlying diverse, yet inter-related pathologies such as tumor
growth, retinal neovascularization (new blood vessel development in the back of
the eye) and rheumatoid arthritis where tissue hypoxia is a central component.
The VEGF protein is produced by smooth muscle cells and other tissues, including
tumor cells, and is essential for the formation of the new blood vessels.
Antagonists to VEGF may be useful for the prevention of the vascular
complications of diabetes and for limiting the growth of solid tumors and
rheumatoid arthritis.
Product Candidate - VEGF Antagonist. The Company's research program is
directed towards the development of small molecule inhibitors of VEGF. VEGF is a
member of the heparin binding growth factor family, as is FGF. Using similar
technology to that used for the FGF antagonist program, the Company has
discovered small molecule inhibitors of VEGF action. The lead compound has been
shown to effectively prevent VEGF function in vitro. The compound also prevents
the vascular actions of VEGF in a rodent model of angiogenesis. TBC scientists
are currently attempting to further optimize this inhibitor series to identify a
clinical candidate. The Company estimates that approximately 700,000 diabetic
retinopathy cases and approximately three million solid organ cancer patient
cases occur in the U.S. annually which could utilize a VEGF antagonist in their
treatment.
APOPTOSIS PROGRAM
Background. Over the past few years it has become evident that cells have a
built-in mechanism for programmed death, termed apoptotic death, which is
important in the formation, organization and remodeling of tissues during
development. This mechanism contrasts with necrotic death which is often the
result of hypoxic injury to tissues. There appear to be certain conditions,
however, where apoptosis appears to contribute to the progression of a disease
state. In particular, much of the tissue damage which develops over time
following an ischemic stroke (resulting from a blood clot) or a heart attack is
thought to be the result of apoptotic death occurring in the tissue.
Additionally, diseases such as rheumatoid arthritis may have components of
apoptosis. In this case, the death of certain cells in a joint, in combination
with over-proliferation of other cells, contribute to the local irritation that
is observed. Evidence suggests this apoptotic process may be stimulated by
inflammatory cells in the tissue. Thus, inhibitors of apoptosis may be useful in
treating a number of disease conditions.
Product Candidates - TNF(alpha) Antagonist, Caspase Inhibitors. The
Company's research in this area is focused on the identification of factors
which contribute to apoptotic death in the heart and brain following a heart at
tack or stroke, which occur in 1.5 million and 450,000 patients, respectively,
in the U.S. annually. One of the factors which has been identified as being
important in these and other disease settings is Tumor Necrosis Factor a
("TNF(alpha)"). TBCscientists have identified small molecule antagonists of
this factor which block TNF(alpha)'s ability to bind to and kill cells in
vitro. These compounds are currently undergoing additional optimization prior
to selection of a clinical candidate. In addition to use in heart attack or
stroke, the Company estimates that approximately two million U.S. patient cases
occur annually which could utilize a TNF(alpha) antagonist in the treatment of
rheumatoid arthritis. Caspases are proteases which are responsible for
mediating the cell death signal in various cell types. TBC has identified lead
inhibitors of caspases which may be useful in preventing cell death following
stroke or AMI.
Other Indications. The Company believes a TNF(alpha) antagonist may have
other indications. For example, a TNF(alpha) antagonist might be developed to
treat inflammatory bowel disease. The Company intends to license any
non-cardiovascular indications to third parties, although no assurance can be
given that the Company will be successful in entering into any such license.
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OTHER INDICATIONS
The Company believes that a number of the small molecule non-carbohydrate
therapeutics that are being developed in its programs may have applications for
other indications. For example, an FGF antagonist might be developed to treat
rheumatoid arthritis, a selectin antagonist to treat psoriasis, transplant
rejection and adult respiratory distress syndrome, and a VCAM antagonist to
treat asthma, rheumatoid arthritis and multiple sclerosis. The Company intends
to license these non-cardiovascular indications to third parties, although no
assurance can be given that the Company will be successful in entering into any
such license.
RESEARCH AND DEVELOPMENT COLLABORATIONS AND LICENSING AGREEMENTS
The Company has established collaborations with a number of corporations,
research institutions and scientists to further its research and development
objectives. These collaborations are generally conducted pursuant to agreements
that (i) grant the Company a license to, or the option to license, or (ii) grant
other companies the right to develop and market certain technology, patent
rights or material that may be valuable to the Company and its collaborators.
The Company's major licensing and collaboration agreements are summarized below.
Mitsubishi. TBC has entered into the Mitsubishi Agreement to license
Mitsubishi's rights and technology relating to NOVASTAN(R) and to license
Mitsubishi's own proprietary technology developed with respect to NOVASTAN(R).
Under the Mitsubishi Agreement, the Company has an exclusive license to use and
sell NOVASTAN(R) in the U.S. and Canada for all cardiovascular, renal,
neurological and immunological purposes other than use for the coating of
stents. The Company is required to pay Mitsubishi specified royalties on net
sales of NOVASTAN(R) by the Company and its sublicensees after its commercial
introduction in the U.S. and Canada. Either party may terminate the Mitsubishi
Agreement on 60 days notice if the other party defaults in its material
obligations under the agreement, declares bankruptcy or is insolvent, or if a
substantial portion of its property is subject to levy. Unless terminated sooner
pursuant to the above described termination provisions, the Mitsubishi Agreement
expires on the later of termination of patent rights in a particular country or
20 years after first commercial sale of products in a particular country. Under
the Mitsubishi Agreement, TBC has access to an improved formulation patent
granted in the U.S. in 1993 which expires in 2010 and a use patent in the U.S.
which expires in 2009. The Company has agreed to pay a consultant involved in
the negotiation of these agreements a royalty based on net sales of products.
SmithKline. In connection with TBC's development and commercialization of
NOVASTAN(R), on August 5, 1997, TBC entered into a Product Development, License
and CoPromotion Agreement with SmithKline (the "SmithKline Agreement") whereby
SmithKline was granted an exclusive sublicense in the U.S. and Canada for the
indications of NOVASTAN(R) that TBC has licensed from Mitsubishi. SmithKline
paid $8.5 million in upfront license fees during August 1997, a $5 million
milestone payment in October 1997, and has agreed to pay up to $15.0 million in
additional milestone payments based on the clinical development and FDA approval
of NOVASTAN(R) for the HIT, HITTS and AMI indications. TBC will be responsible
for completing the ongoing HIT/HITTS clinical trials, with SmithKline providing
60% of the funding for any additional HIT/HITTS trials (except that SmithKline
will pay 100% of the costs of certain Phase IV trials, if such trials are
needed). SmithKline will be responsible for the marketing of NOVASTAN(R) in the
licensed territory for those indications which SmithKline agrees to develop,
subject to TBC's rights to use its own sales force to co-promote NOVASTAN(R) on
a profit sharing basis following the regulatory approval of NOVASTAN(R) for an
additional major indication beyond HIT.
The parties have also formed a joint development committee to analyze the
development of additional NOVASTAN(R) indications (such as AMI and stroke)
covered by TBC's license from Mitsubishi to be funded 60% by SmithKline. TBC and
SmithKline have agreed to make determinations on whether to pursue the AMI
indication within three months after TBC has received data from Synthelabo's AMI
clinical trials (in a form practical for evaluation), and whether to pursue the
stroke indication within one year after the initial meeting regarding
development of this indication. See "Product Pipeline-Thrombosis Program"
SmithKline has the exclusive right to commercialize all products arising out of
the collaboration, subject to the obligation to pay royalties on net sales to
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TBC and to the rights of TBC to co-promote these products through its own sales
force in certain circumstances. TBC will retain the rights to any indications
which SmithKline determines it does not wish to pursue, subject to the
requirement that TBC may not grant marketing rights to any third parties and
must use its own sales force to commercialize any such indications. Any
indications which TBC and SmithKline elect not to develop will be returned to
Mitsubishi, subject to the rights of SmithKline and TBC to commercialize these
indications at their election, with SmithKline 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 Mitsubishi Agreement regarding such
indication will revert to Mitsubishi subject to the right of SmithKline and TBC
to commercialize the indication, with SmithKline having the first opportunity to
commercialize.
The SmithKline Agreement generally terminates on a country by country basis
upon the earlier of the termination of TBC's rights under the Mitsubishi
Agreement, the expiration of applicable patent rights or in the case of certain
royalty payments the commencement of substantial third-party competition.
SmithKline also has the right to terminate the agreement on a country by country
basis by giving TBC at least three months written notice based on a reasonable
determination by SmithKline 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 SmithKline Agreement on 60 days
notice if the other party defaults in its obligations under the agreement,
declares bankruptcy or is insolvent. The Company has agreed to pay an agent
involved in the negotiation of the SmithKline Agreement a fee based on a
percentage of all consideration received by TBC including royalties.
At present, Mitsubishi is the only manufacturer of NOVASTAN(R), and has
entered into the Mitsubishi Supply Agreement with SmithKline to supply
NOVASTAN(R) in bulk in order to meet SmithKline's and TBC's needs under the
SmithKline Agreement. Should Mitsubishi fail during any consecutive nine-month
period to supply SmithKline 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
SmithKline. If SmithKline cannot commence manufacturing of NOVASTAN(R) in a
timely manner or if alternate sources of supply are unavailable or uneconomic,
the Company's results of operations would be materially and adversely affected.
In connection with the execution of the SmithKline Agreement, SmithKline
purchased 176,922 shares of TBC's Common Stock for $1.0 million and an
additional 400,000 shares of Common Stock for $2.0 million in connection with a
public offering which closed on October 1, 1997. TBC granted limited piggyback
registration rights regarding the 176,992 shares which expire when the shares
may be sold pursuant to Rule 144(k) under the Securities Act.
Synthelabo. On October 11, 1994, the Company signed a collaborative
agreement with Synthelabo to develop and market compounds for vascular
proliferative disease derived from the Company's research programs. Upon
consummation of the transaction, Synthelabo purchased 1,428,571 shares of Common
Stock for a total of $5.0 million becoming the Company's largest shareholder at
that time and paid the Company a non-refundable licensing fee of $3.0 million.
During 1997, Synthelabo sold all of the Common Stock. In addition, Synthelabo
committed to pay $3.0 million annually in research payments (payable in
quarterly installments of $750,000). For the years ended December 31, 1995 and
December 31, 1996, TBC received $3.0 million related to the Synthelabo
agreement. Beginning October 31, 1996, the parties agreed to revise the terms of
the payment for the third year to be $750,000, which amount has already been
paid. No such payments were made in 1997 and Synthelabo is not currently paying
any research payment pursuant to the agreement. Synthelabo will pay royalties to
TBC based on the net sales in those areas covered in the agreement. In exchange
for the above consideration, Synthelabo received an exclusive license to
manufacture, use, and sell any products generated from the research, in Europe,
the Middle East, Africa and the countries of the former Soviet Union.
Synthelabo has the right to terminate the agreement any time on or after
October 15, 1997 for any reason and either party has the right to terminate the
contract for breach of any material obligation. If Synthelabo exercises this
termination right, the license granted to Synthelabo will terminate and TBC will
pay Synthelabo a royalty on net sales of any products sold in a certain
territory (Europe, Middle East, Africa and countries of the former Soviet Union)
for a period of time. In addition, Synthelabo may, at its option, require that
the technology be transferred to
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and the development program be conducted by a joint venture owned by TBC and
Synthelabo should TBC's "net worth", as defined in the agreement, be less than
$5.0 million as of the end of any calendar quarter during the term of the
agreement.
In conjunction with the clinical development of NOVASTAN(R), the Company
and Synthelabo, the European licensee, have mutually agreed to exchange certain
clinical data from the clinical studies of NOVASTAN(R). In addition, the Company
agreed to provide certain data from its studies in exchange for up to $2.92
million as certain milestones are met of which approximately $2.88 million has
been paid. See "--Thrombosis--Product Candidate-- NOVASTAN(R)" for a discussion
of the clinical trial programs.
LG Chemical. On October 10, 1996, the Company signed a strategic alliance
agreement with LG Chemical to develop and market compounds derived from the
Company's endothelin receptor and selectin antagonist programs for certain
disease indications. Upon consummation of the transaction, LG Chemical purchased
1,250,000 shares of Common Stock for a total of $5.0 million. LG Chemical has
committed to pay $10.7 million in research payments. Of this amount, $2.1
million has already been paid, and $1.0 million will be paid on each of June 30
and December 31 of 1998, 1999 and 2000, and $1.3 million will be paid on June 30
and December 31, 2001. LG Chemical has the right to terminate future research
payments if TBC fails to meet certain milestones, which milestones will be
established by the parties from time to time in accordance with the agreement.
LG Chemical will pay royalties to TBC, based on net sales, in those geographic
areas covered by the agreement, which include Korea, China, India and certain
other Asian countries, excluding Japan. The Company has agreed to pay its agents
in the contract negotiations a commission on all consideration received
including a royalty on net sales.
TBC TECHNOLOGY
TBC uses a wide variety of technologies to develop pharmaceutical
treatments for cardiovascular diseases. The Company applies its understanding of
vascular biology and advanced drug design techniques to discover novel
therapeutics and to test these therapeutics in-house using in vitro and in vivo
test systems. TBC has assembled a team of scientists with expertise in the
cultivation of human and animal endothelial and smooth muscle cells, signal
transduction in vascular cells, the role of growth factors in blood vessel
formation, the molecular biology of vascular cells, the development and
production of monoclonal antibodies to various targets, the interaction of white
blood cells and endothelial cells and the development of relevant animal models
of human disease. TBC believes that its scientists can study the behavior of
product candidates at all stages of development, from isolated biochemical
assays to whole cells to intact animals and ultimately, to humans.
To aid in the rapid discovery of novel drugs, TBC has developed the
PHARMACEUTICAL TOOLBOX(TM). Management believes that use of the PHARMACEUTICAL
TOOLBOX(TM) allows TBC to discover a broader class of drug candidates more
quickly and at a lower cost than is possible through other current
structure-based discovery methods. For example, TBC has developed a number of
proprietary, highly potent, orally active non-peptide ET(A) and ET(B) receptor
antagonists. These compounds have no chiral centers, are easily scaleable, and
may be synthesized in a small number of chemical steps. TBC has also generated
proprietary low molecular weight, small molecule inhibitors of E-, P-, and
L-selectin, potent peptide and small molecule VCAM/VLA-4 inhibitors, FGF
antagonists and vascular endothelial growth factor antagonists.
The PHARMACEUTICAL TOOLBOX(TM) is comprised of a number of proprietary and
non-proprietary components. The choice of individual components is based on the
needs of each individual drug development program, and the structure information
available. The PHARMACEUTICAL TOOLBOX(TM) has the following three major
components:
Rational Drug Design. The selection of targets for synthesis is
derived from a computational design group equipped with a high-speed
parallel processing supercomputer/server networked to a number of
high-speed graphic workstations. Software capabilities include a suite of
Molecular Simulations Inc. commercial packages, an extensive suite of MDL
Information Systems Inc. databases and software, including both compound
and reaction databases, selected software tools licensed from academic
laboratories, as well as proprietary software
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for ab initio peptide conformation determination. Compounds are then
synthesized by a highly skilled team of medicinal chemists.
Random Library & Selected Library High Throughput Screening. This
component utilizes a number of structurally diverse compound libraries from
commercial, academic and in-house sources to identify leads in any
available assays. Current compound availability is approximately 35,000
individual compounds. Additionally, over 1,000,000 compounds in a computer
database in 3D format for structural searching and selection for assay are
available to TBC. This database is continually updated to include newly
available libraries, as they appear. Assay data is monitored by the MDL
software 'Screen,' which permits the integration of chemical and biological
data and easy access to SAR relationships.
Virtual Libraries/Focused Compound Libraries. This component couples
structural information with the generation of libraries of related
(focused) compounds. Proprietary software written at TBC is used to build a
library of virtual compounds (the structures exist only in the computer
database), all of which can be produced in approximately three chemical
steps from commercial starting materials. These structures can be searched
against any three dimensional query, thereby only compounds with preferred
configurations will be selected for synthesis. Sets of compounds can be
synthesized using a solid-phase combinatorial approach with a Tecan
CombiTec synthesizer for bioassay. TBC has recently developed novel
synthetic approaches for the synthesis of solid phase libraries of
sulfonamides, ureas or carbamates, each of which can be targeted for
specific queries.
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. The Company's policy is to file patent
applications to protect technology, inventions and improvements that are
important to the development of its business. The Company has 15 pending U.S.
patent applications (2 of which have been allowed) and 10 issued U.S. patents
covering compounds including selectin inhibitors, endothelin antagonists and
VCAM/VLA-4 antagonists. In addition, the Company has exclusive licenses to three
patents covering rational drug design technology. The Company has also filed
patent applications in certain foreign jurisdictions covering projects that are
the subject of U.S. applications and intends to file additional patent
applications as its research projects develop. The Company licensed the U.S. and
Canadian rights to NOVASTAN(R) in 1993, which included access to an improved
formulation patent granted in 1993 which expires in 2010 and a use patent which
expires in 2009. If any of the NOVASTAN(R) patents remain outstanding at the
time NOVASTAN(R) receives FDA approval, the Company may apply, under the
Waxman/Hatch Act, for up to a five-year extension of one such patent. If all
such patents have expired at the time NOVASTAN(R) receives FDA approval, the
Waxman/Hatch Act will grant the Company NDA exclusivity for up to five years,
during which time the FDA may not accept or approve abbreviated applications for
generic variations of NOVASTAN(R). Although the Company believes that the
expiration of the NOVASTAN(R) patents will not have a material adverse effect on
the commercialization of NOVASTAN(R), there can be no assurance that the Company
will be able to take advantage of either the patent term extension or NDA
exclusivity provisions of the Waxman/Hatch Act. Moreover, even if the Company
receives either a patent term extension or NDA exclusivity, there can be no
assurance that generic pharmaceutical manufacturers will not ultimately enter
the market and compete with the Company.
The patent positions of biopharmaceutical firms, including the Company, are
uncertain and involve complex legal and factual questions. Consequently, the
Company does not know whether any of its applications will result in the
issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated. Since
patent applications in the U.S. are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, the Company cannot be certain that it was
the first creator of inventions covered by its pending patent applications or
that it was the first to file patent applications for such inventions. Moreover,
the Company may have to participate in interference proceedings declared by the
U.S. Patent and Trademark Office ("PTO") to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company. TBC has one interference proceeding pending
which involves compounds not currently of commercial interest to TBC. There can
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be no assurance that the Company's patents, if issued, would be held valid by a
court of competent jurisdiction. An adverse outcome could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company 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 the Company's applications or conflict in certain respects with
claims made under the Company's applications. Such conflict could result in a
significant reduction of the coverage of the Company's 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, no
assurance can be given that the Company would be able to obtain licenses to
these patents at a reasonable cost or develop or obtain alternative technology.
The Company also relies upon trade secret protection for its confidential
and proprietary information. No assurance can be given that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its trade secrets.
The Company requires its employees, consultants, members of its scientific
advisory board, outside scientific collaborators and sponsored researchers and
certain other advisors to enter into confidentiality agreements with the Company
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 the Company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all
inventions conceived by the employee are the exclusive property of the Company.
There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secrets in
the event of unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and other countries will
be a significant factor in the production and marketing of any products which
may be developed by the Company. The nature and extent to which such regulation
may apply to the Company will vary depending on the nature of the specific
product. Virtually all of the Company's products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous preclinical and clinical
testing and other approval procedures by the FDA and similar health authorities
in foreign countries. Various federal statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations requires the expenditure of substantial resources.
The effect of government regulation may be to delay for a considerable
period of time or prevent the marketing of any product that the Company may
develop and/or to impose costly procedures on the Company's activities, the
result of which may be to furnish an advantage to the Company's competitors. Any
delay in obtaining or failure to obtain such approvals would adversely affect
the marketing of the Company's products and its ability to earn product revenue.
In order to perform clinical tests and to produce and market products for
diagnostic or therapeutic use, a company must comply with mandatory procedures
and safety standards established by the FDA, the Health Protection Branch in
Canada, and comparable agencies in foreign countries. The FDA requires that
before beginning human clinical testing of a potential new drug, a company must
file an IND and receive its concurrence. This application is a summary of the
preclinical studies that were conducted to characterize the drug, including
toxicity and safety studies, as well as an in-depth discussion of the human
clinical studies which are being proposed.
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The pre-marketing program required for approval of a new drug typically
involves a time-consuming and costly three-phase process. In Phase I, trials are
conducted with a small number of patients to determine a drug's early safety
profile, the pattern of its distribution and metabolism. In Phase II, trials are
conducted with groups of patients afflicted with a target disease in order to
determine a drug's preliminary efficacy and optimal dosages and to expand
evidence of safety. In Phase III, large scale, multi-center comparative trials
are conducted with patients afflicted with a target disease in order to provide
enough data for statistical proof of efficacy and safety required by the FDA and
others. The FDA closely monitors the progress of each of the three phases of
clinical testing and may, in its discretion, reevaluate, alter, suspend or
terminate the testing based on the data that have been accumulated to that point
and its assessment of the risk/benefit ratio to the patient. Upon completion of
such clinical testing, a company typically submits a NDA to the FDA that
summarizes the results and observations of the drug during the clinical testing.
An NDA prefiling submission of the Chemistry, Manufacturing and Control section
may be made prior to the data and other sections of the NDA. Based on its review
of the NDA, the FDA will decide whether or not to approve the drug. This review
process can be quite lengthy, and approval for the production and marketing of a
new pharmaceutical product can require a number of years and substantial
funding. There can be no assurance that any approvals will be granted on a
timely basis, if at all.
Once the sale of a product is approved for marketing, FDA regulations
govern the production process and marketing activities, and a post-marketing
testing and surveillance program may be required to monitor continuously a
product's usage and effects. Product approvals may be withdrawn if compliance
with regulatory standards is not maintained. Other countries in which any
products developed by the Company may be marketed impose a similar regulatory
process.
COMPETITION
General. The development and sale of new drugs for the treatment of
vascular diseases is highly competitive and the Company will face intense
competition from major pharmaceutical companies and biotechnology companies
worldwide. Competition may increase further as a result of advances made in the
commercial applicability of technologies and greater availability of capital for
investment in these fields. Companies that complete clinical trials, obtain
required regulatory approvals and commence 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 the Company in recruiting
talented scientists.
TBC has developed the PHARMACEUTICAL TOOLBOX(TM) for expediting rational
drug design. A number of other biopharmaceutical companies (such as Arris
Pharmaceutical Corporation, Vertex Pharmaceutical Incorporated, Agouron
Pharmaceuticals, Inc. and BioCyrst Pharmaceuticals, Inc.) use rational drug
design as part of their effort to identify novel pharmaceutical agents. Many of
these companies have invested considerable resources in developing in-house
x-ray crystallography facilities. While proprietary structural information is
advantageous , for example, both endothelin and selectin x-ray structural data
have been publicly available for some time , the conversion of this information
to clinical candidates has been the major obstacle to drug discovery. TBC
believes that use of the PHARMACEUTICAL TOOLBOX(TM) is a more cost effective
method to develop clinical drug candidates in both the endothelin and selectin
antagonist areas.
The Company believes that its ability to compete successfully will depend
on its capability to create and maintain scientifically advanced technology,
develop proprietary products, attract and retain scientific personnel, obtain
patent or other protection for its products, obtain required regulatory
approvals and manufacture and successfully market products either alone or
through other parties. Many competitors have substantially greater financial,
marketing, and human resources than those of the Company. The Company expects to
encounter significant competition.
NOVASTAN(R). Primary competitors for NOVASTAN(R) in the intravenous heparin
replacement market are initially expected to be Hirulog (bivalirudin), Revasc
(desirudin) and Refludan (lepirudin), manufactured by The
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Medicines Co., Novartis Pharmaceuticals Corporation ("Novartis") and Hoechst
Marion Roussel ("HMR"), respectively. Hirulog and Revasc have completed Phase
III clinical trials. Refludan has received approval in Europe and the U.S.
for proven Type II heparin-associated thrombocytopenia.
Biogen, the originator of Hirulog, has completed a large Phase III trial on
Hirulog which demonstrated improved safety versus heparin but only equal
efficacy. As a result of this study, Biogen halted development of Hirulog and
outlicensed the compound earlier in 1997 to The Medicines Co. The Company
anticipates the Hirulog peptide will have a relatively high cost of goods. An
improved manufacturing process for Hirulog with a lower cost of goods has been
reported, and may become a competitive factor should the product be approved for
marketing. Hirulog has been submitted to the FDA for approval for use in PTCA
based on the previous Phase III trial.
A hirudin compound, Refludan (lepirudin), from HMR has received approval in
Europe and the U.S. for proven Type II heparin-associated thrombocytopenia. On
March 9, 1998 HMR received marketing clearance for Refludan in the U.S. Refludan
is also in development as an adjunct to thrombolytic therapy in AMI. Another
hirudin compound, Revasc, from Novartis has been studied in two large Phase III
trials for AMI and unstable angina. Both trials, TIMI-9 and GUSTO II, were
halted in late 1994 due to increased hemorrhagic stroke. Both trials resumed
with reduced Revasc dosing. The bleeding complications with Revasc may handicap
the product in the marketplace. As a result, development of Revasc for acute
coronary syndrome has been halted. Revasc has received marketing clearance in
Europe for use in deep venous thrombosis. A third hirudin compound,
pegylated-hirudin from Knoll has begun Phase II development in acute coronary
syndrome.
If any of the first generation hirudin-like compounds obtain regulatory
approval in the U.S. or Canada prior to NOVASTAN(R) these drugs may gain a
competitive advantage. Other compounds which may be competitive with NOVASTAN(R)
include napsagatran from Roche and inogatran and malagatran from Astra. These
compounds are very similar to NOVASTAN(R) and could have similar pharmacologic
profiles. Napsagatran is in Phase II trials for various indications including
unstable angina. Inogatran has been tested in a Phase II trial for unstable
angina. Malagatran is in early clinical development.
A defibrinogenating snake venom, Arvin (ancrod) from Knoll Pharmaceuticals
may be submitted for approval to the FDA for HIT in the near future. This drug,
which is available in Canada, is believed to have certain competitive
disadvantages including difficulty in dosing, allergic reactions to the
medication, limited efficacy and high cost.
Low Molecular Weight Heparins ("LMWH") are newer forms of heparin and are
used in prophylaxis for deep vein thrombosis following orthopedic surgery. Most
LMWHs also carry an immunological risk for precipitating HIT, and are
contraindicated as therapy in patients with HIT. A low molecular weight
heparinoid, Orgaran (danaparoid) from Organon, Inc. has been approved for deep
vein thrombosis. Organon, Inc. has conducted trials with this drug in HIT,
although the Company is not aware of an FDA filing for HIT.
Endothelin Receptor Antagonist. TBC 11251 is a small molecule ET(A)
receptor antagonist in Phase II clinical development. A number of other
companies including Abbott Laboratories, Knoll Pharmaceuticals, Bristol-Meyers
Squibb and Zeneca Pharmaceuticals have ET(A) receptor selective antagonist
compounds in Phase I/II clinical development. ET(A) receptor-selective compounds
from Abbott and Knoll are in early Phase II development in indications of
interest to Texas Biotechnology. The Company believes its compounds are
competitive with those from the other companies in terms of bioavailability,
half-life and potency.
Selectin Antagonist. TBC 1269 is a small molecule selectin antagonist in
Phase II clinical development. Cytel Corporation has developed Cylexin, a
carbohydrate selectin antagonist in development for similar disease targets.
This compound has recently completed Phase IIa trials for coronary reperfusion
injury. Although the results of these trials may negatively impact one of the
TBC potential indications (reperfusion injury), the results should have no
impact on TBC 1269's primary indication, asthma. Cytel is currently studying
Cylexin in neonatal coronary reperfusion injury. The compound is in Phase II/III
development. The Company believes TBC 1269 to have advantages over Cylexin in
terms of potency and cost of manufacture. Other competitive drugs for acute
asthma
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include intravenous steroids such as Solu-Medrol. In spite of known side effects
and delay in onset, intravenous steroids are available generically and, as such,
represent substantial price competition. For the inhaled version for chronic
asthma, inhaled steroids, the cromones (Tilade, Intal, etc.) and the leukotriene
inhibitors including Zyflow, Acculate and Singulair represent potential chronic
immunomodulator competition.
MANUFACTURING AND MARKETING
TBC relies on its internal resources and third-party manufacturers to
produce compounds for preclinical development. Currently, the Company has no
manufacturing facilities for either the production of biochemicals or the
manufacture of final dosage forms. The Company believes small molecule drugs are
less expensive to manufacture than protein-based therapeutics, and that all of
its existing compounds can be produced using established manufacturing methods,
including traditional pharmaceutical synthesis.
TBC has established supply arrangements with third-party manufacturers for
certain clinical trials and will establish supply arrangements ultimately for
commercial distribution, although there can be no assurance that such
arrangements will be established on reasonable terms. The Company's long-range
plan may involve establishing internal manufacturing of small molecule
therapeutics, including the ability to formulate, fill, label, package and
distribute its products. Under certain circumstances the Company plans to
outsource such manufacturing. However, the Company does not anticipate
developing an internal manufacturing capability for some time, nor is it able to
determine which of its potential products, if any, will be appropriate for
internal manufacturing. The primary factors the Company 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 the SmithKline Agreement, SmithKline has entered into the
Mitsubishi Supply Agreement regarding the manufacture and supply of NOVASTAN(R),
and the Company will not, therefore, have any direct responsibility regarding
the manufacture and supply of NOVASTAN(R) as it relates to the SmithKline
Agreement. See "--Research and Development Collaborations and Licensing
Agreements."
TBC intends to market products for which it gains approval either directly
or through co-promotion or other licensing arrangements with large
pharmaceutical, biopharmaceutical or biotechnology companies. NOVASTAN(R) will
be initially commercialized by SmithKline through a collaboration. In the
future, the Company also plans to establish (i) a targeted, hospital-based sales
force to sell its compounds and (ii) strategic partner relationships for
non-strategic products and for customer groups outside TBC's targeted markets
or, in some cases, to co-promote in such markets with partners to optimize the
value of its products.
HUMAN RESOURCES
As of December 31, 1997, TBC employed 79 individuals. TBC had 67 employees
engaged directly in research and development activities and 12 in general and
administrative positions. None of the Company's employees is represented by a
labor union. The Company has experienced no work stoppages and believes that its
relations with its employees are good.
The Company's policy is to have each employee enter into a confidentiality
agreement which contains provisions prohibiting the disclosure of confidential
information to anyone outside the Company and requiring disclosure to the
Company of ideas, developments, discoveries or inventions conceived during
employment and assignment to the Company of proprietary rights to such matters
related to the business and technology of the Company.
TBC's success is highly dependent on its ability to attract and retain
qualified scientific and management personnel. In order to commercialize its
products, the Company may need to substantially expand its personnel,
particularly in the areas of clinical trial management, manufacturing, sales and
marketing. The Company faces intense competition for such personnel from other
companies, academic institutions, government entities and other organizations.
There can be no assurance that the Company will be successful in hiring or
retaining qualified personnel.
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SCIENTIFIC ADVISORY BOARD AND CONSULTANTS
The Company has assembled a Scientific Advisory Board composed of
distinguished professors from some of the most prestigious medical schools. The
Scientific Advisory Board is assisting the Company in identifying research and
development opportunities, in reviewing with management the progress of the
Company's projects and in recruiting and evaluating scientific staff. Although
the Company expects to receive guidance from the members of its Scientific
Advisory Board, all of its members are employed on a full-time basis by others
and, accordingly, are able to devote only a small portion of their time to the
Company. Management expects to meet with its Scientific Advisory Board members
as a group at least once each year and individually from time to time on an
informal basis. Each of the members of the Scientific Advisory Board has entered
into a consulting agreement with the Company. The Scientific Advisory Board
includes James T. Willerson, M.D., as Chairman, and the following scientists.
Murad Ferid, M.D., Ph.D. is Professor and Chairman of the Department of
Integrative Biology and Pharmacology at the University of Texas-Houston Medical
School. Dr. Ferid has received many honors including the Ciba Award in 1988 and
the Albert and Mary Lasker Award in Basic Medical Research in 1996. He is also a
member of many professional and honorary societies and is the author or
co-author of more than 300 scientific articles.
Morris J. Karnovsky, M.D. has served since 1972 as Shattuck Professor of
Pathological Anatomy at Harvard Medical School, where he was Chairman of the
Program in Cell and Developmental Biology from 1975 to 1989. Dr. Karnovsky
received the E.B. Wilson Award from the American Society for Cell Biology and
was inducted into the Institute of Medicine by the National Academy of Sciences
in 1991. In 1984, Dr. Karnovsky was elected to serve as President of the
American Society for Cell Biology. He is a member of numerous professional and
honorary societies, editorial boards and is the author or co-author of more than
275 scientific articles.
Joseph F. Sambrook, Ph.D. is a Professor of Pathology at Melbourne
University, Australia and Director of Research at Peter MacCallum Cancer
Institute. He is a member of various honorary and professional societies,
editorial boards and is the author of more than 150 scientific articles.
Professor Sambrook previously worked for 20 years in the USA where he served on
many blue ribbon government and non government committees.
Dr. Denton Cooley, Surgeon-in-Chief of the Texas Heart Institute, acts as
an advisory director to the Company.
The Company also has agreements with various outside scientific consultants
who assist the Company in formulating its research and development strategy. All
of the Company's consultants and advisors are employed by employers other than
the Company and may have commitments to or consulting or advisory contracts with
other entities that may affect their ability to contribute to the Company.
ITEM 2. PROPERTIES
TBC leases 29,300 square feet of office and laboratory space in Houston,
Texas, including a 16,671 square foot laboratory facility and a 3,909 square
foot animal facility. The remaining area is being used for clinical development
and administrative offices, storage space and additional offices for scientists.
The Company's lease expires in December 2000. The Company may require additional
space to accommodate future research and laboratory needs as necessary to bring
products into development and clinical trials and has an option on additional
space in its present facility. The Company believes that these facilities are
adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
On November 21, 1994, a class action shareholders' suit was filed in the
United States District Court for the Southern District of Texas, Houston
Division seeking damages in the amount of $16 million. Plaintiffs are two
individuals who purchased shares of the Company on December 16, 1993 following
the Company's initial public offering("IPO"). In their complaint, plaintiffs
have sued the Company, certain members of the board of directors and certain
officers alleging violations of Sections 11, 12 and 15 of the Securities Act of
1933, as amended (the "Act"). Plaintiffs have also named David Blech, D. Blech &
Co. and Isaac Blech as defendants. On January 23,
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20
1995, the Company and the members of the board of directors filed a motion to
dismiss the plaintiffs' complaint pursuant to Rule 9(b) and Rule 12b(6) of the
Federal Rules of Civil Procedure. In addition, defendant John Pietruski,
Chairman of the Board of Directors, filed a motion to dismiss the plaintiffs'
complaint pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure. On
February 7, 1995, the plaintiffs filed a motion for class certification. The
Court denied the motion by the Company and by John Pietruski.
On March 28, 1995, a second class action shareholders' suit was filed in
the United States District Court for the Southern District of New York seeking
unspecified damages. Plaintiffs are eight individuals who purchased shares in
various companies for which D. Blech & Co. acted as an underwriter (or
co-underwriter) or marketmaker. In their complaint, the plaintiffs have sued the
Company alleging violations of Section 10(b) of the Securities Exchange Act of
1934, as Amended (the "Exchange Act") and Rule 10b-5 promulgated thereunder by
the Securities and Exchange Commission (the "Commission"). Plaintiffs have named
a number of defendants, including David Blech and D. Blech & Co., four
individuals, two brokerage firms, one investment management company and ten
other companies for which D. Blech & Co. acted as underwriter or marketmaker.
On August 14, 1995, the Judicial Panel on The Multi-District Litigation
ordered that the action filed in the United States District Court for the
Southern District of Texas, Houston Division be transferred to the United States
District Court for the Southern District of New York for coordinated or
consolidated pretrial proceedings with the action pending there. In light of the
transfer and consolidation of the Texas case with similar cases against other
companies for which D. Blech & Co. acted as underwriter, the Company requested
that the Court in New York reconsider the Texas Court's denial of its motion to
dismiss as a part of the Court's consideration of similar motions to dismiss
filed by those companies. All of these motions were presented to the Court on
February 6, 1996. On June 6, 1996, the New York District Court entered two
memorandum opinions in the consolidated cases. In one of its opinions, the Court
dismissed all of the Exchange Act and common law fraud claims filed against the
Company and its officers and directors, but afforded those plaintiffs the right
to attempt to preserve those claims by repleading them. The Court ordered that
those claims be repleaded no later than July 26, 1996. Plaintiffs did not
replead those claims by the deadline, resulting in the dismissal of all claims
against the Company in that litigation. In its opinion in the second case, i.e.,
the case filed on November 21, 1994, the Court granted the Company's and its
officers' and directors' motion for reconsideration, but together with all other
similar pending motions, denied the requested relief. Pursuant to the court's
order, the Company therefore filed an answer in that case. The Company also
filed a Motion seeking leave of court to prosecute an immediate appeal of the
Court's denial of the Company's Motion to Dismiss. The Court heard argument on
that Motion on October 10, 1996. The motion was denied on January 16, 1997.
Given the early stage of that case, which is the only remaining litigation
against the Company, the Company is unable to evaluate its potential outcome at
this time. The Company disputes these claims and intends to contest them
vigorously. There can be no assurance, however that the final disposition of
this case will be favorable to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of TBC's stockholders during the fourth
quarter of its fiscal year ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
From December 16, 1993 until November 6, 1994, the Company's Unit security,
which consisted of one share of Common Stock and one redeemable Common Stock
purchase warrant, was traded on the AMEX under the symbol TXB.E. Prior to
December 16, 1993, there was no public market for the Company's securities. On
November 7, 1994, the Unit separated, and the Common Stock and redeemable Common
Stock purchase warrants began trading separately on the AMEX under the symbols
TXB and TXB.WS, respectively.
COMMON STOCK PUBLIC WARRANTS
HIGH LOW HIGH LOW
------ ----- ------ -----
YEAR ENDED DECEMBER 31, 1996
First Quarter 5 1/2 2 1 1/4 1/4
Second Quarter 6 9/16 3 1/2 1 7/8 9/16
Third Quarter 4 7/16 2 3/8 1 1/8 9/16
Fourth Quarter 4 3/4 2 15/16 1 1/16 1/2
YEAR ENDED DECEMBER 31, 1997
First Quarter 7 1/4 3 7/8 2 3/8 11/16
Second Quarter 6 3/16 3 3/4 1 1/2 3/4
Third Quarter 6 1/2 4 9/16 1 9/16 7/8
Fourth Quarter 6 11/16 5 1 5/8 7/8
As of March 2, 1998 there were approximately 489 holders of record of
Common Stock of the Company and approximately 9,600 beneficial holders. On March
2, 1998, the last sale price reported on the AMEX was $7 3/16 per share. The
Company has never paid dividends and does not anticipate paying any cash
dividends in the foreseeable future. The Company intends to retain any future
earnings and capital for use in its business.
RECENT SALES OF UNREGISTERED SECURITIES
Preferred Stock Conversions
On May 19, 1997, May 22, 1997, May 28, 1997, June 11, 1997, July 25, 1997,
September 5, 1997, September 9, 1997, October 8, 1997, October 14, 1997 and
November 11, 1997, the Company issued an aggregate of 1,344,149 shares of Common
Stock to certain institutions pursuant to the conversion of its 5% Preferred
Stock and accrued dividends. The issuance of the Common Stock was exempt from
registration under Section 4 (2) of the Securities Act of 1933, as amended, and
Regulation D promulgated thereunder. The remaining 300 shares of preferred stock
and accrued dividends were converted into 64,795 shares of Common Stock on
February 11, 1998.
Common Stock Transactions
On March 5, 1997, March 13, 1997, March 20, 1997, March 21, 1997, April 8,
1997, June 3, 1997, June 13, 1997, June 18, 1997, July 23, 1997, August 1, 1997,
August 7, 1997, August 12, 1997, October 1, 1997, October 10, 1997, October 24,
1997, October 28, 1997, November 11, 1997, November 26, 1997 and December 3,
1997, the Company issued an aggregate of 548,438 shares of its Common Stock to a
certain institution and individuals, pursuant to the exercise of outstanding
warrants for an aggregate purchase price of $2,030,948. The issuance of the
Common Stock was exempt from registration under Section 4 (2) of the Securities
Act of 1933, as amended.
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The warrants and the Common Stock underlying the warrants may not be sold in the
United States absent registration or an applicable exemption from registration
requirements.
On August 5, 1997, in conjunction with the SmithKline Agreement, the
Company issued 176,992 shares of Common Stock to an affiliate of SmithKline for
a total purchase price of $1 million. The Company has granted limited piggyback
registration rights with respect to such shares. The Common Stock may not be
sold in the United States absent registration or an applicable exemption from
registration requirements.
On October 9, 1997, in conjunction with a collaboration agreement, the
Company issued 214,286 shares of Common Stock to Genentech, Inc. for a total
value of $1,075,191 which was recorded as a noncash expense during 1997. The
Common Stock may not be held in the United States absent registration or an
applicable exemption from registration requirements.
Warrant Transactions
On October 9, 1997, the Company issued 142,858 warrants to Genentech, Inc.,
exercisable at $14.00 per share, to purchase Common Stock with the resale of the
underlying Common Stock subject to certain demand and piggyback registration
rights. The issuance of the warrants was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder. The warrants and the Common Stock underlying the warrants may not be
sold in the United States absent registration or an applicable exemption from
registration requirements.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of and for each of the
fiscal years in the five-year period ended December 31, 1997 and are derived
from the Company's audited financial statements. These selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto.
YEARS ENDED
DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues ............................... $ 16,907,780 $ 5,405,776 $ 7,234,002 $ 4,718,785 $ 149,764
------------ ------------ ------------ ------------ ------------
Expenses:
Research & Development .............. 16,833,135 22,251,895 14,949,822 8,936,004 6,098,282
Charge for purchase of in-process
research and development ........ 1,075,191 -- 2,061,383 6,404,227 1,000,000
General & Administrative ............ 5,759,792 4,067,505 4,693,019 3,992,183 2,590,900
Restructuring & Impairment of
intangible assets ............... -- 421,165 643,750 -- --
------------ ------------ ------------ ------------ ------------
Total expenses ................... 23,668,118 26,740,565 22,347,974 19,332,414 9,689,182
------------ ------------ ------------ ------------ ------------
Other Income
Interest Income .................... 1,122,900 898,039 1,200,921 1,011,251 212,433
Interest Expense ................... -- -- (1,068) (1,315) (1,509)
Other .............................. 2,253 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total other income (expenses) .......... $ 1,125,153 $ 898,039 $ 1,199,853 $ 1,009,936 $ 210,924
Net Loss ............................... 5,635,185 20,436,750 13,914,119 13,603,693 9,328,494
Preferred dividend requirement ......... 1,153,282 -- -- -- --
Net loss applicable to common shares ... 6,788,467 20,436,750 13,914,119 13,603,693 9,328,494
Net loss per common share(1) ........... $ .24 $ .87 $ .83 $ .97 $ 1.05
============ ============ ============ ============ ============
Weighted average common shares
used to compute net loss per
common share ........................ 27,745,700 23,616,033 16,748,995 14,018,269 8,896,780
============ ============ ============ ============ ============
DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Working capital S 42,815,413 S 10,109,803 S 11,927,296 S 22,930,263 S 23,188,611
Total assets 48,798,282 18,180,121 18,926,499 31,192,345 27,996,255
Short-term debt -- -- -- -- 79,536
Stockholders' equity 46,167,066 13,627,406 15,710,125 27,557,596 27,087,065
- -------------
(1) For information concerning calculation of net loss per share, see Note 1(g)
of Notes to Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since its inception in 1989, the Company has primarily devoted its
resources to fund research, drug discovery and development. The Company has
been unprofitable to date and expects to incur substantial losses for the
next several years as the Company invests in product research and
development, preclinical and clinical testing and regulatory compliance.
The Company has sustained net losses of approximately $70.2 million from
inception to December 31, 1997. The Company has primarily financed its
operations to date through certain private placements of Common Stock and
shareholder loans, which have raised an aggregate of $21.3 million in net
proceeds, the IPO which raised an aggregate of $24.2 million in net
proceeds including the over-allotment sold in January 1994, a private
placement of Common Stock on February 13, 1996, which raised $13.0 million
in net proceeds, a private placement of the 5% Preferred on March 14, 1997,
which raised approximately $6.0 million in net proceeds, and a secondary
public offering which closed during October 1997 and raised approximately
$26.7 million in net proceeds.
On July 25, 1994, the Company acquired all of the outstanding stock of IPI
in exchange for 1,599,958 shares of Common Stock, 999,956 shares of
escrowed Common Stock which were released upon satisfaction of certain
research milestones, and contingent stock issue rights to acquire 1,400,000
shares of which 399,961 shares were issued upon satisfaction of certain
research milestones. IPI's financial results have been included in the
Company's financial statements beginning August 1, 1994. In March 1996,
IPI's remaining operations in California were consolidated with the
Company's Houston operations.
The Company signed a collaborative agreement with Synthelabo on October 11,
1994. Upon consummation of the transaction, Synthelabo purchased 1,428,571
shares of Common Stock for a total of $5.0 million and paid a licensing fee
of $3.0 million. In addition, Synthelabo has paid $3.0 million annually in
research payments (payable in quarterly installments) for two years and
paid $750,000 for the third year. During 1996, TBC signed agreements with
Synthelabo to provide copies of certain clinical data. Over the life of the
agreements TBC may receive as much as $2.92 million, of which $2.88 million
has been received as of December 31, 1997. During October 1996, the Company
executed a research and Common Stock purchase agreement with LG Chemical.
LG Chemical purchased 1,250,000 shares of Common Stock for $5.0 million and
committed to pay up to $10.7 million over a five year period to develop two
compounds in clinical development. Of this amount, $2.1 million has been
paid and $1.0 million will be paid on each of June 30 and December 31, of
1998, 1999 and 2000, and $1.3 million will be paid on June 30 and December
31, 2001.
In August 1997, the Company entered into the SmithKline Agreement whereby
SmithKline was granted exclusive rights to work with TBC in the development
and commercialization of NOVASTAN(R) in the U.S. and Canada for specified
indications. Upon execution of the agreement, SmithKline paid an $8.5
million license fee and during October 1997, paid a $5 million milestone
payment to TBC and has committed to pay up to a total of $15.0 million in
additional milestone payments based on the clinical development and FDA
approval of NOVASTAN(R) for the indications of HIT, HITTS and AMI. In
connection with the SmithKline Agreement, SmithKline purchased 176,922
shares of Common Stock for $1.0 million and an additional 400,000 shares of
Common Stock for $2.0 million in conjunction with the Company's public
offering which closed during October, 1997.
The Company's operating results have fluctuated significantly during each
quarter, and the Company anticipates that such fluctuations, largely
attributable to varying research and development commitments and
expenditures, will continue for the next several years.
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RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenues were $16,907,780, $5,405,776 and $7,234,002 during 1997, 1996 and
1995, respectively. Revenues included grant income of $1,727 and $227,938 in
1996 and 1995, respectively. For the years 1997, 1996 and 1995, respectively,
revenues also included $7,500, $8,939 and $217,707 of product sales from the
Company's subsidiary IPI and $16,900,280, $5,395,110 and $6,788,357 from
research agreements and collaborations with various other companies. Revenues
from research agreements in 1997 includes a license fee of $8,500,000 and a
milestone payment of $5,000,000 and in 1996 includes $2.6 million in research
payments from Synthelabo and $2.3 million for data supplied to Synthelabo.
Revenues from research agreements in 1995 includes $3 million in research
payments related to the agreement with Synthelabo and a $2 million additional
research payment from EISAI for attainment of a milestone. Interest income was
$1,122,900, $898,039 and $1,200,921, for the years 1997, 1996 and 1995
respectively. Interest income for the year 1997 was significantly higher over
1996 due to funds received in conjunction with the SmithKline Agreement and a
public offering of common stock completed in 1997. From 1995 to 1996, interest
income declined approximately $300,000 due to lower average invested balances
and a general decline in interest rates.
Total operating expenses decreased 11% from $26,740,565 in 1996 to
$23,668,118 in 1997 and increased 20% from $22,347,974 in 1995 to $26,740,565 in
1996. The Company recorded noncash charges for the purchase of in-process
research and development of $1,075,191 for stock issued pursuant to a license
agreement and $2,061,383 for stock issued pursuant to the acquisition of IPI
during 1997 and 1995, respectively. The Company impaired the remaining goodwill,
$643,750, at December 31, 1995, associated with the IPI purchase due to the
expected consolidation of IPI operations into TBC's in the first half of 1996
and charged $421,165 to expense during 1996 for costs related to restructuring
IPI. The change in operating expenses would have been 14% for the years 1996 to
1997 and 34% for the years 1995 to 1996, without these charges. The decrease
from 1996 to 1997 was due primarily to reduced spending for clinical trails that
were completed for NOVASTAN(R). The increase from 1995 to 1996 was primarily due
to increases in the costs associated with the clinical trials of NOVASTAN(R).
The Company had 79 employees at December 31, 1997, 73 at December 31, 1996, and
98 at December 31, 1995, of which 25 were IPI employees in 1995.
Research and development expenses decreased 24% from $22,251,895 in 1996 to
$16,833,135 in 1997 and increased 49% from $14,949,822 in 1995 to $22,251,895 in
1996 without including the noncash charge for purchase of in-process research
and development of $2,061,383 for the year 1995 and the $1,075,191 for the year
1997. The decrease from 1996 to 1997 was due primarily to reduced spending for
clinical trials that were completed for NOVASTAN(R). The increase from 1996 to
1995 was primarily due to the increase in clinical development expenses related
to the ongoing clinical trials of NOVASTAN(R).
General and administrative expenses increased 42% from $4,067,505 in 1996
to $5,759,792 in 1997 and decreased 13% from $4,693,019 in 1995 to $4,067,505 in
1996. The increase in 1997 was primarily because of a $952,919 noncash charge
related to the extension of the exercise period for certain stock options and an
increase in legal fees related to patent applications for TBC's compounds. The
decrease in 1996 from 1995 was primarily due to the restructuring of IPI and the
related decrease in general and administrative expenses. In addition, legal
expense decreased approximately $300,000 due primarily to lower litigation
expense in 1996.
Rent and related building services, which is a component of both research
and development and general and administrative expense, was approximately
$956,000 in 1997, $1,025,000 in 1996 and $1,218,000 in 1995. The decrease of
approximately $69,000 in 1997 from 1996 was primarily due to the consolidation
of IPI in to TBC and the termination of the lease for the IPI facility. The
decrease of approximately $193,000 in 1996 from 1995 was due to decreases in
leased space at IPI and credits applied to the Houston space due to the lease
renegotiation.
24
26
The Company incurred net losses applicable to common shares of $6,788,467,
$20,436,750 and $13,914,119 for the years ended December 31, 1997, 1996 and
1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its research and development activities to date
principally through (i) public offerings and private placements of its equity
securities, (ii) issuances of Common Stock in conjunction with acquisitions and
research and collaboration agreements and exercises of stock options and
warrants, (iii) milestone and research payments received in conjunction with
research and collaborative agreements, and (iv) investment income, net of
interest expense. During 1997, the Company utilized net cash of $4,891,038 in
operating activities. The use of cash in operations was caused primarily by the
Company's net loss before preferred dividend requirements of $5,635,185.
Investing and financing activities primarily reflect the utilization of
$5,925,269 in net proceeds from the 1997 private placement of the 5% Preferred
and 26,687,521 in net proceeds from the public offering of Common Stock, net of
purchases and redemptions of short term investments during 1997. At December 31,
1997, the Company had cash, cash equivalents and short-term investments of
$43,707,364.
The Company expects to incur substantial research and development
expenditures as it designs and develops small molecule drugs for vascular
diseases . The Company anticipates that operating expenses may continue to
increase during 1998 and subsequent years. The Company began to incur costs to
develop NOVASTAN(R) during the third quarter of 1993. These costs will continue
during 1998 because of ongoing NOVASTAN(R) trials and will continue to be
significant through the FDA approval process and as clinical trial work for
additional clinical indications is performed. The Company also began incurring
clinical trial costs in 1997 for the compounds TBC 11251 and TBC 1269. In 1998,
the Company expects to begin to incur costs for clinical trials related to
additional compounds. These costs include, among other things, hiring personnel
to direct and carry out all operations related to the 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. In addition, the Company anticipates that the administrative costs
associated with this effort will be significant. The amounts and timing of
expenditures will depend on the progress of the Company's ongoing research,
clinical development and commercialization efforts.
The Company anticipates that its existing capital resources and its other
revenue sources should be sufficient to fund its cash requirements through the
end of 1999. This date is contingent upon various factors, including the rates
of patient enrollment and spending associated with the clinical trials of
NOVASTAN(R), the compounds TBC 11251 and TBC 1269, and the level of research and
development expenditures for other compounds. The Company's existing capital
resources may not be sufficient to fund the Company's operations through
commercialization of its first product, NOVASTAN(R). Moreover, TBC's agreement
with Synthelabo requires the Company to maintain a "net worth", as defined in
the agreement, of at least $5.0 million during the term of the agreement. If the
Company fails to maintain at least $5.0 million of "net worth", Synthelabo may
require that the technology be transferred to, and the development program be
conducted by, a joint venture owned by TBC and Synthelabo. The outcome of
certain lawsuits that have been filed against the Company could also have an
impact on liquidity. See Part I, Item 3. Legal Proceedings.
The Company anticipates that it may need to raise substantial funds for
future operations, which may be raised through collaborative arrangements,
public or private issuance of debt and equity, or other arrangements. The
Company expects that additional expenditures will be required if additional
product candidates enter clinical trials which may require additional
expenditures for laboratory space, scientific and administrative personnel, and
services of contract research organizations. There can be no assurance that the
Company will be able to obtain such additional financings on acceptable terms or
in time to fund any necessary or desirable expenditures. In the event such
financing is not obtained, the Company's drug discovery or development programs
may be delayed, scaled back or eliminated. The Company may also be required in
this event to obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain of its
technologies, product candidates or products that it would not otherwise
relinquish.
25
27
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
The Company's research and development activities involve the controlled
use of hazardous and radioactive materials. The Company is subject to federal,
state, and local laws and regulations governing the use, manufacture, storage,
handling and disposal of such materials and certain waste products. Management
believes that the Company is in compliance with such laws, regulations and
standards currently in effect and that the cost of compliance with such laws,
regulations, and standards will not have a material adverse effect on the
Company. The Company does not expect to incur any material capital expenditures
for environmental control in the foreseeable future.
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 the
operations of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company required to be included in this
Item 8 are set forth in Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
John M. Pietruski (1)(2)......................... 65 Chairman of the Board of Directors
David B. McWilliams (1).......................... 54 President, Chief Executive Officer and Director
Richard A. F. Dixon, Ph.D. (1)................... 44 Vice President of Research and Director
Stephen L. Mueller............................... 50 Vice President, Finance and Administration, Secretary
and Treasurer
Richard P. Schwarz, Jr., Ph.D. (4)............... 47 Vice President of Clinical and Regulatory Affairs
Joseph M. Welch.................................. 57 Vice President of Business Development
James T. Willerson, M.D. (1)(2).................. 58 Chairman of the Scientific Advisory Board and Director
Ron J. Anderson, M.D. ........................... 51 Director
Frank C. Carlucci (3)............................ 67 Director
Rita R. Colwell, Ph.D., D.Sc. (3)................ 63 Director
Robert J. Cruikshank (3)......................... 67 Director
James A. Thomson, Ph.D. (2)...................... 53 Director
(1) Member, Executive Committee of the Board of Directors
(2) Member, Compensation and Personnel Committee of the Board of Directors
(3) Member, Audit Committee of the Board of Directors
(4) Dr. Schwarz resigned his position effective April 30, 1998
The additional information requested by this item will be contained in
the Company's definitive Proxy Statement ("Proxy Statement") for its 1998 Annual
Meeting of Stockholders to be held on May 5, 1998 and is incorporated by
reference from the sections titled "Election of Directors" and "Executive
Officers". Such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days subsequent to December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information requested by this item is incorporated by reference from
the section titled "Executive Compensation" in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 5, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information requested by this item is incorporated by reference from
the section titled "Principal Stockholders" in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 5, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information requested by this item is incorporated by reference from
the sections titled "Principal Stockholders," "Compensation Committee Interlocks
and Insider Participation," "Director Compensation", "Employment Agreements" and
"Certain Transactions" in the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 5, 1998.
27
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO 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 and Schedules.
PAGE
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended December 31, 1997, 1996
and 1995 F-3
Consolidated Statements of Stockholders' Equity for the period January 1, 1995
to December 31, 1997 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995 F-7
Notes to Consolidated Financial Statements F-8
2. INDEX TO EXHIBITS
Information with respect to this Item is contained in the attached
Index to Exhibits.
The Company will furnish a copy of any one or more of these exhibits
to a shareholder who so requests upon receipt of payment for the cost
of duplication and mailing the requested items.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K filed during the quarter ended December 31, 1997.
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 notes thereto.
28
30
Independent Auditors' Report
The Board of Directors
Texas Biotechnology Corporation:
We have audited the accompanying consolidated balance sheets of Texas
Biotechnology Corporation and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Texas Biotechnology
Corporation and subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
February 13, 1998
F-1
31
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
Current assets:
Cash and cash equivalents $ 14,323,573 2,127,999
Short term investments 29,383,791 11,262,292
Other current receivables 1,175,280 590,575
Short term note receivable (note 14) -- 122,500
Prepaids 553,585 546,752
Other current assets 10,400 12,400
------------- -------------
Total current assets 45,446,629 14,662,518
Equipment and leasehold improvements, at cost less
accumulated depreciation and amortization (note 5) 3,292,062 3,458,012
Other assets 59,591 59,591
------------- -------------
Total assets $ 48,798,282 18,180,121
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,006,145 1,661,339
Accrued expenses 1,625,071 2,266,376
Deferred revenue (note 8) -- 625,000
------------- -------------
Total current liabilities 2,631,216 4,552,715
Commitments and contingencies (notes 6, 7, 8, 9, 10, 12 and 13) -- --
Stockholders' equity (notes 2, 3 and 6):
Preferred stock, par value $.005 per share. At December 31, 1997
5,000,000 shares authorized; 300 shares of 5% cumulative
convertible issued and outstanding. At December 31, 1996,
5,000,000 shares authorized, none outstanding 2 --
Common stock, par value $.005 per share. At December 31, 1997,
75,000,000 shares authorized; 33,585,919 shares issued and
outstanding. At December 31, 1996, 75,000,000 shares authorized;
25,490,269 shares issued and outstanding 167,929 127,451
Additional paid-in capital 116,085,172 77,808,331
Accumulated deficit (70,086,037) (64,308,376)
------------- -------------
Total stockholders' equity 46,167,066 13,627,406
------------- -------------
Total liabilities and stockholders' equity $ 48,798,282 18,180,121
============= =============
See accompanying notes to consolidated financial statements.
F-2
32
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Revenues:
Research agreements (note 8) $ 8,400,280 5,395,110 6,788,357
License fee income 8,500,000 -- --
Products and services 7,500 8,939 217,707
Grant revenue -- 1,727 227,938
----------- ----------- -----------
Total revenues 16,907,780 5,405,776 7,234,002
----------- ----------- -----------
Expenses:
Research and development 16,833,135 22,251,895 14,949,822
Charge for purchase of in-process research
and development (notes 9 and 15) 1,075,191 -- 2,061,383
General and administrative 5,759,792 4,067,505 4,693,019
Restructuring & impairment charges (note 15) -- 421,165 643,750
----------- ----------- -----------
Total expenses 23,668,118 26,740,565 22,347,974
----------- ----------- -----------
Operating loss 6,760,338 21,334,789 15,113,972
----------- ----------- -----------
Other income (expense):
Interest income 1,122,900 898,039 1,200,921
Interest expense -- -- (1,068)
Other 2,253 -- --
----------- ----------- -----------
Total other income (expense) 1,125,153 898,039 1,199,853
Net loss $ 5,635,185 20,436,750 13,914,119
Preferred dividend requirement 1,153,282 -- --
Net loss applicable to common shares $ 6,788,467 20,436,750 13,914,119
Net loss per share basic and diluted $ 0.24 0.87 0.83
=========== =========== ===========
Weighted average common shares used to compute
basic and diluted net loss per share 27,745,700 23,616,033 16,748,995
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
33
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the period January 1, 1995 to December 31, 1997
PREFERRED STOCK COMMON STOCK
-------------------- --------------------- ADDITIONAL DEFERRED
SHARES SHARES PAID-IN COMPENSATION ACCUMULATED
ISSUED AMOUNT ISSUED AMOUNT CAPITAL EXPENSE DEFICIT TOTAL
--------- --------- --------- ---------- ---------- ------------ ----------- ---------
Balance at January 1, 1995 -- -- 17,039,404 $ 80,198 57,573,847 (138,942) (29,957,507) 27,557,596
Issuance of common stock to former
ImmunoPharmaceutics'
shareholders held in escrow -- -- -- 5,000 1,404,938 -- -- 1,409,938
Issuance of common stock to former
ImmunoPharmaceutics'
shareholders pursuant to issue rights -- -- 399,961 2,000 561,945 -- -- 563,945
Compensation expense related to
stock options -- -- -- -- -- 92,765 -- 92,765
Net loss -- -- -- -- -- -- (13,914,119) (13,914,119)
-------- -------- ---------- -------- ----------- -------- ----------- -----------
Balance at December 31, 1995 -- -- 17,439,365 $ 87,198 59,540,730 (46,177) (43,871,626) 15,710,125
-------- -------- ---------- -------- ----------- -------- ----------- -----------
Issuance of common stock and
warrants through private
placement, net of expenses -- -- 6,550,990 32,754 12,958,327 -- -- 12,991,081
Issuance of common stock for
stock option exercises -- -- 192,640 963 590,092 -- -- 591,055
Issuance of common stock for
warrant exercises -- -- 57,274 286 200,173 -- -- 200,459
Issuance of common stock to
LG Chem for cash, net of
expenses -- -- 1,250,000 6,250 4,519,009 -- -- 4,525,259
Compensation expense related to
stock options -- -- -- -- -- 46,177 -- 46,177
Net loss -- -- -- -- -- -- (20,436,750) (20,436,750)
-------- -------- ----------- -------- ----------- -------- ----------- -----------
Balance at December 31, 1996 -- -- 25,490,269 $127,451 77,808,331 -- (64,308,376) 13,627,406
-------- -------- ----------- -------- ----------- -------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-4
34
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY, CONTINUED
PREFERRED STOCK COMMON STOCK
-------------------- ---------------------- ADDITIONAL DEFERRED
SHARES SHARES PAID-IN COMPENSATION ACCUMULATED
ISSUED AMOUNT ISSUED AMOUNT CAPITAL EXPENSE DEFICIT TOTAL
---------- -------- --------- ---------- ---------- ----------- ------------ -------
Balance at December 31, 1996,
brought forward -- -- 25,490,269 $ 127,451 77,808,331 -- (64,308,376) 13,627,406
------- ------ ----------- --------- ----------- ------ ------------ -----------
Issuance of common stock for
stock option exercises -- -- 58,841 294 183,925 -- -- 184,219
Issuance of common stock for
warrant exercises -- -- 548,438 2,742 2,028,206 -- -- 2,030,948
Issuance of convertible preferred
stock through private
placement, net of expenses 6,000 30 -- -- 5,925,239 -- -- 5,925,269
Issuance of common stock in
payment for services -- -- 2,944 15 14,900 -- -- 14,915
Compensation expense related to
stock option extensions -- -- -- -- 1,303,094 -- -- 1,303,094
Conversion of preferred stock
into common shares (5,700) (28) 1,344,149 6,721 123,872 -- -- 130,565
Issuance of common stock to
SmithKline Beecham plc for
cash, net of expenses -- -- 176,992 885 964,714 -- -- 965,599
Issuance of common stock through
public offering, net of expense -- -- 5,750,000 28,750 26,658,771 -- -- 26,687,521
Issuance of common stock to
Genentech pursuant to contract -- -- 214,286 1,071 1,074,120 -- -- 1,075,191
Net loss -- -- -- -- -- -- (5,635,185) (5,635,185)
Preferred dividends -- -- -- -- -- -- (142,476) (142,476)
------- ------ ----------- --------- ----------- ------ ------------ -----------
Balance at December 31, 1997 300 2 33,585,919 $ 167,929 116,085,172 -- (70,086,037) 46,167,066
======= ====== =========== ========= =========== ====== ============ ===========
See accompanying notes to consolidated financial statements.
F-5
35
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,635,185) (20,436,750) (13,914,119)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of deferred offering costs related
to delayed offering -- 24,140 --
Depreciation and amortization 751,397 759,328 800,614
Non cash acquisition costs expensed (notes 9 and 15) 1,075,191 -- 2,061,383
Expenses paid with stock 14,915 -- --
Compensation expense related to stock options 1,303,094 46,177 92,765
Preferred dividends payable not included in net loss (11,913) -- --
Loss on disposition of fixed assets 7,056 --
Impairment of intangible assets -- -- 643,750
Change in operating assets and liabilities, net of
effect of acquisition:
(Increase) decrease in prepaids (6,833) 7,456 (108,799)
(Increase) decrease in receivables (462,205) -- 71,843
(Increase) decrease in other current assets 2,000 (55,584) (219,601)
(Increase) in other assets -- (33,594) --
Decrease in inventories -- -- 59,118
Increase (decrease) in current liabilities (1,296,499) 1,361,451 2,010,466
(Decrease) in deferred revenue (625,000) (25,110) (2,428,841)
------------ ------------ ------------
Net cash used in operating activities (4,891,038) (18,345,430) (10,931,421)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (585,446) (494,965) (199,750)
Proceeds from disposition of fixed assets -- 27,400 --
Purchase of short term investments (39,163,424) (31,176,391) (23,448,580)
Maturity of short term investments 21,537,653 28,109,406 33,104,073
(Increase) in interest receivable included in short term investment (495,727) -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities (18,706,944) (3,534,550) 9,455,743
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offering of common stock, net 26,687,521 18,307,855 --
Proceeds from sale of preferred stock, net 5,925,269 -- --
Proceeds from sale of common stock and option and
warrant exercises, net 3,180,766 -- --
Cost of delayed offering -- (24,140) --
------------ ------------ ------------
Net cash provided by financing activities 35,793,556 18,283,715 --
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 12,195,574 (3,596,265) (1,475,678)
Cash and cash equivalents at beginning of period 2,127,999 5,724,264 7,199,942
------------ ------------ ------------
Cash and cash equivalents at end of period $ 14,323,573 2,127,999 5,724,264
============ ============ ============
Supplemental schedule of noncash financing activities:
issuance of Common Stock for research and development and
services (see notes 2, 9 and 15) $ 1,090,106 -- 2,061,383
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
36
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Texas Biotechnology Corporation (the "Company" or "TBC"), a
biopharmaceutical company, applies innovative drug discovery
techniques and its specialized knowledge of the role of vascular cell
biology in vascular diseases to the design and development of
novel pharmaceutical compounds. 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") (now discontinued), a San Diego,
California based company, in exchange for Common Stock of the Company.
TBC consolidated the IPI operation into TBC in the first half of 1996.
The Company is presently working on a number of long-term development
projects which involve experimental and unproven technology, which may
require many years and substantial expenditures to complete, and which
may be unsuccessful. To date, other than small amounts of monoclonal
antibody compounds and services produced and sold by IPI (now
discontinued), the Company has not developed or sold any products, and
no assurance can be given that the Company will be able to develop,
manufacture or market any products in the future. In addition, no
assurance exists that future revenues will be significant, that any
sales will be profitable, or that the Company will have sufficient
funds available to complete its research and development programs or
market any products which it may develop.
(b) Basis of Consolidation
The Company's consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, IPI. All material
intercompany transactions have been eliminated. The Company's
consolidated financial statements include the activity related to IPI
since August 1, 1994.
(c) Cash, Cash Equivalents and Short Term Investments
Cash equivalents are considered to be those securities or instruments
with original maturities, when purchased, of three months or less. At
December 31, 1997, approximately $648,000 was invested in demand and
money market accounts. Short term investments are those investments
which have an original maturity of less than one year and greater than
three months. At December 31, 1997, the Company's short term
investments consisted of approximately $975,000 in Government Agency
Discount Notes and $28,409,000 in Corporate Commercial Paper. Cash
equivalents and short term investments are stated at cost plus
accrued interest, which approximates market value. Interest income is
accrued as earned. In connection with the adoption of Financial
Accounting Standards Statement 115, the Company classified all short
term investments as held to maturity.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation of furniture
and equipment is provided on the straight-line method over the
estimated useful lives of the respective assets (3 to 10 years).
Amortization of leasehold improvements is provided on the
straight-line method over the remaining minimum lease term.
F-7
37
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Intangible Assets
Intangible assets are amortized on a straight line basis over ten
years.
(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 period ended
December 31, 1997, 1996 and 1995, totaled approximately $5,645,000,
$6,233,000 and $7,005,000, respectively, of which approximately
$4,262,000, $4,893,000 and $5,612,000, respectively, was charged to
research and development. Payments related to the acquisition of
in-process research and development are expensed.
(g) Net Loss Per Common Share
Basic net loss per common share is based upon the net loss applicable
to common shares after preferred dividend requirements and upon the
weighted average of common and common equivalent shares outstanding
during the period. Preferred dividend requirements for the period
ended December 31, 1997 included $142,476, of accrued dividends and,
pursuant to a Securities and Exchange Commission Staff Position,
deemed dividends attributable to the conversion discount factor at
issuance of the Preferred Stock of $1,010,806. For the years ended
December 31, 1997, 1996 and 1995, the weighted average common shares
used to compute basic net loss per common share totaled 27,745,700,
23,616,033 and 16,748,995, respectively. The conversion of securities
convertible into Common Stock and the exercise of stock options and
warrants were not assumed in the calculation of net loss per common
share because the effect would have been antidilutive. Shares held in
escrow through June 30, 1995, pending satisfaction of certain future
conditions have been excluded from the net loss per share calculation
until such shares were released or issued.
(h) Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform with the December 31, 1997 presentation with no
effect on net loss reported.
(i) Revenue Recognition
Revenue from service contracts is recognized as the services are
performed and/or as milestones are achieved. Milestone payments
related to contractual agreements are recognized as the milestones are
achieved. Revenue from products and services is recognized when the
products are shipped or the services are performed. Revenue from
licensing fees is recorded when the license is granted. Revenue from
grants is recognized as earned under the terms of the related grant
agreements. Amounts received in advance of services to be performed
under contracts are recorded as deferred revenue.
F-8
38
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(j) Patent Application Costs
Costs incurred in filing for patents are expensed as incurred.
(k) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
(l) Development Stage Enterprise
In prior periods, the Company reported as a development stage
enterprise. With the signing of a commercialization agreement for
NOVASTAN(R), the Company began reporting as an operating company
during the third quarter of 1997.
(2) CAPITAL STOCK
In December 1993, for the Company completed an initial public offering
comprised of 4,082,500 units, each unit consisting of one share of Common
Stock (par value $.005 per share) and one warrant to purchase one share of
Common Stock. Proceeds to the Company were approximately $24.2 million, net
of selling expenses of approximately $3.3 million. The securities included
in the unit subsequently separated into its Common Stock and warrant
components. The warrants are exercisable at $8.44 per share and expire on
December 15, 1998. The warrants are redeemable for $.05 per warrant, at the
option of the Company, upon 30 days' prior written notice at any time after
the last sale price of the Common Stock has been at least $11.82 for 30
consecutive business days ending within 15 days of the date of the notice
of redemption. All of the warrants must be redeemed if any are redeemed.
The underwriter received approximately $2.9 million in commissions and
expense reimbursement and purchased options to purchase 355,000 units at an
exercise price of $11.14. These options were sold for $.001 each and expire
on December 15, 1998.
In February, 1996, the Company completed a private placement of Common
Stock. The Company issued 6,550,990 shares of Common Stock at $2 1/8 per
share with proceeds of approximately $13.0 million, net of selling
commissions and expenses of approximately $900,000. In connection with the
private placement, the Company paid selling commissions of $759,283 and
730,461 warrants to purchase Common Stock, expiring on February 13, 2001,
with exercise prices of between $3.05 and $4.58 per share with the resale
of the underlying Common Stock being subject to certain registration
rights.
On October 10, 1996 the Company signed a strategic alliance agreement and
Common Stock purchase with LG Chemical, Ltd. ("LG Chem"), a Korean
corporation. In conjunction with the agreement, LG Chem purchased 1,250,000
shares of Common Stock for $4.00 per share for a total of $5 million. The
Company's agents in the contract negotiations received $420,000 in
commissions and 113,636 warrants to purchase Common Stock, expiring on
October 10, 2001, exercisable at $4.40 per share with the resale of the
underlying Common Stock being subject to certain piggyback registration
rights.
F-9
39
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 14, 1997, the Company completed a $6.0 million private placement
of 5% Cumulative Convertible Preferred Stock ("the 5% Preferred") which
provided net proceeds to the Company of approximately $5.9 million. The 5%
Preferred was convertible into Common Stock at discounts ranging from 6% to
17% from the average of the daily low trading price of the Common Stock for
the ten consecutive trading days immediately preceding the conversion date.
A total of 6,000 shares of 5% Preferred were sold at a price of $1,000 per
share to two institutional investors. As of December 31, 1997, 5,700 shares
of the 5% Preferred and accrued dividends of $130,564 on such shares have
been converted into 1,344,149 shares of Common Stock. The remaining 300
shares of Preferred Stock and $13,603 of accrued dividends were converted
into 64,795 shares of Common Stock on February 11, 1998.
During August, 1997 the Company sold 176,992 shares of Common Stock for $1
million less commissions and expenses of approximately $34,000 pursuant to
a commercialization agreement. (See note 10)
In October, 1997 the Company sold 5,750,000 shares of Common Stock for
$5.00 per share pursuant to an underwritten public offering. The net
proceeds to the Company for the 5,750,000 shares sold were approximately
$26.7 million after deducting selling commissions and expenses of
approximately $2.1 million related to the offering.
In addition, during October, 1997 the Company issued 214,286 shares of
Common Stock and a seven year warrant to purchase 142,858 shares of Common
Stock exercisable at $14.00 per share until October 9, 2004, pursuant to a
license agreement. See (note 9)
(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 225,112 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 1,517,838 shares of Common Stock
are reserved for issuance out of authorized but unissued shares of the
Company.
The Stock Option Plan for Non-Employee Directors ("Director Plan") allows
for the issuance of non-qualified options to non-employee directors,
pursuant to which 37,020 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 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 2,000,000 shares of Common Stock
are reserved for issuance out of authorized but unissued shares of the
Company.
F-10
40
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 296,363 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. In June 1996, the 1995 Director Plan was
amended with respect to the election date requirement for a director to
request stock in lieu of cash payment of director fees.
During December 1996, the Compensation and Personnel Committee of the Board
of Directors authorized the extension of options originally granted for a
five year period to ten years upon election by individual option holders.
During 1997, option holders elected to extend 1,022,833 options, originally
expiring during 1997, 1998, 1999 and 2000, for an additional five years.
Accordingly, the Company recorded a non-cash charge of $1,303,094 during
1997. Of the total, approximately $350,000 was charged to research and
development and the remainder to general and administrative for the
difference between the original option exercise price and fair market value
as of the effective date of election.
A summary of stock options as of December 31, 1997, follows:
Exercise Price Exercised/ Available
Stock Option Plans Per Share Authorized Outstanding Other Exercisable for Grant
------------------ -------------- ---------- ----------- ----------- ----------- ---------
1990 Plan $3.50 - $5.59 285,715 190,549 60,603 169,902 34,563
1992 Plan $1.41 - $5.36 1,700,000 1,294,342 182,162 1,090,288 223,496
Director Plan $2.40 - $4.54 71,429 37,020 34,409 37,020 --
1995 Plan $1.31 - $5.88 2,000,000 1,194,400 -- 228,345 805,600
1995 Director Plan $1.38 - $5.69 300,000 145,705 3,637 95,885 150,658
--------- --------- --------- --------- ---------
TOTALS 4,357,144 2,862,016 280,811 1,621,440 1,214,317
========= ========= ========= ========= =========
The Company applies APB Opinion 25 and related interpretations on
accounting for its plans. The Company has recorded deferred compensation
for the difference between the grant price and the deemed fair value for
financial statement presentation purposes related to certain options
granted in the period subsequent to May 27, 1993 and prior to the initial
public offering. Such amount totaled $287,158, of which $92,765 was charged
to expense in 1995. The unamortized deferred compensation expense of
$46,177 at December 31, 1995 was expensed during 1996. Had compensation
costs for the Company's stock-based compensation plans been determined
consistent with SFAS No. 123, the Company's proforma net loss and proforma
net loss applicable to common shares for the year ended December 31, 1997
would have been $9,438,748 and $0.34, respectively and for December 31,
1996 would have been $21,057,088 and $0.89, respectively and for December
31, 1995 would have been $14,116,842 and $0.84 respectively.
The fair value of options granted during the years ended December 31, 1997,
1996 and 1995 for employee services were estimated on the date of grant
using the Black-Scholes Pricing Model with the following weighted average
F-11
41
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assumptions: risk-free interest rate of between 5.82 and 6.65 percent,
expected life of between 2 and 8 years, expected volatility of between 69
and 74 percent and no dividends. There were no options granted for other
than employee services.
A summary of the status of the Company's stock option plans as of December
31, 1997, 1996 and 1995 and the changes during the years then ended is
presented below:
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
----------- --------------
Outstanding at December 31, 1994 ............ 1,546,800 $ 3.62
Granted ..................................... 717,154 1.51
Canceled .................................... (208,523) 3.43
Exercised ................................... -- --
-----------
Outstanding at December 31, 1995 ............ 2,055,431 2.90
Granted ..................................... 600,102 4.42
Canceled .................................... (294,129) 3.52
Exercised ................................... (192,640) 3.07
-----------
Outstanding at December 31, 1996 ............ 2,168,764 $ 3.22
Granted ..................................... 1,682,909 4.34
Canceled .................................... (986,534) 3.13
Exercised ................................... (58,841) 3.32
Prior Period Adjustments .................... 55,718 --
-----------
Outstanding at December 31, 1997 ............ 2,862,016 3.85
===========
December 31, December 31, December 31,
1997 1996 1995
------------ ----------- ------------
Weighted-average fair value of options
granted during the period at an exercise
price equal to market at issue date ......... $ 3.45 $ 2.72 $ 0.88
The following tables summarize information about the Company's stock
options outstanding as of December 31, 1997, 1996 and 1995, respectively:
Weighted Weighted Weighted
Options Average Average Options Average
Option Outstanding Remaining Exercise Price Exercisable Exercise Price
Exercise Price as of 12/31/97 Contractual Life of Outstanding as of 12/31/97 of Exercisable
-------------- -------------- ---------------- -------------- -------------- ---------------
$1.31 - $3.50 1,222,528 5.16 $ 2.17 1,047,958 $ 2.28
$3.56 - $5.88 1,639,488 7.94 $ 5.09 573,482 $ 4.75
----------- -----------
$1.31 - $5.88 2,862,016 6.75 $ 3.85 1,621,440 $ 3.16
F-12
42
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted Weighted Weighted
Options Average Average Options Average
Option Outstanding Remaining Exercise Price Exercisable Exercise Price
Exercise Price as of 12/31/96 Contractual Life of Outstanding as of 12/31/96 of Exercisable
-------------- -------------- ---------------- -------------- -------------- ---------------
$1.31 - $3.50 1,238,673 4.39 $2.18 727,483 $2.56
$3.56 - $5.36 930,091 6.53 $4.61 241,750 $4.94
-------------- --------------
$1.31 - $5.36 2,168,764 5.31 $3.22 969,233 $3.15
Weighted Weighted Weighted
Options Average Average Options Average
Option Outstanding Remaining Exercise Price Exercisable Exercise Price
Exercise Price as of 12/31/95 Contractual Life of Outstanding as of 12/31/95 of Exercisable
-------------- -------------- ---------------- -------------- -------------- ---------------
$1.31 - $3.50 1,463,029 5.10 $2.21 477,225 $3.12
$3.59 - $5.36 592,402 3.32 $4.60 208,833 $4.58
-------------- --------------
$1.31 - $5.36 2,055,431 4.59 $2.90 686,058 $3.56
The fair value of warrants issued during the years ended December 31, 1997,
1996 and 1995 for other than employee services were estimated on the date
of grant using the Black-Scholes Pricing Model with the following weighted
average assumptions: risk-free interest rate of between 6.06 and 6.51
percent, expected life of between 5.00 and 6.7 years, expected volatility
of between 69 and 74 percent and no dividends.
F-13
43
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the status of the Company's warrants as of
December 31, 1997, 1996 and 1995, and changes during the periods then ended
is presented below:
WEIGHTED-AVERAGE
WARRANTS EXERCISE PRICE
----------- --------------
Outstanding at December 31, 1994 ....... 4,712,066 $ 7.78
Issued ................................. -- --
Forfeited .............................. -- --
Canceled ............................... (373,633) 3.50
Reissued ............................... 373,633 3.50
---------
Outstanding at December 31, 1995 ....... 4,712,066 7.78
Issued ................................. 844,097 3.89
Forfeited .............................. -- --
Canceled ............................... (124,732) 3.93
Exercised .............................. (57,274) 3.50
Reissued ............................... 116,384 3.88
---------
Outstanding at December 31, 1996 ....... 5,490,541 $ 7.23
Issued ................................. 142,858 14.00
Forfeited .............................. -- --
Canceled ............................... (356,453) 3.60
Exercised .............................. (549,095) 3.69
Reissued ............................... 356,453 3.60
---------
Outstanding at December 31, 1997 ....... 5,084,304 7.80
=========
Of the 5,084,304 warrants outstanding at December 31, 1997, 4,082,500 are
publicly trading and are exercisable at $8.44 each and expire on December
15, 1998. The warrants are redeemable for $.05 per warrant, at the option
of the Company, upon 30 days prior written notice at any time after the
last sale price of the Common Stock has been at lease $11.82 for 30
consecutive business days ending within 15 days of the date of the notice
of redemption. All of the warrants must be redeemed if any are redeemed.
In addition, at December 31, 1997, there were outstanding, underwriter
purchase options ("UPO's"), which were issued to the underwriters in the
Company's initial public offering in 1993, to purchase 355,000 units at
$11.14 each. Each unit consisting of one share of Common Stock and a
warrant to purchase one share of Common Stock at an exercise price equal to
$11.14. The UPO's and the warrant expire on December 15, 1998.
F-14
44
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, December 31, December 31,
1997 1996 1995
------------ ----------- ------------
Weighted-average fair value of warrants issued during
the year ended at an exercise price equal to market
price at issue date ......................................... $0.00 $0.00 $0.00
Weighted-average fair value of warrants issued during
the year ended at an exercise price less than market
at issue date ............................................... $0.00 $2.26 $0.00
Weighted-average fair value of warrants issued during
the year ended at an exercise price greater than
market at issue date ........................................ $2.71 $2.17 $0.00
The warrants shown above were issued in connection with equity transactions
of the Company and, therefore, there is no effect on net income.
(4) INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
and tax credit carry forwards. 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.
At December 31, 1997 and 1996, the net deferred tax asset totaled
approximately $23,996,000 and $22,000,000, respectively, and was fully
reserved. The Company did not incur any tax expense in any year due to
operating losses.
At December 31, 1997, 1996 and 1995, the Company had net operating loss
carry forwards of approximately $44,495,000 $45,195,000 and $28,292,000,
respectively, for federal income tax return purposes. Utilization of the
Company's net operating loss carry forwards is subject to certain
limitations due to specific stock ownership changes which have occurred or
may occur. To the extent not utilized, the carry forwards will expire
during the years beginning 2002 through 2011.
F-15
45
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
December 31,1997 December 31, 1996
---------------- -----------------
Laboratory and office equipment $ 4,665,174 $ 4,079,728
Leasehold improvements 3,701,772 3,701,772
----------- -----------
8,366,946 7,781,500
Less accumulated depreciation and amortization (5,074,884) (4,323,488)
----------- -----------
$ 3,292,062 $ 3,458,012
=========== ===========
(6) COMMON STOCK RESERVED
The Company has reserved Common Stock for issuance as of December 31, 1997
as follows:
Stock option plans 4,076,333
Common Stock issuable under licensing agreement 71,429 See (note 9)
Publicly Traded Warrants Outstanding 4,082,500
Other Warrants Outstanding 1,001,804
Underwriters purchase options and related warrants 710,000
Conversion of Preferred Stock 64,795 See (note 2)
-----------
Total shares reserved 10,006,861
===========
(7) CLINICAL RESEARCH AGREEMENTS
On February 10, 1995, the Company entered into an agreement with Coromed,
Inc., a contract research organization, to coordinate the clinical
evaluation of NOVASTAN(R) as an adjunct to streptokinase in acute
myocardial infarction ("AMI"). Coromed is responsible for managing all
aspects of the clinical trial and making all financial remuneration to
testing sites. The term of the agreement is 19 months, subject to extension
upon the mutual written agreement of both parties. The parties have agreed
to a total budget of approximately $3,196,000. Of this amount, $106,000 was
paid upon execution of a letter of intent and approximately $450,000 was
paid upon execution of the agreement. Subsequent payments will be made
monthly on a per patient basis, to a maximum total of approximately
$2,490,000. Coromed will make three additional payments of $50,000 each
upon completion of specified tasks. If the clinical trial is completed in
less than 19 months, the Company will pay Coromed a bonus calculated as a
percentage of personnel costs as set forth in the budget, to a maximum
bonus amount of approximately $327,000. In addition, the Company has
engaged Coromed to provide various services related to other ongoing
NOVASTAN(R) trials being conducted by the Company.
On May 1, 1996, the Company amended the above agreement with Coromed, Inc.
The term of the contract was extended to 24 months with an additional cost
of $1,200,000. The bonus payment, if any, is now based on the completion in
less than 24 months.
In November, 1997, the Company entered into an agreement with Coromed, Inc.
to coordinate the clinical evaluation of TBC 11251 (TBC's lead compound for
vasospasm/hypertension) to determine acute hemodynamic efficacy and safety
in congestive heart failure. The term of the agreement ends May 30, 1998,
subject to extension upon mutual written agreement of both parties. The
parties have agreed to a total budget of $958,992.
F-16
46
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RESEARCH AGREEMENTS
On October 11, 1994, the Company signed a collaborative agreement with
Synthelabo S.A., the pharmaceutical division of L'Oreal S.A. ("Synthelabo")
to develop and market compounds for vascular proliferative disease derived
from the Company's research programs.. During the year ended December 31,
1996, research payments of $3,000,000 were received of which $2,625,000 was
recognized as income during the year. Synthelabo is not currently paying
any research payments to the Company pursuant to the agreement. Synthelabo
will pay royalties to TBC, based on the net sales, in those geographic
areas covered in the agreement. Synthelabo also has certain termination
rights pursuant to the agreement.
During 1995, the Company and Synthelabo mutually agreed to exchange certain
clinical data. During 1996, the Company signed two agreements with
Synthelabo with respect to the supply of information related to certain
clinical studies. Over the term of the agreements as certain milestones are
met, Synthelabo has committed to pay TBC up to $2,920,000. These payments
are dependent on rate of enrollment in certain clinical studies, the
completion of certain clinical studies and date of completion of certain
clinical studies. As of December 31, 1997, TBC has recognized approximately
$2,880,000 of revenue related to these agreements. Synthelabo has the right
to terminate the agreement any time on or after October 15, 1997 for any
reason and either party has the right to terminate the contract for breach
of any material obligation. If Synthelabo exercises this termination right,
the license granted to Synthelabo will terminate and TBC will pay
Synthelabo a royalty on net sales of any products sold in a certain
territory (Europe, Middle East, Africa and countries of the former Soviet
Union) for a period of time. In addition, Synthelabo may, at its option,
require that the technology be transferred to and the development program
be conducted by a joint venture owned by TBC and Synthelabo should "net
worth" of TBC, as defined in the agreement, be less than $5 million as of
the end of any calendar quarter during the term of the agreement.
On October 10, 1996, the Company signed a strategic alliance agreement with
LG Chem, a Korean corporation, to develop and market compounds derived from
the Company's Endothelin Receptor and Selectin Antagonist for certain
disease indications. Upon consummation of the transaction, LG Chem
purchased 1,250,000 shares of Common Stock for $4.00 per share for a total
of $5 million. In addition, LG Chem has committed to pay $10.7 million in
research payments. Of this amount, $2.1 million has been paid (of which
$1.0 million was a receivable at December 31, 1997) and $1.0 million will
be paid on each of June 30 and December 31 of 1998, 1999 and 2000, and $1.3
million on June 30 and December 31, 2001. LG Chem has the right to
terminate future research payments if TBC fails to meet certain milestones,
which milestones will be established by the parties from time to time in
accordance with the agreement. LG Chem will pay royalties to TBC, based on
net sales, in those geographic areas covered by the agreement, which
include Korea, China, India and certain other Asian countries, excluding
Japan. The Company will pay its agents in the contract negotiations, a
commission on all future research payments as well as a royalty on net
sales.
(9) LICENSE AGREEMENT
TBC has entered into an agreement with Mitsubishi Chemical Corporation
("Mitsubishi") to license Mitsubishi's rights and technology relating to
NOVASTAN(R) and to license Mitsubishi's own proprietary technology
developed with respect to NOVASTAN(R) (the "Mitsubishi Agreement"). Under
the Mitsubishi Agreement, the Company has an exclusive license to use and
sell NOVASTAN(R) in the U.S. and Canada for all specified indications. The
Company is required to pay Mitsubishi specified royalties on net sales of
NOVASTAN(R) by the Company and its sublicensees after its commercial
introduction in the U.S. and Canada. Either party may terminate the
Mitsubishi Agreement on 60 days notice if the other party defaults in its
material obligations under the agreement, declares
F-17
47
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
bankruptcy or is insolvent, or if a substantial portion of its property is
subject to levy. Unless terminated sooner pursuant to the above described
termination provisions, the Mitsubishi Agreement expires on the later of
termination of patent rights in a particular country or 20 years after
first commercial sale of products. Under the Mitsubishi Agreement, TBC has
access to an improved formulation patent granted in 1993 which expires in
2010 and a use patent which expires in 2009. 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 NOVASTAN(R) throughout the term of the Mitsubishi Agreement for TBC's
clinical testing and commercial sales of NOVASTAN(R) in the U.S. and
Canada. In the event Mitsubishi should discontinue the manufacture of
NOVASTAN(R), Mitsubishi and TBC have agreed to discuss in good faith the
means by which, and the party to whom, NOVASTAN(R) production technology
will be transferred. The transferee may be a person or entity other than
TBC. At present, Mitsubishi is the only manufacturer of NOVASTAN(R). Should
Mitsubishi terminate or default in its supply commitment, there can be no
assurance that alternate sources of bulk NOVASTAN(R) will be available to
the Company at reasonable cost, if at all. If such alternate sources of
supply are unavailable or uneconomic, the Company's results of operations
would be materially adversely affected. See (note 10)
In exchange for the license to Genentech's (the "Former Licensor")
NOVASTAN(R) technology, TBC issued the Former Licensor 285,714 shares of
Common Stock during 1993 and issued an additional 214,286 shares of Common
Stock on October 9, 1997, after acceptance of the filing of the first New
Drug Application ("NDA") with the FDA for NOVASTAN(R). The Company recorded
a $1,075,191 noncash charge to in-process research and development expense
during the fourth quarter of 1997. An additional 71,429 shares of Common
Stock will be issued to the Former Licensor within ten days after the FDA's
first approval of an NDA for NOVASTAN(R). Additionally, on October 9, 1997,
upon acceptance of the filing of the first NDA for NOVASTAN(R) with the
FDA, the Company granted the Former Licensor a warrant to purchase an
additional 142,858 shares of Common Stock at an exercise price of $14.00
per share, subject to adjustment, which expires on October 9, 2004. The
Company will not be required to make any cash payment if the approval of
the NDA does not occur. TBC has also granted the Former Licensor demand and
piggyback registration rights with regard to shares of Common Stock issued
to the Former Licensor.
During the third quarter of 1997, the Company sublicensed certain rights to
NOVASTAN(R) to SmithKline Beecham, plc ("SmithKline"). 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, 2001 and to provide
access to certain NOVASTAN(R) clinical data to Mitsubishi in certain
circumstances. See (note 10)
(10) COMMERCIALIZATION AGREEMENT
In connection with TBC's development and commercialization of NOVASTAN(R),
in August 1997, TBC entered into a Product Development, License and
CoPromotion Agreement with SmithKline Beecham plc (the "SmithKline
Agreement") whereby SmithKline was granted exclusive rights to work with
TBC in the development and commercialization of NOVASTAN(R) in the U.S. and
Canada for specified indications. SmithKline paid $8.5 million in upfront
license fees during August 1997, a $5 million milestone payment in October
1997, and will pay up to $15 million in additional milestone payments based
on the clinical development and FDA approval of NOVASTAN(R) for the
heparin-induced thrombocytopenia ("HIT") and HIT with thrombosis syndrome
("HITTS") and AMI indications. SmithKline has also agreed to provide 60% of
the funding for clinical trials for the HIT/HITTS and
F-18
48
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMI indications. The parties have also formed a joint development committee
to analyze the development of additional NOVASTAN(R) indications to be
funded 60% by SmithKline except for certain Phase IV trials which shall be
funded entirely by SmithKline. Pursuant to the Mitsubishi Agreement, TBC
and SmithKline must make a determination as to their desire to pursue the
stroke indication within one year after the initial meeting regarding
development of this indication. SmithKline has the exclusive right to
commercialize all products arising out of the collaboration, subject to the
obligation to pay royalties on net sales to TBC and to the rights of TBC to
copromote these products through its own sales force in certain
circumstances. TBC will retain the rights to any indications which
SmithKline determines it does not wish to pursue, subject to the
requirement that TBC must use its own sales force to commercialize any such
indications. Any indications which TBC elects not to pursue will be
returned to Mitsubishi. In conjunction with the SmithKline Agreement, a
consulting firm involved in negotiations related to the agreement will
receive a percentage of all consideration received by TBC as a result of
the agreement.
At present, Mitsubishi is the only manufacturer of NOVASTAN(R), and has
entered into the Mitsubishi Supply Agreement with SmithKline to supply
NOVASTAN(R) in bulk in order to meet SmithKline's and TBC's needs under the
SmithKline Agreement. Should Mitsubishi fail during any consecutive
nine-month period to supply SmithKline 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 SmithKline. If SmithKline cannot commence
manufacturing of NOVASTAN(R) or alternate sources of supply are unavailable
or uneconomic, the Company's results of operations would be materially and
adversely affected.
The SmithKline Agreement generally terminates on a country by country basis
upon the earlier of the termination of TBC's rights under the Mitsubishi
Agreement, the expiration of applicable patent rights or, in the case of
royalty payments, the commencement of substantial third-party competition.
SmithKline also has the right to terminate the agreement on a country by
country basis by giving TBC at least three months written notice at any
time before SmithKline first markets products in that country based on a
reasonable determination by SmithKline that the commercial profile of the
product in question would not justify continued development in that
country. SmithKline has similar rights to terminate the SmithKline
Agreement on a country by country basis after marketing has commenced. In
addition, either party may terminate the SmithKline Agreement on 60 days
notice if the other party defaults in its obligations under the agreement,
declares bankruptcy or is insolvent.
In connection with the execution of the SmithKline Agreement, SmithKline
purchased 176,992 shares of TBC's Common Stock for $1.0 million and an
additional 400,000 shares of Common Stock for $2.0 million in connection
with the public offering which closed on October 1, 1997. TBC granted
limited piggyback registration rights regarding the 176,992 shares which
expire when the shares may be sold pursuant to Rule 144(k) under the
Securities Act. See (note 2)
(11) REGULATORY FILING
During August 1997, the Company filed an NDA with the FDA for its' lead
product candidate, NOVASTAN(R) (argatroban) for use as an anticoagulant in
patients with HIT. During September 1997, the FDA granted priority review
status to the new drug application for NOVASTAN(R) (argatroban). During
October, 1997, the Company was notified by the FDA that the filed NDA for
NOVASTAN(R) was accepted. The FDA extended the priority review period by 90
days during January 1998.
F-19
49
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
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 15 percent of
their compensation, with a maximum of $9,500 per employee in 1997. At the
present time, no matching contributions have been authorized by the Board
of Directors. Costs associated with administering the plan totaled
approximately $10,000 in 1997. During 1995, the existing 401(k) plan of
ImmunoPharmaceutics, Inc. was merged into the Texas Biotechnology
Corporation plan.
(13) COMMITMENTS AND CONTINGENCIES
a) Employment Agreements
Since inception, the Company has entered into employment agreements
with certain officers and key employees. The Company has signed
agreements with five of its officers to provide certain benefits in
the event of a "change of control" as defined in these agreements and
the occurrence of certain other events. The agreements provide for a
lump-sum payment in cash equal to eighteen (18) months to three (3)
years of annual base salary and annual bonus if any. The base salary
portion of the agreements would aggregate approximately $2.0 million
at current rate of compensation. In addition, the agreements provide
for gross-up for certain taxes on the lump-sum payment, continuation
of certain insurance and other benefits for periods of eighteen (18)
months to three (3) years and reimbursement of certain legal expenses
in conjunction with the agreements. These provisions are intended to
replace compensation continuation provisions of any other agreement in
effect for an officer if the specified event occurs.
(b) Lease Agreements
The Company renegotiated its noncancelable lease agreement which began
December 1, 1990 for its facilities in Houston, Texas and executed a
new lease agreement. The new lease was effective January 1, 1995 and
calls for a lease term of six years at an annual rate of $706,663 for
1995 and $712,449 for 1996 through December 2000 subject to
adjustments based on certain variable building operating expenses. The
Company also amended the lease effective for the period from October
1, 1996 through June 30, 1997 to include additional expansion space
for research and development. For the years ended December 31, 1997,
1996, 1995, rent and related building services totaled approximately
$956,000, $1,025,000 and $1,218,000, respectively, of which
approximately $851,000, $924,000 and $1,076,000, respectively, was
charged to research and development expense.
Total committed lease payments from January 1, 1997 through December
31, 2000 equal $2,849,796. The Company has also committed to pay for
seventy-four parking spaces during the lease at the facility
established rate charged which currently approximates $45,000 per
annum. The lease also includes a provision for the Company to pay
certain additional charges to obtain utilities and building services
during off-business hours. Currently, the amount of these charges is
approximately $250,000 per annum, payable in monthly installments.
These charges are subject to annual adjustments based on the local
consumer price index. Should the Company terminate the use of
non-standard services, an additional amount of up to $4,167 per month
shall be due in addition to base rent on the remaining lease payments
through December 2000. In addition, the lease grants certain credits
to rent and utilities which at December 31, 1997 totaled approximately
$225,000, and which will be amortized on a straight line basis over
the lease term.
F-20
50
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company leases certain scientific equipment and computer hardware
and software. These have been classified as operating leases. The
future minimum lease payments for noncancelable equipment leases are
$3,776 for the year ended December 31, 1998. For the year ended
December 31, 1997, lease expenses totaled $45,661.
c) Legal Proceedings
On November 21, 1994, a class action shareholders' suit was filed in
the United States District Court for the Southern District of Texas,
Houston Division seeking damages in the amount of $16 million.
Plaintiffs are two individuals who purchased shares of the Company on
December 16, 1993 following the Company's initial public
offering("IPO"). In their complaint, plaintiffs have sued the Company,
certain members of the board of directors and certain officers
alleging violations of Sections 11, 12 and 15 of the Securities Act of
1933, as amended (the "Act"). Plaintiffs have also named David Blech,
D. Blech & Co. and Isaac Blech as defendants. On January 23, 1995, the
Company and the members of the board of directors filed a motion to
dismiss the plaintiffs' complaint pursuant to Rule 9(b) and Rule
12b(6) of the Federal Rules of Civil Procedure. In addition, defendant
John Pietruski, Chairman of the Board of Directors, filed a motion to
dismiss the plaintiffs' complaint pursuant to Rule 12(b)(2) of the
Federal Rules of Civil Procedure. On February 7, 1995, the plaintiffs
filed a motion for class certification. The Court denied the motion by
the Company and by John Pietruski.
On March 28, 1995, a second class action shareholders' suit was filed
in the United States District Court for the Southern District of New
York seeking unspecified damages. Plaintiffs are eight individuals who
purchased shares in various companies for which D. Blech & Co. acted
as an underwriter (or co-underwriter) or marketmaker. In their
complaint, the plaintiffs have sued the Company alleging violations of
Section 10(b) of the Securities Exchange Act of 1934, as Amended (the
"Exchange Act") and Rule 10b-5 promulgated thereunder by the
Securities and Exchange Commission (the "Commission"). Plaintiffs have
named a number of defendants, including David Blech and D. Blech &
Co., four individuals, two brokerage firms, one investment management
company and ten other companies for which D. Blech & Co. acted as
underwriter or marketmaker.
On August 14, 1995, the Judicial Panel on The Multi-District
Litigation ordered that the action filed in the United States District
Court for the Southern District of Texas, Houston Division be
transferred to the United States District Court for the Southern
District of New York for coordinated or consolidated pretrial
proceedings with the action pending there. In light of the transfer
and consolidation of the Texas case with similar cases against other
companies for which D. Blech & Co. acted as underwriter, the Company
requested that the Court in New York reconsider the Texas Court's
denial of its motion to dismiss as a part of the Court's consideration
of similar motions to dismiss filed by those companies. All of these
motions were presented to the Court on February 6, 1996. On June 6,
1996, the New York District Court entered two memorandum opinions in
the consolidated cases. In one of its opinions, the Court dismissed
all of the Exchange Act and common law fraud claims filed against the
Company and its officers and directors, but afforded those plaintiffs
the right to attempt to preserve those claims by repleading them. The
Court ordered that those claims be repleaded no later than July 26,
1996. Plaintiffs did not replead those claims by the deadline,
resulting in the dismissal of all claims against the Company in that
litigation. In its opinion in the second case, i.e., the case filed on
November 21, 1994, the Court granted the Company's and its officers'
and directors' motion for reconsideration, but together with all other
similar pending motions, denied the requested relief. Pursuant to the
court's order, the Company therefore filed an answer in that case. The
F-21
51
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company also filed a Motion seeking leave of court to prosecute an
immediate appeal of the Court's denial of the Company's Motion to
Dismiss. The Court heard argument on that Motion on October 10, 1996.
The motion was denied on January 16, 1997. Given the early stage of
that case, which is the only remaining litigation against the Company,
the Company is unable to evaluate its potential outcome at this time.
The Company disputes these claims and intends to contest them
vigorously. There can be no assurance, however that the final
disposition of this case will be favorable to the Company.
(14) SHORT TERM NOTE RECEIVABLE
On April 12, 1994, the Company loaned $350,000 to D. Blech and Company,
Incorporated in exchange for a non-interest bearing promissory note of even
amount. The loan represented advance payment of a success fee pursuant to a
consulting agreement with D. Blech and Company, Incorporated payable in
connection with the IPI acquisition (See (note 15) As of December 31, 1997,
$227,500 of the fee had been earned. The remaining amount of the note will
be considered earned as fees upon issuance of the remaining Company stock
related to the IPI acquisition upon the satisfaction of the conditions to
issuance. Since the conditions were not met, the remaining $122,500 was
due. This amount was deemed uncollectible and was charged to expense in the
year ended December 31, 1997.
(15) ACQUISITION OF IMMUNOPHARMACEUTICS, INC.
On July 25, 1994, the Company acquired all of the outstanding Common Stock
of IPI in exchange for Common Stock of the Company. TBC issued (i)
1,599,958 shares of Common Stock which was distributed to the existing IPI
shareholders, (ii) 999,956 shares of Common Stock, issued in the names of
IPI shareholders that was held in escrow pending satisfaction of certain
research and development milestones and released from escrow on June 30,
1995, and (iii) contingent stock issue rights to issue an aggregate of
1,400,000 shares of Common Stock, the conversion of which was pending
satisfaction of research and development milestones, in exchange for all
the issued and outstanding shares of IPI (after conversion of the IPI
Series A and Series B preferred stock and all options and warrants). On
June 30, 1995, the Company issued 399,961 shares pursuant to the contingent
stock issue rights, upon attainment of certain research and development
milestones.
The acquisition of IPI was accounted for under the purchase method of
accounting. The aggregate purchase price (consisting of the fair value of
non-contingent TBC shares issued, transaction expenses and liabilities
assumed) was allocated to the tangible and intangible assets acquired based
on their estimated fair value as of the date of the acquisition. The Common
Stock issued on July 25, 1994 was valued at $3.63 per share which was
derived by discounting the value of the TBC shares without the attached
warrant on July 25, 1994. The Common Stock issued on June 30, 1995 and the
Common Stock released from escrow was valued at $1.41 per share which was
derived by discounting the value of the TBC shares on June 30, 1995. During
the second quarter of 1995, the Company charged $1,973,883 to in-process
research and development expense which represented the value of the
1,399,917 shares of TBC Common Stock (including 999,956 shares released
from escrow and 399,961 shares issued pursuant to the contingent stock
issue rights) given as consideration for acquired technology. The value of
the remaining shares issuable upon conversion of the contingent stock issue
rights will be determined when the research and development milestones are
met by IPI, if ever, and additional in-process research and development
expense will be recorded at such time. As of December 31, 1997, the Company
had determined that the contractual requirements for issuance of additional
shares pursuant to the contingent stock issue rights had not been met. The
Company has received notification from the committee representing former
IPI shareholders that it does not agree with this determination. Any
further discussion would be by arbitration pursuant to the Acquisition
Agreement. The Company consolidated the IPI operation into TBC's in the
first half of 1996. The Company believes that
F-22
52
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$643,750 of goodwill was impaired due to the decision to cease operations
at IPI and the sale of the QED business unit and has charged it to expense
in the year ended December 31, 1995. The restructuring costs associated
with the consolidation of the IPI operation were approximately $421,000 and
were expensed in 1996. These costs included waste disposal, future lease
commitments, severance pay and related taxes.
F-23
53
INDEX TO EXHIBITS
Exhibit No Description of Exhibit
---------- ----------------------
2.1 (7)* Plan and Agreement of Merger, dated June 17, 1994, among the Company, TBC Acquisition Company
No. 1 and certain major shareholders of ImmunoPharmaceutics, Inc.
3.1 (1) Certificate of Incorporation, as amended
3.2 (1) By-laws, as amended
3.3 (1) Amendment to Article IV of By-laws
3.4 (9) Amendment to the Certificate of Incorporation dated November 30, 1993
3.5 (9) Amendment to the Certificate of Incorporation dated May 20, 1994
3.6 (15) Certificate of Amendment of Certificate of Incorporation
3.7 (16) Amended and Restated By-laws of Texas Biotechnology Corporation
4.1 (1) Article II of the By-laws
4.4 (1) Agreement with Dr. James T. Willerson dated March 6, 1990
4.5 (1) Agreement with Dr. Richard Dixon dated February 23, 1990
4.6 (6) Form of Warrant Agreement (with Form of Warrant)
4.7 (6) Form of Underwriter's Unit Purchase Options
4.8 (17) Certificate of Designations of 5% Cumulative Convertible Preferred Stock for Texas Biotechnology
Corporation
10.3 (1) Employment Agreement with Dr. Richard A.F. Dixon dated July 15, 1990
10.4 (1) Consulting Agreement with Dr. James T. Willerson dated January 1, 1990
10.6 (1) Consulting Agreement with Mr. John M. Pietruski dated January 1, 1992
10.11 (2) Employment Agreement with David B. McWilliams dated July 15, 1992
10.12 (3) Consulting Agreement with Hennessey & Associates, Ltd.
10.17 (4)(5)* Sublicense and License Agreement dated May 27, 1993 between Company and Genentech, Inc.,
together with exhibits
10.18 (4)* Stock Agreement dated May 27, 1993 between the Company and Genentech, Inc.
10.27 (8)* License and Research and Development Agreement between the Company and Synthelabo S.A. dated
October 11, 1994 (the "License Agreement"), Schedule 1 - Patent Applications, Schedule 1.27 -
Territories, and Schedule 3.2(c) - Work Plan for the Company's Restenosis Program
- Schedule 1 - Patent Applications.
- Schedule 1.27 - Territories.
- Schedule 3.2(c) - Work Plan for the Company's Restenosis Program.
10.31 (10) Lease Agreement dated, February 24, 1995 between Texas Biotechnology Corporation and Doctors
Center, Inc.
10.33 (10) Amended and Restated 1990 Incentive Stock Option Plan
10.34 (10) Amended and Restated 1992 Incentive Stock Option Plan (as of March 3, 1995)
10.36 (10) Employment Agreement, dated February 7, 1995 between Richard P. Schwarz Jr., Ph.D. and Texas
Biotechnology Corporation
10.38 (11) Clinical Trial Research Agreement dated February 10, 1995 between Texas Biotechnology Corporation
and Coromed, Inc.
10.39 (12) Amended and Restated Stock Option Plan for Non-Employee Directors
10.40 (12) 1995 Stock Option Plan
54
10.42 (13) Clinical Trial Research Agreement dated April 1, 1995 between Texas Biotechnology Corporation
and Coromed, Inc.
10.43 (13) Clinical Trial Research Agreement dated June 1, 1995 between Texas Biotechnology Corporation
and Coromed, Inc.
10.46 (13) Employee Agreement with Stephen L. Mueller and Texas Biotechnology Corporation dated July 1, 1995.
10.47 (13) Employee Agreement with David B. McWilliams and Texas Biotechnology Corporation dated July 1, 1995.
10.48 (13) Employee Agreement with Richard A. F. Dixon, Ph.D. and Texas Biotechnology Corporation dated
July 1, 1995.
10.49 (13) Employee Agreement with Richard P. Schwarz, Jr., Ph. D. and Texas Biotechnology Corporation dated
July 1, 1995.
10.50 (13) Employee Agreement with Joseph M. Welch and Texas Biotechnology Corporation dated July 1, 1995.
10.51 (14)* Letter Agreement regarding Argatroban Studies Information dated December 14, 1995, between the
Company and Synthelabo Recherche
10.52 (14) Amendment B to Clinical Trial Research Agreement dated February 10, 1995 between Texas
Biotechnology Corporation and Coromed Inc.
10.53 (15) Letter of Understanding between Texas Biotechnology Corporation and Mitsubishi Chemical
Corporation dated July 10, 1996
10.54 (15) Form of Indemnification Agreement between Texas Biotechnology Corporation and its officers and
directors dated May 3, 1996
10.55 (15) Amended and Restated 1995 Non-Employee Director Stock Option Plan (as amended by the Board of
Directors on June 30, 1996)
10.56 (16)* Strategic Alliance Agreement between Texas Biotechnology Corporation and LG Chemical, Ltd. dated
October 10, 1996
10.57 (16) Common Stock Purchase Agreement between Texas Biotechnology Corporation and LG Chemical, Ltd.
dated October 10, 1996
10.58 (18) Third Amendment dated January 1, 1997 to Consulting Agreement with John M. Pietruski
dated January 1, 1992.
10.59 (18) Amendment to License and Research and Development Agreement between the Company and Synthelabo S.A.
10.60 (17) Preferred Stock Investment Agreement dated March 13, 1997 between Texas Biotechnology Corporation
and certain investors
10.61 (17) Registration Rights Agreement dated March 13, 1997 between Texas Biotechnology Corporation and
certain investors
55
10.62 (19) Amendment to the 1995 Stock Option Plan of Texas Biotechnology Corporation dated March 4, 1997
10.63 (19) Amendment to the 1995 Non-Employee Director Stock Option Plan of Texas Biotechnology Corporation
dated March 4, 1997
99.1 (20) Agreement between Mitsubishi Chemical Corporation, Texas Biotechnology Corporation and SmithKline
Beecham plc dated August 5, 1997
99.2 (20) Product Development License and Co-Promotion Agreement between Texas Biotechnology Corporation and
SmithKline Beecham plc dated August 5, 1997
99.3 (20) Common Stock Purchase Agreement between Texas Biotechnology Corporation and SmithKline Beecham
plc dated August 5, 1997
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
- ------------
* The Company has omitted certain portions of these agreements in reliance
on Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.
(1) Filed as an exhibit to the Company's Form 10 (File No. 0-20117) effective
June 26, 1992 (as amended) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the
quarter ended June 30, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the
quarter ended September 30, 1992 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the
quarter ended June 30, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Form 10-Q/A-1 (File No. 0-20117) for
the quarter ended June 30, 1993 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Form S-1 registration statement (File
No. 0-20117) effective December 15, 1993 (as amended) and incorporated
herein by reference.
(7) Filed as an exhibit to the Company's Form 8-K (File No. 0-20117) filed with
the Securities and Exchange Commission (the "Commission") on October 5,
1994 (as amended) and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Form 8-K/A (File No. 0-20117) filed
with the Commission on March 13, 1995 (as amended) and incorporated herein
by reference.
(9) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) filed
with the Commission on November 14, 1994.
(10) Filed as an exhibit to the Company's Form 10-K (File No. 0-20117) for the
year ended December 31, 1994 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the
quarter ended March 31, 1995 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the
quarter ended June 30, 1995 and incorporated herein by reference.
(13) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended September 30, 1995 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended March 31, 1996 and incorporated herein by reference.
56
(15) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended June 30, 1996 and incorporated herein by reference.
(16) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended September 30, 1996 and incorporated herein by reference.
(17) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) with the
Commission on April 2, 1997 and incorporated herein by reference.
(18) Filed as an exhibit to the Company's Form 10-K (File No. 1-12574) for the
year ended December 31, 1996 with the Commission on March 11, 1997 and
incorporated herein by reference.
(19) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended June 30, 1997 with the Commission on August 14, 1997 and
incorporated herein by reference.
(20) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) filed
with the Commission on August 25, 1997 and incorporated herein
by reference.
57
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON
AND STATE OF TEXAS ON THE 6TH DAY OF MARCH, 1998.
TEXAS BIOTECHNOLOGY CORPORATION
By: /s/ Stephen L. Mueller
---------------------------------------
Stephen L. Mueller
Vice President, Finance and
Administration, Secretary and Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS AND IN THE CAPACITIES
INDICATED ON THE 6TH DAY OF MARCH, 1998.
SIGNATURE TITLE
--------- -----
/s/ John M. Pietruski Chairman of the Board of Directors
- --------------------------------------------------------
John M. Pietruski
/s/ David B. McWilliams Director, President and Chief Executive Officer
- -------------------------------------------------------- (Principal Executive Officer)
David B. McWilliams
/s/ Richard A.F. Dixon Director and Vice President of Research
- --------------------------------------------------------
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/ Rita R. Colwell Director
- --------------------------------------------------------
Rita R. Colwell, Ph.D., D.Sc. (Hon)
/s/ Robert J. Cruikshank Director
- --------------------------------------------------------
Robert J. Cruikshank
/s/ James A. Thomson Director
- --------------------------------------------------------
James A. Thomson, Ph.D.
/s/ James T. Willerson Director
- --------------------------------------------------------
James T. Willerson, M.D.