ITEM 1. BUSINESS
Texas Biotechnology Corporation ("TBC" or the "Company"), a biopharmaceutical company, applies innovative drug discovery techniques and its specialized knowledge of the role of vascular cell biology in vascular diseases to the design and development of novel pharmaceutical compounds. The Company's research and development programs are currently focused on inhibitors (also referred to as antagonists or blockers) of thrombosis, vasospasm/hypertension, vascular inflammation, vascular proliferative disease, angiogenesis and apoptosis. The Company was incorporated in Delaware in August 1989 under the name Cardiology Institute of Texas, Ltd., and its name was changed to Texas Biotechnology Corporation in October 1990. As of December 31, 1998, the Company had 84 employees, 69 of whom were engaged in research and development. References to TBC or the Company include its subsidiary ImmunoPharmaceutics, Inc. ("IPI") unless otherwise indicated. The Company's research laboratories and executive offices are located at 7000 Fannin, Suite 1920, Houston, Texas 77030, (713) 796-8822.
The Company's lead product candidate is NOVASTAN(R), a direct thrombin inhibitor that is being developed for various indications as an anticoagulant alternative to heparin. Approximately 390,000 patients treated with heparin in the U.S. annually develop the immunological reaction known as heparin induced thrombocytopenia ("HIT") syndrome, which may lead to a potentially life-threatening thrombosis (blood clot). The Company has initially focused on the therapeutic and commercial potential of NOVASTAN(R) in this indication. NOVASTAN(R) is marketed in Japan for ischemic stroke, peripheral arterial occlusion and hemodialysis in patients with antithrombin III deficiency. Approximately 164,000 patients have been treated with NOVASTAN(R) in Japan since its introduction in 1990. TBC has licensed the U.S. and Canadian rights to NOVASTAN(R) from Mitsubishi Chemical Corporation ("Mitsubishi"). The Company has entered into a collaboration with SmithKline Beecham plc ("SmithKline") regarding the commercialization and development of NOVASTAN(R).
The original New Drug Application ("NDA") for NOVASTAN(R) was filed in August 1997, and was granted priority review status. The United States ("U.S.") Food and Drug Administration (the "FDA") extended the priority review period by 90 days during January, 1998. On May 11, 1998, the Company announced that it had received a non-approvable letter from the FDA for NOVASTAN(R). The Company amended its NDA with the FDA for NOVASTAN(R) (argatroban) as an anticoagulant for use in patients with HIT syndrome on March 19, 1999. While the Company believes the amendment includes consistent, positive results and supports the use of NOVASTAN(R) in its proposed indication, the Company cannot predict the timing or outcome of the FDA decision.
TBC's internal research has produced several small molecule product candidates in the areas of vasospasm, hypertension and vascular inflammation. The Company's lead compound for the treatment of CHF is TBC11251, a synthetic small molecule receptor antagonist that selectively blocks endothelinA receptors which are believed to be associated with vasoconstriction (constriction of blood flow through blood vessels). In the area of vascular inflammation (associated with asthma, reperfusion injury, or psoriasis), the Company has identified several compounds, including TBC1269, which in preclinical studies have shown efficacy in inhibiting acute inflammation. The Company completed its initial Phase IIa clinical trial for TBC11251 (TBC's lead endothelinA receptor antagonist ("ETA") compound for vasospasm/hypertension) in congestive heart failure ("CHF"). In treatment of patients with moderate to severe congestive heart failure, with intravenous TBC11251, the treated group demonstrated a statistically significant improvement versus placebo in the primary objective of improving central hemodynamics, particularly pulmonary artery pressure. In addition, positive trends were observed in other important cardiovascular measures. These results will allow the Company to proceed with the program using oral dosing regimes in additional Phase II studies. The Company also completed a Phase IIa clinical trial for TBC1269 (TBC's lead selectin antagonist compound for vascular inflammation) in acute asthma. The trial demonstrated statistically significant improvement over placebo as measured by reducing eosinophil recruitment. The Company is currently developing inhaled and topical formulations of TBC1269 for clinical testing in asthma and psoriasis, respectively.
Additionally, in the vascular inflammation area, the Company has identified vascular cell adhesion molecule ("VCAM") antagonists for the intercellular adhesion observed in atherosclerosis, asthma and rheumatoid arthritis, and is continuing to optimize lead VCAM compounds to obtain a clinical candidate. The Company is conducting research in the vascular proliferative disease area (which can result in coronary restenosis after angioplasty) to identify antagonists that block fibroblast growth factor ("FGF"), a protein which triggers growth of smooth muscle cells in blood vessels. The Company is also conducting research into treatments for the consequences of excess angiogenesis (the formation of new blood vessels from pre-existing blood vessels) and apoptosis (programmed cell death). The Company has identified a number of compounds which are undergoing further optimization prior to selection of clinical candidates.
The TBC strategy is to identify proprietary candidates for targeted indications, and to selectively commercialize those candidates through collaborations with other pharmaceutical and biotechnology companies. The Company has also entered into collaborations with Synthelabo S.A., the pharmaceutical division of L'Oreal S.A. ("Synthelabo"), and LG Chemical, Ltd. ("LG Chemical") regarding other compounds, as described below. In the future, the Company intends to directly commercialize its compounds for acute indications by establishing a hospital-based sales force, and intends to out-license the compounds in territories outside its targeted markets, as well as the rights to any non-strategic use of its compounds.
PRODUCTS IN DEVELOPMENT AND RESEARCH
The following table summarizes the potential indications and the current status of TBC's compounds in development and research. A more detailed description of these compounds follows the table.
COMPOUND PIPELINE
(1) See "Government Regulation."
(2) The original NDA was filed in August 1997, and was granted priority review status. The FDA extended the priority review period by 90 days during January, 1998. On May 11, 1998, the Company announced that it had received a non-approvable letter from the FDA for NOVASTAN(R). The Company amended its NDA on March 19, 1999. See "Thrombosis Program".
(3) Phase II clinical trials are anticipated to commence during 1999.
THROMBOSIS PROGRAM
Background. Thrombosis is the formation of a blood clot in a vessel that causes various vascular diseases depending on the location of the clot. An arterial clot may lead to heart attack if lodged in a coronary artery, or to stroke if lodged in an artery that supplies oxygen to the brain. Venous clots occur principally in the arms or legs (deep vein thrombosis), and may cause local inflammation, chronic pain and other complications. In some cases, a venous clot can cause lung injury (pulmonary embolism) by migrating from the veins to the lungs.
Thrombosis can be treated with anticoagulants, thrombolytic drugs or surgically. Anticoagulant drugs, which prevent clots from forming, are characterized as either antithrombotic or antiplatelet drugs. Antithrombotic drugs block the action of the blood protein thrombin and may be used to treat both arterial and venous clots. Antiplatelet drugs prevent platelets from clumping together and are only effective in treating arterial clots. Heparin and aspirin are the most widely-used antithrombotic and antiplatelet drugs, respectively. Thrombolytic drugs dissolve existing clots in veins or arteries, but do not block the formation of new blood clots. Tissue plasminogen activator ("t-PA") and streptokinase ("SK") are two of the most commonly used thrombolytic drugs. A combination of an anticoagulant and a thrombolytic often achieves the best therapeutic effect.
Heparin, first discovered over 80 years ago, is the most widely used injectable anticoagulant. In the U.S., approximately ten million patients annually receive therapeutic heparin to treat a variety of conditions that require inhibition of the body's natural clotting mechanism. Each year approximately 390,000 patients develop a profound immunological reaction to heparin which is known as HIT. This reaction may lead to a potentially life threatening thrombosis (blood clot).
Product Candidate - NOVASTAN(R). TBC's lead compound, NOVASTAN(R), is a non-protein, synthetic small molecule thrombin inhibitor that directly and selectively binds to and inactivates thrombin in the blood plasma. NOVASTAN(R) is also effective against thrombin that is bound in blood clots. NOVASTAN(R) is manufactured and marketed in Japan by Mitsubishi where it is approved for the treatment of ischemic stroke, peripheral arterial occlusion and hemodialysis in patients with antithrombin III deficiency. Since introduction in 1990, approximately 164,000 patients have been treated with NOVASTAN(R) in Japan. TBC is developing NOVASTAN(R) as an anticoagulant alternative to heparin for the U.S. and Canadian markets in conjunction with SmithKline. See "-- Research and Development Collaborations and Licensing Agreements."
In studies conducted by TBC in the U.S., as well as by Mitsubishi in Japan and Synthelabo in Europe, a significant correlation was identified between the administered dose of NOVASTAN(R) and the degree of anticoagulation achieved. Moreover, these studies suggest that the relationship between dose and effect may be generally predictable over the expected dose-range. As a result, the Company believes the risk of either insufficient or excessive anticoagulation associated with small dose changes, as is the case with heparin, should be reduced. TBC further believes that NOVASTAN(R) could have a superior profile, as compared with heparin, for efficacy, ease of dosing, speed of achieving "therapeutic anticoagulation", risk of bleeding and total economic costs of anticoagulation.
Indication - HIT/HITTS. Because NOVASTAN(R) does not evoke the immune reaction caused by heparin, the Company believes it should provide a safe and effective anticoagulant for patients diagnosed with HIT. The Company conducted a multicenter Phase III study ("ARG-911") that compared 304 patients treated with NOVASTAN(R) for up to 14 days (160 with HIT and 144 with HIT with thrombosis syndrome ("HITTS"), with 217 historical control patients. The Company submitted this trial as part of an NDA on August 15, 1997 and was granted priority review status. The FDA extended the priority review period by 90 days during January 1998. On May 11, 1998 the Company announced that it had received a non-approvable letter from the FDA. Based on consultation with representatives from the FDA, TBC has focused on the collection and analysis of a new more comparable historical control group as the basis for demonstrating NOVASTAN(R)'s safety and efficacy. The new historical control includes 193 patients, which were collected according to a predetermined methodology from the centers that enrolled the NOVASTAN(R) patients. The amended NDA includes one Phase III clinical trial involving 304 treated patients and a second follow on supporting trial involving 263 patients. Both of the Phase III studies were
comparable with regard to study design, primary and secondary endpoints and dosing regimen. Both trials were compared to the 193 newly collected historical control patients. The Company amended its NDA with the FDA for NOVASTAN(R) as an anticoagulant for use in patients with HIT syndrome on March 19, 1999. While the Company believes the amendment includes consistent, positive results and supports the use of NOVASTAN(R) in its proposed indication, the Company cannot predict the timing or outcome of the FDA decision.
Other Indications. TBC has completed the clinical trials to support the potential use of NOVASTAN(R) in patients undergoing angioplasty. TBC and SmithKline intend to submit a supplemental NDA to the FDA following the FDA decision on the primary indication. TBC is currently considering the development of NOVASTAN(R) for additional indications. NOVASTAN(R) has been tested for use as an adjunctive to thrombolytic therapy for acute myocardial infarction ("AMI"). The compound was found to be safe and as effective as heparin for this indication. NOVASTAN(R) is approved in Japan for ischemic stroke. TBC is evaluating the feasibility of development of NOVASTAN(R) for stroke and possibly AMI.
VASOSPASM/HYPERTENSION PROGRAM
Background. Smooth muscle cells in the blood vessel, via a series of biochemical and morphological events, are directly responsible for mediating changes in vessel diameter. The regulation of blood flow depends on a delicate balance between physical and chemical stimuli that cause smooth muscle cells to relax (vasodilate) or contract (vasoconstrict). Chronic periods of excessive vasoconstriction in the peripheral circulation can lead to disturbances in blood pressure (hypertension) or heart function (congestive heart failure), whereas acute episodes of intense vasoconstriction (vasospasm) can restrict blood flow and lead to severe tissue damage and loss of function (myocardial infarction or kidney failure). An essential component of blood vessels is the vascular endothelium-the cells comprising the innermost lining of all blood vessels. Recently, it has been determined that the vascular endothelium plays a pivotal role in maintaining normal blood vessel tone, including blood flow, by producing substances that regulate the balance between vasodilation and vasoconstriction.
Endothelins are a family of three peptides that are believed to play a critical role in the control of blood flow. It has been determined that this multiplicity of endothelin actions on different cell types can be explained by endothelins' interactions with two distinct receptors, ETA and ETB, on cell surfaces. In general, ETA receptors are associated with vasoconstriction and disorders of the cardiovascular and renal systems, while ETB receptors are primarily associated with vasodilation and disorders of the central nervous system. There is substantial evidence that endothelins are involved in a variety of diseases where blood flow is important. These include vasospasm, myocardial infarction, congestive heart failure, renal disease, subarachnoid hemorrhage and certain types of hypertension.
Product Candidate - TBC11251. The Company's research program in the vasospasm/hypertension area is aimed at developing small molecules that inhibit the binding of ET to its cell surface receptors. The Company believes that specific agents for each receptor subtype may provide the best clinical utility and safety. The Company's initial focus has been to develop a highly potent and selective small-molecule based ETA receptor antagonist. An antagonist (or inhibitor) blocks the effects of a ligand at its receptor. A ligand is a chemical messenger which binds to a specific site on a target molecule or cell. TBC scientists have discovered a novel class of low molecular weight compounds (molecular weight of less than 500 daltons) that antagonize ET binding to the ETA receptor with high potency (these compounds block ET binding at low compound concentration). The Company identified lead compounds which mimicked the ability of ET to bind to the ETA receptor. Further optimization was then used to develop more potent compounds until the current series of leads was identified. In addition to their ability to block receptor binding, these compounds functionally inhibit ET action on isolated blood vessels in vitro acting as full, competitive antagonists. The lead compounds in this series have been shown to exhibit in vivo efficacy using various animal models.
TBC11251, a selective ETA inhibitor, has been identified as the Company's lead compound in this program. The Company believes that a substantial market opportunity for TBC11251 exists for the treatment of CHF, which is currently estimated to affect approximately five million people in the U.S. annually. TBC filed an investigational new drug application ("IND") with the FDA for TBC11251 in late 1996 and has completed the first of its planned Phase II clinical trials, which was terminated early due to the achievement of statistical significance with only 24 of
the planned 45 patients. The Company is considering additional Phase II studies using additional dosing regimens. In treatment of patients with moderate to severe CHF, the TBC11251 treated group demonstrated a statistically significant improvement verses placebo in the primary objective of improving central hemodynamics, particularly pulmonary artery pressure. In addition, positive trends were observed in other important cardiovascular measures. These results will allow the Company to proceed with the program using additional dosing regimens. The Company also completed Phase I clinical trials with the oral form of TBC11251. The Company anticipates commencing a Phase II clinical trial during 1999 with the oral formulation of TBC11251 in hypertension.
Other Indications. The Company believes endothelin antagonist compounds may have other indications. For example, an endothelin antagonist may be used to treat chronic obstructive pulmonary disease, primary and secondary pulmonary hypertension, systemic hypertension and prostate cancer. The Company may consider licensing certain indications to third parties, although no assurance can be given that the Company will be successful in entering into any such license.
VASCULAR INFLAMMATION PROGRAM
Background. Inflammation is the body's natural defense mechanism that fends off bacterial, viral and parasitic infections. The inflammatory response involves a series of events by which the body attempts to limit or destroy an injurious agent. These steps include the production of proteins that attract white blood cells, or leukocytes, to the site of inflammation, the production of chemicals to destroy the injurious agent and the removal of the resulting debris. This process is normally self-limiting and not harmful to the individual. However, in certain instances, the process may be overly active, as during an acute inflammatory reaction leading to a build up of white blood cells and debris at the inflammation site that causes tissue damage.
The initial interaction between white blood cells and the endothelial cell layer is mediated by a group of adhesion molecules known as selectins. The selectins are a family of three proteins, two of which are found on inflamed endothelium, which bind to the carbohydrate sialyl Lewis x (sLex) found on the surface of white blood cells. White blood cells are able to migrate into inflamed areas because sLex present on the surface of white blood cells binds to selectin molecules present on activated endothelium. This binding slows the flow of leukocytes through the bloodstream, which is one of the first steps in the movement of white blood cells from the blood into the tissue. The second step in this process is VCAM mediated white blood cell attachment and migration which helps to localize white blood cells in areas of injury or infection.
The selectins may be involved in acute and chronic inflammatory diseases such as reperfusion injury (tissue injury caused when blood flow is restored following removal of an obstruction) and asthma, both primary areas of interest for the Company. The Company estimates that there are approximately 685,000 patient cases of coronary reperfusion injury in the U.S. annually and that between fourteen and fifteen million persons in the U.S. suffer from asthma. The presence of VCAM at sites of endothelial injury leads to an accumulation at these sites of Very Late Antigen-4 ("VLA-4")-containing white blood cells. Diseases that are associated with chronic inflammation include asthma, atherosclerosis or the accumulation of fatty deposits in the artery, psoriasis and rheumatoid arthritis.
Product Candidate - TBC1269. The Company has developed a computer model of the selectin/sLex complex and used it to produce a novel class of synthetic small molecule compounds that inhibit the selectin-mediated cellular adhesion that occurs during inflammation. The lead compound in the series, TBC1269, has shown efficacy both in cell-based and biochemical assays, and in animal models of inflammation. TBC filed an IND with the FDA for TBC1269 in August 1997. A Phase IIa clinical trial in allergic asthma was completed during 1998 in mild to moderate asthmatics. The trial, which involved 21 patients with mild to moderate asthma, demonstrated statistically significant improvement over placebo as measured by reducing eosinophil recruitment. Eosinophils are white blood cells that are involved in many inflammatory diseases, including asthma. Reductions in lung eosinophils have been shown to improve the course of an asthmatic response. The Company is currently developing inhaled and topical formulations of TBC1269 for clinical testing in asthma and psoriasis, respectively.
Product Candidate - VCAM/VLA-4. TBC has also identified VCAM antagonists for the intercellular adhesion observed in atherosclerosis. The Company's initial lead compounds block the ability of white blood cells to interact through VCAM and VLA-4. These lead compounds are being modified in an attempt to improve efficacy. TBC has
demonstrated efficacy in small molecule antagonists in an animal model of acute inflammation, suggesting that VCAM/VLA-4 plays a role in this disease process. These compounds are still in research.
Other Indications. The Company believes these anti-inflammatory compounds may have applicability in other indications. For example, a selectin antagonist may be used to treat psoriasis, or a VCAM antagonist may be used to treat asthma, rheumatoid arthritis and multiple sclerosis. The Company may consider licensing certain indications to third parties, although no assurance can be given that the Company will be successful in entering into any such license.
VASCULAR PROLIFERATION DISEASE PROGRAM
Background. Smooth muscle cells in the blood vessel wall proliferate in response to injury to the vessel. When the endothelial cell layer is damaged, platelets attach to the vessel surface. Platelets and other cells begin to release cellular growth factors, including the proteins FGF, platelet-derived growth factor and thrombin. In response to these growth factors, specific genes are activated in the smooth muscle cells. The products of these genes stimulate the smooth muscle cells to move and divide. When the initial damage is slight, the proliferation is limited to endothelial cell repair. If the damage is more extensive, the smooth muscle cells continue to proliferate. Eventually, the proliferation process thickens the vessel wall, reduces the interior size of the blood vessel and produces a stenosis (a blood vessel with reduced lumen diameter). This stenosis is comprised primarily of smooth muscle cells and protein called fibroproliferative material. The process of producing this fibroproliferative material is referred to as the fibroproliferative response. Fibroproliferative stenosis differs from stenosis produced by atherosclerotic plaque, which contains smooth muscle cells, fatty deposits and macrophages (a type of white blood cell). As with atherosclerotic plaque stenosis, however, blood flow is restricted, and the tissue served by the vessel is deprived of oxygen. If the stenosis occurs in a coronary artery, the heart muscle is deprived of oxygen, and a heart attack may result.
Fibroproliferative material is generally produced in response to extensive damage to the blood vessel wall as a result of a mechanical injury. Mechanical injury sufficient to produce the fibroproliferative response often occurs during procedures designed to repair blood vessels that are occluded by plaque or thrombus material, such as mechanical reopening of arteries (angioplasty) and coronary artery bypass graft surgery. Other surgical procedures, including vein grafts and organ transplants, can also produce fibroproliferative stenosis. When fibroproliferative stenosis occurs following the removal of the stenosis by surgical or other means, it is referred to as restenosis. Irrespective of how the injury is produced, the conditions which lead to the fibroproliferative response are termed vascular proliferative diseases.
Product Candidate - FGF Antagonist. The Company's research program for vascular proliferative disease is focused on identifying the factors that activate cells to proliferate and developing small molecule antagonists to these factors. Using its knowledge of the signaling pathways through which these factors stimulate cells to proliferate, the Company seeks to develop compounds that disrupt the signaling process between cells and prevent unnecessary smooth muscle cell proliferation.
The Company has focused on FGF because of a growing body of evidence as to its central role in blood vessel formation. The Company's research has shown that some components of the signaling pathways used by FGF are important for smooth muscle cell proliferation. TBC's current effort on FGF involves the development of small molecules designed to prevent activation of latent FGF, and to block FGF receptor targets. The Company estimates that approximately 685,000 annual patient cases exist in the U.S. which could utilize an FGF antagonist in the treatment of coronary restenosis.
Other Applications. The Company believes an FGF antagonist may have other applications. For example, an FGF antagonist might be developed to treat rheumatoid arthritis or cancer. The Company may consider licensing certain indications to third parties, although no assurance can be given that the Company will be successful in entering into any such license.
ANGIOGENESIS PROGRAM
Background. Angiogenesis, the formation of new blood vessels from pre-existing vessels, depends on a delicate balance of local physical and chemical stimuli acting on the vascular endothelium. Angiogenesis is associated with numerous physiological processes, including embryogenesis, wound healing, organ regeneration, and the female reproductive cycle. However, angiogenesis also plays a major role in the pathogenesis of tumor growth, rheumatoid arthritis, atherosclerosis, various retinopathies, certain skin diseases and gingivitis. One of the key factors required for angiogenesis is Vascular Endothelial Growth Factor ("VEGF"). Increases in VEGF expression may be a common mechanism underlying diverse, yet inter-related pathologies such as tumor growth, retinal neovascularization (new blood vessel development in the back of the eye) and rheumatoid arthritis where tissue hypoxia is a central component. The VEGF protein is produced by smooth muscle cells and other tissues, including tumor cells, and is essential for the formation of the new blood vessels. Antagonists to VEGF may be useful for the prevention of the vascular complications of diabetes and for limiting the growth of solid tumors and rheumatoid arthritis.
Product Candidate - VEGF Antagonist. The Company's research program is directed towards the development of small molecule inhibitors of VEGF. VEGF is a member of the heparin binding growth factor family, as is FGF. Using similar technology to that used for the FGF antagonist program, the Company has discovered small molecule inhibitors of VEGF action. The lead compound has been shown to effectively prevent VEGF function in vitro. The compound also prevents the vascular actions of VEGF in a rodent model of angiogenesis. TBC scientists are currently attempting to further optimize this inhibitor series to identify a clinical candidate. The Company estimates that approximately 1.1 million solid organ cancer patient cases occur in the U.S. annually which could utilize a VEGF antagonist in their treatment.
APOPTOSIS PROGRAM
Background. Over the past few years it has become evident that cells have a built-in mechanism for programmed death, termed apoptotic death, which is important in the formation, organization and remodeling of tissues during development. This mechanism contrasts with necrotic death which is often the result of hypoxic injury to tissues. There appear to be certain conditions where apoptosis is thought to contribute to the progression of a disease state. In particular, much of the tissue damage which develops over time following an ischemic stroke (resulting from a blood clot) or a heart attack is thought to be the result of apoptotic death occurring in the tissue. Additionally, diseases such as rheumatoid arthritis may have components of apoptosis. In this case, the death of certain cells in a joint, in combination with over-proliferation of other cells, contribute to the local irritation that is observed. Evidence suggests this apoptotic process may be stimulated by inflammatory cells in the tissue. Thus, inhibitors of apoptosis may be useful in treating a number of disease conditions.
Product Candidates - TNF(alpha) Antagonist, Caspase Inhibitors. The Company's research in this area is focused on the identification of factors which contribute to apoptotic death in the heart and brain following a heart attack or stroke, which occur in 1.1 million and 600,000 patients, respectively, in the U.S. annually. One of the factors which has been identified as being important in these and other disease settings is Tumor Necrosis Factor a ("TNF(alpha)"). TBC scientists have identified small molecule antagonists of this factor which block TNF(alpha)'s ability to bind to and kill cells in vitro. These compounds are currently undergoing additional optimization prior to selection of a clinical candidate. In addition to use in heart attack or stroke, the Company estimates that approximately two million U.S. patient cases occur annually which could utilize a TNF(alpha) antagonist in the treatment of rheumatoid arthritis. Caspases are proteases which are responsible for mediating the cell death signal in various cell types. TBC is currently attempting to identify lead compounds to block caspase action.
Other Indications. The Company believes a TNF(alpha) antagonist may have other indications. For example, a TNF(alpha) antagonist might be developed to treat inflammatory bowel disease. The Company may consider licensing certain indications to third parties, although no assurance can be given that the Company will be successful in entering into any such license.
OTHER INDICATIONS
The Company believes that a number of the small molecule non-carbohydrate therapeutics that are being developed in its programs may have applications for other indications. For example, an FGF antagonist might be developed to treat rheumatoid arthritis, a selectin antagonist to treat psoriasis, transplant rejection and adult respiratory distress syndrome, and a VCAM antagonist to treat asthma, rheumatoid arthritis and multiple sclerosis. The Company may consider licensing certain indications to third parties, although no assurance can be given that the Company will be successful in entering into any such license.
RESEARCH AND DEVELOPMENT COLLABORATIONS AND LICENSING AGREEMENTS
The Company has established collaborations with a number of corporations, research institutions and scientists to further its research and development objectives. These collaborations are generally conducted pursuant to agreements that (i) grant the Company a license to, or the option to license, or (ii) grant other companies the right to develop and market certain technology, patent rights or material that may be valuable to the Company and its collaborators. The Company's major licensing and collaboration agreements are summarized below.
Mitsubishi. TBC has entered into the Mitsubishi Agreement to license Mitsubishi's rights and technology relating to NOVASTAN(R) and to license Mitsubishi's own proprietary technology developed with respect to NOVASTAN(R). Under the Mitsubishi Agreement, the Company has an exclusive license to use and sell NOVASTAN(R) in the U.S. and Canada for all cardiovascular, renal, neurological and immunological purposes other than use for the coating of stents. The Company is required to pay Mitsubishi specified royalties on net sales of NOVASTAN(R) by the Company and its sublicensees after its commercial introduction in the U.S. and Canada. Either party may terminate the Mitsubishi Agreement on 60 days notice if the other party defaults in its material obligations under the agreement, declares bankruptcy or is insolvent, or if a substantial portion of its property is subject to levy. Unless terminated sooner pursuant to the above described termination provisions, the Mitsubishi Agreement expires on the later of termination of patent rights in a particular country or 20 years after first commercial sale of products in a particular country. Under the Mitsubishi Agreement, TBC has access to an improved formulation patent granted in the U.S. in 1993 which expires in 2010 and a use patent in the U.S. which expires in 2009. The Company has agreed to pay a consultant involved in the negotiation of these agreements a royalty based on net sales of products.
SmithKline. In connection with TBC's development and commercialization of NOVASTAN(R), on August 5, 1997, TBC entered into a Product Development, License and CoPromotion Agreement with SmithKline (the "SmithKline Agreement") whereby SmithKline was granted an exclusive sublicense in the U.S. and Canada for the indications of NOVASTAN(R) that TBC has licensed from Mitsubishi. SmithKline paid $8.5 million in upfront license fees during August 1997, a $5 million milestone payment in October 1997, and has agreed to pay up to $15.0 million in additional milestone payments based on the clinical development and FDA approval of NOVASTAN(R) for the HIT, HITTS and AMI indications. Future milestone payments for the AMI indication are subject to SmithKline's agreement to market NOVASTAN(R) for such indication. TBC was responsible for completing the ongoing HIT/HITTS clinical trials, with SmithKline providing 60% of the funding for any additional HIT/HITTS trials (except that SmithKline will pay 100% of the costs of certain Phase IV trials, if such trials are needed). SmithKline will be responsible for the marketing of NOVASTAN(R) in the licensed territory for those indications which SmithKline agrees to develop, subject to TBC's rights to use its own sales force to co-promote NOVASTAN(R) on a profit sharing basis following the regulatory approval of NOVASTAN(R) for an additional major indication beyond HIT.
The parties have also formed a joint development committee to analyze the development of additional NOVASTAN(R) indications (such as AMI and stroke) covered by TBC's license from Mitsubishi to be funded 60% by SmithKline. SmithKline has the exclusive right to commercialize all products arising out of the collaboration, subject to the obligation to pay royalties on net sales to TBC and to the rights of TBC to co-promote these products through its own sales force in certain circumstances. TBC will retain the rights to any indications which SmithKline determines it does not wish to pursue, subject to the requirement that TBC may not grant marketing rights to any third parties and must use its own sales force to commercialize any such indications. Any indications which TBC
and SmithKline elect not to develop will be returned to Mitsubishi, subject to the rights of SmithKline and TBC to commercialize these indications at their election, with SmithKline having the first opportunity to commercialize. Mitsubishi may also request the joint development committee to develop new indications inside or outside the licensed field of use, and if the joint development committee determines that it does not want to proceed with any such indication, all rights under the Mitsubishi Agreement regarding such indication will revert to Mitsubishi subject to the right of SmithKline and TBC to commercialize the indication, with SmithKline having the first opportunity to commercialize. At this time, SmithKline has no plans to conduct development work for the AMI and stroke indications. TBC is evaluating the feasibility of development of NOVASTAN(R) for stroke and possibly AMI.
The SmithKline Agreement generally terminates on a country by country basis upon the earlier of the termination of TBC's rights under the Mitsubishi Agreement, the expiration of applicable patent rights or, in the case of certain royalty payments, the commencement of substantial third-party competition. SmithKline also has the right to terminate the agreement on a country by country basis by giving TBC at least three months written notice, based on a reasonable determination by SmithKline, that the commercial profile of the product in question would not justify continued development or marketing in that country. In addition, either party may terminate the SmithKline Agreement on 60 days notice if the other party defaults in its obligations under the agreement, declares bankruptcy or is insolvent. The Company has agreed to pay an agent involved in the negotiation of the SmithKline Agreement a fee based on a percentage of all consideration received by TBC including royalties.
At present, Mitsubishi is the only manufacturer of NOVASTAN(R), and has entered into the Mitsubishi Supply Agreement with SmithKline to supply NOVASTAN(R) in bulk in order to meet SmithKline's and TBC's needs under the SmithKline Agreement. Should Mitsubishi fail during any consecutive nine-month period to supply SmithKline at least 80% of its requirements, and such requirements cannot be satisfied by existing inventories, the Mitsubishi Supply Agreement provides for the nonexclusive transfer of the production technology to SmithKline. If SmithKline cannot commence manufacturing of NOVASTAN(R) in a timely manner or if alternate sources of supply are unavailable or uneconomic, the Company's results of operations would be materially and adversely affected.
In connection with the execution of the SmithKline Agreement, SmithKline purchased 176,922 shares of TBC's Common Stock for $1.0 million and an additional 400,000 shares of Common Stock for $2.0 million in connection with a public offering which closed on October 1, 1997.
Synthelabo. On October 11, 1994, the Company signed a collaborative agreement with Synthelabo to develop and market compounds for vascular proliferative disease derived from the Company's research programs. Upon consummation of the transaction, Synthelabo purchased 1,428,571 shares of Common Stock for a total of $5.0 million becoming the Company's largest shareholder at that time and paid the Company a non-refundable licensing fee of $3.0 million. During 1997, Synthelabo sold all of the Common Stock. In addition, Synthelabo paid $3.0 million annually in research payments for two years and paid $750,000 for the third year. Synthelabo is not currently paying any research payment pursuant to the agreement. Synthelabo will pay royalties to TBC based on the net sales in those areas covered in the agreement. In exchange for the above consideration, Synthelabo received an exclusive license to manufacture, use, and sell any products generated from the research, in Europe, the Middle East, Africa and the countries of the former Soviet Union.
Synthelabo has the right to terminate the agreement any time on or after October 15, 1997 for any reason and either party has the right to terminate the contract for breach of any material obligation. If Synthelabo exercises this termination right, the license granted to Synthelabo will terminate and TBC will pay Synthelabo a royalty on net sales of any products sold in a certain territory (Europe, Middle East, Africa and countries of the former Soviet Union) for a period of time. In addition, Synthelabo may, at its option, require that the technology be transferred to and the development program be conducted by a joint venture owned by TBC and Synthelabo should TBC's "net worth", as defined in the agreement, be less than $5.0 million as of the end of any calendar quarter during the term of the agreement.
In conjunction with the clinical development of NOVASTAN(R), the Company and Synthelabo, the European licensee, have mutually agreed to exchange certain clinical data from the clinical studies of NOVASTAN(R). In addition, the Company agreed to provide certain data from its studies in exchange for up to $2.92 million as certain
milestones are met of which approximately $2.88 million has been paid. See "--Thrombosis Program--Product Candidate-- NOVASTAN(R)" for a discussion of the clinical trial programs.
LG Chemical. On October 10, 1996, the Company signed a strategic alliance agreement with LG Chemical to develop and market compounds derived from the Company's endothelin receptor and selectin antagonist programs for certain disease indications. Upon consummation of the transaction, LG Chemical purchased 1,250,000 shares of Common Stock for a total of $5.0 million. LG Chemical has committed to pay $10.7 million in research payments. Of this amount, $4.1 million has already been paid, and $1.0 million will be paid on each of June 30 and December 31 of 1999 and 2000, and $1.3 million will be paid on June 30 and December 31, 2001. LG Chemical has the right to terminate these future research payments if TBC fails to meet certain milestones, which milestones will be established by the parties from time to time in accordance with the agreement. LG Chemical will pay royalties to TBC, based on net sales, in those geographic areas covered by the agreement, which include Korea, China, India and certain other Asian countries, excluding Japan. The Company has agreed to pay its agents in the contract negotiations a commission on all consideration received including a royalty on net sales.
TBC TECHNOLOGY
TBC uses a wide variety of technologies to develop pharmaceutical treatments for cardiovascular diseases. The Company applies its understanding of vascular biology and advanced drug design techniques to discover novel therapeutics and to test these therapeutics in-house using in vitro and in vivo test systems. TBC has assembled a team of scientists with expertise in the cultivation of human and animal endothelial and smooth muscle cells, signal transduction in vascular cells, the role of growth factors in blood vessel formation, the molecular biology of vascular cells, the development and production of monoclonal antibodies to various targets, the interaction of white blood cells and endothelial cells and the development of relevant animal models of human disease. TBC believes that its scientists can study the behavior of product candidates at all stages of development, from isolated biochemical assays to whole cells, to intact animals and ultimately, to humans.
To aid in the rapid discovery of novel drugs, TBC has developed an integrated approach which may allow TBC to discover a broader class of drug candidates more quickly and at a lower cost than is possible through other current structure-based discovery methods. For example, TBC has developed a number of proprietary, highly potent, orally active non-peptide ETA and ETB receptor antagonists. These compounds have no chiral centers, are easily scaleable, and may be synthesized in a small number of chemical steps. TBC has also generated proprietary low molecular weight, small molecule inhibitors of E-, P-, and L-selectin, potent peptide and small molecule VCAM/VLA-4 inhibitors, FGF antagonists and vascular endothelial growth factor antagonists.
TBC uses a number of proprietary and non proprietary components including, Rational Drug Design, Random Library and Selected Library High Throughput Screening and Virtual Libraries/Focused Compound Libraries to support its drug development programs.
LICENSES AND PATENTS
Because of the substantial length of time and expense associated with developing new pharmaceutical products, the biotechnology industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. The Company's policy is to file patent applications to protect technology, inventions and improvements that are important to the development of its business. The Company has 14 pending U.S. patent applications (2 of which have been allowed) and 15 issued U.S. patents covering compounds including selectin inhibitors, endothelin antagonists and VCAM/VLA-4 antagonists. In addition, the Company has exclusive licenses to three patents covering rational drug design technology. The Company has also filed patent applications in certain foreign jurisdictions covering projects that are the subject of U.S. applications and intends to file additional patent applications as its research projects develop. The Company licensed the U.S. and Canadian rights to NOVASTAN(R) in 1993, which included access to an improved formulation patent granted in 1993 which expires in 2010 and a use patent which expires in 2009. If any of the NOVASTAN(R) patents remain outstanding at the time NOVASTAN(R) receives FDA approval, the Company may apply, under the Waxman/Hatch Act, for up to a five-year extension of one such patent. If all such patents have expired at the time NOVASTAN(R) receives FDA approval, the Waxman/Hatch Act will grant the Company NDA exclusivity for up to five years, during which time
the FDA may not accept or approve abbreviated applications for generic variations of NOVASTAN(R). Although the Company believes that the expiration of the NOVASTAN(R) patents will not have a material adverse effect on the commercialization of NOVASTAN(R), there can be no assurance that the Company will be able to take advantage of either the patent term extension or NDA exclusivity provisions of the Waxman/Hatch Act. Moreover, even if the Company receives either a patent term extension or NDA exclusivity, there can be no assurance that generic pharmaceutical manufacturers will not ultimately enter the market and compete with the Company.
The patent positions of biopharmaceutical firms, including the Company, are uncertain and involve complex legal and factual questions. Consequently, the Company does not know whether any of its applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the U.S. are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it was the first creator of inventions covered by its pending patent applications or that it was the first to file patent applications for such inventions. Moreover, the Company may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office ("PTO") to determine priority of invention, which could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. TBC has one interference proceeding pending which involves compounds not currently of commercial interest to TBC. There can be no assurance that the Company's patents, if issued, would be held valid by a court of competent jurisdiction. An adverse outcome could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from third parties or require the Company to cease using such technology.
The development of therapeutic products for cardiovascular applications is intensely competitive. Many pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in this field. Some of these applications or patents may be competitive with the Company's applications or conflict in certain respects with claims made under the Company's applications. Such conflict could result in a significant reduction of the coverage of the Company's patents, if issued. In addition, if patents are issued to other companies that contain competitive or conflicting claims and such claims are ultimately determined to be valid, no assurance can be given that the Company would be able to obtain licenses to these patents at a reasonable cost or develop or obtain alternative technology.
The Company also relies upon trade secret protection for its confidential and proprietary information. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its trade secrets.
The Company requires its employees, consultants, members of its scientific advisory board, outside scientific collaborators and sponsored researchers and certain other advisors to enter into confidentiality agreements with the Company that contain assignment of invention clauses. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with the Company is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the employee are the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for the Company's trade secrets in the event of unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and other countries will be a significant factor in the production and marketing of any products which may be developed by the Company. The nature and extent to which such regulation may apply to the Company will vary depending on the nature of the specific product. Virtually all of the Company's products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA and similar health authorities in foreign countries. Various federal statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations requires the expenditure of substantial resources.
The effect of government regulation may be to delay for a considerable period of time or prevent the marketing of any product that the Company may develop and/or to impose costly procedures on the Company's activities, the result of which may be to furnish an advantage to the Company's competitors. Any delay in obtaining or failure to obtain such approvals would adversely affect the marketing of the Company's products and its ability to earn product revenue.
In order to perform clinical tests and to produce and market products for diagnostic or therapeutic use, a company must comply with mandatory procedures and safety standards established by the FDA, the Health Protection Branch in Canada, and comparable agencies in foreign countries. The FDA requires that before beginning human clinical testing of a potential new drug, a company must file an IND and receive its concurrence. This application is a summary of the preclinical studies that were conducted to characterize the drug, including toxicity and safety studies, as well as an in-depth discussion of the human clinical studies which are being proposed.
The pre-marketing program required for approval of a new drug typically involves a time-consuming and costly three-phase process. In Phase I, trials are conducted with a small number of patients to determine a drug's early safety profile, the pattern of its distribution and metabolism. In Phase II, trials are conducted with groups of patients afflicted with a target disease in order to determine a drug's preliminary efficacy and optimal dosages and to expand evidence of safety. In Phase III, large scale, multi-center comparative trials are conducted with patients afflicted with a target disease in order to provide enough data for statistical proof of efficacy and safety required by the FDA and others. The FDA closely monitors the progress of each of the three phases of clinical testing and may, in its discretion, reevaluate, alter, suspend or terminate the testing based on the data that have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. Upon completion of such clinical testing, a company typically submits a NDA to the FDA that summarizes the results and observations of the drug during the clinical testing. An NDA prefiling submission of the Chemistry, Manufacturing and Control section may be made prior to the data and other sections of the NDA. Based on its review of the NDA, the FDA will decide whether or not to approve the drug. This review process can be quite lengthy, and approval for the production and marketing of a new pharmaceutical product can require a number of years and substantial funding. There can be no assurance that any approvals will be granted on a timely basis, if at all.
Once the sale of a product is approved for marketing, FDA regulations govern the production process and marketing activities, and a post-marketing testing and surveillance program may be required to continuously monitor a product's usage and effects. Product approvals may be withdrawn if compliance with regulatory standards is not maintained. Other countries in which any products developed by the Company may be marketed impose a similar regulatory process.
COMPETITION
General. The development and sale of new drugs for the treatment of vascular diseases is highly competitive and the Company will face intense competition from major pharmaceutical companies and biotechnology companies worldwide. Competition may increase as a result of advances made in the commercial applicability of technologies and greater availability of capital for investment in these fields. Companies that complete clinical trials, obtain required regulatory approvals and commence commercial sales of their products before their competitors may achieve a significant competitive advantage. In addition, significant research in biotechnology and vascular medicine may occur in universities and other nonprofit research institutions. These entities have become increasingly active in seeking patent protection and licensing revenues for their research results. They also compete with the Company in recruiting talented scientists.
TBC has developed a competitive process for expediting rational drug design. A number of other biopharmaceutical companies use rational drug design as part of their effort to identify novel pharmaceutical agents. TBC believes that its drug-design process could lead to more rapid lead drug candidate identification.
The Company believes that its ability to compete successfully will depend on its capability to create and maintain scientifically-advanced technology, develop proprietary products, attract and retain scientific personnel, obtain patent or other protection for its products, obtain required regulatory approvals and manufacture and successfully market products either alone or through other parties. Many competitors have substantially greater financial, marketing, and human resources than those of the Company. The Company expects to encounter significant competition.
NOVASTAN(R). Primary competitors for NOVASTAN(R) in the intravenous heparin replacement market are initially expected to be bivalirudin, Revasc(R) (desirudin) and Refludan(R) (lepirudin), manufactured by The Medicines Co., Rhone Poulenc Rorer ("RPR") and Hoechst Marion Roussel ("HMR"), respectively. Bivalirudin and Revasc(R) have completed Phase III clinical trials. Refludan(R) has received approval in Europe and the U.S for HIT.
Biogen, the originator of bivalirudin, has completed a large Phase III trial on bivalirudin which demonstrated improved safety versus heparin but only equal efficacy. As a result of this study, Biogen halted development of bivalirudin and outlicensed the compound earlier in 1997 to The Medicines Co. The Company anticipates bivalirudin will have a relatively high cost of goods. An improved manufacturing process for bivalirudin with a lower cost of goods has been reported, and may become a competitive factor should the product be approved for marketing. Bivalirudin has been submitted to the FDA for approval for use in percutaneous transluminal coronary angioplasty ("PTCA") based on the previous Phase III trial. On October 26, 1998, an FDA advisory committee declined to recommend approval of bivalirudin for PTCA.
A hirudin compound, Refludan(R) (lepirudin), from HMR has received approval in Europe and the U.S. for HIT. On March 11, 1998, HMR received marketing clearance for Refludan(R) in the U.S. Refludan(R) is also in development as an adjunct to thrombolytic therapy in AMI. Another hirudin compound, Revasc(R), from RPR has been studied in two large Phase III trials for AMI and unstable angina. Both trials, TIMI-9 and GUSTO II, were halted in late 1994 due to increased hemorrhagic stroke. Both trials resumed with reduced Revasc(R) dosing. The bleeding complications with Revasc(R) may handicap the product in the marketplace. As a result, development of Revasc(R) for acute coronary syndrome has been halted. Revasc(R) has received marketing clearance in Europe for use in deep venous thrombosis. A third hirudin compound, pegylated-hirudin from Knoll AG ("Knoll") has begun Phase II development in acute coronary syndromes.
If any of the first generation hirudin-like compounds obtain regulatory approval in the U.S. or Canada prior to NOVASTAN(R), these drugs may gain a competitive advantage. Other compounds which may be competitive with NOVASTAN(R) include napsagatran from Hoffmann-La Roche, Inc. and inogatran and malagatran from Astra Pharmaceuticals. These compounds are very similar to NOVASTAN(R) and could have similar pharmacologic profiles. Napsagatran is in Phase II trials for various indications including unstable angina. Inogatran has been tested in a Phase II trial for unstable angina. Malagatran is in early clinical development.
A defibrinogenating snake venom, viprinex from Knoll may be submitted for approval to the FDA for acute ishemic stroke in the near future. The drug may also be submitted to the FDA for HIT.
Low Molecular Weight Heparins ("LMWH") are newer forms of heparin and are used in prophylaxis for deep vein thrombosis following orthopedic surgery. Most LMWH's also carry an immunological risk for precipitating HIT, and are contraindicated as therapy in patients with HIT. A low molecular weight heparinoid, Orgaran (danaparoid) from Organon, Inc. has been approved for deep vein thrombosis. Organon, Inc. has conducted trials with this drug in HIT, and an FDA filing for HIT may occur in the future.
Endothelin Receptor Antagonist. TBC11251 is a small molecule ETA receptor antagonist in Phase II clinical development. A number of other companies including Abbott Laboratories ("Abbott"), Knoll, Bristol-Meyers Squibb and Zeneca Pharmaceuticals have ETA receptor selective antagonist compounds in Phase I/II clinical development. ETA receptor-selective compounds from Abbott and Knoll are in early Phase II development in indications of interest to TBC. The Company believes its compounds are competitive with those from the other companies in terms of bioavailability, half-life and potency.
Selectin Antagonist. TBC1269 is a small molecule selectin antagonist in Phase II clinical development. Cytel Corporation has developed Cylexin(R), a carbohydrate selectin antagonist in development for inflammatory disease targets. This compound has recently completed Phase IIa trials for coronary reperfusion injury. Although the results of these trials may negatively impact one of the TBC potential indications (coronary reperfusion injury), the results should have no impact on TBC1269's primary indication, asthma. Cytel is currently studying Cylexin(R) in neonatal coronary reperfusion injury and the compound is in Phase II/III development. The Company believes TBC1269 to have advantages over Cylexin(R) in terms of potency and cost of manufacture. Competitive drugs for acute asthma include intravenous steroids such as Solu-Medrol(R). In spite of known side effects and delay in onset, intravenous steroids are available generically and, as such, represent substantial price competition. As for inhaled treatments for chronic asthma, inhaled steroids, cromones (Tilade(R), Intal(R), etc.) and the leukotriene inhibitors including Zyflow(R), Accolate(R) and Singulair(R) represent potential chronic immunomodulator competition.
MANUFACTURING AND MARKETING
TBC relies on its internal resources and third-party manufacturers to produce compounds for preclinical development. Currently, the Company has no manufacturing facilities for either the production of biochemicals or the manufacture of final dosage forms. The Company believes small molecule drugs are less expensive to manufacture than protein-based therapeutics, and that all of its existing compounds can be produced using established manufacturing methods, including traditional pharmaceutical synthesis.
TBC has established supply arrangements with third-party manufacturers for certain clinical trials and will establish supply arrangements ultimately for commercial distribution, although there can be no assurance that such arrangements will be established on reasonable terms. The Company's long-range plan may involve establishing internal manufacturing of small molecule therapeutics, including the ability to formulate, fill, label, package and distribute its products. Under certain circumstances the Company plans to outsource such manufacturing; however, the Company does not anticipate developing an internal manufacturing capability for some time, nor is it able to determine which of its potential products, if any, will be appropriate for internal manufacturing. The primary factors the Company will consider in making this determination are the availability and cost of third-party sources, the expertise required to manufacture the product and the anticipated manufacturing volume. Pursuant to the SmithKline Agreement, SmithKline has entered into the Mitsubishi Supply Agreement regarding the manufacture and supply of NOVASTAN(R), and the Company will not have any direct responsibility regarding the manufacture and supply of NOVASTAN(R) as it relates to the SmithKline Agreement. See "--Research and Development Collaborations and Licensing Agreements."
TBC intends to market products for which it gains approval either directly or through co-promotion or other licensing arrangements with large pharmaceutical, biopharmaceutical or biotechnology companies. NOVASTAN(R) will be initially commercialized by SmithKline through a collaboration. In the future, the Company also plans to establish (i) a targeted, hospital-based sales force to sell its compounds and (ii) strategic partner relationships for non-strategic products and for customer groups outside TBC's targeted markets or, in some cases, to co-promote in such markets with partners to optimize the value of its products.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
The Company's research and development activities involve the controlled use of hazardous and radioactive materials. The Company is subject to federal, state, and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Management believes that the Company is in compliance with such laws, regulations and standards currently in effect and that the cost of compliance with such laws, regulations, and standards will not have a material adverse effect on the Company. The Company does not expect to incur any material capital expenditures for environmental control in the foreseeable future.
HUMAN RESOURCES
As of December 31, 1998, TBC employed 84 individuals. TBC had 69 employees engaged directly in research and development activities and 15 in general and administrative positions. None of the Company's employees is represented by a labor union. The Company has experienced no work stoppages and believes that its relations with its employees are good.
The Company's policy is to have each employee enter into a confidentiality agreement which contains provisions prohibiting the disclosure of confidential information to anyone outside the Company and requiring disclosure to the Company of ideas, developments, discoveries or inventions conceived during employment and assignment to the Company of proprietary rights to such matters related to the business and technology of the Company.
TBC's success is highly dependent on its ability to attract and retain qualified scientific and management personnel. In order to commercialize its products, the Company may need to substantially expand its personnel, particularly in the areas of clinical trial management, manufacturing, sales and marketing. The Company faces intense competition for such personnel from other companies, academic institutions, government entities and other organizations. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel.
SCIENTIFIC ADVISORY BOARD AND CONSULTANTS
The Company has assembled a Scientific Advisory Board composed of distinguished professors from some of the most prestigious medical schools. The Scientific Advisory Board is assisting the Company in identifying research and development opportunities, in reviewing with management the progress of the Company's projects and in recruiting and evaluating scientific staff. Although the Company expects to receive guidance from the members of its Scientific Advisory Board, all of its members are employed on a full-time basis by others and, accordingly, are able to devote only a small portion of their time to the Company. Management expects to meet with its Scientific Advisory Board members as a group at least once each year and individually from time to time on an informal basis. Each of the members of the Scientific Advisory Board has entered into a consulting agreement with the Company. The Scientific Advisory Board includes James T. Willerson, M.D., as Chairman, and the following scientists.
Morris J. Karnovsky, M.D. has served since 1972 as Shattuck Professor of Pathological Anatomy at Harvard Medical School, where he was Chairman of the Program in Cell and Developmental Biology from 1975 to 1989. Dr. Karnovsky received the E.B. Wilson Award from the American Society for Cell Biology and was inducted into the Institute of Medicine by the National Academy of Sciences in 1991. In 1984, Dr. Karnovsky was elected to serve as President of the American Society for Cell Biology. He is a member of numerous professional and honorary societies, editorial boards and is the author or co-author of more than 275 scientific articles.
Ferid Murad, M.D., Ph.D. is Professor and Chairman of the Department of Integrative Biology and Pharmacology at the University of Texas-Houston Medical School and the Director of the Institute of Molecular Medicine. Dr. Murad has received many honors including the Nobel Prize in Medicine in 1998, Ciba Award in 1988 and the Albert and Mary Lasker Award in Basic Medical Research in 1996. He is also a member of many professional and honorary societies and is the author or co-author of more than 300 scientific articles.
Joseph F. Sambrook, Ph.D. is a Professor of Pathology at Melbourne University, Australia and Director of Research at Peter MacCallum Cancer Institute. He is a member of various honorary and professional societies, editorial boards and is the author of more than 150 scientific articles. Professor Sambrook previously worked for 20 years in the U.S. where he served on many blue ribbon government and non-government committees.
Ajit Varki, M.D. has been a Professor of Medicine since 1991 and is currently serving in that position as well as leader of the glycobiology program at the University of California, San Diego. Dr. Varki served as Instructor in Medicine at Washington University School of Medicine from 1980 to 1982. He also served as Assistant Professor of Medicine from 1982 to 1987 and as Associate Professor of Medicine from 1987 to 1991 at the University of California, San Diego. In 1975, Dr. Varki received an M.D. from Christian Medical College and his Post-Doctorate
in Biochemistry from Washington University from 1979 to 1982. He is a member of various professional societies and has won numerous awards since 1969. He is currently president of the American Society for Clinical Investigation. Dr. Varki is the author or co-author of 160 scientific publications.
Dr. Denton Cooley, Surgeon-in-Chief of the Texas Heart Institute, acts as an advisory director to the Company.
The Company also has agreements with various outside scientific consultants who assist the Company in formulating its research and development strategy. All of the Company's consultants and advisors are employed by employers other than the Company and may have commitments to or consulting or advisory contracts with other entities that may affect their ability to contribute to the Company.
ITEM 2.
ITEM 2. PROPERTIES
TBC leases 29,300 square feet of office and laboratory space in Houston, Texas, including a 16,671 square foot laboratory facility and a 3,909 square foot animal facility. The remaining area is being used for clinical development and administrative offices, storage space and additional offices for scientists. The Company signed a letter of intent to lease approximately 8,591 square feet of additional space within its building to begin during 1999. The Company's lease expires in December 2000 and includes a renewal option. The Company may require additional space to accommodate future research and laboratory needs as necessary to bring products into development and clinical trials and has an option on additional space in its present facility. The Company believes that these facilities are adequate for its present needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On November 21, 1994, a class action shareholders' suit was filed in the United States District Court for the Southern District of Texas, Houston Division seeking damages in the amount of $16 million. Plaintiffs are two individuals who purchased shares of the Company on December 16, 1993 following the Company's initial public offering ("IPO"). In their complaint, plaintiffs have sued the Company, certain members of the board of directors and certain officers alleging violations of Sections 11, 12 and 15 of the Securities Act of 1933, as amended (the "Act"). Plaintiffs have also named David Blech, D. Blech & Co. and Isaac Blech as defendants. On January 23, 1995, the Company and the members of the board of directors filed a motion to dismiss the plaintiffs' complaint pursuant to Rule 9(b) and Rule 12b(6) of the Federal Rules of Civil Procedure. In addition, defendant John Pietruski, Chairman of the Board of Directors, filed a motion to dismiss the plaintiffs' complaint pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure. The Court denied the motion by the Company and by John Pietruski.
On March 28, 1995, a second class action shareholders' suit was filed in the United States District Court for the Southern District of New York seeking unspecified damages. Plaintiffs are eight individuals who purchased shares in various companies for which D. Blech & Co. acted as an underwriter (or co-underwriter) or marketmaker. In their complaint, the plaintiffs have sued the Company alleging violations of Section 10(b) of the Securities Exchange Act of 1934, as Amended (the "Exchange Act") and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (the "Commission"). Plaintiffs named a number of defendants, including David Blech and D. Blech & Co., four individuals, two brokerage firms, one investment management company and ten other companies for which D. Blech & Co. acted as underwriter or marketmaker. On June 6, 1996, the Court dismissed all of the Exchange Act and common law fraud claims filed against the Company and its officers and directors, but afforded those plaintiffs the right to attempt to preserve those claims by repleading them. The Court ordered that those claims be repleaded no later than July 26, 1996. Plaintiffs did not replead those claims by the deadline, resulting in the dismissal of all claims against the Company in this litigation.
On August 14, 1995, the Judicial Panel on Multi-District Litigation ordered that the action filed in the United States District Court for the Southern District of Texas, Houston Division be transferred to the United States District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings with the related actions pending there. In light of the transfer and consolidation, the Company requested that the New York Court reconsider the Texas Court's denial of its motion to dismiss as a part of the Court's consideration of similar motions to dismiss filed by the other defendant companies for which D. Blech & Co. acted as underwriter. All of these
motions were presented to the Court on February 6, 1996. On June 6, 1996, the New York Court granted the Company's and its officers' and directors' motion for reconsideration, but together with all other similar pending motions, denied the requested relief. Pursuant to the court's order, the Company therefore filed an answer in the case. The Company also filed a Motion seeking leave of court to prosecute an immediate appeal of the Court's denial of the Company's Motion to Dismiss. The Court heard argument on that Motion on October 10, 1996. The motion was denied on January 16, 1997. On February 3, 1999, the New York Court certified the action as a class action. The Company is unable to evaluate its potential outcome at this time. The Company disputes these claims and intends to contest them vigorously. There can be no assurance, however that the final disposition of this case will be favorable to the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of TBC's stockholders during the fourth quarter of its fiscal year ended December 31, 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock and redeemable Common Stock purchase warrants trade separately on the AMEX under the symbols TXB and TXB.WS, respectively.
As of March 19, 1999 there were approximately 557 holders of record of Common Stock of the Company and approximately 11,000 beneficial holders. In addition, there were approximately 18 holders of record of the Public Warrant and approximately 1,700 beneficial holders. The Company has never paid dividends and does not anticipate paying any cash dividends in the foreseeable future. The Company intends to retain any future earnings and capital for use in its business.
RECENT SALES OF UNREGISTERED SECURITIES
Previously reported in Form 10-Qs.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of and for each of the fiscal years in the five-year period ended December 31, 1998 and are derived from the Company's audited financial statements. These selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto.
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(1) For information concerning calculation of net loss per share, see Note 1(g) of Notes to Consolidated Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1989, the Company has primarily devoted its resources to fund drug discovery research and development. The Company has been unprofitable to date and expects to incur substantial losses for the next several years as the Company invests in product research and development, preclinical and clinical testing and regulatory compliance. The Company has sustained net losses of approximately $84.6 million from inception to December 31, 1998. The Company has primarily financed its operations to date through certain private placements of Common Stock and shareholder loans, which have raised an aggregate of $21.3 million in net proceeds, the IPO which raised an aggregate of $24.2 million in net proceeds including the over-allotment sold in January 1994, a private placement of Common Stock on February 13, 1996, which raised $13.0 million in net proceeds, a private placement of 5% Preferred Stock on March 14, 1997, which raised approximately $6.0 million in net proceeds, and a secondary public offering which closed during October 1997 and raised approximately $26.7 million in net proceeds.
On July 25, 1994, the Company acquired all of the outstanding stock of IPI in exchange for 1,599,958 shares of Common Stock, 999,956 shares of escrowed Common Stock which were released upon satisfaction of certain research milestones, and contingent stock issue rights to acquire 1,400,000 shares of which 399,961 shares were issued upon satisfaction of certain research milestones. IPI's financial results have been included in the Company's financial statements beginning August 1, 1994. In March 1996, IPI's remaining operations in California were consolidated with the Company's Houston operations.
The Company signed a collaborative agreement with Synthelabo on October 11, 1994. Upon consummation of the transaction, Synthelabo purchased 1,428,571 shares of Common Stock for a total of $5.0 million and paid a licensing fee of $3.0 million. In addition, Synthelabo paid $3.0 million annually in research payments for two years and paid $750,000 for the third year. During 1996, TBC signed agreements with Synthelabo to provide copies of certain NOVASTAN(R) clinical data. Over the life of the agreements TBC may receive as much as $2.92 million, of which $2.88 million has been received as of December 31, 1998.
During October 1996, the Company executed a research and Common Stock purchase agreement with LG Chemical. LG Chemical purchased 1,250,000 shares of Common Stock for $5.0 million and committed to pay up to $10.7 million over a five year period to develop two compounds in clinical development. Of this amount, $4.1 million has been paid and $1.0 million will be paid on each of June 30 and December 31, of 1999 and 2000, and $1.3 million will be paid on June 30 and December 31, 2001.
In August 1997, the Company entered into the SmithKline Agreement whereby SmithKline was granted exclusive rights to work with TBC in the development and commercialization of NOVASTAN(R) in the U.S. and Canada for specified indications. Upon execution of the agreement, SmithKline paid an $8.5 million license fee and during October 1997, paid a $5 million milestone payment to TBC and has committed to pay up to a total of $15.0 million in additional milestone payments based on the clinical development and FDA approval of NOVASTAN(R) for the indications of HIT, HITTS and AMI. Future milestone payments for the AMI indication are subject to SmithKline's agreement to market NOVASTAN(R) for such indication. In connection with the SmithKline Agreement, SmithKline purchased 176,922 shares of Common Stock for $1.0 million and an additional 400,000 shares of Common Stock for $2.0 million in conjunction with the Company's public offering which closed during October, 1997. At this time, SmithKline has no plans to conduct development work for the AMI and stroke indications. TBC is evaluating the feasibility of development of NOVASTAN(R) for stroke and possibly AMI.
The Company's operating results have fluctuated significantly during each quarter, and the Company anticipates that such fluctuations, largely attributable to varying research and development commitments and expenditures, will continue for the next several years.
RESULTS OF OPERATIONS
Revenues were $2,251,681, $16,907,780 and $5,405,776 during 1998, 1997 and 1996, respectively. For the years 1997 and 1996, respectively, revenues included $7,500 and $8,939 of product sales from the Company's subsidiary IPI. For the years 1998, 1997 and 1996, revenues also included $2,251,681, $16,900,280 and $5,395,110 from research agreements, commercialization agreements and collaborations with various other companies. Revenues from research agreements in 1998 includes research payments from LG Chemical, in 1997 includes research payments from LG Chemical, a license fee of $8,500,000 and a milestone payment of $5,000,000 and in 1996 includes $2.6 million in research payments from Synthelabo and $2.3 million for data supplied to Synthelabo. Interest income was $2,087,707, $1,122,900 and $898,039, for the years 1998, 1997 and 1996, respectively. Interest income for the year 1998 was significantly higher over 1997 and 1996 due to investment of funds received in conjunction with the SmithKline Agreement and a secondary public offering of common stock completed in October 1997. Research and development expenses decreased 16% from $16,833,135 in 1997 to $14,122,671 in 1998 and decreased 24% from $22,251,895 in 1996 to $16,833,135 in 1997. The decrease from 1997 to 1998 was due primarily to reduced spending for clinical trials for NOVASTAN(R) that were completed in 1998 and one-time charges during 1997 associated with the license of NOVASTAN(R). The decrease from 1996 to 1997 was primarily due to the decrease in expenses related to the clinical trials of NOVASTAN(R).
Non cash charges for the purchase of in-process research and development decreased from $1,075,191 in 1997 to $133,875 in 1998 because of Common Stock issued pursuant to the NOVASTAN(R) license agreement and a research collaboration agreement signed in 1998, respectively.
In 1996 the Company charged $421,165 to expense for costs related to restructuring IPI.
General and administrative expenses decreased 20% from $5,759,792 in 1997 to $4,597,014 in 1998 and increased 42% from $4,067,505 in 1996 to $5,759,792 in 1997. The decrease in 1998 from 1997 and increase in 1997 over 1996 was primarily because of a $952,919 noncash charge related to the 1997 extension of the exercise period for certain stock options and an increase in 1997 legal fees related to patent applications for TBC's compounds.
Rent and related building services, which is a component of both research and development and general and administrative expense, was approximately $958,000 in 1998, $956,000 in 1997 and $1,025,000 in 1996. The decrease of approximately $69,000 in 1997 from 1996 was primarily due to the consolidation of IPI into TBC and the termination of the lease for the IPI facility.
The Company incurred net losses applicable to common shares of $14,515,862, $6,788,467 and $20,436,750 for the years ended December 31, 1998, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its research and development activities to date principally through (i) public offerings and private placements of its equity securities, (ii) issuances of Common Stock in conjunction with acquisitions and research and collaboration agreements and exercises of stock options and warrants, (iii) license fees and milestone and research payments received in conjunction with research and collaborative agreements, and (iv) investment income, net of interest expense. During 1998, the Company utilized net cash of $13,951,755 in operating activities. The use of cash in operations was caused primarily by the Company's net loss. Investing and financing activities primarily reflect the utilization of $5,925,269 in net proceeds from the 1997 private placement of the preferred stock and $26,687,521 in net proceeds from the secondary public offering of Common Stock, net of purchases and redemptions of short term investments during 1998. In addition, $1,415,640 was provided by exercise of warrants and stock options. At December 31, 1998, the Company had cash, cash equivalents, short-term investments and long-term investments of $30,376,002.
The Company expects to incur substantial research and development expenditures as it designs and develops small molecule drugs for vascular diseases. The Company anticipates that operating expenses may increase during 1999 and subsequent years. The Company began to incur costs to develop NOVASTAN(R) during the third quarter of 1993. These costs will continue during 1999 due to expenses associated with the amendment of the new drug application with the FDA for NOVASTAN(R) and costs associated with additional clinical and regulatory work being completed for NOVASTAN(R). The Company also began incurring clinical trial costs in 1997 for the compounds TBC11251 and TBC1269 and is continuing its clinical trials for these compounds during 1999. In 1999, the Company expects to begin to incur costs for clinical trials related to additional compounds. These costs include, among other things, hiring personnel to direct and carry out all operations related to the clinical trials, hospital and procedural costs, services of a contract research organization and purchasing and formulating large quantities of the compound to be used in such trials. In addition, the Company anticipates that the administrative costs associated with this effort will be significant. The amounts and timing of expenditures will depend on the progress of the Company's ongoing research, clinical development and commercialization efforts.
The Company anticipates that its existing capital resources, research payments from LG Chemical and its other revenue sources should be sufficient to fund its cash requirements through the second quarter of the year 2000. This date is contingent upon various factors, including the rates of patient enrollment and spending associated with the development and commercialization of NOVASTAN(R), the level of research, development and clinical trial expenditures for TBC11251, TBC1269 and other compounds, results of clinical trials, the costs and timing of regulatory approvals (including NOVASTAN(R)), the success of sales and marketing efforts for NOVASTAN(R), if approved by the FDA, the exercise of the Company's publicly traded warrants, if any, which expire on September 30, 1999 and are presently not "in the money", and the timing and terms of future corporate collaborations, if any, entered into by the Company. If the Company does not receive timely FDA approval for NOVASTAN(R), or such approval is significantly delayed or if NOVASTAN(R) cannot be successfully marketed after FDA approval, the Company will need to re-examine the use of its existing capital resources. No assurances can be given that the Company will be able to continue its research and development programs at currently anticipated levels. Moreover, TBC's agreement with Synthelabo requires the Company to maintain a "net worth", as defined in the agreement, of at least $5.0 million during the term of the agreement. If the Company fails to maintain at least $5.0 million of "net worth", Synthelabo may require that the technology, as defined in the agreement, be transferred to, and the development program be conducted by, a joint venture owned by TBC and Synthelabo. The outcome of certain lawsuits that have been filed against the Company could also have an impact on liquidity. See Part I, Item 3. Legal Proceedings.
The Company anticipates that it may need to raise substantial funds for future operations through collaborative arrangements, public or private issuance of debt and equity, or other arrangements. These financings could result in the issuance of equity securities which dilute the existing holders of the Company's Common Stock. The Company expects that as additional product candidates enter clinical trials, the Company may incur increased expenditures for laboratory space, scientific and administrative personnel, and services of contract research organizations. There can be no assurance that the Company will be able to obtain such additional financings or establish corporate collaborations on acceptable terms or in time to fund its research and development programs. It is likely that the Company's ability to raise additional funds will be adversely affected by unfavorable results of its clinical trials and the failure to obtain regulatory approvals for its product candidates, including NOVASTAN(R). In the event such financing is not obtained, the Company's drug discovery or development programs may be delayed, scaled back or eliminated. The Company may also be required in this event to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that it would not otherwise relinquish.
IMPACT OF INFLATION AND CHANGING PRICES
The pharmaceutical research industry is labor intensive, and wages and related expenses increase in inflationary periods. The lease of space and related building services for the Houston facility contains a clause that escalates rent and related services each year based on the increase in building operating costs and the increase in the Houston Consumer Price Index, respectively. To date, inflation has not had a significant impact on the operations of the Company.
YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer equipment, software and other devices with imbedded technology that are time-sensitive, such as computer systems, related software, research equipment, alarm systems and telephone systems may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, temporary inability to process data, and may materially impact the Company's financial condition.
The Company has undertaken various initiatives intended to ensure that it is prepared for the Y2K issue. The Company is in the process of assessing its state of readiness. Presently, the Company has reviewed its scientific equipment, computer systems and related software to identify systems which may exhibit Y2K issues. This review was performed by internal teams from various disciplines within the Company. These teams evaluated the Company's equipment, computer systems and software for Y2K issues and is currently performing testing to insure proper operation after January 1, 2000. If necessary, specific remediation plans will be developed for non-compliant items after testing is completed. As a part of this review the Company will determine the known risks related to the consequences of a failure to correct any Y2K deficiencies. The Company has initiated formal communications with material third parties to determine the extent to which the Company may be vulnerable to those third parties' failure to remediate their Y2K problems. The Company and its licensee, SmithKline Beecham plc are dependent upon Mitsubishi Chemical Corporation for supply of bulk NOVASTAN(R) for clinical trial material and for its inventory needs should the FDA approve the compound for marketing. The Company has received communication from Mitsubishi Chemical Corporation which states that it has undertaken to become Y2K compliant. Any Y2K issues which would result in significant interruptions of delivery schedules could have a material effect on the Company's operations. However, the Company is presently not aware of any Y2K issues that have been encountered by any third party, which could materially affect the Company's operations.
The Company has developed a contingency plan to address potential Y2K issues. This contingency plan addresses problems that the Company may encounter after January 1, 2000 and will be updated to include issues identified during the course of its remediation efforts and reasonably foreseeable problems that may arise as a result of Y2K, including, but not limited to computer hardware and software and research equipment. The contingency plan will be continually refined as additional information becomes available. However, it is unlikely that any contingency plan can fully address all events that may arise.
The Company estimates that the costs associated with the Y2K issue will not be material, and as such will not have a significant impact on the Company's financial position or operating results. The Company's current estimate of Y2K remediation costs is approximately $50,000 which may be revised should other remediation costs be discovered in the review of Y2K issues. However, the failure to discover or correct a material Y2K problem could result in an interruption in the Company's normal business activities or operations. Such failure could materially and adversely affect the Company's results of operation, liquidity and financial condition.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company required to be included in this Item 8 are set forth in Item 14 of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
(1) Member, Executive Committee of the Board of Directors
(2) Member, Compensation and Personnel Committee of the Board of Directors
(3) Member, Audit Committee of the Board of Directors
The additional information requested by this item will be contained in the Company's definitive Proxy Statement ("Proxy Statement") for its 1999 Annual Meeting of Stockholders to be held on May 4, 1999 and is incorporated by reference from the sections titled "Election of Directors" and "Other Information - Executive Officers and - Section 16(a) Beneficial Ownership Reporting Compliance". Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to December 31, 1998.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information requested by this item is incorporated by reference from the section titled "Other Information Executive Compensation" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 4, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information requested by this item is incorporated by reference from the section titled "Other Information Principal Stockholders" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 4, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information requested by this item is incorporated by reference from the sections titled Other Information Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 4, 1999.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements, the reports thereon, and the notes thereto commencing at Page of this Annual Report on Form 10-K. Set forth below is an index to such Financial Statements and Schedules.
2. INDEX TO EXHIBITS
Information with respect to this Item is contained in the attached Index to Exhibits.
The Company will furnish a copy of any one or more of these exhibits to a shareholder who so requests upon receipt of payment for the cost of duplication and mailing the requested items.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
All schedules have been omitted since the information is not required or is not material to require submission of the schedule, or because the information is included in the financial statements or notes thereto.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON AND STATE OF TEXAS ON THE 25TH DAY OF MARCH, 1999.
TEXAS BIOTECHNOLOGY CORPORATION
By: /s/ STEPHEN L. MUELLER --------------------------------------------- Stephen L. Mueller Vice President, Finance and Administration, Secretary and Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS AND IN THE CAPACITIES INDICATED ON THE 25TH DAY OF MARCH, 1999.
INDEPENDENT AUDITORS' REPORT
The Board of Directors Texas Biotechnology Corporation:
We have audited the accompanying consolidated balance sheets of Texas Biotechnology Corporation and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Texas Biotechnology Corporation and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles.
KPMG LLP
Houston, Texas February 12, 1999
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
See accompanying notes to consolidated financial statements.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
See accompanying notes to consolidated financial statements.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
See accompanying notes to consolidated financial statements.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Texas Biotechnology Corporation (the "Company" or "TBC"), a biopharmaceutical company, applies innovative drug discovery techniques and its specialized knowledge of the role of vascular cell biology in vascular diseases to the design and development of novel pharmaceutical compounds. Since its formation in 1989, the Company has been engaged principally in research and drug discovery programs and clinical development of certain drug compounds. On July 25, 1994, the Company acquired all of the outstanding Common Stock of ImmunoPharmaceutics, Inc. ("IPI") (now discontinued), a San Diego, California based company, in exchange for Common Stock of the Company. TBC consolidated the IPI operation into TBC in the first half of 1996.
The Company is presently working on a number of long-term development projects which involve experimental and unproven technology, which may require many years and substantial expenditures to complete, and which may be unsuccessful. To date, other than small amounts of monoclonal antibody compounds and services produced and sold by IPI, the Company has not developed or sold any products, and no assurance can be given that the Company will be able to develop, manufacture or market any products in the future. In addition, no assurance exists that future revenues will be significant, that any sales will be profitable, or that the Company will have sufficient funds available to complete its research and development programs or market any products which it may develop.
(b) Basis of Consolidation
The Company's consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, IPI. All material intercompany transactions have been eliminated. The Company's consolidated financial statements include the activity related to IPI since August 1, 1994.
(c) Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments
Cash equivalents are considered to be those securities or instruments with original maturities, when purchased, of three months or less. At December 31, 1998, approximately $89,000 was invested in demand and money market accounts. Short-term investments are those investments which have an original maturity of less than one year and greater than three months. At December 31, 1998, the Company's short-term investments consisted of approximately $4,483,000 in Government Agency Discount Notes and Bonds and $15,924,000 in Corporate Commercial Paper. Long-term investments consist of approximately $5,792,000 in Government Agency bonds with an original maturity of one year or more. Cash equivalents, short-term and long-term investments are stated at cost plus accrued interest, which approximates market value. Interest income is accrued as earned. In connection with the adoption of Financial Accounting Standards Statement 115, the Company classified all short-term investments and long-term investments as held to maturity.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is provided on the straight-line method over the estimated useful
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
lives of the respective assets (3 to 10 years). Amortization of leasehold improvements is provided on the straight-line method over the remaining minimum lease term.
(e) Intangible Assets
Intangible assets are amortized on a straight line basis over ten years.
(f) Research and Development Costs
All research and development costs are expensed as incurred and include salaries of research and development employees, certain rent and related building services, research supplies and services, clinical trial expenses and other associated costs. With respect to research and development, salaries and benefits for the year ended December 31, 1998, 1997 and 1996, totaled approximately $6,286,000, $5,645,000 and $6,233,000, respectively, of which approximately $4,725,000, $4,262,000 and $4,893,000, respectively, was charged to research and development. Payments related to the acquisition of in-process research and development are expensed as incurred.
(g) Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the net loss applicable to common shares after preferred dividend requirements by the weighted average number of common and common equivalent shares outstanding during the period. For the years 1998, 1997 and 1996, there were no common equivalent shares used in the calculation of weighted average common shares outstanding. Preferred dividend requirements for the period ended December 31, 1997 included $142,476 of accrued dividends and, pursuant to a Securities and Exchange Commission Staff Position, deemed dividends attributable to the conversion discount factor at issuance of the Preferred Stock of $1,010,806. For the years ended December 31, 1998, 1997 and 1996, the weighted average common shares used to compute basic net loss per common share totaled 33,930,276, 27,745,700 and 23,616,033, respectively. The conversion of securities convertible into Common Stock and the exercise of stock options and warrants were not assumed in the calculation of diluted net loss per common share because the effect would have been antidilutive.
(h) Reclassifications
Certain reclassifications have been made to prior period financial statements to conform with the December 31, 1998 presentation with no effect on net loss previously reported.
(i) Revenue Recognition
Revenue from service contracts is recognized as the services are performed and/or as milestones are achieved. Milestone payments related to contractual agreements are recognized as the milestones are achieved. Revenue from products and services is recognized when the products are shipped or the services are performed. Revenue from licensing fees is recorded when the license is granted. Revenue from grants is recognized as earned under the terms of the related grant agreements. Amounts received in advance of services to be performed under contracts are recorded as deferred revenue.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(j) Patent Application Costs
Costs incurred in filing for patents are expensed as incurred.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates.
(l) Development Stage Enterprise
In prior periods, the Company reported as a development stage enterprise. With the signing of a commercialization agreement for NOVASTAN(R), the Company began reporting as an operating company during the third quarter of 1997.
(2) CAPITAL STOCK
In December, 1993, the Company completed an initial public offering comprised of 4,082,500 units, each unit consisting of one share of Common Stock (par value $.005 per share) and one warrant to purchase one share of Common Stock. Proceeds to the Company were approximately $24.2 million, net of selling expenses of approximately $3.3 million. The securities included in the unit subsequently separated into its Common Stock and warrant components. The warrants are exercisable at $8.44 per share. On December 13, 1998, the expiration date of the warrants was extended from December 14, 1998 to September 30, 1999 for those warrant holders electing such extension. The warrants are redeemable for $.05 per warrant, at the option of the Company, upon 30 days' prior written notice at any time after the last sale price of the Common Stock has been at least $11.82 for 30 consecutive business days ending within 15 days of the date of the notice of redemption. All of the warrants must be redeemed if any are redeemed. The underwriter received approximately $2.9 million in commissions and expense reimbursement and purchased options to purchase 355,000 units at an exercise price of $11.14. These options were sold for $.001 each and expired on December 15, 1998.
In February, 1996, the Company completed a private placement of Common Stock. The Company issued 6,550,990 shares of Common Stock at $2.125 per share with proceeds of approximately $13.0 million, net of selling commissions and expenses of approximately $900,000. In connection with the private placement, the Company paid selling commissions of $759,283 and issued 730,461 warrants to purchase Common Stock. These warrants expire on February 13, 2001, with exercise prices of between $3.05 and $4.58 per share. The resale of the underlying Common Stock is subject to certain registration rights.
On October 10, 1996 the Company signed a strategic alliance agreement and Common Stock purchase agreement with LG Chemical, Ltd. ("LG Chemical"), a Korean corporation. In conjunction with the agreement, LG Chem purchased 1,250,000 shares of Common Stock for $4.00 per share for a total of $5 million. The Company's agents in the contract negotiations received $420,000 in commissions and 113,636 warrants to purchase Common Stock, expiring on October 10, 2001, exercisable at $4.40 per share with the resale of the underlying Common Stock being subject to certain piggyback registration rights.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 14, 1997, the Company completed a $6.0 million private placement of 5% Cumulative Convertible Preferred Stock ("the 5% Preferred"), which provided net proceeds to the Company of approximately $5.9 million. The 5% Preferred was convertible into Common Stock at discounts ranging from 6% to 17% from the average of the daily low trading price of the Common Stock for the ten consecutive trading days immediately preceding the conversion date. A total of 6,000 shares of 5% Preferred were sold at a price of $1,000 per share to two institutional investors. As of December 31, 1998, 6,000 shares of the 5% Preferred and accrued dividends of $144,166 on such shares have been converted into 1,408,944 shares of Common Stock.
During August, 1997 the Company sold 176,992 shares of Common Stock for $1 million less commissions and expenses of approximately $34,000 pursuant to a commercialization agreement. See note 10.
In October, 1997 the Company sold 5,750,000 shares of Common Stock for $5.00 per share pursuant to an underwritten secondary public offering. The net proceeds to the Company for the 5,750,000 shares sold were approximately $26.7 million after deducting selling commissions and expenses of approximately $2.1 million related to the offering.
In addition, during October, 1997 the Company issued 214,286 shares of Common Stock and a warrant to purchase 142,858 shares of Common Stock exercisable at $14.00 per share until October 9, 2004, pursuant to a license agreement. See note 9.
(3) STOCK OPTIONS AND WARRANTS
The Company has in effect the following stock option plans:
The Amended and Restated 1990 Incentive Stock Option Plan ("1990 Plan") allows for the issuance of incentive and non-qualified options to employees, directors, officers, non-employee independent contractors and non-employee directors, pursuant to which 219,397 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company.
The Amended and Restated 1992 Incentive Stock Option Plan ("1992 Plan") allows for the issuance of incentive and non-qualified options to employees, directors, officers, non-employee independent contractors and non-employee directors, pursuant to which 1,427,507 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company.
The Amended and Restated Stock Option Plan for Non-Employee Directors ("Director Plan") allows for the issuance of non-qualified options to non-employee directors, pursuant to which 34,242 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company to be issued to non-employee members of the Board of Directors of the Company based on a formula. No new issuances are being made under the Director Plan.
The Amended and Restated 1995 Stock Option Plan ("1995 Plan") allows for the issuance of incentive and non-qualified options, shares of restricted stock and stock bonuses to employees, officers, and non-employee independent contractors, pursuant to which 1,978,149 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Amended and Restated 1995 Non-Employee Director Stock Option Plan ("1995 Director Plan") allows for the issuance of non-qualified options to non-employee directors, pursuant to which 289,091 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company to be issued to non-employee members of the Board of Directors of the Company based on a formula. In June 1996, the 1995 Director Plan was amended with respect to the election date requirement for a director to request stock in lieu of cash payment of director fees.
During December, 1996, the Compensation and Personnel Committee of the Board of Directors authorized the extension of options originally granted for a five year period to ten years upon election by individual option holders. During 1997, option holders elected to extend 1,022,833 options, originally expiring during 1997, 1998, 1999 and 2000, for an additional five years. Accordingly, the Company recorded a non-cash charge of $1,303,094 during 1997. Of the total, approximately $350,000 was charged to research and development expenses and the remainder to general and administrative expenses for the difference between the original option exercise price and fair market value as of the effective date of election.
During March, 1999, the Board of Directors approved the 1999 Stock Incentive Plan (the "1999 Plan"). This plan allows for the issuance of incentive and non-qualified options, shares of restricted stock and stock bonuses to directors, employees, officers and non-employee independent contractors, pursuant to which 1,000,000 shares of Common Stock are to be reserved for issuance out of the authorized but unissued shares of the Company. The 1999 Plan is subject to approval of the stockholders at the Company's annual meeting in 1999.
A summary of stock options as of December 31, 1998, follows:
The Company applies APB Opinion 25 and related interpretations in accounting for its plans. The Company has recorded deferred compensation for the difference between the grant price and the deemed fair value for financial statement presentation purposes related to certain options granted in the period subsequent to May 27, 1993 and prior to the initial public offering. Such amount totaled $287,158, of which the remaining balance of $46,177 was expensed during 1996. Had compensation costs for the Company's stock-based compensation plans been determined consistent with SFAS No. 123, the Company's proforma net loss and proforma net loss applicable to
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common shares for the year ended December 31, 1998 would have been $16,758,119 and $0.49, respectively and for December 31, 1997 would have been $9,438,748 and $0.34, respectively, for December 31, 1996 would have been $21,057,088 and $0.89, respectively.
The fair value of options granted during the years ended December 31, 1998, 1997 and 1996 for employee services were estimated on the date of grant using the Black-Scholes Pricing Model with the following weighted average assumptions: risk-free interest rate of between 4.45 and 6.65 percent, expected life of between 2 and 8 years, expected volatility of between 69 and 75 percent and no dividends.
A summary of the status of the Company's stock option plans as of December 31, 1998, 1997 and 1996 and the changes during the years then ended is presented below:
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize information about the Company's stock options outstanding as of December 31, 1998, 1997 and 1996, respectively:
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of warrants issued during the years ended December 31, 1998, 1997 and 1996 for other than employee services were estimated on the date of grant using the Black-Scholes Pricing Model with the following weighted average assumptions: risk-free interest rate of between 6.06 and 6.51 percent, expected life of between 3 and 7 years, expected volatility of between 69 and 74 percent and no dividends. No new warrants were issued during 1998 for either employee or non-employee services. Several existing warrants were exchanged by the original holder for the benefit of a new holder with terms identical to those of the original.
The following table summarizes the status of the Company's warrants as of December 31, 1998, 1997 and 1996, and changes during the periods then ended is presented below:
On November 12, 1998, the Company announced an extension of the exercise period of the Company's publicly traded redeemable common stock purchase warrants from December 14, 1998 to September 30, 1999 for those warrant holders electing such extension. These publicly traded warrants comprise 3,995,394 of the 4,655,972 warrants outstanding at December 31, 1998. The exercise price of $8.44 remains unchanged. The publicly traded warrants are redeemable for $.05 per warrant, at the option of the Company, upon 30 days prior written notice at any time after the last sale price of the Common Stock has been at least $11.82 for 30 consecutive business days ending within 15 days of the date of the notice of redemption. All of the warrants must be redeemed if any are redeemed.
In addition, at December 31, 1997, there were outstanding underwriter purchase options ("UPO's"), which were issued to the underwriters in the Company's initial public offering in 1993, to purchase 355,000 units at $11.14 each. Each unit consists of one share of Common Stock and a warrant to purchase one share of Common Stock at an exercise price equal to $11.14. The UPO's expired on December 15, 1998.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The warrants shown above were issued in connection with equity transactions of the Company and, therefore, there is no effect on net income.
(4) INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit 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.
At December 31, 1998 and 1997, the net deferred tax asset, representing primarily net operating loss carryforwards, totaled approximately $29,572,000 and $23,996,000, respectively. The Company has established a valuation allowance for the full amount of these deferred tax assets, as management believes that it is not more likely than not that the Company will recover these assets. The Company did not incur any tax expense in any year due to operating losses.
At December 31, 1998, 1997 and 1996, the Company had net operating loss carryforwards of approximately $54,192,000, $44,375,000 and $45,195,000, respectively, for federal income tax return purposes. Utilization of the Company's net operating loss carryforwards is subject to certain limitations due to specific stock ownership changes which have occurred or may occur. To the extent not utilized, the carryforwards will expire during the years beginning 2002 through 2013.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
(6) COMMON STOCK RESERVED
The Company has reserved Common Stock for issuance as of December 31, 1998 as follows:
During March, 1999, the Board of Directors approved the 1999 Stock Incentive Plan (the "1999 Plan"). This plan allows for the issuance of incentive and non-qualified options, shares of restricted stock and stock bonuses to directors, employees, officers and non-employee independent contractors, pursuant to which 1,000,000 shares of Common Stock are to be reserved for issuance out of the authorized but unissued shares of the Company. The 1999 Plan is subject to approval of the stockholders at the Company's 1999 annual meeting.
(7) CLINICAL RESEARCH AGREEMENTS
On February 10, 1995, the Company entered into an agreement with Coromed, Inc., a contract research organization, to coordinate the clinical evaluation of NOVASTAN(R) as an adjunct to streptokinase in acute myocardial infarction ("AMI"). Coromed is responsible for managing all aspects of the clinical trial and making all financial remuneration to testing sites. The term of the agreement is 19 months, and was extended to 24 months by mutual agreement of both parties. The parties agreed to a total budget of approximately $3,196,000.
In November, 1997, the Company entered into an agreement with Coromed, Inc. to coordinate the clinical evaluation of TBC11251 to determine acute hemodynamic efficacy and safety in congestive heart failure. The term of the agreement ended May 30, 1998. Coromed, Inc. is currently completing the final report for this study. The parties agreed to a total budget of $993,415.
(8) RESEARCH AGREEMENTS
On October 11, 1994, the Company signed a collaborative agreement with Synthelabo S.A., the pharmaceutical division of L'Oreal S.A. ("Synthelabo") to develop and market compounds for vascular proliferative disease derived from the Company's research programs. The Company recognized income of $2,625,000 in 1996 and $625,000 in 1997. Synthelabo is not currently paying any research payments to the Company pursuant to the agreement. Synthelabo will pay royalties to TBC, based on the net sales, in those geographic areas covered in the agreement.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Synthelabo also has certain termination rights pursuant to the agreement. Synthelabo has the right to terminate the agreement any time on or after October 15, 1997 for any reason and either party has the right to terminate the contract for breach of any material obligation. If Synthelabo exercises this termination right, the license granted to Synthelabo will terminate and TBC will pay Synthelabo a royalty on net sales of any products sold in a certain territory (Europe, Middle East, Africa and countries of the former Soviet Union) for a period of time. In addition, Synthelabo may, at its option, require that the technology, as defined in the agreement, be transferred to and the development program be conducted by a joint venture owned by TBC and Synthelabo should "net worth" of TBC, as defined in the agreement, be less than $5 million as of the end of any calendar quarter during the term of the agreement.
During 1995, the Company and Synthelabo mutually agreed to exchange certain clinical data. During 1996, the Company signed two agreements with Synthelabo with respect to the supply of information related to certain clinical studies for NOVASTAN(R). Over the term of the agreements as certain milestones were met, Synthelabo committed to pay TBC up to $2,920,000. These payments were dependent on rate of enrollment in certain clinical studies, the completion of certain clinical studies and date of completion of certain clinical studies. As of December 31, 1998, TBC has recognized approximately $2,880,000 of revenue related to these agreements.
On October 10, 1996, the Company signed a strategic alliance agreement with LG Chemical, a Korean corporation, to develop and market compounds derived from the Company's Endothelin Receptor and Selectin Antagonist for certain disease indications. Upon consummation of the transaction, LG Chemical purchased 1,250,000 shares of Common Stock for $4.00 per share for a total of $5 million. In addition, LG Chemical has committed to pay $10.7 million in research payments. Of this amount, $4.1 million has been paid (of which $1.0 million was a receivable at December 31, 1998) and $1.0 million will be paid on each of June 30 and December 31 of 1999 and 2000, and $1.3 million on June 30 and December 31, 2001. LG Chemical has the right to terminate future research payments if TBC fails to meet certain milestones, which milestones will be established by the parties from time to time in accordance with the agreement. LG Chemical will pay royalties to TBC, based on net sales, in those geographic areas covered by the agreement, which include Korea, China, India and certain other Asian countries, excluding Japan. The Company will pay its agents in the contract negotiations, a commission on all future research payments as well as a royalty on net sales.
During 1998, the Company entered into an agreement to license rights to certain technology related to the research programs licensed from Hedral Therapeutics, Inc. Upon execution of the agreement, the Company paid a license fee of 40,000 shares of restricted Common Stock valued at $133,875. The agreement includes a total of 40,000 additional shares of Common Stock to be paid upon reaching certain milestones and cash royalty payments based on net sales in the event a product is developed and commercialized under this agreement.
(9) LICENSE AGREEMENT
TBC has entered into an agreement with Mitsubishi Chemical Corporation ("Mitsubishi") to license Mitsubishi's rights and technology relating to NOVASTAN(R) and to license Mitsubishi's own proprietary technology developed with respect to NOVASTAN(R) (the "Mitsubishi Agreement"). Under the Mitsubishi Agreement, the Company has an exclusive license to use and sell NOVASTAN(R) in the U.S. and Canada for all specified indications. The Company is required to pay Mitsubishi specified royalties on net sales of NOVASTAN(R) by the Company and its sublicensees after its commercial introduction in the U.S. and Canada. Either party may terminate the Mitsubishi Agreement on 60 days notice if the other party defaults in its material obligations under the agreement, declares bankruptcy or is insolvent, or if a substantial portion of its property is subject to levy. Unless terminated sooner
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pursuant to the above described termination provisions, the Mitsubishi Agreement expires on the later of termination of patent rights in a particular country or 20 years after first commercial sale of products. Under the Mitsubishi Agreement, TBC has access to an improved formulation patent granted in 1993 which expires in 2010 and a use patent which expires in 2009. In conjunction with the Mitsubishi Agreement, a consulting firm involved in negotiations related to the agreement will receive a percentage of net sales received as a result of the agreement.
Mitsubishi further agreed to supply the Company with its requirements of bulk NOVASTAN(R) throughout the term of the Mitsubishi Agreement for TBC's clinical testing and commercial sales of NOVASTAN(R) in the U.S. and Canada. In the event Mitsubishi should discontinue the manufacture of NOVASTAN(R), Mitsubishi and TBC have agreed to discuss in good faith the means by which, and the party to whom, NOVASTAN(R) production technology will be transferred. The transferee may be a person or entity other than TBC. At present, Mitsubishi is the only manufacturer of NOVASTAN(R). Should Mitsubishi terminate or default in its supply commitment, there can be no assurance that alternate sources of bulk NOVASTAN(R) will be available to the Company at reasonable cost, if at all. If such alternate sources of supply are unavailable or uneconomic, the Company's results of operations would be materially adversely affected. See note 10.
In exchange for the license to Genentech's (the "Former Licensor") NOVASTAN(R) technology, TBC issued the Former Licensor 285,714 shares of Common Stock during 1993 and issued an additional 214,286 shares of Common Stock on October 9, 1997, after acceptance of the filing of the first New Drug Application ("NDA") with the FDA for NOVASTAN(R). The Company recorded a $1,075,191 noncash charge to in-process research and development expense during the fourth quarter of 1997. An additional 71,429 shares of Common Stock will be issued to the Former Licensor within ten days after the FDA's first approval of an NDA for NOVASTAN(R). Additionally, on October 9, 1997, upon acceptance of the filing of the first NDA for NOVASTAN(R) with the FDA, the Company granted the Former Licensor a warrant to purchase an additional 142,858 shares of Common Stock at an exercise price of $14.00 per share, subject to adjustment, which expires on October 9, 2004. The Company will not be required to make any cash payment if the approval of the NDA does not occur. TBC has also granted the Former Licensor demand and piggyback registration rights with regard to shares of Common Stock issued to the Former Licensor.
During the third quarter of 1997, the Company sublicensed certain rights to NOVASTAN(R) to SmithKline Beecham, plc ("SmithKline"). In conjunction with this agreement, the Company agreed to make certain payments to Mitsubishi, which are included in research and development expense, to pay an additional royalty to Mitsubishi, beginning January 1, 2001 and to provide access to certain NOVASTAN(R) clinical data to Mitsubishi in certain circumstances. See note 10.
(10) COMMERCIALIZATION AGREEMENT
In connection with TBC's development and commercialization of NOVASTAN(R), in August, 1997, TBC entered into a Product Development, License and CoPromotion Agreement with SmithKline Beecham plc (the "SmithKline Agreement") whereby SmithKline was granted exclusive rights to work with TBC in the development and commercialization of NOVASTAN(R) in the U.S. and Canada for specified indications. SmithKline paid $8.5 million in upfront license fees during August, 1997, a $5 million milestone payment in October, 1997, and will pay up to $15 million in additional milestone payments based on the clinical development and FDA approval of NOVASTAN(R) for the heparin-induced thrombocytopenia ("HIT") and HIT with thrombosis syndrome ("HITTS") and AMI indications. Future milestone payments for the AMI indication are subject to SmithKline's agreement to market NOVASTAN(R) for such indication. The parties have also formed a joint development committee to analyze
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the development of additional NOVASTAN(R) indications to be funded 60% by SmithKline except for certain Phase IV trials which shall be funded entirely by SmithKline. At this time, SmithKline has no plans to conduct development work for the AMI and stroke indications. TBC is evaluating the feasibility of development of NOVASTAN(R) for stroke and possibly AMI. SmithKline has the exclusive right to commercialize all products arising out of the collaboration, subject to the obligation to pay royalties on net sales to TBC and to the rights of TBC to copromote these products through its own sales force in certain circumstances. TBC will retain the rights to any indications which SmithKline determines it does not wish to pursue, subject to the requirement that TBC must use its own sales force to commercialize any such indications. Any indications which TBC elects not to pursue will be returned to Mitsubishi. In conjunction with the SmithKline Agreement, a consulting firm involved in negotiations related to the agreement will receive a percentage of all consideration received by TBC as a result of the agreement.
At present, Mitsubishi is the only manufacturer of NOVASTAN(R), and has entered into the Mitsubishi Supply Agreement with SmithKline to supply NOVASTAN(R) in bulk in order to meet SmithKline's and TBC's needs under the SmithKline Agreement. Should Mitsubishi fail during any consecutive nine-month period to supply SmithKline at least 80% of its requirements, and such requirements cannot be satisfied by existing inventories, the Mitsubishi Supply Agreement provides for the nonexclusive transfer of the production technology to SmithKline. If SmithKline cannot commence manufacturing of NOVASTAN(R) or alternate sources of supply are unavailable or uneconomic, the Company's results of operations would be materially and adversely affected.
The SmithKline Agreement generally terminates on a country by country basis upon the earlier of the termination of TBC's rights under the Mitsubishi Agreement, the expiration of applicable patent rights or, in the case of royalty payments, the commencement of substantial third-party competition. SmithKline also has the right to terminate the agreement on a country by country basis by giving TBC at least three months written notice at any time before SmithKline first markets products in that country based on a reasonable determination by SmithKline that the commercial profile of the product in question would not justify continued development in that country. SmithKline has similar rights to terminate the SmithKline Agreement on a country by country basis after marketing has commenced. In addition, either party may terminate the SmithKline Agreement on 60 days notice if the other party defaults in its obligations under the agreement, declares bankruptcy or is insolvent.
In connection with the execution of the SmithKline Agreement, SmithKline purchased 176,992 shares of TBC's Common Stock for $1.0 million and additional 400,000 shares of Common Stock for $2.0 million in connection with the secondary public offering, which closed on October 1, 1997.
(11) REGULATORY FILING
During August, 1997, the Company filed a new drug application ("NDA") with the United States Food and Drug Administration (the "FDA") for its lead product candidate, NOVASTAN(R), for use as an anticoagulant in patients with HIT and HITTS. During September, 1997, the FDA granted priority review status to the new drug application for NOVASTAN(R). During October, 1997, the Company was notified by the FDA that the filed NDA for NOVASTAN(R) was accepted. The FDA extended the priority review period by 90 days during January, 1998. On May 11, 1998, the Company announced that it had received a non-approvable letter from the FDA for NOVASTAN(R). Based on consultation with representatives from the FDA, TBC has focused on the collection and analysis of a new more comparable historical control group as the basis for demonstrating the safety and efficacy NOVASTAN(R). The Company amended its NDA with the FDA for NOVASTAN(R) as an anticoagulant for use in patients with HIT syndrome on March 19, 1999.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) 401(k) PLAN
The Company adopted a 401(k) plan which became effective on September 1, 1993. Under the plan, all employees with three months of service are eligible to participate in the plan and may contribute up to 15 percent of their compensation, with a maximum of $10,000 per employee in 1998. At the present time, no matching contributions have been authorized by the Board of Directors. Costs associated with administering the plan totaled approximately $10,000 in 1998.
(13) COMMITMENTS AND CONTINGENCIES
a) Employment Agreements
Since inception, the Company has entered into employment agreements with certain officers and key employees. The Company has signed agreements with six of its officers to provide certain benefits in the event of a "change of control" as defined in these agreements and the occurrence of certain other events. The agreements provide for a lump-sum payment in cash equal to eighteen (18) months to three (3) years of annual base salary and annual bonus, if any. The base salary portion of the agreements would aggregate approximately $2.5 million at the current rate of compensation. In addition, the agreements provide for gross-up for certain taxes on the lump-sum payment, continuation of certain insurance and other benefits for periods of eighteen (18) months to three (3) years and reimbursement of certain legal expenses in conjunction with the agreements. These provisions are intended to replace compensation continuation provisions of any other agreement in effect for an officer if the specified event occurs.
(b) Lease Agreements
The Company renegotiated its noncancelable lease agreement which began December 1, 1990 for its facilities in Houston, Texas and executed a new lease agreement. The new lease was effective January 1, 1995 and calls for a lease term of six years at an annual rate of $712,449 through December 2000, subject to adjustments based on certain variable building operating expenses. For the years ended December 31, 1998, 1997, 1996, rent and related building services totaled approximately $958,000, $956,000 and $1,025,000, respectively, of which approximately $820,000, $851,000 and $924,000, respectively, was charged to research and development expense.
Total committed lease payments from January 1, 1999 through December 31, 2000 equal $1,418,483. The Company executed a letter of intent to lease additional space, which will cost approximately $14,000 per month, upon completion of improvements to the space. The Company has also committed to pay for seventy-four parking spaces during the lease at the facility established rate charged, which currently approximates $44,000 per annum. The lease also includes a provision for the Company to pay certain additional charges to obtain utilities and building services during off-business hours. Currently, the amount of these charges is approximately $250,000 per annum, payable in monthly installments. These charges are subject to annual adjustments based on the local consumer price index. Should the Company terminate the use of non-standard services, an additional amount of up to $4,167 per month shall be due in addition to base rent on the remaining lease payments through December 2000. In addition, the lease grants certain credits to rent and utilities which at December 31, 1998 totaled approximately $109,000, and which are being amortized on a straight line basis over the lease term.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c) Legal Proceedings
On November 21, 1994, a class action shareholders' suit was filed in the United States District Court for the Southern District of Texas, Houston Division seeking damages in the amount of $16 million. Plaintiffs are two individuals who purchased shares of the Company on December 16, 1993 following the Company's initial public offering ("IPO"). In their complaint, plaintiffs have sued the Company, certain members of the board of directors and certain officers alleging violations of Sections 11, 12 and 15 of the Securities Act of 1933, as amended (the "Act"). Plaintiffs have also named David Blech, D. Blech & Co. and Isaac Blech as defendants. On January 23, 1995, the Company and the members of the board of directors filed a motion to dismiss the plaintiffs' complaint pursuant to Rule 9(b) and Rule 12b(6) of the Federal Rules of Civil Procedure. In addition, defendant John Pietruski, Chairman of the Board of Directors, filed a motion to dismiss the plaintiffs' complaint pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure. The Court denied the motion by the Company and by John Pietruski.
On March 28, 1995, a second class action shareholders' suit was filed in the United States District Court for the Southern District of New York seeking unspecified damages. Plaintiffs are eight individuals who purchased shares in various companies for which D. Blech & Co. acted as an underwriter (or co-underwriter) or marketmaker. In their complaint, the plaintiffs have sued the Company alleging violations of Section 10(b) of the Securities Exchange Act of 1934, as Amended (the "Exchange Act") and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (the "Commission"). Plaintiffs named a number of defendants, including David Blech and D. Blech & Co., four individuals, two brokerage firms, one investment management company and ten other companies for which D. Blech & Co. acted as underwriter or marketmaker. On June 6, 1996, the Court dismissed all of the Exchange Act and common law fraud claims filed against the Company and its officers and directors, but afforded those plaintiffs the right to attempt to preserve those claims by repleading them. The Court ordered that those claims be repleaded no later than July 26, 1996. Plaintiffs did not replead those claims by the deadline, resulting in the dismissal of all claims against the Company in this litigation.
On August 14, 1995, the Judicial Panel on Multi-District Litigation ordered that the action filed in the United States District Court for the Southern District of Texas, Houston Division be transferred to the United States District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings with the related actions pending there. In light of the transfer and consolidation, the Company requested that the New York Court reconsider the Texas Court's denial of its motion to dismiss as a part of the Court's consideration of similar motions to dismiss filed by the other defendant companies for which D. Blech & Co. acted as underwriter. All of these motions were presented to the Court on February 6, 1996. On June 6, 1996, the New York Court granted the Company's and its officers' and directors' motion for reconsideration, but together with all other similar pending motions, denied the requested relief. Pursuant to the court's order, the Company therefore filed an answer in the case. The Company also filed a Motion seeking leave of court to prosecute an immediate appeal of the Court's denial of the Company's Motion to Dismiss. The Court heard argument on that Motion on October 10, 1996. The motion was denied on January 16, 1997. On February 3, 1999, the New York Court certified the action as a class action. The Company is unable to evaluate its potential outcome at this time. The Company disputes these claims and intends to contest them vigorously. There can be no assurance, however that the final disposition of this case will be favorable to the Company.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) SHORT TERM NOTE RECEIVABLE
On April 12, 1994, the Company loaned $350,000 to D. Blech and Company, Incorporated in exchange for a non-interest bearing promissory note of even amount. The loan represented advance payment of a success fee pursuant to a consulting agreement with D. Blech and Company, Incorporated payable in connection with the IPI acquisition. See note 15. As of December 31, 1997, $227,500 of the fee had been earned. The remaining amount of the note would have been considered earned as fees upon issuance of the remaining Company stock related to the IPI acquisition upon the satisfaction of the conditions to issuance. Since the conditions were not met, the remaining $122,500 was due. This amount was deemed uncollectible and was charged to expense in the year ended December 31, 1997.
(15) ACQUISITION OF IMMUNOPHARMACEUTICS, INC.
On July 25, 1994, the Company acquired all of the outstanding Common Stock of IPI in exchange for Common Stock of the Company. TBC issued (i) 1,599,958 shares of Common Stock which was distributed to the existing IPI shareholders, (ii) 999,956 shares of Common Stock, issued in the names of IPI shareholders that was held in escrow pending satisfaction of certain research and development milestones and released from escrow on June 30, 1995, and (iii) contingent stock issue rights to issue an aggregate of 1,400,000 shares of Common Stock, the conversion of which was pending satisfaction of research and development milestones, in exchange for all the issued and outstanding shares of IPI (after conversion of the IPI Series A and Series B preferred stock and all options and warrants). On June 30, 1995, the Company issued 399,961 shares pursuant to the contingent stock issue rights, upon attainment of certain research and development milestones.
The acquisition of IPI was accounted for under the purchase method of accounting. The aggregate purchase price (consisting of the fair value of non-contingent TBC shares issued, transaction expenses and liabilities assumed) was allocated to the tangible and intangible assets acquired based on their estimated fair value as of the date of the acquisition. The Common Stock issued on July 25, 1994 was valued at $3.63 per share, which was derived by discounting the value of the TBC shares without the attached warrant on July 25, 1994. The Common Stock issued on June 30, 1995 and the Common Stock released from escrow was valued at $1.41 per share, which was derived by discounting the value of the TBC shares on June 30, 1995. During the second quarter of 1995, the Company charged $1,973,883 to in-process research and development expense which represented the value of the 1,399,917 shares of TBC Common Stock (including 999,956 shares released from escrow and 399,961 shares issued pursuant to the contingent stock issue rights) given as consideration for acquired technology. The value of the remaining shares issuable upon conversion of the contingent stock issue rights will be determined when the research and development milestones are met by IPI, if ever, and additional in-process research and development expense will be recorded at such time. During 1996, the Company determined that the contractual requirements for issuance of additional shares pursuant to the contingent stock issue rights had not been met. The Company received notification from the committee representing former IPI shareholders that it did not agree with this determination. Any further discussion would be by arbitration pursuant to the Acquisition Agreement. The Company consolidated the IPI operation into TBC's in the first half of 1996. The Company believes that $643,750 of goodwill was impaired due to the decision to cease operations at IPI and the sale of the QED business unit and has charged it to expense in the year ended December 31, 1995. The restructuring costs associated with the consolidation of the IPI operation were approximately $421,000 and were expensed in 1996. These costs included waste disposal, future lease commitments, severance pay and related taxes.
INDEX TO EXHIBITS
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* The Company has omitted certain portions of these agreements in reliance on Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.
(1) Filed as an exhibit to the Company's Form 10 (File No. 0-20117) effective June 26, 1992 (as amended) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the quarter ended June 30, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the quarter ended September 30, 1992 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the quarter ended June 30, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Form 10-Q/A-1 (File No. 0-20117) for the quarter ended June 30, 1993 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Form S-1 registration statement No. 33-70994 (File No. 0-20117) effective December 15, 1993 (as amended) and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Form 8-K (File No. 0-20117) filed with the Securities and Exchange Commission (the "Commission") on October 5, 1994 (as amended) and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Form 8-K/A (File No. 0-20117) filed with the Commission on March 13, 1995 (as amended) and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) filed with the Commission on November 14, 1994.
(10) Filed as an exhibit to the Company's Form 10-K (File No. 0-20117) for the year ended December 31, 1994 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the quarter ended March 31, 1995 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Form 10-Q (File No. 0-20117) for the quarter ended June 30, 1995 and incorporated herein by reference.
(13) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the quarter ended September 30, 1995 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the quarter ended March 31, 1996 and incorporated herein by reference.
(15) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the quarter ended June 30, 1996 and incorporated herein by reference.
(16) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the quarter ended September 30, 1996 and incorporated herein by reference.
(17) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) with the Commission on April 2, 1997 and incorporated herein by reference.
(18) Filed as an exhibit to the Company's Form 10-K (File No. 1-12574) for the year ended December 31, 1996 with the Commission on March 11, 1997 and incorporated herein by reference.
(19) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the quarter ended June 30, 1997 with the Commission on August 14, 1997 and incorporated herein by reference.
(20) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) with the Commission on August 25, 1997 and incorporated herein by reference.