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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION FILE NUMBER __________
ARIAD PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3106987
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
26 LANDSDOWNE STREET, CAMBRIDGE, MASSACHUSETTS 02139-4234
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 494-0400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
COMMON STOCK PURCHASE WARRANTS
RIGHTS TO PURCHASE SERIES A PREFERRED STOCK
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
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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 of the registrant's Common Stock outstanding as of
March 10, 1999: 21,992,880. The number of Common Stock Purchase Warrants
outstanding as of March 10, 1999: 2,125,225.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $30 million as of March 10, 1999, based on the last
reported sales price of the registrant's Common Stock on the Nasdaq National
Market on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement (the "Proxy Statement") to be
used in connection with the Registrant's 1999 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
ARIAD Pharmaceuticals, Inc. ("ARIAD" or the "Company") is focused on the
discovery and development of novel and proprietary drugs based on its
understanding of the inner-workings of cells and the genes involved in disease.
The Company has developed a product based on its gene regulation technology to
treat graft-versus-host disease, a complication of bone marrow transplantation
involving an attack by a patient's immune system on healthy tissue. This product
entered Phase 1 human clinical trials in December 1998. All of the Company's
other drug candidates are in the pre-clinical stage.
ARIAD's research and development programs involve three areas: signal
transduction inhibitors, regulated gene therapy and functional genomics. Signal
transduction inhibitors are drugs designed to block specific molecular targets
in bone cells and white blood cells. In November 1995, the Company entered into
an agreement with Hoechst Marion Roussel, Inc. ("HMR") to collaborate on the
discovery and development of such drugs to treat osteoporosis and other bone
diseases. The Company also has developed a system referred to as "ARIAD
Regulated Gene Expression Technology" or "ARGENT(TM)" which is designed to
control cellular activities using small-molecule drugs. This system can be
applied in research for discovery of new drugs and new genes, in gene and cell
therapy, and in the manufacture of biological products. The leading application
of this system is the controlled production of protein drugs by regulated gene
therapy. Another use of this system is ARIAD's product to treat graft-versus-
host disease. This product may improve the safety and effectiveness of certain
types of bone marrow transplants by selectively killing the cells responsible
for graft-versus-host disease. In addition, the Company is working in an area
known as functional genomics, which involves the discovery of new genes and the
validation of molecular targets that may be useful in the treatment of diseases.
ARIAD is developing this information as a tool to accelerate the discovery of
new drugs to treat these diseases, such as osteoporosis (bones), atherosclerosis
(heart and blood vessels) and cancer. In March 1997, the Company established a
joint venture with HMR, named the Hoechst-ARIAD Genomics Center, LLC (the
"Genomics Center"), to pursue this area.
SIGNAL TRANSDUCTION INHIBITORS. ARIAD is developing drugs that inhibit signal
transduction pathways in cells responsible for osteoporosis and immune-related
diseases such as transplant rejection and rheumatoid arthritis. In each of these
programs, the Company has identified intracellular signaling protein targets
that it believes are critical to the disease process. ARIAD scientists are using
the Company's advanced drug discovery platform to design and develop small
molecules that bind to these proteins and block their ability to transmit
signals within the cell. To treat osteoporosis, ARIAD is developing small
molecules designed to bind to Src. Src is an intracellular signaling protein
that the Company believes is critical to the function of osteoclasts, the cells
that resorb bone. By inhibiting the function of Src, it may be possible to
correct the imbalance between bone resorption and bone formation that causes
osteoporosis. In November 1995, ARIAD entered into an agreement with HMR (the
"1995 HMR Osteoporosis Agreement") to develop Src inhibitors for the treatment
of osteoporosis and
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related bone diseases. HMR agreed to invest up to $40 million in cash, of
which $10 million was paid upon closing. Up to $30 million will fund research at
ARIAD over a five-year period, including $10 million to be paid upon the
achievement of certain research milestones. HMR also agreed to fund all
preclinical and clinical research activities of the program. ARIAD has developed
small-molecule drugs that bind selectively to Src and inhibit bone resorption in
cellular assays and in an in vivo animal model of osteoporosis. Demonstration of
significant activity in vivo was the basis for the Company's achievement of the
second milestone in the HMR collaboration, leading to a payment to ARIAD of $2
million in February 1999. The Company's lead compounds in the osteoporosis
program are currently being optimized further and tested in additional animal
models of osteoporosis.
ARIAD REGULATED GENE EXPRESSION TECHNOLOGY (ARGENT). ARGENT is a novel and
proprietary system designed to provide a means to control cellular activities,
such as protein production and cell proliferation, using small-molecule drugs.
ARGENT has potential for broad applications in drug discovery, in gene and cell
therapy, in manufacturing of biological products and in genomics research.
ARIAD's leading applications of the technology are the development of (i) orally
active therapeutic proteins and (ii) a treatment of graft-versus-host-disease in
the context of allogeneic bone marrow transplants.
Orally active therapeutic proteins - Currently, therapeutic proteins such as
erythropoietin (for use in anemia), interferon-alpha (hepatitis) or growth
hormone (pituitary dysfunction) must be delivered by injection. This mode of
administration can be inconvenient and uncomfortable to the patient and can
result in circulating protein levels that fluctuate well above and below the
optimal therapeutic dose. Using ARGENT, it may be possible to modify a patient's
cells genetically to produce a therapeutic protein of choice in response to a
proprietary small-molecule drug. This approach could provide physicians with the
ability to administer and control protein therapy in a manner consistent with
conventional pharmaceutical dosing (i.e., with a pill). The use of ARGENT also
may allow maintenance of stable and effective levels of a therapeutic protein in
the body. The ARGENT system has the potential not only to improve upon current
protein therapies but also to enable new therapeutic uses of proteins that
currently cannot be administered effectively by injection. ARIAD is currently
testing ARGENT orally active protein therapy in animal models. In vivo proof-
of-concept studies have been completed using growth hormone (in mice) and
erythropoietin (in mice and primates). Further preclinical studies and
manufacturing scale-up efforts are underway.
Product for the treatment of graft-versus-host disease - Graft-versus-host
disease is a limiting toxicity of allogeneic bone marrow transplantation. T
cells from the bone marrow donor have beneficial effects, but unfortunately they
also cause graft-versus-host disease in many allogeneic transplant recipients.
ARIAD has incorporated ARGENT into a method of engineering donor T cells to
enable their selective elimination by administration of a proprietary compound,
AP1903. In December 1998, ARIAD initiated a Phase 1 clinical trial of this
small-molecule drug in healthy volunteers.
FUNCTIONAL GENOMICS. In March 1997, ARIAD established a joint venture with HMR
called the Hoechst-ARIAD Genomics Center, LLC (the "Genomics Center"). The
Genomics Center aims to identify novel therapeutic proteins and targets for
small-molecule drug discovery using advanced
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technologies in molecular and cellular genetics and bioinformatics. ARIAD
and HMR share operating costs of the Genomics Center equally. Each company can
select for further development half of the genes validated as drug targets or
therapeutic proteins. ARIAD and HMR have agreed to commit $85 million to fund
the operating expenses, capital expenditures and other costs of the Genomics
Center until March 2002. The Genomics Center currently is focusing on
identifying genes that play a critical role in osteoporosis, atherosclerosis,
and cancer. Supplemental capital is available from HMR to augment the committed
allocation. The Genomics Center, has formed partnerships with several of the
leading bioinformatic and microarray technology providers, including Pangea
Systems, Molecular Dynamics, and Affymetrix.
ARIAD's BUSINESS STRATEGY
ARIAD's strategy is based on applications of its understanding of the
inner-workings of cells and the genes involved in disease to discover, develop
and commercialize proprietary pharmaceutical products. Through internal efforts
and strategic collaborations, ARIAD has assembled a broad portfolio of advanced
technologies for pharmaceutical discovery and development. The integrated
application of these technologies has allowed the Company to pursue multiple
business opportunities, each with diverse potential products (Figure 1). The key
technical elements of ARIAD's research and development strategy are described
below.
FIGURE 1
ARIAD'S RESEARCH AND DEVELOPMENT STRATEGY
[GRAPHIC OMITTED]
MAINTAIN A BROAD AND INTEGRATED PORTFOLIO OF ADVANCED DRUG DISCOVERY
CAPABILITIES. ARIAD's integrated capabilities in multiple aspects of drug
discovery include target identification and validation (functional genomics),
structure-based drug design and molecular modeling, combinatorial chemistry,
bioinformatics, novel assays and high-throughput screening, medicinal chemistry,
and pharmacology. ARIAD's integrated approach enables the Company to pursue drug
discovery and development from the identification of a critical gene to the
clinical testing of an optimized compound. The Company believes that this
approach to drug discovery enables ARIAD to retain a larger portion of the
commercial value of its potential products. The approach is useful for many
small-molecule drug targets in addition to those involved in signal
transduction.
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ESTABLISH STRATEGIC COLLABORATIONS TO ACCESS COMPLEMENTARY TECHNOLOGIES AND
ACCELERATE DRUG DEVELOPMENT. ARIAD actively pursues collaborations with
pharmaceutical and biotechnology companies to accelerate the development,
testing and regulatory approval of its products. Certain of its collaborations
give ARIAD access to complementary technologies and research capabilities. For
example, ARIAD has partnered with Genovo, Inc. ("Genovo") to access gene
transfer technology for use in its orally active therapeutic protein program.
Other collaborations, such as the 1995 HMR Osteoporosis Agreement, enable ARIAD
to gain access to product development and commercialization capabilities. Along
with partially offsetting the risks and expenses of drug development, the
Company believes that this partnering strategy enables ARIAD to leverage the
knowledge gained through each collaboration into drug discovery opportunities in
other areas.
PURSUE DRUG DISCOVERY PROGRAMS WITH MULTIPLE PRODUCT OPPORTUNITIES. The
Company's broad drug discovery platform is designed to create multiple product
opportunities. For example, while the Company's signal transduction inhibitor
program currently focuses on osteoporosis and immune and inflammatory diseases,
the knowledge acquired may be applied to other illnesses, such as cancer and
infectious diseases. Similarly, while the initial target products in ARIAD's
orally active therapeutic protein program are being designed to replace and/or
improve upon existing injectable protein therapeutics such as growth hormone and
erythropoietin, the technology may also enable delivery of many newly identified
therapeutic proteins. The functional genomics program aims to identify multiple
small-molecule drug targets and novel therapeutic proteins. ARIAD may develop
these drug targets and therapeutic proteins independently, or sell or license
them to partners as well.
RETAIN DEFINED COMMERCIALIZATION RIGHTS. ARIAD has structured its strategic
alliances and joint ventures to preserve, whenever possible, the flexibility to
develop certain product opportunities independently or with third parties. For
example, in the osteoporosis collaboration with HMR, ARIAD has the option to
develop and commercialize certain products for non-osteoporosis indications in
North America. Additionally, ARIAD has retained commercialization rights to
other signal transduction inhibitor programs. While ARIAD has partnered with
Genovo for the joint development and commercialization of therapeutic proteins
using the ARGENT system in muscle and skin cells, the Company retains the right
to pursue independently all other applications of ARGENT. ARIAD's selections of
the small-molecule drug targets or novel proteins, if any, that arise out of the
Genomics Center may be developed independently or with partners.
ARIAD DRUG DISCOVERY PROGRAMS
External signals stimulate or inhibit intracellular events, thereby controlling
cellular responses. The process by which an external signal is transmitted into
and within a cell to elicit a response is referred to as signal transduction.
Signal transduction is generally initiated by the interaction of extracellular
factors (e.g., hormones, adhesion molecules or neurotransmitters) with receptors
on the cell surface. These extracellular signals are transduced to the inner
face of the cell membrane, causing the intracellular portion of the receptor to
interact with specific contact sites (domains) on intracellular signaling
proteins. The initial intracellular receptor-target interactions stimulate a
series of additional protein interactions that disseminate the signal throughout
the cell, thereby producing a specific cellular response.
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ARIAD believes that the protein-protein and protein-DNA interactions of signal
transduction pathways are excellent targets for drug discovery. By inhibiting
signaling pathways, it may be possible to shut down the cellular responses that
are responsible for diseases such as osteoporosis or rheumatoid arthritis. By
activating signaling pathways, it may be possible to gain control of cellular
responses, thereby inducing therapeutic effects.
SIGNAL TRANSDUCTION INHIBITOR PROGRAM
In each of ARIAD's signal transduction inhibitor projects, the Company seeks to:
(i) identify an intracellular signaling pathway critical to the process of a
major disease or disorder, and an intracellular signaling protein essential to
that pathway; (ii) determine the specific binding domain of the protein
responsible for transduction of the signal; and (iii) design a small-molecule
drug that binds to the targeted domain, thereby blocking the transmission of the
signal and halting the disease process (Figure 2). ARIAD's primary signal
transduction inhibitor projects focus on intracellular pathways that the Company
believes are critically involved in osteoporosis and immune-related diseases.
The Company is currently optimizing and testing small-molecule compounds that
bind to specific domains on signaling proteins involved in these disease
processes.
FIGURE 2
NORMAL SIGNAL TRANSDUCTION SIGNAL PATHWAY INHIBITED
[GRAPHIC OMITTED]
Drug Discovery Process
The essential elements of ARIAD's signal transduction inhibitor drug discovery
process are summarized below:
Identification of intracellular targets - ARIAD employs molecular cell biology,
molecular and cellular genetics and bioinformatics to identify specific
intracellular signaling proteins that represent validated targets for
pharmacologic intervention. When selecting these targets, ARIAD
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considers the following criteria:
- - The targeted pathway is well characterized and implicated in an important
human disease.
- - The targeted protein is critical to the disease pathway.
- - The domains involved in the targeted protein's interaction with other
proteins in the signaling pathway are amenable to structural analysis using
nuclear magnetic resonance ("NMR") spectroscopy or x-ray crystallography.
- - The sites of contact between domains are small enough to be blocked with a
small-molecule compound.
ARIAD scientists are targeting a class of intracellular protein binding domains
called SH2 domains, which fit these criteria. SH2 domains are found in multiple
signaling proteins that are critical to particular disease processes. While SH2
domains share common structural attributes overall, the Company believes that
their differences should enable the design of specific compounds. ARIAD hopes to
transfer the knowledge gained in designing one SH2 inhibitor drug to the design
of other SH2 inhibitors for other disease applications. This ability to leverage
knowledge of target structure and small-molecule inhibitor design could result
in a faster and more efficient drug discovery process.
Structure determination - ARIAD chemists determine the detailed
three-dimensional molecular structure of the targeted protein domain, using
advanced biophysical imaging techniques, such as NMR spectroscopy and x-ray
crystallography.
Lead compound identification - After the structure of a given target is
determined, ARIAD scientists use two integrated approaches to identify small
molecules that may block that target. In the first approach, ARIAD chemists use
the structural information as a blueprint for the design and synthesis of
individual small molecules intended to bind to the domain and block the target
protein's interaction with other proteins in the signal transduction pathway.
After their binding and biological activity are tested, selected compounds are
further studied through determination of the structure of their complex with the
target protein. Data obtained from the activity and structural determinations
are used to refine the compound design further, with the aim of increasing the
compound's affinity for its target. As a complementary approach, ARIAD
scientists use combinatorial chemistry to produce "libraries" of small molecules
based on prototype molecules identified through the design process. The Company
believes that its approach to combinatorial chemistry -- using information from
its structure-based approach to bias the libraries produced combinatorially--
should increase the probability of producing a compound that binds to the
targeted domain. By determining the molecular structure of combinatorial
compounds that bind well or poorly to the domains, ARIAD chemists can further
bias succeeding generations of combinatorial compound libraries in an iterative
effort to identify selective and powerful signal transduction inhibitor drugs.
Assay systems - The ability of ARIAD's compounds to bind to the target protein's
domain is
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determined in proprietary in vitro assays based on fluorescence polarization
technology. These assays are highly sensitive and adaptable to high-throughput
screening. ARIAD has also designed cell-based assays to validate leads
identified in screening. These assays help determine whether compounds can pass
through cell membranes, bind selectively to the target and block the disease
process. Compounds that perform effectively in ARIAD's assay systems are
evaluated further in the Company's validated animal models of specific diseases.
Clinical candidate selection - The goal of ARIAD's signal transduction inhibitor
discovery and optimization process is to develop a proprietary, small-molecule
compounds that are stable, suitable for oral administration and safe and
effective in in vitro assays and in vivo studies. Such a compound may then
become a candidate for initial clinical trials.
PRIMARY SIGNAL TRANSDUCTION INHIBITOR DRUG DISCOVERY PROJECTS
Osteoporosis - Osteoporosis is characterized by progressive loss of bone
architecture and mineralization leading to the loss of bone strength and an
increased fracture rate. The skeleton is constantly being remodeled by a balance
between cells that lay down new bone (osteoblasts) and those cells that break
down or resorb bone (osteoclasts). A prolonged imbalance of bone resorption over
formation can occur in post-menopausal women, as well as in men and women with
certain disorders such as renal osteodystrophy, hypercalcemia and Paget's
disease. This imbalance leads to weaker bone structure and a higher risk of
fractures. These fractures often heal poorly and result in clinical
complications for those affected and substantial costs to the healthcare system.
Osteoporosis afflicts approximately 25 million people in the United States and
more than 200 million people worldwide. The estimated cost of treatment and care
for osteoporosis and related fractures exceeds $10 billion per year in the
United States alone. Because bone loss occurs gradually over time and without
symptoms, osteoporosis is often untreated until severe. According to the
National Osteoporosis Foundation, 80% of those afflicted with osteoporosis are
women. Many osteoporosis patients who sustain the bone fractures caused by this
disease suffer a distinct loss of mobility, and nearly one quarter of those who
fracture their hips die within six months.
Current therapies for osteoporosis include calcitonin, estrogen replacement
therapy, selective estrogen receptor modulators, and bisphosphonates. Both
calcitonin and estrogen replacement attempt to maintain bone mass by decreasing
the rate at which bone is naturally resorbed by the body. Recent studies have
suggested that estrogen replacement therapy may increase the risk of breast
cancer in post-menopausal women. Bisphosphonates are a more recent form of
therapy for osteoporosis. While these compounds appear to perform better than
calcitonin and estrogen replacement therapy in some patients, they have some
undesirable side effects.
ARIAD's approach for treating osteoporosis is to develop small-molecule drugs
that bind to the SH2 domain or kinase domain of Src, an intracellular signaling
protein that is implicated in the bone-resorption activity of osteoclasts, but
does not appear to be critical to the function of other cells. The Company
believes that Src is a key mediator in osteoclast-induced bone resorption based
on experiments in mice that have had Src genetically removed. These animals
experience a condition known as osteopetrosis, or "stone bone," characterized by
thickening of the bone.
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Additional research has shown that Src appears essential for bone resorption by
osteoclasts, because osteoclasts from mice that lack Src are incapable of
resorbing bone. Therefore, the Company believes that Src inhibitors can be safe
and effective treatments for osteoporosis.
In November 1995, ARIAD entered into a collaboration with HMR to develop
small-molecule inhibitors of Src for the treatment of osteoporosis and related
hyper-resorptive bone diseases. Under the terms of this collaboration, HMR made
an initial cash payment to ARIAD of $10 million and agreed to provide up to $20
million of research support payments over a five-year period and up to $10
million upon the attainment of certain research milestones. In addition, HMR
agreed to fund all preclinical and clinical development costs for products that
emerge from the collaboration. HMR will pay royalties to ARIAD on net sales of
any products successfully commercialized out of this collaboration, if any.
ARIAD attained the first $2 million research milestone in late 1996 after
successfully designing small-molecule compounds that block the SH2 domain of Src
and retard bone resorption in in vitro and ex vivo assays. During 1998, ARIAD
scientists further improved the potency and selectivity of several of its
leading Src inhibitor compounds and continued testing these compounds in in vivo
animal models of osteoporosis. In February 1999, ARIAD announced achievement of
the second $2 million research milestone, the demonstration of significant
anti-resorptive activity in vivo. ARIAD researchers continue to optimize the
leading Src inhibitor compounds with the goal of identifying a candidate for
human clinical trials.
Immune-Related Diseases - Organ transplant rejection and autoimmune disorders
(e.g., rheumatoid arthritis, multiple sclerosis and inflammatory bowel disease)
are caused by unwanted reactions by the human immune system. Transplant
rejection occurs when the immune system recognizes transplanted tissue as
foreign and mounts an attack against it. Autoimmune disorders are the result of
the body's immune system failing to distinguish "self" from "non-self" and
attacking normal tissue. The incidence of such diseases is increasing, but no
universally effective treatment exists.
A critical step in the human immune response is the activation of white blood
cells called T cells. T-cell activation starts when specific antigens bind to
the extracellular portion of the T-cell receptor. This binding activates a
signaling pathway within the T cell leading to a full-scale immune response. The
goal of ARIAD's immune-related disease program is to develop a small-molecule
immunosuppressive drug that specifically inhibits the intracellular signaling
protein interactions that lead to T cell activation, to be used to treat
autoimmune disorders and transplant rejection.
ARIAD is using structure-based drug design and structure-based combinatorial
chemistry to develop inhibitors of an intracellular signaling protein called
ZAP. ZAP, which is expressed exclusively within T cells, is essential for
antigen-induced T cell activation. Molecular, genetic and biochemical studies
have confirmed that ZAP binds to the intracellular portion of the T cell
receptor and that blocking this interaction can prevent T cell activation. In
addition, those humans who have a genetic defect in ZAP are severely
immunodeficient. This research suggests that a small-molecule drug that
selectively blocks ZAP may represent an effective immunosuppressive agent that
may not exhibit the side effects associated with existing
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immunosuppressive drugs, such as cyclosporine or tacrolimus.
ARIAD scientists were the first to determine and publish the molecular structure
of the tandem SH2 domains of ZAP and the nature of their interaction with the
T-cell receptor. Using this information, as well as the knowledge about
SH2-inhibiting compounds gained in the osteoporosis program, ARIAD has
identified lead molecules for its efforts to develop ZAP-inhibiting drugs. These
compounds bind selectively to ZAP SH2 domains in in vitro binding assays. The
Company is evaluating these compounds using in vitro assays to select the most
promising compounds to undergo animal testing in models of immune-related
disease.
ARIAD REGULATED GENE EXPRESSION TECHNOLOGY (ARGENT)
Whereas ARIAD's signal transduction inhibitor program is based on identifying
small-molecule drugs that block intracellular protein interactions, the ARGENT
program is based on the use of small-molecule drugs to promote and regulate
intracellular protein interactions. ARIAD is applying its expertise in
regulating signaling pathways to develop a system that controls the adminis-
tration of therapeutic proteins delivered by gene therapy, and a conceptually
related system that controls the survival of genetically modified cells.
Gene therapy involves the genetic modification of cells to produce specific
therapeutic proteins. Cells can be removed from a patient, genetically modified
and transplanted back into the patient (ex vivo gene therapy). Alternatively,
cells can be modified in the body through the administration of a vector that
delivers the gene into certain cells (in vivo gene therapy). Gene therapy can
therefore be thought of as an in vivo protein production and delivery system.
ARIAD believes that most diseases currently treated by the administration of
injectable recombinant proteins, such as anemia, hepatitis, multiple sclerosis
and pituitary disorders, are candidates for regulated gene therapy. However,
current gene therapy strategies have had limited success. Key reasons include
the difficulty in achieving adequate levels of therapeutic protein production,
the lack of a means to control the dose of the protein produced, and the
inability to discontinue therapy should it become unwanted or unnecessary.
ARIAD's proprietary technology called ARGENT, when used in conjunction with
specific gene transfer vectors, should address several of the key issues facing
the practical clinical use of gene therapy: (i) efficiently and safely
delivering genetic material directly to the patient's cells; (ii) causing those
cells to produce efficacious levels of therapeutic proteins; (iii) controlling
protein production levels in a manner consistent with conventional pharma-
ceutical dosing; and (iv) providing the ability to terminate treatment if
necessary. ARGENT is based on the principle that specific protein interactions
regulate intracellular activities. By selecting protein interactions that
produce a desired cellular response, then engineering those proteins to interact
only in the presence of a novel small-molecule drug, complex biological
responses can be brought under direct pharmacologic control.
Orally Active Protein Therapy
If successfully developed, ARGENT orally active protein therapy would be
utilized as follows: patients would receive an injection of genetic material
(DNA) that would equip certain of their cells to produce a desired therapeutic
protein, such as erythropoietin. These patients then would
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take a pill to activate therapeutic protein production in a dose-dependent
fashion. The Company believes that this application of ARGENT would allow the
physician to manage protein therapy by varying the dosage regimen of the pill.
The ARGENT therapeutic protein delivery system takes advantage of the
observation that transcription factors, intracellular signaling molecules that
are responsible for activating genes to produce proteins, contain two discrete
functional domains. One domain recognizes and binds to DNA, and the second
interacts with the transcriptional machinery to activate expression of the
target gene. ARIAD has selected a specific DNA-binding domain and a separate
transcriptional activation domain, and genetically engineered each domain to
include a specific drug binding site. The resulting system can control the
activity of the transcription factor -- and therefore the expression of the
therapeutic gene -- through the administration of a proprietary, orally active
Dimerizer Drug(TM) (Figure 3).
FIGURE 3
ARGENT ORALLY ACTIVE PROTEIN THERAPY
[GRAPHIC OMITTED]
In a study published in the journal Science in January 1999, ARIAD and
University of Pennsylvania scientists used adeno-associated virus ("AAV")-based
gene delivery vectors in combination with the ARGENT system to regulate the
production of the therapeutic protein erythropoietin in mice and primates. These
experiments demonstrated the feasibility of introducing therapeutic genes into
the body and
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then precisely controlling the activity of those genes with a drug that could be
given as a simple pill. The researchers injected animals in the muscle with
vectors containing both the gene for the production of erythropoietin and genes
that encode two fragments of a transcription factor. These transcription factor
fragments had been engineered to have high affinity for one of ARIAD's Dimerizer
Drugs. Administration of the Dimerizer Drug to the animals activated the target
gene, causing biologically effective amounts of erythropoietin ("EPO") to be
produced. The dose-dependent increase in EPO resulted in higher numbers of red
blood cells in the bloodstream. Discontinuing drug administration shut down
production (Figure 4).
FIGURE 4
DIMERIZER DRUG (RAPAMYCIN) CONTROLS EPO AND HEMATOCRIT IN RHESUS MONKEY
INJECTED INTRAMUSCULARLY WITH AAV VECTORS
[GRAPHIC OMITTED]
REFERENCE: Ye, X., Rivera, V.M., Zoltick, P., Cerasoli, F., Jr., Schnell, M.A.,
Gao, G.-p., Hughes, J.V., Gilman, M., and Wilson, J.M. (1999)
Regulated delivery of therapeutic proteins after in vivo somatic cell
gene transfer. Science 283, 88-91.
ARIAD is seeking to develop and commercialize gene therapy-based products as
alternatives for currently marketed injectable therapeutic proteins, such as
growth hormone (for pituitary disorders), erythropoietin (for anemia) and
cytokines such as alpha and beta interferon (for cancer and hepatitis). The
current worldwide market for injected therapeutic proteins is estimated at over
$11 billion annually.
ARGENT Product for Treatment of GVHD
A second application of ARGENT is designed to provide a method for eliminating
engineered cells in vivo. Controlled cell elimination has been achieved through
the construction of a chimeric gene encoding a drug-binding domain fused to the
intracellular signaling domain of the
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FAS protein. Clustering of this chimeric protein by a specific small-molecule
Dimerizer Drug designed to bind to the engineered drug-binding domain induces
apoptosis, the natural suicide program resident in cells. ARIAD is developing
this technology to control the population of donor T cells used in conjunction
with allogeneic bone marrow transplantation (BMT) to treat graft-versus-host
disease.
Worldwide, approximately 40,000 total BMTs are performed each year. However, a
severe complication called graft-versus-host disease (GvHD) limits growth in the
number of patients who can benefit from allogeneic BMTs. GvHD is an often-lethal
condition that arises when transplanted T cells attack healthy host tissues.
Equipping T cells with ARIAD's inducible cell elimination system by retroviral
transduction before transplantation should allow the patient to receive
therapeutic quantities of T cells. The effectiveness of BMT should thereby be
increased, because T cells enhance engraftment of the transplant, confer
immunity against infection, and in some cases have been shown to exert a potent
anti-tumor effect. Should GvHD occur, the donor T cells can be eliminated by
administration of ARIAD's Dimerizer Drug that triggers apoptosis only in the
engineered cells. Thus, the availability of a reliable, selective cell-killing
system should increase the efficacy of BMT and extend the use of BMT to new
disease populations.
ARIAD has designed both the DNA constructs and the Dimerizer Drug, AP1903, which
together have been shown to equip T cells with a selective suicide system. When
human T cells are engineered to express this suicide system and then implanted
into mice, administration of AP1903 results in their selective elimination.
Studies describing AP1903's design and its activity in cells and animals were
published in Proceedings of the National Academy of Sciences in September 1998.
ARIAD initiated a Phase 1 clinical trial of AP1903 in healthy volunteers in
December 1998.
Additional ARGENT Applications
The ARGENT inducible apoptosis system may provide an important safety feature to
current gene therapy strategies, which generally are irreversible. Gene
therapies that cannot be withdrawn or turned off if necessary may be the subject
of concern among physicians and regulatory authorities. Thus, the Company
believes that the selective elimination of engineered cells upon the
administration of a specific dimerizing agent represents a potentially important
advance in gene therapy.
Along with its therapeutic applications, ARGENT has additional uses in genomics
and other basic and applied research. ARGENT can be employed to control gene
expression and protein-protein clustering in experiments in cells and in
animals, enabling the biological activity of a protein to be determined. This
application is also useful to ARIAD's functional genomics program (below).
ARIAD'S FUNCTIONAL GENOMICS PROGRAM
ARIAD's signal transduction inhibitor and ARGENT programs represent a
significant commitment to the acquisition, development and integration of
advanced drug discovery technologies. With these systems in place, ARIAD is
expanding its target identification and validation capabilities.
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ARIAD's genomics program is designed to provide a source of novel drug targets
for the small-molecule drug discovery program and therapeutic genes and proteins
for the ARGENT program. A significant part of ARIAD's efforts to enhance its
target identification and validation capabilities is the expansion of the
Company's program in functional genomics.
Genomics is the study of gene structure and function. Over the past five years,
the convergence of molecular and cellular biology, genetics, automation and
advanced information technologies has given genomics researchers the discovery
tools necessary to begin to understand human diseases at the genetic level.
Researchers are currently engaged in the mapping and sequencing of the estimated
100,000 genes encoded by the human genome. However, knowing a gene's sequence is
only the first step and often provides little information about how the gene
functions. Functional genomics is the process by which the role of genes in
normal and diseased cellular processes is uncovered. Such an understanding of
gene function may provide researchers with the information required to design
novel and specific therapeutics for disease intervention.
Genes provide the detailed information required for cells to produce proteins,
the basic building blocks of the human body. Malfunctions in genes and proteins
are frequently the cause of human disease. "Monogenic" disorders such as cystic
fibrosis, which are caused by a mutation in a single gene, have been relatively
easy to characterize with traditional molecular biology techniques. However,
"polygenic" disorders such as cancer, osteoporosis, obesity, diabetes, asthma,
and neurological diseases have traditionally been much more difficult to
understand due to the complex interaction of multiple genes and environmental
influences.
The Genomics Center is a joint venture established by ARIAD and HMR to pursue
functional genomics. The mission of the Genomics Center is to identify novel
genes associated with disease processes and demonstrate that a particular gene
or genes either causes or prevents disease. This objective is being accomplished
through the application of advanced technologies in molecular biology, cellular
biology, automation and bioinformatics. Genes identified by the joint venture
and selected by either ARIAD or HMR for further development will encode either
therapeutic proteins, such as erythropoietin, or proteins that are believed to
be responsible for disease, such as the Src protein -- ARIAD's small-molecule
drug target for the treatment of osteoporosis.
The discovery of genes involved in disease is accomplished in two steps. Each
step serves as a filter to reduce the number of potential disease genes from
100,000 down to 1 or 2 genes shown to be critically important for disease. As
diagrammed in Figure 5, step one involves a series of experiments that identify
a set of candidate genes. These genes are potentially involved in the disease
process. However, after this first step, it is not known whether these genes are
the cause or the effect of the disease. The Genomics Center uses a set of core
technologies to identify candidate genes: (i) high-throughput differential gene
expression, (ii) genetic screens in mammalian cells, and (iii) proteomic
analysis. Bioinformatics, a set of computational tools for DNA and protein
analysis, helps to analyze the large volume of genomic data produced by these
gene discovery technologies and to focus attention on a subset of candidate
genes, thereby reducing the number of genes for further study. In the second
step, these candidate genes are introduced individually or in small groups into
cells and animals where specific gene function is assessed. Genes found to be
directly involved in disease (validated genes) may be selected by either ARIAD
or HMR for use in the
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discovery and development of pharmaceutical products.
FIGURE 5
FUNCTIONAL GENOMICS
[GRAPHIC OMITTED]
ARIAD's approach to functional genomics is based on the belief that the
functional analysis of genes involved in disease processes requires the
integrated application of technologies in molecular genetics, cellular biology,
automation and bioinformatics. The technologies currently established in the
Genomics Center include custom cDNA-based gene chip arrays (Molecular Dynamics),
commercial high-density gene chip arrays (Affymetrix), cDNA library
construction, high throughput EST sequencing, high-throughput FL cloning and
sequencing, integrated automation systems, genetic screen methodologies for gene
discovery, mouse gene targeting technologies, and bioinformatics tools for
analysis of DNA sequencing and gene chip data. In conjunction with disease
relevant biological systems, these technologies are being employed for the
discovery and functional analysis of genes for therapeutic applications and drug
screening.
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A critical experiment in the functional analysis of a given gene is to examine
the behavior of cells and tissues when such gene is on compared to when it is
off. If a gene is critically involved in the disease process, then either
turning it off or on should stop the disease process. Therefore, the ability to
control genes by turning them on or off at will can be an extremely powerful
tool for determining the role of a gene in a given disease process. ARGENT,
ARIAD's proprietary method for regulating gene expression using small-molecule
drugs, provides a methodology for genomics researchers to control gene function.
For example, ARIAD scientists have developed a strain of laboratory mice that
contain the genetic components of ARGENT. Researchers can introduce a gene
thought to control bone density into these animals and activate this gene using
a specific Dimerizer Drug. By observing the physiological changes in the mice
that have the gene turned on, it may be possible to gain critical information
regarding the role of that gene in osteoporosis. This principle can be applied
to multiple genes and multiple disease processes.
Given the large number of human genes and the extensive effort involved in
analysis of these genes, the Genomics Center is focusing its initial efforts on
a limited number of therapeutic areas: osteoporosis, atherosclerosis, and
cancer. The goal of the osteoporosis project is to identify genes that play a
key role in bone formation. The Genomics Center approach is to identify genes
that stimulate bone cells to produce more bone, thereby increasing a patient's
bone density. Working with partners at HMR, Genomics Center scientists are using
high-throughput differential gene expression analysis (HTDGE) on Affymetrix and
Molecular Dynamics gene chips to identify genes that function in activated
osteoblasts, the cells that form new bone.
In atherosclerosis, the Genomics Center is conducting studies to find genes
involved in smooth muscle proliferation, a key step in coronary artery
restenosis. In the oncology program, Genomics Center researchers are using gene
chips and genetic screens to identify genes involved in colon, mammary, and
prostate cancer. ARIAD believes that several different classes of therapeutic
products could be developed from these investigations.
ARIAD has the right to select for further pursuit half of the validated genes
identified by the Genomics Center. These genes will fall into two distinct
categories: (i) those that encode small-molecule drug targets such as
intracellular signaling proteins and (ii) those that encode secreted proteins
such as hormones. Those genes that encode for intracellular proteins represent a
source of targets for the Company's small-molecule drug discovery program. Those
genes that encode for secreted proteins may be combined with the ARGENT program
to create orally active therapeutic protein products. In addition, the Genomics
Center may be the source of genes upon which ARIAD could build new drug
discovery programs or base collaborations with biotechnology, pharmaceutical or
diagnostic companies.
DRUG DISCOVERY COLLABORATIONS
ARIAD has established and intends to continue to establish collaborations with
pharmaceutical and biotechnology companies. The Company's collaborations are set
forth below.
HMR OSTEOPOROSIS COLLABORATION. On November 5, 1995, ARIAD entered into an
agreement
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with HMR to collaborate on the discovery and development of small-molecule
signal transduction inhibitor drugs to treat osteoporosis and other
hyperresorptive bone diseases. HMR agreed to invest up to $40 million to support
ARIAD's osteoporosis research activities. In addition, HMR has established a
dedicated research group to collaborate with ARIAD on the discovery of
inhibitors of the Company's Src target for osteoporosis and agreed to fund all
of the preclinical and clinical development activities of the collaboration.
Under the terms of this agreement, ARIAD is employing its capabilities in
combinatorial chemistry and structure-based drug design in a joint effort with
HMR to design and develop Src inhibitor drugs. HMR has exclusive rights to
commercialize these drugs worldwide for the treatment of osteoporosis and
related bone diseases. ARIAD has the right, under certain circumstances, to
participate in the clinical development and commercialization of these products
for nonosteoporosis indications in North America. In addition to an upfront cash
payment of $10 million in 1995, HMR will fund up to $30 million of research at
ARIAD over five years, $10 million of which is tied to the achievement of
certain research milestones. The second of these milestones was achieved in
February, 1999, and ARIAD received a $2 million cash payment. The agreement also
calls for the payment of royalties to ARIAD based on product sales.
GENOVO, INC. On February 14, 1997, ARIAD, through its subsidiary, ARIAD Gene
Therapeutics, Inc. ("AGTI"), and Genovo entered into a contract to jointly
develop and commercialize gene therapy products for the therapeutic protein
market. The agreement combines ARIAD's regulated gene expression and apoptosis
technology with Genovo's gene transfer technology for the intramuscular and
subcutaneous delivery of genes. Genovo's technology is derived largely from its
exclusive license of intellectual property and access to the work of James
Wilson, M.D., Ph.D. and his laboratory at the Institute for Human Gene Therapy
at the University of Pennsylvania School of Medicine.
Under the terms of the agreement, ARIAD and Genovo will seek to develop gene
therapy-based protein products. Each partner will pay its respective costs of
research and development, and any payments received by either party for combined
products will be divided equally between ARIAD and Genovo, after reimbursement
of certain costs. The companies are pursuing partnerships with companies that
have a strong strategic interest in protein therapeutics and the markets they
address.
The focus of ARIAD's and Genovo's joint efforts is on vector-based delivery of
genes encoding secreted proteins to the muscle and skin. Each company is free to
develop and partner its respective technologies in all other applications.
ARIAD's agreement with Genovo has an initial term that, subject to extension and
other conditions relating to third-party transactions, expires in February 2002.
HOECHST-ARIAD GENOMICS CENTER, LLC. On March 4, 1997, ARIAD and HMR entered into
a 50/50 joint venture to pursue functional genomics. The Genomics Center employs
advanced technologies in molecular and cellular genetics and bioinformatics to
analyze human genes and identify those genes that encode for novel therapeutic
proteins or targets for small-molecule drug discovery. ARIAD and HMR each has
the right to select for further development 50% of the genes identified by the
joint venture. ARIAD and HMR also have the right, subject to a right of
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first negotiation held by the other party, to form strategic alliances with
other pharmaceutical or biotechnology companies for the development of products
based on genes or targets selected from the joint venture.
The Company and HMR agreed to commit $85 million to the establishment of the
joint venture and its first five years of operations. ARIAD may fund its share
of this commitment through the purchase by HMR of ARIAD series B preferred
stock. The Genomics Center is located in dedicated facilities at ARIAD's
headquarters and is staffed by ARIAD scientists under contracts with the joint
venture. The operating costs of the Genomics Center are divided equally between
ARIAD and HMR, and both companies have access to new technologies developed
within the Genomics Center.
Concurrent with the signing of the joint venture agreement (the "1997 HMR
Genomics Agreement"), HMR committed to provide ARIAD with capital adequate to
fund ARIAD's share of such costs through the purchase of up to $49,000,000 of
ARIAD series B convertible preferred stock over the five-year period, including
an initial investment of $24,000,000, which was completed in March 1997 and
$5,747,000 which was completed in January 1999 (Note 7). Should ARIAD and HMR
determine that the Genomics Center requires funds in excess of those committed,
ARIAD may fund its share of the excess through a loan facility made available by
HMR. Funds borrowed by ARIAD pursuant to such loan facility, if any, will bear
interest at a rate of LIBOR plus 0.25% and are repayable by June 30, 2003 in
cash or series B convertible preferred stock, at the Company's option.
The 1997 HMR Genomics Agreement has an initial term that, subject to extension,
expires in March 2002.
INCYTE PHARMACEUTICALS, INC. In March 1997, ARIAD became the second
biotechnology company to become a subscriber to the Incyte LifeSeq(R) gene
sequence and expression database. This agreement was amended in December, 1998
to provide ARIAD an additional subscription to the Incyte LifeSeq Gene Album(TM)
Reagent Set. ARIAD pays Incyte access fees and would owe Incyte milestone
payments and royalties on the sale of products derived from the database, if
any. ARIAD employs the Incyte database in its functional genomics program. This
database offers one of the largest sources of genomic data, containing gene
sequence and expression information from normal as well as diseased cells and
tissues from most of the major tissue types in the human body. ARIAD, through
the Genomics Center, uses the Incyte databases in its efforts to identify and
characterize genes that encode for therapeutic proteins and novel small-molecule
drug targets.
HUMAN RESOURCES
As of March 15, 1999, ARIAD had 146 full-time employees, 64 of whom hold
post-graduate degrees, including 54 Ph.D.'s. Most of the Company's employees are
engaged directly in research and development. The Company has entered into
confidentiality and noncompetition agreements with all of its employees. None of
ARIAD's employees is covered by a collective bargaining agreement, and
management considers relations with its employees to be good.
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BOARD OF SCIENTIFIC AND MEDICAL ADVISORS
ARIAD has assembled a Board of Scientific and Medical Advisors (the "Advisory
Board") that currently consists of experts in the fields of molecular cell
biology, molecular pharmacology and biochemistry, immunology, bioorganic and
synthetic chemistry and physical and computational chemistry.
On an individual basis, members of the Advisory Board advise the Company's
management and employees on scientific matters relating to the Company's
research programs, including the selection of molecular targets, drug discovery
strategies, clinical applications of proposed products and new technological
developments.
Each advisor is engaged under a consulting agreement that requires the advisor,
to the extent possible, to provide exclusive consulting services to the Company
in the Company's field of interest. Each advisor has agreed, pursuant to such
agreements, not to disclose any confidential information of the Company.
LICENSES AND SPONSORED RESEARCH
The Company has entered into license arrangements with various research
institutions and universities pursuant to which the Company is the licensee of
certain technologies upon which some of the Company's current and future product
candidates may be based. A partial summary of certain of the Company's licenses
and sponsored research programs is presented below. In many cases, the principal
scientist associated with these programs serves on the Advisory Board. The
options for exclusive licenses mentioned below are subject to negotiation (upon
exercise of the relevant options) of satisfactory royalty and other terms with
the relevant institution. Failure of the Company and the relevant institution to
agree on such terms could result in a loss by the Company of rights underlying
such options.
STANFORD UNIVERSITY AND HARVARD UNIVERSITY (ARGENT PROGRAM). The Company has
obtained an exclusive license to a series of patents and patent applications and
related technology from Stanford University and Harvard University based upon
the work of Drs. Gerald Crabtree and Stuart Schreiber and their colleagues. The
Company believes that this technology, which includes materials and methods for
regulating the transcription of specific genes in vivo, will be important in
developing regulated gene therapy for a wide range of disease targets. In
connection with this license, Stanford and Harvard were issued an aggregate of
128,571 shares of Common Stock of AGTI (representing approximately 3% of the
currently outstanding capital stock of AGTI).
MASSACHUSETTS INSTITUTE OF TECHNOLOGY (ARGENT PROGRAM). The Company has obtained
an exclusive license from the Massachusetts Institute of Technology to a patent
application based on work by Drs. Philip Sharp, Carl Pabo and Joel Pomerantz.
The licensed technology involves engineered DNA-binding proteins, DNA molecules
encoding such proteins, DNA sequences to which the engineered proteins bind and
compositions and methods for using such proteins. The Company believes this
technology will be useful in regulating the expression
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of desired genes in various gene therapy applications.
HARVARD UNIVERSITY (ARGENT PROGRAM). The Company has obtained an exclusive
license to a patent application and related technology from Harvard University
based on the work of Dr. Gregory Verdine concerning synthetic transcription
modulators. Under this license, the Company may also supply Dr. Verdine with its
proprietary reagents developed as part of the ARGENT program and has a right to
negotiate for a non-exclusive commercial license to any resulting inventions.
The Company believes this technology may be useful in regulating the
transcription of desired genes in gene therapy.
MOCHIDA (ARGENT PROGRAM). The Company has obtained a nonexclusive license to a
series of patents from Mochida Pharmaceuticals, Ltd. The technology covered by
these patents relates to the use of the Fas gene for triggering apoptosis, or
controlled cell death. The Company believes that this technology will be
important to its regulated gene and cell therapy programs.
UNIVERSITY OF PENNSYLVANIA (GENE THERAPY). The Company has entered into
agreements with the Trustees of the University of Pennsylvania pursuant to which
the University has agreed to grant to ARIAD a nonexclusive license under the
terms set forth in such agreement to discoveries made using ARIAD's regulated
gene expression technology by Dr. James Wilson and colleagues. This technology
may be used in various gene therapy applications.
CORNELL UNIVERSITY. The Company has obtained an exclusive license from the
Cornell Research Foundation, Inc. to discoveries by Dr. Jon Clardy relating to
the three-dimensional structure of an important mediator of T cell activation
and cell-cycle. This structure may be useful in the Company's drug discovery
efforts.
MOUNT SINAI HOSPITAL, UNIVERSITY OF TORONTO (SH2 DOMAINS). The Company has
obtained an exclusive license from Mount Sinai Hospital, an affiliate of the
University of Toronto, to two issued United States patents and related pending
applications based upon the discoveries of Dr. Anthony Pawson. This technology
relates to a specific class of protein domains which are involved in mediating
signal transduction. Furthermore, the Company has a first option to acquire
related technologies and improvements from Dr. Pawson's laboratory for the
duration of the license, which is equivalent to the life of the covered patents
(unless terminated sooner). The Company believes that this technology may be
important in identifying inhibitors of signal transduction pathways which may be
useful as lead compounds for the treatment of several diseases.
YALE UNIVERSITY (OSTEOPOROSIS). The Company is sponsoring research in the
laboratory of Dr. Roland Baron at Yale University and has an option to license
exclusively any rights to technology developed as part of the sponsored
research. Dr. Baron also has an existing relationship with HMR. The scope of
this research includes the functional evaluation of potential lead molecules for
the treatment of osteoporosis.
MASSACHUSETTS INSTITUTE OF TECHNOLOGY, THE WHITEHEAD INSTITUTE AND HARVARD
UNIVERSITY. The Company has obtained an exclusive license from the Massachusetts
Institute of Technology, the Whitehead Institute and Harvard University to a
series of United States patents and patent
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applications and their foreign counterparts, including US Patent No. 5,804,374,
based upon the work of Dr. David Baltimore and his colleagues. These patent
documents relate to transcription factors, including NF-kB, and methods and
materials for identifying inhibitors of them. NF-kB is a key mediator of the
immune response. The issued patent specifically covers drug discovery methods
for identifying antagonists of NF-kB-mediated gene transcription.
STANFORD UNIVERSITY. The Company has obtained an exclusive license from
Stanford University to a series of patents, including US Patent No. 5,837,840,
and patent applications based upon the work of Dr. Gerald Crabtree and his
colleagues. That work involved the cloning of genes for certain NF-AT proteins
which are believed to be key mediators of the immune function and which have
recently been implicated additionally in cardiac hypertrophy. The patent
documents relate to materials and methods for drug discovery efforts based on
NF-AT targets.
UNIVERSITY OF WISCONSIN. The Company has obtained an exclusive license from the
Wisconsin Alumni Research Foundation (WARF) to discoveries by Drs. Jo Handelsman
and Robert Goodman relating to the identification of natural products from
unculturable microorganisms. The Company also is sponsoring research at the
University of Wisconsin-Madison in the laboratories of Drs. Handelsman and
Goodman to further extend this technology and has an option to exclusively
license from WARF any future discoveries as part of this collaboration.
HARVARD UNIVERSITY. The Company has obtained a nonexclusive license to a patent
application and related technology from Harvard University based on the work of
Dr. Stuart Schreiber and colleagues concerning a high-throughput cellular assay
technology known as the nanodroplet system. The Company believes that this
technology may be important in its drug discovery programs.
The Company has also obtained certain patent rights in connection with its
various collaborations. In particular, the Company's collaboration agreement
with Incyte gives the Company a nonexclusive license to Incyte's gene sequence
and expression database and an option for an exclusive license for any promising
sequences identified by the Company in such database. The Company's
collaboration agreement with Genovo provides the Company with access to Genovo
intellectual property for use in the collaboration and provides that the Company
and Genovo may grant licenses to certain of their respective patents to third
parties in connection with the commercialization of any products developed in
such collaboration.
The Company has agreed to pay royalties to its licensors on sales of certain
products based on the licensed technologies, as well as, in some instances,
milestone payments and patent filing and prosecution costs. The licenses also
impose various milestone, commercialization, sublicensing, royalty as well as
insurance and other obligations. Failure by the Company to comply with these
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requirements could result in the termination of the applicable agreement which
could have a material adverse effect on the business, financial condition and
results of operations of the Company.
The Company has also entered into approximately 180 material transfer agreements
with various institutions and companies under which the Company has provided its
proprietary reagents developed as part of the ARGENT program for research
purposes and has obtained certain rights to inventions made as a result of
research conducted using the Company's materials.
PATENTS AND PROPRIETARY RIGHTS
The Company owns 42 patent applications in the United States relating to the
Company's technologies and compounds and has filed counterparts of certain of
these applications in foreign countries. The majority of these applications are
directed to inventions and discoveries arising from the Company's ongoing
research and development programs, including materials and methods used in
regulated gene expression and drug discovery, as well as compounds that affect
intracellular signaling pathways discovered thus far in the course of such
research by the Company.
In addition, the Company has obtained exclusive licenses to 11 issued United
States patents and 26 patent applications pending in the United States. The
Company has further obtained exclusive options on three United States patent
applications. The Company has also secured several nonexclusive technology
licenses with certain institutions in support of its research programs. The
Company anticipates that it will continue to obtain licenses from universities
and others where applicable technology complements its research programs, but no
assurance can be given as to the Company's ability to secure such licenses on
reasonable business terms.
The Company also relies on unpatented trade secrets and proprietary know-how.
However, trade secrets are difficult to protect. The Company enters into
confidentiality agreements with its employees, consultants and collaborators. In
addition, the Company believes that certain technologies utilized in its
research and development programs are in the public domain. Accordingly, the
Company does not believe that patent or other protection is available for these
technologies. If a third party were to obtain patent or other proprietary
protection for any of these technologies, the Company may be required to
challenge such protections, obtain a license for such technologies or terminate
or modify its programs that rely on such technologies.
MANUFACTURING, MARKETING AND SALES
The Company has no history of manufacturing, marketing or product sales and has
not invested in manufacturing, marketing or product sales resources. The Company
expects to manufacture, package, label and distribute its product candidates
independently or to establish arrangements with third parties to perform some or
all of these functions. If the Company is unable to manufacture or contract for
a sufficient supply of its potential therapeutic products on acceptable terms,
the Company's preclinical studies and clinical trials may be delayed or
interrupted resulting in the delay of submission of products for regulatory
approval, which may have a material adverse effect on the Company. If the
Company chooses to contract for manufacturing services
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and encounters delays or difficulties in establishing relationships with
manufacturers to produce, package and distribute its finished pharmaceutical
products, if any, market introduction and subsequent sales of such products
would be adversely affected. Further, if it develops pharmaceutical products
that it determines to commercialize itself, the Company will need to hire
additional personnel skilled in clinical trials and regulatory compliance
process and in marketing and product sales. Contract manufacturers that the
Company may use must adhere to the Good Manufacturing Practices ("GMP")
regulations prescribed by the FDA. To the extent that the Company arranges with
third parties to manufacture or market its products, if any, the success of such
products may depend on the efforts of such third parties. The Company's
potential dependence upon third parties for the manufacture of its products may
adversely affect the Company's profit margins and its ability to develop and
deliver such products on a timely and competitive basis. Should the Company
decide to manufacture its own products, the Company will be subject to the risks
and delays or difficulties inherent in the manufacturing process and would
require substantial additional capital.
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products, if any, and its
ongoing research and development activities are subject to extensive regulation
by numerous governmental authorities in the United States and other countries.
Any drug developed by the Company must undergo rigorous preclinical studies and
clinical testing and an extensive regulatory approval process implemented by the
FDA under the federal Food, Drug and Cosmetic Act prior to marketing in the
United States. Satisfaction of such regulatory requirements, which includes
demonstrating that the product is both safe and effective, typically takes
several years or more depending upon the type, complexity and novelty of the
product and requires the expenditure of substantial resources. Preclinical
studies must be conducted in conformance with the FDA's good laboratory practice
regulations. Before commencing clinical trials in the United States, the Company
must submit to and receive clearance from the FDA of an Investigational New Drug
application ("IND"). There can be no assurance that submission of an IND would
result in FDA clearance to commence clinical trials. Clinical testing must meet
requirements for institutional review board oversight, informed consent and good
clinical practice and is subject to continuing FDA oversight. The Company has a
limited history of conducting preclinical studies and no history of conducting
and managing the clinical trials necessary to obtain regulatory approval.
Furthermore, the Company or the FDA may suspend clinical trials at any time if
they believe that the subjects participating in such trials are being exposed to
unacceptable risks or if the FDA finds deficiencies in the conduct of the
trials.
Before receiving FDA approval to market a product, the Company will have to
demonstrate that the product is safe and effective in the patient population
that will be treated. Data obtained from preclinical studies and clinical trials
are susceptible to varying interpretations which could delay, limit or prevent
regulatory clearances. In addition, delays or rejections may be encountered
based upon additional government regulation from future legislation or
administrative action or changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review. Similar delays also may
be encountered in foreign countries. There can be no assurance that even after
such time and expenditures, regulatory approval will be obtained for any
products developed by the Company. If regulatory approval of a product is
granted, such approval will be
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limited to those disease states and conditions for which the product is useful,
as demonstrated by clinical trials. Furthermore, approval may entail ongoing
requirements for postmarketing studies. Even if such regulatory approval is
obtained, a marketed product, its manufacturer and its manufacturing facilities
are subject to continual review and periodic inspections by the FDA. Discovery
of previously unknown problems with a product, manufacturer or facility may
result in restrictions on such product or manufacturer, including costly recalls
or even withdrawal of the product from the market. There can be no assurance
that any compound developed by the Company alone or in conjunction with others
will prove to be safe and efficacious in clinical trials and will meet all of
the applicable regulatory requirements needed to receive and maintain marketing
approval.
Outside the United States, the Company's ability to market a product will be
contingent upon receiving a marketing authorization from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. At present, foreign marketing authorizations are applied for
at a national level, although within the European Community certain registration
procedures are available to companies wishing to market a product in more than
one member state. If the regulatory authority is satisfied that adequate
evidence of safety, quality and efficacy has been presented, a marketing
authorization will be granted. This foreign regulatory approval process includes
all of the risks associated with FDA clearance set forth above.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause the actual results of the Company to be
materially different from the historical results or from any results expressed
or implied by such forward-looking statements. Such factors include, among
others, the following factors which are in plain English:
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WE MAY NEVER SUCCEED IN DEVELOPING MARKETABLE DRUGS. We are an early stage
company with no product revenues and we may not succeed in producing drugs for
commercialization. Our main focus is still primarily in conducting research to
advance the complex and specialized technologies we are developing. We are
exploring human diseases at the cellular level. We seek to discover what genes
within cells malfunction to help cause disease, what signals are triggered
within the cells during the disease process to cause the cells to react in
harmful ways, and what chemicals (i.e., drugs) can be developed to halt or
reverse those activities within the cells. As with all discovery science, we
face much trial and error and we may fail at numerous stages along the way.
In our research associated with signal transduction,
- - we may not identify the most important signals within the cells;
- - since the signals are made up of a chain of chemical reactions between
proteins within the cell, we may fail to identify a good intervention point to
try to block the signal; and
- - we may not succeed in developing a chemical capable of blocking the signal.
In our research related to our ARGENT system,
- - we may not be able to identify drugs which successfully regulate the delivery
of proteins through gene therapy on a long term basis.
In our functional genomics research,
- - we might not identify the critical genes involved in disease; and
- - we may be unable to discover a chemical capable of blocking or affecting the
signal.
In all of our programs, we may find that
- - we are unable to recruit, hire and retain the highly skilled scientific
personnel, especially in our functional genomics program, necessary to achieve
success in developing our products and technologies;
- - a potential drug, even if it seems to work in animals, may not be effective,
or may even be harmful, when tested in humans;
- - even if we prove through human clinical trials that a drug is safe and
effective in humans, we may not be able to manufacture it economically; and
- - a drug may not be well accepted by doctors and patients, or may be less
effective or accepted than competing drugs made by others.
Despite the progress in our research and development programs, we do not expect
to have any drugs on the market for several years.
INSUFFICIENT FUNDING MAY JEOPARDIZE OUR RESEARCH AND DEVELOPMENT PROGRAMS AND
MAY PREVENT COMMERCIALIZATION OF OUR PRODUCTS AND TECHNOLOGIES. We may not be
able to secure the significant funding which is required to maintain and
continue each of our research and development programs at their current levels.
Other than a research and development agreement we entered into with Hoechst
Marion Roussel to develop drugs to treat osteoporosis and other bone diseases,
which expires in November 2000, we have no strategic alliance or other
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funding for our signal transduction program. We also do not have any strategic
alliance funding for the advancement of our ARGENT system, which includes our
regulated gene therapy system and our graft-versus-host disease product. To fund
these programs, as well as our functional genomics program, we are relying
principally on funding provided by Hoechst Marion Roussel under an agreement
entered into in November 1995, under which Hoechst Marion Roussel is required to
make future payments to us of $1.0 million per quarter through November 2000 for
research, plus up to $6.0 million in additional payments upon achievement of
certain research and development milestones. We may fail to achieve future
milestones for payment in a timely manner, or at all. In addition, we rely on
Hoechst Marion Roussel to provide significant funding to sustain our genomics
center. Hoechst Marion Roussel has agreed to fund its 50% share and to finance
our 50% share of the costs associated with operating the genomics center, which
is expected to exceed $30 million, through March 31, 2002; thereafter, we will
likely need more money to sustain the genomics center. Although Hoechst Marion
Roussel has agreed to fund our share of costs in excess of the amount required
by our agreement if such expenditures are approved by both of us, Hoechst Marion
Roussel has no obligation to cover costs beyond what is required under the
agreement. Furthermore, if Hoechst Marion Roussel has a significant strategic
shift in its business focus due to its merger into Aventis Pharma, Hoechst
Marion Roussel may not perform its obligations under its agreements with us. If
our funding from Hoechst Marion Roussel and other sources is insufficient, we
intend to seek additional funding from collaborations or public or private
financings, which may not be available on terms acceptable to us, or at all.
Insufficient funds may require us to delay, scale back or eliminate one or more
of our research and development programs or to enter into license arrangements
with third parties to commercialize products or technologies that we would
otherwise seek to develop ourselves.
OUR ABILITY TO COMMERCIALIZE CERTAIN OF OUR PRODUCTS MAY DEPEND ON GENOVO'S
ABILITY TO SECURE GENE TRANSFER TECHNOLOGY. Genovo is required under our
agreement to:
- - develop a mechanism which is to be used as a vehicle to introduce new genes
into muscle tissue,
- - fund the costs associated with the development of this gene transfer
technology, and
- - secure the patents and licenses required for such proprietary technology.
This gene transfer technology is necessary to develop and commercialize our
ARGENT regulated gene therapy system for the controlled production of protein
drugs. The success in developing our gene therapy system may be delayed or
prevented if:
- - Genovo is unable to develop gene transfer technology in a timely manner,
- - Genovo is unable to obtain the required funding,
- - Genovo is unable to acquire rights to such technology from the Trustees of the
University of Pennsylvania and others to the extent required.
As of February 15, 1999, our agreement with Genovo may be terminated by either
party upon sixty (60) days' prior written notice. Unless both we and Genovo
continue to work together on the development of a regulated gene therapy system
under the terms of our agreement or modified terms, we will have to seek and
obtain gene therapy transfer technology elsewhere. Furthermore, another
strategic partner of Genovo, which is our potential competitor in some markets,
holds a significant minority interest in Genovo and has the ability to influence
Genovo's actions, such as its ability or willingness to perform its obligations
under our agreement or to work with us in the future.
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WE HAVE SIGNIFICANT LOSSES AND MAY NEVER BE PROFITABLE. We have incurred
significant operating losses in each year since our inception in 1991, and have
an accumulated deficit of approximately $93 million from our operations through
December 31, 1998. We currently have no product revenue, may never be able to
earn such revenue, and may never have profitable operations, even if we are able
to commercialize any of our products. Over the next several years, we expect to
have substantial increasing operating losses. If our losses continue and we are
unable to successfully develop, commercialize, manufacture and market product
candidates, we may never achieve product revenue or profitability. Losses have
resulted principally from costs incurred in research and development of product
candidates, and from general and administrative costs associated with our
operations, including expenses related to the genomics center. If costs
associated with the genomics center were to increase beyond what is currently
provided for in the 1997 agreement with Hoechst Marion Roussel, as is likely,
and we finance our share of such costs through a loan from Hoechst Marion
Roussel as provided in the genomics center agreements, our outstanding
indebtedness would increase.
THE LOSS OF KEY MEMBERS OF OUR SCIENTIFIC AND MANAGEMENT STAFF COULD DELAY AND
MAY PREVENT THE ACHIEVEMENT OF OUR RESEARCH, DEVELOPMENT AND BUSINESS
OBJECTIVES. Our Chief Executive Officer, Harvey J. Berger, M.D., and
approximately nine officers and key members of our scientific staff responsible
for areas such as clinical development, chemistry research, bioinformatics, cell
biology and genetics, structure-based drug design, molecular technology and
genomics are important to our specialized scientific business. The loss of, and
failure to promptly replace, any one of this group could significantly delay and
may prevent the achievement of research, development and business objectives.
While we have entered into employment agreements with certain of our officers,
they may not remain with us. We are also dependent upon a few of our scientific
advisors to assist in formulating our research and development strategy.
WE MAY BE UNABLE TO DEVELOP OR COMMERCIALIZE OUR PRODUCTS IF WE ARE UNABLE TO
OBTAIN OR MAINTAIN CERTAIN LICENSES. We are currently attempting to obtain
licenses for technology useful to the development of certain compounds for, or
components of, our regulated gene therapy system and our graft-versus-host
disease product. Our inability to obtain any one or more of the licenses related
to our regulated gene therapy system which we are seeking, on commercially
reasonable terms or at all, or to circumvent the need for any such license,
could cause significant delays and cost increases and materially effect our
ability to develop and commercialize this system. We also use gene sequences or
proteins encoded by those sequences, and other biological materials, in each of
our research programs which are, or may become, patented by others and to which
we would be required to obtain licenses in order to develop or market our
products. Some of our programs, including our regulated gene therapy system, may
require the use of multiple proprietary technologies. Obtaining such licenses
may require us to make cumulative royalty payments or other payments to several
third parties, potentially reducing amounts paid to us or making the cost of our
products commercially prohibitive.
We have entered into license agreements, either directly or through one of our
subsidiaries, with Stanford University, Harvard University and the Massachusetts
Institute of Technology, under which we have obtained exclusive rights to
technologies useful to our ARGENT program in general and our regulated gene
therapy system in particular. We have obtained exclusive rights from Mochida
Pharmaceutical Co., Ltd. for certain technology useful to the development of our
graft-versus-host disease product. We have also obtained non-exclusive access
to, and use of, certain database information from Incyte Pharmaceuticals, Inc.
which is useful to the research we are conducting as part of our functional
genomics program. Each of these licenses obligates us to exercise diligence in
pursuing development of product candidates, to make certain milestone payments
(some of which are substantial), and to provide for royalties (which can be
significant). In some instances, we are responsible for the costs of filing and
prosecuting patent applications. The licenses generally expire upon the earlier
of a fixed term of years after the date of the license or
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the expiration of the applicable patents, but each license is also terminable by
either party upon default in the obligations of the other party. Our inability
or failure to meet our diligence requirements or make any payments required
under these licenses would result in a reversion of the rights granted to the
licensor which, with respect to the licenses where we have obtained exclusive
rights, would materially affect our ability to develop and market products based
on our ARGENT program.
COMPETING TECHNOLOGIES MAY RENDER SOME OR ALL OF OUR PROGRAMS OR FUTURE PRODUCTS
NONCOMPETITIVE OR OBSOLETE. Many well-known pharmaceutical, chemical and
specialized biotechnology companies, academic and research institutions and
government agencies, who have substantially greater capital, research and
development capabilities and experience than us, are presently engaged in:
- - developing products based on signal transduction,
- - exploring the field of gene therapy,
- - pursuing functional genomics, and
- - conducting research and development programs for the treatment of all the
disease areas in which we are focused.
Some of these entities already have drug candidates in clinical trials or in
more advanced preclinical studies than our product candidates. They may succeed
in commercializing competitive products before we do, which would give them a
competitive advantage. Competing technologies may render some or all of our
programs or future products noncompetitive or obsolete and we may not be able to
make the enhancements to our technology necessary to compete successfully with
newly emerging technologies.
WE MAY NOT BE ABLE TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS. We and our
licensors have pending patent applications covering biochemical and cellular
tests useful in drug discovery, new chemical compounds discovered in our signal
transduction program, certain components, configurations and uses of our ARGENT
system and methods and materials for conducting genetic research. These patent
applications may never issue as patents. In addition, patents issued to us or
our licensors may be challenged and subsequently narrowed, invalidated or
circumvented. In that event, such patents may never afford meaningful protection
for our technologies or products, which would materially impact our ability to
develop and market them. Certain technologies utilized in our research and
development programs are already in the public domain. Moreover, a number of our
competitors have developed technologies, filed patent applications or obtained
patents on technologies that are related to our business and may cover or
conflict with our patent applications. Such conflicts could limit the scope of
the patents that we may be able to obtain or may result in the denial of our
patent applications. If a third party were to obtain patent or other proprietary
protection for any of these technologies, we may be required to challenge such
protections, terminate or modify our programs that rely on such technologies or
obtain licenses for use of these technologies.
WE MAY NOT BE ABLE TO OBTAIN GOVERNMENT REGULATORY APPROVAL FOR OUR PRODUCT
CANDIDATES PRIOR TO MARKETING. To date, we have not submitted an application for
any product candidate to the U.S. Food and Drug Administration, and none of our
product candidates have been approved for commercialization in the United States
or elsewhere. Any product candidate ready for commercialization, would be
subject to an extensive and lengthy governmental regulatory approval process in
the United States and in other countries. We may not be able to obtain
regulatory approval for any products we develop. We have no history of
conducting and managing the clinical testing necessary to obtain such regulatory
approval. Satisfaction of these
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regulatory requirements, which includes satisfying the FDA and foreign
regulatory authorities that the product is both safe and effective, typically
takes several years or more depending upon the type, complexity and novelty of
the product and requires the expenditure of substantial resources. Furthermore,
the regulatory requirements governing our potential products are uncertain. This
uncertainty may result in excessive costs or extensive delays in the regulatory
approval process, adding to the already lengthy review process. If regulatory
approval of a product is granted, such approval will be limited to those disease
states and conditions for which the product is proven useful, as demonstrated by
clinical trials, and our products will be subject to ongoing regulatory reviews.
IF WE DEVELOP A PRODUCT FOR COMMERCIAL USE, A SUBSEQUENT PRODUCT
LIABILITY-RELATED CLAIM OR RECALL COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Our business exposes us to potential product liability risks inherent in the
testing, manufacturing and marketing of human therapeutic products, and we may
not be able to avoid significant product liability exposure. A product
liability-related claim or recall could be detrimental to our business. However,
except for insurance covering product use in our clinical trial, we do not
currently have any product liability insurance, and we may not be able to obtain
or maintain such insurance on acceptable terms and we may not be able to obtain
any insurance to provide adequate coverage against potential liabilities. Our
inability to obtain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent or
limit the commercialization of any products we develop.
EFFORTS TO CONTAIN OR REDUCE THE COST OF HEALTH CARE COULD HURT OUR REVENUES AND
EARNINGS. As a biopharmaceutical company, we expect that our business could be
affected by the efforts of governmental and third-party payors to contain or
reduce the costs of health care. In the near term, our ability to raise capital
could be adversely affected by governmental efforts to assert greater control
over pricing or profitability of prescription pharmaceuticals. Such efforts
could adversely affect the profitability of our existing and potential
collaborators, reduce their cash resources, and discourage them from investing
in our research and development programs. In the longer term, if we and our
collaborators are successful in developing human therapeutic drugs, the efforts
of the government and third party payors to contain or reduce health care costs
could adversely affect our revenues and earnings from such products.
OUR MANAGEMENT AND PRINCIPAL STOCKHOLDERS OWN APPROXIMATELY 25% OF OUR
OUTSTANDING COMMON STOCK AND COULD INFLUENCE MOST MATTERS REQUIRING APPROVAL BY
OUR STOCKHOLDERS. Our directors and officers and several five percent
stockholders and their affiliates beneficially own, in the aggregate, shares
representing approximately 25% of the outstanding shares of our common stock,
series B preferred stock and series C preferred stock. As a result, these
stockholders, acting together, could influence significantly and possibly
control most matters requiring approval by our stockholders. In addition, our
certificate of incorporation does not provide for cumulative voting with respect
to the election of directors. Consequently, the present executive officers,
directors and affiliated individuals and entities may be able to control the
election of the members of our board of directors. Such a concentration of
ownership could affect the liquidity, and have an adverse effect on the price of
our common stock, and may have the effect of delaying or preventing an
acquisition or change in the control of our company, including transactions in
which stockholders might otherwise receive a premium for their shares over then
current market prices.
RESULTS OF OUR OPERATIONS AND GENERAL MARKET CONDITIONS FOR BIOTECHNOLOGY STOCK
COULD RESULT IN THE SUDDEN CHANGE IN THE VALUE OF OUR STOCK. As a biopharma-
ceutical company, we have experienced significant volatility in our common
stock. Fluctuations in our operating results and general market conditions for
biotechnology stocks could have a significant impact on the volatility of our
common stock price. Over the past twelve months our stock price has ranged from
a high of $5.50 to a low of $1.38 and from January 1, 1999 to
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February 28, 1999 our stock price has ranged from a high of $4.25 to a low of
$1.50. Factors contributing to such volatility include:
- - results of preclinical studies and clinical trials,
- - evidence of the safety or efficacy of pharmaceutical products,
- - announcements of new collaborations,
- - failure to enter into collaborations,
- - our funding requirements and the terms of our series C preferred stock
financing,
- - announcements of technological innovations or new therapeutic products,
- - governmental regulation,
- - healthcare legislation, and
- - developments in patent or other proprietary rights, including litigation.
IF THE SERIES C PREFERRED STOCK IS CONVERTED OR WE ISSUE ADDITIONAL SHARES OF
EQUITY SECURITIES, THE VALUE OF THOSE SHARES OF COMMON STOCK THEN OUTSTANDING
MAY BE DILUTED. To the extent that we raise additional capital by issuing equity
securities at a price or a value per share less than the then current price per
share of common stock, the value of the shares of common stock then outstanding
will be diluted or reduced. At present we have one arrangement to issue
additional equity securities which could result in dilution to the present
common stockholders. That arrangement involves the issuance of our series C
preferred stock, which is convertible into shares of common stock at a price per
share equal to the lesser of (a) the four lowest closing bid prices during the
22 consecutive trading days prior to the date of conversion, or (b) $2.09 per
share. Based on the number of shares of series C preferred stock presently
outstanding and the applicable conversion price as of February 25, 1999, we
would be required to issue up to 3,122,445 shares of common stock at a price per
share that is approximately $.18 less than the last sale price of the common
stock on February 25, 1999. In anticipation of price fluctuations that may
reduce the conversion price, we have registered for resale up to 5,933,362
shares of common stock which would become issuable upon conversion of the series
C preferred stock if the conversion price fell as low as $.85 per share. If the
conversion price fell even further, then more than 5,933,362 shares of common
stock would be issuable upon conversion of the series C preferred stock. In
addition, subject to certain conditions, we may be required during the month of
September 1999 to sell additional shares of series C preferred stock at the then
current market price and then applicable conversion prices to the original
purchasers of series C preferred stock.
IF OUR COMMON STOCK IS DELISTED FROM THE NASDAQ STOCK MARKET, IT WOULD BE MORE
DIFFICULT FOR STOCKHOLDERS TO SELL SHARES OF OUR COMMON STOCK. In order for our
common stock to continue to be listed on the Nasdaq stock market, we must comply
with all of Nasdaq's continued listing requirements. If Nasdaq determines that
we have violated any of its continued listing requirements, our common stock
could be delisted. The issuance and conversion of our series C preferred stock
could cause Nasdaq to determine that we have violated up to three of its
continued listing requirements. The first of the three applicable Nasdaq rules
requires that our common stock have a minimum bid price per share of $1.00. Our
bid price is currently approximately $1.75 per share. If the series C preferred
stock is converted at its current discount price and the common stock issued
upon conversion is subsequently sold in the public market, the bid price of our
common stock may be reduced to less than $1.00 per share, in which case Nasdaq
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may determine that a violation exists and our common stock may be delisted. The
second applicable Nasdaq rule requires us to comply with the more onerous
requirements for initial listing if Nasdaq determines that we have undergone a
change in control or a change in financial structure. Depending on the number of
shares of common stock issued upon conversion of the series C preferred stock,
Nasdaq may deem the issuance of such preferred stock to be a change in control
or a change in financial structure and a violation that could result in
delisting. The third applicable Nasdaq rule permits Nasdaq to delist a security
if it deems it necessary to protect investors and the public interest.
Therefore, if Nasdaq determines that the returns on the series C preferred stock
are excessive compared with the returns received by the holders of our common
stock, and such excess returns are egregious, Nasdaq could delist our common
stock.
OUR COMPUTER SYSTEM COULD FAIL WHEN THE YEAR CHANGES TO 2000. Many computer
systems will not properly recognize date-sensitive information when the year
changes to 2000. Computers which refer to years in terms of their final two
digits only may interpret the year 2000 to mean the year 1900. If our systems or
software licensed from third parties do not properly recognize such information,
our systems could generate erroneous data or fail. We are in the process of
inventorying our information technology infrastructure, hardware and software,
and have commenced an assessment of our year 2000 compliance. We are also
conducting a more in-depth analysis and testing of our internal systems and are
soliciting and are, where feasible, obtaining certification of year 2000
compliance from third-party software vendors and determining the readiness of
our significant suppliers. We are also working with our external suppliers and
service providers to ensure that they and their systems will be able to support
our needs and, where necessary, interact with our server and networking hardware
and software infrastructure in preparation for the year 2000. This testing phase
is expected to be completed by September 30, 1999. To date, our costs of
becoming year 2000 compliant have not been material. However, if any necessary
modifications, conversions and/or replacements are not made, are not completed
timely, or if any of the Company's suppliers or customers do not successfully
deal with the year 2000 issue, such circumstances could have a material impact
on the Company. The Company's research and development efforts, which rely
heavily on the storage and retrieval of electronic information, could be
interrupted, resulting in the generation of erroneous data, the loss of
information and/or significant delays in any one or all of our research and
development programs. The severity of these possible problems would depend on
the nature of the problem and how quickly it could be corrected or an
alternative implemented, which is unknown at this time. In the extreme, such
problems could disrupt a significant portion of our operations. We expect to
have contingency plans in place by November 30, 1999 to address situations in
which various systems of the Company, or of third parties with which the Company
does business, are not year 2000 complaint. We estimate the total cost for
upgrading our computer system hardware and software are not likely to exceed
$200,000. However, significant uncertainty exists concerning the potential costs
and effects associated with any year 2000 compliance.
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ITEM 2. PROPERTIES
The Company has leased approximately 90,000 square feet of laboratory and office
space at 26 Landsdowne Street, located in University Park at M.I.T., in
Cambridge, Massachusetts. The lease is for a ten-year term ending in the first
quarter of the year 2002, with two consecutive five-year renewal options. ARIAD
believes that its currently leased facilities will, in large part, be adequate
for its research and development activities at least through the end of 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company was named as a defendant in a purported class action lawsuit
commenced in the United States District Court for the Southern District of New
York on October 21, 1994 (the "Blech Securities Litigation"). The Company filed
a motion to dismiss the Blech Securities Litigation, and on June 6, 1996, the
Court granted that motion as to the Company. Although the Court gave plaintiffs
an opportunity to replead their allegations, the Company was not named as a
defendant in the amended complaint that plaintiffs subsequently filed.
The Company is a named defendant in a purported class action law suit (the
"Degulis Action") commenced on June 8, 1995 in the United States District Court
for the Southern District of New York. The Degulis Action names as defendants
the Company, David Blech (managing director and sole shareholder of D. Blech &
Company Incorporated ("D. Blech & Co.") and a former director of the Company),
D. Blech & Co., (which acted as underwriter for the Company's initial public
offering ("IPO") and a market maker for the Company's securities), as well as
certain members of the Company's Board of Directors and Shoenberg Hieber, Inc.
(which acted as qualified independent underwriter for the IPO).
In the Degulis Action, plaintiff purports to sue individually and on behalf of a
purported class of persons who purchased securities issued by the Company during
the period May 20, 1994 through September 21, 1994. Plaintiff alleges, among
other things, that the Registration Statement filed in connection with the IPO
was false and misleading. Each of the defendants therefore are alleged to have
violated Sections 11 and 12(2) of the Securities Act, and the individual
defendants also are alleged to be secondarily liable under Section 15 of the
Securities Act. The complaint also alleges among other things, that David Blech
and D. Blech & Co. participated in purported "sham" sales transactions of the
Company's securities after the IPO in an alleged attempt to artificially inflate
the prices at which the Company's securities were sold in the public markets.
Plaintiff alleges that all defendants knew, or should have known, of this
alleged scheme and that they are liable for their failure to disclose the
alleged scheme to the investing public at the time of the IPO and thereafter.
All defendants are alleged to have participated in this alleged scheme and thus
to have violated Section 10(b) of the Exchange Act, and SEC Rule 10b-5, and to
have engaged in common-law fraud. There are no allegations that assert specific
acts of participation or wrongdoing by the Company in the alleged schemes.
Plaintiffs seek an unspecified amount of damages, costs and attorneys' fees.
The Company filed a motion to dismiss the Degulis Action, and on June 6, 1996,
the Court denied the motion. The Company intends to continue to defend
vigorously the Degulis Action. Other than the Degulis Action, the Company is not
party to any material legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock has been traded on the Nasdaq National Market under
the symbol "ARIA" since September 19, 1994. The following table sets forth the
high and low sales prices of the common stock as quoted on the Nasdaq National
Market for the periods indicated.
HIGH LOW
-------- --------
1997:
First Quarter $8 3/8 $5
Second Quarter 6 5/8 4 13/16
Third Quarter 6 13/16 5 1/16
Fourth Quarter 6 1/16 3 25/32
1998:
First Quarter $5 1/2 $3 1/2
Second Quarter 5 1/16 3
Third Quarter 4 1/4 1 7/8
Fourth Quarter 2 7/8 1 3/8
HOLDERS
The approximate number of holders of record of the common stock as of March 10,
1999 was 350.
DIVIDENDS
The Company has not declared or paid dividends on its common stock in the past
and does not intend to declare or pay such dividends in the foreseeable future.
The Company's current long-term debt agreements prohibit the payment of cash
dividends. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Note 5 of "Notes to
Consolidated Financial Statements.")
RECENT SALES OF UNREGISTERED SECURITIES
(a) Securities Sold. On November 9, 1998, the Company completed a
private placement of 5,000 shares of Series C Preferred Stock
to a group of institutional investors and received proceeds of
$5,000,000. The underlying common shares were registered for
resale under the Securities Act of 1933, as amended.
(b) Underwriters and other purchasers. No underwriters were
involved in the transaction. The Company issued 3,000 shares
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of Series C Preferred Stock to HFTP Investment LLC, 1,300
shares of Series C Preferred Stock to Brown Simpson Strategic
Growth Fund, Ltd and 700 shares of Series C Preferred Stock to
Brown Simpson Strategic Growth Fund, L.P.
(c) Consideration. The shares were issued for $5,000,000.
(d) Exemption from registration claimed. The Company relied upon
Section 4(2) of the Securities Act of 1933, as amended,
because the transaction did not involve any public offerings
by the Company.
(e) Terms of conversion. Each share of Series C Preferred Stock is
convertible into common stock of the Company beginning on
February 15, 1999, at a conversion price equal to the lower of
a variable conversion price (the "Variable Price") or $2.09
per share. Subject to certain adjustments, the Variable Price
for any given conversion is based on the average of the four
lowest closing bid prices for the common stock during the 22
trading days preceding the date of conversion.
(f) Use of Proceeds. Not applicable.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1998, 1997, 1996,
1995 and 1994 and for the years then ended have been derived from the audited
consolidated financial statements of the Company, certain of which are included
elsewhere in this Annual Report on Form 10-K, and are qualified by reference to
such financial statements. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited consolidated financial statements,
and the notes thereto, and other financial information included herein.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -------------
Revenue:
Research revenue
(principally related parties) $ 12,143,192 $ 9,233,708 $ 10,304,332 $ 2,102,222 $ 460,084
Interest income 998,743 1,757,327 1,271,895 1,360,225 1,091,820
------------ ------------ ------------ ------------ -------------
Total revenue 13,141,935 10,991,035 11,576,227 3,462,447 1,551,904
------------ ------------ ------------ ------------ -------------
Operating expenses:
Research and development 35,515,270 20,286,945 15,253,874 13,675,025 14,566,444
General and administrative 2,633,923 2,924,972 2,229,273 2,281,247 2,089,380
Interest expense 480,627 410,072 269,131 323,124 359,581
------------ ------------ ------------ ------------ -------------
Total operating expenses 38,629,820 23,621,989 17,752,278 16,279,396 17,015,405
------------ ------------ ------------ ------------ -------------
Equity in net loss of Genomics
Center 660,295
------------ ------------ ------------ ------------ -------------
Loss before cumulative effect of
change in accounting principle (26,148,180) (12,630,954) (6,176,051) (12,816,949) (15,463,501)
Cumulative effect of change
in accounting principle 90,909
------------ ------------ ------------ ------------ -------------
Net loss (26,148,180) (12,630,954) (6,176,051) (12,816,949) (15,372,592)
Preferred dividend 35,616
------------ ------------ ------------ ------------ -------------
Net loss attributable to
common stockholders $(26,183,796) $(12,630,954) $ (6,176,051) $(12,816,949) $(15,372,592)
============ ============ ============ ============ =============
Per common share (basic and
diluted):
Loss before cumulative effect of
change in accounting principle $ (1.25) $ (.66) $ (.33) $ (.72) $ (1.07)
Cumulative effect of change in
accounting principle .01
------------ ------------ ------------ ------------ -------------
Net loss $ (1.25) $ (.66) $ (.33) $ (.72) $ (1.06)
============ ============ ============ ============ =============
Weighted average number of shares
of common stock outstanding 20,966,586 19,252,885 18,999,229 17,738,126 14,515,202
DECEMBER 31,
-------------------------------------------------------------------------
BALANCE SHEET DATA: 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -------------
Cash, cash equivalents and
marketable securities $ 14,176,136 $ 29,359,457 $ 15,702,300 $ 27,056,234 $ 24,188,848
Working capital 5,805,656 16,538,781 11,901,775 20,995,251 22,117,200
Total assets 30,785,940 47,409,176 27,604,993 37,201,730 33,481,980
Long-term debt 3,295,139 5,156,219 1,472,812 1,540,727 2,459,515
Redeemable Preferred Stock 5,035,616
Accumulated deficit (92,640,457) (66,456,661) (53,825,707) (47,649,656) (34,832,707)
Stockholders' equity 11,733,288 28,373,818 16,684,471 22,684,447 28,021,482
34
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements based upon current
expectations that involve risks and uncertainties. When used in this prospectus,
the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and
similar expressions as they relate to ARIAD are included to identify
forward-looking statements. The Company's actual results and the timing of
certain events could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under the heading "Cautionary Statement Regarding Forward-Looking
Statements" appearing elsewhere herein.
OVERVIEW
The Company focuses on the discovery and development of novel and proprietary
drugs based on its understanding of the inner-workings of cells and the genes
involved in disease. The Company has developed a product based on its gene
regulation technology to treat graft-versus-host disease, a complication of bone
marrow transplantation involving an attack by a patient's immune system on
healthy tissue. This product entered Phase 1 human clinical trials in December
1998. All of the Company's other drug candidates are in the pre-clinical stage.
ARIAD's research and development programs involve three areas: signal
transduction inhibitors, regulated gene therapy and functional genomics. Signal
transduction inhibitors are drugs designed to block specific molecular targets
in bone cells and white blood cells. In November 1995, the Company entered into
an agreement with Hoechst Marion Roussel, Inc. ("HMR") to collaborate on the
discovery and development of such drugs to treat osteoporosis and other bone
diseases. The Company also has developed a system referred to as "ARIAD
Regulated Gene Expression Technology" or "ARGENT" which is designed to control
cellular activities using small molecule drugs. This system can be applied in
research for discovery of new drugs and new genes, in gene and cell therapy, and
in the manufacture of biological products. The leading application of this
system is the controlled production of protein drugs by regulated gene therapy.
Another use of this system is ARIAD's product to treat graft-versus-host
disease. This product may improve the safety and effectiveness of certain types
of bone marrow transplants by selectively killing the cells responsible for
graft-versus-host disease. In addition, the Company is working in an area known
as functional genomics, which involves the discovery of new genes and the
validation of molecular targets that may be useful in the treatment of diseases.
ARIAD is developing this information as a tool to accelerate the discovery of
new drugs to treat these diseases, such as osteoporosis (bones), atherosclerosis
(heart and blood vessels) and cancer. In March 1997, the Company established a
joint venture with HMR, named the Hoechst-ARIAD Genomics Center, LLC (the
"Genomics Center"), to pursue this area.
Since its inception in 1991, the Company has devoted substantially all of its
resources to its research and development programs. The Company receives no
revenue from the sale of pharmaceutical products and substantially all revenue
to date has been received in connection with the Company's research
collaborations. The Company has not been profitable since inception and expects
to incur substantial and increasing operating losses for the foreseeable future,
primarily due to the expansion of its research and development programs,
including the services the Company provides to the Genomics Center pursuant to
certain research and administrative services agreements (the "Services
Agreements"), which services are accounted for on a cost reimbursement basis.
The Company expects that losses will fluctuate from quarter to quarter and that
such fluctuations may be substantial. As of December 31, 1998, the Company had
an accumulated deficit of $92,640,000.
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37
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REVENUE
The Company recognized research revenue under the Services Agreements,
collaborative research arrangements and government-sponsored grants of
$12,143,000, $9,234,000 and $10,304,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The increase of $2,909,000 or 31.5% in 1998
compared to 1997 was due to an increase of $3,594,000 in research revenue
recognized under the Services Agreements with the Genomics Center offset by a
$685,000 decrease in research revenue recognized under the 1995 HMR Osteoporosis
Agreement and government-sponsored research grants. The decrease in research
revenue of $1,070,000 or 10.4% in 1997 compared to 1996 was due to a $2,427,000
decrease in research revenue recognized under the 1995 HMR Osteoporosis
Agreement and government-sponsored research grants offset by an increase of
$1,357,000 in research revenue recognized under the Services Agreements with the
Genomics Center. Research revenue for 1996 recognized under the 1995 HMR
Osteoporosis Agreement included $2,000,000 for the achievement of the first
research milestone. Research revenue resulting from the Services Agreements with
the Genomics Center is expected to increase over the next two years and research
revenue recognized under the 1995 HMR Osteoporosis Agreement is expected to
increase in 1999 compared to 1998 primarily due to the achievement of the second
research milestone of $2,000,000 which was received on February 23, 1999. See
"--Liquidity and Capital Resources."
Interest income was $999,000, $1,757,000 and $1,272,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Interest income decreased by
$758,000 in 1998 compared to 1997 as a result of a lower level of funds
invested. Interest income increased by $485,000 in 1997 compared to 1996 as a
result of higher levels of funds invested offset somewhat by lower yields.
OPERATING EXPENSES
Research and development expenses were $35,515,000, $20,287,000 and $15,254,000
for the years ended December 31, 1998, 1997 and 1996, respectively. Research and
development expenses increased by $15,228,000 or 75.1% in 1998 compared to 1997
and $5,033,000 or 33.0% in 1997 compared to 1996 primarily due to the expected
increases in research services provided to the Genomics Center under the
Services Agreements and increased drug development costs for the regulated gene
expression technology (ARGENT(TM)), including manufacturing, process development
and other preclinical development activities in preparation for clinical trials
of AP 1903 which commenced in December 1998. AP 1903 is an ARGENT(TM) inducible
apoptosis product to treat graft versus host disease in patients undergoing
allogeneic bone marrow transplantation. The Company expects its research and
development expenses to increase over the next two years as a result of
increased research services to be provided to the Genomics Center as well as
increased manufacturing and preclinical development costs associated with its
drug candidates and the cost of human clinical trials of AP 1903.
General and administrative expenses were $2,634,000, $2,925,000 and $2,229,000
for the years ended December 31, 1998, 1997 and 1996, respectively. General and
administrative expenses decreased by $291,000 or 10.0% in 1998 compared to 1997
primarily due to the nonrecurrence in 1998 of administrative expenses incurred
in connection with the formation of the Genomics Center in 1997. General and
administrative expenses increased by $696,000 or 31.2% in 1997 compared to 1996
primarily due to increased expenses incurred with the formation of and services
provided to the Genomics Center and other administrative expenses.
36
38
The Company incurred interest expense of $481,000 in 1998 compared to $410,000
in 1997 and $269,000 in 1996. The increase of $71,000 in 1998 compared to 1997
was due to the issuance of debt at the end of the second quarter of 1997 and the
increase of $141,000 in 1997 compared to 1996 was due to a higher level of
long-term debt.
OPERATING RESULTS
The Company incurred net losses of $26,148,000 in 1998, $12,631,000 in 1997 and
$6,176,000 in 1996. The Company expects that substantial operating losses will
continue for several more years and will increase as a result of services
provided to the Genomics Center and as the Company's drug candidates in
research, if successfully developed, undergo preclinical studies and clinical
trials. Operating losses are likely to fluctuate as a result of differences in
the timing and composition of revenue earned and expenses incurred. Preferred
dividends of $35,600 were recognized in the fourth quarter of 1998 which are
attributable to the $5,000,000 of Series C Convertible Preferred Stock ("Series
C Preferred Stock") issued on November 9, 1998. The Series C Preferred Stock
carries a 5% annual dividend resulting in net losses attributable to common
stockholders of $26,184,000 in 1998, $12,631,000 in 1997 and $6,176,000 in 1996,
or $1.25, $.66 and $.33 per share, respectively.
At December 31, 1998, the Company had available for federal tax reporting
purposes net operating loss carryforwards of approximately $92,100,000 that
expire commencing in 2006. The Company also had federal research and development
tax credit carryovers of approximately $3,800,000 that expire commencing in
2006. The utilization of both the net operating loss carryforwards and tax
credits is subject to certain limitations under federal tax laws.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and investments primarily through the
private placement and public offering of its securities, including the sale of
Series C Preferred Stock to investors, the sale of Series B Convertible
Preferred Stock ("Series B Preferred Stock") to HMR, supplemented by the
issuance of long-term debt, operating and capital lease transactions, interest
income, government-sponsored research grants, research revenue under the 1995
HMR Osteoporosis Agreement and, commencing in April 1997, research revenue under
the terms of the Services Agreements with the Genomics Center.
At December 31, 1998, the Company had cash, cash equivalents and marketable
securities totaling $14,176,000 and working capital of $5,806,000 compared to
cash, cash equivalents and marketable securities totaling $29,359,000 and
working capital of $16,539,000 at December 31, 1997.
The primary uses of cash during the year ended December 31, 1998 were
$27,348,000 to finance the Company's operations and working capital
requirements, $1,674,000 to purchase laboratory equipment, $1,817,000 to repay
long-term debt, $523,000 for net investment in the Genomics Center and $759,000
to acquire intellectual property. The primary sources of funds during the year
ended December 31, 1998 were $5,000,000 from the private placement of Series C
Preferred Stock, $9,226,000 from the private placement of common stock and
$2,580,000 from the sale/leaseback of laboratory equipment.
On May 11, 1998, the Company completed a private placement of 2,537,500 shares
of common stock to a group of institutional investors at a price of $4.00 per
share and received net proceeds of approximately $9,226,000 after deducting
selling commissions and offering expenses. The shares were registered for resale
under the Securities Act of 1933, as amended.
37
39
On November 9, 1998, the Company completed a private placement of 5,000 shares
of Series C Preferred Stock to a group of institutional investors and received
proceeds of $5,000,000. The underlying common shares were registered for resale
under the Securities Act of 1933, as amended.
In March 1997, the Company entered into a 50/50 joint venture with HMR to pursue
functional genomics with the goal of identifying novel therapeutic proteins and
small-molecule drug targets. The Company and HMR agreed to commit $85,000,000 to
the establishment of the Genomics Center and its first five years of operations.
The Company and HMR committed to jointly fund $78,500,000 of operating and
related costs, and ARIAD committed to invest up to $6,500,000 in leasehold
improvements and equipment for use by ARIAD in conducting research on behalf of
the Genomics Center. Through December 31, 1998, the Company had invested
$6,500,000 in leasehold improvements and equipment and funded $8,839,000 in
operating and related costs. HMR has committed to provide ARIAD with capital
adequate to fund ARIAD's share of such costs through the purchase of up to
$49,000,000 of Series B Preferred Stock through the five-year period, including
an initial investment of $24,000,000 as discussed below. The Company also
entered into the Services Agreements with the Genomics Center to provide
research and administrative services to the Genomics Center on a cost
reimbursement basis.
Pursuant to the 1997 HMR Genomics Agreement, on March 18, 1997, HMR purchased
2,526,316 shares of the Company's Series B Preferred Stock for $24,000,000.
During the period from 1999 to 2002, at the Company's option, HMR has agreed to
make subsequent purchases of up to $25,000,000 of Series B Preferred Stock at
purchase prices based on a premium to the market price of the common stock at
the time of each subsequent purchase, unless the market price of the common
stock exceeds a predetermined ceiling, in which case the purchase price will be
equal to the market price (the "Series B Price"). On January 5, 1999, HMR
purchased 428,120 shares of Series B Preferred Stock for $5,747,000,
representing the amount of the subsequent purchase available to ARIAD for 1999
under the agreement. Subsequent commitments by HMR to purchase Series B
Preferred Stock are $8,536,000 and $8,691,000 for each of the years ended
December 31, 2000 and 2001 and $2,026,000 for the three months ended March 31,
2002. Should ARIAD and HMR determine that the Genomics Center require funds in
excess of those committed, ARIAD may fund its share of the excess through a loan
facility made available by HMR. Funds borrowed by ARIAD pursuant to such loan
facility, if any, will bear interest at a rate of LIBOR plus 0.25% and are
repayable by June 30, 2003 in cash or Series B Preferred Stock, at the Series B
Price, at the Company's option.
In November 1995, the Company entered into an agreement with HMR to collaborate
on the discovery and development of drugs to treat osteoporosis and related bone
diseases, one of the Company's signal transduction inhibitor programs. Under the
terms of the 1995 HMR Osteoporosis Agreement, HMR made an initial cash payment
to the Company of $10,000,000, agreed to provide research funding in equal
quarterly amounts of $1,000,000 up to an aggregate of $20,000,000 over a
five-year period and agreed to provide an aggregate of up to $10,000,000 upon
the attainment of certain research milestones, including the second milestone of
$2,000,000 which was received on February 23, 1999. In addition, HMR has
established a dedicated research group to collaborate with the Company on the
discovery of osteoporosis drugs and has agreed to fund all of the preclinical
and clinical development costs for products that emerge from the collaboration.
The 1995 HMR Osteoporosis Agreement further provides for the payment of
royalties to the Company based on product sales. To date, revenue recognized
under the 1995 HMR Osteoporosis Agreement has amounted to $24,666,000.
The Company has substantial fixed commitments under various research and
licensing agreements, consulting and employment agreements, lease agreements and
long-term debt instruments. Such fixed commitments currently aggregate in excess
of $12,000,000 per year and may increase. The Company will require substantial
additional funding for its research and product development programs, including
preclinical development and clinical trials, for operating expenses, for the
pursuit of regulatory clearances and for
38
40
establishing manufacturing, marketing and sales capabilities. Adequate funds for
these purposes, whether obtained through financial markets or collaborative or
other arrangements with collaborative partners, or from other sources, may not
be available when needed or on terms acceptable to the Company.
The Company believes that its existing capital resources, plus interest income
and planned research and development funding and other sources of funding,
including anticipated strategic alliances, will be adequate to satisfy its
capital and operating requirements through 1999. However, there can be no
assurance that changes in the Company's research and development plans or other
events affecting the Company's revenues or operating expenses will not result in
the earlier depletion of the Company's funds.
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 issue relates to a complex of potential problems arising from the
ways in which computer software can handle dates. Many older systems use a
two-digit date format, as opposed to four digits, to indicate the year. Some of
the Company's computer programs or other information systems that have
time-sensitive software or embedded microcontrollers may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations.
The Company's plan to address year 2000 issues consists of three phases:
assessment, testing and implementation. The Company is in the process of
completing an initial assessment of its information technology infrastructure,
hardware and software which began in 1998. Based on this review, the Company
believes that the costs and/or consequences associated with the year 2000 issue
are not expected to have a material effect on its business, operations or
financial condition.
A second, more in-depth analysis is also currently ongoing. Internally, this
review will include the testing of systems developed by the Company. Although
the internal portion of this analysis just recently commenced, the Company
believes that, with modifications to existing software and conversions to new
software and systems, the year 2000 issue will not pose significant operational
problems for its computer and other information systems. If required, the
Company will utilize additional internal and external resources to reprogram,
replace, and test the software and systems for year 2000 modifications.
Externally, the Company's preparations for the year 2000 issue will consist of
soliciting and, where feasible, obtaining certification of year 2000 compliance
from third-party software vendors and determining the readiness of its
significant suppliers. The Company is working with external suppliers and
service providers to ensure that they and their systems will be able to support
our needs and, where necessary, interact with our server and hardware and
software infrastructure in preparation for the year 2000. This testing phase is
expected to be completed by September 30, 1999.
If any necessary modifications, conversions and/or replacements are not made,
are not completed timely, or if any of the Company's suppliers or customers do
not successfully deal with the year 2000 issue, such circumstances could have a
material impact on the operations of the Company. The Company's research and
development efforts, which rely heavily on the storage and retrieval of
electronic information, could be interrupted resulting in significant delays in
any one or all of the Company's research and development programs. The severity
of these possible problems would depend on the nature of the problem and how
quickly it could be corrected or an alternative implemented, which is unknown at
this time. In the extreme, such problems could disrupt a significant portion of
the Company's operation.
While management has not yet specifically determined the costs associated with
its year 2000 readiness efforts, monitoring and managing the year 2000 issue
will result in additional direct and indirect costs to the Company. Direct costs
include potential charges by third-party software vendors for product
enhancements, costs involved in testing software products for year 2000
compliance and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. The Company
39
41
estimates the total cost for upgrading its computer system, hardware and
software is not likely to exceed $200,000. Indirect costs will principally
consist of the time devoted by existing employees in monitoring software vendor
progress, testing enhanced software products and implementing any necessary
contingency plans. Such costs have not been material to date. Both direct and
indirect costs of addressing the year 2000 issue will be charged to earnings as
incurred.
At the present time, a contingency plan has not been developed. After evaluating
its internal compliance efforts as well as the compliance of third parties as
described above, the Company expects to have contingency plans in place by
November 30, 1999 to address situations in which various systems of the Company,
or of third parties with which the Company does business, are not year 2000
compliant. Some risks of the year 2000 issue, however, are beyond the control of
the Company and its suppliers and customers. For example, no preparations or
contingency plan will protect the Company from a downturn in economic activity
caused by the possible ripple effect throughout the entire economy caused by the
year 2000 issue.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, Reporting on the Cost of Start-Up
Activities, which will require that all organizational costs be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. The Company will adopt this SOP effective January 1, 1999 and will expense
$364,000 in the first quarter of 1999, as a cumulative effect accounting change.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective for
fiscal years beginning after June 15, 1999. The new standard requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Management is currently assessing
the impact of SFAS No. 133 on the consolidated financial statements of the
Company. The Company will adopt this accounting standard on January 1, 2000, as
required.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio in accordance with its Investment
Policy. The primary objectives of the Company's Investment Policy are to
preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment.
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. The
Company's marketable securities consist of corporate debt and U.S. Government
securities primarily with maturities of one year or less, but generally less
than six months. These securities are classified as available-for-sale.
Available-for-sale securities are recorded on the balance sheet at fair market
value with unrealized gains or losses reported as a separate component of
stockholders' equity (accumulated other comprehensive loss). Gains and losses on
investment security transactions are reported on the specific-identification
method. Interest income is recognized when earned. A decline in the market value
of any available-for-sale security below cost that is deemed other than
temporary results in a charge to earnings and establishes a new cost basis for
the security. These investments are sensitive to interest rate risk. The Company
believes that the effect, if any, of reasonable possible near-term changes in
the interest rates on its financial position, results of operations and cash
flows would not be material due to the short-term nature of these investments.
40
42
At December 31, 1998, the Company has a bank term note at prime plus 1% and a
government sponsored term note at prime plus 2.75%. These notes are sensitive to
interest rate risk. In the event of a hypothetical 10% increase in the prime
rate, the Company would incur approximately $425,000 of additional interest
expense per year.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
ARIAD Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of ARIAD
Pharmaceuticals, Inc. and its subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in all
material respects, the financial position of ARIAD Pharmaceuticals, Inc. and its
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 10, 1999
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44
ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
NOTES 1998 1997
----- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents 1 $ 6,501,648 $ 13,858,910
Marketable securities 1,2 7,674,488 15,500,547
Inventory and other 1 2,018,846 758,463
Due from Genomics Center 332,571
------------ ------------
Total current assets 16,527,553 30,117,920
------------ ------------
Property and equipment: 1,5,6
Leasehold improvements 12,555,301 12,350,100
Equipment and furniture 4,438,399 5,549,127
------------ ------------
Total 16,993,700 17,899,227
Less accumulated depreciation and amortization 8,944,027 6,459,857
------------ ------------
Property and equipment, net 8,049,673 11,439,370
------------ ------------
Investment in Genomics Center 4 1,902,129 1,418,864
------------ ------------
Intangible and other assets, net 1,6 4,306,585 4,433,022
------------ ------------
Total $ 30,785,940 $ 47,409,176
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 5 $ 1,861,021 $ 1,816,583
Accounts payable 3,322,439 3,299,168
Accrued liabilities 2,042,641 2,849,353
Advance from Genomics Center 4 3,162,463 2,502,921
Deferred revenue 3 333,333 3,111,114
------------ ------------
Total current liabilities 10,721,897 13,579,139
------------ ------------
Long-term debt 5 3,295,139 5,156,219
------------ ------------
Deferred revenue 1,3 300,000
------------
Commitments and contingent liabilities 6,10
Redeemable convertible preferred stock, at
liquidation value 7 5,035,616
------------
Stockholders' equity:
Series B convertible preferred stock, $.01
par value; 4,7,8
authorized, 5,000,000 shares; issued and
outstanding, 2,526,316 shares in 1998 and
1997 (liquidation preference, $24,000,000) 25,263 25,263
Common stock, $.001 par value; authorized,
60,000,000 shares; issued and outstanding,
21,938,754 shares in 1998 and 19,308,605
shares in 1997 21,939 19,309
Additional paid-in capital 104,360,924 94,833,479
Accumulated other comprehensive loss 2 (34,381) (47,572)
Accumulated deficit (92,640,457) (66,456,661)
------------ ------------
Stockholders' equity 11,733,288 28,373,818
------------ ------------
Total $ 30,785,940 $ 47,409,176
============ ============
See notes to consolidated financial statements.
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ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
NOTES 1998 1997 1996
------ ------------ ------------ -----------
Revenue:
Research revenue (principally
related parties) 1,3,4 $ 12,143,192 $ 9,233,708 $10,304,332
Interest income 2 998,743 1,757,327 1,271,895
------------ ------------ -----------
Total revenue 13,141,935 10,991,035 11,576,227
------------ ------------ -----------
Operating expenses:
Research and development 4 35,515,270 20,286,945 15,253,874
General and administrative 2,633,923 2,924,972 2,229,273
Interest expense 5 480,627 410,072 269,131
------------ ------------ -----------
Total operating expenses 38,629,820 23,621,989 17,752,278
Equity in net loss of
Genomics Center 1,4 660,295
------------ ------------ -----------
Net loss (26,148,180) (12,630,954) (6,176,051)
Preferred dividend 7 35,616
------------ ------------ ------------
Net loss attributable to common
stockholders $(26,183,796) $(12,630,954) $(6,176,051)
============ ============ ===========
Net loss per common share
(basic and diluted) 1 $ (1.25) $ (.66) $ (.33)
============ ============ ===========
Weighted average number of shares
of common stock outstanding 1 20,966,586 19,252,885 18,999,229
See notes to consolidated financial statements.
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ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------ -------------
Cash flows from operating activities:
Net loss $(26,148,180) $(12,630,954) $ (6,176,051)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,468,971 2,662,291 2,293,446
Stock-based compensation 72,612 70,302 27,225
Increase (decrease) from:
Deferred revenue (3,077,781) (3,333,332) (3,333,332)
Inventory, accounts receivable and other (1,260,383) 1,810,941 (2,064,944)
Due from the Genomics Center (332,571)
Other assets 53,380 (154,262) (233,021)
Accounts payable 23,271 2,510,886 110,364
Accrued liabilities (806,712) 2,210,327 (121,139)
Advance from Genomics Center 659,542 2,502,921
------------ ------------ ------------
Net cash used in operating activities (27,347,851) (4,350,880) (9,497,452)
------------ ------------ ------------
Cash flows from investing activities:
Acquisitions of marketable securities (14,845,944) (24,890,446) (17,352,936)
Proceeds from sales and maturities of
marketable securities 22,571,606 22,102,315 27,752,510
Investment in Genomics Center (6,237,132) (2,806,093)
Return of investment in Genomics Center 5,714,587 1,357,377
Investment in property and equipment, net (1,673,979) (9,403,738) (1,265,253)
Acquisition of intangible and other assets (758,876) (2,237,571) (451,811)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 4,770,262 (15,878,156) 8,682,510
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of series B
convertible preferred stock 24,000,000
Proceeds from issuance of redeemable
preferred stock 5,000,000
Proceeds from borrowings 6,000,000
Repayment of borrowings (1,816,642) (1,775,966) (1,558,233)
Proceeds from sale/leaseback of equipment, net 2,579,506 2,762,189 1,391,668
Proceeds from issuance of common stock, net of
issuance costs 9,226,060
Proceeds from issuance of stock pursuant to
stock option and purchase plans 231,403 194,872 138,276
------------ ------------ ------------
Net cash provided by (used in)
financing activities 15,220,327 31,181,095 (28,289)
------------ ------------ ------------
Net (decrease) increase in cash and equivalents (7,357,262) 10,952,059 (843,231)
Cash and equivalents, beginning of year 13,858,910 2,906,851 3,750,082
------------ ------------ ------------
Cash and equivalents, end of year $ 6,501,648 $ 13,858,910 $ 2,906,851
============ ============ ============
See notes to consolidated financial statements.
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ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Series B
Convertible Accumulated
Preferred Stock Common Stock Additional Other
---------------- ------------------- Paid-in Comprehensive Accumulated Stockholders'
Notes Shares Amount Shares Amount Capital Loss Deficit Equity
----- ------ -------- ---------- ------- ------------ ----------- ------------ -------------
Balance, January 1, 1996 18,965,728 $18,966 $ 70,428,410 $(113,273) $(47,649,656) $ 22,684,447
Exercise of stock options 8 70,995 71 138,205 138,276
Stock-based compensation to
consultants 1 27,225 27,225
Comprehensive loss:
Net loss (6,176,051) (6,176,051)
Other comprehensive
income - 1
Unrealized gains on
marketable securities 2 10,574 10,574
------------
Comprehensive loss (6,165,477)
---------- ------- ------------ -------- ----------- ------------
Balance, December 31, 1996 19,036,723 19,037 70,593,840 (102,699) (53,825,707) 16,684,471
Issuance of series B
convertible preferred
stock 4,7 2,526,316 $25,263 23,974,737 24,000,000
Exercise of 1992 warrants 7
Issuance of shares pursuant 179,182 179 (179)
to stock option and
purchase plans 8 92,700 93 194,779 194,872
Stock-based compensation to
consultants 1 70,302 70,302
Comprehensive loss:
Net loss (12,630,954) (12,630,954)
Other comprehensive
income - 1
Unrealized gains on
marketable securities 2 55,127 55,127
------------
Comprehensive loss (12,575,827)
--------- ------- ---------- ------- ------------ -------- ------------ ------------
Balance, December 31, 1997 2,526,316 25,263 19,308,605 19,309 94,833,479 (47,572) (66,456,661) 28,373,818
Private placement of common
stock 7,8 2,537,500 2,537 9,223,523 9,226,060
Issuance of shares pursuant
to stock option and
purchase plans 8 92,649 93 231,310 231,403
Stock-based compensation
to consultants 1 72,612 72,612
Accretion of preferred
dividends (35,616) (35,616)
Comprehensive loss:
Net loss (26,148,180) (26,148,180)
Other comprehensive
income - 1
Unrealized gains on
marketable securities 2 13,191 13,191
------------
Comprehensive loss (26,134,989)
--------- ------- ---------- ------- ------------ -------- ------------ ------------
Balance, December 31, 1998 2,526,316 $25,263 21,938,754 $21,939 $104,360,924 $(34,381) $(92,640,457) $ 11,733,288
========= ======= ========== ======= ============ ======== ============ ============
See notes to consolidated financial statements.
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ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
ARIAD Pharmaceuticals, Inc. ("ARIAD" or the "Company") is focused on the
discovery and development of novel and proprietary drugs based on its
understanding of the inner-workings of cells and the genes involved in disease.
The Company has developed a product to treat graft-versus-host disease, a
complication of bone marrow transplantation involving an attack by a patient's
immune system on healthy tissue, which entered Phase 1 human clinical trials
(safety studies) in December 1998. All of the Company's other drug candidates
are in the pre-clinical stage.
ARIAD's research and development programs involve three areas: Signal
transduction inhibitors, regulated gene therapy and functional genomics. Signal
transduction inhibitors are drugs designed to block specific molecular targets
in bone cells and white blood cells. In November 1995, the Company entered into
an agreement with Hoechst Marion Roussel, Inc. ("HMR") to collaborate on the
discovery and development of such drugs to treat osteoporosis and other bone
diseases. The Company has also developed a system referred to as "ARIAD
Regulated Gene Expression Technology" or "ARGENT(TM)" which is designed to
control cellular activities using drugs. This system can be applied in research
for discovery of new drugs and new genes, in gene and cell therapy, and in the
manufacture of biological products. The leading application of this system is
the controlled production of protein drugs by regulated gene therapy. Another
use of this system is ARIAD's product to treat graft-versus-host disease. This
product may improve the safety and effectiveness of certain types of bone marrow
transplants by selectively killing the cells responsible for graft-versus-host
disease. In addition, the Company is working in an area known as functional
genomics, which involves the discovery of new genes and the validation of
molecular targets that may be useful in the treatment of diseases. ARIAD is
developing this information as a tool to accelerate the discovery of new drugs
to treat these diseases, such as osteoporosis (bones), atherosclerosis (heart
and blood vessels) and cancer. In March 1997, the Company established a joint
venture with HMR, named the Hoechst-ARIAD Genomics Center, LLC (the "Genomics
Center"), to pursue this area.
Principles of Consolidation
The consolidated financial statements include the accounts of ARIAD
Pharmaceuticals, Inc., its wholly owned subsidiary, ARIAD Corporation, and its
95%-owned subsidiary, ARIAD Gene Therapeutics, Inc. ("AGTI"). Intercompany
accounts and transactions have been eliminated.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts payable and accrued
liabilities approximate fair value because of their short-term nature.
Marketable securities are recorded in the consolidated financial statements at
aggregate fair value (Note 2). The carrying amounts of the Company's debt
instruments approximate fair value (Note 5).
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Accounting Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosure of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts and disclosure of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents include short-term, highly liquid investments, which consist
principally of United States Treasury and Agency securities and high-grade
domestic corporate securities, purchased with remaining maturities of 90 days or
less.
Marketable Securities
The Company has classified its marketable securities as "available-for-sale"
and, accordingly, carries such securities at aggregate fair value. Fair value
has been determined based on quoted market prices, in a dealer market, at the
closing bid for each individual security held.
Inventory
Inventories are carried at cost using the first-in, first-out method and are
charged to research and development expense when consumed. Inventory consisted
of bulk pharmaceutical material to be used for multiple preclinical and clinical
drug development programs and amounted to $1,446,000 at December 31, 1998.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of the assets (3 to 10
years). Assets acquired under capital lease obligations are stated at the lower
of the present value of the minimum lease payments or the fair market value at
the inception of the lease. Assets recorded under capital leases and leasehold
improvements are amortized over the shorter of their useful lives or lease term
using the straight-line method (4 to 10 years).
The Company accounts for the impairment of long-lived assets in accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.
Investment in Genomics Center
The Company accounts for its investment in the Genomics Center using the equity
method (Note 4). Intercompany transactions are eliminated to the extent of the
Company's interest (50%) in the Genomics Center.
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Intangible and Other Assets
Intangible and other assets consist primarily of purchased patents, patent
applications, costs incurred in connection with the 1995 HMR Osteoporosis
Agreement (Note 3) and deposits.
The cost of purchased patents and patent applications and costs incurred in
filing for patents are capitalized. Capitalized costs related to patent
applications are expensed when it becomes determinable that such applications
will not be pursued. Capitalized costs related to issued patents are amortized
over a period not to exceed seventeen years or the remaining life of the patent,
whichever is shorter, using the straight-line method. Costs incurred in
connection with the 1995 HMR Osteoporosis Agreement (Note 3) are being amortized
over a three-year period beginning November 1995. Accumulated amortization of
intangible and other assets at December 31, 1998 and 1997 was $2,902,000 and
$2,111,000, respectively.
Revenue Recognition
Research revenue under collaborative research and development agreements is
recognized as research is performed under the terms of the respective applicable
agreement. Amounts received in advance under the 1995 HMR Osteoporosis Agreement
(Note 3) are recorded as deferred revenue and are being amortized over the
minimum term of the agreement, using the straight-line method. Revenue earned
upon the attainment of research or drug development milestones is recognized
when achieved. Research revenue is billed on a cost reimbursement basis, which
includes direct costs incurred in connection with research activities and an
allocation of certain other costs incurred by the Company, under the terms of
the Services Agreements with the Genomics Center (Note 4) is recognized as
services are provided. None of the Company's research revenue recognized is
refundable.
Segment Reporting
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Company organizes itself as one segment reporting to the chief
operating decision maker. Products and services consist primarily of research
and development activities with collaborative and strategic partners in the
pharmaceutical industry.
Stock-Based Compensation
The Company applies the intrinsic value method to account for employee
stock-based compensation and the fair value method to account for stock-based
compensation to consultants.
Earnings Per Share
Basic earnings per common share are computed using the weighted average number
of common shares outstanding during each year. Diluted earnings per common share
reflect the effect of the Company's outstanding options, warrants and
convertible securities, except where such items would be anti-dilutive. Because
of the net loss reported in each year, basic and diluted per share amounts are
the same.
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Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which requires businesses to disclose comprehensive income
and its components in their general-purpose financial statements.
Recently Issued Financial Accounting Standards
In April 1998 the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities, which will require that all organizational costs be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. The Company will adopt this SOP effective January 1, 1999 and will expense
$364,000 in the first quarter of 1999 as a cumulative effect accounting change.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective for
fiscal years beginning after June 15, 1999. The new standard requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Management is currently assessing
the impact of SFAS No. 133 on the consolidated financial statements of the
Company. The Company will adopt this accounting standard on January 1, 2000, as
required.
2. MARKETABLE SECURITIES
The Company has classified its marketable securities as available-for-sale and,
accordingly, carries such securities at aggregate fair value. At December 31,
1998 and 1997, the Company's marketable securities consisted of the following:
Aggregate Amortized Gross Unrealized
Fair Value Cost Basis Gains Losses
----------- ----------- ------ --------
1998
----
U.S. Government obligations $ 583,720 $ 603,222 $(19,502)
Corporate debt securities 7,090,768 7,105,647 $3,772 (18,651)
----------- ----------- ------ --------
Total $ 7,674,488 $ 7,708,869 $3,772 $(38,153)
=========== =========== ====== ========
1997
----
U.S. Government obligations $ 2,974,292 $ 3,006,012 $(31,720)
Corporate debt securities 12,526,255 12,542,107 $2,680 (18,532)
----------- ----------- ------ --------
Total $15,500,547 $15,548,119 $2,680 $(50,252)
=========== =========== ====== ========
At December 31, 1998, 1997 and 1996 approximately $6,669,000, $14,504,000 and
$8,545,000, respectively, of investments in marketable securities had
contractual maturities of one year or less. Realized gains and losses on sales
of marketable securities were not material during the years ended December 31,
1998, 1997 and 1996. Changes in market values resulted in a reduction of
$13,191, $55,127 and $10,574 in net unrealized losses for the years ended
December 31, 1998, 1997 and 1996, respectively.
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At December 31, 1998, marketable securities amounting to $5,586,000 were pledged
through January 15, 1999 to secure the principal amounts of the Company's bank
term note and capital lease obligation with its principal bank.
3. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
In November 1995, the Company entered into an agreement with HMR (the "1995 HMR
Osteoporosis Agreement") to collaborate on the discovery and development of
drugs to treat osteoporosis and related bone diseases, one of the Company's
signal transduction drug discovery programs. Under the 1995 HMR Osteoporosis
Agreement, the Company granted to HMR exclusive rights to develop and
commercialize these drugs worldwide. The Company has the right, under certain
circumstances, to participate in the development and commercialization of these
products for certain indications in North America. Under the terms of the 1995
HMR Osteoporosis Agreement, HMR made an initial cash payment to the Company of
$10,000,000, agreed to provide research funding in equal quarterly amounts of
$1,000,000 up to an aggregate of $20,000,000 over a five-year period and agreed
to provide an aggregate of up to $10,000,000 upon the attainment of certain
research milestones. In addition, HMR established a dedicated research group to
collaborate with the Company on the discovery of osteoporosis drugs and agreed
to fund all of the preclinical and clinical development costs for products that
emerge from the collaboration. The 1995 HMR Osteoporosis Agreement further
provides for the payment of royalties to the Company based on product sales.
Revenue recognized under the 1995 HMR Osteoporosis Agreement amounted to
$6,778,000, $7,333,000 and $9,333,000 for 1998, 1997 and 1996, respectively,
including, in 1996, $2,000,000 for the achievement of the first research
milestone.
The Company was the grantee organization of four grants from the National
Institutes of Health to conduct research related to signal transduction. Costs
incurred and the corresponding research revenue recognized were approximately
$114,000, $543,000 and $971,000 for 1998, 1997 and 1996, respectively.
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4. HOECHST-ARIAD GENOMICS CENTER, LLC
In March 1997, the Company entered into an agreement which established a 50/50
joint venture with HMR to pursue functional genomics (the "1997 HMR Genomics
Agreement") with the goal of identifying genes that encode novel therapeutic
proteins and small-molecule drug targets. The joint venture, named the
Hoechst-ARIAD Genomics Center, LLC (the "Genomics Center"), is located at the
Company's research facilities in Cambridge, Massachusetts. Under the terms of
the 1997 HMR Genomics Agreement, the Company and HMR agreed to commit
$85,000,000 to the establishment of the Genomics Center and its first five years
of operation. The Company and HMR agreed to jointly fund $78,500,000 of
operating and related costs, and ARIAD agreed to invest up to $6,500,000 in
leasehold improvements and equipment for use by ARIAD in conducting research on
behalf of the Genomics Center. Through December 31, 1998, the Company had
invested $6,500,000 in leasehold improvements and equipment and funded
$8,839,000 in operating and related costs. HMR committed to provide ARIAD with
capital adequate to fund ARIAD's share of such costs through the purchase of up
to $49,000,000 of ARIAD series B convertible preferred stock over the five-year
period, including an initial investment of $24,000,000, which was completed in
March 1997 and $5,747,000 which was completed in January 1999 (Note 7). Should
ARIAD and HMR determine that the Genomics Center requires funds in excess of
those committed, ARIAD may fund its share of the excess through a loan facility
made available by HMR. Funds borrowed by ARIAD pursuant to such loan facility,
if any, will bear interest at a rate of LIBOR plus 0.25% and are repayable by
June 30, 2003 in cash or series B convertible preferred stock, at the Company's
option.
The Company also entered into agreements with the Genomics Center to provide
research and administrative services (the "Services Agreements") to the Genomics
Center on a cost reimbursement basis. ARIAD's costs of providing the research
and administrative services to the Genomics Center are charged to research and
development expense and general and administrative expense in the consolidated
financial statements. Under the Services Agreements, ARIAD bills the Genomics
Center for 100% of its costs of providing the research and administrative
services; however, because ARIAD is providing 50% of the funding of the Genomics
Center, ARIAD recognizes as revenue only 50% of the billings to the Genomics
Center. The remaining 50% is accounted for as a return of ARIAD's investment in
the Genomics Center. Under the Services Agreements, the Company bills the
Genomics Center in advance for the next quarter's projected services. At
December 31, 1998, the balance sheet advance amount of $3,162,463 represents the
projected amount for the first quarter of 1999. Revenue recognized pursuant to
the Services Agreements amounted to $4,951,000 and $1,357,000 for the years
ended December 31, 1998 and 1997, respectively.
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The major components of the Genomics Center's financial position and results of
operations are as follow:
AS OF DECEMBER 31,
-------------------------
1998 1997
------------ ----------
Advance to ARIAD $ 3,162,000 $2,503,000
Other assets 804,000 4,000
------------ ----------
Total assets $ 3,966,000 $2,507,000
============ ==========
Total liabilities - due to ARIAD $ 400,000 $ -
Equity 3,566,000 2,507,000
------------ ----------
Total liabilities and equity $ 3,966,000 $2,507,000
============ ==========
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997
------------ ------------
Revenues $ - $ -
Operating expenses:
ARIAD 9,902,000 2,696,000
Other 1,307,000 -
------------ -----------
Net Loss $(11,209,000) $(2,696,000)
============ ===========
ARIAD's 50% share of net loss $ (5,605,000) $(1,348,000)
Elimination of intercompany transactions 4,945,000 1,348,000
------------ -----------
ARIAD's equity in the net (loss) of the
Genomics Center $ (660,000) $ -
============ ===========
5. Long-Term Debt
Long-term debt was comprised of the following:
DECEMBER 31,
--------------------------
1998 1997
--------- -----------
Bank term-note at prime plus 1% (8.75%, at December 31,
1998) payable in monthly installments of $100,000
plus interest, through July 1, 2002 $4,300,000 $5,500,000
Capital lease obligation, at 9.0%, payable in
monthly installments of $46,518 including interest,
through December 31, 2000 725,205 1,199,007
Government-sponsored seven-year term note, at prime
plus 2.75% (10.5%, at December 31, 1998), payable
in monthly installments of $11,905 plus interest,
through November 1, 1999 130,955 273,795
---------- ----------
Total 5,156,160 6,972,802
Less current portion 1,861,021 1,816,583
---------- ----------
Long-term debt $3,295,139 $5,156,219
========== ==========
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The notes and capital lease obligation are collateralized by all assets of the
Company, and the government-sponsored note is partially guaranteed by the Small
Business Administration. The Company may, at its option, pledge marketable
securities under the bank term note, and, in such event, the interest rate would
be adjusted to the equivalent of 90-day LIBOR plus 1.25%. At December 31, 1998,
such marketable securities were pledged resulting in a rate of 6.87% (Note 2).
The above agreements contain certain covenants that restrict additional
indebtedness, capital spending and stock redemption; prohibit dividend
distributions; and require the Company to pledge its marketable securities or
maintain minimum levels of tangible net worth of $11,000,000, working capital of
$7,000,000 and liquid assets of $15,000,000, all as defined.
The aggregate future principal payments are $1,861,000 in 1999, $1,395,000 in
2000, $1,200,000 in 2001 and $700,000 in 2002. Interest payments during 1998,
1997 and 1996 were $453,000, $395,000 and $231,000, respectively.
6. LEASES, LICENSED TECHNOLOGY AND OTHER COMMITMENTS
Facility Lease
In 1992, the Company entered into a ten-year noncancelable operating lease, with
an option to extend for an additional ten years, for approximately 50,000 square
feet of office and laboratory space. The lease grants to the Company a right of
first refusal on any additional space that may become available in the 100,000
square-foot building under substantially the same terms and conditions as the
initial space. Pursuant to this right, the Company leased an additional 40,000
square feet of unimproved space, and in 1997 completed renovations, principally
to provide research services to the Genomics Center (Note 4), at an aggregate
cost of $5,327,000. Rent expense for the years ended December 31, 1998, 1997 and
1996 amounted to $1,106,000, $945,000, and $803,000, respectively. Future
minimum annual rental payments under the lease are approximately $1,382,000 for
each of the four years 1999 through 2002.
Equipment Leases
The Company utilizes lease credit facilities from various equipment leasing
companies to acquire equipment, which is resold to a lessor at cost, with no
resulting gain or loss recognized. The lease agreements, which are classified as
operating leases for financial reporting purposes, have terms ranging from three
to five years, with various lease renewal or purchase options at the end of the
initial term. During the years ended December 31, 1998, 1997 and 1996, the
Company entered into sales leaseback transactions amounting to $2,579,000,
$2,762,000 and $1,392,000, respectively. Equipment rental expense for the years
ended December 31, 1998, 1997 and 1996 amounted to $1,864,000, $1,011,000 and
$1,462,000, respectively. Some of the agreements contain covenants requiring the
Company to maintain certain minimum levels of net worth, working capital and
liquid assets. Minimum future rental payments under the initial terms of the
leases are approximately $2,282,000 for 1999, $1,585,000 for 2000, $1,305,000
for 2001, $1,231,000 for 2002 and $180,000 for 2003.
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Collaborative Agreement
In connection with the establishment of the Genomics Center (Note 4), the
Company entered into a three year collaborative agreement with Incyte
Pharmaceuticals, Inc. that provides the Company with access to various genomic
data through December 31, 2000. The agreement was amended in December 1998 to
provide increased data access and increase the annual fees from $3,000,000 to
$3,750,000 commencing in 1999, of which $500,000 is reimbursed annually by HMR.
The amount charged to research expense in 1998 and 1997 was $2,702,000 and
$833,000, respectively. The agreement provides for additional payments for
exclusive licenses, the achievement of certain milestones in drug development
and royalties on net sales. Future minimum commitments under the collaborative
agreement with Incyte Pharmaceuticals, Inc. are $3,750,000 annually for 1999 and
2000.
Licensed Technology
The Company and AGTI have entered into agreements with several universities
under the terms of which the Company has received exclusive licenses or options
to technology in certain patent applications. The agreements, which are
generally cancelable by the Company, provide for the payment of license fees
and/or minimum payments, which are generally creditable against future
royalties. Fees aggregated $300,000, $105,000 and $125,000 for 1998, 1997 and
1996, respectively, and are expected to amount to approximately $187,000 for
1999, $177,000 for 2000, $222,000 for 2001, $182,000 for 2002 and $182,000 for
2003. In addition, the agreements provide for payments upon the achievement of
certain milestones in drug development, such as the filing of an Investigational
New Drug Application or the filing of a New Drug Application for regulatory
approval in the United States. The agreements also require the Company to fund
certain costs associated with the filing of patent applications.
Other Commitments
The Company has entered into various employment agreements with its senior
executive officers. The agreements provide for aggregate annual base salaries of
$2,105,000 and remaining terms of employment ranging up to three years.
7. STOCKHOLDERS' EQUITY
Series Preferred Stock
The Company has authorized 10,000,000 shares of preferred stock which the Board
of Directors is empowered to designate and issue in different series. At
December 31, 1998, the Board of Directors had designated 500,000 shares as
series A preferred stock, 5,000,000 shares as series B preferred stock, 25,000
shares as series C preferred stock, and 4,475,000 shares remained undesignated.
Series B Convertible Preferred Stock ("Series B Preferred Stock")
On March 18, 1997, HMR purchased 2,526,316 shares of the Company's Series B
Preferred Stock for $24,000,000. During the period from 1999 to 2002, at the
Company's option, HMR has agreed to make subsequent purchases of up to
$25,000,000 of Series B Preferred Stock at purchase prices based on a premium to
the market price of the common stock at the time of each subsequent purchase
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(unless the market price of the common stock exceeds a predetermined ceiling, in
which case the purchase price will be equal to the market price). On January 5,
1999, HMR purchased 478,120 shares of Series B Preferred Stock for $5,747,000,
representing the amount available for 1999 under the agreement. Subsequent
commitments by HMR to purchase Series B Preferred Stock are $8,536,000 and
$8,691,000 for each of the years ended December 31, 2000 and 2001 and $2,026,000
for the three months ended March 31, 2002. The Series B Preferred Stock is
convertible one-for-one into common stock upon the earliest to occur of: (i) six
months following termination of the Genomics Center, (ii) June 30, 2003, or
(iii) upon a change of control of the Company; and, if still outstanding, the
Series B Preferred Stock shall be automatically converted on December 31, 2006.
The series B stockholder has voting rights equivalent to common stockholders,
subject to certain restrictions relative to a merger or acquisition of the
Company.
Series C Redeemable Convertible Preferred Stock ("Series C Preferred Stock")
On November 9, 1998, the Company issued 5,000 shares of the Company's Series C
Preferred Stock to a group of institutional investors (the "Investors") and
received proceeds of approximately $5,000,000. Each share of Series C Preferred
Stock has a liquidation value of $1,000, plus an additional amount equal to 5%
per annum (preferred dividend), accrued from the date of issue, and is
convertible into common stock of the Company beginning on February 15, 1999, at
a conversion price equal to the lower of a variable conversion price (the
"Variable Price") or $2.09 per share. Subject to certain adjustments, the
Variable Price for any given conversion is based on the average of the four
lowest closing bid prices for the common stock during the 22 trading days
preceding the date of conversion.
Under the Securities Purchase Agreement, dated as of November 9, 1998, between
the Company and the Investors (the "Purchase Agreement"), subject to certain
conditions and limitations, the Company will be required to sell and the
Investors will have the right, commencing approximately ten months after the
closing date to purchase two additional shares of Series C Preferred Stock, at
$1,000 per share, for each share then held or previously converted provided that
it has been converted at $2.09 per share. The Purchase Agreement further
provides that, during a six-month period commencing approximately ten months
after the closing date and subject to certain conditions, the Company will have
the right to require the Investors to purchase up to an aggregate of 5,000
additional shares of Series C Preferred Stock.
Under certain circumstances and at prices less than $1.95 per share, the Company
may elect to redeem any shares of Series C Preferred Stock that are presented
for conversion. Under certain circumstances relating primarily to a change of
control the Investors have the right to require the Company to redeem the Series
C Preferred Stock at a price equal to the greater of 120% of the liquidation
value, or the market value, at such date. The Company is required to register
the underlying common shares within 120 days of the closing (March 9, 1999) or
incur penalties of approximately 2% per day.
Common Stock
On May 11, 1998, the Company completed a private placement of 2,537,500 shares
of common stock to a group of institutional investors at a price of $4.00 per
share and received net proceeds of approximately $9,226,000 after deducting
selling commissions and offering expenses. The shares were registered under the
Securities Act of 1933, as amended.
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Warrants
In 1994, in connection with an initial public offering, the Company issued
2,125,225 warrants with an exercise price of $8.40 per share, subject to
adjustment. These publicly traded warrants expire on May 20, 1999 and are
subject to earlier redemption.
Stockholder Rights Plan
On December 15, 1994, the Board of Directors adopted a stockholder rights plan
which provided for the distribution to each stockholder of one Series A
Preferred Stock purchase right for each outstanding share of common stock. Under
certain circumstances involving an acquisition by a person or group of 20% or
more of ARIAD common stock or involving a 15% stockholder entering into certain
transactions involving the Company, or into certain business combinations, the
rights permit the holders (other than such person or group) to purchase ARIAD
common stock at a 50% discount. The plan is designed to protect ARIAD
stockholders in the event that an attempt is made to acquire the Company without
an offer of fair value.
Minority Interest in Subsidiary
The 5% minority interest in AGTI includes shares issued to Stanford University
and Harvard University (3%) issued in 1995 in connection with a license
agreement and shares issued to option holders (2%) upon their exercise (Note 8).
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8. STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans
The Company's 1991 and 1994 Stock Option Plans (the "Plans") provide for the
granting of nonqualified and incentive stock options to purchase up to a maximum
of 6,068,608 shares of common stock to officers, directors, employees and
consultants of the Company. Options become exercisable as specified in the
related option agreement, typically over a four year period, and expire ten
years from the date of grant.
Transactions under the Plans for the years ended December 31, 1996, 1997 and
1998 are as follows:
Weighted Average
Number Exercise Price
of Shares per Share
--------- ----------------
Options outstanding, January 1, 1996 2,447,355 $2.25
Granted 773,585 4.23
Forfeited (70,584) 2.70
Exercised (70,995) 1.91
---------
Options outstanding, December 31, 1996 3,079,361 2.57
Granted 618,196 6.53
Forfeited (63,404) 4.88
Exercised (91,596) 2.07
---------
Options outstanding, December 31, 1997 3,542,557 3.23
Granted 1,313,775 3.75
Forfeited (240,154) 4.32
Exercised (77,441) 2.08
---------
Options outstanding, December 31, 1998 4,538,737 $3.34
=========
Options exercisable, December 31, 1996 1,878,668 $2.18
=========
December 31, 1997 2,197,320 $2.37
=========
December 31, 1998 2,618,294 $2.59
=========
The following table sets forth information regarding options outstanding at
December 31, 1998:
Weighted Average
Range of Weighted Weighted Average Number of Option Exercise Price for
Exercise Number of Average Remaining Life Shares Currently Currently
Prices Shares Exercise Price (years) Exercisable Exercisable
- ---------- --------- -------------- ---------------- ---------------- ------------------
$1.59-2.69 2,338,983 $1.98 5.0 2,060,366 $1.94
3.55-4.87 1,631,012 4.20 8.4 340,770 4.20
4.88-7.63 568,742 6.46 8.5 217,158 6.11
- ---------- --------- ----- --- --------- -----
$1.59-7.63 4,538,737 $3.34 6.7 2,618,294 $2.59
========== ========= ===== === ========= =====
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As described in Note 1, the Company uses the intrinsic value method to measure
compensation expense associated with grants of stock options to employees. Had
the Company used the fair value method to measure compensation, the reported net
loss and net loss per share would have been reported as follows:
1998 1997 1996
------------ ------------ ------------
Proforma net loss attributable to
common stockholders
$(27,816,845) $(13,663,496) $(6,726,601)
Proforma net loss per share
(basic and diluted) $ (1.33) $ (.71) $ (.35)
The above disclosure, required by SFAS No. 123, includes only the effect of
grants made subsequent to January 1, 1996. For purposes of calculating the above
disclosure, the fair value of options on their grant date was measured using the
Black-Scholes option pricing model. Key assumptions used to apply this pricing
model included a risk-free interest rate of 5.5% for 1998 and 6% for 1997 and
1996, expected lives of the option grants ranging from two to six years and
expected rates of volatility for the underlying stock of 82% for 1998, and 78%
for 1997 and 1996. Using this model, the weighted average fair value per option
for all options granted to consultants and employees in 1998, 1997 and 1996 was
$2.75, $3.10 and $2.40, respectively.
The Company's subsidiary, AGTI, adopted stock option plans in 1993 substantially
similar to the Plans and reserved 1,785,714 shares of AGTI's common stock for
issuance pursuant to such plans. At December 31, 1998, options with respect to
1,167,137 shares of AGTI's common stock were outstanding at an exercise price of
$.42 per share, and all option shares were exercisable. During 1998, options
with respect to 62,499 shares were exercised at an exercise price of $.42 per
share and 8,929 shares were forfeited. If all of the options outstanding at
December 31, 1998 had been exercised, the optionees would own 21.2% of the
outstanding shares of AGTI.
Employee Stock Purchase Plan
In 1997, the Company adopted the 1997 Employee Stock Purchase Plan and reserved
500,000 shares of common stock. Under this plan, substantially all of its
employees may, through payroll withholdings, purchase shares of the Company's
stock at a price of 85% of the lesser of the fair market value at the beginning
or end of each three-month withholding period. During 1998, 15,207 shares of
common stock were issued.
9. INCOME TAXES
At December 31, 1998, the Company had available for federal tax reporting
purposes, net operating loss carryforwards of approximately $92.1 million which
expire commencing in 2006. The Company also had federal research and development
credit carryovers of approximately $3.8 million which expire commencing in 2006.
Both the net operating loss carryforwards and credits are subject to certain
limitations under federal tax law.
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The components of deferred income taxes were as follows:
1998 1997
----------- ------------
Deferred tax liabilities:
Intangible and other assets $ 1,544,000 $ 1,390,000
Organizational costs 2,000 1,000
----------- ------------
Total deferred tax liabilities 1,546,000 1,391,000
----------- ------------
Deferred tax assets:
Net operating loss carryforwards 35,446,000 25,383,000
Tax credit carryovers 7,585,000 5,398,000
Depreciation 1,499,000 749,000
Deferred revenue 133,000 1,244,000
Other 58,000 42,000
----------- ------------
Total deferred tax assets 44,721,000 32,816,000
----------- ------------
Deferred tax assets, net 43,175,000 31,425,000
Valuation allowance (43,175,000) (31,425,000)
----------- ------------
Total deferred taxes $ -0- $ -0-
=========== ============
The Company has not yet achieved profitable operations. Accordingly, management
believes the tax benefits as of December 31, 1998 and 1997 do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a valuation
allowance for the entire net deferred tax asset. The valuation allowance
increased during 1998 and 1997 primarily due to an increase in the Company's net
operating loss carryforwards and tax credit carryovers.
10. LITIGATION
The Company was named as a defendant in a purported class action lawsuit
commenced in the United States District Court for the Southern District of New
York on October 21, 1994 (the "Blech Securities Litigation"). The Company filed
a motion to dismiss the Blech Securities Litigation, and on June 6, 1996, the
Court granted that motion as to the Company. Although the Court gave plaintiffs
an opportunity to replead their allegations, the Company was not named as a
defendant in the amended complaint that plaintiffs subsequently filed.
The Company is a named defendant in a purported class action law suit (the
"Degulis Action") commenced on June 8, 1995 in the United States District Court
for the Southern District of New York. The Degulis Action names as defendants
the Company, David Blech (managing director and sole shareholder of D. Blech &
Company Incorporated ("D. Blech & Co.") and a former director of the Company),
D. Blech & Co., (which acted as underwriter for the Company's initial public
offering ("IPO") and a market maker for the Company's securities), as well as
certain members of the Company's Board of Directors and Shoenberg Hieber, Inc.
(which acted as qualified independent underwriter for the IPO).
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In the Degulis Action, plaintiff purports to sue individually and on behalf of a
purported class of persons who purchased securities issued by the Company during
the period May 20, 1994 through September 21, 1994. Plaintiff alleges, among
other things, that the Registration Statement filed in connection with the IPO
was false and misleading. Each of the defendants therefore are alleged to have
violated Sections 11 and 12(2) of the Securities Act, and the individual
defendants also are alleged to be secondarily liable under Section 15 of the
Securities Act. The complaint also alleges among other things, that David Blech
and D. Blech & Co. participated in purported "sham" sales transactions of the
Company's securities after the IPO in an alleged attempt to artificially inflate
the prices at which the Company's securities were sold in the public markets.
Plaintiff alleges that all defendants knew, or should have known, of this
alleged scheme and that they are liable for their failure to disclose the
alleged scheme to the investing public at the time of the IPO and thereafter.
All defendants are alleged to have participated in this alleged scheme and thus
to have violated Section 10(b) of the Exchange Act, and SEC Rule 10b-5, and to
have engaged in common-law fraud. There are no allegations that assert specific
acts of participation or wrongdoing by the Company in the alleged schemes.
Plaintiffs seek an unspecified amount of damages, costs and attorneys' fees.
The Company filed a motion to dismiss the Degulis Action, and on June 6, 1996,
the Court denied the motion. The Company intends to continue to defend
vigorously the Degulis Action.
The ultimate outcome of the litigation, which is not presently determinable,
could have a material adverse effect on the Company's financial position,
results of operations, and cash flows. No provision for any loss that may result
upon resolution of this matter has been made in the accompanying consolidated
financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Harvey J. Berger, M.D.(1) 48 Chairman of the Board of Directors, President
and Chief Executive Officer
Sandford D. Smith(1)(2) 51 Vice Chairman of the Board of Directors
Jay R. LaMarche(1) 52 Executive Vice President and Chief Financial
Officer, Treasurer and Director
Laurie A. Allen, Esq. 38 Senior Vice President, Corporate Development
and Legal Affairs, General Counsel and Secretary
John D. Iuliucci, Ph.D. 56 Senior Vice President, Drug Development
Manfred Weigele, Ph.D. 66 Senior Vice President, Chief Scientific Officer
Mark J. Zoller, Ph.D. 45 Senior Vice President, Genomics and Scientific
Director, Hoechst-ARIAD Genomics Center, LLC
David L. Berstein, Esq. 46 Vice President, Chief Patent Counsel
Rainer Fuchs, Ph.D. 38 Vice President, Chief Information Officer
Dennis A. Holt, Ph.D. 42 Vice President, Drug Discovery - Chemistry
Jacqueline Papkoff, Ph.D. 42 Vice President, Cell Biology and Genetics
Tomi K. Sawyer, Ph.D. 44 Vice President, Drug Discovery
Joan S. Brugge, Ph.D. 49 Director
Vaughn D. Bryson(1) 60 Director
John M. Deutch, Ph.D. 60 Director
Philip Felig, M.D.(2) 62 Director
Joel S. Marcus(3) 51 Director
Ralph Snyderman 58 Director
Raymond S. Troubh(2) 72 Director
(1) Member of the Executive Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Audit Committee.
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Harvey J. Berger, M.D. is the principal founder of ARIAD and has served as the
Company's Chairman of the Board, President and Chief Executive Officer since
April 1991. From 1986 to 1991, Dr. Berger held a series of senior management
positions at Centocor, Inc., a biotechnology company, most recently as Executive
Vice President and President, Research and Development Division. Dr. Berger
currently is a Lecturer in the Division of Health Sciences and Technology at the
Massachusetts Institute of Technology and the Harvard Medical School. He also
has held senior academic and administrative appointments at Emory University,
Yale University and the University of Pennsylvania and was an Established
Investigator of the American Heart Association. Dr. Berger received his A.B.
degree in Biology from Colgate University and his M.D. degree from Yale
University School of Medicine and did further medical and research training at
the Massachusetts General Hospital and Yale-New Haven Hospital.
Sandford D. Smith, a Director of ARIAD since October 1991 and Vice Chairman
since January 1999, is President, Therapeutics International, Genzyme
Corporation. Previously, from May 1996 to September 1996, he was Vice President
and General Manager, Specialty Therapeutics and International Group, Genzyme
Corporation. Mr. Smith was President and Chief Executive Officer and a Director
of the Repligen Corporation from 1986 to March 1996. Mr. Smith previously held a
number of positions with the Bristol-Myers Company from 1977 to 1986, including,
most recently, Vice President of Corporate Development and Planning for the
United States Pharmaceutical and Nutritional Group. Mr. Smith earned his B.A.
degree from the University of Denver. Mr. Smith is also a Director of CSPI.
Jay R. LaMarche has served as Chief Financial Officer, Treasurer, and a Director
of ARIAD since January 1992. Mr. LaMarche has served as Executive Vice President
since March 1997, and as Senior Vice President, Finance from January 1992 to
February 1997. Prior to joining ARIAD, he was Chief Financial Officer and a
Director of ChemDesign Corporation, a fine chemicals manufacturer, where he
served in several capacities, most recently as Executive Vice President. Prior
to his employment at ChemDesign, Mr. LaMarche was a partner with Deloitte
Haskins & Sells. Mr. LaMarche received his B.B.A. degree in Public Accountancy
from the University of Notre Dame and served as an officer in the United States
Navy.
Laurie A. Allen, Esq. has served as Senior Vice President, Corporate Development
and Legal affairs, General Counsel and Secretary since January 1999. Prior to
joining ARIAD, she was a partner with Brobeck, Phleger and Harrison, LLP,
leading technology law firm, from January 1996 to December 1998. She was an
associate with Brobeck, Phleger & Harrison, LLP from February 1991 to December
1995 and with Pettit & Martin from September 1989 to January 1991. Ms. Allen
received her L.L.M. degree in taxation from New York University and her J.D.
degree from Emory University School of Law. She received her A.B. degree in
History from the University of California, Los Angeles.
John D. Iuliucci, Ph.D. has served as Senior Vice President, Drug Development
since January 1999. Dr. Iuliucci also served as Vice President, Drug Development
from October 1996 to December 1998, and Vice President, Preclinical Development
of ARIAD from June 1992 to September 1996. Prior to joining ARIAD, Dr. Iuliucci
was Director of Preclinical Pharmacology and Toxicology at Centocor, Inc. from
1984 to 1992. From 1975 to 1984, Dr. Iuliucci headed the Drug Safety Evaluation
Department at Adria Laboratories. He was a Senior Toxicologist at the
Warner-Lambert Pharmaceutical Research Institute from 1972 to
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1975. Dr. Iuliucci received a B.S. degree in Pharmacy and M.S. and Ph.D. degrees
in Pharmacology from Temple University.
Manfred Weigele, Ph.D. has served as Senior Vice President and Chief Scientific
Officer since March 1999. Dr. Weigele also served as Senior Vice President,
Physical and Chemical Sciences from October 1996 to December 1998 and as Senior
Vice President, Research - Chemistry of ARIAD from October 1991 to September
1996. Prior to joining ARIAD, from 1985 to 1991, Dr. Weigele was a Vice
President and Group Director of Chemistry Research for Hoffmann-LaRoche Inc.,
where he directed chemistry research. He joined Hoffmann-LaRoche, a worldwide
pharmaceuticals company, in 1965. Dr. Weigele received his undergraduate
training at Technische Universitat in Braunschweig, Germany and his Ph.D. degree
from the University of Wisconsin.
Mark J. Zoller, Ph.D. has served as Senior Vice President, Genomics since
November 1998 and as Scientific Director of the Hoechst-ARIAD Genomics Center,
LLC since April 1997. Dr. Zoller also served as Vice President, Genomics from
April 1997 to October 1998, Vice President, Drug Discovery - Signal Transduction
from October 1996 to March 1997 and Vice President, Research - Molecular Biology
from November 1994 to September 1996. Previously, he served as Director,
Molecular Biology for ARIAD from June 1992 to October 1994. Prior to joining
ARIAD, he was a Senior Scientist and group leader of Genentech, Inc. Previously,
Dr. Zoller was a Senior Staff Investigator at the Cold Spring Harbor Laboratory
where he focused on the development of molecular genetic systems to study
protein kinases. Dr. Zoller received his Ph.D. degree in Chemistry from the
University of California, San Diego and was a Postdoctoral Fellow in Molecular
Biology at the University of Vancouver, Canada.
David L. Berstein has served as Vice President, Chief Patent Counsel of ARIAD
since September 1993. Prior to joining ARIAD, from 1990 through 1993, Mr.
Berstein was Patent Counsel at BASF Bioresearch Corporation, where he was
responsible for intellectual property matters, including patents and licensing.
Prior to joining BASF, from 1985 to 1990, Mr. Berstein was a patent attorney at
Genetics Institute, Inc. where he was involved in various aspects of the patent
process from patent procurement through litigation. Mr. Berstein joined Genetics
Institute from the law firm of Cooper & Dunham. Mr. Berstein received his B.S.
degree from the University of Michigan and his J.D. degree from Fordham
University.
Rainer Fuchs, Ph.D. has served as Vice President, Chief Information Officer
since January 1998. Dr. Fuchs also serves as Director, Bioinformatics for the
Hoechst-ARIAD Genomics Center, LLC. Prior to joining ARIAD, Dr. Fuchs
established and directed the bioinformatics group at Glaxo Wellcome, where he
served most recently as Director of Bioinformatics. Dr. Fuchs began his career
at the European Molecular Biology Laboratory (EMBL) Data Library Program in
Heidelberg, Germany. He received his Ph.D. degree in Biochemistry from
Technische Hochschule Darmstadt in Germany.
Dennis Holt, Ph.D. has served as Vice President, Drug Discovery - Chemistry
since October 1996 and served as Director of Research, Chemistry from August
1994 to September 1996. Prior to joining ARIAD, Dr. Holt was Associate Director
of the medicinal chemistry group at SmithKline Beecham Pharmaceuticals where he
focused on the discovery of novel synthetic and
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semi-synthetic drugs. Dr. Holt received his B.A. degree from Johns Hopkins
University and his M.A. and Ph.D. degrees from Harvard University.
Jacqueline Papkoff, Ph.D. has served as Vice President, Cell Biology and
Genetics since June 1998. Dr. Papkoff also serves as Director, Cell Biology and
Genetics for the Hoechst-ARIAD Genomics Center, LLC. Prior to joining ARIAD,
from February 1996 to May 1998, Dr. Papkoff was Director of Molecular Oncology
at Megabios Corp. From July 1993 to January 1996, she was Senior Scientist,
Department of Cellular Biochemistry at Sugen, Inc. Dr. Papkoff was the Group
Leader, Department of Tumor Biology, at Syntex Research from January 1993 to
June 1993 and a Staff Researcher from January 1987 to May 1993. Dr. Papkoff
received her Ph.D. degree in Biology from the University of California, San
Diego working at the Salk Institute and her B.A. degree in Biology from the
University of California, Santa Cruz.
Tomi K. Sawyer, Ph.D. has served as Vice President, Drug Discovery since January
1999 and as Director, Drug Discovery-Signal Transduction from October 1997 to
December 1998. From July 1993 to September 1997, he was Head and Associate
Research Fellow, Structure-Based Design and Chemistry at Parke-Davis
Pharmaceutical Research, a Division of Warner-Lambert Company, and Section
Director, Peptide and Peptidomimetic Chemistry at Parke-Davis from July 1991 to
July 1993. Dr. Sawyer received his Ph.D. in Organic Chemistry from the
University of Arizona and his B.S. in Chemistry from Moorhead State University.
Joan S. Brugge, Ph.D., a Director since February 1995, is Professor of Cell
Biology at Harvard Medical School. Dr. Brugge served as Senior Vice President,
Exploratory Research at ARIAD from October 1996 through July 1997 and as Senior
Vice President, Research-Biology from May 1992 to September 1996 and as
Scientific Director of ARIAD from May 1992 to February 1997. From 1989 to 1992,
Dr. Brugge was a Professor of Microbiology at the University of Pennsylvania
School of Medicine and an Investigator of the Howard Hughes Medical Institute.
Dr. Brugge currently serves on the Medical Advisory Board of the Howard Hughes
Medical Institute and the Advisory Committee to the Director and Board of
Scientific Advisors of the National Cancer Institute. She received her A.B.
degree in Biology from Northwestern University and her Ph.D. degree in Virology
from Baylor College of Medicine and completed postdoctoral research at the
University of Colorado Medical Center.
Vaughn D. Bryson, a Director of ARIAD since February 1995, is President of Life
Science Advisors, Inc. Mr. Bryson was a thirty-two year employee of Eli Lilly &
Co. ("Lilly") and served as President and Chief Executive Officer of Lilly from
1991 to 1993. He served as Executive Vice President from 1986 until 1991. He
also served as member of Lilly's Board of Directors from 1984 until his
retirement in 1993. Mr. Bryson was Vice Chairman of Vector Securities
International Inc. from April 1994 to December 1996. He also is a Director of
Chiron Corporation, Fusion Medical Technologies, Inc., Perclose, Inc., and
Quintiles Transnational Corporation. He received a B.S. degree in Pharmacy from
the University of North Carolina and completed the Sloan Program at the Stanford
University Graduate School of Business.
John M. Deutch, Ph.D., a Director of ARIAD since March 1997, is an Institute
Professor at the Massachusetts Institute of Technology. He has previously served
as Director of Central Intelligence, Deputy Secretary of Defense, Undersecretary
of Defense (Acquisition and Technology), Provost of the Massachusetts Institute
of Technology, Dean of the School of
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Science, Chairman of the Department of Chemistry and the Karl Taylor Compton
Professor of Chemistry. Mr. Deutch has received numerous awards and honors in
physical chemistry and computational sciences. Mr. Deutch received his B.A.
degree from Amherst College and his D.Sc. degree from the Massachusetts
Institute of Technology and was a postdoctoral fellow at the National Institutes
of Health. Mr. Deutch is a Director of Citicorp, CMS Energy, Cummins Engine
Company, Inc. and Schlumberger Ltd.
Philip Felig, M.D., a Director of ARIAD since October 1991, is currently in
medical practice specializing in endocrinology and diabetes as an Attending
Physician on the Senior Medical Staff at Lenox Hill Hospital. Prior to this,
from 1986 to 1987, he was Chief Executive Officer of Sandoz Pharmaceuticals
Corporation and from 1984 to 1987, President of the Sandoz Research Institute.
Dr. Felig came to Sandoz from the Yale University School of Medicine where he
was Professor and Vice-Chairman of the Department of Medicine and Chief of
Endocrinology. Dr. Felig received his B.A. degree from Princeton University and
his M.D. degree from the Yale University School of Medicine and did further
medical training at the Yale-New Haven Hospital, the Joslin Laboratory at
Harvard Medical School and the Peter Bent Brigham Hospital. Dr. Felig also holds
an Honorary Doctor of Medicine from the Karolinska Institute.
Joel S. Marcus, a Director of ARIAD since February 1995, is Chief Executive
Officer of Alexandria Real Estate Equities, Inc., a publicly held real estate
investment trust principally focused on the life sciences industry. Mr. Marcus
is a founder and principal of Health Science Capital Partners, which invests in
healthcare related companies. From 1986 to 1994, Mr. Marcus was a partner with
Brobeck, Phleger & Harrison, a law firm (and its predecessor). Mr. Marcus is a
co-founder of the International Life Science Partnering Conference and was one
of the original architects and officers of the Kirin-Amgen, Inc. joint venture,
which financed the development of two leading genetically engineered
pharmaceuticals. He received his undergraduate degree from the University of
California, Los Angeles, and a jurisprudence degree also from UCLA. He is also a
licensed certified public accountant.
Ralph Snyderman, M.D., a Director of ARIAD since June 1998, has been Chancellor
for Health Affairs, Dean, School of Medicine at Duke University, and President
and CEO of Duke University Health System since March 1989. He was formerly
Senior Vice President of Medical Research and Development at Genentech, Inc.
from January 1987 to May 1989. Dr. Snyderman also serves on the Board of
Directors of Proctor and Gamble, Inc.. Dr. Snyderman received his M.D. degree
from University of New York and his B.S. degree from Washington College,
Chestertown, Maryland.
Raymond S. Troubh, a Director of ARIAD since October 1991, has been a financial
consultant for more than the past five years. He was a general partner of Lazard
Freres & Co., an investment banking firm, and a governor of the American Stock
Exchange. Mr. Troubh is a Director of Becton, Dickinson and Company, Diamond
Offshore Drilling, Inc., Foundation Health Systems, Inc., General American
Investors Company, Inc., Olsten Corporation, Petrie Stores Corporation, Starwood
Hotels & Resorts, Inc., Triarc Companies, Inc. and WHX Corporation. He received
his A.B. degree from Bowdoin College and his LL.B. degree from Yale Law School.
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SECTION 16 FILINGS
Section 16(a) of the Exchange Act requires the Company's directors, executive
officers and beneficial owners of more than 10% of the Company's Common Stock to
file reports of ownership and changes of ownership with the Commission on Forms
3, 4 and 5. The Company believes that during the fiscal year ended December 31,
1998 its directors, executive officers and beneficial owners of more than 10% of
the Company's Common Stock complied with all applicable filing requirements. In
making these disclosures, the Company has relied solely on information filed
with the Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Company's Proxy Statement for its 1999 Annual
Meeting of Stockholders under the captions "Proposal 1.-- Election of Class 2
Directors -- Additional Information Concerning the Board of Directors" and
"Executive Compensation" is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Company's Proxy Statement for its 1999 Annual
Meeting of Stockholders under the caption "Security Ownership of Certain
Beneficial Owners and Management" is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Company's Proxy Statement for its 1999 Annual
Meeting of Stockholders under the caption "Certain Relationships and Related
Transactions" is incorporated herein by this reference.
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PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following Consolidated Financial Statements, Notes
thereto and Independent Auditors' Report are incorporated
herein by reference to Item 8:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a) (2) The Company is not required to file any financial statement
schedules
The Exhibits listed in the Exhibit Index are filed herewith in
the manner set forth therein.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on November 12,
1998 reporting that it had completed at private placement of
5,000 shares of Series C Convertible Preferred Stock
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 Boston and
Commonwealth of Massachusetts on the 31st of March, 1999.
ARIAD PHARMACEUTICALS, INC.
By: /s/ Harvey J. Berger
-------------------------------------
Name: Harvey J. Berger, M.D.
Title: Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Harvey J. Berger Chairman of the Board of Directors,
- ------------------------ President and Chief Executive Officer March 31, 1999
Harvey J. Berger, M.D. (Principal Executive Officer)
/s/ Sandford D. Smith Vice Chairman of the Board of Directors March 31, 1999
- ------------------------
Sandford D. Smith
/s/ Jay R. LaMarche Executive Vice President, Chief Financial March 31, 1999
- ------------------------ Officer, Treasurer and Director
Jay R. LaMarche (Principal Financial and Accounting Officer)
/s/ Joan S. Brugge Director March 31, 1999
- ------------------------
Joan S. Brugge, Ph.D.
/s/ Vaughn D. Bryson Director March 31, 1999
- ------------------------
Vaughn D. Bryson
/s/ John M. Deutch Director March 31, 1999
- ------------------------
John M. Deutch, Ph.D.
/s/ Philip Felig Director March 31, 1999
- ------------------------
Philip Felig, M.D.
/s/ Joel S. Marcus Director March 31, 1999
- ------------------------
Joel S. Marcus
/s/ Ralph Snyderman Director March 31, 1999
- ------------------------
Ralph Snyderman, M.D.
/s/ Raymond S. Troubh Director March 31, 1999
- ------------------------
Raymond S. Troubh
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EXHIBIT INDEX
EXHIBIT NO. TITLE
- ----------- -----
3.1 Certificate of Incorporation of the Company, as amended (1)
3.2 By-laws of the Company, as amended (5)
3.3 Amendment of Certificate of Incorporation of the Company, dated
April 8, 1994 (2)
3.4 Amendment of Certificate of Incorporation of the Company, dated
October 4, 1994 (5)
3.5 Certificate of Designations in respect of Series B Preferred Stock
of the Company (8)
4.1 Form of ARIAD Pharmaceuticals, Inc. Common Stock Purchase
Warrant (1)
4.2 Principal Stockholders' Agreement, dated as of January 5, 1992,
among ARIAD Pharmaceuticals, Inc., David Blech, David Blech as
trustee of The Blech Family Trust, Mark S. Germain, Harvey J.
Berger, Harvey J. Berger and Wendy S. Berger as Trustees of the
Berger Family Trust, Avalon Ventures and Avalon Ventures IV. (1)
4.3 Form of Warrant Agreement (with Form of Warrant). (3)
4.4 Rights Agreement, dated as of December 15, 1994, between the
Company and State Street Bank and Trust Company, which includes the
Certificate of Designations in respect of the Series A Preferred
Stock, as Exhibit A, the Form of Right Certificate as Exhibit B and
the Summary of Rights to Purchase Series A Preferred Stock as
Exhibit C. Pursuant to the Rights Agreement, Right Certificates
will not be mailed until after the Separation Date (as defined
therein). (4)
4.5 Amendment, dated as of April 24, 1995, to Rights Agreement, dated
as of December 15, 1994, between ARIAD Pharmaceuticals, Inc. and
State Street Bank and Trust Company. (6)
4.6 Stock Purchase Agreement, dated as of April 24, 1995, between ARIAD
Pharmaceuticals, Inc. and Biotech Target S.A. (7)
4.7 Certificate of Designations for Series C. Convertible Preferred
Stock (10)
4.8 Securities Purchase Agreement and Registration Rights Agreement
dated November 9, 1998, by and between the Company and the Buyers
named therein. (10)
10.1 Lease Agreement, dated January 8, 1992, between ARIAD
Pharmaceuticals, Inc. and Forest City Cambridge, Inc. (1)
10.2+ Executive Employment Agreement, dated as of January 1, 1992,
between ARIAD Pharmaceuticals, Inc. and Harvey J. Berger, M.D. (1)
10.3+ Executive Employment Agreement, dated as of January 3, 1992,
between ARIAD Pharmaceuticals, Inc. and Joan S. Brugge, Ph.D. (1)
10.4+ Executive Employment Agreement, dated as of January 1, 1992,
between ARIAD Pharmaceuticals, Inc. and Jay R. LaMarche. (1)
10.5+ Executive Employment Agreement, dated as of October 14, 1991,
between ARIAD Pharmaceuticals, Inc. and Manfred Weigele, Ph.D. (1)
10.6 Loan and Security Agreement, dated September 23, 1992, by and
between ARIAD Pharmaceuticals, Inc., ARIAD Corporation and BayBank
Boston, N.A. and related instruments and documents. (1)
10.7 Loan Agreement, dated October 28, 1992, among ARIAD Corporation,
ARIAD Pharmaceuticals, Inc. and the Massachusetts Business
Development Corporation and related instruments and documents. (1)
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EXHIBIT NO. TITLE
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10.8 Equipment Lease Agreement, dated December 10, 1992, by and between
ARIAD Corporation and General Electric Capital Corporation. (1)
10.9 Master Lease Agreement, dated December 21, 1992, by and between
ARIAD Corporation and Comdisco, Inc. (1)
10.10+ ARIAD Pharmaceuticals, Inc. 1991 Stock Option Plan for Employees,
as amended. (5)
10.11+ ARIAD Pharmaceuticals, Inc. 1991 Stock Option Plan for
Directors. (1)
10.12+ ARIAD Retirement Savings Plan. (1)
10.13 Amended and Restated Agreement dated as of December 12, 1997
between The Board of Trustees of The Leland Stanford Junior
University and ARIAD Gene Therapeutics, Inc. (9)
10.14+ Amendment, dated April 19, 1994, to Executive Employment Agreement
between ARIAD Pharmaceuticals, Inc. and Harvey J. Berger, M.D. 3)
10.15+ Amendment, dated March 2, 1994, to Executive Employment Agreement
between ARIAD Pharmaceuticals, Inc. and Joan S. Brugge, Ph.D. (3)
10.16+ Amendment, dated March 2, 1994, to Executive Employment Agreement
between ARIAD Pharmaceuticals, Inc. and Jay R. LaMarche. (3)
10.17+ Amendment, dated March 2, 1994, to Executive Employment Agreement
between ARIAD Pharmaceuticals, Inc. and Manfred Weigele, Ph.D. (3)
10.18 Unit Purchase and Technology Right of First Negotiation Agreement,
dated May 5, 1994, among Genentech, Inc., ARIAD Pharmaceuticals,
Inc. and ARIAD Gene Therapeutics, Inc. (3)
10.19+ Amendment No. 2, dated June 30, 1994, to Executive Employment
Agreement between ARIAD Pharmaceuticals, Inc. and Harvey J. Berger,
M.D. (5)
10.20+ ARIAD Pharmaceuticals, Inc. 1994 Stock Option Plan for Non-Employee
Directors. (5)
10.21 Collaborative Research and License Agreement, dated November 5,
1995, between Roussel Uclaf and ARIAD Pharmaceuticals, Inc. (7)
10.22 License Agreement dated as of September 12, 1996 between Mochida
Pharmaceuticals Co., Ltd. and ARIAD Pharmaceuticals, Inc. (8)
10.23 Joint Venture Agreement dated as of February 14, 1997 between
Genovo, Inc. and ARIAD Gene Therapeutics, Inc. (8)
10.24 Joint Venture Master Agreement dated as of March 4, 1997 between
Hoechst Marion Roussel, Inc. and ARIAD Pharmaceuticals, Inc. (8)
10.25 Stock Purchase, Standstill and Registration Rights Agreement dated
as of March 4, 1997 between Hoechst Marion Roussel, Inc. and ARIAD
Pharmaceuticals, Inc. (8)
10.26 Collaborative Agreement dated as of March 4, 1997 between Incyte
Pharmaceuticals, Inc. and ARIAD Pharmaceuticals, Inc. (8)
10.27+ Amendment, dated January 1, 1997, to Executive Employment Agreement
between ARIAD Pharmaceuticals, Inc. and Harvey J. Berger, M.D. (8)
10.28+ Amendment, dated January, 1, 1997, to Executive Employment
Agreement between ARIAD Pharmaceuticals, Inc. and Jay R.
LaMarche (8)
10.29+ Amendment, dated January 1, 1997, to Executive Employment Agreement
between ARIAD Pharmaceuticals, Inc. and Manfred Weigele, Ph.D. (8)
10.30+ Consulting Agreement, dated July 1, 1997, between ARIAD
Pharmaceuticals, Inc. and Joan S. Brugge, Ph.D. (8)
10.31+ ARIAD Pharmaceuticals, Inc. 1997 Employee Stock Purchase Plan (8)
10.32+ Amendment to the 1991 Stock Option Plan for Employees and
Consultants (8)
10.33+ Amendment to the 1994 Stock Option Plan for Non-Employee
Directors (8)
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EXHIBIT NO. TITLE
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10.34 Fourth Amendment to Loan and Security Agreement dated June 27, 1997
with BankBoston, N.A. as successor in interest to BayBank, N.A. (8)
10.35 License Agreement, dated July 17, 1997, between ARIAD
Pharmaceuticals, Inc. and Mitotix Inc. (8)
10.36 Technology Purchase and Sale Agreement and related agreements,
dated July 17, 1997, between ARIAD Pharmaceuticals, Inc. and
Mitotix, Inc. (8)
10.37 ARIAD Pharmaceuticals, Inc. 1997 Executive Compensation Plan (9)
21.1 Subsidiaries of the Company. (3)
23.1 Consent of Deloitte & Touche LLP (11)
27.1 Financial Data Schedule (11)
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(+) Management Contract or Compensatory Plan or Arrangement
(1) Incorporated by reference to Registration Statement on Form 10 of
the Company filed with the Securities and Exchange Commission on
June 25, 1993.
(2) Incorporated by reference to Form 10-K of the Company for the
fiscal year ended December 31, 1993 filed with the Securities and
Exchange Commission on April 15, 1994.
(3) Incorporated by reference to Registration Statement on Form S-1 of
the Company (No. 33-76414) filed with the Securities and Exchange
Commission on March 11, 1994.
(4) Incorporated by reference to Form 8-K of the Company filed with the
Securities and Exchange Commission on December 21, 1994.
(5) Incorporated by reference to Form 10-K of the Company for the
fiscal year ended December 31, 1994 filed with the Securities and
Exchange Commission on March 30, 1995.
(6) Incorporated by reference to Form 8-K of the Company filed with the
Securities and Exchange Commission on May 15, 1995.
(7) Incorporated by reference to Form 10-K of the Company for the
fiscal year ended December 31, 1995 filed with the Securities and
Exchange Commission on March 15, 1996.
(8) Incorporated by reference to Forms 10-Q of the Company filed with
the Securities and Exchange Commission on May 12, 1997, August 12,
1997 and November 12, 1997.
(9) Incorporated by reference to Form 10-K of the Company for the fiscal
year ended December 31, 1997 filed with the Securities and Exchange
Commission on March 5, 1998.
(10) Incorporated by reference to Form 8-K of the Company filed with
the Securities and Exchange Commission on November 12, 1998.
(11) Filed herewith.
72