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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 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 0-19732
CORVAS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0238812
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3030 SCIENCE PARK ROAD, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices, including 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, $.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes [ ] No [X]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock reported on the Nasdaq National Market was $26,050,400 as of February 28,
2003.*
The number of shares of Common Stock outstanding as of February 28,
2003 was 27,590,647.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
* Excludes 12,619,146 shares of common stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10% of the shares outstanding at
February 28, 2003. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
-1-
PART I
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED IN THIS REPORT, THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, INCLUDING STATEMENTS IN THIS REPORT ABOUT OUR
PROPOSED ACQUISITION BY DENDREON CORPORATION, OUR FUTURE CLINICAL TRIALS,
PRODUCT DEVELOPMENT OR FINANCIAL PERFORMANCE. FORWARD-LOOKING STATEMENTS
TYPICALLY ARE IDENTIFIED BY THE USE OF TERMS SUCH AS "MAY," "WILL," "SHOULD,"
"EXPECT," "BELIEVE," "INTEND," "PLAN," "ANTICIPATE," "ESTIMATE," "PREDICT,"
"POTENTIAL," "CONTINUE," AND SIMILAR WORDS OR THE NEGATIVE OF THESE WORDS,
ALTHOUGH SOME FORWARD-LOOKING STATEMENTS ARE EXPRESSED DIFFERENTLY. ALTHOUGH WE
BELIEVE THAT OUR BELIEFS, EXPECTATIONS AND ASSUMPTIONS AS REFLECTED IN THESE
STATEMENTS ARE REASONABLE, OUR ACTUAL RESULTS AND FINANCIAL PERFORMANCE MAY
PROVE TO BE VERY DIFFERENT FROM WHAT WE PREDICTED ON THE DATE OF THIS REPORT.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS IN THE SECTIONS
ENTITLED "OUR PRODUCT DEVELOPMENT PROGRAMS," "OUR STRATEGY," "PATENTS AND
PROPRIETARY RIGHTS," AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
IN THIS REPORT, "CORVAS," "WE," "US" AND "OUR" REFER TO CORVAS
INTERNATIONAL, INC.
ITEM 1. BUSINESS
OVERVIEW
We are a biopharmaceutical company focused on the development of new
biotherapeutics that address large medical markets, including cardiovascular
disease and cancer. In November 2002 we initiated a Phase II clinical program
for rNAPc2, a novel anticoagulant intended for the treatment of people affected
by acute coronary syndromes, which include unstable angina and non-ST-segment
elevation myocardial infarction, or UA/NSTEMI. Our cancer research programs are
focused on the development of new biotherapies, including monoclonal antibodies
and synthetic prodrugs, that target serine proteases associated with the growth
and spread of cancerous tumors.
Our core expertise is the design of drugs that inhibit, or otherwise
modulate, enzymes known as serine proteases, which mediate a variety of normal
biological and disease processes. Our scientists employ their understanding of
the molecular and cellular mechanisms underlying blood clotting and tumor growth
towards the ultimate goal of developing therapeutics administered by injection
or taken in pill form that intervene at specific steps involved in disease
processes. By targeting the molecular underpinnings of disease processes, we
strive to develop new drugs that have improved potency, specificity and safety
over currently available therapeutics.
In support of this goal, we have integrated expertise from both the
traditional pharmaceutical and biotechnology industries. These capabilities
include gene expression and protein engineering, cellular, molecular and
structural biology, medicinal chemistry and pharmacology. Through the use of
medicinal chemistry, we have developed a new series of synthetic compounds that
specifically deliver cytotoxic compounds to solid tumors following activation by
serine proteases located on the cell surface. This technology, known as Protease
Activated Cancer Therapy, or PACT, has advanced through testing in animal models
of human prostate and breast cancer and we believe that this program will yield
a clinical candidate within the next 12-18 months. We believe that coupling our
PACT approach with our program to identify monoclonal antibodies directed
against selected tumor-associated serine proteases will enable us to efficiently
select multiple drug leads for targets throughout this important protease gene
family.
On February 25, 2003, we executed a definitive merger agreement under
which Dendreon Corporation will acquire us, subject to various closing
conditions including approval by the stockholders of each company. Under the
terms of this agreement, each share of our common stock will be exchanged for a
fixed ratio of 0.45 shares of Dendreon common stock in a tax-free
reorganization. Upon successful closing of this transaction, our existing
stockholders will own approximately 31.4% of the combined company. The
transaction is anticipated to close in the second quarter of 2003, subject to
approval by stockholders of both companies.
-2-
OTHER INFORMATION
We originally incorporated in California in 1987 and reincorporated in
Delaware in 1993. Our executive offices are located at 3030 Science Park Road,
San Diego, California 92121, and our telephone number is (858) 455-9800.
CORVAS(R) is a registered trademark and the Corvas logo is our trademark. All
other trademarks, trade names and product names referred to herein are the
property of their respective owners.
OUR PRODUCT DEVELOPMENT PROGRAMS
The following is a summary of our principal product development
programs:
- ---------------------------------- --------------------------------- -------------------------------- ------------------------------
PRODUCT CANDIDATE INDICATION STATUS COLLABORATOR
- ----------------- ---------- ------ ------------
rNAPc2 Treatment of acute coronary Phase II study in UA/NSTEMI Proprietary
syndromes, including unstable patients ongoing
angina (UA) and
non-ST-segment elevation
myocardial infarction (NSTEMI)
Protease Activated Cancer Cancer Preclinical; selection of Proprietary
Therapy (PACT) development candidate
expected within next 12-18
months
Membrane-bound Serine Protease Cancer Preclinical Dyax for antibody, small
Inhibitors protein and peptide inhibitors
Target discovery and lead for 2 targets; Abgenix for
identification (multiple) antibodies against 2 targets
Urokinase (u-PA) Inhibitors Cancer Preclinical Proprietary
- ---------------------------------- --------------------------------- -------------------------------- ------------------------------
In the table above, the terms we use under the column titled "Status" have
the following meanings:
TARGET DISCOVERY is the identification of a protein implicated in the
progression of the disease of interest that may represent a target for new
drug development.
LEAD IDENTIFICATION is the identification of compounds that modulate the
activity of the target.
rNAPc2
Recombinant nematode anticoagulant protein c2, or rNAPc2, is a novel
and potent anticoagulant in clinical development for the prevention and
treatment of acute coronary syndromes, which include unstable angina, or UA, and
non-ST-segment elevation myocardial infarction, or NSTEMI. We originally
discovered NAPc2, a natural form of the protein, in blood-feeding hookworms.
rNAPc2 has been evaluated in over 500 patients and healthy volunteers in several
Phase I studies, Phase II trials for the prevention of deep vein thrombosis, or
DVT, and pulmonary embolism, as well as a Phase IIa safety trial in low-risk
patients undergoing elective percutaneous coronary intervention, or PCI. Since
many UA/NSTEMI patients receive medical intervention to open up clogged
arteries, we conducted this study to determine the safety of rNAPc2 in such
-3-
circumstances. The data showed that rNAPc2 appears to be safe and well tolerated
in this patient population. Based upon this safety data, in November 2002, we
initiated a Phase II clinical program in UA/NSTEMI patients.
Abnormal blood clot formation, or thrombosis, can reduce or completely
block the flow of blood and oxygen supply to vital organs, which can lead to
serious clinical conditions. The formation of blood clots in one or more
coronary arteries of the heart may result in UA/NSTEMI, which oftentimes
progresses to myocardial infarction, or heart attack, if left untreated. UA and
NSTEMI are characterized by severe chest pain, even at rest, often the result of
clogged coronary arteries.
Blood clot formation is a normal repair mechanism that the body uses to
recover from damage to blood vessels resulting from cuts, bruises or disease.
The formation of a blood clot results from a complex series of biochemical
events known as the blood coagulation cascade, which involves enzymes called
serine proteases, cellular fragments called platelets and other proteins in
blood.
The coagulation cascade is most often triggered when there is damage or
disruption to the lining of the blood vessel wall, or endothelium. This damage
or disruption exposes the protein Tissue Factor, or TF, to the blood, allowing
the serine protease Factor VIIa, which circulates freely in the blood, to bind
to TF. The resulting Factor VIIa/Tissue Factor complex, or FVIIa/TF, is the
initial trigger of the coagulation cascade and promotes the formation of another
serine protease Factor Xa. Factor Xa causes the formation of the key serine
protease thrombin. Thrombin then cleaves the protein fibrinogen into fibrin and
activates platelets in the blood, which stick to each other and to the fibrin
matrix, to form a blood clot in the damaged blood vessel. The resulting blood
clot blocks blood flow and oxygen delivery to heart tissues, causing severe
chest pain.
The blood coagulation cascade is characterized by exponential
amplification, starting with a small number of FVIIa/TF complexes and
culminating in the formation of millions of thrombin molecules. Recombinant
NAPc2 inhibits FVIIa/TF, thereby preventing the formation of thrombin. We
believe that inhibiting the relatively few FVIIa/TF complexes early in the
cascade may have significant safety and efficacy advantages over other
anticoagulant strategies including indirect thrombin inhibitors such as
unfractionated heparins and low molecular weight heparins, or LMWH, as well as
direct thrombin inhibitors such as Angiomax, all of which target thrombin late
in the cascade after amplification has occurred.
Results from our Phase II open-label dose-ranging trial in 292 patients
undergoing elective unilateral knee replacement surgery demonstrated that rNAPc2
appeared to reduce the risk of developing DVT and related complications by
greater than 50% compared to the current standard therapy of unfractionated LMWH
without compromising safety. Based on an end-of-Phase II meeting and subsequent
communications with the Food and Drug Administration, or FDA, we concluded that
an additional Phase II trial for DVT would be required to firmly establish a
more commercially viable fixed dosing regimen. Although we continue to believe
that rNAPc2 is a safe and effective therapy for the prevention of DVT, we made a
decision in October 2001 to focus the clinical development of rNAPc2 on unstable
coronary syndromes, which we believe is more commercially viable based on both
the time to market and the rapidly-changing commercial environment in the DVT
prophylaxis arena. Future clinical development of rNAPc2 in DVT will depend on
securing an appropriate development partner.
MARKET OPPORTUNITY. It is estimated that there are over 1.4 million
hospitalizations for UA/NSTEMI each year in the United States alone.
Historically, UA/NSTEMI has been treated with aspirin plus LMWH or
unfractionated heparin. Recent guidelines have recommended that nearly all
patients receive the antiplatelet agent Plavix in addition to the historical
standard of care. We are developing rNAPc2 to be added to the current standard
of care therapies. In moderate to high-risk patients with severe coronary artery
disease, UA/NSTEMI may be treated with interventions such as PCI, which includes
percutaneous transluminal coronary angioplasty, or PTCA, and stent placement.
-4-
Patients may also undergo coronary arterial bypass grafting or bypass surgery.
In some cases, these patients may then receive antiplatelet drugs such as
glycoprotein IIb/IIIa antagonists like ReoPro, Integrelin or Aggrastat.
Traditional therapies are not completely effective; it is estimated that 8-15%
of UA/NSTEMI patients will require additional PCI, suffer a heart attack or
chest pain, or die within 30 days of hospital admission despite treatment with
the current standard and use of an early interventional approach. By blocking
the first step in the formation of a blood clot, we believe rNAPc2 may afford
significant clinical benefit in high-risk patients with UA/NSTEMI when
administered in combination with LMWH and aspirin, which work at later steps of
the coagulation cascade.
DEVELOPMENT STATUS. In order to establish the safety of rNAPc2 prior to
initiating clinical trials in patients with unstable angina, we completed a
double-blinded, placebo-controlled, dose-ranging Phase IIa study in patients
undergoing elective PCI. In this trial, patients were randomized to receive
either rNAPc2 or placebo with unfractionated heparin, aspirin and, in most
cases, Plavix. The primary goal of the study was to assess safety as measured by
femoral, or groin, compression time, which is a measure of the extent of
bleeding at the surgical site used for placement of the coronary catheter. The
Phase IIa results indicate that rNAPc2 appears to be safe and well tolerated in
this patient population and that, in contrast to standard therapy with
unfractioned heparin, aspirin and Plavix alone, rNAPc2 was shown to be more
effective in suppressing the formation of thrombin in this elective PCI patient
population.
Based on the safety data obtained in this Phase IIa trial, in November
2002 we initiated a double-blinded, placebo-controlled Phase II clinical program
of rNAPc2 in unstable angina patients. This trial, referred to as the
Anticoagulation with NAPc2 To Help Eliminate MACE (ANTHEM/TIMI-32), is being
coordinated with the help of the Thrombolysis in Myocardial Infarction, or TIMI,
Group led by Dr. Eugene Braunwald of Brigham and Women's Hospital and Harvard
Medical School. The TIMI Group has been performing clinical research in patients
suffering from acute coronary syndromes since 1984. The ANTHEM/TIMI-32 Phase II
program is composed of three parts. We will have an opportunity to decide
whether to proceed with the trial following the conclusion of each part based on
an evaluation of safety and efficacy. The first part, which is ongoing, is a
double-blinded, randomized, placebo-controlled, dose-ranging trial which is
designed to determine the safety of intravenously administered rNAPc2 in
moderate to high-risk UA/NSTEMI patients undergoing PCI. This part is intended
to sequentially enroll 125 patients at clinical centers in the United States
randomized to either placebo or one of five rNAPc2 dose groups starting at 1.5
micrograms per kilogram of body weight increasing to 5.0 micrograms per
kilogram. All patients will receive the low molecular weight heparin enoxaparin,
or Lovenox, and aspirin, with the use of glycoprotein IIb/IIIa antagonists and
Plavix determined by the attending physician. The primary objective of this
portion of the trial is to determine a safe dose range for rNAPc2 in these
patients using established and accepted criteria for bleeding. During the first
part of this program, we will measure efficacy by the incidence of ischemic
events as determined from seven day continuous electrocardiographic monitoring
using portable Holter devices.
The second and third parts of the ANTHEM/TIMI-32 program, which will
follow the first part assuming favorable clinical results, are intended to focus
on a broader patient population in both North America and Europe and will
include moderate to high-risk patients that are not subject to an early
interventional treatment strategy such as PCI. The primary efficacy endpoint for
these subsequent phases of the clinical program are planned to be ischemic
events measured using Holter monitors and clinical events including death,
myocardial infarction and recurrent ischemia requiring re-hospitalization. This
entire clinical program, which is expected to enroll 1,525 patients, is
scheduled to take 18-24 months to complete.
-5-
PROTEASE MODULATION DISCOVERY AND DEVELOPMENT PROGRAMS FOR CANCER
We are pursuing a new approach to the discovery and development of
cancer therapeutics by targeting the serine protease gene family for drug
discovery. Through our research on serine proteases involved in cardiovascular
and viral disease, we have built a resident expertise in the understanding of
serine protease biology and the design of synthetic small molecules that
inhibit, or otherwise modulate, the activity of this protease family. In
addition to protein drugs like rNAPc2 and small molecule inhibitors of the
hepatitis C NS3A serine protease developed with Schering-Plough, we have
developed core capabilities in the area of protease inhibition based on our
fundamental understanding of serine protease structure and function. Serine
proteases constitute the largest protease gene family in the human genome and
have well-established roles in biological processes such as blood coagulation.
The potential role serine proteases may play in the growth and progression of
solid tumors is now emerging, and we believe that we are well positioned to
exploit this knowledge for the development of novel anti-cancer agents.
Proteases are proteins that act as molecular scissors to cleave other
proteins to activate or inactivate them, and are responsible for regulating
normal cellular function. The maintenance of normal health requires that the
activity of proteases be tightly controlled. Excessive or deficient protease
activity underlies many serious diseases in humans, including cardiovascular
disease, cancer and many infectious diseases.
The growth and progression of human tumors involve different proteases
at multiple stages during these processes. Serine proteases are thought to be
important for tumor cell growth directly and through the modulation of growth
factors required for tumor growth. In addition, serine proteases have been shown
to indirectly support tumor cell growth through their effects on the network of
blood vessels that is essential for tumor survival, a process known as
angiogenesis. We are focused on the development of drugs that suppress the
growth of primary and secondary solid tumors by inhibiting known and novel key
serine proteases involved in cancer processes. We employ an integrated approach
to drug discovery that spans the discovery of serine proteases as cancer
targets, the design and optimization of lead monoclonal antibody candidates
against selected targets, and the subsequent validation of lead molecules in
animal models of cancer.
We use functional genomics to discover and validate serine protease
targets, which includes initially cloning the full-length gene sequence and
producing the functional domain or active portion of the protease as a
recombinant enzyme. Using the recombinant enzymes, we have established automated
assays to select monoclonal antibodies and small protein inhibitors in
collaboration with external partners Dyax Corp. and Abgenix, Inc. In addition,
we have determined the three-dimensional structure of several serine proteases
complexed with lead small molecule inhibitors that were developed early in the
program. We discontinued our small molecule development program in July 2002 as
part of the realignment of our programs. We believe that this proprietary
structural information will facilitate the optimization of drug candidates in
collaboration with an appropriate partner using computer-aided drug design
technologies that may be applicable to multiple targets across the serine
protease gene family due to the similarities in their three-dimensional
structure.
In April 2002, we entered into an exclusive collaboration agreement
with Abgenix 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 sales of products
successfully commercialized from any co-development efforts.
-6-
In September 2001, we entered into a strategic alliance with Dyax to
discover, develop and commercialize antibody, small protein and peptide
inhibitors for two targets that we isolated and characterized. Under the terms
of this agreement, both companies will jointly develop any inhibitory agents
that may be identified and will share commercialization rights and profits, if
any, from any marketed products. We believe that such joint development efforts
may help maximize the potential of our serine protease approach to combat cancer
by enabling a more rapid validation of these potential cancer targets and by
providing additional sources of potential lead drug candidates to advance into
clinical testing.
We have also entered into a research and exclusive license agreement
with Georgetown University related to Georgetown's intellectual property for
matriptase, a novel serine protease cancer target implicated in several solid
tumors including breast and prostate cancer. In the event that we develop and
commercialize any products covered by Georgetown's intellectual property, we
would be required to make milestone and royalty payments. We may enter into
additional collaborative relationships to complement our resident expertise in
protease modulation and help advance our cancer programs into the clinic.
PROTEASE ACTIVATED CANCER THERAPY (PACT) PROGRAM. We have developed a
strategy that exploits, rather than blocks, the activity of proteases on the
surface of tumor cells. The goal of this prodrug approach is to deliver a potent
cytotoxic, or cell-killing, drug directly to the tumor cells, thereby sparing
healthy tissue from the toxic treatment. This program, called PACT, involves the
design of synthetic molecules composed of a sequence of amino acids that are
recognized by a targeted serine protease. This sequence of amino acids is
chemically attached to a known cancer chemotherapeutic or cytotoxic drug such as
doxorubicin, or dox, yielding a hybrid or conjugate molecule. We believe that
our PACT approach will reduce damage to normal, non-tumor cells because the
sequence of attached amino acids will prevent the cytotoxic drug from entering
the normal cells where it could cause its lethal effects. In contrast, with the
PACT approach a solid tumor should be more susceptible to the cytotoxic drug
because the serine proteases in the tumor cells should free the cytotoxic drug
in the vicinity of the tumor cell. Once free, the cytotoxic drug can enter into
the tumor cell and kill it. We believe that this strategy of using the conjugate
molecules will result in fewer side effects compared to cytotoxic drugs alone,
many of which are in widespread use today.
We have synthesized several different classes of conjugate molecules
that have shown protease-specific liberation of the cytotoxic drug in cell
culture. In addition, we have conducted extensive studies in mouse xenograft
models of human prostate cancer. These models are commonly used to evaluate
potential anti-tumor drugs prior to clinical development. In our animal studies,
we have shown that our PACT approach enhanced uptake of the cytotoxic drug dox
in several different human prostate tumors using our conjugate strategy in
comparison to the use of dox alone. In addition, we have shown significant
anti-tumor activity with several of our lead PACT compounds with fewer overall
toxic side effects compared to dox alone. We expect to select a PACT clinical
development candidate within the next 12-18 months, with clinical trials
expected to begin in 2004.
MEMBRANE-BOUND SERINE PROTEASE INHIBITOR PROGRAM. We also have a cancer
program based on an emerging class of membrane-bound proteases which have been
implicated in supporting the growth and progression of several types of solid
tumors including prostate, breast, ovarian and colorectal cancers. Certain
membrane-bound serine proteases have been shown to activate growth factors that
are thought to promote the metastatic spread and establishment of tumor cells,
as well as formation of new blood vessels, a process called angiogenesis, that
nourish tumor cells and the growing tumor mass. Unlike most proteases, which are
either secreted from or retained in the cell, membrane-bound serine proteases
are located on the cell surface of the tumor cell. This confined location may
offer a unique opportunity to target cancer treatments directly to diseased
tumor cells, thereby avoiding damage to healthy cells and tissues, which is a
serious problem associated with many current therapies including radiation and
chemotherapy.
-7-
With our collaborators at the Max-Planck Institute for Biochemistry in
Germany, we published the three-dimensional structure of matriptase, which
represents the first structural characterization of this emerging class of
cancer-associated transmembrane serine proteases. We have used matriptase as a
target itself for the development of monoclonal antibodies. In addition we have
also used a potent, specific small molecule inhibitor of matriptase developed in
our now-discontinued small molecule program in experimental models of
late-stage, human prostate cancer. The reported animal data demonstrates the
anti-tumor effects of selective matriptase inhibition, which is an important
step in validating this serine protease as a potential cancer target. In
addition, we have cloned close to 30 genes encoding a growing number of members
of this protease family from human cancer tissue or cell lines, as well as from
human endothelial cells. Endothelial cells are key participants in supporting
tumor growth through angiogenesis.
UROKINASE PLASMINOGEN ACTIVATOR (u-PA) INHIBITOR PROGRAM. Urokinase is
a serine protease that has been implicated in the growth and progression of
certain solid tumors in the breast, ovary, colon and prostate. This serine
protease facilitates angiogenesis and the survival of metastatic tumors in
organs and tissues distant from the primary tumor. We have a portfolio of potent
and selective inhibitors of urokinase plasminogen activator, or u-PA, developed
prior to the discontinuance of our small molecule programs. We may collaborate
with others on the development of these inhibitors as anti-tumor agents. In
addition, we have also designed highly selective and potent monoclonal
antibodies that have been shown to slow tumor growth in animal models.
MARKET OPPORTUNITY. Cancer is the second leading cause of death in the
United States, following heart disease. Breast and prostate cancer, our initial
therapeutic focus areas, represent two of the largest cancer markets today, each
accounting for over 180,000 new cases every year in the United States alone. It
is estimated that over 1.1 million new cases of solid tumor cancers, including
breast, prostate, ovarian and colorectal cancer, are diagnosed annually in the
United States. Despite recent product introductions, we believe that physicians
and patients are unsatisfied with currently available cancer treatments,
presenting opportunities for companies like Corvas to develop more effective
treatments.
OTHER PROGRAMS
HEPATITIS C LICENSE. We have collaborated with Schering-Plough to
identify and optimize lead synthetic compounds for the inhibition of the key
serine protease involved in the replication of the hepatitis C virus.
Schering-Plough has exclusive rights to develop and commercialize products
resulting from this collaboration, if any. We have no further responsibility for
this program and would receive royalties on certain products that are
commercialized by Schering-Plough under the license, if any. However,
Schering-Plough has no obligation to pursue the commercialization of any
products under this agreement, and we have no information on the status of
ongoing efforts, if any.
rNIF. As with rNAPc2, we discovered recombinant neutrophil inhibitory
factor, or rNIF, from blood-feeding hookworms. In 1997, we licensed to Pfizer
this anti-inflammatory agent, which was being developed for reperfusion injury
associated with ischemic stroke. Based on results from a Phase IIb clinical
trial, Pfizer terminated this collaboration in June 2002 and returned all rights
to us. Based on the favorable safety profile that was obtained from several
Phase I and two Phase II studies of more than 2,000 patients and volunteers
conducted by Pfizer, we have been investigating alternative clinical indications
for rNIF. We believe there may be alternative uses for rNIF in the treatment of
acute inflammation that has been implicated in several cardiovascular
indications including cardiopulmonary bypass surgery. We are planning to
investigate these alternative opportunities for rNIF in relevant preclinical
models prior to making any decisions to move forward with the development of
this compound. In addition to its safety profile, we have a well-defined,
proprietary manufacturing process that would be used to develop rNIF for
alternative indications.
-8-
OUR STRATEGY
In the event that we continue as a stand-alone company, our objective
is to build a profitable, fully integrated biopharmaceutical company focused on
the development of new biotherapeutics that address large markets, including
cardiovascular disease and cancer. Our strategy involves the generation of a
revenue stream by completing the development and commercialization of our rNAPc2
cardiovascular product candidate currently in clinical trials, ultimately with
the support of strategic alliances. Our internal growth will focus on the
advancement of our cancer pipeline through our own internal drug discovery and
development efforts, strategic partnerships and opportunistic acquisitions of
complementary technologies, products or companies that are consistent with our
growth objectives. The key elements of our strategy to accomplish this objective
are to:
o ADVANCE THE DEVELOPMENT OF rNAPc2. We intend to continue the
development of rNAPc2 for the treatment of acute coronary
syndromes, which include UA/NSTEMI. In order to maximize the
value of rNAPc2 and reduce our cash requirements for clinical
trials, we may enter into one or more appropriate strategic
partnerships for the commercialization of this drug following
either the completion of any of the parts of the ongoing
ANTHEM/TIMI-32 trial or following completion of the entire
trial.
o DISCOVER AND DEVELOP NOVEL THERAPEUTICS FOR SOLID TUMOR
CANCER. We plan to use our expertise in modulating protease
activity to discover and develop a new generation of drugs for
treating solid tumors focused on exploiting known and novel
serine protease targets. We expect our initial product
candidate to come from our PACT program. We will also focus on
developing product candidates based on monoclonal antibodies
through external collaborations such as Dyax and Abgenix. We
selected this therapeutic area due to its large market size
and unmet medical need, the potential for expedited review by
the FDA, and the smaller and, oftentimes, less expensive
clinical trials required for the commercialization of cancer
drugs. We also believe we can effectively build an internal
sales force to commercialize any cancer products we may
develop due to the relatively small number of treating
physicians in oncology.
o FORM CORPORATE COLLABORATIONS TO SUPPORT THE DEVELOPMENT AND
COMMERCIALIZATION OF OUR PRODUCTS. We intend to continue to
pursue collaborations to expand our product development
capabilities. We believe that collaborations will be
particularly useful for the development of products with a
large target market where clinical development and
commercialization efforts will require a very substantial
investment of financial and human resources. We believe that
by entering into collaborations with respect to selected
programs, we also create the potential for multiple sources of
revenue and diversify our scientific and financial risk.
o ACQUIRE COMPLEMENTARY PRODUCTS, TECHNOLOGIES OR COMPANIES, OR
COMBINE WITH ANOTHER COMPANY. Our strategy of seeking to
expand on our internal development efforts by in-licensing or
acquiring potential products or technologies developed by
third parties or acquiring complementary businesses led us to
execute the definitive merger agreement with Dendreon. If this
merger is not completed for any reason, we would re-access
this strategy.
PATENTS AND PROPRIETARY RIGHTS
We believe that patents, trademarks, copyrights and other proprietary
rights are important to our business. We rely on trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain our competitive position. Our success will depend in part on our
ability to obtain additional patents, maintain trade secrets and operate without
infringing the proprietary rights of others, both in the United States and other
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countries. We periodically file patent applications to protect the technology,
inventions and improvements that may be important to the development of our
business.
Our strategy is to file applications as appropriate for patents
covering both our products and processes. As of February 28, 2003, we have 68
issued U.S. patents and have received Notices of Allowance for three U.S. patent
applications that have not yet issued as patents. Our issued patents and patent
applications include claims directed to potential pharmaceutical compounds, such
as rNAPc2, rNIF and protease inhibitors, to methods of making the compounds and
for treating specific diseases using the compound. We have filed approximately
46 additional patent applications that currently are pending in the U.S. Patent
and Trademark Office. Most of these patent applications relate to our cancer
programs and are directed to novel protease targets, novel pharmaceutical
compounds which modulate these protease targets, methods of identifying such
pharmaceutical compounds and methods of treating specific diseases by modulating
these protease targets with novel or known pharmaceutical compounds. We have
filed foreign counterparts to some of our issued patents and patent applications
in many countries. Generally, it is our policy to file foreign counterparts in
countries with significant pharmaceutical markets. Some of these foreign
counterparts have issued as patents or have been allowed. We continue to
actively seek patent protection for these related technologies in the United
States and foreign countries.
Under the terms of our collaborations, third parties may have rights to
patents owned by us as specified under applicable agreements. It is possible
that a patent will not issue from any of our owned or licensed patent
applications, and the breadth or scope of protection allowed under any issued
patents may not provide adequate protection to protect our products. In
addition, any patents that we own may be challenged and invalidated by a third
party or circumvented, and any rights granted to us may not provide adequate
protection.
We also rely on trade secrets and contractual arrangements to protect
our trade secrets. Much of the know-how important to our technology and many of
its processes are dependent upon the knowledge, experience and skills of our key
scientific and technical personnel and are not the subject of pending patent
applications or issued patents. To protect our rights to know-how and
technology, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements with us that prohibit the
unauthorized use of, and restrict the disclosure of, confidential information,
and require disclosure and assignment to us during the term of their employment
of their ideas, developments, discoveries and inventions related to the services
that they perform for us.
In the past, some of our research has been funded in part by grants
from the U.S. government. As a result of this funding, the government has rights
to any technology, including inventions, developed with the funding. These
rights include the grant of a non-exclusive, paid-up, worldwide license to
related inventions for any governmental purpose. In addition, the government has
the right to require us to grant an exclusive license to any of these inventions
to a third party if the government determines that:
o adequate steps have not been taken to commercialize those
inventions;
o the license is necessary to meet public health or safety
needs; and
o the license is necessary to meet requirements for public use
under federal regulations.
Federal law requires any licensor of an invention that was partially
funded by federal grants to obtain a covenant from its exclusive licensee to
manufacture any products using the invention in the United States. In addition,
our licenses may also relate to technology developed with federal funding and,
therefore, may also be subject to rights held by the government.
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GOVERNMENT REGULATION
Research, preclinical development, clinical trials, manufacturing and
marketing activities are subject to regulation for safety, efficacy and quality
by numerous governmental authorities in the United States and other countries.
In the United States, drugs are subject to rigorous FDA regulation. The Federal
Food, Drug and Cosmetic Act and other federal and state statutes and regulations
govern, among other things, the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of our
products. Product development and approval within this regulatory framework take
a number of years and involve substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
United States include:
o preclinical laboratory tests, animal pharmacology and
toxicology studies, and formulation studies;
o the submission of an investigational new drug application, or
an IND, to the FDA for human clinical testing, which may be
reviewed by the FDA before human clinical trials may commence;
o the carrying out of adequate and well-controlled human
clinical trials must be conducted by us or our collaborators
to establish the safety and efficacy of the drug candidate;
o the submission of a new drug application to the FDA; and
o FDA approval of the new drug application to allow us to
conduct any commercial sale or shipment of the drug.
In addition to obtaining FDA approval for each product, each domestic
drug manufacturing establishment must be registered with the FDA. Domestic drug
manufacturing establishments are subject to regular inspections by the FDA and
must comply with FDA regulations. To supply products for use in the United
States, foreign manufacturing establishments must also comply with FDA
regulations and are subject to periodic inspection by the FDA, or by
corresponding regulatory agencies in their home countries under reciprocal
agreements with the FDA.
Preclinical studies include the laboratory evaluation of in vitro
pharmacology, product chemistry and formulation, as well as animal studies to
assess the potential safety and efficacy of a product. Compounds must be
formulated according to the FDA's regulations on Good Manufacturing Practices
and preclinical safety tests must be conducted by laboratories that comply with
FDA regulations regarding Good Laboratory Practices. The results of the
preclinical tests are submitted to the FDA as part of an IND and are reviewed by
the FDA before human clinical trials may begin. The IND must also contain
protocols for any clinical trials that will be carried out. If the FDA does not
object to an IND, the IND becomes effective 30 days following its receipt by the
FDA. At any time during this 30 day waiting period or at any time thereafter,
the FDA may halt proposed or ongoing clinical trials until the agency authorizes
trials under specified terms. Such a halt, called a clinical hold, continues in
effect unless and until the FDA's concerns are adequately addressed. In some
cases, clinical holds are never lifted. Imposition by the FDA of a clinical hold
can delay or preclude further product development. The IND process may be
extremely costly and may substantially delay product development.
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Clinical trials must be sponsored and conducted in accordance with good
clinical practice under protocols and methodologies that:
o ensure receipt of signed consents from participants that
inform them of risks;
o detail the protocol and objectives of the study;
o detail the parameters to be used to monitor safety; and
o detail the efficacy criteria to be evaluated.
Furthermore, each clinical study must be conducted under the
supervision of a principal investigator operating under the auspices of an
Institutional Review Board, or IRB, at the institution where the study is
conducted. The IRB will consider, among other things, ethical factors, the
safety of human subjects and the possible liability of the institution.
Sponsors, investigators and IRB members are obligated to avoid conflicts of
interests and ensure compliance with all legal requirements.
Clinical trials are typically conducted in three sequential phases. In
Phase I, the initial introduction of the drug into a small number of patients or
healthy volunteers is undertaken. The drug is evaluated for safety by assessing
the adverse effects, dosage tolerance, metabolism, distribution, excretion and
clinical pharmacology. The Phase I trial must provide pharmacological data that
is sufficient to devise the Phase II trials.
Phase II trials involve studies in a larger, yet limited, patient
population in order to:
o obtain initial indications of the efficacy of the drug for
specific, targeted indications;
o determine dosage tolerance and optimal dosage; and
o identify possible adverse affects and safety risks.
When a compound is determined preliminarily to be effective and to have
an acceptable safety profile in Phase Il evaluation, Phase III trials can be
undertaken to evaluate safety and efficacy endpoints further in expanded patient
populations at geographically diverse clinical trial sites. Positive results in
Phase II trials are no guarantee of positive results in Phase III.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a new drug application,
which must be complete, accurate and in compliance with FDA regulations. The
approval of a new drug application permits commercial-scale manufacturing,
marketing, distribution, exporting from the United States and sale of the drug
in the United States. The testing and approval process typically requires
substantial time, effort and expense. The FDA may deny a new drug application
filed by us or our collaborators if the applicable scientific and regulatory
criteria are not satisfied and thus, we may not be able to manufacture and sell
the product in the United States. Moreover, the FDA may require additional
testing or information, or may require post-approval testing, surveillance and
reporting to monitor the products. Notwithstanding any of the foregoing, the FDA
may ultimately decide that a new drug application filed by us or our
collaborators does not meet the applicable agency standards and, even if
approval is granted, it can be limited or revoked if evidence subsequently
emerges casting doubt on the safety or efficacy of a product or if the
manufacturing facility, processes or controls do not comply with regulatory
standards. Finally, an approval may include limitations on the uses, labeling,
dosage forms, distribution and packaging of the product.
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Among the conditions for new drug approval is the requirement that the
prospective manufacturer's quality control, record keeping, notifications and
reporting, and manufacturing systems conform to the FDA's regulations on current
Good Manufacturing Practices. In complying with the standards contained in these
regulations, manufacturers must continue to expend time, money, resources and
effort in order to ensure compliance.
Outside the United States, our ability to market a product is
contingent upon receiving a marketing authorization from the appropriate
regulatory authority. This foreign regulatory approval process includes many of
the same steps associated with FDA approval described above.
In addition to regulations enforced by the FDA, we are subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
Our research and development activities involve the controlled use of hazardous
materials, chemicals and various radioactive compounds. Although we believe that
our safety procedures for handling and disposing of these materials comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of an accident, we could be liable for any damages that
may result.
COMPETITION
Due to the high incidence of cardiovascular disease and cancer, most,
if not all, of the major pharmaceutical companies have significant research and
product development programs in these areas. We expect to encounter significant
competition both in the United States and in foreign markets for each of the
drugs we seek to develop. Several existing products have well-established market
positions and there are a number of new products in advanced clinical
development. If commercialized, the success of rNAPc2 will depend upon
cardiologists accepting the drug as part of the current standard of care for the
acute treatment of UA/NSTEMI. Many biotechnology and pharmaceutical companies
are focused on the development of drugs to treat cancer, and we expect that any
products we develop may compete against today's standard treatments and any
potential new drugs that are currently under development.
Our competitors include fully-integrated pharmaceutical and
biotechnology companies both in the United States and in foreign markets which
have expertise in research and development, manufacturing processes, testing,
obtaining regulatory clearances and marketing, and may have significantly
greater financial and other resources than we do. Smaller companies may also
prove to be significant competitors. Academic institutions, U.S. and foreign
government agencies and other public and private research organizations conduct
research relating to diseases we target, and may develop products for the
treatment of these diseases that may compete directly with any we develop. Our
competitors may also compete with us for collaborations. In addition, these
companies and institutions compete with us in recruiting and retaining highly
qualified scientific personnel.
Our competition will be determined, in part, by the potential
indications that are ultimately cleared for marketing by regulatory authorities,
by the timing of any clearances and market introductions and by whether any
currently available drugs, or drugs under development by others, are effective
in the same indications. Accordingly, the relative speed with which we can
develop product candidates, complete the clinical trials, receive regulatory
approval and supply commercial quantities of the products to the market is
expected to be an important competitive factor. We expect that competition among
products approved for sale will be based, among other things, on product
efficacy, safety, reliability, availability, price and patent position. Our
competitive position also depends on our ability to attract and retain qualified
personnel, obtain protection for our proprietary products and processes, and
secure sufficient capital resources.
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EMPLOYEES
As of February 28, 2003, we employed 55 individuals on a full-time
basis, of which 14 hold Ph.D. degrees. A significant number of our management
and professional employees have had prior experience with pharmaceutical,
biotechnology or medical product companies. None of our employees is covered by
a collective bargaining agreement. All of our employees are covered by
confidentiality agreements, and three of our officers have employment contracts.
We believe that our relationship with employees is good.
AVAILABLE INFORMATION
Our website address is www.corvas.com. We make available free of charge
through our website our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission.
RISK FACTORS
WE MAY NOT BE SUCCESSFUL IN COMPLETING OUR PROPOSED ACQUISITION BY DENDREON
CORPORATION.
Although we executed a definitive merger agreement with Dendreon, it is
subject to various closing conditions including approval by the stockholders of
both companies and it is possible that the merger may not be completed in the
stated timeframe or at all. Two of our stockholders have publicly stated that
they are opposed to the merger and intend to vote against it. If the proposed
merger is not completed or is delayed, our business may suffer for a number of
reasons including, but not limited to, other opportunities foregone while the
transaction was pending, additional costs incurred in support of the proposed
merger, loss of employees due to uncertainty surrounding the acquisition and a
further reduction in our cash balances. Even if the proposed merger is
completed, we may fail to realize the anticipated benefits of the merger.
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 December 31, 2002, we had an accumulated deficit of approximately
$146.2 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. Currently, we do not have any committed sources of external
funding. We will continue to incur substantial additional operating losses for
at least the next several years as we pursue our clinical trials and research
and development efforts. To become profitable as a stand-alone company, we,
either alone or with our collaborators, would have to successfully identify,
develop, manufacture and market new product candidates. We do not expect to
generate revenues from product sales or royalties from commercial sales of our
products for at least a number of years, and it is possible that we will never
have product sales revenue or receive significant royalties from sales of any of
our licensed products.
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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. In November 2002, we initiated the
ANTHEM/TIMI-32 trial for our only clinical stage product candidate, rNAPc2.
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
our 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 remain
a stand-alone company and we are unable to develop any commercial drugs, or if
such development is delayed, we may be required to 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.
Because we currently have only one product in clinical development, our
business prospects depend in large part on our ability, alone or with
collaborators, to successfully commercialize rNAPc2. Many factors will affect
our current and future clinical trials for rNAPc2 including patient enrollment,
which is affected by the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the trial, competing
clinical trials and new drug approvals. Delays in patient enrollment in our
current or any future trials may result in increased costs, program delays, or
both, which could slow down our product development and approval process. If
clinical trials for rNAPc2 are not completed or conducted as planned, due to any
reason including, but not limited to, rNAPc2 not being safe or effective, the
commercialization of rNAPc2 would likely be delayed or prevented, our business
would likely be materially harmed and, if we remain a stand-alone company, our
stock price would likely decline. In addition, if we do not receive required
regulatory approvals, we may never commercialize rNAPc2 and therefore may never
be profitable. Finally, if rNAPc2 were to fail in the ANTHEM/TIMI-32 trial prior
to the closing of the proposed merger with Dendreon, then Dendreon would have
the right to terminate the merger agreement due to the occurrence of a material
adverse event.
OUR rNAPc2 CLINICAL TRIALS MAY TAKE LONGER TO COMPLETE THAN WE PROJECT.
Many factors including, but not limited to, difficulty recruiting and
enrolling patients who meet our trial eligibility criteria, regulatory
requirements, and problems at the clinical sites may cause delays that would
extend the duration of any of the three parts of the ANTHEM/TIMI-32 trial, or
prevent the completion of any part of this trial. Further, we are relying
primarily upon third parties to conduct, supervise and monitor our rNAPc2
clinical trials under the oversight of our clinical group and, therefore, have
less control over the timing and other aspects of this program than if we
conducted the trials on our own. If such delays are significant, we may never
commercialize rNAPc2 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. 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. Although we have completed a Phase IIa
clinical trial of rNAPc2 in patients undergoing elective coronary angioplasty to
-15-
establish safety prior to conducting additional clinical trials in patients with
UA/NSTEMI, results from our ANTHEM/TIMI-32 trial may not support the continued
development of rNAPc2.
rNAPc2, or any future product candidates we may develop, may not be
safe for human use. Administering any of our product candidates 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 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 candidate
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
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, for each of our product
candidates we must conduct, at our own expense or a collaborator's expense,
preclinical research and clinical trials 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 clinical
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 regulations applicable to a particular product.
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 may 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 regulations 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.
-16-
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 ENTER INTO FUNDED COLLABORATION AGREEMENTS FOR OUR DRUG PROGRAMS,
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
2002, we had a net loss of approximately $21.2 million and we anticipate that
our 2003 net loss will be larger. As a stand-alone company, we expect that we
will continue to spend substantial amounts on research and development,
including the costs of our ongoing ANTHEM/TIMI-32 trial as well as 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, the outcome of
the first part of the ongoing ANTHEM/TIMI-32 trial and those factors outlined in
"Liquidity and Capital Resources."
We do not have committed external sources of funding. If we are unable
to enter into future collaboration agreements, including co-development and
marketing agreements, or 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 that we retain
to future product candidates; 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, we may have to reduce or delay further development
of rNAPc2 or some of our cancer programs in the future and/or increase our
expenditures and undertake further development activities at our own expense.
Beyond completion of the ongoing ANTHEM/TIMI-32 trial, future clinical
development of rNAPc2 may 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 partnered
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 their
abilities to establish the safety and efficacy of our product candidates, obtain
regulatory approvals and achieve market acceptance of our products.
-17-
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
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 through which our collaborator is funding all
or a portion of the research and development 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 have been 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 existing or potential
collaborators were to occur, the effect could be to diminish, terminate or cause
delays in one or more of our product development programs.
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
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 cardiovascular disease and
cancer against which ours may compete. It is possible that our competitors will
develop and market products that are less expensive, more effective or safer
than our future products, if any, or that will render our products obsolete. It
is also possible that our competitors will commercialize competing products
before any of our products are approved and marketed. Many of our competitors
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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.
MARKET ACCEPTANCE OF rNAPc2 AND FUTURE PRODUCT CANDIDATES, IF ANY, IS UNCERTAIN.
If approved, we intend for rNAPc2 to be used in combination with the
current treatment regimen for UA/NSTEMI. However, physicians may not ultimately
use rNAPc2. Physicians will only prescribe rNAPc2 or any of our future products
if they determine, based on experience, clinical data, side effect profiles and
other factors, that they are beneficial in combination with other products or
preferable to other products then in use. Recommendations and endorsements by
influential physicians will be essential for market acceptance of rNAPc2 or
future products, if any, and we may not be able to obtain these recommendations
and endorsements. In addition, many other factors influence the adoption of new
drugs, including marketing and distribution restrictions, adverse publicity,
product pricing and reimbursement by third-party payers. Even if rNAPc2 and our
future product candidates, if any, achieve market acceptance, the market may not
be sufficiently large to result in significant revenues. If any of our products
do not achieve adequate sales, we may never be profitable and our business and
financial condition would be adversely affected.
FAILURE TO RETAIN KEY SCIENTIFIC PERSONNEL COULD DECREASE OUR ABILITY TO DEVELOP
OUR PRODUCT CANDIDATES AND, IF WE REMAIN A STAND-ALONE COMPANY, TO CONTINUE TO
OBTAIN NEW COLLABORATIONS OR OTHER SOURCES OF FUNDING.
We depend, to a significant extent, on the efforts of our key
employees. The loss of these individuals may delay or prevent us from achieving
our business objective of commercializing our product candidates. 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 recruitment and retention
efforts, our business operations will be harmed.
BECAUSE WE HAVE LIMITED MANUFACTURING EXPERIENCE AND WE 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 to continue to rely on third parties to manufacture
our product candidates. There are only a limited number of contract
manufacturers capable of manufacturing rNAPc2. 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, our third-party
manufacturers may be unable to manufacture any product candidate we develop in
commercial quantities on a cost-effective basis.
We may need to expand our existing relationships or establish new
relationships with third-party manufacturers for rNAPc2 and for future product
candidates, if any. 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
-19-
and may be unable to obtain or maintain the necessary governmental licenses and
approvals to manufacture our 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, FDA
approval, 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
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 believe
that we have protected 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
-20-
uncertain. Our competitors may also independently develop equivalent knowledge,
methods and know-how or gain access to our proprietary information through some
other means.
Because 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.
It is impossible to fully predict the potential adverse effects that a
product candidate may have in humans from the results of studies in animals.
Because 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.
CHANGES IN, OR INTERPRETATIONS OF, ACCOUNTING RULES AND REGULATIONS COULD RESULT
IN UNFAVORABLE ACCOUNTING CHARGES.
Accounting regulations and corporate governance practices are receiving
increased scrutiny and continue to be subject to further review, interpretation
and guidance from relevant accounting authorities, including the Securities and
Exchange Commission, or the SEC. Although we believe that our accounting
practices are consistent with current accounting regulations, changes to, or
interpretations of, accounting methods or policies in the future may require us
to reclassify, restate or otherwise change or revise our financial statements,
which may adversely affect our results of operations and business.
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 payers such as government
health administration authorities, private health insurers, managed care
programs and other organizations. Third-party payers 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 drugs would not be economically feasible. If third parties fail to
provide reimbursement for any drugs we may develop, consumers and physicians may
not choose to use our products, and we may not realize an acceptable return on
our investment in product development.
-21-
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 some or all of
the revenues we receive will depend upon the efforts of third parties, which
efforts may not be successful.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS 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, storage 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. 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.
ITEM 2. PROPERTIES
We currently lease approximately 42,300 square feet of laboratory and
office space in San Diego, California. Our lease expires in September 2006.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in certain litigation arising out
of our operations. We maintain liability insurance, including product liability
coverage, in amounts our management believes is adequate. We are not currently
engaged in any legal proceedings that we expect would materially harm our
business or financial condition. However, our evaluation of the likely impact of
these actions could change in the future and an unfavorable outcome, depending
upon the amount and timing, could have a material adverse effect on our results
of operations or our cash flows in a future period.
-22-
On March 4, 2003, the Asset Value Fund Limited Partnership, or AVF,
filed a purported class action complaint against us and our directors in
Delaware state court alleging that our Board of Directors violated their
fiduciary duties to shareholders when they approved the proposed merger of us
and Dendreon Corporation. Specifically, the complaint alleges that (1) the
directors failed to consider all available information when deciding to pursue
the merger, (2) the directors failed to negotiate a mechanism to protect
shareholders from the effects of a decline in Dendreon's stock price before the
merger, and (3) a minority of the directors were furthering their own interests
in approving the merger instead of the interests of shareholders. AVF seeks to
enjoin us from proceeding with the merger, and also seeks compensatory damages
and reimbursement of the costs of bringing suit. Neither the Company nor any of
our directors has yet been served with the complaint. We deny the material
allegations in the complaint and, if the complaint is served, intend to defend
the action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since 1992, our common stock has traded on the Nasdaq National Market
under the symbol "CVAS." The following table sets forth, for the periods
indicated, the high and low sales prices of our common stock, as reported on the
Nasdaq National Market.
HIGH LOW
---- ---
2001
First Quarter....................................... $ 15.00 $ 6.09
Second Quarter...................................... 14.55 7.63
Third Quarter....................................... 12.77 4.98
Fourth Quarter...................................... 7.46 5.00
2002
First Quarter....................................... $ 7.35 $ 5.47
Second Quarter...................................... 6.10 1.79
Third Quarter....................................... 2.35 1.20
Fourth Quarter...................................... 1.75 1.21
2003
First Quarter (through February 28, 2003)........... $ 2.11 $ 1.23
On February 28, 2003, the closing price of our common stock was $1.74
per share, and there were approximately 600 holders of record of our common
stock.
We have never declared or paid dividends on our capital stock. We
anticipate that we will retain our earnings, if any, to support our operations
and to finance the growth and development of our business. Therefore, we do not
expect to pay cash dividends in the foreseeable future.
-23-
ITEM 6. SELECTED FINANCIAL DATA
This section presents our historical financial data. You should
carefully read the financial statements included elsewhere in this report,
including the notes to the financial statements and the Management's Discussion
and Analysis of Financial Condition and Results of Operations included herein.
We do not intend the selected data in this section to replace the financial
statements. We derived the statement of operations data for the years ended
December 31, 2000, 2001 and 2002, and the balance sheet data as of December 31,
2001 and 2002 from the audited financial statements included in this report.
KPMG LLP, independent certified public accountants, audited our financial
statements. We derived the statement of operations data for the years ended
December 31, 1998 and 1999 and the balance sheet data as of December 31, 1998,
1999, and 2000 from our audited financial statements that are not included
elsewhere in this report. Historical results are not necessarily indicative of
the results that we may expect in the future.
YEAR ENDED DECEMBER 31,
============================================================================
(In thousands, except per share data)
STATEMENTS OF OPERATIONS DATA: 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
REVENUES:
Revenue from collaborative agreements $ --- $ --- $ 3,263 $ 6,088 $ 6,985
License fees and milestones --- --- 2,500 --- 2,795
Net product sales --- --- --- --- 44
Royalties 142 117 167 190 145
Research grants --- 195 198 14 ---
------------ ------------ ------------ ------------ ------------
Total revenues 142 312 6,128 6,292 9,969
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Research and development 16,649 24,020 14,928 14,669 15,800
General and administrative 5,161 5,123 4,068 5,320 3,670
Restructuring charges 1,929 --- --- --- ---
Cost of products sold --- --- --- --- 18
------------ ------------ ------------ ------------ ------------
Total costs and expenses 23,739 29,143 18,996 19,989 19,488
------------ ------------ ------------ ------------ ------------
Loss from operations (23,597) (28,831) (12,868) (13,697) (9,519)
OTHER INCOME (EXPENSE):
Interest income 3,260 6,187 2,941 901 1,201
Interest expense (841) (797) (762) (221) ---
Other income --- --- --- --- 214
------------ ------------ ------------ ------------ ------------
Net other income 2,419 5,390 2,179 680 1,415
------------ ------------ ------------ ------------ ------------
Net loss and other comprehensive loss $ (21,178) $ (23,441) $ (10,689) $ (13,017) $ (8,104)
============ ============ ============ ============ ============
Basic and diluted net loss per share (1) $ (0.77) $ (0.85) $ (0.49) $ (0.82) $ (0.56)
============ ============ ============ ============ ============
Shares used in calculation of basic
and diluted net loss per share (1) 27,537 27,426 21,801 15,842 14,460
============ ============ ============ ============ ============
DECEMBER 31,
----------------------------------------------------------------------------
BALANCE SHEETS DATA: 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(in thousands)
Cash, cash equivalents & investments (2) $ 90,474 $ 112,299 $ 135,585 $ 21,511 $ 17,613
Working capital 79,755 76,594 122,547 20,278 16,902
Total assets 96,593 117,003 139,022 23,889 19,912
Long-term debt 12,558 11,736 10,958 10,215 ---
Accumulated deficit (146,178) (125,000) (101,559) (90,870) (77,853)
Total stockholders' equity 81,531 102,457 124,933 11,275 18,386
_____________________
(1) See Note 2 of the Notes to Financial Statements.
(2) In certain years, includes long- and short-term investments.
-24-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 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 ABOVE 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
biotherapeutics that address large medical markets, including cardiovascular
disease and cancer. In November 2002 we initiated a Phase II clinical program
for rNAPc2 in patients with acute coronary syndromes, which include unstable
angina and non-ST-segment elevation myocardial infarction, or UA/NSTEMI. Our
cancer research programs are focused on the development of new biotherapies,
including monoclonal antibodies and synthetic prodrugs, that target serine
proteases associated with the growth and spread of cancerous tumors.
On February 25, 2003, we executed a definitive merger agreement under
which Dendreon Corporation will acquire us, subject to various closing
conditions including approval by the stockholders of each company. Under the
terms of this agreement, each share of our common stock will be exchanged for a
fixed ratio of 0.45 shares of Dendreon common stock in a tax-free
reorganization. The transaction is anticipated to close in the second quarter of
2003, subject to approval by stockholders of both companies. All of the
projections, trends and forward-looking statements included herein are based on
Corvas operating as a stand-alone entity. In the event that this proposed merger
is completed, these projections, trends and forward-looking statements will
likely change, and the changes may be significant.
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 December 31, 2002, we had an accumulated
deficit of $146.2 million. Unless we enter into any new collaborative agreements
that include funding for research and development or funding for the continued
development of our drug candidates, we expect that our major source of income,
if any, for the next several years will continue to primarily be interest
income. We may not enter into any additional collaborative agreements and may
not recognize any associated revenue.
RESTRUCTURING
In July 2002, we initiated a workforce reduction of nearly 40% of our
research and administrative staff as part of an extensive strategic realignment
of our research and development programs. This restructuring was implemented to
focus our resources on the continued clinical development of our proprietary
rNAPc2 product candidate and on our cancer research programs focused on
therapeutic antibodies and synthetic prodrugs. We expect to realize annualized
cost savings estimated at more than $8.0 million from this restructuring and
related cost-cutting measures.
-25-
RESULTS OF OPERATIONS
REVENUES. Our 2002 operating revenues decreased to $142,000 from
$312,000 in 2001 and $6.1 million in 2000. We recorded no revenues from
collaborative agreements or license fees in 2002 and 2001, compared to $5.8
million in 2000. Revenues from collaborative agreements in 2000 included $3.0
million from an agreement with Schering-Plough related to oral anticoagulants
for chronic thrombosis, and $263,000 from an agreement with Schering-Plough
related to oral inhibitors of the hepatitis C virus. A $2.5 million license fee
from Schering-Plough for the hepatitis C inhibitor program was also recognized
in 2000. Royalty revenues of $142,000, $117,000 and $167,000 were recognized in
2002, 2001 and 2000, respectively, from our license agreements related to sales
of recombinant tissue factor. Due to the completion of a research grant in
August 2001, no research grant revenue was recognized in 2002, compared to
$195,000 and $198,000 in 2001 and 2000, respectively.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses,
which accounted for 70% of our total costs and expenses in 2002, 82% in 2001 and
79% in 2000, decreased to $16.6 million in 2002 from $24.0 million in 2001. This
$7.4 million decrease was attributable to both non-recurring manufacturing costs
associated with the manufacturing of rNAPc2 in 2001 and our July 2002 workforce
reduction, which also resulted in a realignment of our ongoing research
programs. Research and development expenses in 2001 increased to $24.0 million
from $14.9 million in 2000. This $9.1 million increase was primarily
attributable to rNAPc2 manufacturing costs, as well as growth in the number of
scientists along with licensing and patent activities in support of our cancer
programs.
We expect that our 2003 research and development expenses will continue
to be comprised of costs associated with rNAPc2 development as well as our
internally-funded cancer research programs. Although our expenses for basic
research are expected to decrease as a result of the workforce reduction which
primarily impacted our scientists, we expect that our 2003 research and
development costs will increase over 2002 due to the recent initiation of our
rNAPc2 Phase II clinical program in UA/NSTEMI patients. As of December 31, 2002,
we had paid approximately $2.8 million for this trial. We have not prepaid any
significant expenses for the second and third parts of this trial. We will
continue to incur expenses for the first part of the trial, as we pay a per
patient fee and associated costs as each patient is enrolled.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses in 2002 increased to $5.2 million from $5.1 million in 2001 and $4.1
million in 2000. The 2002 increase of $38,000 compares to a $1.0 million
increase in 2001, primarily due to increased facility costs resulting from
additional square footage assumed in 2000 and, to a lesser extent, costs
associated with hiring a new executive. We expect that our general and
administrative expenses in 2003 will increase over the 2002 amounts, mainly due
to legal and other costs associated with the proposed merger with Dendreon.
RESTRUCTURING CHARGES. In connection with the July 2002 restructuring
of nearly 40% of our research and administrative staff, we recorded total
restructuring charges of $1.9 million. Approximately 68% or $1.3 million of the
total charges were comprised of severance payments and related benefits.
Settlement of contractual obligations and legal costs accounted for 15% or
$295,000 of the total charges, while 9% or $170,000 was incurred for
outplacement services provided to the impacted employees and 8% or $160,000
related to a non-cash charge for impaired assets. Future cash payments of
$426,000 are expected to be paid through July 2003 in connection with the
restructuring. See Note 4 of the Notes to Financial Statements for more details
regarding the restructuring charges.
NET OTHER INCOME. Net other income was $2.4 million in 2002, compared
to $5.4 million in the previous year. This $3.0 million decrease was due to a
combination of lower balances available for investment and the significant
-26-
reduction in interest rates. Net other income in 2001 increased by $3.2 million
over the $2.2 million recognized in 2000. This increase was attributable to the
investment of net proceeds from our November 2000 public offering of common
stock. Interest income in each of these years was partially offset by interest
expense of $841,000, $797,000 and $762,000 in 2002, 2001 and 2000, respectively,
attributable to the outstanding convertible notes. As a result of the lower
prevailing interest rates and lower balances available for investment, we expect
that our interest income will continue to decline.
We expect that we will continue to incur substantial additional
operating losses for at least 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 year to year 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 debt and equity 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 $90.2
million as of December 31, 2002. Working capital, which is our current assets
minus our current liabilities, was $79.8 million at December 31, 2002. We invest
available cash in accordance with an investment policy set by our board of
directors.
During the year ended December 31, 2002, we used net cash of $20.5
million in our operating activities, $20.4 million of which was provided by our
investing activities. Net cash of $172,000 was provided by financing activities
in 2002 from the exercise of stock options and purchases of stock through our
employee stock purchase plan.
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, or the
convertible notes, 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 convertible 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 convertible notes
any time after August 18, 2002 upon payment of the outstanding principal and
accreted interest. In the event we are acquired by Dendreon, the note holder may
require the redemption of the convertible notes within 30 business days
following the change of control. If the holder exercises this right, as is
currently expected, then the principal of the convertible notes must be paid in
cash and Dendreon will have the option of paying the accreted interest in cash
or in Dendreon common stock priced at the average closing price for the 20
trading days immediately prior to the redemption.
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
-27-
equally in the product development costs and any profits from 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 that was used
in certain of our cancer research and development programs prior to our July
2002 restructuring. In January 2003, we terminated this agreement and paid a
$100,000 termination fee.
For at least the next several years, we expect additional operating
losses and negative cash flows from operations. We currently expect our 2003
burn rate to be in the low to mid $20 million range. Our current estimate does
not account for any potential strategic transactions and assumes that we proceed
with the second and third parts of the ANTHEM/TIMI-32 trial without having a
corporate partner in place to fund any of the trial costs. We expect to fund our
working capital and capital expenditure requirements during the next 12 months
from our available cash and investments. Based on our current estimates,
including expected annualized cost savings of more than $8.0 million from our
restructuring and other cost-cutting measures, we believe that our available
cash and investments should be sufficient to satisfy our anticipated funding
requirements for at least the next several years as a stand-alone company.
Our material contractual obligations are as follows (in thousands):
Payments Due/Estimated by Period
--------------------------------
Less than 1 After
year 1-3 years 4-5 years 5 years
Total (2003) (2004-2006) (2007-2008) (2009 +)
----- ------ ----------- ----------- --------
Commitments(1)
--------------
Operating lease $ 5,320 $ 1,345 $ 3,975 $ -0- $ -0-
Capital expenditures (2) 268 268 -0- -0- -0-
Committed research and development (3) 20,566 3,047 17,147 248 124
Workforce reduction and related costs 426 426 -0- -0- -0-
----------- ----------- ------------ ------------ ------------
Total contractual obligations $ 26,580 $ 5,086 $ 21,122 $ 248 $ 124
=========== =========== ============ ============ ============
_________________
1 Does not include payment of outstanding principal and accreted interest
on the convertible notes as we expect they will be converted into shares of our
common stock. This may change for many reasons including, but not limited to,
the reasons listed on the next page.
2 Based on 2003 capital purchases and purchase commitments. This estimate
is less than our approved capital budget for 2003. This estimate may change for
many reasons including, but not limited to, the reasons listed on the next page.
3 Includes committed costs for rNAPc2, assuming that we complete all three
parts of our Phase II study, as well as for our cancer programs. Further,
assumes various license agreements are not terminated prior to the time period
indicated and are renewed annually. These future estimates may change for many
reasons including, but not limited to, the reasons listed on the next page.
-28-
Our current estimate of our future burn rate and capital requirements
will change in the event we are acquired by Dendreon. In addition, our estimates
may change for many other reasons, some of which are beyond our control,
including, but not limited to:
o the costs associated with our recently-initiated
ANTHEM/TIMI-32 trial, including the timing of the initiation
of various parts of the program;
o the rate of patient enrollment in all parts of our
ANTHEM/TIMI-32 trial;
o the timing and magnitude of expenses incurred to further
develop and potentially commercialize 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, including the timing of selection of a clinical drug
candidate from our PACT program;
o our success in entering into future collaborative agreements,
if any;
o competing technological and market developments;
o the costs we incur in obtaining and enforcing patent and other
proprietary rights;
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;
o the timing and form of payment (cash or common stock) related
to repayment of our outstanding convertible notes; and
o costs associated with our pending transaction with Dendreon,
including, but not limited to, proxy solicitation expenses,
legal fees and costs associated with the class action
complaint purportedly filed in Delaware state court.
Our expected cash requirements may vary materially from those now
anticipated for many reasons. 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, including Corvas, have historically 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, scale back or discontinue one or more of our
drug discovery programs, clinical trials or other aspects of our operations.
Our net operating loss carryforwards available to offset future taxable
income at December 31, 2002 were approximately $140.7 million for federal income
tax reporting purposes, and begin to expire in 2003. The net operating loss
carryforwards for state purposes, which expire five to ten years after
generation, are approximately $81.8 million. We also had unused research and
development tax credits for federal income tax reporting purposes of $7.2
million at December 31, 2002. In accordance with Internal Revenue Code Sections
382 and 383, the annual utilization of net operating loss carryforwards and
credits existing prior to a change in control may be limited. The extent of such
prior limitations, if any, has not been determined.
-29-
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in accordance with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amounts reported
in our financial statements and accompanying notes. These estimates include,
among others, revenue recognition, stock-based compensation and research and
development expenses. We typically base our estimates on historical experience,
terms of existing contracts, trends in the industry, information available from
other outside sources, and on various other assumptions that we believe are
reasonable under the circumstances. Actual results could vary from these
estimates under different assumptions or conditions.
Our significant accounting policies, which have been consistently
applied in all material respects, are more fully described in Note 2 of our
Notes to Financial Statements. We consider certain of these policies to be
critical.
REVENUE RECOGNITION. Revenues from collaborative agreements are
recognized 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 recorded as deferred revenue and recognized as revenue in
accordance with the terms of the agreements. Non-refundable license fees are
recognized when we receive such payments, absent any continuing involvement as
required by Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." We recognize milestone payments as revenue upon achievement of the
milestones specified in our agreements. Research grant revenues are recognized
as the related research is performed under the terms of the grant. We do not
currently have any agreements in place under which we expect to recognize any
revenue in 2003.
STOCK-BASED COMPENSATION. As permitted by Statement of Financial
Accounting Standards No. 123, or SFAS 123, "Accounting for Stock-Based
Compensation," as amended by Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123," we have elected to continue to apply the
provisions of Accounting Principles Board, or APB, Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for our
employee stock option and stock purchase plans. Accordingly, we recognize no
compensation expense in connection with our employee stock option and stock
purchase plans. We are required by SFAS 123 to disclose the pro forma effects on
our reported net loss and loss per share as if compensation expense had been
recognized for these items based on the fair value method of accounting
prescribed by SFAS 123. In connection with stock options granted to certain
consultants, we must make various valuation assumptions for purposes of
recording compensation expense. Had we determined compensation cost for our
stock-based plans based on the fair value at the grant date, our net loss and
net loss per share would have been increased to the pro forma amounts indicated
below (in thousands, except per share data).
2002 2001 2000
------------- ------------ -------------
Net loss - As reported $ (21,178) $ (23,441) $ (10,689)
Net loss - Pro forma $ (26,150) $ (29,709) $ (12,330)
Basic and diluted net loss per share - As reported $ (0.77) $ (0.85) $ (0.49)
Basic and diluted net loss per share - Pro forma $ (0.95) $ (1.08) $ (0.57)
-30-
RESEARCH AND DEVELOPMENT EXPENSES. We expense all research and
development costs as they are incurred. Our research and development costs
include, but are not limited to, payroll and related costs, lab supplies,
clinical and preclinical studies, manufacturing costs for clinical supplies,
sponsored research at other labs, consulting, legal patent fees and
research-related overhead charges. Our accrued liabilities for research and
development expenses are based, in part, on a number of estimates that are
related to our clinical, preclinical and other studies.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards No. 148, or SFAS 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." SFAS 148 enables companies that choose to
adopt the fair value based method to report the full effect of employee stock
options in their financial statements immediately upon adoption. We will
continue to apply the disclosure-only provisions of SFAS 123. See Notes 2 and 6
of our Notes to Financial Statements for additional information regarding our
treatment of stock options. The transition provisions of SFAS 148 are effective
for fiscal years ending after December 15, 2002. The disclosure provisions are
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002.
In November 2002, the FASB published Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." Interpretation No. 45 expands on
the accounting guidance of Statements of Financial Accounting Standards Nos. 5,
57, and 107, and incorporates without change the provisions of FASB
Interpretation No. 34, which is being superseded. Interpretation No. 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. Further it requires
companies to recognize an initial liability for the fair value, or market value,
of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements at the time a
guarantee is issued. The initial recognition and measurement provisions apply on
a prospective basis to guarantees issued or modified after December 31, 2002,
regardless of the guarantor's fiscal year end. The disclosure requirements in
Interpretation No. 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002, and are not expected to have a
material effect on our financial statements.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, or SFAS 146, "Accounting for Restructuring Costs," which
applies to costs associated with an exit activity, including restructuring, or
with a disposal of long-lived assets. SFAS 146 requires that a liability be
recorded for costs associated with an exit or disposal activity when that
liability is incurred and can be measured at fair value, rather than at the date
of commitment to an exit activity. SFAS 146 also requires disclosures about exit
and disposal activities, the related costs, and changes in those costs in the
notes to the financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002. We do not expect the adoption of SFAS 146 to
have a material effect on our financial statements.
-31-
ITEM 7A. 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. See Note 2 of our Notes to Financial Statements for
information about these financial instruments. 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 allows us to aggregate their value.
The carrying amount of all held to maturity investments as of December 31, 2002
is $85.7 million, and they have a weighted-average interest rate of 2.6%. These
investments mature at various dates through August 18, 2004.
Considering our investment balances as of December 31, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ...............................................................F-1
Balance Sheets as of December 31, 2002 and 2001.............................................F-2
Statements of Operations for the three years ended December 31, 2002........................F-3
Statements of Stockholders' Equity for the three years ended December 31, 2002..............F-4
Statements of Cash Flows for the three years ended December 31, 2002........................F-5
Notes to Financial Statements...............................................................F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-32-
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Corvas International, Inc.:
We have audited the accompanying balance sheets of Corvas International, Inc. as
of December 31, 2002 and 2001, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Corvas International, Inc. as
of December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
San Diego, California
January 31, 2003, except for Note 13,
which is as of February 25, 2003
F-1
CORVAS INTERNATIONAL, INC.
BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
2002 2001
---------- ----------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 4,428 $ 4,332
Short-term debt securities held to maturity and time deposits,
partially restricted (notes 2 and 8) 73,860 72,359
Receivables 1,172 1,865
Note receivable from related party (note 11) --- 250
Other current assets 2,541 382
---------- ----------
Total current assets 82,001 79,188
---------- ----------
Debt issuance costs 70 89
Long-term debt securities held to maturity 12,186 35,608
Property and equipment, net (note 3) 2,336 2,118
---------- ----------
$ 96,593 $ 117,003
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 601 $ 925
Accrued liabilities 789 1,123
Accrued leave 430 546
Accrued restructuring charges (note 4) 426 ---
---------- ----------
Total current liabilities 2,246 2,594
---------- ----------
Convertible notes payable 12,558 11,736
Deferred rent 258 216
Stockholders' equity (notes 6 and 9):
Common stock, $0.001 par value, 75,000,000 shares
authorized; issued and outstanding 27,591,000 shares in
2002 and 27,499,000 shares in 2001 28 27
Additional paid-in capital 227,681 227,430
Accumulated deficit (146,178) (125,000)
---------- ----------
Total stockholders' equity 81,531 102,457
Commitments and contingencies (note 8)
---------- ----------
$ 96,593 $ 117,003
========== ==========
See accompanying notes to financial statements.
F-2
CORVAS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
REVENUES:
Revenue from collaborative agreements $ --- $ --- $ 3,263
(note 9)
License fees and milestones (note 9) --- --- 2,500
Royalties (note 9) 142 117 167
Research grants (note 12) --- 195 198
--------- --------- ---------
Total revenues 142 312 6,128
--------- --------- ---------
COSTS AND EXPENSES:
Research and development (notes 9 and 12) 16,649 24,020 14,928
General and administrative (note 9) 5,161 5,123 4,068
Restructuring charges (note 4) 1,929 --- ---
--------- --------- ---------
Total costs and expenses 23,739 29,143 18,996
--------- --------- ---------
Loss from operations (23,597) (28,831) (12,868)
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 3,260 6,187 2,941
Interest expense (note 5) (841) (797) (762)
--------- --------- ---------
2,419 5,390 2,179
--------- --------- ---------
Net loss and other comprehensive loss $(21,178) $(23,441) $(10,689)
========= ========= =========
Basic and diluted net loss per share $ (0.77) $ (0.85) $ (0.49)
========= ========= =========
Shares used in calculation of basic and
diluted net loss per share 27,537 27,426 21,801
========= ========= =========
See accompanying notes to financial statements.
F-3
CORVAS INTERNATIONAL, INC.
Statements of Stockholders' Equity
For the Three Years Ended December 31, 2002
(In thousands)
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock Additional Total
----------------- --------------- ------------------ Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
-------- ------- ------ ------- --------- ------- ---------- ---------- ----------
Balance as of December 31, 1999 1,000 $ 1 250 $ --- 17,503 $ 17 $ 102,127 $ (90,870) $ 11,275
Common stock issued for cash,
net of issuance costs --- --- --- --- 5,750 6 107,356 --- 107,362
Common stock issued upon
exercise of stock options --- --- --- --- 604 1 2,392 --- 2,393
Common stock issued pursuant
to employee stock purchase plan --- --- --- --- 41 --- 119 --- 119
Conversion of preferred stock
to common stock (1,000) (1) (250) --- 1,250 1 --- --- ---
Common stock issued pursuant to
exercise of warrants, net of
issuance costs --- --- --- --- 2,204 2 11,851 --- 11,853
Compensation expense recognized
pursuant to issuance of stock
options for services --- --- --- --- --- --- 59 --- 59
Capital contribution --- --- --- --- --- --- 2,561 --- 2,561
Net loss and other comprehensive
loss --- --- --- --- --- --- --- (10,689) (10,689)
-------- ------- ------ ------- --------- ------- ---------- ---------- ----------
Balance as of December 31, 2000 --- --- --- --- 27,352 27 226,465 (101,559) 124,933
-------- ------- ------ ------- --------- ------- ---------- ---------- ----------
Common stock issued upon exercise
of stock options --- --- --- --- 115 --- 345 --- 345
Common stock issued pursuant to
employee stock purchase plan --- --- --- --- 32 --- 188 --- 188
Compensation expense recognized
pursuant to issuance of stock
options for services --- --- --- --- --- --- 207 --- 207
Capital contribution --- --- --- --- --- --- 225 --- 225
Net loss and other comprehensive
loss --- --- --- --- --- --- --- (23,441) (23,441)
-------- ------- ------ ------- --------- ------- ---------- ---------- ----------
Balance as of December 31, 2001 --- --- --- --- 27,499 27 227,430 (125,000) 102,457
-------- ------- ------ ------- --------- ------- ---------- ---------- ----------
Common stock issued upon
exercise of stock options --- --- --- --- 8 -- 28 --- 28
Common stock issued pursuant
to employee stock purchase plan --- --- --- --- 84 1 143 --- 144
Compensation expense recognized
pursuant to issuance of stock
options for services --- --- --- --- --- --- 80 --- 80
Net loss and other comprehensive
loss --- --- --- --- --- --- --- (21,178) (21,178)
-------- ------- ------ ------- --------- ------- ---------- ---------- ----------
Balance as of December 31, 2002 --- $ --- --- $ --- 27,591 $ 28 $ 227,681 $(146,178) $ 81,531
======== ======= ====== ======= ========= ======= ========== ========== ==========
See accompanying notes to financial statements.
F-4
CORVAS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (21,178) $ (23,441) $ (10,689)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 874 667 486
Amortization of premiums and discounts on investments 508 937 (15)
Amortization of debt issuance costs 19 19 19
Non-cash interest expense on convertible notes payable 822 778 743
Net gain on sale of property and equipment (15) --- ---
Asset impairment related to restructuring charges 160 --- ---
Stock compensation expense 80 207 59
Changes in assets and liabilities:
(Increase) decrease in receivables 693 (339) (1,210)
(Increase) decrease in other current assets (2,159) 120 45
Increase (decrease) in accounts payable,
accrued liabilities, accrued benefits and
accrued leave (774) (407) 627
Increase in accrued restructuring charges 426 --- ---
Increase in deferred rent 42 86 105
---------- ---------- ----------
Net cash used in operating activities (20,502) (21,373) (9,830)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity and time deposits (48,463) (129,415) (238,848)
Proceeds from maturity of investments held to maturity and time deposits 50,638 130,029 127,852
Proceeds from sale of investments held to maturity 19,238 11,914 10,209
Proceeds from sale of property and equipment 16 --- ---
Purchases of property and equipment (1,253) (1,762) (399)
Repayment from related party 250 28 ---
---------- ---------- ----------
Net cash provided by (used in) investing activities 20,426 10,794 (101,186)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 172 533 121,727
Capital contribution --- 225 2,561
---------- ---------- ----------
Net cash provided by financing activities 172 758 124,288
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 96 (9,821) 13,272
Cash and cash equivalents at beginning of year 4,332 14,153 881
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,428 $ 4,332 $ 14,153
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY -
Conversion of preferred stock to common stock $ --- $ --- $ 1
See accompanying notes to financial statements.
F-5
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements
December 31, 2002 and 2001
(l) The Company
-----------
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 the
discovery and development of novel therapeutics that address today's
largest medical markets, cardiovascular disease and cancer, based on the
Company's expertise in vascular biology and protease modulation.
(2) Summary of Significant Accounting Policies
------------------------------------------
(a) Cash Equivalents:
-----------------
Cash equivalents consist of investments in short-term government
funds and a high-quality money market fund with original
maturities of three months or less. Cash equivalents are stated at
cost, which approximates market value.
(b) Debt Securities Held to Maturity and Time Deposits:
---------------------------------------------------
Short-term debt securities consist of highly liquid debt
instruments of corporations and financial institutions with strong
credit ratings and U.S. government obligations. The Company has
the ability and intent to hold its investments until their
maturity and, therefore, records its investments at amortized
cost, which approximates market value. Short-term debt securities
mature at various dates through December 31, 2003.
Long-term debt securities have a maturity of more than twelve
months as of December 31, and consist of highly liquid debt
instruments of corporations and financial institutions with strong
credit ratings. Long-term debt securities, all of which are held
to maturity, are stated at amortized cost. The market value of
long-term debt securities was $12.3 million as of December 31,
2002. Long-term debt securities mature at various dates through
August 18, 2004.
At both December 31, 2002 and 2001, time deposits of $303,000 were
restricted related to the facility lease. See Note 8.
(c) Concentration of Credit Risk:
-----------------------------
Cash, cash equivalents and debt securities are financial
instruments that potentially subject the Company to concentration
of credit risk. The Company's investment policy establishes
guidelines relative to diversification, maturities and minimum
acceptable credit ratings to maintain safety and liquidity. As of
December 31, 2002, the Company has not experienced any material
losses on its investments. During the years ended December 31,
2002 and 2001, certain securities that were no longer in
compliance with the Company's investment policy were sold prior to
maturity due to downgrading of credit ratings.
(d) Depreciation and Amortization:
------------------------------
Depreciation is provided using the straight-line method over
estimated useful lives of three to five years. Leasehold
improvements are amortized on a straight-line basis over the
shorter of the lease terms or estimated useful lives of the
assets.
(e) Research and Development Costs:
-------------------------------
Research and development costs are expensed in the period
incurred.
(f) Patents:
--------
Costs to obtain and maintain patents are expensed as incurred.
F-6
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(g) Net Loss per Share:
-------------------
Under Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), basic and diluted net loss per
share are required to be presented. Basic net loss per share is
calculated using the weighted-average number of common shares
outstanding during the period, while diluted net loss per share
also includes potential dilutive common shares outstanding.
Potential common equivalent shares from convertible securities,
stock options and warrants are excluded from the calculation of
diluted loss per share since the effect of their inclusion would
be anti-dilutive; accordingly, there is no difference between the
Company's basic and diluted net loss per share.
For the years ended December 31, 2002, 2001 and 2000, 3,573,000,
3,237,000 and 2,248,000 options, respectively, were excluded from
the calculation of dilutive net loss per share. In addition,
3,682,000, 3,488,000 and 3,303,000 shares from the assumed
conversion of the 5.5% convertible senior subordinated notes
issued in 1999 (see Note 5) were also excluded from this
calculation for the years ended December 31, 2002, 2001 and 2000,
respectively.
(h) Accounting for Stock-Based Compensation:
----------------------------------------
As permitted by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as
amended by Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123," the Company
has elected to use the intrinsic value-based method as prescribed
in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. If the
Company had determined compensation cost for its stock-based plans
based on the fair value at the grant date, the Company's net loss
and net loss per share would have been increased to the pro forma
amounts indicated below (in thousands, except per share data).
2002 2001 2000
------------ ------------- -------------
Net loss - As reported $ (21,178) $ (23,441) $ (10,689)
Net loss - Pro forma $ (26,150) $ (29,709) $ (12,330)
Basic and diluted net loss per share - As reported $ (0.77) $ (0.85) $ (0.49)
Basic and diluted net loss per share - Pro forma $ (0.95) $ (1.08) $ (0.57)
The following weighted-average assumptions were used in
calculating compensation cost for stock-based plans under SFAS
123:
2002 2001 2000
------------- ------------ -------------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 3.99% 4.29% 5.57%
Expected life 6.71 years 7.74 years 7.31 years
Expected volatility 78.86% 81.67% 81.69%
(i) Revenue Recognition:
--------------------
Revenue from collaborative agreements typically consists of
non-refundable research and development funding under
collaborative agreements with strategic partners. Revenue from
collaborative agreements is recognized as the related research and
development activities are performed under the terms of the
agreements; any advance payments received in excess of amounts
earned are recorded as deferred revenue and recognized as revenue
in accordance with the terms of the agreements. License fees
consist of non-refundable fees from the sale of rights under
collaborative development and/or license agreements with strategic
partners. Non-refundable license fees are recognized as revenue
upon receipt, absent any continuing involvement as required by
Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). Product development milestone
payments, as specified in various collaborative agreements, are
recognized as revenue upon achievement of the milestones specified
in the agreements. Research grant revenue is recognized as the
related research is performed under the terms of the grant.
F-7
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(j) Income Taxes:
-------------
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and net
operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(k) Use of Estimates:
-----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management of the Company to make a number of
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes to financial
statements. Actual results could differ from these estimates under
different assumptions or conditions.
(l) Fair Value of Financial Instruments:
------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" ("SFAS 107"), defines
the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties. The carrying value of cash and cash equivalents,
short-term debt securities held to maturity, time deposits,
receivables, other current assets, accounts payable, accrued
liabilities, accrued benefits, accrued leave and accrued
restructuring, included in the accompanying balance sheets,
approximate the estimated fair value of those instruments because
of their short-term nature. The carrying values of the long-term
debt securities held to maturity approximate fair value due to the
nature of these securities.
(m) Impairment of Long-Lived Assets:
--------------------------------
Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144")
requires losses from impairment of long-lived assets used in
operations to be recorded when indicators of impairment are
present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. The
Company periodically evaluates the carrying value of long-lived
assets to be held and used when events and circumstances indicate
that the carrying amount of an asset may not be recovered. During
the year ended December 31, 2002, the Company recorded an
impairment charge of $160,000 in connection with its July 2002
restructuring. See Note 4.
(n) Segment Reporting:
------------------
Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS
131"), establishes reporting standards for a Company's operating
segments and related disclosures about its products, services,
geographic areas and major customers. An operating segment is
defined as a component of an enterprise that engages in business
activities from which it may earn revenues and incur expenses, and
about which separate financial information is regularly evaluated
by management in deciding how to allocate resources. The Company
believes that it operates in a single segment, biopharmaceuticals.
F-8
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(3) Property and Equipment
----------------------
Property and equipment are recorded at cost and are summarized as follows
(in thousands).
December 31,
-------------------------
2002 2001
---------- ----------
Machinery and equipment $ 5,903 $ 5,726
Furniture and fixtures 161 161
Leasehold improvements 1,258 1,047
---------- ----------
Total property and equipment 7,322 6,934
Less accumulated depreciation (4,986) (4,186)
---------- ----------
$ 2,336 $ 2,118
========== ==========
(4) Restructuring
-------------
In July 2002, the Company announced a workforce reduction which resulted
in the termination of 42 research and administrative employees. This
restructuring was part of an extensive strategic realignment of research
programs designed to focus the Company's resources on the continued
development of its most-advanced cardiovascular and cancer programs.
Summary information related to the restructuring as of December 31, 2002
is included in the table below (in thousands).
Cash Total
Payments Non-Cash Restructuring
Made Charges Accrued Charges
----------- ------------ ------------ -------------
Severance and related $ 1,027 $ --- $ 277 $ 1,304
Outplacement 170 --- --- 170
Asset impairment --- 160 --- 160
Contractual obligations and legal costs 146 --- 149 295
----------- ----------- ----------- ----------
$ 1,343 $ 160 $ 426 $ 1,929
=========== =========== =========== ==========
(5) Convertible Notes Payable
-------------------------
In August and October of 1999, the Company issued and sold, in two
private financings, a total of 2,000,000 shares of its 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 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 the Company's option, the
accreted interest portion of both notes may be paid in cash or in common
stock priced at the then-current market price. The Company 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. The Company may redeem the
notes upon payment of the outstanding principal and accreted interest.
The maximum number of shares that will be issued upon conversion of these
notes is 4,484,000 shares of common stock, which have been reserved for
the potential conversion of these notes.
Interest expense of $841,000, $797,000 and $762,000 was recorded for the
years ended December 31, 2002, 2001 and 2000, respectively, related to
both of the convertible notes.
F-9
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(6) Stockholders' Equity
--------------------
(a) Common Stock:
-------------
In November 2000, the Company issued and sold 5,750,000 shares of
common stock in a public offering, which resulted in net proceeds
of $107.4 million.
During the year ended December 31, 2000, the Company issued a
total of 2,204,000 shares of common stock pursuant to the exercise
of outstanding warrants, which resulted in aggregate net proceeds
of $11.9 million.
(b) Stock Option Plans:
-------------------
The Company has several plans and agreements under which incentive
stock options, non-statutory stock options, restricted stock
awards and stock bonus awards can be granted to key personnel,
including officers, directors and outside consultants. The grants
are authorized by the Human Resources Committee of the Board of
Directors. A total of 4,966,000 options to purchase shares of
common stock are authorized for issuance as of December 31, 2002,
and 631,000 shares of common stock are reserved for future grant.
Stock options generally have a term of 10 years and a price per
share equal to the fair market value on the date of grant. Annual
grants to outside directors have an exercise price equal to 85% of
the fair market value on the date of grant, and certain grants to
outside consultants have a term of less than 10 years. Most
options, except for certain grants to outside consultants and a
2002 grant made to all non-executive employees, become exercisable
over a four-year period beginning one year from the date of grant,
vesting 25% at the end of the first year and 6.25% each quarter
thereafter. Activity under these plans is as follows (in
thousands, except per share data):
Number of Shares Weighted-Average
Under Option Exercise Price per Share
------------------------- ----------------------------
Outstanding, December 31, 1999 2,234 $ 3.79
Granted 739 $ 15.19
Exercised (604) $ 3.96
Cancelled (121) $ 4.37
--------
Outstanding, December 31, 2000 2,248 $ 7.46
Granted 1,067 $ 7.70
Exercised (115) $ 3.01
Cancelled (48) $ 8.29
--------
Outstanding, December 31, 2001 3,152 $ 7.69
Granted 1,076 $ 1.95
Exercised (8) $ 3.34
Cancelled (647) $ 7.35
--------
Outstanding, December 31, 2002 3,573 $ 6.03
========
F-10
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
A summary of stock options outstanding as of December 31, 2002 follows
(in thousands, except per share data):
Options Outstanding Options Exercisable
------------------------------------------ -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
--------------------- ----------- ---------------- --------- ----------- ---------
$ 1.42 - $ 2.63 1,073 9.3 years $ 1.65 115 $ 2.47
$ 2.75 - $ 6.56 1,161 5.3 years $ 4.18 961 $ 4.20
$ 6.80 - $19.91 1,339 8.3 years $ 11.15 528 $ 12.31
-------- -------
3,573 7.6 years $ 6.03 1,604 $ 6.74
======== =======
(c) Stock-Based Compensation:
-------------------------
The Company accounts for its stock-based plans in accordance with
the recognition provisions of APB 25 and related interpretations.
Accordingly, stock compensation expense is recorded on the date of
grant only when options are granted to outside consultants.
If the Company had determined compensation cost for its
stock-based plans based on the fair value at the grant date, the
Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below (in thousands,
except per share data).
2002 2001 2000
------------ ------------- -------------
Net loss - As reported $ (21,178) $ (23,441) $ (10,689)
Net loss - Pro forma $ (26,150) $ (29,709) $ (12,330)
Basic and diluted net loss per share - As reported $ (0.77) $ (0.85) $ (0.49)
Basic and diluted net loss per share - Pro forma $ (0.95) $ (1.08) $ (0.57)
The per share weighted-average fair market value of stock options
granted during 2002, 2001 and 2000 at exercise prices equal to the
fair market value on the date of grant was $1.29, $5.80 and
$13.09, respectively, using the Black-Scholes option-pricing
model. The per share weighted-average fair market value of stock
options granted during 2002, 2001 and 2000 at exercise prices less
than the fair market value on the date of grant was $4.85, $10.61
and $8.35, respectively, on the date of grant.
The following weighted-average assumptions were used in
calculating compensation cost for stock-based plans under SFAS
123:
2002 2001 2000
------------- ------------ -------------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 3.99% 4.29% 5.57%
Expected life 6.71 years 7.74 years 7.31 years
Expected volatility 78.86% 81.67% 81.69%
(d) Employee Stock Purchase Plan:
-----------------------------
In December 1991, the Company adopted an employee stock purchase
plan (the "ESPP") that provided for the issuance of up to 150,000
shares of common stock. In April 2000, the ESPP was amended to
provide for the issuance of up to 350,000 shares of common stock.
The ESPP is intended to qualify under Section 423 of the Internal
Revenue Code and is for the benefit of qualifying employees, as
designated by the Human Resources Committee of the Board of
Directors. Under the terms of the ESPP, participating employees
are eligible to have a maximum of 10% of their compensation
withheld through payroll deductions to purchase shares of common
stock at the lower of 85% of the fair market value (i) at the
beginning of each offering period or (ii) on predetermined dates.
As of December 31, 2002, 277,000 shares of common stock have been
issued pursuant to the ESPP and 73,000 shares of common stock are
reserved for future issuance.
F-11
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(e) Warrants:
---------
During the year ended December 31, 2000, warrants were exercised
to purchase a total of 2,204,000 shares of common stock at a
weighted-average exercise price of $5.38 per share. As of December
31, 2002 and 2001, no warrants remained outstanding.
(f) Stockholder Rights Plan:
------------------------
In September 1997, the Company adopted a stockholder rights plan
and declared a dividend distribution of one preferred share
purchase right (a "Right") for each outstanding share of common
stock ("Common Shares"), effective for stockholders of record as
of October 15, 1997 ("Record Date"). The Rights also attach to new
Common Shares issued after the Record Date. Each Right entitles
the registered holder to purchase from the Company one
one-hundredth of a share of Series C Junior Participating
Preferred Stock, par value $0.001, at an exercise price of $50
(the "Purchase Price"). The Rights will become exercisable only if
a person or group acquires 20% or more of the common stock or
announces a tender offer for 20% or more of the common stock in a
transaction not approved by the Board of Directors. If the Rights
become exercisable, all holders of Rights, except the acquirer of
more than 20% of the common stock, will be entitled to acquire for
the Purchase Price that number of Common Shares having a market
value of two times the Purchase Price of the Right, in lieu of
purchasing Series C Junior Participating Preferred Stock. This
Right will commence on the date of public announcement that a
person has become an Acquiring Person (as defined in the Rights
Agreement) or the effective date of a registration statement
relating to distribution of the Rights, if later, and terminate 60
days later (subject to certain provisions in the Rights
Agreement).
The Rights will expire on September 18, 2007, unless exchanged or
redeemed prior to that date. Until a Right is exercised, the
holder of these Rights will have no rights as a stockholder of the
Company, including, without limitation, the right to vote or to
receive dividends. See Note 13.
(7) Income Taxes
------------
Income tax expense was zero for each of the years in the three-year
period ended December 31, 2002, and differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to pretax loss as a
result of the following (in thousands).
2002 2001 2000
-------------- -------------- -------------
Computed "expected" tax benefit $ (7,201) $ (7,970) $ (3,634)
State and local income taxes, net of federal benefit 1 1 1
Credits (1,051) (939) (263)
Other (1,424) 2,747 (10)
Change in federal valuation allowance 9,675 6,161 3,906
----------- ----------- ------------
$ --- $ --- $ ---
=========== =========== ============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2002 and 2001 are presented below (in thousands).
2002 2001
------------ ------------
Deferred tax assets:
Fixed assets $ 207 $ 217
Net operating loss carryforwards 52,183 43,146
Credits 11,033 8,679
Stock options 2,799 2,524
Other 844 118
------------ ------------
Total gross deferred tax assets 67,066 54,684
Less valuation allowance (67,066) (54,684)
------------ ------------
Net deferred tax assets $ --- $ ---
============ ============
F-12
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
The Company has no net, taxable temporary differences that would require
recognition of deferred tax liabilities. Due to management's belief of
the uncertainty of future realizability of deferred tax assets, the
Company has recorded a valuation allowance against any net deferred tax
assets for deductible temporary differences, tax operating loss
carryforwards and tax credits. The Company increased its valuation
allowance by approximately $12.4 million, $7.2 million and $7.7 million
for the years ended December 31, 2002, 2001 and 2000, respectively,
primarily as a result of the increase in tax operating loss
carryforwards. The valuation allowance includes approximately $2.8
million related to stock option deductions, the benefit of which will
eventually be credited to equity.
At December 31, 2002, the Company had available net operating loss
carryforwards of approximately $140.7 million for federal income tax
reporting purposes that begin to expire in 2003. The net operating loss
carryforwards for state purposes, which expire five to ten years after
generation, are approximately $81.8 million. The Company has unused
research and development tax credits for federal income tax purposes of
$7.2 million at December 31, 2002, which begin to expire in 2003.
In accordance with Internal Revenue Code Sections 382 and 383, the annual
utilization of net operating loss carryforwards and credits existing
prior to a change in control may be limited. The extent of such prior
limitations, if any, has not been determined.
(8) Commitments and Contingencies
-----------------------------
(a) Lease Commitments:
------------------
The Company currently leases its principal facility under a
noncancellable operating lease that expires in September 2006. The
lease provides for escalating rent payments over the term of the
lease. For financial reporting purposes, rent expense is
recognized on a straight-line basis over the lease term.
Accordingly, rent expense recognized in excess of cash rent paid
is reflected as deferred rent. Total rent expense recognized under
this lease for the years ended December 31, 2002, 2001 and 2000
was $1.3 million, $1.3 million and $1.2 million, respectively.
The annual future minimum commitments under the facility lease for
years ending December 31 are as follows (in thousands).
2003 $ 1,345
2004 1,392
2005 1,441
2006 1,142
----------
Total minimum lease payments $ 5,320
==========
(b) Letter of Credit:
-----------------
The Company has an unused standby letter of credit in the amount
of $303,000 that expires on September 30, 2003, with provisions
for annual renewal. This letter of credit, collateralized by a
$303,000 time deposit, is pledged in lieu of a security deposit
against the principal facility lease.
(c) Litigation Contingencies:
-------------------------
The Company is involved in routine litigation arising in the
ordinary course of business. While the results of such litigation
cannot be predicted with certainty, the Company believes, in part
based on the advice of legal counsel, that the final outcome of
such matters will not have a material adverse effect on the
Company's financial position or results of operations.
F-13
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(d) Change in Control Arrangements:
-------------------------------
In March 2002, the Board of Directors adopted the 2002 Change in
Control Executive Severance Benefit Plan ("the Change in Control
Plan"). The Change in Control Plan provides separation pay and
benefits to each of our executive officers whose employment is
involuntarily terminated without cause or voluntarily terminated
for good reason during the period beginning one month before and
ending 13 months following the effective date of a change in
control of the Company.
(9) Collaborative Agreements
------------------------
In June 2002, Pfizer Inc. terminated the license and development
agreement originally entered into in 1997 to collaborate with the Company
on the development of UK-279,276, or rNIF, an anti-inflammatory agent.
Pfizer returned exclusive, worldwide development and commercialization
rights for rNIF to the Company.
In April 2002, the Company entered into an exclusive collaboration
agreement with Abgenix, Inc. to discover, develop and commercialize
fully-human monoclonal antibodies against two selected antigens from the
Company's 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
sales of products successfully commercialized from any co-development
efforts.
In September 2001, the Company entered into a collaboration agreement
with Dyax Corp. to discover, develop and commercialize novel cancer
therapeutics focused on serine protease inhibitors for two targets
isolated and characterized by Corvas. 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, the Company entered into an agreement with Incyte Genomics,
Inc. for a multi-year subscription to Incyte's LifeSeq(R) Gold database
that was used in certain of the Company's cancer research and development
programs. The Company gave notice to Incyte of its intent to terminate
this agreement; accordingly the $100,000 termination fee has been
included in restructuring charges on the accompanying statements of
operations. This agreement also required us to pay an annual access fee.
Included in research and development expenses on the accompanying
statements of operations is $500,000 in 2002 and $246,000 in 2001
attributable to this agreement.
In May 2000, the Company and Schering-Plough amended the license and
collaboration agreement originally entered into in 1997 that covers the
design and development of an oral inhibitor of a key protease associated
with hepatitis C virus replication, resulting in the recognition of a
$2.5 million license fee in 2000. The Company also recognized $263,000 of
revenue from collaborative agreements attributable to this collaboration
in 2000. Under the terms of the amended agreement, Schering-Plough has an
exclusive worldwide license to selected patents and other intellectual
property related to hepatitis C virus replication, and is responsible for
the conduct of any further research and development, if any. We have no
continuing involvement with respect to the research and development of
inhibitors of the hepatitis C virus.
In December 1994, the Company entered into a strategic alliance agreement
with Schering-Plough to collaborate on the discovery and
commercialization of an oral anticoagulant for chronic thrombosis. Under
the terms of the agreement, Schering-Plough funded the Company's research
and development through December 31, 2000. The accompanying statements of
operations reflect revenue from collaborative agreements pursuant to this
collaboration of $3.0 million in 2000. Schering-Plough is responsible for
the conduct of any further research and development, if any. We have no
continuing involvement with respect to the further research and
development of oral anticoagulants.
In conjunction with this agreement, Schering-Plough purchased 1,000,000
shares of Series A Convertible Preferred Stock of the Company in 1994,
which resulted in net proceeds of $4.9 million and 250,000 shares of
Series B Convertible Preferred Stock in 1996, which yielded net proceeds
of $2.0 million. Both series of preferred stock converted to common stock
in February 2000.
F-14
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
In November 1998, the Company entered into license agreements
transferring manufacturing activities for recombinant tissue factor to
two affiliates of Johnson & Johnson, superceding earlier agreements
entered in June 1992. These agreements continue to provide for royalties
to be paid to the Company based on unit sales of tissue factor. For the
years ended December 31, 2002, 2001 and 2000, these royalties amounted to
$142,000, $117,000 and $167,000, respectively.
(10) Employee Benefits Plan
----------------------
Effective January 1, 1988, the Board of Directors approved the Corvas
International, Inc. 401(k) Compensation Deferral Savings Plan (the
"401(k) Plan"), adopting provisions of the Internal Revenue Code Section
401(k). The 401(k) Plan was approved by the IRS in 1989, and has been
previously amended and restated as of January 1, 1997. The 401(k) Plan is
for the benefit of all qualifying employees, and permits employee
voluntary contributions, qualified nonelective contributions and Company
profit-sharing contributions. No employer contributions have been
approved by the Board of Directors through December 31, 2002.
(11) Related Party Transaction
-------------------------
The note receivable from related party of $250,000 as of December 31,
2001 consisted of a loan, evidenced by an amended promissory note,
originally granted to an executive officer of the Company in connection
with the officer's relocation to San Diego. This amended note was repaid
in full in 2002.
(12) Research Grant
--------------
Pursuant to a Small Business Innovation Research (SBIR) grant from the
National Institute for Allergy and Infectious Disease that ended in 2001,
research grant revenue of $195,000 and $198,000 was recognized in 2001
and 2000, respectively. The related expenses, which equal research grant
revenues, are recorded as research and development expenses in the
accompanying statements of operations.
(13) Subsequent Event
----------------
On February 25, 2003, Corvas announced the signing of a definitive merger
agreement under which Dendreon Corporation will acquire Corvas, subject
to various closing conditions including approval by the stockholders of
each company. Under the terms of this agreement, each share of Corvas
common stock will be exchanged for a fixed ratio of 0.45 shares of
Dendreon common stock in a tax-free reorganization. Upon successful
closing of this transaction, Corvas' existing stockholders will own
approximately 31.4% of the combined company. The transaction is
anticipated to close in the second quarter of 2003, subject to approval
by stockholders of both companies.
In connection with the Dendreon merger agreement, the Company entered
into Amendment No. 1 to its Rights Agreement, which excluded the proposed
merger. See Note 6.
On March 4, 2003, the Asset Value Fund Limited Partnership ("AVF") filed
a purported class action complaint against the Company and its directors
in Delaware state court alleging that the Board of Directors violated
their fiduciary duties to shareholders when they approved the proposed
merger of the Company and Dendreon Corporation. Specifically, the
complaint alleges that (1) the directors failed to consider all available
information when deciding to pursue the merger, (2) the directors failed
to negotiate a mechanism to protect shareholders from the effects of a
decline in Dendreon's stock price before the merger, and (3) a minority
of the directors were furthering their own interests in approving the
merger instead of the interests of shareholders. AVF seeks to enjoin the
Company from proceeding with the merger, and also seeks compensatory
damages and reimbursement of the costs of bringing suit. Neither the
Company nor any of its directors has yet been served with the complaint.
The Company denies the material allegations in the complaint and, if the
complaint is served, intends to defend the action vigorously.
F-15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
Each of our officers serves at the discretion of our Board of
Directors, or Board. Our Certificate of Incorporation and By-laws permit the
Board to establish the number of directors authorized by resolution, and we
presently have eight members on our Board. Further, our Certificate of
Incorporation and By-laws provide that the Board shall be divided into three
classes, each class consisting, as nearly as possible, of one-third of the total
number of directors, with each class having a three-year term. Each director
holds office until the annual meeting of our stockholders which coincides with
the end of such director's term and until such director's successor is elected
and qualified, or until such director's earlier death, resignation or removal.
Our executive officers and directors, their ages, and certain other
information about them as of February 28, 2003 is set forth below:
NAME AGE POSITION
---- --- --------
Randall E. Woods (1) ....................... 51 President, Chief Executive Officer and Director
George P. Vlasuk, Ph.D. .................... 47 Chief Scientific Officer and Executive Vice
President, Research and Development, Director
Stephen F. Keane ........................... 45 Vice President of Corporate Development
Carolyn M. Felzer .......................... 45 Vice President and Controller and Corporate Secretary
M. Blake Ingle, Ph.D. (1) (2) (3) (4)....... 60 Chairman of the Board
Susan B. Bayh (4)........................... 43 Director
J. Stuart Mackintosh (2).................... 47 Director
Burton E. Sobel, M.D. (3)................... 65 Director
Michael Sorell, M.D. (2) ................... 55 Director
Nicole Vitullo (1) (3) (4).................. 45 Director
____________
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Human Resources Committee
(4) Member of Governance and Nominating Committee
RANDALL E. WOODS has served as our President and Chief Executive
Officer and as a director of Corvas since May 1996. Prior to joining Corvas, he
served as the President of the U.S. Operations, Boehringer Mannheim
Pharmaceuticals Corporation, or Boehringer, from February 1994 to March 1996,
and was Vice President of Marketing and Sales from December 1993 to March 1994.
Prior to that, he served in various capacities at Eli Lilly and Company from
1973 to December 1993. Mr. Woods received his M.B.A. from Western Michigan
University. Mr. Woods serves on the Board of Directors of Oasis Biosciences,
Inc.
GEORGE P. VLASUK, PH.D. has served as one of our directors since June
1999 and as our Chief Scientific Officer since December 2000. He joined Corvas
in 1991 and has been our Executive Vice President, Research and Development
since September 1996. Prior to joining Corvas, he was an Associate Director of
Hematology Research at Merck Research Laboratories where he contributed to a
range of cardiovascular drug programs. He is well known for his innovative work
in the discovery and development of novel anticoagulant drug candidates. Dr.
Vlasuk received his Ph.D. in biochemistry from Kent State University.
-33-
STEPHEN F. KEANE has served as our Vice President of Corporate
Development since March 2001. Prior to joining Corvas, he held similar positions
at Epimmune, Inc., a biopharmaceutical company, from November 1999 to March
2001, and at SIBIA Neurosciences, Inc., a biotechnology company, from October
1998 to November 1999. Prior to that, Mr. Keane was Director of Business
Development at MBI from November 1994 to October 1998. He received his B.A. in
English literature from San Diego State University.
CAROLYN M. FELZER has served as Corporate Secretary since August 2002
and as our Vice President and Controller since December 2000. Previously, she
served as our Senior Director of Finance and Assistant Corporate Secretary from
December 1997 to December 2000, as Controller from January 1993 through December
1997 and as our Accounting Manager from July 1991 through January 1993. Prior to
joining Corvas, she held various financial positions with private companies
since beginning her career at KPMG LLP. Ms. Felzer received her B.S. in
accounting from The Pennsylvania State University and is a Certified Public
Accountant.
M. BLAKE INGLE, PH.D. was elected Chairman in June 1999, and has served
as one of our directors since January 1994. Since 1998, Dr. Ingle has been a
general partner of Inglewood Ventures, a venture capital firm. From March 1993
to February 1996 when it was acquired by Schering-Plough, he was the President
and Chief Executive Officer of Canji, Inc., a biopharmaceutical company. Prior
to that, he was employed in a variety of capacities with the IMCERA Group, Inc.,
a healthcare company consisting of Mallinckrodt Medical, Mallinckrodt Specialty
Chemicals and Pitman Moore, from 1980 to 1993, most recently serving as
President and Chief Executive Officer. Dr. Ingle currently serves on the Boards
of Directors of Vical, Inc., Inex Pharmaceuticals Corporation, NewBiotics, Inc.
and GeneFormatics Inc., and ATI Medical, Inc.
SUSAN B. BAYH has served as one of our directors since June 2000. Since
1994, she has been a Distinguished Visiting Professor at the College of Business
Administration at Butler University in Indianapolis, Indiana. From 1994 to 2000,
she was a Commissioner for the International Joint Commission of the Water
Treaty Act between the United States and Canada. From 1989 to 1994, Ms. Bayh
served as an attorney in the Pharmaceutical Division of Eli Lilly and Company.
She currently serves on the Boards of Directors of Anthem Inc., a Blue
Cross/Blue Shield company, Cubist Pharmaceuticals, Inc., a pharmaceutical
company, Curis, Inc., a therapeutic drug development company, Emmis
Communications, a diversified media company and Esperion Therapeutics, Inc., a
biopharmaceutical company.
J. STUART MACKINTOSH has served as one of our directors since February
2000. Since 1985, Mr. Mackintosh has served in various capacities with European
Investors Incorporated, a New York based investment management firm, and is
currently Managing Director and Principal. Before joining European Investors
Incorporated, he was an Assistant Vice President with Bank of Boston.
BURTON E. SOBEL, M.D. has served as one of our directors since February
2000. He is Physician-in-Chief at Fletcher Allen Health Care and E.L. Amidon
Professor and Chair of the Department of Medicine at The University of Vermont
College of Medicine. Dr. Sobel currently serves on the Boards of Directors of
Scios Inc. and ARIAD Pharmaceuticals. Inc., both biopharmaceutical companies,
and has been a consultant to and served on scientific advisory boards of several
pharmaceutical and biotechnology companies, as well as serving as editor of
various scientific publications.
-34-
MICHAEL SORELL, M.D. has served as one of our directors since April
1996. Since March 1996, he has been the Managing Partner of MS Capital Advisors,
LLC, a consulting firm. From July 1986 to February 1992, he was associated with
Morgan Stanley & Co., an investment banking firm, in various capacities, the
last being Principal. From March 1992 to July 1994, he was a partner in a joint
venture with Essex Investment Management of Boston, an investment management
firm. In August 1994, he rejoined Morgan Stanley as the emerging growth
strategist where he served until February 1996. Prior to that, he was on the
staff of Memorial Sloan-Kettering Cancer Center and worked in clinical
development at Schering-Plough.
NICOLE VITULLO has served as one of our directors since April 1996. She
has been Managing Director of Domain Associates, L.L.C., a venture capital
management company focused on life sciences, since April 1999. From November
1996 to April 1999, Ms. Vitullo was a Senior Vice President, and from November
1992 to November 1996 was a Vice President, of Rothschild Asset Management Inc.,
which managed International Biotechnology Trust plc and advised Biotechnology
Investments, Limited. She served as Director of Corporate Communications at
Cephalon, Inc., a neuropharmaceutical company, from July 1991 to November 1992.
Prior to that, she was Manager, Healthcare Investments at Eastman Kodak Company.
She also serves on the Board of Directors of Onyx Pharmaceuticals Inc.
BOARD COMMITTEES AND MEETINGS
During 2002, the Board held four regularly scheduled meetings, one
special meeting and acted by unanimous written consent one time without a
meeting. We have four standing committees of the Board: a Human Resources
Committee, an Audit Committee, a Governance and Nominating Committee and an
Executive Committee.
The Human Resources Committee currently consists of Ms. Vitullo as
Chairwoman, Dr. Ingle and Dr. Sobel. The Human Resources Committee adopted a new
written charter in 2002 that specifies that this committee shall have at least
two members, comprised solely of independent, non-employee directors. The Human
Resources Committee is authorized to exercise all powers and authority of the
Board in all compensation matters, including the establishment of rates of
salary, bonuses, retirement and other compensation for all directors, officers
and such other personnel of the Company as the Board may from time to time
designate. It is also authorized to exercise the authority of the Board in the
administration of the Company's 1991 Incentive and Compensation Plan, or the
1991 Plan, the Company's 2000 Equity Incentive Plan, or the 2000 Plan, and the
Company's Employee Stock Purchase Plan, or the ESPP. The Human Resources
Committee held four regularly scheduled meetings and one special meeting during
2002.
The Audit Committee currently consists of Dr. Sorell as Chairman, Dr.
Ingle and Mr. Mackintosh. The Audit Committee adopted a written charter in 2000
that specifies that the Audit Committee shall have at least three members,
comprised solely of independent directors, each of whom has a working
familiarity with basic finance and accounting practices. In addition, at least
one member of the Audit Committee must have accounting or related financial
management experience. The primary function of the Audit Committee is to assist
the Board in fulfilling its responsibilities to the stockholders and the
investment community relating to our corporate accounting and reporting
practices, and the quality and integrity of our financial reports. The Audit
Committee held seven regularly scheduled meetings during 2002.
-35-
The Governance and Nominating Committee, which was established by our
Board in March 2002, currently consists of Ms. Bayh as Chairwoman, Dr. Ingle and
Ms. Vitullo. This committee adopted a written charter in 2002 that specifies the
Governance and Nominating Committee shall have at least three members, comprised
solely of independent directors. The primary function of the Governance and
Nominating Committee is to assist the Board with oversight of the integrity of
the corporate governance process to ensure compliance with the standards for
good corporate governance and to serve as a nominating committee for the Board.
The Governance and Nominating Committee works in conjunction with the Board to
interview and evaluate candidates for the directorships which become vacant and
to make recommendations to the Board concerning the nomination of such
candidates. The Governance and Nominating Committee held two regularly scheduled
meetings during 2002.
The Executive Committee consists of Dr. Ingle as Chairman, Ms. Vitullo
and Mr. Woods. The Executive Committee is authorized to exercise the full
authority of the Board except with respect to (i) those matters not permitted
under the Delaware General Corporation Law to be delegated to any committee,
(ii) approval of Company obligations in amounts greater than $200,000, (iii)
approval of annual operating plans, business plans and major strategic
decisions, and (iv) approval of other major transactions such as corporate
partnerships or financing plans. The Executive Committee did not hold any
meetings during 2002.
During 2002, all directors attended at least 75% of the Board meetings
held, except for Dr. Sobel who attended three of five, or 60%, of the Board
meetings held due to scheduling conflicts. During 2002, all members of
committees of the Board attended at least 75% of the committee meetings in which
they were entitled to participate.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, or the Exchange
Act, requires our directors and executive officers, and persons who own more
than 10% of a registered class of our equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of our common
stock and other of our equity securities. Specific due dates for these reports
have been established, and we are required to disclose any failure to file by
these dates during 2002. Our officers, directors and greater than 10%
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file.
Based solely on a review of the copies of such reports furnished to us
and written representations that no other reports were required during 2002, we
believe that our officers, directors and greater than 10% beneficial owners
complied with all applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Members of our Board who are employees of the Company or who are
representatives of principal stockholders do not receive compensation for
service as directors or for service as members of any committee of the Board.
Drs. Sobel and Sorell, Ms. Bayh and Ms. Vitullo each currently receive
compensation at the rate of $15,000 per year for their service as a non-employee
director who is not a representative of one of our principal stockholders. Dr.
Ingle is compensated at the rate of $20,000 per year for service as Chairman of
the Board unaffiliated with any principal stockholder. During the year ended
December 31, 2002, the total compensation paid to outside directors in
connection with their service as directors was $80,000. Members of our Board are
also reimbursed for their expenses incurred in connection with attendance at
Board meetings in accordance with Company policy.
-36-
Pursuant to the 2000 Plan, each of our non-employee directors receives,
on the first business day of each year, an annual non-discretionary stock option
grant to purchase 8,000 shares of our common stock at an exercise price equal to
85% of the fair market value of the common stock on the date of grant. Our fair
market value is defined as the average of the high and low sales price reported
on The Nasdaq Stock Market for the date of grant. Further, each new non-employee
director receives a one time stock option grant to purchase 15,000 shares of our
common stock at an exercise price equal to 85% of the fair market value of the
common stock on the date of grant. However, a non-employee director is not
entitled to an annual grant if he or she received an initial grant in that same
year or within 6 months of the initial grant. Options granted to non-employee
directors under the 2000 Plan generally vest over a four-year period, 25% on the
first anniversary of the grant date and 6.25% each quarter thereafter until
fully vested, and have a maximum term of 10 years from the grant date. Under the
2000 Plan, upon certain corporate events resulting in a change in control of the
Company, the surviving or acquiring corporation must assume or replace any
outstanding options with substitute options. In the event the surviving or
acquiring corporation refuses to assume or replace the outstanding options, the
outstanding options will be accelerated in full and will terminate if not
exercised at or prior to such event. Options granted to non-employee directors
under the 1991 Plan became exercisable at the rate of 25% per year over four
years, with a maximum term of 10 years from the grant date. Under the 1991 Plan,
upon certain corporate events resulting in a change in control of the Company,
at the discretion of the Board, the vesting of the outstanding options will
accelerate for a period of 30 days prior to such event and the options will
terminate if not exercised prior to the consummation of the transaction if the
outstanding options are not assumed or substituted with equivalent options by
the successor corporation.
Options granted to non-employee directors under the 1991 Plan and the
2000 Plan are not intended to qualify as incentive stock options under the
Internal Revenue Code of 1986, as amended, or the Code, nor do they disqualify
the members of the Human Resources Committee from granting stock awards which,
pursuant to Rule 16b-3, are exempt from the application of Section 16 of the
Exchange Act. During the year ended December 31, 2002, pursuant to the 2000
Plan, we granted to non-employee directors options to purchase an aggregate of
48,000 shares at an exercise price of $5.4613, which represented 85% of the fair
market value on the date of grant. On January 2, 2003, pursuant to the 2000
Plan, we granted to non-employee directors options to purchase an aggregate of
48,000 shares at an exercise price of $1.3388 which represented 85% of the fair
market value on the date of grant. The 2000 Plan was amended in February 2003 to
provide that the 48,000 options granted on January 2, 2003 would fully vest and
become exercisable upon a change in control. See "Certain Relationships and
Related Transactions." As of February 28, 2003, options to purchase 464,000
shares of our common stock have been granted to current and former directors
under the 1991 Plan, the 2000 Plan and outside of the plans (net of
cancellations), options to purchase 146,000 of these shares have been exercised
and options to purchase 318,000 of these shares remain outstanding.
-37-
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth for the years ended December 31, 2002,
2001 and 2000 compensation earned by our Chief Executive Officer, the three
other current executive officers and one former executive officer at December
31, 2002 whose salaries and bonuses for services rendered to us in 2002 were in
excess of $100,000. Our executive officers serve at the discretion of the Board,
subject to certain existing employment agreements. See "Employment Agreements
and Change in Control Arrangements."
Long-Term
Compensation
Annual Compensation Awards
------------------- -------------
Name and Stock All Other
Principal Salary(1) Bonus Options(2) Compensation(3)
Position Year ($) ($) (#) ($)
-------- ---- --------- ------- ---------- ---------------
Randall E. Woods(4) 2002 410,000 70,571 120,000 6,624
President and Chief 2001 395,000 191,194 120,000 6,550
Executive Officer 2000 375,000 117,309 150,000 5,346
George P. Vlasuk, Ph.D. (5) (6) 2002 305,000 -0- -0- 7,049
Chief Scientific Officer and 2001 310,589 265,000 100,000 6,378
Executive Vice President 2000 275,000 76,246 150,000 1,579
Research and Development
Stephen F. Keane(7) (8) 2002 235,000 50,000 120,000 333
Vice President, Corporate 2001 181,782 65,000 190,000 197
Development 2000 -0- -0- -0- -0-
Carolyn M. Felzer(9) 2002 168,000 30,000 40,000 5,215
Vice President and 2001 172,308 20,000 35,000 4,367
Controller and Corporate 2000 110,000 45,284 50,000 127
Secretary
Kevin S. Helmbacher(10) (11) (12) 2002 122,216 -0- -0- 170,379
Former General Counsel 2001 150,100 33,000 35,000 145
and Corporate Secretary 2000 83,561 10,000 30,000 21
_______________
(1) Includes amounts earned but deferred into our 401(k) Compensation Deferral
Savings Plan at the election of the executive officer.
(2) To date, we have not issued any restricted stock awards to any executive
officers.
(3) Includes amounts paid on behalf of executive officers for excess group term
life insurance premiums and on behalf of certain executive officers for
long-term disability insurance premiums.
(4) The amount set forth under the column entitled "Bonus" for 2001 includes
$5,571 of interest which would have been payable in 2002 under an
interest-free loan granted by the Company. This loan was originally granted
to Mr. Woods upon his hire in 1996 and was repaid in full in 2002. See
"Certain Relationships and Related Transactions." The Human Resources
Committee awarded Mr. Woods cash bonuses of $65,000 and $80,000 for
performance in fiscal years 2002 and 2001, respectively. For performance in
fiscal year 2000, the Human Resources Committee awarded Mr. Woods a cash
bonus of $200,000, of which $100,000 was received in December 2000 and
$100,000 was received in January 2001.
-38-
(5) The amount set forth under the column entitled "Bonus" for 2001 includes
cash bonus awards paid for performance in fiscal years 2001 and 2000. The
Human Resources Committee awarded Dr. Vlasuk a cash bonus of $65,000 for
performance in fiscal year 2001 which was received in December 2001, and
for performance in fiscal year 2000 they awarded Dr. Vlasuk a cash bonus of
$200,000 which was received in January 2001.
(6) The amount set forth under the column entitled "Salary" for 2001 includes
$20,589 paid out from Dr. Vlasuk's accrued vacation time.
(7) Mr. Keane joined the Company in March 2001.
(8) The amount set forth under the column entitled "Bonus" for 2001 includes a
cash bonus of $20,000 related to Mr. Keane's hiring, and a cash bonus of
$45,000 awarded by the Human Resources Committee for performance in fiscal
year 2001.
(9) The amount set forth under the column entitled "Salary" for 2001 includes
$12,308 paid out from Ms. Felzer's accrued vacation time.
(10) Mr. Helmbacher joined the Company in June 2000 and was appointed an
executive officer of the Company in May 2001. Mr. Helmbacher's position
with us was terminated in July 2002.
(11) The amount set forth under the column entitled "Bonus" for 2001 includes a
cash bonus of $20,000 for performance in fiscal year 2001 which was
received in December 2001 and, for performance in fiscal year 2000 a cash
bonus of $13,000 which was received in January 2001.
(12) The amount set forth under the column entitled "All Other Compensation" for
2002 includes consulting services for which we paid $31,544 and total
severance awarded in the amount of $138,750. Mr. Helmbacher's severance
payments will be paid through April 2003.
STOCK OPTION GRANTS AND EXERCISES
Since July 2000, we have granted stock options to our executive
officers and others under our 2000 Plan. Prior to July 2000, such grants were
made pursuant to our 1991 Plan. As of February 28, 2003, options to purchase a
total of 1,206,158 shares were outstanding under the 1991 Plan, stock awards
totaling 5,400 shares of our common stock had been made under the 1991 Plan, and
no shares remain available for grant thereunder. As of February 28, 2003,
options to purchase a total of 45,000 shares issued outside of our plans to two
of our former directors were outstanding. In addition, options to purchase a
total of 2,358,712 shares were outstanding under the 2000 Plan and options to
purchase 631,440 shares of our common stock remained available for grant
thereunder.
-39-
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock
options granted to our current executive officers and one former officer during
the year ended December 31, 2002.
Individual Grants
------------------------------------------------------
Number % of Potential Realizable Value
of Total at Assumed Annual
Shares Options Rates of Stock Price
Underlying Granted to Appreciation for
Options Employees Exercise Option Term(4)(5)
Granted in Fiscal Price Expiration --------------------------
Name (#)(1) Year(2) ($/Share)(3) Date 5% 10%
---- ---------- ---------- ------------ ---------- -------- --------
Mr. Woods 120,000 11.73% $1.585 12/11/12 $119,616 $303,132
Dr. Vlasuk -0- -0- -0-
Mr. Keane 120,000 11.73% $1.585 12/11/12 $119,616 $303,132
Ms. Felzer 40,000 3.91% $1.585 12/11/12 $39,872 $101,044
Mr. Helmbacher -0- -0- -0-
____________________
(1) Includes options granted under the 2000 Plan. Upon a change in control, the
consequences to all outstanding options to purchase common stock granted
under the 2000 Plan are described under the heading, "Executive
Compensation, Compensation of Directors."
(2) Based on an aggregate of 1,023,400 options granted to employees in 2002,
including the above grants. This is not necessarily indicative of the
number of options that will be granted in the future.
(3) The exercise price is equal to 100% of the fair market value of our common
stock on the date of grant.
(4) The 5% and 10% assumed rates of appreciation are suggested by the rules of
the SEC and do not represent our estimate or projection of our future
common stock price.
(5) The potential realizable value is calculated based on the term of the
option at the time of grant (10 years in all cases above). It is calculated
by assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the
option, and that the option is exercised and sold on the last day of its
term for the appreciated stock price. No gain to the optionee is possible
unless the stock price increases over the option term, which will benefit
all stockholders. For example, a stockholder who purchased one share of
stock on December 12, 2002 at $1.585, held the stock for 10 years and sold
it on December 11, 2012 while the stock appreciated at 5% and 10%
compounded annually, would have profits of $1.00 and $2.53, respectively,
on his $1.585 investment.
-40-
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information regarding stock
options exercised by our executive officers during the year ended December 31,
2002, and the number and value of securities underlying unexercised options held
by these officers as of December 31, 2002.
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 2002 (#)(1) December 31, 2002 ($)(2)
Acquired On Value ------------------------ ------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Mr. Woods -0- -0- 606,875 338,125 -0- -0-
Dr. Vlasuk -0- -0- 329,687 176,563 -0- -0-
Mr. Keane -0- -0- 66,250 243,750 -0- -0-
Ms. Felzer -0- -0- 75,375 95,625 -0- -0-
Mr. Helmbacher -0- -0- -0- -0- -0- -0-
____________________
(1) Includes options granted under the 1991 Plan and the 2000 Plan. Options
granted under both the 1991 Plan and the 2000 Plan generally vest over a
four-year period, 25% on the first anniversary of the grant date and 6.25%
each quarter thereafter until fully vested, and have a maximum term of 10
years from the grant date, subject to earlier termination upon the
optionee's cessation of service with us. The consequences upon a change in
control to outstanding options to purchase common stock granted under the
2000 Plan and the 1991 Plan are described under the heading, "Executive
Compensation, Compensation of Directors."
(2) Amounts reflected are based on the fair market value of our common stock at
December 31, 2002 ($1.525), minus the exercise price of the options.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
We have employment agreements with the following executive officers:
Mr. Woods, Dr. Vlasuk and Mr. Keane. Each of these employment agreements
provides for separate severance benefits following a change in control.
EMPLOYMENT AGREEMENT WITH MR. WOODS. Pursuant to Mr. Woods' employment
agreement with us, if his employment is involuntarily terminated by us or if he
resigns for any reason within 180 days following a change in control of Corvas,
Mr. Woods will be entitled to receive the following severance benefits upon
providing Corvas with a general release: (a) a lump sum payment equal to one
year of his then-current salary; (b) accelerated vesting of all unvested options
and (c) the continuation for 12 months of all employee benefit plans and
programs in which Mr. Woods was entitled to participate prior to such
termination, including life, disability, medical and dental insurance coverage.
EMPLOYMENT AGREEMENT WITH DR. VLASUK. Dr. Vlasuk's employment agreement
provides that if his employment is involuntarily terminated by us or if he
resigns for any reason within 180 days following a change in control of Corvas,
he will be entitled to the following severance benefits upon providing Corvas
with a general release: (a) a lump sum payment equal to one year of his
then-current salary; (b) accelerated vesting of all unvested options; and (c)
the continuation for 12 months of all employee benefit plans and programs in
which Dr. Vlasuk was entitled to participate prior to such termination,
including life, disability, medical and dental insurance coverage.
-41-
EMPLOYMENT AGREEMENT WITH MR. KEANE. Pursuant to Mr. Keane's employment
agreement with Corvas, if his employment is involuntarily terminated by Corvas
or if he resigns for any reason within 180 days following a change in control of
Corvas, Mr. Keane will be entitled to receive the following severance benefits
upon providing Corvas with a general release: (a) a lump sum payment equal to
one year of his then-current salary; (b) accelerated vesting of all unvested
options; (c) the continuation for 12 months of all employee benefit plans and
programs in which Mr. Keane was entitled to participate prior to such
termination, including life, disability, medical and dental insurance coverage;
and (d) limited outplacement services paid by Corvas.
In addition to the employment agreements described above, we have
implemented the 2002 Change in Control Executive Severance Benefit Plan, or the
Change in Control Plan, for the benefit of each of Mr. Woods, Dr. Vlasuk, Mr.
Keane and Ms. Felzer. The Change in Control Plan provides for separate severance
benefits following a change in control. Under the terms of the Change in Control
Plan, severance benefits become payable if, during the period beginning one
month before and ending 13 months following a change in control of Corvas, any
of the covered executive officers' employment is involuntarily terminated by us
without cause, or if any of the executive officers chooses to terminate his or
her employment for good reason. For the purposes of the Change in Control Plan,
good reason means (i) any significant and material reduction in the job duties
of the executive or the level of management to which the executive reports, (ii)
any reduction of 10% or more of executive's level of compensation, or (iii) any
relocation of executive's place of employment by greater than 50 miles.
MR. WOODS. Pursuant to the Change in Control Plan, if Mr. Woods'
employment is involuntarily terminated by Corvas without cause or voluntarily
terminated by Mr. Woods for good reason during the period beginning one month
before and ending 13 months following the change in control of Corvas, he will
be entitled to receive the following benefits upon providing Corvas with a
general release: (a) a lump sum payment equal to 24 months of his current salary
plus the maximum potential target bonus that he will be eligible for the
applicable calendar year; (b) accelerated vesting of all unvested options; (c)
the payment by Corvas of premiums for continued health benefits pursuant to
COBRA for 18 months for Mr. Woods and his dependents; and (d) limited
outplacement services paid by Corvas.
DR. VLASUK. Pursuant to the Change in Control Plan, in the event that
Dr. Vlasuk's employment is involuntarily terminated by Corvas without cause or
voluntarily terminated by Dr. Vlasuk for good reason during the period beginning
one month before and ending 13 months following the change in control of Corvas,
he will be entitled to receive the following benefits upon providing Corvas with
a general release: (a) a lump sum payment equal to 24 months of his current
salary plus the maximum potential target bonus that he will be eligible for the
applicable calendar year; (b) accelerated vesting of all unvested stock options
held by Dr. Vlasuk; (c) the payment by Corvas of premiums for continued health
benefits pursuant to COBRA for 18 months for Dr. Vlasuk and his dependents; and
(d) limited outplacement services paid by Corvas.
MR. KEANE. Pursuant to the Change in Control Plan, if Mr. Keane's
employment is involuntarily terminated by Corvas without cause or voluntarily
terminated by Mr. Keane for good reason during the period beginning one month
before and ending 13 months following the change in control of Corvas, he will
be entitled to receive the following benefits upon providing Corvas with a
general release: (a) a lump sum payment equal to 18 months of his current salary
plus the maximum potential target bonus that he will be eligible for the
applicable calendar year; (b) accelerated vesting of all unvested stock options
held by Mr. Keane; (c) the payment by Corvas of premiums for continued health
benefits pursuant to COBRA for 18 months for Mr. Keane and his dependents; and
(d) limited outplacement services paid by Corvas.
-42-
MS. FELZER. Under the Change in Control Plan, in the event that Ms.
Felzer's employment is involuntarily terminated by Corvas without cause or
voluntarily terminated by Ms. Felzer for good reason during the period beginning
one month before and ending 13 months following the change in control of Corvas,
she will be entitled to receive the following benefits upon providing Corvas
with a general release: (a) a lump sum payment equal to 18 months of her current
salary plus the maximum potential target bonus that she will be eligible for the
applicable calendar year; (b) accelerated vesting of all unvested stock options
held by Ms. Felzer; (c) the payment by Corvas of premiums for continued health
benefits pursuant to COBRA for 18 months for Ms. Felzer and her dependents; and
(d) limited outplacement services paid by Corvas.
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our Human Resources Committee are Ms. Vitullo as Chairwoman,
Dr. Ingle and Dr. Sobel. None of the members of the Human Resources Committee is
or ever was one of our officers or employees. There are no relationships between
the members of this committee and any third party with whom we conduct business
that must be disclosed. In addition, none of our executive officers serves on
the board or compensation committee of another company that has one or more
executive officers on our Board or Human Resources Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information regarding our
compensation plans under which shares of common stock may be issued as of
December 31, 2002.
(a) (b) (c)
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a))
- ---------------------------- --------------------------- ---------------------------- -----------------------------
Equity compensation plans 3,522,889 $ 6.06 703,959(1)(2)
approved by security
holders
Equity compensation plans 50,000 $ 3.89 -0- (3)
not approved by security
holders
----------- ----------- ----------
Total 3,572,889 $ 6.03 703,959
=========== =========== ==========
_______________
(1) Includes 72,519 shares that are reserved for issuance under the ESPP.
(2) Shares reserved for future issuance under the 2000 Plan is calculated on
the last day of each fiscal quarter so that the total number of shares
reserved for issuance under the 2000 Plan equals eighteen percent (18%) of
the number of shares of our common stock issued and outstanding as of the
last day of the applicable quarter; this product is then reduced by the
number of shares issued pursuant to the 2000 Plan and the 1991 Plan, or
subject to outstanding options or other awards under the 2000 Plan and the
1991 Plan, except for the annual non-discretionary grants made to
non-employee directors.
(3) These options were issued outside of our stock option plans to two of our
former directors.
-43-
SECURITY OWNERSHIP
The following table sets forth certain information regarding the
ownership of our common stock as of December 31, 2002 by (i) all those known by
us to be the beneficial owners of more than 5% of our outstanding shares of
common stock, (ii) each director, (iii) each of the executive officers named in
the summary compensation table, and (iv) all directors and executive officers as
a group.
Beneficial Ownership (1)
--------------------------------------------------
Shares Beneficially Percentage Beneficially
Beneficial Owner Owned Owned
---------------- ----- -----
BVF Partners L.P.(2)................................................... 5,464,729 19.8%
One Sansome Street, 39th Floor
San Francisco, California 94104
Artisan Equity Limited (3)............................................. 3,682,286 11.8%
c/o Island Circle Ltd. 22 Church Street
Hamilton HM11 Bermuda
Wellington Management Company, LLP(4).................................. 3,362,380 12.2%
75 State Street
Boston, Massachusetts 02109
Ziff Asset Management, L.P.(5)......................................... 2,400,000 8.7%
283 Greenwich Avenue
Greenwich, Connecticut 06830
AIM Management Group, Inc.(6).......................................... 1,923,200 7.0%
11 Greenway Plaza, Suite 100
Houston, Texas 77046-1173
Liberty Wanger Asset Management, L.P.(7)............................... 1,383,000 5.0%
227 West Monroe, Suite 3000
Chicago, Illinois 60606-5016
J. Stuart Mackintosh(3) (8)............................................ 3,699,536 11.8%
Randall E. Woods(9).................................................... 687,656 2.4%
George P. Vlasuk, Ph.D. (10) .......................................... 342,190 1.2%
Carolyn M. Felzer(11).................................................. 85,205 *
Stephen F. Keane(12)................................................... 67,250 *
M. Blake Ingle, Ph.D.(13).............................................. 53,000 *
Michael Sorell, M.D.(14)............................................... 27,000 *
Nicole Vitullo(15)..................................................... 27,000 *
Burton E. Sobel, M.D.(16).............................................. 17,250 *
Susan B. Bayh(17)...................................................... 13,500 *
Kevin S. Helmbacher(18)................................................ 7,667 *
All directors and officers as group (11 persons) (19) ................. 5,027,254 15.5%
________________
* Less than 1%.
-44-
(1) This table is based on information furnished by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the SEC.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, we believe that each of the
stockholders named in this table has sole voting and investment power with
respect to the shares indicated as beneficially owned. Except as otherwise
indicated in the table, the address of each owner listed is in care of
Corvas International, Inc. at 3030 Science Park Road, San Diego, CA 92121.
Applicable percentages are based on 27,590,647 shares of common stock
outstanding, adjusted as required by rules promulgated by the SEC.
(2) BVF Partners L.P. beneficially owns 5,464,729 shares of common stock. BVF
Partners L.P. and its general partner, BVF, Inc. share voting and
dispositive power over the shares of common stock they own with
Biotechnology Value Fund, L.P., Biotechnology Value Fund II, L.P., BVF
Investments, L.L.C. and certain managed accounts on whose behalf BVF
Partners, L.P., as investment manager, purchased such shares.
(3) Represents 3,076,923 shares of common stock issuable upon conversion of
the $10.0 million principal portion of the convertible notes at $3.25 per
share. The shares beneficially owned in the table above also include
605,363 shares, representing $1,967,431 of accreted value assumed to be
converted within 60 days of December 31, 2002 at $3.25 per share. Mr.
Mackintosh, who is the designee of Artisan Equity Limited on the Company's
Board of Directors, disclaims beneficial ownership of these shares.
(4) Wellington Management Company, LLP, in its capacity as investment advisor,
beneficially owns 3,362,380 shares of common stock and shares voting power
over 2,877,820 shares and dispositive power over 3,362,380 shares with its
clients.
(5) Ziff Asset Management, L.P. beneficially owns 2,400,000 shares of common
stock and shares voting and dispositive power over the 2,400,000 shares
with its general partner, PBK Holdings, Inc., and Philip B. Korsant.
(6) AIM Management Group Inc. beneficially owns 1,923,200 shares of common
stock and has sole voting and dispositive power over these shares.
(7) Liberty Acorn Fund beneficially owns 1,258,000 shares of common stock and
shares voting and dispositive power over the 1,258,000 shares with Liberty
Wanger Asset Management, L.P. Oregon State Treasury beneficially owns
125,000 shares of common stock and shares voting and dispositive power
over the 125,000 shares with Liberty Wanger Asset Management, L.P.
(8) Includes 17,250 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 2002.
(9) Includes 610,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 2002 and 5,781 shares of common
stock purchased by Mr. Woods through the ESPP.
(10) Includes 331,250 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 2002, and 5,940 shares of
common stock purchased by Dr. Vlasuk through the ESPP.
(11) Includes 75,750 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 2002, and 6,713 shares of
common stock purchased by Ms. Felzer through the ESPP.
(12) Includes 66,250 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 2002.
(13) Includes 42,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 2002.
(14) Represents 27,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 2002.
(15) Represents 27,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 2002.
(16) Represents 17,250 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 2002.
(17) Represents 13,500 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 2002.
(18) Includes 6,167 shares of common stock purchased by Mr. Helmbacher through
the ESPP.
(19) Includes 1,227,250 shares of common stock issuable upon exercise of
options and 3,682,286 shares of common stock issuable upon conversion of
convertible notes exercisable within 60 days of December 31, 2002. See
footnotes (1) through (18) above.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1996, as a recruiting incentive, we loaned Mr. Woods $200,000,
interest-free, in connection with his relocation to San Diego County,
California. The note was amended several times by our Board and Human Resources
Committee, including an increase the principal amount of the note to $277,500 in
July 2000. The $250,000 balance remaining on the loan was repaid in full in
2002.
We have entered into employment agreements with Mr. Woods, Dr. Vlasuk
and Mr. Keane, which are described under the heading, "Employment Agreements and
Change in Control Arrangements." In addition, in March 2002, our Board adopted
the Change in Control Plan which provides all of the executive officers with
severance benefits upon termination following a change in control of the
Company. This plan is also described under the heading, "Employment Agreements
and Change in Control Arrangements."
In the second half 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, or the
convertible notes, 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 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 convertible 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.
We have entered into indemnity agreements with our officers and
directors which provide, among other things, that we will indemnify such officer
or director, under the circumstances and to the extent provided for therein, for
expenses, damages, judgments, fines and settlements such person may be required
to pay in actions or proceedings which such person is or may be made a party by
reason of their position as a director, officer or other agent of the Company,
and otherwise to the full extent permitted under Delaware law and the Company's
By-laws.
RECENT EVENTS
On February 25, 2003, we announced the signing of a definitive merger
agreement under which Dendreon Corporation will acquire Corvas, subject to
various closing conditions including approval by the stockholders of each
company. Under the terms of the agreement, each share of our common stock will
be exchanged for a fixed ratio of 0.45 shares of Dendreon common stock in a
tax-free reorganization. Upon successful closing of this transaction, our
existing stockholders will own approximately 31.4% of the combined company. The
transaction is anticipated to close in the second quarter of 2003, subject to
approval by stockholders of both companies.
The 2000 Plan was amended in February 2003 to provide that the 48,000
options to purchase shares of common stock granted to our non-employee directors
on January 2, 2003 would fully vest and become exercisable upon a change in
control.
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PART IV
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Vice President and Controller, we
performed an evaluation of the effectiveness of our disclosure controls and
procedures within 90 days before the filing date of this annual report. Based on
that evaluation our management, including our Chief Executive Officer and Vice
President and Controller, concluded that our disclosure controls and procedures
are effective.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other
factors that could significantly affect internal controls.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See Index to Financial Statements under Item 8 of this report.
2. Financial Statement Schedules:
Schedules are omitted because they are not required or are inapplicable
or because the information called for is included in the financial
statements or the notes thereto.
3. Exhibits -- See (c) below
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) Exhibits
The following documents are exhibits to this report:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 Amended and Restated Certificate of Incorporation.(4)
3.2 Bylaws.(4)
3.3 Certificate of Designation of the Series C Junior Participating
Preferred Stock, dated as of October 6, 1997. (15)
3.4 Restated Certificate of Incorporation.(34)
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EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
4.1 Reference is made to exhibits 3.1, 3.2, 3.3, 3.4, 4.3, 4.4, 4.5 and
4.6.
4.2 Specimen stock certificate.(1)
4.3 Note Purchase Agreement between the Company and Artisan Equity
Limited ("Artisan"), dated as of August 18, 1999.(24)
4.4 5.5% Convertible Senior Subordinated Note Due 2006, in the principal
amount of $6,500,000, issued to Artisan, dated as of August 18,
1999.(24)
4.5 Registration Rights Agreement between the Company and Artisan, dated
as of August 18, 1999.(24)
4.6 5.5% Convertible Senior Subordinated Note Due 2006, in the principal
amount of $3,500,000, issued to Artisan, dated as of October 20,
1999.(26)
10.1* Form of Indemnification Agreement between the Company and each
director and executive officer.(1)
10.2* Form of Employee Stock Purchase Plan.(1) (30)
10.3* 1991 Incentive and Compensation Plan of the Company, as amended (see
Exhibit 10.37).(1) (11)
10.4* Form of Incentive Stock Option Agreement under the 1991 Incentive
and Compensation Plan of the Company.(2)
10.5* Form of Non-Qualified Stock Option Agreement under the 1991
Incentive and Compensation Plan of the Company.(2)
10.6 Lease Agreement for 3030 Science Park Road, San Diego, California
between the Company and Hartford Accident and Indemnity Company,
dated as of March 28, 1989, as amended on March 23, 1990, May 18,
1990 and May 16, 1991.(1)
10.7 Fourth Lease Amendment to Lease Agreement for 3030 Science Park
Road, San Diego, California between the Company and Hartford
Accident and Indemnity Company, dated as of January 21, 1992.(1)
10.8 Fifth Lease Amendment to Lease Agreement for 3030 Science Park Road,
San Diego, California between the Company and Hartford Accident and
Indemnity Company, dated as of April 15, 1992, Sixth Lease Amendment
dated as of July 16, 1992, Seventh Lease Amendment dated as of
January 18, 1993.(3)
10.9 Assignment of Lease Agreement for 3030 Science Park Road, San Diego,
California from Corvas International, Inc., a California
corporation, to Corvas International, Inc., a Delaware corporation,
dated September 14, 1993.(4)
10.10 Research and License Agreement for Oral Thrombin Inhibitor Drugs
between the Company and Schering Corporation and Schering-Plough
Ltd., dated as of December 14, 1994 (see Exhibits 10.24, 10.25,
10.26, 10.30, 10.31, 10.32 and 10.33).(5) (6)
10.11 Eighth Lease Amendment to Lease Agreement for 3030 Science Park
Road, San Diego, California between the Company and Hartford
Accident and Indemnity Company, dated as of July 7, 1995.(7)
10.12 Collaborative Research and Option Agreement between the Company and
Pfizer Inc. and Pfizer Limited, dated as of October 14, 1995 (see
Exhibit 10.45).(8) (10)
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EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.13 Ninth Lease Amendment to Lease Agreement for 3030 Science Park Road,
San Diego, California between the Company and Hartford Accident and
Indemnity Company, dated as of March 15, 1996.(9)
10.14* Employment Agreement by and between the Company and George P.
Vlasuk, dated as of March 18, 1997. (11)
10.15* Employment Agreement by and between the Company and Randall E.
Woods, dated as of March 18, 1997. (11)
10.16 Tenth Lease Amendment to Lease Agreement for 3030 Science Park Road,
San Diego, California between the Company and Hub Properties Trust,
dated as of May 12, 1997.(12)
10.17 License and Collaboration Agreement between the Company and Schering
Corporation, dated as of June 11, 1997 (see Exhibits 10.18, 10.20,
10.28, 10.34 and 10.38). (13) (16)
10.18 License and Collaboration Agreement between the Company and
Schering-Plough Ltd., dated as of June 11, 1997 (see Exhibits 10.17,
10.20, 10.28, 10.34 and 10.38). (13) (16)
10.19 Rights Agreement between the Company and American Stock Transfer and
Trust Company, dated as of September 18, 1997 (see Exhibit 10.51).
(14)
10.20 Letter of Agreement between the Company and Schering Corporation and
Schering-Plough Ltd., dated as of April 16, 1998 (see Exhibits
10.17, 10.18, 10.28, 10.34 and 10.38). (17) (18)
10.21 Eleventh Amendment to Lease Agreement for 3030 Science Park Road,
San Diego, California between the Company and Hub Properties Trust,
dated as of April 23, 1998. (17)
10.22 License Agreement between the Company and Ortho-Clinical
Diagnostics, Inc., dated as of July 22, 1998. (19) (40)
10.23 License Agreement between the Company and LifeScan, Inc., dated as
of July 22, 1998. (19) (40)
10.24 Termination of Research and License Agreement for Thrombin Research
Program between the Company and Schering Corporation and
Schering-Plough, Ltd., effective August 14, 1998 (see Exhibits 10.10
and 10.26). (19)
10.25 Letter of Agreement between the Company and Schering Corporation and
Schering-Plough Ltd., dated as of December 15, 1998 (see Exhibits
10.10, 10.26, 10.30, 10.31, 10.32 and 10.33). (20) (22)
10.26 Amendment Agreement between the Company and Schering Corporation and
Schering-Plough Ltd., effective as of February 18, 1999 (see
Exhibits 10.10 and 10.24). (20) (22)
10.27 Twelfth Amendment to Lease Agreement for 3030 Science Park Road, San
Diego, California between the Company and Hub Properties Trust,
dated as of March 9, 1999. (20)
10.28 Letter of Agreement between the Company and Schering Corporation and
Schering-Plough Ltd., dated as of April 29, 1999 (see Exhibits
10.17, 10.18, 10.20, 10.34 and 10.38). (21) (40)
10.29 Thirteenth Amendment to Lease Agreement for 3030 Science Park Road,
San Diego, California between the Company and Hub Properties Trust,
dated as of June 15, 1999. (23)
10.30 Letter of Agreement between the Company and Schering Corporation and
Schering-Plough Ltd., dated as of June 23, 1999 (see Exhibits 10.10,
10.25, 10.26, 10.31, 10.32 and 10.33). (23)
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EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.31 Second Amendment Agreement between the Company and Schering
Corporation and Schering-Plough Ltd., effective as of June 29, 1999
(see Exhibits 10.10, 10.25, 10.26, 10.30, 10.32 and 10.33). (23)
(25)
10.32 Letter of Agreement between the Company and Schering Corporation and
Schering-Plough Ltd., effective as of September 8, 1999 (see
Exhibits 10.10, 10.25, 10.26, 10.30, 10.31 and 10.33). (27)
10.33 Third Amendment Agreement between the Company and Schering
Corporation and Schering-Plough Ltd., effective as of December 7,
1999 (see Exhibits 10.10, 10.25, 10.26, 10.30, 10.31 and 10.32).
(29)
10.34 Letter of Agreement between the Company and Schering Corporation and
Schering-Plough Ltd., dated as of March 30, 2000 (see Exhibits
10.17, 10.18, 10.20, 10.28 and 10.38). (28)
10.35* 2000 Equity Incentive Plan of the Company (see Exhibit 10.53). (30)
10.36* Form of Stock Option Agreement under the 2000 Equity Incentive Plan
of the Company, with certain exhibits. (33)
10.37* Amendment to 1991 Incentive and Compensation Plan of the Company
(see Exhibit 10.3). (33)
10.38 Amendment Agreement between the Company and Schering Corporation and
Schering-Plough Ltd., effective as of May 18, 2000 (see Exhibits
10.17, 10.18, 10.20, 10.28 and 10.34). (31) (32)
10.39 Fourteenth Amendment to Lease Agreement for 3030 Science Park Road,
San Diego, California between the Company and Hub Properties Trust,
dated as of June 20, 2000. (31)
10.40 Agreement between the Company and Centocor, Inc., dated as of July
14, 2000. (31) (32)
10.41 Collaborative Agreement between the Company and Incyte Genomics,
Inc., dated as of July 30, 2001. (34) (40)
10.42* Employment Agreement by and between the Company and Stephen F.
Keane, dated as of August 20, 2001, with certain exhibits thereto.
(35)
10.43* Second Amended and Restated Promissory Note between the Company and
Randall E. Woods and Nancy Saint Woods, dated as of October 15,
2001. (35)
10.44* 2002 Change in Control Executive Severance Benefit Plan, effective
as of March 15, 2002. (36)
10.45 Termination of License and Development Agreement between the Company
and Pfizer Inc. and Pfizer Limited, dated as of June 13, 2002 (see
Exhibit 10.12). (37)
10.46* 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).(37)
10.47* Separation Agreement by and between Kevin Helmbacher and the
Company, dated as of August 5, 2002. (38)
10.48 Agreement and Plan of Merger, by and among Dendreon Corporation, a
Delaware corporation, Seahawk Acquisition, Inc., a Delaware
corporation, Charger Project LLC, a Delaware limited liability
company, and the Company, dated as of February 24, 2003. (39)
10.49 Form of Lockup and Voting Agreement by and between the Company and
certain directors and officers of Dendreon Corporation, dated as of
February 24, 2003. (39)
-50-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.50 Form of Lockup and Voting Agreement by and between Dendreon
Corporation and certain directors and officers of the Company, dated
as of February 24, 2003. (39)
10.51 Amendment No. 1 to the Rights Agreement between the Company and
American Stock Transfer and Trust Company, dated February 24, 2003
(see Exhibit 10.19). (39)
10.52* Second Amendment to the Corvas International, Inc. 401(k)
Compensation Deferral Savings Plan and Trust Agreement (Amended and
Restated as of January 1, 1997), dated as of December 16, 2002.
10.53* Amendment to the 2000 Equity Incentive Plan of the Company (see
Exhibit 10.35).
21.1 Subsidiary of the Company.(1)
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. Reference is made to page 53.
99.1 Section 906 certification.
99.2 Section 302 certification of Chief Executive Officer.
99.3 Section 302 certification of Vice President and Controller.
___________________
(1) Incorporated by reference to Registration Statement on Form S-1 (No.
33-44555), as amended, filed December 13, 1991.
(2) Incorporated by reference to Registration Statement on Form S-8 (No.
33-45607), as amended, filed February 10, 1992.
(3) Incorporated by reference to Annual Report on Form 10-K, filed March 30,
1993.
(4) Incorporated by reference to Annual Report on Form 10-K, filed February 23,
1994.
(5) Incorporated by reference to Annual Report on Form 10-K, filed March 30,
1995.
(6) Portions of this exhibit have been granted confidential treatment pursuant
to an order granted by the Securities and Exchange Commission on May 11,
1995.
(7) Incorporated by reference to Quarterly Report on Form 10-Q, filed November
13, 1995.
(8) Incorporated by reference to Annual Report on Form 10-K, filed February 28,
1996.
(9) Incorporated by reference to Registration Statement on Form S-1 (No.
333-2644), filed March 25, 1996.
(10) Portions of this exhibit have been granted confidential treatment pursuant
to an order granted by the Securities and Exchange Commission on April 26,
1996.
(11) Incorporated by reference to Annual Report on Form 10-K, filed March 28,
1997.
(12) Incorporated by reference to Quarterly Report on Form 10-Q, filed May 14,
1997.
(13) Incorporated by reference to Quarterly Report on Form 10-Q, filed August
13, 1997.
(14) Incorporated by reference to Current Report on Form 8-K, filed October 8,
1997.
(15) Incorporated by reference to Quarterly Report on Form 10-Q, filed November
12, 1997.
(16) Portions of this exhibit have been granted confidential treatment pursuant
to an order granted by the Securities and Exchange Commission on August 26,
1997.
(17) Incorporated by reference to Quarterly Report on Form 10-Q, filed May 14,
1998.
(18) Portions of this exhibit have been granted confidential treatment pursuant
to an order granted by the Securities and Exchange Commission on July 10,
1998.
(19) Incorporated by reference to Quarterly Report on Form 10-Q, filed November
13, 1998.
(20) Incorporated by reference to Annual Report on Form 10-K, filed March 30,
1999.
(21) Incorporated by reference to Quarterly Report on Form 10-Q, filed May 17,
1999.
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(22) Portions of this exhibit have been granted confidential treatment pursuant
to an order granted by the Securities and Exchange Commission on May 28,
1999.
(23) Incorporated by reference to Quarterly Report on Form 10-Q, filed August
13, 1999.
(24) Incorporated by reference to Schedule 13D, filed by Artisan Equity Limited
on August 27, 1999.
(25) Portions of this exhibit have been granted confidential treatment pursuant
to an order granted by the Securities and Exchange Commission on September
22, 1999.
(26) Incorporated by reference to Schedule 13D, filed by Artisan Equity Limited
on November 5, 1999.
(27) Incorporated by reference to Quarterly Report on Form 10-Q, filed November
12, 1999.
(28) Incorporated by reference to Quarterly Report on Form 10-Q, filed May 12,
2000.
(29) Portions of this exhibit have been granted confidential treatment pursuant
to an order granted by the Securities and Exchange Commission on June 2,
2000.
(30) Incorporated by reference to Registration Statement on Form S-8 (No.
333-41784), filed July 19, 2000.
(31) Incorporated by reference to Quarterly Report on Form 10-Q, filed August
11, 2000.
(32) Portions of this exhibit have been granted confidential treatment pursuant
to an order granted by the Securities and Exchange Commission on October 6,
2000.
(33) Incorporated by reference to Annual Report on Form 10-K, filed March 30,
2001.
(34) Incorporated by reference to Quarterly Report on Form 10-Q, filed August
14, 2001.
(35) Incorporated by reference to Quarterly Report on Form 10-Q, filed November
13, 2001.
(36) Incorporated by reference to Annual Report on Form 10-K, filed March 29,
2002.
(37) Incorporated by reference to Quarterly Report on Form 10-Q, filed August
14, 2002.
(38) Incorporated by reference to Quarterly Report on Form 10-Q, filed November
14, 2002.
(39) Incorporated by reference to Current Report on Form 8-K, filed February 25,
2003.
(40) Confidential treatment has been requested from the Securities and Exchange
Commission for portions of this exhibit.
* Indicates executive compensation plan or arrangement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 13, 2003 By: /s/ RANDALL E. WOODS
-----------------------------------------
Randall E. Woods
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Randall E. Woods and Carolyn M. Felzer,
and each of them, as his true and lawful attorneys-in-fact, with the full power
of substitution and resubstitution for him in any and all capacities, to sign
any or all amendments to this Report, and to file the same, with exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
Signatures Titles Date
---------- ------ ----
/s/ RANDALL E. WOODS President, Chief Executive March 13, 2003
------------------------------------ Officer and Director
Randall E. Woods (PRINCIPAL EXECUTIVE OFFICER)
/s/ CAROLYN M. FELZER Vice President and Controller March 13, 2003
------------------------------------ (PRINCIPAL FINANCIAL AND
Carolyn M. Felzer ACCOUNTING OFFICER)
/s/ M. BLAKE INGLE, PH.D. Chairman of the Board of March 13, 2003
------------------------------------ Directors
M. Blake Ingle, Ph.D.
/s/ SUSAN B. BAYH Director March 13, 2003
------------------------------------
Susan B. Bayh
/s/ J. STUART MACKINTOSH Director March 13, 2003
------------------------------------
J. Stuart Mackintosh
/s/ BURTON E. SOBEL, M.D. Director March 13, 2003
------------------------------------
Burton E. Sobel, M.D.
/s/ MICHAEL SORELL, M.D. Director March 13, 2003
------------------------------------
Michael Sorell, M.D.
/s/ NICOLE VITULLO Director March 13, 2003
------------------------------------
Nicole Vitullo
/s/ GEORGE P. VLASUK, PH.D. Director March 13, 2003
------------------------------------
George P. Vlasuk, Ph.D.
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