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FORM 1O-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19732
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CORVAS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0238812
(State or other jurisdiction (I .R.S. Employer
of incorporation or organization) Identification No.)
3030 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and zip code)
(858) 455-9800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark whether the Registrant (l) 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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At August 8, 2002, there were 27,567,968 shares of Common Stock, $0.001
par value, of the Registrant issued and outstanding.
CORVAS INTERNATIONAL, INC.
INDEX
Page
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001 1
Condensed Statements of Operations for the Three and Six Months
Ended June 30, 2002 and 2001 (unaudited) 2
Condensed Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (unaudited) 3
Notes to Condensed Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
None
Item 3. Defaults Upon Senior Securities 22
None
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 23
(b) Reports on Form 8-K 23
SIGNATURES 24
CERTIFICATION 24
PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CORVAS INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
In thousands
(unaudited)
JUNE 30, 2002 DECEMBER 31, 2001
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ASSETS
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Current assets:
Cash and cash equivalents $ 7,246 $ 4,332
Short-term debt securities held to maturity
and time deposits, partially restricted 71,586 72,359
Receivables 1,382 1,865
Note receivable from related party 250 250
Other current assets 1,268 382
------------ ------------
Total current assets 81,732 79,188
------------ ------------
Debt issuance costs 79 89
Long-term debt securities held to maturity 22,556 35,608
Property and equipment, net 2,600 2,118
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$ 106,967 $ 117,003
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 864 $ 925
Accrued liabilities 1,013 1,123
Accrued benefits 96 --
Accrued leave 617 546
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Total current liabilities 2,590 2,594
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Convertible notes payable 12,141 11,736
Deferred rent 243 216
Stockholders' equity:
Common stock 27 27
Additional paid-in capital 227,610 227,430
Accumulated deficit (135,644) (125,000)
------------ ------------
Total stockholders' equity 91,993 102,457
Commitments and contingencies
------------ ------------
$ 106,967 $ 117,003
============ ============
See accompanying notes to condensed financial statements.
1
CORVAS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
In thousands, except per share data
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
REVENUES:
Royalties $ 46 $ 37 $ 73 $ 67
Research grants -- 57 -- 96
---------- ---------- ---------- ----------
Total revenues 46 94 73 163
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Research and development 5,001 9,817 9,725 15,020
General and administrative 1,206 1,296 2,473 2,495
---------- ---------- ---------- ----------
Total costs and expenses 6,207 11,113 12,198 17,515
---------- ---------- ---------- ----------
Loss from operations (6,161) (11,019) (12,125) (17,352)
OTHER INCOME (EXPENSE):
Interest income 916 1,659 1,896 3,676
Interest expense (209) (198) (415) (393)
---------- ---------- ---------- ----------
707 1,461 1,481 3,283
---------- ---------- ---------- ----------
Net loss and other comprehensive loss $ (5,454) $ (9,558) $ (10,644) $ (14,069)
========== ========== ========== ==========
Basic and diluted net loss per share $ (0.20) $ (0.35) $ (0.39) $ (0.51)
========== ========== ========== ==========
Shares used in calculation of basic and
diluted net loss per share 27,507 27,400 27,505 27,380
========== ========== ========== ==========
See accompanying notes to condensed financial statements.
2
CORVAS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
In thousands
(unaudited)
Six Months Ended
June 30,
-------------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,644) $ (14,069)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 452 296
Amortization of premiums and discounts on investments 564 (120)
Amortization of debt issuance costs 10 10
Non-cash interest expense on convertible notes payable 405 384
Gain on sale of property and equipment (5) --
Stock compensation expense 38 96
Changes in assets and liabilities:
Decrease in receivables 483 222
Increase in other current assets (886) (88)
Increase (decrease) in accounts payable, accrued
liabilities, accrued benefits and accrued leave (4) 2,476
Increase in deferred rent 27 49
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Net cash used in operating activities (9,560) (10,744)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity (32,847) (81,138)
Proceeds from maturity of investments held to maturity 34,369 85,542
Proceeds from sale of investments held to maturity 11,739 1,981
Proceeds from sale of property and equipment 5 --
Purchases of property and equipment (934) (1,032)
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Net cash provided by investing activities 12,332 5,353
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 142 402
Capital contribution -- 225
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Net cash provided by financing activities 142 627
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Net increase (decrease) in cash and cash equivalents 2,914 (4,764)
Cash and cash equivalents at beginning of period 4,332 14,153
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,246 $ 9,389
============= =============
See accompanying notes to condensed financial statements.
3
CORVAS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) The Company
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Corvas International, Inc. (the "Company") was incorporated on March
27, 1987 under the laws of the State of California. In July 1993, the Company
reincorporated in the State of Delaware. The Company is focused on development
of new therapeutics that target serine proteases, the largest human protease
gene family, for the treatment of cardiovascular disease and cancer.
(2) Basis of Presentation
---------------------
The interim financial information contained herein is unaudited but, in
management's opinion, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. The condensed
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto for the year ended December 31, 2001
included in the Company's Annual Report on Form 10-K. Results for the interim
periods are not necessarily indicative of results for other interim periods or
for the full year.
(3) Net Loss Per Share
------------------
Net loss per share for the three months ended June 30, 2002 and 2001 is
computed using the weighted-average number of common shares outstanding. Options
totaling 3,211,000 and 2,356,000 shares were excluded from the calculation of
diluted net loss per share for the six months ended June, 2002 and 2001
respectively. In addition, 3,745,000 and 3,394,000 shares from the assumed
conversion of the 5.5% convertible senior subordinated notes issued in 1999 have
been excluded from this calculation as of June 30, 2002 and 2001, respectively.
(4) Debt Securities Held to Maturity
--------------------------------
Certain securities that were no longer in compliance with the Company's
investment policy were sold prior to maturity during the six months ended June
30, 2002.
(5) Subsequent Event
----------------
On July 22, 2002, the Company announced a significant workforce
reduction of nearly 40% of its research and administrative staff, representing
42 employees. This restructuring is part of an extensive strategic realignment
of the Company's research and development programs designed to focus resources
on the most advanced programs. The restructuring will result in a third quarter
restructuring charge of up to $2.0 million and, along with other cost-cutting
measures, is expected to result in an annualized cost savings of more than $8.0
million.
4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM WHAT IS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE HEADING "RISK
FACTORS."
THE TERMS "CORVAS," "WE," "US" AND "OUR" REFER TO CORVAS
INTERNATIONAL, INC.
OVERVIEW
We are a biopharmaceutical company focused on the development of new
therapeutics that address today's largest medical markets, including
cardiovascular disease and cancer. We are currently developing our
cardiovascular drug candidate, a novel proprietary injectable anticoagulant
known as rNAPc2, for the treatment of people affected by acute coronary
syndromes, specifically unstable angina and non-ST-segment elevation myocardial
infarction, or UA/NSTEMI. In anticipation of studies in UA/NSTEMI, we have
completed a Phase IIa safety study in patients undergoing elective coronary
angioplasty. Our cancer research programs are focused on the development of new
therapies, including monoclonal antibodies and synthetic prodrugs, that target
serine protease enzymes associated with the growth and spread of cancerous
tumors. We have collaborations with Abgenix, Inc. and Dyax Corp. to discover,
develop and commercialize therapeutic antibodies against cancer. Our Protease
Activated Cancer Therapy, or PACT, research program employs a synthetic
conjugate molecule, or prodrug, approach designed to target tumor-associated
proteases followed by the activation of potent, cytotoxic drugs to kill tumor
cells.
We currently have no products for sale and are focused on research and
development and clinical trial activities. We have not been profitable on an
annual basis since inception and we anticipate that we will incur substantial
additional operating losses over the next several years as we progress in our
cardiovascular and cancer programs. To date, we have funded our operations
primarily through the sale of equity and debt securities, payments received from
collaborators and interest income. At June 30, 2002, we had an accumulated
deficit of $135.6 million. Unless we enter into any new collaborative agreements
that include funding for research and development or funding for the continued
development of clinical drug candidates, we expect that our sources of revenue,
if any, for the next several years will continue to primarily consist of
interest income. We may not enter into any additional collaborative agreements
and may not recognize any revenue pursuant to collaborative agreements in the
future. Based upon results from a Phase IIb study, Pfizer terminated our
collaborative agreement with them in June 2002 covering UK-279,276, formerly
known as neutrophil inhibitory factor or rNIF, an anti-inflammatory agent being
developed for the treatment of reperfusion injury associated with ischemic
stroke. Accordingly, we will not recognize any additional revenue pursuant to
this agreement.
Since we have never had a product candidate advance beyond Phase II
clinical trials, the process of developing our product candidates will require
significant additional research and development, preclinical and clinical
testing, and regulatory approvals prior to commercialization of a product
candidate. Pending appropriate regulatory approvals, we intend to initiate a
Phase II clinical study of rNAPc2 in UA/NSTEMI patients in the second half of
2002. The primary objective of the proposed Phase II trial is to determine a
safe and effective dose of rNAPc2 for the prophylaxis of ischemic complications
5
of UA/NSTEMI. We also plan to continue to build on selected preclinical cancer
programs. In July 2002, we announced a significant workforce reduction as part
of an extensive strategic alignment of our research and development programs. As
a result of this reduction in personnel and other cost-cutting measures, we
anticipate that our research and development and, to a lesser degree, general
and administrative expenditures in 2002 will be less than those incurred in
2001. However, we expect to continue to incur substantial operating losses for
the foreseeable future. In addition, we continue to pursue and evaluate various
possible strategic transactions to expand our pipeline of clinical drug
candidates, including in-licensing or acquiring complementary products,
technologies or companies, or combining with another company. If we in-license
or acquire products, technologies or companies, we expect that our operating
expenses would increase as a result.
SUBSEQUENT EVENT
On July 22, 2002 we announced a significant workforce reduction of
nearly 40% of our research and administrative staff, representing 42 employees.
This restructuring is part of an extensive strategic realignment of our research
and development programs designed to focus resources on the continued
development of rNAPc2 and on selected cancer programs including our antibody
collaborations with Abgenix and Dyax, as well as our PACT program. The
restructuring will result in a third quarter restructuring charge of up to $2.0
million, of which $290,000 is expected to be paid in 2003. Along with other
cost-cutting measures, the restructuring is expected to result in an annualized
cost savings of more than $8.0 million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES. Our operating revenues, comprised solely of royalties from
the license of recombinant tissue factor to two Johnson & Johnson companies,
decreased to $46,000 in the three months ended June 30, 2002 from $94,000 in the
corresponding period of 2001. This $48,000 decrease was primarily attributable
to the completion of a research grant in August 2001.
We do not expect to receive any revenues under collaborative agreements
in 2002. In the event that we enter into new collaborative agreements, it is
possible that we may recognize related revenue; however, we cannot predict
whether or when we will enter into new collaborative agreements, if any. Even if
we do enter into new collaborative agreements, we may not recognize any revenue
under these agreements in 2002 or in subsequent years.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
the quarter ended June 30, 2002 decreased to $5.0 million, or 81% of our total
expenses, compared to $9.8 million, or 88%, in the corresponding quarter of
2001. This $4.8 million decrease was primarily attributable to expenses
associated with the manufacturing of rNAPc2 in the first half of 2001. This
decrease was partially offset by an increased number of scientists working on
our cancer programs and costs incurred in anticipation of our planned Phase II
rNAPc2 trial.
Pending appropriate regulatory approvals, we expect to initiate a
double-blinded, placebo-controlled Phase II clinical trial of rNAPc2 for the
6
treatment of UA/NSTEMI in the second half of this year. However, as a result of
the recently-announced workforce reduction, we expect our research and
development expenses for 2002 to decrease from the 2001 levels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses in the three months ended June 30, 2002 decreased to $1.2 million from
$1.3 million in the same quarter of 2001. This $90,000 decrease was mainly the
result of lower utility costs.
NET OTHER INCOME. Net other income, which consists of interest income
and interest expense on our convertible notes payable, was $707,000 in the
second quarter of 2002, compared to nearly $1.5 million one year earlier. This
$754,000 decrease was due to a combination of lower balances available for
investment and the significant reduction in interest rates. Unless our cash
position increases, we expect that our interest income will continue to decline
in subsequent quarters.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES. Operating revenues for the six months ended June 30, 2002
decreased to $73,000 from $163,000 in the same period of 2001. This $90,000
decrease was primarily attributable to the completion of a research grant in
August 2001.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
the six months ended June 30, 2002 decreased to $9.7 million, or 80% of our
total costs, from $15.0 million, or 86% of our total costs, one year earlier.
This $5.3 million decrease was primarily attributable to the expenses associated
with manufacturing of rNAPc2 in the first half of 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses remained at $2.5 million for both of the six month periods ended June
30, 2002 and 2001.
NET OTHER INCOME. Net other income decreased to $1.5 million for the
six months ended June 30, 2002 from $3.3 million one year earlier. This $1.8
million decrease was due to lower balances available for investment and the
significant reduction in interest rates.
We expect that we will continue to incur substantial additional
operating losses over the next several years as we pursue our clinical trials
and research and development efforts. We also expect both our expenses and
losses to fluctuate from quarter to quarter and that the fluctuations may, at
times, be substantial.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our operations have been financed primarily through
public offerings and private placements of our equity and debt securities,
payments received through collaborative agreements, and interest income earned
on cash and investment balances. Our principal sources of liquidity are cash and
cash equivalents, time deposits and short- and long-term held to maturity debt
securities, which, net of $303,000 in restricted time deposits, totaled $101.1
million as of June 30, 2002. Working capital at June 30, 2002 was approximately
$79.1 million. We invest available cash in accordance with an investment policy
set by our board of directors, which has established objectives of preserving
principal, maintaining adequate liquidity and maximizing income. Our policy
provides guidelines concerning the quality, term and liquidity of investments.
We presently invest our excess cash primarily in debt instruments of
corporations with strong credit ratings and government-backed debt obligations.
In the six months ended June 30, 2002, we used net cash of $9.6 million in our
operating activities, the majority of which was provided by our investing
activities.
7
In August and October of 1999 we issued and sold, in two private
financings, a total of 2,000,000 shares of our common stock for $2.50 per share
and 5.5% convertible senior subordinated notes due in August 2006 in an
aggregate principal amount of $10.0 million. Net proceeds of $14.8 million were
raised in these financings. At the option of the note holder, the principal
balance of both notes is convertible into shares of our common stock at $3.25
per share, subject to certain adjustments. Interest on the outstanding principal
amounts of these notes accretes at 5.5% per annum, compounded semi-annually,
with interest payable upon redemption or conversion. Upon maturity, these notes
will have an accreted value of $14.6 million. At our option, the accreted
interest portion of both notes may be paid in cash or in our common stock priced
at the then-current market price. We have agreed to pay any applicable
withholding taxes on behalf of the note holder that may be incurred in
connection with the accreted interest, which are estimated and accrued at 30% of
the annual accretion. We may redeem the notes any time after August 18, 2002
upon payment of the outstanding principal and accreted interest, although we
have no current intent to redeem these notes.
In April 2002, we entered into an exclusive collaboration agreement
with Abgenix, Inc. to discover, develop and commercialize fully-human monoclonal
antibodies against two selected antigens from our portfolio of membrane-bound
serine proteases. Under the terms of the collaboration, Abgenix will use its
human antibody technologies to generate and select antibodies against the Corvas
targets. Both companies will have the right to co-develop and commercialize, or,
if co-development is not elected, to solely develop and commercialize any
antibody products discovered during the collaboration. Both companies will share
equally in the product development costs and any profits from product sales of
products successfully commercialized from any co-development efforts.
In September 2001, we entered into a collaboration agreement with Dyax
Corp. to discover, develop and commercialize novel cancer therapeutics focused
on serine protease inhibitors for two targets that we isolated and
characterized. Under the terms of this agreement, both companies will assume
joint development of any product candidates that may be identified and will
share commercialization rights and profits from any marketed products.
In July 2001, we entered into an agreement with Incyte Genomics, Inc.
for a multi-year subscription to Incyte's LifeSeq(R) Gold database for use in
our cancer research programs focused on serine proteases. The LifeSeq Gold
database provides researchers with a view of the entire human genome by
integrating proprietary expressed sequence tag and full-length gene sequence
information, mapping data and public genomic sequence information. We have
non-exclusive rights to Incyte's full-length gene program in addition to
sequence-verified cDNA clones, or copies of genes to facilitate the
identification and validation of new drug targets in the serine protease gene
family. Our agreement requires us to pay an annual subscription fee and, in the
event that any products based on the information acquired from this database are
developed and commercialized, we would also be required to make milestone and
royalty payments.
Over the next several years, we expect additional operating losses and
negative cash flows from operations. Assuming an estimated restructuring charge
of nearly $2.0 million and estimated annual savings of approximately $8.0
million from our recently-announced workforce reduction and other cost-cutting
measures, we currently expect our burn rate for 2002 to be in the mid $20
million range. Our current estimate assumes that we commence our Phase II
UA/NSTEMI trial in the second half of 2002 and does not account for any
potential strategic transactions. We expect to fund our working capital and
capital expenditure requirements during the next twelve months from our
available cash and investments and, based on our current estimates, we believe
that our available cash and investments should be sufficient to satisfy our
anticipated funding requirements for at least the next several years.
8
Our material external commitments for the balance of 2002 and for 2003,
based on contractual obligations and/or our current estimates, are as follows:
Payments Due/Estimated by Year
------------------------------
2002 2003
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Commitments (In thousands)
-----------
Operating lease $ 655 $ 1,345
Capital expenditures (1) 415 900
Committed research and development (2) 6,600 16,500
Workforce reduction termination costs (3) 1,315 290
----------- -----------
$ 8,985 $ 19,035
=========== ===========
Our current estimate of our future burn rate and capital requirements
may change for many reasons, some of which are beyond our control, including,
but not limited to:
o whether and when we begin our planned double-blinded,
placebo-controlled, dose-ranging Phase II clinical study of rNAPc2
in patients with UA/NSTEMI;
o the rate of patient recruitment in our planned Phase II clinical
study of rNAPc2 in patients with UA/NSTEMI;
o the timing and magnitude of expenses incurred to further develop
rNAPc2;
o the costs and timing of regulatory approvals related to rNAPc2;
o the progress related to our collaboration agreements with Abgenix
and Dyax, including the selection of any preclinical candidates;
o the progress on, and scope of, our internally-funded cancer
programs;
o our success in entering into future collaborative agreements, if
any;
o the costs of, and our success in, acquiring and integrating
complementary products, technologies or companies, if any;
o competing technological and market developments;
o the costs we incur in obtaining and enforcing patent and other
proprietary rights; and
o the costs we incur in defending against potential infringement of
the patents of others or in obtaining a license to operate under
such patents.
Our expected cash requirements may vary materially from those now
anticipated for many reasons. We recently announced a significant workforce
reduction of nearly 40% of our research and administrative staff. The objective
of this restructuring was to conserve cash by reducing expenses to allow us to
- --------------------
1) Based on our current projections for 2002 and 2003. These estimates may
change for many reasons including, but not limited to, the reasons listed above.
2) Includes both contractually-committed items and costs estimated for 2002 and
2003 for rNAPc2 and for our cancer programs. These future estimates may change
for many reasons including, but not limited to, the reasons listed above.
3) Excludes estimated asset impairment and other non-cash charges included in
the estimated restructuring charge.
9
focus on the programs that we believe have the highest probability of success,
since we do not expect to be able to raise capital through the sale of equity
securities in the near term. However, in the future we may need to raise
additional capital through strategic or other financings or through
collaborative relationships. Our ability to raise additional funds through the
sale of securities depends in part on investors' perceptions of the
biotechnology industry, in general, and of Corvas, in particular. Market prices
for securities of biotechnology companies, particularly Corvas, have been highly
volatile and may continue to be volatile in the future. Accordingly, additional
funding may not be available on acceptable terms or at all. If additional funds
are raised by issuing securities, our stockholders will experience dilution,
which may be substantial, especially if our stock price remains at the current
low levels. If we are not able to raise adequate funds in the future, we may be
required to significantly delay, further scale back or discontinue one or more
additional drug discovery programs, clinical trials or other aspects of our
operations.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies, which have been consistently
applied in all material respects, are more fully described in Note 2 to our
Notes to Financial Statements included in our Annual Report on Form 10-K.
Certain of our accounting policies require the application of judgment and
estimates by management, which may be affected by different assumptions and
conditions. These estimates are typically based on historical experience, terms
of existing contracts, trends in the industry and information available from
other outside sources, as appropriate. We believe the estimates and judgments
associated with our reported amounts are appropriate in the circumstances.
Actual results could vary from those estimates under different assumptions or
conditions.
We consider our most critical accounting policy to be revenue
recognition. We apply Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," which reflects the SEC's views on revenue recognition. We
recognize revenue from collaborative agreements as the related research and
development activities are performed under the terms of our agreements; any
advance payments received in excess of amounts earned are classified as deferred
revenue. Non-refundable license fees are recognized when we receive such
payments, absent any continuing involvement. We recognize milestone payments as
revenue upon achievement of the milestones specified in our agreements. We
recognize research grant revenue as the related research is performed under the
terms of the grant.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In accordance with our investment policy, we do not invest in
derivative financial instruments or any other market risk sensitive instruments.
Our available cash is invested in high quality fixed income investments that we
intend to hold to maturity. We believe that our interest rate market risk is
limited, and that we are not exposed to significant changes in fair value
because our investments are held to maturity and are primarily short-term in
nature. The fair value of each investment approximates its amortized cost.
For purposes of measuring interest rate sensitivity, we have assumed
that the similar nature of our investments allow us to aggregate their value.
The carrying amount of all held to maturity investments as of June 30, 2002 is
$93.8 million and they have a weighted-average interest rate of 3.1%.
10
Considering our investment balances as of June 30, 2002, rates of
return and the fixed rate nature of the convertible notes payable that were
issued in the second half of 1999, an immediate 10% change in interest rates
would not have a material impact on our financial condition or results of
operations.
Since the $10.0 million aggregate principal of the 5.5% convertible
senior subordinated notes that we issued is convertible into common stock at
$3.25 per share at the option of the holder, there is underlying market risk
related to an increase in our stock price or an increase in interest rates that
may make conversion of these notes into common stock beneficial to the holder.
Conversion of these convertible notes will have a dilutive effect on our common
stock.
RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY NEVER BECOME PROFITABLE.
We have experienced significant operating losses since our inception in
1987. At June 30, 2002, we had an accumulated deficit of approximately $135.6
million. We have not earned any revenues from commercial sales of any
therapeutic products. We have funded our operations principally from sales of
our equity and debt securities, payments received from collaborators and
interest income. Pfizer recently terminated our collaboration with them covering
UK-279,276, or rNIF, and we do not currently have any committed sources of
external funding. We will continue to incur substantial additional operating
losses over the next several years as we pursue our clinical trials and research
and development efforts. To become profitable, we, either alone or with
collaborators, must successfully identify, develop, manufacture and market new
product candidates. We do not expect to generate revenues from product sales or
royalties for at least a number of years, and it is possible that we will never
have significant product sales revenue or receive significant royalties on any
licensed product candidates.
WE HAVE NEVER HAD A PRODUCT CANDIDATE ADVANCE BEYOND PHASE II CLINICAL TRIALS
AND WE DO NOT HAVE, AND MAY NEVER DEVELOP, ANY COMMERCIAL DRUGS OR OTHER
PRODUCTS THAT GENERATE REVENUES.
We are at an early stage of development as a biopharmaceutical company,
and we do not have any commercial products. We expect to begin a Phase II
clinical trial for our only product candidate, rNAPc2, in the second half of
2002. rNAPc2 will require significant additional development, clinical trials,
regulatory clearances and additional investment before it can be commercialized.
Our product development efforts may not lead to commercial drugs, either because
the product candidates fail to be safe and effective in clinical trials or
because we have inadequate financial or other resources to pursue the program
through the clinical trial process. We do not expect to be able to market rNAPc2
or any future product candidates for a number of years, if at all. If we are
unable to develop any commercial drugs, or if such development is delayed, we
will be unable to generate revenues, which may require that we raise additional
capital through financings, scale back or discontinue some part of our
operations, or cease our operations entirely.
WE ARE DEPENDENT ON THE SUCCESSFUL OUTCOME OF THE CLINICAL TRIALS FOR OUR RNAPC2
PRODUCT CANDIDATE AND ANY FUTURE PRODUCT CANDIDATES, IF ANY.
11
We have completed a Phase IIa clinical trial of rNAPc2 in patients
undergoing elective coronary angioplasty to establish safety prior to conducting
additional clinical trials in patients with UA/NSTEMI. Subject to government
approval, we intend to enter rNAPc2 into a Phase II clinical study in UA/NSTEMI
patients in the second half of 2002.
Our business prospects depend on our ability, alone or with
collaborators, to complete patient enrollment in clinical trials, to obtain
satisfactory results, to obtain required regulatory approvals and to
successfully commercialize our products. Many factors affect patient enrollment,
including the size of the patient population, the proximity of patients to
clinical sites and the eligibility criteria for the trial. Delays in patient
enrollment in the trials may result in increased costs, program delays, or both,
which could slow down our product development and approval process. In addition,
we may not be able to commence the planned Phase II clinical trial for rNAPc2 in
UA/NSTEMI patients in the second half of 2002 due to regulatory or other
reasons. If clinical trials for any of our product candidates are not completed
or conducted as planned, due to any reason including, but not limited to, the
product candidate not being safe or effective, the commercialization of our
product candidates would likely be delayed or prevented, our business would
likely be materially harmed and our stock price would likely decline. In
addition, if we do not receive required regulatory approvals, we may never
commercialize any products and therefore may never be profitable.
OUR PRECLINICAL AND CLINICAL TESTING RESULTS ARE UNCERTAIN. IF TRIAL RESULTS ARE
NEGATIVE, WE MAY BE FORCED TO STOP DEVELOPING PRODUCT CANDIDATES IMPORTANT TO
OUR FUTURE.
The results of preclinical studies and initial clinical trials of our
product candidates will not necessarily predict the results obtained from
later-stage clinical trials. For example, Pfizer conducted successful
preclinical trials, several Phase I trials and a Phase IIa trial of UK-279,276,
but the results of a Phase IIb trial indicated that UK-279,276 did not have an
effect on recovery in stroke patients. Product candidates in later stages of
clinical trials may fail to show the desired safety and efficacy endpoints
despite having progressed through initial clinical testing. In addition, the
data collected from clinical trials of our product candidates may not be
sufficient to support FDA or other regulatory approval.
rNAPc2, or any of our future product candidates, may not be safe for
human use. Administering any product candidates we may develop to humans may
produce undesirable side effects. These side effects could interrupt, delay or
cause us or the FDA to halt clinical trials of our product candidates and could
result in the FDA or other regulatory authorities denying approval of our
product candidates for any or all targeted indications. Along with the FDA or
other regulatory authorities, we or our collaborators may suspend or terminate
clinical trials at any time.
THE FDA HAS NEVER APPROVED ANY CORVAS PRODUCT CANDIDATE AND WE MAY NEVER BE
PERMITTED TO COMMERCIALIZE ANY PRODUCT WE MAY DEVELOP.
We have never had a product candidate advance beyond the early stages
of development and none have received the regulatory clearance required from the
FDA or any other regulatory body to be commercially marketed and sold. While our
goal is to commence commercial sales of rNAPc2 and any other product candidates
we may develop, we may not achieve this goal for any product candidate in the
expected timeframe, or at all. The regulatory clearance process typically takes
many years and is extremely expensive, and regulatory clearance is never
guaranteed. If we fail to obtain regulatory clearance for our current or future
12
product candidates, we will be unable to market and sell any products and
therefore may never be profitable.
As part of the regulatory clearance process, we must conduct, at our
own expense or our collaborators' expense, preclinical research and clinical
trials for each product candidate to demonstrate safety and efficacy. In
addition, it is difficult to predict if the FDA will agree with the design of
our clinical trials. Even though earlier clinical trial results for a particular
compound and a specific indication may indicate that the compound appears to be
safe and effective, the FDA may suggest or even require that additional trials
be completed before advancing to later-stage trials. The number of preclinical
studies and clinical trials that will be required varies depending on many
factors including the product, disease or condition that the product is in
development for, and any regulations applicable to a particular product.
The regulatory process typically also includes a review of the
manufacturing process to ensure compliance with applicable standards. The FDA
can delay, limit or not grant approval for many reasons, including:
o a product candidate may not demonstrate sufficient safety or
efficacy;
o FDA officials may interpret data from preclinical testing and
clinical trials in different ways than we interpret it, or
require data that is different from what was obtained in our
clinical trials;
o the FDA might not approve our manufacturing processes or
facilities, or the processes or facilities of our
collaborators; and
o the FDA may change its approval policies or adopt new
regulations.
The FDA also may approve a product candidate for fewer indications than
requested or may condition approval on the performance of post-marketing studies
for a product candidate. Even if we receive FDA and other regulatory approvals,
our product candidates may later exhibit adverse effects that limit or prevent
their widespread use or that force us to withdraw those product candidates from
the market. In addition, any marketed product and its manufacturer continue to
be subject to strict regulation after approval. Any unforeseen problems with an
approved product or any violation of regulations could result in restrictions on
the product, including its withdrawal from the market.
The process of obtaining approvals in foreign countries is subject to
delay and failure for many of the same reasons. Any delay in, or failure to
receive approval for, any of our products could materially harm our business,
financial condition and results of operations.
IF WE FAIL TO OBTAIN ADDITIONAL FINANCING, WE MAY BE UNABLE TO COMPLETE THE
DEVELOPMENT AND COMMERCIALIZATION OF RNAPC2 AND ANY OTHER PRODUCT CANDIDATES WE
MAY DEVELOP, OR TO CONTINUE OUR RESEARCH AND DEVELOPMENT PROGRAMS.
Our operations have consumed substantial amounts of cash since
inception. Our sources of revenue have been primarily limited to research
funding, license fees and milestone payments from corporate collaborators. In
2001, we had a net loss of approximately $23.4 million and we anticipate that
13
our 2002 net loss will be larger than in 2001. We expect that we will continue
to spend substantial amounts on research and development, including amounts
spent on our planned Phase II UA/NSTEMI trial of rNAPc2 and clinical trials for
future product candidates, if any. Our future burn rate and capital needs will
depend on many factors, including, but not limited to, those outlined in
"Liquidity and Capital Resources."
We do not have committed external sources of funding. If we are unable
to raise additional capital when required or on acceptable terms, we may have to
significantly delay, scale back or discontinue one or more of our drug discovery
programs, clinical trials or other aspects of our operations. We also could be
required to:
o seek corporate collaborators for programs at an earlier stage
than would be desirable to maximize the rights to future
product candidates that we retain; and/or
o relinquish or license rights to technologies, product
candidates or products that we would otherwise seek to develop
or commercialize ourselves on terms that are less favorable to
us than might otherwise be available.
IF WE DO NOT FIND COLLABORATORS FOR RNAPC2 AND FOR ANY OTHER PRODUCT CANDIDATES
WE MAY DEVELOP, WE MAY HAVE TO REDUCE OR DELAY OUR RATE OF PRODUCT DEVELOPMENT
AND/OR INCREASE OUR EXPENDITURES.
Our strategy for developing, manufacturing and commercializing our
products includes entering into various relationships with pharmaceutical and/or
biotechnology companies to advance our programs and reduce our expenditures on
each program. We may not be able to negotiate additional collaborations on
acceptable terms or at all. If we are not able to establish additional
collaborative arrangements, in the future we may have to reduce or delay further
development of rNAPc2 or some of our cancer programs and/or increase our
expenditures and undertake further development activities at our own expense.
Future clinical development of rNAPc2 in deep vein thrombosis, or DVT, will
depend on securing an appropriate development partner. If we elect to increase
our expenditures to fund our development programs, we will need to obtain
additional capital, which may not be available on acceptable terms or at all.
We may have to rely on our collaborators for all aspects of the
programs, including the conduct of research and development that the
collaborator chooses to conduct, clinical trials and the regulatory approval
process. We may have no control over the amount and timing of resources that our
collaborators dedicate to the development of our licensed product candidates, if
any. Our ability to generate royalties from our collaborators depends on our
collaborators' abilities to establish the safety and efficacy of our product
candidates, obtain regulatory approvals and achieve market acceptance of our
products.
Collaborative agreements generally pose the following risks:
o collaborators may not pursue further development and
commercialization of compounds resulting from collaborations
or may elect not to renew research and development programs;
o collaborators may delay clinical trials, underfund a clinical
trial program, stop a clinical trial or abandon a product
14
candidate, repeat or conduct new clinical trials, require a
new formulation or encounter other manufacturing difficulties
of a product candidate for clinical testing;
o collaborators could independently develop, or develop with
third parties, products that could compete with our future
products;
o the terms of our agreements with current or future
collaborators may not be favorable to us in the future;
o a collaborator with marketing and distribution rights to one
or more products may not commit enough resources to the
marketing and distribution of our products, limiting our
potential revenues from the commercialization of a product;
o disputes may arise delaying or terminating the research,
development or commercialization of our product candidates, or
result in significant litigation or arbitration;
o collaborations may be terminated and we will experience
increased capital requirements if we elect to pursue further
development of the product candidate; and
o collaborators may not have the financial or other resources to
fund the research, development or commercialization of our
product candidates, and we will experience increased capital
requirements if we elect to pursue further development of
these candidates.
In addition, there continues to be a significant number of business
consolidations among and between large pharmaceutical and biopharmaceutical
companies that have resulted in a reduced number of potential future
collaborators. If business combinations involving our collaborators were to
occur, the effect could be to diminish, terminate or cause delays in one or more
of our product development programs.
IF WE ARE SUCCESSFUL IN ACQUIRING COMPLEMENTARY PRODUCTS, TECHNOLOGIES OR
COMPANIES, WE MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF SUCH ACQUISITIONS,
AND OUR CASH REQUIREMENTS MAY INCREASE SIGNIFICANTLY.
We continue to actively pursue and evaluate various possible strategic
transactions, including in-licensing or acquiring complementary products,
technologies or businesses. If we in-license or acquire products, technologies
or companies, we may not be able to successfully integrate any products,
technologies, companies or personnel that we might acquire without a significant
expenditure of financial and management resources, if at all. We expect that our
operating expenses and cash requirements would increase as a result, and such
increase could be significant. Further, we may fail to realize the anticipated
benefits of any acquisition or investment, or it may not ultimately be
consistent with our overall objectives. We may have to incur debt or issue
equity securities to pay for such acquisition, which could be dilutive to our
stockholders. We could also be exposed to contingent liabilities that could
negatively impact our business operations. However, we may not be successful in
our efforts to acquire any such complementary products, technologies or
companies.
15
OUR COMPETITORS MAY DEVELOP AND MARKET DRUGS THAT ARE LESS EXPENSIVE, MORE
EFFECTIVE, OR SAFER, OR REACH THE MARKET SOONER, WHICH MAY DIMINISH OR ELIMINATE
THE COMMERCIAL SUCCESS OF ANY PRODUCTS WE MAY COMMERCIALIZE.
The biopharmaceutical market is highly competitive. We expect that the
competition from other biopharmaceutical companies, pharmaceutical companies,
universities and public and private research institutions will increase. Almost
all of the larger biopharmaceutical companies have developed, or are attempting
to develop, products that will compete with products we may develop, including
some that are in advanced stage clinical trials. In particular, many other
companies and institutions have active programs for cancer and cardiovascular
disease against which ours may compete. It is possible that our competitors will
develop and market products that are less expensive and more effective than our
future products or that will render our products obsolete. It is also possible
that our competitors will commercialize competing products before any of our
products are marketed. Many of our competitors have substantially greater
financial, technical, research and other resources than we do. We may not have
the financial resources, technical expertise or marketing, distribution or
support capabilities to compete successfully.
FAILURE TO RETAIN OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, OUR CHIEF
SCIENTIFIC OFFICER AND OTHER KEY PERSONNEL COULD DECREASE OUR ABILITY TO OBTAIN
FINANCING, CONDUCT CLINICAL TRIALS OR DEVELOP OUR PRODUCT CANDIDATES.
We depend on our key personnel, particularly our President and Chief
Executive Officer, Randall E. Woods, and our Chief Scientific Officer, George P.
Vlasuk, Ph.D. The loss of either of these individuals may prevent us from
achieving our business objective of commercializing our product candidates. Both
of these employees have employment agreements with us, but the agreements
provide for "at-will" employment with no specified term. In addition, we
maintain key man life insurance for Dr. Vlasuk in the amount of $1.0 million.
Our future success will also depend in large part on our continued ability to
attract and retain other highly qualified scientific, technical and management
personnel, as well as personnel with expertise in clinical testing and
governmental regulation. We face intense competition for personnel from other
companies, universities, public and private research institutions, government
entities and other organizations. If we are unsuccessful in our recruiting and
retention efforts, our business operations will be harmed.
BECAUSE WE HAVE LIMITED MANUFACTURING EXPERIENCE AND RELY ON THIRD-PARTY
MANUFACTURERS, WE ARE UNABLE TO CONTROL THE AVAILABILITY OF, AND MANUFACTURING
COSTS FOR, OUR PRODUCT CANDIDATES.
In order to be successful, our product candidates must be capable of
being manufactured in sufficient quantities, in compliance with regulatory
requirements, and at an acceptable cost. We have only limited experience in
pilot scale manufacturing. For larger-scale production, which is required for
clinical testing, we expect that we will continue to rely on third parties to
manufacture our product candidates. If we cannot continue to contract for
large-scale manufacturing capabilities on acceptable terms, or if we encounter
delays or difficulties with manufacturers, we may not be able to conduct
clinical trials as planned. This would delay or cause us to halt submission of
our product candidates for regulatory clearance, and may prevent us from selling
our products and achieving profitability. Also, third-party manufacturers may be
unable to manufacture any product candidate we develop in commercial quantities
on a cost-effective basis.
16
We may need to expand our existing relationships or establish new
relationships with third-party manufacturers for our current and future product
candidates. We may be unable to establish or maintain relationships with
third-party manufacturers on acceptable terms, or at all. Our dependence on
third parties may reduce our profit margins and delay or limit our ability to
develop and commercialize our products on a timely and competitive basis.
Furthermore, third-party manufacturers may encounter manufacturing or quality
control problems in connection with the manufacture of our product candidates
and may be unable to obtain or maintain the necessary governmental licenses and
approvals to manufacture any product candidates. Any such failure could delay or
preclude receiving regulatory approvals to sell our product candidates.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WE MAY NOT BE ABLE TO
COMPETE AS EFFECTIVELY.
Our success depends in part on our ability to obtain and enforce patent
protection for our products, both in the United States and other countries, and
operate without infringing the proprietary rights of third parties. The scope
and extent of patent protection for our product candidates is uncertain and
frequently involves complex legal and factual questions. We cannot predict the
breadth of claims that will be allowed and issued in patents related to
biotechnology or pharmaceutical applications. Once patents have issued, we
cannot predict how the claims will be construed or enforced. In addition,
statutory differences between countries may limit the protection we can obtain
on some of our inventions outside of the United States. For example, methods of
treating humans are not patentable in many countries outside of the United
States. We rely on patent and other intellectual property protection to prevent
our competitors from developing, manufacturing and marketing products based on
our technology. Our patents may not be enforceable and they may not afford us
protection against competitors, especially since there is a lengthy lead time
between when a patent application is filed and when it is actually issued.
Because of this, we may infringe on intellectual property rights of others
without being aware of the infringement. If a patent holder believes that one of
our product candidates infringes on their patent, they may sue us even if we
have applied, or received patent protection, for our technology. If another
party claims we are infringing their technology, we could face a number of
issues, including the following:
o defending a lawsuit, which is very expensive and time
consuming;
o paying a large sum for damages if we are found to be
infringing;
o being prohibited from selling or licensing our products or
product candidates until we obtain a license from the patent
holder, who may refuse to grant us a license or only agree to
do so on unfavorable terms. Even if we are granted a license,
we may have to pay substantial royalties or grant
cross-licenses to our patents; and
o redesigning our drug so it does not infringe on the patent
holder's technology. This may not be possible and, even if
possible, it would require substantial additional capital and
would delay commercialization.
The coverage claimed in a patent application can be significantly
narrowed before a patent is issued, either in the United States or abroad. We do
not know whether any of our pending or future patent applications will result in
the issuance of patents. To the extent patents have been issued or will be
17
issued, we do not know whether these patents will be subjected to further
proceedings limiting their scope, will provide significant proprietary
protection or competitive advantage, or will be circumvented or invalidated.
Furthermore, patents already issued to us, or patents that may issue on our
pending applications, may become subject to dispute, including interference
proceedings in the United States to determine priority of invention or
opposition proceedings in foreign countries contesting the validity of issued
patents.
We also rely on trade secrets, proprietary know-how and continuing
inventions to develop and maintain our competitive position. While we have
procedures to protect our trade secrets, some of our current or former
employees, consultants or scientific advisors, or current or prospective
corporate collaborators, may unintentionally or willfully disclose our
confidential information to competitors or use our proprietary technology for
their own benefit. Furthermore, enforcing a claim alleging the infringement of
our trade secrets would be expensive and difficult to prove, making the outcome
uncertain. Our competitors may also independently develop equivalent knowledge,
methods and know-how or gain access to our proprietary information through some
other means.
Since we collaborate with third parties on some of our technology,
there is also the risk that disputes may arise as to the rights to technology or
drugs developed in collaboration with other parties.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, THE DAMAGES MAY EXCEED OUR
INSURANCE.
Since we conduct clinical trials on humans, we face the risk that the
use of our product candidates will result in adverse effects. These risks will
exist even for products that may be cleared for commercial sale. Although we
maintain liability insurance of $10.0 million for our product candidates in
clinical trials, the amount of insurance coverage we currently hold may not be
adequate to protect us from any liabilities. Furthermore, coverage is becoming
increasingly expensive and we may not be able to maintain or obtain insurance at
a reasonable cost or in sufficient amounts to protect us against potential
losses. We may not have sufficient resources to pay for any liabilities
resulting from a claim beyond the limit of our insurance coverage.
THE REIMBURSEMENT STATUS OF NEWLY APPROVED HEALTHCARE DRUGS IS UNCERTAIN AND
FAILURE TO OBTAIN ADEQUATE REIMBURSEMENT COULD LIMIT OUR ABILITY TO MARKET ANY
PRODUCTS WE MAY DEVELOP AND DECREASE OUR ABILITY TO GENERATE REVENUE.
There is significant uncertainty related to the reimbursement of newly
approved pharmaceutical products. Our ability, and that of our collaborators, to
commercialize our products in both domestic and foreign markets will partially
depend on the reimbursements obtained from third-party payors such as government
health administration authorities, private health insurers, managed care
programs and other organizations. Third-party payors are increasingly attempting
to contain healthcare costs by limiting both coverage and the level of
reimbursement of new pharmaceutical products. Cost control initiatives could
decrease the price that we, or our collaborators, would receive for our products
and affect our ability to commercialize any products we may develop so that the
sale of our drug would not be economically feasible. If third parties fail to
provide reimbursement for any drugs we may develop, consumers and doctors may
not choose to use our products, and we may not realize an acceptable return on
our investment in product development.
18
IF WE ARE UNABLE TO CREATE SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR
ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS, WE WILL NOT
BE ABLE TO COMMERCIALIZE OUR PRODUCTS.
Because we do not have any marketed products, we have virtually no
experience in sales, marketing and distribution. To directly market and
distribute any products we may develop, we must build a substantial marketing
and sales force with appropriate technical expertise and supporting distribution
capabilities. Alternatively, we may obtain the assistance of a pharmaceutical
company or other entity with a large distribution system and a large direct
sales force. We may not be able to establish sales, marketing and distribution
capabilities of our own or enter into such arrangements with third parties in a
timely manner or on acceptable terms. To the extent that we enter into
co-promotion or other licensing arrangements, our product revenues are likely to
be lower than if we directly marketed and sold our products, and any revenues we
receive will depend upon the efforts of third parties, which efforts may not be
successful.
OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS AND WE MUST COMPLY WITH ENVIRONMENTAL
LAWS AND REGULATIONS, WHICH CAN BE EXPENSIVE.
Our research and development activities involve the controlled use of
hazardous materials, including chemicals and radioactive and biological
materials. Our operations also produce hazardous waste products. We are subject
to a variety of federal, state and local regulations relating to the use,
handling and disposal of these materials. We generally contract with third
parties for the disposal of such substances, and store our low level radioactive
waste at our facility until the materials are no longer considered radioactive
because there are no facilities permitted to accept such waste in California or
neighboring states. While we believe that we comply with current regulatory
requirements, we cannot eliminate the risk of accidental contamination or injury
from these materials. We may be required to incur substantial costs to comply
with current or future environmental and safety regulations. In the event of an
accident or contamination, we would likely incur significant costs associated
with civil penalties or criminal fines and in complying with environmental laws
and regulations.
OUR STOCK HAS BEEN, AND MAY CONTINUE TO BE, EXTREMELY VOLATILE, AND YOUR
INVESTMENT IN OUR COMMON STOCK COULD DECLINE IN VALUE.
Our stock price has been extremely volatile and has continued to
decline in price. As with many other companies, our stock price will likely
continue to be subject to wide fluctuations in response to a variety of factors,
many of which are beyond our control, and include the following:
o changes in the market valuations and perceptions of
biotechnology companies;
o announcements and results of our clinical trials, or those of
our competitors;
o results of the government clearance and approval process for
rNAPc2 or any of our future products, if any, as well as
competing products;
o the termination of any existing collaborative agreements or
other developments in our relationships with our existing or
any future collaborators;
o fluctuations in our operating results;
19
o announcements of technological innovations or new products or
services by us or by our competitors;
o developments related to patents or other proprietary rights of
us or others;
o comments, or changes in financial estimates, by securities
analysts;
o actions by governmental regulatory agencies;
o announcements by us or our competitors of acquisitions,
strategic relationships, joint ventures or capital
commitments;
o developments in domestic and international affairs or
governmental regulations;
o additions or departures of our key personnel;
o sales of our common stock in the open market; and
o general market conditions and other events or factors,
including factors unrelated to our performance or the
performance of our competitors.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION, BYLAWS AND
STOCKHOLDER RIGHTS PLAN AND UNDER DELAWARE LAW MAY ADVERSELY AFFECT A POTENTIAL
TAKEOVER AND COULD PREVENT STOCKHOLDERS FROM RECEIVING A FAVORABLE PRICE FOR
THEIR SHARES.
Provisions in our certificate of incorporation and bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in our control, even if the transaction would benefit our stockholders. These
provisions:
o authorize our board of directors, without requiring
stockholder approval, to issue up to 8.25 million shares of
"blank check" preferred stock to increase the number of
outstanding shares and prevent a takeover attempt;
o limit who has the authority to call a special meeting of
stockholders;
o prohibit stockholder action by written consent, thereby
requiring all stockholder actions to be taken at a meeting of
our stockholders; and
o require the approval of holders of at least 66 2/3% of our
voting stock as a condition to a merger or other specified
business transactions with, or proposed by, a holder of 15% or
more of our voting stock.
Further, our board of directors has adopted a stockholder rights plan,
commonly known as a "poison pill," that may delay or prevent a change in
control.
ISSUANCE OF SHARES IN CONNECTION WITH FINANCING TRANSACTIONS OR UNDER STOCK
PLANS AND OUTSTANDING CONVERTIBLE NOTES WILL DILUTE CURRENT STOCKHOLDERS.
20
We maintain stock plans under which employees, directors and certain
consultants can acquire shares of our common stock through the exercise of stock
options and other purchase rights. We also have outstanding convertible notes.
You will incur dilution upon exercise of our outstanding options and convertible
notes. If we raise additional funds by issuing additional stock or convertible
debt, further dilution to our stockholders will result, and new investors could
have rights superior to existing stockholders.
21
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, we are involved in certain litigation arising out of
our operations. We are not currently engaged in any legal proceedings that we
expect would materially harm our business or financial condition.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of Corvas was held on May 29, 2002.
The matters described below were submitted to a vote of stockholders. The
Company had 27,507,382 shares of common stock outstanding and entitled to vote
as of April 5, 2002, the date of record for the meeting. At the annual meeting,
holders of a total of 20,296,702 shares of common stock were present in person
or represented by proxy.
a. Election of Class I directors for a three-year term expiring at the
2005 annual meeting of stockholders.
Name Shares voting for Shares withheld
---- ----------------- ---------------
J. Stuart Mackintosh 20,239,523 57,179
George P. Vlasuk, Ph.D. 20,240,231 56,471
Class II directors continuing in office until the 2003 annual meeting
of stockholders:
Susan B. Bayh
Michael Sorell, M.D.
Nicole Vitullo
Class III directors continuing in office until the 2004 annual meeting
of stockholders:
M. Blake Ingle, Ph.D.
Burton E. Sobel, M.D.
Randall E. Woods
22
b. A proposal to ratify the appointment of KPMG LLP as our independent
public accountants for the fiscal year ending December 31, 2002.
For 20,039,651
Against 37,850
Abstain 219,201
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit Number Description
-------------- -----------
10.50 Termination of License and Development
Agreement between the Company and Pfizer
Inc. and Pfizer Limited, dated as of June
13, 2002.
10.51 Corvas International, Inc. 401(k)
Compensation Deferral Savings Plan and
Trust Agreement (Amended and Restated as
of January 1, 1997), and First Amendment
thereto (Revised to incorporate
amendments to plan).
b. Reports on Form 8-K
On July 25, 2002, the Company filed a Current Report of Form 8-K.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CORVAS INTERNATIONAL, INC.
Date: August 12, 2002 By: /s/ RANDALL E. WOODS
------------------------------------------
Randall E. Woods
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 2002 By: /s/ CAROLYN M. FELZER
------------------------------------------
Carolyn M. Felzer
Vice President and Controller
(Principal Financial Officer)
CERTIFICATION
Pursuant to Section 906 of the Public Company Accounting Reform and
Investor Protection Act of 2002 (18 U.S.C. ss. 1350, as adopted), each of the
undersigned hereby certifies that to the best of his or her knowledge:
1. The Company's Quarterly Report on Form 10-Q for the period ended June 30,
2002 fully complies with the requirements of Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934, as amended; and
2. The information contained in this Report fairly presents, in all material
respects, the financial condition of the Company at the end of the period
covered by this Report and the results of operations of the Company for the
period covered by this Report.
Date: August 12, 2002 By: /s/ RANDALL E. WOODS
------------------------------------------
Randall E. Woods
President and Chief Executive Officer
Date: August 12, 2002 By: /s/ CAROLYN M. FELZER
------------------------------------------
Carolyn M. Felzer
Vice President and Controller
24