-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G/p5mrO/57IdrkqtxCOs4pTrki4iOZUTqe97BLdQbr2Z5OvLNXkchze14kSIb1Dr nl3kLYtvRHP2uZtneDn+WA== 0000936392-99-000370.txt : 19990402 0000936392-99-000370.hdr.sgml : 19990402 ACCESSION NUMBER: 0000936392-99-000370 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIBIA NEUROSCIENCES INC CENTRAL INDEX KEY: 0001011065 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 953616229 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28310 FILM NUMBER: 99583138 BUSINESS ADDRESS: STREET 1: 505 COAST BLVD SOUTH STREET 2: STE 300 CITY: LA JOLLA STATE: CA ZIP: 92037 BUSINESS PHONE: 6194525892 MAIL ADDRESS: STREET 1: 505 COAST BLVD SOUTH STREET 2: SUITE 300 CITY: LA JOLLA STATE: CA ZIP: 92037 10-K405 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-28310 SIBIA NEUROSCIENCES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3616229 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
505 COAST BOULEVARD SOUTH, SUITE 300, LA JOLLA, CA 92037 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (619) 452-5892 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] On January 29, 1999, the aggregate market value of the voting stock held by non-affiliates of the Registrant totaled approximately $24,518,214 based on the closing stock price as reported by The Nasdaq Stock Market. For purposes of determining this number, shares of Common Stock held by officers and directors and stockholders whose ownership exceeded ten percent (10%) of the total shares of Common Stock outstanding at January 29, 1999 were excluded. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled or under control with the Registrant. The number of shares of Common Stock of the Registrant outstanding as of January 29, 1999 was 9,517,947. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A in connection with the 1999 Annual Meeting of Stockholders scheduled to be held May 26, 1999 are incorporated herein by reference into Part III of this Report. Such Proxy Statement will be filed with the Commission not later than 120 days after Registrant's year end. Certain Exhibits filed with the Registrant's Registration Statement on Form S-1 (Registration No. 333-2586), Form 10-K for the year ended December 31, 1996, Form 8-K filed on March 31, 1997 and Forms 10-Q for the quarters ended June 30, 1997, March 31, 1998 and June 30, 1998 are incorporated by reference into Parts III and IV of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SIBIA NEUROSCIENCES, INC. FORM 10-K INDEX
PAGE ---- PART I.................................................................... 1 ITEM 1. BUSINESS.................................................... 1 ITEM 2. PROPERTIES.................................................. 26 ITEM 3. LEGAL PROCEEDINGS........................................... 26 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 26 PART II................................................................... 27 ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................... 27 ITEM 6. SELECTED FINANCIAL DATA..................................... 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 31 PART III.................................................................. 31 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 31 ITEM 11. EXECUTIVE COMPENSATION...................................... 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 31 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 31 PART IV................................................................... 32 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................................... 32 SIGNATURES.............................................................. 35
i 3 PART I ITEM 1. BUSINESS Except for historical information contained herein, the discussion in this Form 10-K contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended ("Exchange Act") that involve certain risks and uncertainties that could cause the Company's actual results to differ materially from those anticipated. Factors that could cause or contribute to such differences include, but are not limited to, uncertainties regarding the ability to identify new drug leads or move drug leads into pre-clinical development, the ability of the Company or its corporate partners to develop safe and efficacious drugs in a timely and efficient manner, the ability to enter into future collaborative and other agreements that will generate license, royalty, contract and other revenue and cash flow, uncertainties regarding the Company's patents and proprietary rights (including the risk that the Company may be forced to engage in costly litigation to protect such patent rights and the material adverse consequences to the Company if there were unfavorable outcome of any such litigation), uncertainties regarding the availability of additional financing on favorable terms, if at all, uncertainties regarding the potential impact of Year 2000 issues, as well as other risks and uncertainties discussed in the description of the Company's business below and the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed in any document incorporated herein by reference. OVERVIEW SIBIA Neurosciences, Inc. ("SIBIA" or the "Company") is engaged in the discovery and development of novel small molecule therapeutics for the treatment of neurodegenerative, neuropsychiatric and neurological disorders, many of which have large patient populations and represent critical unmet medical needs. SIBIA is a leader in the development of proprietary drug discovery platforms that combine key tools necessary for modern drug discovery, including genomics, high throughput screening, advanced combinatorial chemistry techniques and pharmacology. These platforms are based on two primary technologies in which the Company has established a leading scientific and proprietary position: human receptor/ion channel subtype technology and human protease technology. The Company's proprietary molecular targets and drug candidates, together with its drug discovery technologies and research expertise, have enabled the Company to establish several collaborative research and license agreements, which include Bristol-Myers Squibb Company ("Bristol-Myers Squibb"), Eli Lilly and Company ("Lilly"), Meiji Seika Kaisha, Ltd. ("Meiji"), and Novartis AG ("Novartis"), and multiple technology licensing and sublicensing arrangements, which include Aurora Biosciences Corporation ("Aurora"), Lilly, Merck & Company, Inc. ("Merck"), Neurocrine Biosciences, Inc. ("Neurocrine"), and The Salk Institute for Biological Studies ("The Salk Institute"). In March, 1999, the Company licensed to Bristol-Myers Squibb non-exclusive rights to practice its patented transcription-based assay technology. SIBIA currently receives collaborative research funding from only Bristol-Myers Squibb. SIBIA has recently completed its collaborative research with Lilly and Novartis and is entitled to receive, from Bristol-Myers Squibb, Lilly, Meiji, and Novartis, milestone payments at certain stages of the development of product candidates, if any are identified, and royalties on sales of products that are developed, if any are developed. SIBIA believes its proprietary drug discovery technology platform and drug candidates will lead to additional corporate collaborations and licensing opportunities with pharmaceutical, biotechnology and drug discovery service companies. The first compound to enter clinical trials from the Company's drug discovery program was SIB-1508Y, currently in development for Parkinson's disease. This compound was selected as a potential drug candidate on the basis of its nicotinic acetylcholine receptor ("nAChR") subtype selectivity and behavioral profile. In contrast to current therapies, which treat only motor dysfunction, SIB-1508Y is being developed for the treatment of motor, affective and cognitive dysfunctions of Parkinson's disease. SIB-1508Y is currently in Phase 2 clinical trials that the Company expects to be completed in mid-1999. The Company has a collaboration with Meiji for the development and commercialization of SIB-1508Y in Japan and certain other Asian countries and plans to establish additional corporate collaborations for advanced clinical trials and commercialization of SIB-1508Y in other areas of the world. 1 4 SIBIA's second compound to enter clinical trials from the Company's drug discovery program was another nAChR subtype-selective compound, SIB-1553A, as a development candidate for the treatment of Alzheimer's disease. This compound was also selected as a potential drug candidate on the basis of its nAChR subtype selectivity and behavioral profile. The Company's studies indicate that this compound strongly stimulates acetylcholine release in specific brain regions associated with memory and learning, the same regions which exhibit deficits of this neurotransmitter in Alzheimer's disease. SIB-1553A is currently in a Phase 2 clinical trial that the Company expects to be completed in mid-1999. The Company does not currently have a collaborative partner for the development and commercialization of SIB-1553A but plans to establish corporate collaborations for advanced clinical trials and commercialization of SIB-1553A throughout the world. SIBIA has been involved in patent litigation with Cadus Pharmaceutical Corporation ("Cadus"). On December 18, 1998, a jury returned a verdict in favor of the Company in this litigation, finding that certain of the Company's patents are valid and enforceable and awarding the Company damages in the amount of $18 million to compensate the Company for Cadus' past direct and indirect infringement of those patents. On January 29, 1999, the Court granted the Company's request for a permanent injunction preventing Cadus, and all persons acting in concert or otherwise participating with Cadus from practicing the methods claimed in those patents. See "Item 3, Legal Proceedings." The Company is applying its drug discovery technologies to discover and develop potential drug candidates independently and in collaboration with established pharmaceutical companies. The Company currently expects that late stage clinical development and commercialization of independently discovered compounds will be accomplished in conjunction with corporate partners. The Company believes, assuming successful pre-clinical studies, that additional compounds discovered with its technologies by the Company and its corporate partners will enter clinical trials within the next 12 to 18 months. There can be no assurance, however, that pre-clinical studies relating to any of the Company's compounds will be successful. SIBIA'S DRUG DISCOVERY PLATFORMS SIBIA is pursuing a molecular target-based approach to drug discovery. The Company believes that its proprietary drug discovery platform technologies will enable the early identification of compounds that are selective for specific receptor/ion channel subtypes and proteases, facilitating the discovery and development of new classes of drugs, such as SIB-1508Y and SIB-1553A, that may be more effective and have fewer side effects than existing drugs for the treatment of nervous system disorders. SIBIA's drug discovery platforms are based on two primary technologies that define the molecular targets on which the Company has focused, and in which the Company has established a leading scientific and proprietary position: human receptor/ion channel subtype technology and human protease technology. The Role of Calcium in Nervous System Function and Disease The human nervous system is a complex network of interconnected neurons that are responsible for coordination of virtually all bodily activities, including movement, sensory perception, learning, memory and emotions. Neurons receive, conduct and transmit signals; this communication between neurons and with other cells is essential to the function of the nervous system. Neuronal cell death or dysfunction that impairs the ability of neurons to communicate can result in neurodegenerative disorders (e.g., Alzheimer's and Parkinson's diseases), neurological disorders (e.g., epilepsy and chronic pain), and psychiatric disorders (e.g., schizophrenia and depression). Communication between neurons occurs through complex electrical and chemical processes. Neurons communicate with each other and with target cells through the transmission and reception of molecules known as neurotransmitters. Nerve impulses, in the form of voltage changes, cause the release of neurotransmitters, activating specific receptors on the surface of an adjacent neuron or target cell and cause a response in the receiving cell. This interaction takes place at a synapse, which is the point at which a nerve impulse is transmitted from one neuron to another. Each different neurotransmitter interacts with a specific corresponding receptor or family of receptors and transmits primary messages that control important processes within those neurons and target cells. These processes include the regulation of secondary messenger systems that, in turn, modulate a wide array of signal transduction pathways involved in neuronal communication and survival. 2 5 One of the most important messengers in the nervous system is calcium ions, which facilitate the communication between neurons. Calcium ions regulate many essential functions in neurons, such as the release of neurotransmitters, electrical activity, activation of enzymes and transcription of genes. Calcium ions perform this function by entering neurons through ion channels ("receptor/ion channels") which open and close (i.e., are gated) either through neurotransmitter reception (more generally, ligand/receptor interactions) or voltage changes such as nerve impulses. Because calcium is central to so many critical neuronal functions, the Company believes that controlling calcium levels within neurons is a key strategy for potential therapeutic intervention in a number of nervous system disorders, including Parkinson's disease, Alzheimer's disease and other dementias, Attention Deficit Hyperactivity Disorder ("ADHD"), depression, schizophrenia, neuropathic and chronic pain, epilepsy, stroke, brain injury, anxiety, bipolar disorder and migraine. Over the past 20 years, drugs blocking calcium influx through certain receptor/ion channels (e.g., voltage-gated calcium channels ("VGCCs")) have been successfully developed and commercialized for the treatment of cardiovascular diseases such as angina and hypertension. However, these existing calcium channel blockers are either generally ineffective or have significant side effects when evaluated for nervous system disorders. The Company believes this is due to their lack of selectivity or activity on specific neuronal VGCC subtypes and that the Company's drug discovery technologies will enable it to identify lead compounds that are highly selective for brain receptor/ion channel subtypes. Calcium ions enter neurons primarily through: (i) two receptor classes that function as ligand-gated ion channels -- nAChRs and excitatory amino acid receptors ("EAARs"); and (ii) VGCCs. These three classes are the major receptor/ion channel classes involved in regulating neuronal calcium. Each class is comprised of numerous structurally and pharmacologically distinct subtypes. In addition, subtypes within these receptor/ion channel classes are anatomically distinct, located not only in different organs of the body (such as the heart and brain), but also localized within specific substructures of organs (such as the hippocampus and cerebellum of the brain). The large number and diversity of nAChR, EAAR and VGCC subtypes has only recently been identified through modern gene cloning techniques. SIBIA was a pioneer in the discovery and functional expression of cloned genes encoding important human subtypes in these three receptor/ion channel classes. This has enabled SIBIA to characterize a large number of previously unrecognized receptor/ion channel subtypes and establish them as targets for drug discovery. SIBIA has further incorporated these molecular targets into functional cell-based assays for drug screening. SIBIA's Human Receptor/Ion Channel Subtype Technology SIBIA's human receptor/ion channel subtype technology is based on (i) the identification and cloning of the genes encoding nAChRs, EAARs and VGCCs from human brain tissue, (ii) the expression of these genes in mammalian cells to afford fully functional receptor/ion channels of defined subtype and (iii) the use of these cells in in vitro high throughput functional drug screening assays. Each cell line or assay contains only a single human receptor/ion channel subtype representing a pure molecular target for drug screening. In contrast to traditional binding assays, these proprietary assays can quantify the functional effect of test compounds and characterize them as agonists, antagonists or modulators, at any functional site, known or unknown, on a specific receptor/ion channel subtype, all in a primary screen. SIBIA has established a leading proprietary position in drug discovery based on human receptor/ion channel subtypes. Each of the following scientific and technological developments by SIBIA was critical in building this position and has represented a significant advance: - The Company has discovered, isolated and developed an extensive library of more than 63 complete genes cloned from human brain tissue which code for multiple, distinct subtypes of nAChRs, EAARs and VGCCs. - SIBIA has expressed more than 32 functional receptor/ion channel subtypes in the nAChR, EAAR and VGCC classes in stable cell lines. Each subtype potentially represents a novel molecular target for developing therapeutic compounds for nervous system disorders. This was a difficult and significant technical challenge, since most receptor/ion channel subtypes are multimeric (i.e., molecular com- 3 6 plexes of two or more proteins) and require the expression of multiple complex genes to form a functional subtype. - SIBIA has developed proprietary functional cell-based assays encompassing these molecular targets and uses these assays with its proprietary high throughput screening technology, which includes novel assay methods and instrumentation, to rapidly identify and select compounds for further development. Human Protease Technology Proteases are a class of enzymes which play an important role in the processing of proteins. The body uses this mechanism to control many critical pathways or biochemical cascades. In neurons, specific proteases control pathways critical to neuronal communication and survival. Abnormal neuronal protease activity can lead to degenerative processes, as occurs during progressive disorders such as Alzheimer's disease and in phases of acute neuronal cell death resulting from head trauma and ischemia due to stroke. For example, these proteases can generate products that are neurotoxic, such as the amyloid beta protein ("A(BETA)") which forms the senile plaques seen in Alzheimer's disease patients, or initiate degradative cascades that are involved in breaking down the neuronal cytoskeleton, leading to nerve cell death. The Company believes that modulating the activity of selected proteases may control these degenerative processes and have therapeutic benefit leading to neuroprotection and reduced neuronal cell loss. SIBIA believes there are significant new opportunities for protease-based therapeutics for nervous system disorders, particularly neurodegenerative conditions. To pursue this class of molecular targets the Company has established its human protease technology platform, which includes the identification and characterization of specific proteases and their functional activity, the development of proprietary assays to measure specific protease activity and the use of novel combinatorial chemistry techniques to design proprietary and selective protease inhibitors. The Company has established a panel of more than 15 protease targets to be able to evaluate the selectivity of its compounds. These targets have been incorporated into assays that include isolated enzymes and cell-based approaches. This has facilitated the discovery of specific small molecule inhibitors that have demonstrated effectiveness in animal models of human neurodegenerative diseases. DRUG DISCOVERY TECHNOLOGIES SIBIA is a leader in the development of proprietary drug discovery platforms which combine key tools necessary for modern drug discovery, including genomics, high throughput screening, advanced combinatorial chemistry techniques and pharmacology. The Company's proprietary molecular targets and drug candidates, together with its drug discovery technologies and research expertise, have enabled the Company to establish several corporate collaborations and resulted in a number of compounds being evaluated for, or developed in, clinical trials. The Company believes its technology platform, including its human receptor/ion channel subtype and human protease technologies, and product candidates will lead to additional corporate collaborations and licensing opportunities with pharmaceutical and biotechnology companies. Molecular Targets Genomics. For over ten years, SIBIA has been involved in the cloning of complete genes encoding selected receptor/ion channel subtypes from human brain tissue. This has been critical for the Company's target based approach to drug discovery. Receptor/ion channel subunit genes have been cloned through molecular biological, biochemical, immunological and functional approaches, and by using molecular hybridization techniques and homology screening, related subunits and splice variants of those genes have been identified. SIBIA is now incorporating expression cloning and more sophisticated bioinformatics-based approaches to its target identification efforts and has developed a collection of more than 63 complete receptor/ion channel genes encompassing all known subtypes of the targeted nAChR, EAAR and VGCC classes. This has provided SIBIA with a strong proprietary position with respect to those particular drug targets. Functional Genomics. In an effort to establish functions for specific isolated receptor/ion channel subtypes and proteases, SIBIA has pursued various functional genomic approaches either internally or in conjunction with leading academic collaborators. These include anatomical (mapping studies in normal and diseased tissue using clones and antibodies to expressed proteins), pharmacological (utilizing molecular 4 7 target-specific compounds in cell, tissue or animal models), genetic (chromosomal mapping, linkage studies, knockouts and transgenic animals) and expression array (gene chip or gene filter) approaches. Functional Assay Technology and High Throughput Screening High throughput screening utilizing functional assays is a key component of SIBIA's target-based approach to drug discovery. SIBIA utilizes its human receptor/ion channel subtype technology and human protease technology with high throughput screening in two modes: first, for the testing of large random compound libraries to discover novel structures that are selective and potent substrates for more in-depth research and evaluation; and second, for the rapid identification, characterization, profiling and optimization of selected compounds through an interactive process with chemistry and pharmacology for further in vitro and in vivo study of lead candidates. SIBIA's proprietary high throughput functional cell-based assays are applicable to all of SIBIA's drug discovery programs -- nAChRs, EAARs, VGCCs and proteases. SIBIA's proprietary assays are based on the receptor/ion channel-induced changes in cellular calcium levels, or protease-mediated changes in fluorescent substrates. In contrast to traditional binding assays, these assays also allow for simultaneous analysis of the selectivity, potency, efficacy and pharmacological nature (e.g., agonist, antagonist or modulator) of test compounds with respect to specific molecular targets. Fluorescence-Based Ion Assay. SIBIA's proprietary fluorescence-based ion assay technology measures changes in intracellular events (e.g., calcium concentrations) through the use of ion-sensitive and other fluorescent dyes. SIBIA, in collaboration with a third party, has developed a microtiter plate-imaging fluorimeter to perform functional high throughput screening. The equipment is fully automated with robotics and analyzes the fluorescent signals of all 96 wells in a standard microtiter plate simultaneously, rather than sequentially in a time-delayed manner. This system can also be adapted to a 384 well plate format. This equipment incorporates a sophisticated computer control and data capture system which allows SIBIA to perform more than 25,000 functional receptor/ion channel assays per day. SIBIA is in the process of expanding its capacity in this area and expects to significantly increase high throughput screening. Transcription-Based Assay. SIBIA's proprietary transcription-based assay technology measures the functional activity of test compounds on cell-surface proteins using a wide array of specifically responsive promoter-reporter gene constructs and products. SIBIA believes its proprietary transcription-based assay technology is broadly applicable to virtually any cell-surface protein, such as receptors and ion channels, that control signal transduction processes affecting gene transcription. In addition, the Company believes that transcription-based assays have applications beyond SIBIA's current receptor/ion channel subtype targets and could support the expansion of SIBIA's drug discovery efforts to other human molecular targets involved in nervous system disorders or to other therapeutic categories. Chemistry Medicinal Chemistry. SIBIA has established in-house a state-of-the-art medicinal chemistry capability which incorporates structure-based drug design, computer assisted molecular modeling, pharmacophore development based on structure-activity relationships and organic synthesis. These activities are closely integrated with combinatorial chemistry. Combinatorial Chemistry. SIBIA has developed a combinatorial chemistry capability referred to as high throughput organic synthesis ("HTOS"). HTOS is currently focused on the rapid generation of analogues of "hits" from high throughput screening. The Company's HTOS laboratory is automated and is able to produce milligram amounts of up to 1,000 individual compounds per week. Novel synthetic approaches and strategies have also been developed and are being utilized in SIBIA's drug discovery programs. SIBIA has integrated its high throughput screening capabilities with its proprietary HTOS technologies to rapidly convert hits identified through screening to potential lead compounds. Pharmacology Neuropharmacology. SIBIA has established in-house a number of in vitro and in vivo assays for evaluating properties of specific test compounds such as second messenger modulation, neurotransmitter release from tissue slices, and in vivo microdialysis. 5 8 Neurodegeneration. SIBIA has established in-house a number of in vitro and in vivo assays to measure neuroprotective and neurodegenerative potential of test compounds in acute neurodegenerative diseases such as stroke and head trauma and chronic neurodegenerative diseases such as Parkinson's disease and Alzheimer's disease. Behavioral Pharmacology. SIBIA has developed in-house a panel of more than 30 different animal models that permit the evaluation and optimization in vivo of compound activity in a range of potential therapeutic indications. Developmental Pharmacology. SIBIA has established an in-house group capable of performing safety, pharmacokinetic and ADME (absorption, distribution, metabolism and excretion) studies in rodents, which are a precursor to the development of drug candidate compounds. DISCOVERY AND DEVELOPMENT PROGRAMS
DEVELOPMENT COMMERCIAL PROGRAM THERAPEUTIC TARGET STATUS(1) RIGHTS ------- ------------------ ----------- ---------- HUMAN RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY nAChR Agonists SIB-1508Y Parkinson's Disease Phase 2 clinical trials Meiji/SIBIA SIB-1553A Alzheimer's Disease, Phase 2 clinical trial SIBIA Attention Deficit and Hyperactivity Disorder (ADHD), Schizophrenia SIB-3182 Alzheimer's Disease, Pre-clinical SIBIA Attention Deficit and Hyperactivity Disorder (ADHD), Schizophrenia Other Series Pain, Schizophrenia, Discovery/Leads identified SIBIA Depression EAAR Ligands CGP 79397 Epilepsy Pre-clinical Novartis/SIBIA CGP 80887 Pain Pre-clinical Novartis/SIBIA Other Series Pain, Anxiety, Discovery/Leads identified SIBIA Schizophrenia, Neurodegenerative Diseases VGCC Antagonists Compound Series Neuropathic and Leads identified SIBIA Chronic Pain HUMAN PROTEASE TECHNOLOGY A(BETA) Inhibitors Alzheimer's Disease Pre-clinical Bristol-Myers Squibb/ SIBIA Apoptosis Modulators Stroke, Brain Discovery/Leads identified SIBIA Injury, Neurodegenerative Diseases
6 9
DRUG DISCOVERY TECHNOLOGY LICENSEES ------------------------- --------- Transcription-Based Assay Novartis; Aurora; Neurocrine; Bristol-Myers Squibb Fluorescence-Based Ion Assay Novartis; Aurora; Lilly Phage Display Technology Affymax/Glaxo Wellcome
- --------------- (1) "Discovery" activities include initial research related to specific molecular targets and assay development for the identification of new lead compounds. "Leads identified" indicates that lead compounds have been discovered that meet certain criteria of the Company. Lead compounds may undergo structural modification and more extensive evaluation prior to selection of candidates for preclinical development. "Pre-clinical" indicates that SIBIA is conducting pharmacology testing, toxicology testing, formulation, process development and/or manufacturing scale-up prior to possible submission of an IND. "Phase 2 clinical trials" are those in which the drug is administered to patients to evaluate safety, tolerability and efficacy. This indicates that SIBIA has completed the initial introduction of the drug into healthy human subjects (Phase 1), where it has successfully been tested for safety, tolerability and pharmacokinetics over a range of doses. In some cases, aspects of the metabolism or the pharmacodynamics of compounds are also tested in Phase 1. HUMAN RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY nAChR Program In the late 1980s, SIBIA began exploring nAChR subtypes as targets for drug discovery because of the growing awareness of the diversity and importance of the nAChR system and its endogenous neurotransmitter, acetylcholine, in a variety of behaviors, particularly cognition; the discovery of a number of distinct nAChR subtypes located in the brain; and the complex pharmacology of the exogenous ligand nicotine. The complexity of nicotine's activity was believed to be due to its non-selective nature (acting at all nAChRs), and SIBIA sought to separate the potential therapeutic benefits of nicotinic compounds from less desirable effects with receptor subtype-selective compounds. Until recently, the pharmaceutical industry has not focused on nAChRs as important drug targets. Mapping and pharmacological studies have revealed that nAChR subtypes are widely but discretely distributed in the brain and appear to be associated with specific neuronal structures and functions. The Company's nAChR drug discovery program is focused on the identification, optimization and early-stage development of nAChR subtype-selective compounds as novel drug candidates. There is strong evidence that nAChRs are important in a number of nervous system disorders. In particular, deficits of nAChRs have been demonstrated in Parkinson's and Alzheimer's patients. Studies by the Company indicate that nAChRs are involved in modulating the release of dopamine, acetylcholine and other important neurotransmitters in different brain regions. The Company believes that it may be able to develop subtype-selective nAChR drugs, such as SIB-1508Y and SIB-1553A, to ameliorate the disease symptoms that result from reduced concentrations of dopamine and acetylcholine in Parkinson's and Alzheimer's patients, respectively. In addition, SIBIA believes that nAChR compounds with different subtype selectivities may be useful for the treatment of other nervous system disorders such as schizophrenia, ADHD, depression and pain. SIB-1508Y. The first compound discovered by SIBIA to enter clinical trials was SIB-1508Y, currently in development for Parkinson's disease. In contrast to current Parkinson's disease therapies which treat only motor dysfunction, SIB-1508Y is being developed for the treatment of motor, affective and cognitive dysfunctions of this disease. SIB-1508Y exhibits subtype-selective nAChR agonist activity and releases dopamine, acetylcholine and norepinephrine from selected brain regions. SIB-1508Y has been tested in a number of animal models, and demonstrated activity in rodent and primate models of Parkinson's disease, in rodent models of depression and in primate models of cognitive function. Pre-clinical data suggests that SIB-1508Y may be useful both as a stand-alone therapeutic agent and as an adjunctive therapy with L-dopa. SIB-1508Y is currently in two Phase 2 clinical trials for Parkinson's disease. The first trial, ongoing since 7 10 January 1998, is assessing the safety, motor and cognitive effects of SIB-1508Y in early stage Parkinson's patients requiring but not receiving dopamine replacement therapy. The second trial, initiated in early 1999, is studying the compound in later-stage patients in combination with a half dose of their current dopamine replacement therapy. SIBIA plans to complete both Phase 2 studies in mid-year 1999. In March 1997, the Company announced a collaboration with Meiji for the development and commercialization of SIB-1508Y in Japan and certain other Asian countries. SIBIA has retained worldwide rights to manufacture the clinical supplies and bulk drug material required for the commercial production of SIB-1508Y. The Company plans to establish additional corporate collaborations for advanced clinical trials and commercialization of SIB-1508Y in other areas of the world. SIB-1553A. Another compound discovered by SIBIA's proprietary drug discovery platforms is SIB-1553A, currently in development for Alzheimer's disease. The Company's studies indicate that this compound strongly stimulates acetylcholine release in specific brain regions associated with memory and learning, the same regions which exhibit deficits of this neurotransmitter in Alzheimer's disease. In the first half of 1997, the Company reported pre-clinical data demonstrating that in animals, SIB-1553A significantly stimulates the release of acetylcholine. In addition, SIB-1553A was demonstrated to improve working (short-term) and reference (long-term) memory deficits due to injury, drugs or aging in studies in rodents and monkeys. SIB-1553A is currently in a Phase 2 clinical trial, commenced in early 1999, to study the effect of the compound on cognitive performance in early to mid-stage Alzheimer's patients. SIBIA expects to complete this study mid-year 1999. EAAR Program The excitatory amino acid system is the major excitatory system in the brain. EAARs are divided into three categories based on the names of compounds selective for each category: NMDA-type receptor/ion channels, AMPA-type receptor/ion channels, kainate-type receptor/ion channels and metabotropic receptors, a category of G protein-coupled receptors which do not directly flux calcium but rather function via other cellular second messenger molecules. Each category is comprised of multiple subtypes that are activated by excitatory amino acid neurotransmitters such as glutamate and each subtype has unique anatomical distributions. The NMDA-, AMPA-, and kainate-type receptor/ion channel categories are ligand-gated ion channels, and these subtypes directly flux calcium into neurons. These receptor/ion channel subtypes are important for diverse brain functions, including memory and learning, and are also implicated in a variety of central nervous system disorders, including stroke and brain trauma, epilepsy, pain, schizophrenia, depression and others. Stable cell lines expressing NMDA-, AMPA-, and kainate-type EAARs have been established and are being used in SIBIA's functional high throughput screening assays. Potent and selective compounds are being identified and are being evaluated in various animal models of nervous system disorders. Metabotropic receptors also appear to be involved in certain nervous system disorders. Clones for genes encoding a number of different and novel metabotropic EAARs have been isolated by SIBIA from human brain tissue and have been demonstrated to be functional in several types of assays. Stable cell lines expressing metabotropic EAARs have been established and are being used in SIBIA's functional high throughput screening assays. Potent and selective compounds have been identified and are being evaluated in various animal models. The Company believes drugs acting at different and specific EAAR subtypes may have application to certain disorders of the central nervous system as stated above. To date, developing therapeutically useful EAAR drugs has been difficult. Traditional drug discovery approaches have produced non-selective EAAR antagonists which generally have intolerable side effects. SIBIA has discovered a number of novel and distinct human EAAR subtypes, each with different pharmacological properties. By identifying receptor subtype-selective EAAR agonists and antagonists, the Company believes it should be possible to effectively treat certain nervous system disorders without the side effects caused by non-selectively blocking multiple EAAR subtypes. 8 11 The first EAAR gene was cloned at The Salk Institute, and SIBIA has an exclusive license to broad patents relating to this research. The Company has subsequently filed its own patents on additional EAAR subtypes. SIBIA and Novartis have identified a series of subtype-specific human metabotropic receptor antagonists. Under the terms of their agreement, SIBIA and Novartis both worked to design and optimize potential lead compounds which are selective for EAARs. Such compounds will be further developed by Novartis and SIBIA will receive milestone payments based on their success. Subsequent to the completion of the collaborative research with Novartis in October 1998, SIBIA has been independently pursuing drug discovery on EAAR targets. VGCC Program VGCCs are a major receptor/ion channel family involved in regulating neuronal calcium flux and cell excitability. VGCCs have traditionally been classified as L-, T-, N- and P-type calcium channels based on their biophysical and pharmacological properties. SIBIA's pioneering research in the characterization of VGCCs by molecular structure has led to the identification of other classes of calcium channels as well as channel subtypes within these classes, resulting in a new structure-based understanding of VGCCs. The critical role of VGCC subtypes in the function and potential dysfunction of nerve cells indicates that they may be important targets for therapeutic intervention in a number of nervous system disorders. Calcium entry into neurons through distinct VGCC subtypes is essential for several fundamental activities of neurons, e.g., regulation of neurotransmitter release, activation of enzymes and regulation of gene transcription. This gives rise to several possible therapeutic applications of modulation of VGCC function. Currently, SIBIA is focusing on small molecule VGCC antagonists for the treatment of pain. This derives from the observation that a synthetic version of a VGCC subtype-selective peptide, (OMEGA)-conotoxin MVIIA, is currently in late stage clinical development by a third party for chronic pain. This molecule has demonstrated efficacy, but its widespread use may be limited by its peptidic nature and by the fact that it must be administered into the spinal fluid by a pump. The Company believes that this validates a particular VGCC subtype as a molecular target for pain, and that small molecule drugs of the type SIBIA is identifying will offer significant advantages over peptides or their derivatives in creating a useful drug for chronic pain, where great unmet need exists. In addition, recent studies have identified specific mutations in one of the Company's proprietary human VGCC genes associated with an inherited form of migraine. The Company believes this provides insight as to a novel therapeutic approach for the treatment of migraine. The Company further believes modulation of synaptic activity by controlling neurotransmitter release, neuronal calcium levels and neuronal excitability with VGCC subtype-selective drugs may prove to be a more effective approach with broader applicability than current drug therapy for many nervous system disorders. The Company believes it was the first to clone and functionally express a human neuronal N-type VGCC. SIBIA has generated a number of stable mammalian cell lines which functionally express additional distinct VGCC subtypes and has developed these cell lines into assays that currently are being employed in efforts to discover selective drugs using high throughput screening technology. SIBIA has an extensive patent portfolio in this area. Potent and selective compounds have been identified by the Company and are being evaluated in various animal models. SIBIA is currently free to develop compounds and other technology it discovers in this area on its own or with partners. HUMAN PROTEASE TECHNOLOGY APP Modulators SIBIA's Amyloid Precursor Protein (APP) Modulator program is currently focused on controlling proteases that generate A(BETA), the neurotoxic fragment of APP. A(BETA), which is derived from APP, is generally understood to be a key molecule in the development of Alzheimer's disease. A(BETA) is found at autopsy in senile plaques and in deposits surrounding the small blood vessels in brain tissue, both of which are diagnostic for Alzheimer's disease. A number of studies indicate that mutations in the APP gene are associated with early-onset familial Alzheimer's disease. The clinical presentation and histopathology of early-onset Alzheimer's disease are indistinguishable from that seen in the more prevalent late-onset Alzheimer's disease. 9 12 The Company therefore believes the inhibition of A(BETA) formation may be broadly applicable to early- and late-onset Alzheimer's disease. SIBIA has conducted extensive research concerning the role of APP in Alzheimer's disease. It has developed technology related to the metabolism of APP in Alzheimer's disease and methods for controlling the formation of A(BETA). The other important APP metabolic product, secreted APP(s(ALPHA)), has been shown in in vitro and in vivo studies to have neuroprotective properties and has been shown by SIBIA to be significantly decreased in the cerebrospinal fluid of Alzheimer's disease patients. SIBIA is seeking to develop compounds which selectively modulate the enzymatic processing of APP, such that the formation of A(BETA) is inhibited and that of APP(s(ALPHA)) is maintained or enhanced. SIBIA believes such compounds could slow disease progression or possibly modify the underlying disease process. In the A(BETA) inhibitor program, SIBIA has developed neuronal-type cell lines able to process human APP and produce APP(s(ALPHA)), A(BETA) and other processing fragments which can be detected with the use of various antibodies, and which have been established as functional assays for compound screening and drug development. SIBIA's biochemical assays allow quantification of A(BETA) and APP(s(ALPHA)) in cultured cells, tissues and biological fluids (for example, cerebrospinal fluid) from animals (normal and transgenic mice) and sporadic and familial Alzheimer's patients. The Company believes its assays, and the ability to biochemically evaluate the effect of test compounds on APP processing in biological systems, and potentially in patients in clinical trials, provide it a significant competitive advantage. SIBIA, in collaboration with its partner in the APP Modulator program, Bristol-Myers Squibb, has identified several series of small molecules that inhibit A(BETA) production in vitro and in vivo. The most advanced compounds from this collaboration are in pre-clinical development. Other Protease Targets SIBIA has built an integrated drug discovery platform able to address a broad range of human proteases as molecular targets. The Company has developed a novel cell-based screening assay using protease activity as a "reporter" for utilizing proprietary technology licensed from Aurora for monitoring the effects of test compounds. SIBIA is currently utilizing this assay to discover inhibitors of programmed cell death (apoptosis), which occurs in stroke, head trauma and neurodegenerative disease. STRATEGIC ALLIANCES Strategic alliances with major pharmaceutical and biotechnology companies are an integral part of SIBIA's business strategy. Currently, SIBIA has a collaborative research and license agreement with Bristol-Myers Squibb and development and license agreement with Meiji. Only the collaborative research agreement with Bristol-Myers Squibb currently provides research funding payments. SIBIA is entitled to receive, from Bristol-Myers Squibb, Lilly, Meiji, and Novartis, milestone payments at certain stages of the development of product candidates, if any are identified, and royalties on sales of products that are developed, if any are developed. Bristol-Myers Squibb Company In August 1995, SIBIA entered into a collaborative research and license agreement with Bristol-Myers Squibb under which Bristol-Myers Squibb agreed to fund research for a minimum of four years to discover and develop compounds able to selectively modulate the processing of APP for the treatment of Alzheimer's disease and related neurodegenerative disorders. During the joint research effort, neither SIBIA nor Bristol-Myers Squibb may enter into any other third-party agreements directed toward the discovery and development of products for use in the area of APP metabolism. In addition, Bristol-Myers Squibb has the sole discretion to determine which compounds, if any, it will pursue to develop. Under the terms of the agreement, all pre-clinical and clinical development of lead compounds will be undertaken by Bristol-Myers Squibb. SIBIA has a right of first negotiation to obtain a license to certain compounds discovered during the research collaboration in the event Bristol-Myers Squibb elects not to pursue the development of such compounds. Pursuant to the collaborative research and license agreement, except with regard to SIBIA's assay technology, SIBIA has granted to Bristol-Myers Squibb an exclusive, worldwide, royalty-bearing license 10 13 to commercialize products arising out of the collaboration. Furthermore, upon the termination of the research collaboration, SIBIA and Bristol-Myers Squibb have granted to one another non-exclusive licenses to the other's assay technology for the discovery and development of new compounds. The collaborative research funding may not be terminated prior to August 1999 without the parties' mutual consent. Coincident with the collaborative research and license agreement, Bristol-Myers Squibb made an equity investment in the amount of $7,000,000 and paid a non-refundable license fee of $3,000,000. Bristol-Myers Squibb is also obligated to make a further equity investment of $6,000,000 upon the initiation of clinical trials relating to any product developed from the collaboration. In addition to research funding, SIBIA is entitled to receive certain milestone payments at certain stages during the development of product candidates, if any are identified. The agreement also provides that Bristol-Myers Squibb will pay SIBIA royalties on net sales of products resulting from the joint research, if any are developed. Meiji Seika Kaisha, Ltd. In February 1997, the Company entered into a development and license agreement with Meiji for the development and commercialization of the Company's proprietary nAChR agonist, SIB-1508Y, as a treatment for Parkinson's disease and other nervous system disorders in Japan and other Asian countries. Under the agreement, the Company received a one-time license fee of $3,000,000 for the license of certain technology to Meiji. In addition, the Company may receive development milestone payments and royalties on future product sales, if the product is successfully commercialized in such countries. SIBIA has retained rights to develop and commercialize SIB-1508Y outside of Japan and certain other Asian countries, and has retained rights to manufacture clinical supplies and commercial material worldwide. Completed Research Collaborations In October 1997, the Company and Lilly completed their collaborative research in the area of VGCCs. The Company and Lilly will independently pursue discovery and development of drug leads that act on VGCC drug targets identified during the research collaboration. The Company is free to develop compounds it discovers in this area on its own or with other partners. Lilly has exercised its option to license the Company's fluorescence-based ion assay technology. In October 1992, SIBIA entered into a collaborative research and license agreement (which included research funding and a $5,000,000 equity investment) with Novartis to develop and utilize SIBIA's receptor/ion channel technology in the area of EAARs for the discovery of drugs that interact with these molecular targets. In March 1996, the initial term of the collaborative research funding was extended through September 1998, at which time the parties' collaborative research was concluded. Under the agreement, Novartis was granted exclusive worldwide rights to manufacture and market products it or SIBIA discovered using the EAAR technology during the research collaboration, and SIBIA is entitled to receive milestone payments at certain stages of the development of product candidates, if any are identified, and royalties on sales of products that are developed, if any are developed. Novartis also received a non-exclusive license to the Company's transcription-based assay technology and fluorescence-based ion assay technology. SIBIA has retained the rights to use the program technology for its own drug discovery efforts and may screen molecules from other sources against EAARs and pursue development of these molecules. Pursuant to the extended agreement, Novartis paid SIBIA $500,000 to fund certain capital expenditures and agreed to purchase $7,500,000 of the Company's Common Stock, $5,000,000 of which was purchased in conjunction with the initial public offering of the Company's Common Stock and the remaining $2,500,000 of which is required to be purchased upon the achievement of certain research milestones. 11 14 DRUG DISCOVERY TECHNOLOGY LICENSES Consistent with the Company's strategy of enhancing and leveraging its proprietary drug discovery platform technologies, the Company has entered into the following technology licensing arrangements with third parties: The Salk Institute for Biological Studies In 1988, SIBIA entered into a license agreement with The Salk Institute on a number of nAChR subunit clones on which five U.S. patents have issued. This agreement was amended in March 1996 such that the license to the issued U.S. patents and related patent applications became an exclusive worldwide license. Pursuant to the agreement, as amended, SIBIA is obligated to pay royalties to The Salk Institute on sales of products resulting from The Salk Institute's nAChR technology. In addition, the Company is required to make minimum annual royalty payments to The Salk Institute beginning in 2002. Failure to pay such royalties will result in the related license becoming non-exclusive. In 1990, SIBIA entered into a three-year agreement with The Salk Institute in the area of EAARs. This agreement provided for the support of research at The Salk Institute by SIBIA and the transfer of research materials and research results in the EAAR area from The Salk Institute to SIBIA. SIBIA also received an exclusive worldwide license to certain EAAR-related patents and patent applications held by The Salk Institute. The agreement was amended in March 1996. Pursuant to the agreement, as amended, SIBIA began making certain annual minimum royalty payments to The Salk Institute beginning in 1998. Failure to pay such royalties will result in the related license agreement becoming non-exclusive. Aurora Biosciences Corporation In January 1997, the Company entered into an agreement with Aurora. Under the agreement, the Company licensed to Aurora non-exclusive rights to practice its patented transcription-based assay technology, and certain aspects of its fluorescence-based ion assay technology related to automated drug screening. In return, in addition to other consideration, the Company received from Aurora non-exclusive rights to several assay technologies, including novel reporter molecules, that will facilitate the Company's high throughput screening and drug discovery efforts directed to certain receptor, ion channel and enzyme targets associated with nervous system disorders. Both parties have limited sublicensing rights to each other's patents. In December 1997, Aurora entered into agreements with Lilly and Merck to sublicense certain of SIBIA's patents when used in conjunction with Aurora technologies. Bristol-Myers Squibb In March 1999, SIBIA entered into a license agreement with Bristol-Myers Squibb. Under the agreement, the Company licensed to Bristol-Myers Squibb non-exclusive rights to practice its patented transcription-based assay technology. SIBIA will receive annual maintenance payments as well as royalties on the sales of any products identified using the licensed technology. Neurocrine Biosciences, Inc. In October 1997, SIBIA entered into an agreement with Neurocrine. Under the agreement, the Company licensed to Neurocrine non-exclusive rights to practice its patented transcription-based assay technology for use with a specified molecular target. In exchange, SIBIA has been granted access to a compound library developed by Neurocrine's combinatorial chemistry group. SIBIA intends to use the Neurocrine compound library in its drug discovery and high throughput screening programs directed to certain receptor/ion channel and enzyme targets associated with nervous system disorders. Affymax/Glaxo Wellcome In 1993, SIBIA entered into a semi-exclusive license with Affymax, which was subsequently acquired by Glaxo Wellcome, regarding SIBIA patents covering phage display technology for drug discovery. This 12 15 technology covers the display of random peptide epitopes on the surface of viral coat proteins, which can then be screened for activity in various types of assays. SIBIA retains exclusive rights to this technology for vaccine and other applications. SELECTED ACADEMIC RESEARCH COLLABORATIONS The Mayo Clinic, Jacksonville SIBIA is collaborating with and providing research support to Dr. Steven G. Younkin, Director of Research at the Mayo Clinic, Jacksonville. Research is focused on measuring the effects of lead compounds on A(BETA) levels in biological samples from in vitro and in vivo models of APP processing and Alzheimer's disease. The Rockefeller University SIBIA is collaborating with Dr. Rong Wang, a researcher in the Mass Spectrometry Laboratory at Rockefeller, on the detection and quantitation of A(BETA) and related APP fragments in tissue culture, cerebrospinal fluid and plasma samples. University of California, Los Angeles, School of Medicine SIBIA is collaborating with Robert Baloh, M.D., Professor, Department of Neurology and Joanna Jen, M.D., Ph.D., Clinical Instructor, Department of Neurology, in the area of genetic disorders involved with calcium channels. Thomas Jefferson University SIBIA is collaborating with Jay S. Schneider, Ph.D., Professor, Department of Pathology, Anatomy and Cell Biology, and Department of Neurology, in the evaluation of various compounds on cognitive deficits in motor asymptomatic macaques treated with MPTP. Medical College of Georgia SIBIA is collaborating with Jerry J. Buccafusco, Ph.D., Professor, Director, ARC Animal Behavior Center, in the evaluation of various compounds in aged rhesus monkeys. University of Chicago SIBIA is collaborating with Dr. Richard J. Miller, Professor, Department of Pharmacology and Physiological Sciences, on the biophysical and pharmacological characterization of certain VGCC subtypes. University of California, San Diego, School of Medicine SIBIA is collaborating with Dr. Tony Yaksh, Professor and Chair, Department Anesthesiology, to map changes in calcium channels in neuropathic pain states. Parkinson's Institute SIBIA is collaborating with J. William Langston, M.D., President, and Giselle M. Petzinger, M.D., Assistant Research Scientist, in the evaluation of various compounds in the systemic MPTP parkinsonian monkey model (squirrel monkeys). PATENTS AND PROPRIETARY RIGHTS SIBIA files patent applications to protect molecular targets, technologies, compounds, processes, assay methods and therapeutic treatment methods that are important to the development of its business. The 13 16 Company also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. SIBIA has established an extensive patent portfolio which it intends to protect on behalf of its shareholders. The Company has been engaged in litigation with Cadus Pharmaceutical Corporation ("Cadus") regarding the Company's U.S. Patent No. 5,401,629 (the "'629 patent"), entitled "Assay Methods and Compositions Useful for Measuring the Intracellular Transduction of an Intracellular Signal." See "Item 3. Legal Proceedings." SIBIA directly holds, or has exclusive licenses to, 48 issued U.S. and 26 foreign patents relating to molecular targets, technologies, compounds and assay methods for various nervous system diseases and disorders. In addition, SIBIA has 58 U.S. and 71 foreign applications relating to these enabling technologies, thirteen of which have been allowed. SIBIA has eight issued patents and three allowed which include claims to DNAs encoding key structural components of VGCCs, one of which, the (ALPHA)(2)(DELTA) component, is thought to be essential for all VGCC subtypes. Four additional patents cover VGCCs which can be utilized in assays to identify compounds that modulate VGCC function. SIBIA has been granted a European patent covering DNA encoding VGCC (ALPHA)(2)(DELTA) subunits, cells expressing the same and a method to identify compounds that modulate VGCC function and Australian and British patents covering a number of subtypes and assay methods. Eleven of the pending U.S. patent applications cover the composition or use of VGCC genes and the encoded subtypes and assay methods; two of these have been allowed. SIBIA has been issued five U.S. patents which claim DNAs encoding and assays for key structural components of nAChRs and has an exclusive license from the Salk Institute to five issued U.S. patents and three pending applications (of which 2 stand allowed), all of which claim DNAs encoding various nAChR subunits and assay methods. SIBIA also has been granted four patents in Great Britain covering nAChR subtypes and assay methods. Seven of SIBIA's pending U.S. applications cover the composition or use of human nAChR genes and encoded subtypes and assay methods; four of these have been allowed. SIBIA has two issued U.S. patent with claims to DNAs encoding human metabotropic receptors and cells containing the same and a corresponding patent has been granted in Australia and Great Britain. SIBIA also has one issued U.S. patent with claims to NMDA receptors and an exclusive license from the Salk Institute to four additional issued U.S. patents with broad claims to DNAs encoding various NMDA- and non-NMDA-type ligand gated EAA receptor/ion channel subtypes, and corresponding Australian and British patents have issued. SIBIA has five pending U.S. applications covering human NMDA receptor genes and encoded subtypes and seven pending U.S. applications covering human metabotropic glutamate receptor ("mGLuR") genes and assay methods, two of which have been allowed. Several of SIBIA's pending U.S. patent applications relate to functional screening techniques that can be utilized in conjunction with receptor/ion channel compositions for identifying drugs which have the potential for treatment of disorders associated with the particular receptor or ion channel. Two issued U.S. patents cover methods and compositions for identifying receptor-modulating compounds based on detection of reporter gene transcription. In addition, one issued U.S. patent, three granted foreign patents, five pending U.S. patent applications and seven pending foreign applications cover fluorescence-based automated systems and methods for high throughput functional screening of receptor-modulating compounds. SIBIA has also filed a patent application disclosing proprietary methods for solid phase synthesis of chemical series, termed resin activation/capture or REACAP, to produce libraries of compounds that would be difficult, or impossible, to obtain using solution phase syntheses. An additional advantage of the methods is the production of compounds of increased purity. The libraries produced by the methods will be useful for screening against SIBIA's molecular targets. SIBIA has eleven issued U.S. patents covering the composition, use, or methods or preparation of compounds which modulate the activity of nAChRs for the treatment of diseases and disorders involving these receptors, including six issued U.S. patents covering, inter alia, SIB-1508Y. Additionally, SIBIA has four pending U.S. applications, fifteen foreign applications and one issued Australian patent, covering different 14 17 series of nAChR compounds. Two additional applications covering EAA compounds are jointly assigned to SIBIA and Novartis. SIBIA has three issued U.S. patents and six U.S. patent applications and three foreign applications pending covering the composition or use of compounds that modulate the processing of proteins implicated in Alzheimer's disease and an issued U.S. patent covering assay methods for the detection of Alzheimer's disease. Four additional applications covering compounds for treating Alzheimer's disease are jointly assigned to SIBIA and Bristol-Myers Squibb. SIBIA has a non-exclusive worldwide license to various patents and patent applications held by Aurora. The technology covered by these patents and patent applications include several assay technologies. The Company intends to file additional applications as appropriate for patents covering its technologies, compounds and processes. There can be no assurance that the Company will develop additional technologies, compounds or processes that are patentable, that patents will issue from any patent application or that claims allowed will be sufficient to protect the Company's technologies, compounds or processes. Competitors may have filed applications, may have been issued patents or may obtain additional patents and proprietary rights relating to technologies, compounds or processes competitive with those of the Company. The failure by the Company to adequately protect its technologies, compounds or processes covered by issued patents or to obtain patents based on the applications referred to herein or any future applications could have a material adverse effect on the Company's business. The patent positions of pharmaceutical and biotechnology firms, including SIBIA, are uncertain and involve complex legal and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued or upon reexamination. Consequently, the Company does not know whether any more 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 United States are maintained in secrecy until a patent issues, and since publication of discoveries in the scientific or patent literature often lag 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. The success of the Company will also depend in part on SIBIA not infringing patents issued to competitors and not breaching the technology licenses upon which any Company compounds or processes are based. It is uncertain whether any third-party patents will require the Company to alter its technologies, compounds or processes, obtain licenses or cease certain activities. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in the field in which the Company is involved. 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 issued to other companies contain competitive or conflicting claims and such claims are ultimately determined to be valid, the Company may be required to obtain licenses to these patents or to develop or obtain alternative technology. If any licenses are required, there can be no assurance that the Company will be able to obtain any such license on commercially favorable or acceptable terms, if at all. The Company's breach of an existing license or failure to obtain a license to any technology that it may require to develop and commercialize its compounds would have a material adverse effect on the Company's business. Litigation, which could result in substantial costs to the Company, may also be necessary to enforce any patents issued to the Company or to determine the scope and validity of third-party proprietary rights. See "Item 3. Legal Proceedings." Moreover, if competitors of the Company prepare and file patent applications in the United States that claim technology also claimed by the Company, the Company may have to participate in interference proceedings declared by the United States 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. Similarly, the Company may have to participate in opposition proceedings with respect to granted foreign patents. The Company is aware of a third-party patent application 15 18 that elicited an interference proceeding with one of the Company's patent applications in the PTO. There can be no assurance that the Company will prevail in these proceedings. Also, there can be no assurance that the validity of the Company's patents, if issued, would be upheld by a court of competent jurisdiction. An adverse outcome in patent prosecution or in litigation with respect to the validity of any of the Company's patents 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, any of which could have a material adverse effect on the Company's business. In addition, the recombinant Pichia pastoris yeast expression system developed at SIBIA is protected by several patents that have issued to Phillips Petroleum. These patents include claims to key Pichia gene regulatory elements, marker genes and transformation methods that form the basis of the recombinant expression system. SIBIA retains full rights to the general expression system protected by these patents but does not have the right to sublicense this technology. SIBIA has filed numerous applications and has been granted eight U.S. patents and two foreign patents pertaining to Pichia-based recombinant systems for the production of certain proteins including human epidermal growth factor, human IGF-1 and aprotinin. SIBIA also has patents in vaccine-related technology. In addition to patents, the Company relies on trade secret laws to protect its technology, especially where patent protection is not believed to be appropriate or obtainable. Thus, SIBIA relies on protecting its proprietary technology and processes in part by confidentiality agreements with its employees, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. COMPETITION Competition to develop drugs to treat nervous system disorders is intense and expected to increase as knowledge and interest in the disorders addressed by the products the Company is seeking to develop increases. The Company's most significant competitors are pharmaceutical companies and established biotechnology companies. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical companies. In addition, the Company faces competition from academic institutions, governmental agencies and other public and private research organizations which conduct research, seek patent protection, and establish collaborative arrangements for product and clinical development and marketing. Furthermore, these companies and institutions compete with the Company in recruiting and retaining highly qualified scientific and management personnel. Many of the Company's competitors have substantially greater financial, technical and human resources than the Company and have significant products approved or in development. In addition, many of these competitors have significantly greater experience than the Company in undertaking preclinical testing and clinical trials of new pharmaceutical products and in obtaining FDA approval for products more rapidly than the Company. The Company has not sought the approval of the FDA for any product based on any of its compounds under development. Furthermore, if the Company is permitted to commence commercial sales of products that it may develop, it will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which it has no experience. Any product that the Company may succeed in developing, and for which it gains regulatory approval, must then compete for market acceptance and market share. For certain of the Company's potential products, an important competitive factor will be the timing of market introduction. Accordingly, the Company expects that the relative speed with which companies can develop products, complete the clinical testing and approval processes and supply commercial quantities of the product to the market will be important competitive factors. With respect to clinical testing, competition may delay progress by limiting the number of clinical investigators and patients available to test the Company's potential products. In addition to the above factors, competition is based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capability, price, patent position and reimbursement coverage. 16 19 MANUFACTURING The Company currently has no manufacturing facilities for clinical or commercial production of any compounds currently under development or the manufacture and distribution of products that may be developed. The Company is currently relying on third-party manufacturers to produce its compounds for pre- clinical and clinical purposes. Furthermore, the compounds under development by the Company have never been manufactured on a commercial scale and may not be able to be manufactured at a cost or in quantities to make commercially viable products. The Company intends to establish arrangements with third-party manufacturers to supply compounds for preclinical and clinical trials and commercial sales of products that may be developed, as well as for the packaging, labeling and distribution of such products. If the Company is unable to contract for a sufficient supply of its compounds on acceptable terms, the Company's preclinical and clinical testing schedule would be delayed, resulting in the delay of submission of products for regulatory approval and initiation of new development programs, which would have a material adverse effect on the Company's business. If the Company should encounter delays or difficulties in establishing relationships with manufacturers to produce, package and distribute products that it may develop, market introduction or penetration of such products would be adversely affected. SALES AND MARKETING The commercialization of products, such as those that may be developed by the Company, is an expensive and time-consuming process. The Company has no experience in sales, marketing or distribution. In order to market directly any products that the Company may develop, the Company must develop a marketing and sales force with technical expertise and supporting distribution capability. Alternatively, the Company may seek to obtain the assistance of a pharmaceutical or biotechnology company with a large distribution system and a large direct sales force. GOVERNMENT REGULATION The manufacturing and marketing of pharmaceutical products in the United States requires the approval of the FDA under the federal Food, Drug and Cosmetic Act. Similar approvals by the comparable agencies are required in most foreign countries. The FDA has established mandatory procedures and safety standards that apply to the pre-clinical and clinical testing, manufacture and marketing of pharmaceutical products. Obtaining FDA approval for a new therapeutic takes several years and involves substantial expenditures. Pharmaceutical manufacturing facilities are also regulated by state, local and other authorities. As an initial step in the FDA regulatory approval process, pre-clinical studies are typically conducted in animal models to assess a drug's efficacy and to identify potential safety problems. The results of these studies are submitted to the FDA as part of an IND, which is filed to comply with FDA regulations prior to beginning clinical trials. Clinical trials are typically conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial introduction of the drug into healthy human subjects, the drug is tested for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical pharmacology). Phase 2 involves studies in a limited patient population to (i) assess the potential of the drug for specific, targeted indications; (ii) evaluate dosage tolerance and optimal dosage; and (iii) identify possible adverse effects and safety risks. When a compound is found to be effective and to have an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical study sites. Data from clinical trials are submitted to the FDA in a New Drug Application ("NDA") or Product License Application ("PLA"). Preparing an NDA or PLA involves considerable data collection, verification, analysis and expense. The testing and approval process requires substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. The time period required for NDA review and approval may be affected by a number of factors, including the severity of the disease, the availability of alternative 17 20 treatments and the risks and benefits demonstrated in clinical trials. Additional animal studies or clinical trials may be requested during the FDA review period. The FDA may ask one of its advisory committees to aid in its assessment of the drug. All of these factors may delay marketing approval. The FDA may also require post-marketing testing to monitor for adverse effects, which can involve significant expense. FDA approval is limited to specified indications. Moreover, the product label and promotional labeling and prescription drug advertising are highly regulated by the FDA under the federal Food, Drug and Cosmetic Act. In order to permit promotion of the approved product for indications not included in the scope of the original approval, further clinical trials and FDA approval may be necessary. NDA approval requires, among other things, that the prospective manufacturer's quality control and manufacturing procedures conform to Good Manufacturing Practices ("GMP") regulations. All manufacturing facilities, whether foreign or domestic, may be subjected to a pre-NDA approval inspection. Additionally, domestic manufacturing facilities are subject to biennial FDA inspections and foreign manufacturing facilities are subject to periodic inspection by foreign regulatory authorities as well as by the FDA where the FDA has a reciprocal inspection agreement with the foreign regulatory authorities. For clinical investigation and marketing outside the United States, the Company also is subject to foreign regulatory requirements governing clinical trials and marketing approval for drugs. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. The Company's approach to the European regulatory process involves the identification of respected clinical investigators in the member states of the European Union ("EU") to conduct clinical studies. The Company intends to design these studies to meet both FDA and EU standards. Provided regulatory harmonization is finalized in the EU, these studies are designed to develop a regulatory package sufficient for multi-country approval in the Company's European target markets without the need to duplicate studies for individual country approvals. This approach also takes advantage of regulatory requirements in some countries, such as in the United Kingdom, which allow Phase 1 studies to commence after appropriate toxicology and preclinical pharmacology studies but prior to formal regulatory approval. HUMAN RESOURCES As of December 31, 1998, the Company had 122 employees, 39 of whom hold Ph.D. degrees. 109 employees are engaged in, or directly support, research and development. The Company's employees are not covered by a collective bargaining agreement and the Company considers its relations with its employees to be excellent. RISK FACTORS Absence of Developed Products; Early Stage of Development. SIBIA is an early stage biotechnology company. The Company has no products available for sale and does not expect to have any products resulting from its research efforts, including its collaborations with others, commercially available for at least several years, if at all. SIBIA has commenced clinical trials on two of its compounds (SIB-1508Y and SIB-1553A) currently under research and development, but no clinical trials have commenced by the Company's collaborative partners for any compound in connection with their collaborations with the Company. Even though Phase 2 clinical trials with respect to SIB-1508Y and SIB-1553A have commenced, both may prove to be ineffective in the treatment of neural disorders, or have undesirable or unintended side effects or other characteristics that prevent or limit their commercial use, either of which could have a material adverse effect on the Company's business. Furthermore, there can be no assurance that any products will be successfully discovered or developed by the Company or its collaborative partners, be approved for clinical trials, prove to be safe and efficacious in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs or be marketed successfully. The failure of the Company or its collaborative partners to discover or develop commercially viable products or successfully market such products would have a material adverse effect on the Company's business. The Company's area of therapeutic focus, disorders of the nervous system, is not thoroughly understood and there can be no assurance that the compounds the Company is seeking to develop will prove to be safe and 18 21 effective in treating nervous system disorders. The development of such compounds will require the commitment of substantial resources to continue research and to conduct the pre-clinical development and clinical trials necessary to bring such compounds to market and to establish production and marketing capabilities. Drug research, discovery and development by nature are uncertain. There is a risk of delay or failure at any stage, and the time required and cost involved in successfully accomplishing the Company's objectives cannot be predicted. Actual drug research, discovery and development costs could exceed budgeted amounts, which could have a material adverse effect on the Company's business. Dependence on Collaborative Relationships. The Company's strategy for the development, clinical testing, manufacturing and commercialization of certain of its compounds includes entering into various collaborations with corporate partners, licensors, licensees and others. The Company's collaborators have received from SIBIA certain exclusive rights to commercialize any products developed under their respective agreements. These collaborators have generally agreed to fund the research and development of compounds discovered under their respective agreements, conduct clinical testing of lead compounds, prepare and file submissions for regulatory approval, make milestone payments to SIBIA upon the achievement of certain goals and pay royalties on any resulting products. Under its agreements with these collaborators, the Company is restricted in its ability to conduct research with third parties with respect to the technology subject to the respective agreement until its collaborative research is complete. The amount and timing of resources dedicated by these collaborators under their respective agreements also is not within the control of the Company. There can be no assurance that the Company will ever receive any milestone or royalty payments under these agreements. In addition, if products that may be developed under such agreements are approved for marketing, any revenues to the Company from such products will be dependent on the marketing and sales efforts of these collaborators. Each of the collaborative parties has the right to terminate its respective collaboration under certain circumstances, including upon the occurrence of a material breach and, in certain cases, upon a change in control. There can be no assurance that the Company's relationships with its collaborative partners will not be terminated or that the Company will be able to enter into additional collaborations in the future. In addition, there can be no assurance that collaborators will not pursue alternative technologies to develop treatments for the diseases targeted by the respective collaborative programs. If any of the Company's collaborative partners terminates or breaches its agreement with the Company or fails to devote adequate resources to or to conduct in a timely manner its collaborative activities, the research program under the applicable collaborative agreement or the development and commercialization of drug candidates subject to such collaboration would be materially adversely affected, which would have a material adverse effect on the Company's business. In addition, because the Company's collaborative agreements have accounted for 93%, 95%, 97% of total revenues for the years ended December 31, 1998, 1997 and 1996, respectively, such a termination or breach could materially adversely affect the Company's results of operations and financial condition. Also, there can be no assurance that a research program covered by a particular collaborative agreement does not or will not conflict with any research programs covered by the Company's other collaborations. The occurrence of any such conflict could have a material adverse effect on the Company's business. A key element of the Company's strategy is to enter into additional collaborative arrangements with pharmaceutical and biotechnology companies to develop and commercialize its drug candidates. There can be no assurance that the Company will be able to negotiate collaborative arrangements in the future on acceptable terms, if at all, or that such collaborative arrangements will be successful. Most of the Company's competitors similarly are seeking to develop or expand their collaborative relationships with pharmaceutical and biotechnology companies, which could adversely impact the Company's ability to enter into additional collaborative arrangements. To the extent that the Company is not able to establish such arrangements or any of its existing arrangements are terminated, it would require significant capital to undertake development, regulatory, manufacturing and marketing activities at its own expense and may be required to curtail significantly or eliminate one or more of its research, discovery or development programs, either of which could have a material adverse effect on the Company's business. In addition, the Company may encounter significant delays in introducing products that it may develop into certain markets or may find that the 19 22 development, manufacture or sale of such products in such markets is adversely affected by the absence of such collaborative arrangements. New and Uncertain Technology. The Company's proprietary nervous system discovery technologies, which comprise the human receptor/ion channel subtype technology and human protease technology, are unproven and relatively new compared to traditional methods of drug discovery. The Company uses its technologies to isolate and identify molecular targets that it believes play an important role in nervous system function and nervous system disorders. The ability of the Company to screen potential compounds, select product candidates and develop products is dependent in large part upon the number of such targets available for screening and whether the expected functionality of such targets plays an important role in nervous system function and nervous system disorders. There can be no assurance that the use of such technologies will lead to the discovery or development of commercial pharmaceutical products that are safe and efficacious in treating any nervous system disorder. Failure to develop any such product would have a material adverse effect on the Company's business. History of Operating Losses. The Company is at an early stage of development with respect to its nervous system technologies and its compounds. Except for 1995, the Company has incurred net losses every year since it shifted its area of therapeutic focus to the central nervous system in 1991. As of December 31, 1998, the Company had an accumulated deficit of approximately $45.1 million. The Company's revenue for the short term will be limited to payments under its existing or future strategic alliance agreements. There can be no assurance that the Company will ever achieve or sustain significant revenues or profitable operations. To achieve significant revenues or profitable operations, the Company, alone or with its collaborators, must successfully develop, manufacture and market safe and efficacious products and obtain the regulatory approvals required for their testing, manufacture and sale. Failure to achieve significant revenues or profitable operations could impair the Company's ability to sustain operations. There can be no assurance that the Company will be successful in entering into additional collaborative arrangements or that any such arrangements will result in revenues or that the Company will receive additional revenues under existing collaborative arrangements. The Company has not yet received any revenues from the achievement of milestones from the discovery or development of, or royalties from the sale of, commercial drugs by Lilly, Novartis, Bristol-Myers Squibb or Meiji, and such revenues, if any, are not expected to represent a material amount of the Company's total revenues for several years, if at all. Future Capital Needs; Uncertainty of Additional Funding. The Company will require substantial additional funds to conduct the research and development and pre-clinical and clinical testing of its compounds and to manufacture and market any products that may be developed. Although the Company plans to contract with third parties to manufacture and market any products that may be developed, to the extent the Company is unsuccessful and is required to establish its own manufacturing capacity or marketing program, it will require substantial additional capital. The Company's future capital needs will be dependent upon many factors, including progress in its research and development activities, the magnitude and scope of these activities, progress with pre-clinical and clinical trials, the cost of preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaborative arrangements, the establishment of additional collaborative arrangements and the cost of manufacturing scale-up and development of marketing activities, if undertaken by the Company. The Company expects to expend substantial funds in connection with research and development and in the prosecution and enforcement of its intellectual property rights. Payments under existing collaborative agreements and the Company's current cash reserves will be insufficient to fund the Company's operations through the completion of any clinical trials and commercialization of its first product, if developed. Although the Company will seek to obtain additional funds through public or private equity or debt financings, collaborative or other arrangements with corporate partners or from other sources, there can be no assurance that additional financing will be available or, if available, that it will be available on acceptable terms. If additional funds are raised by issuing equity securities, further dilution to then existing stockholders would result. If adequate funds are not available, the Company may be required to curtail significantly or eliminate one or more of its research, discovery or development programs or obtain funds through additional arrangements with corporate partners or others which may require the 20 23 Company to relinquish rights to certain of its technologies or product candidates that the Company would not otherwise relinquish, any of which could have a material adverse effect on the Company's business. Intense Competition; Rapid Technological Change. The field in which the Company is involved is characterized by extensive research efforts, rapid technological change and intense competition from numerous organizations including pharmaceutical companies, biotechnology companies, drug discovery service companies, universities and other research organizations. Technologies, products and therapies currently exist on the market that would compete directly with those that the Company is seeking to develop and market. In addition, new developments occur and are expected to continue to occur at a rapid pace. Competition from pharmaceutical, biotechnology and drug discovery service companies is intense and is expected to increase. Many of these companies have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical and clinical testing, obtaining regulatory approvals and marketing than the Company. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical companies. Many of these competitors have significant nervous system products approved or in development and operate large, well-funded nervous system research and development programs. Academic institutions, governmental agencies and other public and private research organizations also conduct research, and establish collaborative arrangements for the clinical development of compounds and marketing of products aimed at treating nervous system disorders. The Company's competitors may succeed in discovering and developing products more rapidly or products that are more effective or more affordable than any that may be developed by the Company and its collaborative partners, and such competitors may also prove to be more successful than the Company and its collaborative partners in production and marketing of such products. There can be no assurance that research, discoveries or commercial developments by others will not render any of the Company's or its collaborative partners' programs or potential products obsolete or noncompetitive, any of which would have a material adverse effect on the Company's business. Moreover, there can be no assurance that the Company's competitors will not obtain patent protection or other intellectual property rights that would limit the Company's or its collaborative partners' ability to use the Company's technology or commercialize products that may be developed. Uncertainty Regarding Patents and Proprietary Rights. The Company's success will depend in part on its ability to obtain patents, maintain trade secrets and operate without infringing on the proprietary rights of others, both in the United States and other countries. The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions, and therefore, the breadth of claims allowed in biotechnology and pharmaceutical patents cannot be predicted. There can be no assurance that patents issued to or licensed by the Company will not be infringed or will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection to the Company's technology, to products that the Company may develop, or to other competitive advantages that the Company may possess. SIBIA has 58 pending applications for U.S. patents and 71 pending foreign applications on its technology relating to drug discovery for various nervous system disorders. To date, the Company has exclusively licensed twelve U.S. patents from The Salk Institute related to SIBIA's human receptor/ion channel subtype technology, including continuations-in-part and foreign counterparts of these patents. The Company intends to file additional applications as appropriate for patents covering its technologies, compounds and processes. There can be no assurance that the Company will develop additional technologies, compounds or processes that are patentable, that patents will issue from any patent application, that issued patents will prevail in reexamination or that claims allowed will be sufficient to protect the Company's technologies, compounds or processes. Competitors may have filed applications, may have been issued patents or may obtain additional patents and proprietary rights relating to technologies, compounds or processes competitive with those of the Company. The failure by the Company to adequately protect its technologies, compounds or processes covered by issued patents or to obtain patents based on the applications referred to herein or any future applications could have a material adverse effect on the Company's business. The success of the Company will also depend in part on SIBIA not infringing patents issued to competitors and not breaching the technology licenses upon which any Company compounds or processes are 21 24 based. It is uncertain whether any third-party patents will require the Company to alter its technologies, compounds or processes, obtain licenses or cease certain activities. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in the field in which the Company is involved. 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 issued to other companies contain competitive or conflicting claims and such claims are ultimately determined to be valid, the Company may be required to obtain licenses to these patents or to develop or obtain alternative technology. If any licenses are required, there can be no assurance that the Company will be able to obtain any such license on commercially favorable or acceptable terms, if at all. The Company's breach of an existing license or failure to obtain a license to any technology that it may require to develop and commercialize its compounds would have a material adverse effect on the Company's business. Litigation, which could result in substantial economic costs to the Company and diversion of management and other resources, may also be necessary to enforce any patents issued to the Company or to determine the scope and validity of third-party proprietary rights. See "Item 3. Legal Proceedings." Moreover, if competitors of the Company prepare and file patent applications in the United States that claim technology also claimed by the Company, the Company may have to participate in interference proceedings declared by the United States 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. Similarly, the Company may have to participate in opposition proceedings with respect to granted foreign patents. The Company is aware of third-party patent applications that may elicit an interference proceeding with two of the Company's patent applications in the PTO. There can be no assurance that the Company will prevail in these proceedings. Also, there can be no assurance that the validity of the Company's patents, if issued, would be upheld by a court of competent jurisdiction. An adverse outcome in patent prosecution or in litigation with respect to the validity of any of the Company's patents 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, any of which could have a material adverse effect on the Company's business. In addition to patents, the Company relies on trade secret laws to protect its technology, especially where patent protection is not believed to be appropriate or obtainable. Thus, SIBIA relies on protecting its proprietary technology and processes in part by confidentiality agreements with its employees, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. If the Company is unable to sufficiently protect its trade secrets, such inability could have a material adverse effect on the Company's business. No Assurance of Regulatory Approval; Government Regulation. The production and marketing of products that the Company may develop and its ongoing research and development activities are subject to extensive regulation by numerous governmental authorities in the United States and other countries. Prior to marketing in the United States, any drug developed by the Company must undergo rigorous pre-clinical and clinical testing and an extensive regulatory approval process implemented by the FDA under the federal Food, Drug and Cosmetic Act. To market products abroad, the Company also would be subject to foreign regulatory requirements, implemented by foreign health authorities, governing clinical trials and marketing approval for drugs. Satisfaction of such regulatory requirements, which includes demonstrating to the satisfaction of the FDA that the product is both safe and effective, typically takes several years or more depending upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. Pre-clinical studies must be conducted, as appropriate, in conformance with the FDA's good laboratory practice regulations. Clinical trials will be vigorously regulated and must meet requirements for institutional review board oversight and informed consent as well as FDA review and oversight and under good clinical practice regulations. The Company has no experience in developing a product through the clinical trial process, which is necessary to obtain regulatory approval. The Company intends to establish collaborative relationships to conduct clinical trials and seek regulatory approvals to market products that it may develop, although there 22 25 can be no assurance that such approvals will be received on a timely basis, if at all. Clinical trials require the recruitment of large numbers of test subjects, particularly for products that are intended to treat nervous system disorders. There can be no assurance that those conducting clinical trials for the Company will be able to initiate such trials at preferred clinical test sites or recruit sufficient test subjects, or that such trials will be started or completed successfully within any specified time period, if at all, with respect to any of the products that the Company may develop. Furthermore, the Company or the FDA may suspend clinical trials at any time if it is determined that the subjects participating in such trials are being exposed to unacceptable health risks. There can be no assurance that the Company will not encounter problems in clinical trials which would cause the Company or the FDA to delay or suspend clinical trials. Any such delay or suspension could have a material adverse effect on the Company's business. There can be no assurance that any compound that may be developed by the Company alone or in conjunction with others will prove to be safe and efficacious in clinical trials and meet all of the applicable regulatory requirements needed to receive marketing approval. If regulatory approval of a product is granted, such approval will be limited to those disease states and conditions for which the product is useful, as demonstrated through clinical studies. The failure to obtain marketing approval for any drug candidate could have a material adverse effect on the Company's business. There can be no assurance that delays or rejections will not be encountered based upon additional government regulation from future legislation or administrative action or that changes will not be made in FDA policy during the period of product development and FDA regulatory review of each submitted new drug application. Similar delays may also be encountered in foreign countries. Furthermore, product approval may entail ongoing requirements for post-marketing studies. Even if such regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections, and the regulatory standards for manufacturing are currently being applied stringently by the FDA. Later discovery of previously unknown problems with a product, a manufacturer or its facility may result in restrictions on such product or manufacturer, including withdrawal of the product from the market, which would have a material adverse effect on the Company's business. Reliance on Third-Party Manufacturers. The Company currently has no manufacturing facilities for clinical or commercial production of any compounds currently under development or marketing capability for the distribution of any products that may be developed. The Company is currently relying on third-party manufacturers to produce its compounds for pre-clinical and clinical purposes. The Company's only compounds in human clinical trials, SIB-1508Y and SIB-1553A, have never been manufactured on a commercial scale and there can be no assurance that such compounds, or any other compounds the Company or its collaborators may develop, can be manufactured at a cost or in quantities to make commercially viable products. The Company intends to establish additional arrangements with third-party manufacturers to supply compounds for pre-clinical and clinical trials and commercial sales of products that may be developed, as well as for the packaging, labeling and distribution of such products. If the Company is unable to contract for a sufficient supply of its compounds on acceptable terms, the Company's pre-clinical and clinical testing schedule would be delayed, resulting in the delay of submission of compounds for regulatory approval and initiation of new development programs, which would have a material adverse effect on the Company's business. If the Company should encounter delays or difficulties in establishing relationships with manufacturers to produce, package and distribute products that the Company may develop, market introduction or penetration of such products would be adversely affected. Moreover, third-party manufacturers that the Company may use must adhere to good manufacturing practice regulations enforced by the FDA through its facilities inspection program. If facilities of third-party manufacturers cannot pass a pre-approval plant inspection, the FDA approval of products that may be developed by the Company will be adversely affected. Year 2000. As many computer systems and other equipment with embedded chips or processors use only two digits to represent the year, they may be unable to process accurately certain data before, during or after the year 2000. As a result, internal systems of the Company and its suppliers and vendors are at risk for possible miscalculations or systems failures causing disruptions in their business operations. This is commonly known as the Year 2000 ("Y2K") issue. The Company's efforts to address the Y2K issue are described in 23 26 more detail in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Management of Growth; Dependence on Key Personnel; Need to Attract and Retain Key Employees and Consultants. To expand its research and development programs and pursue its product development plans, the Company will be required to hire additional qualified scientific personnel to perform research and development, as well as personnel with expertise in clinical testing and government regulation. These requirements are also expected to necessitate the addition of management personnel and the development of additional expertise by existing management personnel. The failure to attract such personnel or to develop or acquire such expertise would have a material adverse effect on the Company's business. As part of this growth, the Company will be required to enter into additional collaborative arrangements and successfully manage these, along with its current, collaborative arrangements. To the extent the Company does not enter into collaborative agreements with third parties, it will also be required to hire manufacturing and marketing personnel. If the Company is unable to manage its growth effectively, the Company's business would be materially adversely affected. The Company is highly dependent on the principal members of its scientific and management staff, and the loss of any of these members might significantly delay the achievement of the Company's development objectives. The Company does not maintain "key man" insurance on any of its employees, nor does the Company intend to secure such insurance. In addition, the Company relies on consultants and advisors, including its scientific advisors, to assist the Company in formulating its research and development strategy. Retaining and attracting qualified personnel, consultants and advisors will be critical to the Company's success. The Company faces competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities and other research institutions. There can be no assurance that the Company will be able to attract and retain such individuals on acceptable terms or at all. The failure to attract or retain such personnel would have a material adverse effect on the Company's business. Control by Principal Stockholders; Anti-Takeover Provisions. The Salk Institute and its affiliates beneficially owned approximately 19.6% of the outstanding shares of Common Stock of SIBIA as of January 31, 1999. In addition, as of January 31, 1999, the present directors and executive officers of the Company beneficially owned approximately 8.2% of the outstanding shares of Common Stock. Accordingly, together with The Salk Institute, the present directors and executive officers of the Company have the ability to exercise substantial influence over the outcome of most stockholders' actions. Moreover, the Company's Certificate of Incorporation does not provide for cumulative voting with respect to the election of directors. Consequently, the present directors and executive officers, together with The Salk Institute, are able to exercise substantial influence over the election of the members of the Board of Directors. Such concentration of ownership could have an adverse effect on the price of SIBIA's Common Stock. In addition, the Company's Certificate of Incorporation provides that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing. Special meetings of the stockholders of the Company may be called only by the Chairman of the Board of Directors, the President of the Company, by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors, or by the holders of 10% of the outstanding voting stock of the Company. Moreover, the Company's Certificate of Incorporation and Bylaws provide for a classified Board of Directors and eliminate the ability of stockholders to remove a director without cause. The Company's Certificate of Incorporation and Bylaws also require that the holders of at least 66 2/3% of the voting stock of the Company must approve any amendment to either the Certificate of Incorporation or Bylaws affecting certain provisions, including the provisions described above. These provisions may have the effect of making hostile takeovers of the Company more difficult, but may also render more difficult the accomplishment of mergers or the assumption of control by a principal stockholder because they make it more difficult to remove the Company's management. In addition, the Board of Directors has the authority, without action by stockholders, to issue additional shares of Common Stock and to fix the rights and preferences of and issue shares of Preferred Stock, either of which may have the effect of delaying or preventing a change in control of the Company. 24 27 Further, the Company has issued rights (the "Rights") to the holders of its Common Stock to purchase a specified class of Preferred Stock of the Company pursuant to a Preferred Share Purchase Rights Plan (the "Rights Plan"). Although the Rights Plan will not prevent a takeover of the Company, it may discourage abusive and coercive takeover tactics that result in a rapid, forced sale of the Company at a lower price than might otherwise be obtainable. The existence of a Rights Plan may confront the Board of Directors with difficult decisions with respect to redemption or amendment of the outstanding Rights. In addition, once a hostile bidder crosses a certain threshold, the Rights become non-redeemable and the Board of Directors' ability to enter into a negotiated acquisition would be impaired. There can be no assurance that the Rights Plan will maximize shareholder value. Furthermore, there can be no assurance that the Rights Plan will not discourage potential bidders from attempting to gain control of the Company. The foregoing charter provisions as well as other charter provisions, the rights of first refusal in favor of the Company, the Rights Plan and certain provisions of Delaware law may discourage certain types of transactions involving an actual or potential change in control of the Company or its management (including transactions in which stockholders might otherwise receive a premium for their shares over then current prices) and may limit the ability of stockholders to remove current management of the Company or approve transactions that stockholders may deem to be in their best interests. In addition, certain of the Company's collaborative partners have the right to terminate their respective agreements with the Company upon certain changes in control of the Company, which may discourage acquisitions or other changes in control (including those in which stockholders of the Company might otherwise receive a premium for their shares over then current market prices). Product Liability Exposure and Uninsured Risks. The testing of compounds and the marketing and sale of commercial pharmaceutical products involves unavoidable risks. The use of any of the Company's compounds or its collaborative partners' compounds in clinical trials and the sale of any products that may be developed may expose the Company to potential liability resulting from the use of such compounds or products. Such liability might result from claims made directly by consumers or by regulatory agencies, pharmaceutical companies or others using or selling such compounds or products. The Company has obtained insurance coverage for its current clinical trials. The Company intends to seek additional insurance coverage if and when it develops products that are ready to be commercialized. There can be no assurance that the Company will be able to obtain or maintain product liability insurance in the future on acceptable terms or that, if obtained, the insurance coverage will be sufficient to cover any potential claims or liabilities. The inability of the Company to obtain product liability coverage in amounts sufficient to cover any damages resulting from a product liability claim could have a material adverse effect on the Company's business. Hazardous Materials. The Company's research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. Although the Company believes that its safety procedures for storing, handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any resulting damages, which could have a material adverse effect on the Company's business. Possible Volatility of Stock Price. The market prices for securities of biopharmaceutical and biotechnology companies, including that of SIBIA, historically have been highly volatile, and the market from time to time has experienced significant price and volume fluctuations that are unrelated to the operating performance of such companies. Factors that may have a significant impact on the market price and marketability of the Company's Common Stock include: announcements of technological innovations or new commercial therapeutic products by the Company, its collaborative partners or the Company's present or potential competitors; announcements by the Company or others of results of preclinical testing and clinical trials; developments or disputes concerning patent or other proprietary rights; developments in the Company's relationships with its existing or future collaborative partners; acquisitions; litigation; adverse legislation; changes in governmental regulation, third party reimbursement policies, or the status of the Company's regulatory approvals or applications; changes in earnings; changes in securities analysts' recommendations; changes in health care policies and practices; economic and other external factors; and period-to-period fluctuations in financial results of the Company and general market conditions. Fluctuations in the trading 25 28 price or liquidity of the Company's Common Stock may adversely affect the Company's ability to raise capital through future equity financing, which could have a material adverse effect on the Company's business. ITEM 2. PROPERTIES The Company's facilities are located in La Jolla, California. The Company leases approximately 53,526 square feet of space used for laboratory and administrative purposes of which approximately 10,792 square feet is sublet. SIBIA believes that its present facility will be adequate to conduct its research activities through December 2006, when its current lease, including available option terms, expires. Management believes that it will be able to secure additional space at commercially reasonable rates during the terms of such lease, if necessary. ITEM 3. LEGAL PROCEEDINGS On July 9, 1996, the Company filed an action for patent infringement against Cadus Pharmaceutical Corporation ("Cadus") in the United States District Court for the Southern District of California. The complaint asserted that Cadus' assay technology infringes the Company's United States Patent No. 5,401,629 (the "'629 Patent"), entitled "Assay Methods and Compositions Useful for Measuring the Transduction of an Intercellular Signal." The Company sought damages in an unspecified amount and injunctive relief in the complaint. Cadus responded by asserting that the '629 Patent and the Company's United States Patent No. 5,436,128 (the "'128 Patent"), entitled "Assay Methods and Compositions for Detecting and Evaluating the Intercellular Transduction of an Extracellular Signal," are invalid, unenforceable and not infringed, and further asserting claims for intentional interference with prospective economic advantage and unfair competition. Cadus sought declaratory relief and compensatory and punitive damages against the Company. On August 3, 1998, the Court granted summary judgment for the Company on Cadus' counterclaims. Cadus subsequently dismissed its counterclaim alleging invalidity and unenforceability of the '128 Patent. On December 18, 1998, the jury returned a verdict in favor of the Company, finding that the '629 Patent is valid and enforceable and awarding the Company damages in the amount of $18 million to compensate the Company for Cadus' past direct and indirect infringement of the '629 Patent. On January 29, 1999, the Court granted the Company's request for a permanent injunction preventing Cadus, and all persons acting in concert or otherwise participating with Cadus from practicing the methods claimed in the '629 Patent. On February 26, 1999, the Court denied Cadus' request to decrease the amount of damages awarded by the jury and to order a new trial. On March 10, 1999, the Court confirmed the jury's verdict in all respects and entered judgment in favor of the Company. On March 23, 1999, Cadus posted security for the judgment in the amount of $18,500,000. On March 25, 1999, Cadus filed a notice of appeal from the judgment. The Company has recently been notified that the Patent & Trademark Office has granted a request for reexamination of the '629 Patent. The Company's management intends to vigorously defend the '629 Patent in that proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's Security holders during the fourth quarter of the year ended December 31, 1998. 26 29 PART II ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock commenced trading on the Nasdaq National Market under the symbol "SIBI" on May 9, 1996. The following table sets forth, for the periods indicated, the high and low sales prices per share of the Common Stock as reported on the Nasdaq National Market:
HIGH LOW ---- --- 1998 Fourth Quarter.............................................. $6 3/4 $3 Third Quarter............................................... 5 1/4 2 1/2 Second Quarter.............................................. 7 3/4 4 7/8 First Quarter............................................... 7 1/4 5 1997 Fourth Quarter.............................................. $9 $5 5/8 Third Quarter............................................... 9 1/8 6 Second Quarter.............................................. 9 5 1/4 First Quarter............................................... 9 1/2 7 1/2
The last reported sale price of the Common Stock on the Nasdaq National Market on January 29, 1999 was $5.50. As of January 29, 1999, there were approximately 900 stockholders of record of the Company's Common Stock. To date, the Company has not paid any dividends on its Common Stock. ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected financial data for each of the five years in the period ended December 31, 1998. The information should be read in conjunction with the financial statements included elsewhere in this report.
YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Total revenue..................... $ 7,043 $ 11,197 $ 8,481 $ 10,448 $ 4,852 Research and development expenses........................ $ 18,247 $ 15,819 $ 12,268 $ 8,949 $ 8,663 Net income (loss)................. $(15,807) $ (7,593) $ (5,564) $ 2,926 $ (27) Basic net income (loss) per common share........................... $ (1.68) $ (0.82) $ (0.73) $ 0.60 Diluted net income (loss) per common share.................... $ (1.68) $ (0.82) $ (0.73) $ 0.47 Shares used in computing basic net income (loss) per common share........................... 9,421 9,248 7,596 4,893 Shares used in computing diluted net income (loss) per common share........................... 9,421 9,248 7,596 6,164 BALANCE SHEET DATA: Cash, cash equivalents and investment securities........... $ 17,187 $ 33,347 $ 37,464 $ 16,488 $ 5,944 Working capital................... $ 13,662 $ 31,214 $ 35,324 $ 14,338 $ 4,523 Total assets...................... $ 21,199 $ 36,180 $ 39,983 $ 18,251 $ 8,005 Long-term debt, less current portion......................... $ 1,350 $ 695 $ 519 $ 721 $ 860 Accumulated deficit............... $(45,093) $(29,286) $(21,693) $(16,129) $(19,055) Total stockholders' equity...... $ 21,199 $ 32,214 $ 36,572 $ 15,107 $ 5,166
27 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW SIBIA, incorporated in Delaware in 1981, was established by The Salk Institute. Through 1990, SIBIA successfully developed several proprietary life-sciences technologies in collaboration with corporate partners. In 1987, SIBIA initiated research in the neuroscience field and in 1991 shifted its focus completely to the development of novel therapeutics to treat nervous system disorders. The Company receives contract revenue and license and royalty revenue. Contract revenue includes payments for research to support a specified number of the Company's scientists and payments upon the achievement of specified research and drug development milestones. Research contracts are generally conducted on a best efforts basis. Contract revenue is recognized as the research is performed using the percentage-of-completion method of accounting, primarily based on contract costs incurred to date compared with total estimated costs at completion. Revenue related to milestones is recognized upon the achievement of the related milestone and when collection is probable. License revenue is recognized when earned as generally evidenced by certain factors including: receipt of such fees, satisfaction of any performance obligations and the non-refundable nature of such fees. Royalty revenue is recognized when earned and collection is probable. Research and development costs are expensed as incurred and include costs associated with collaborative agreements. These costs consist of direct and indirect costs related to specific projects as well as fees paid to other entities which conduct certain research activities on behalf of the Company. The Company has no products available for sale and does not expect to have any products resulting from its research efforts, including its collaborations with others, commercially available for at least several years, if at all. Except for 1995, the Company has incurred net losses every year since shifting its area of therapeutic focus to the central nervous system in 1991. The Company expects that its revenue and other income for the next several years will fluctuate significantly on a quarterly and annual basis and will be limited to payments under its collaborative relationships, license fees, interest income and other miscellaneous income. During the years ended December 31, 1998, 1997, and 1996, the Company had three, four and three collaborative research agreements that accounted for 93%, 95% and 97%, respectively, of total revenue. As of December 31, 1998, the Company had an accumulated deficit of approximately $45,093,000. To date, the Company's operations have been funded primarily through equity financings, research contracts, option and license and royalty revenues. In addition, SIBIA received funds from the sale of its interest in a corporate joint venture in 1994 and from the settlement of certain litigation in 1995, with which it has purchased investment securities and which it has used to finance its operations. RESULTS OF OPERATIONS Years Ended December 31, 1998 and 1997 Total revenue decreased by 37%, to $7,043,000 in 1998 from $11,197,000 in 1997. The decrease was due primarily to one-time license fees of $3,000,000 recognized in 1997 related to the Company's agreement with Meiji for the development of SIB-1508Y, SIBIA's lead compound for Parkinson's disease, and the completion of the Company's research programs under its collaborations with Eli Lilly and Novartis in October 1997 and September 1998, respectively. Total expenses increased by 22%, to $25,587,000 in 1998 from $20,965,000 in 1997. The increase in total expenses was primarily attributable to increases in both research and development and general and administrative expenses. Research and development expenses increased 15%, to $18,247,000 in 1998 from $15,819,000 in 1997. This was primarily the result of expanded programs in drug discovery including psychiatric disorders, chronic pain, neuroprotection and apoptosis and for expenses associated with clinical trials. The Company's two compounds under development are SIB-1508Y, currently in Phase 2 clinical studies for Parkinson's disease, and SIB-1553A, currently in Phase 2 clinical studies for Alzheimer's disease. General and administrative expenses increased 43%, to $7,340,000 in 1998 from $5,146,000 in 1997. The 28 31 increase in general and administrative expenses was primarily due to increased legal fees related to the Company's ongoing patent litigation with Cadus Pharmaceutical Corporation. In December 1998, SIBIA was awarded an $18.0 million jury verdict that has been appealed by Cadus. Other income increased by 26%, to $2,737,000 in 1998 from $2,175,000 in 1997. The increase in other income was due primarily to the net effect of gains on the sale of equity securities which were partially offset by decreased interest income as a result of lower average cash and investment balances carried in 1998. Years Ended December 31, 1997 and 1996 Total revenue increased by 32%, to $11,197,000 in 1997 from $8,481,000 in 1996. The increase was due primarily to one-time license fees of $3,000,000 recognized in 1997 related to the Company's agreement with Meiji for the development of SIB-1508Y, SIBIA's lead compound for Parkinson's disease. Total expenses increased by 32%, to $20,965,000 in 1997 from $15,829,000 in 1996. The increase in total expenses was primarily attributable to an increase in research and development expenses of 29%, to $15,819,000 in 1997 from $12,268,000 in 1996. This was primarily the result of expanded programs in drug discovery and for expenses associated with clinical trials of SIB-1508Y. General and administrative expenses increased 45%, to $5,146,000 in 1997 from $3,561,000 in 1996. The increase in general and administrative expenses was primarily due to increased legal fees related to various patent and litigation matters, the payment, in 1997, of foreign taxes related to payments received under the Meiji agreement and costs associated with a proposed secondary offering of the Company's common stock, which offering was withdrawn by the Company in February 1998 due to market conditions. Other income increased by 22%, to $2,175,000 in 1997 from $1,784,000 in 1996. The increase in other income was due primarily to an increase in interest income earned on proceeds from the Company's initial public offering of Common Stock in May 1996. LIQUIDITY AND CAPITAL RESOURCES SIBIA has financed its operations primarily through equity financings, research contracts (generally conducted on a best efforts basis) and option, license and royalty revenues. Since 1991, the Company has received approximately $41,775,000 in net proceeds from the sale of Convertible Preferred Stock and Common Stock to investors and collaborative partners and approximately $54,979,000 in contract, license and royalty revenue. The Company is entitled to receive additional payments under the collaborative agreements in the form of contract revenue, milestone payments, if milestones are achieved, and royalties, if products are commercialized. As of December 31, 1998, the Company had an accumulated deficit of $45,093,000. The Company believes its proprietary drug discovery platform will lead to corporate collaboration and licensing opportunities which may generate future revenues in the form of license fees, milestone payments and/or royalties. The Company anticipates that the cash, cash equivalents and investment securities balance of $17,187,000 as of December 31, 1998 will be sufficient to support continued research and development of its technologies and fund other general and administrative expenditures through 1999. The Company leases laboratory and office facilities under an agreement expiring on December 31, 2001. The average minimum annual payment under the lease is approximately $1,518,000, before consideration of sublease income. The Company believes that its present facility will be adequate to conduct its research activities through December 2001. Management believes that it should be able to secure additional space at commercially reasonable rates, if necessary. The Company has an option to extend its lease for an additional five years. Since 1991, the Company has invested $5,735,000 in property and equipment. Included within this amount is $4,651,000 of equipment under capital leases and equipment notes payable. The net present value of obligations under such capital leases as of December 31, 1998 was $2,075,000. The Company's future capital needs will be dependent upon many factors, including progress in its research and development activities, the magnitude and scope of these activities, progress with pre-clinical and 29 32 clinical trials, the cost of preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaborative arrangements, the establishment of additional licensing and/or collaborative arrangements, and the cost of manufacturing scale-up and development of marketing activities, if undertaken by the Company. The Company intends to seek additional funding through research and development relationships with suitable corporate collaborators or through public or private financing. There can be no assurance that the Company will be successful in its efforts to collaborate with additional partners or that additional financing from other sources will be available on favorable terms, if at all. Payments under existing collaborative agreements and the Company's current cash reserves will be insufficient to fund the Company's operations through the completion of any clinical trials and commercialization of its first product, if developed. Although the Company will seek to obtain additional funds through public or private equity or debt financings, collaborative or other arrangements with corporate partners or from other sources, there can be no assurance that additional financing will be available or, if available, that it will be available on acceptable terms. If additional funds are raised by issuing equity securities, further dilution to then existing stockholders would result. If adequate funds are not available, the Company may be required to curtail significantly or eliminate one or more of its research, discovery or development programs or to obtain funds through additional arrangements with corporate partners or others which may require the Company to relinquish rights to certain of its technologies or product candidates that the Company would not otherwise relinquish, which could have a material adverse effect on the Company's business. NET OPERATING LOSSES As of December 31, 1998, the Company had available net operating loss carryforwards for federal and state income tax purposes of approximately $44,335,000 and $18,972,000, respectively, which expire beginning in 2006 and 2002, respectively. As of December 31, 1998, the Company had federal and state tax credits for research activities totaling approximately $2,210,000 and $814,000, respectively, which are available to offset future income taxes and expire beginning in 2004 and 2000, respectively. The Company's ability to utilize net operating loss carryforwards and tax credits is subject to limitations as set forth in applicable federal and state tax laws. As specified in the Internal Revenue Code, an ownership change of more than 50% by a combination of the Company's significant stockholders during any three-year period would result in certain limitations on the Company's ability to utilize its net operating loss and tax credit carryforwards. YEAR 2000 As many computer systems and other equipment with embedded chips or processors use only two digits to represent the year, they may be unable to process accurately certain data before, during or after the year 2000. As a result, internal systems of the Company and its suppliers and vendors are at risk for possible miscalculations or systems failures causing disruptions in their business operations. This is commonly known as the Year 2000 ("Y2K") issue. The Company has formed a Y2K Compliance Committee ("Y2K Committee"), with representation from each major functional area within the organization that has been charged with implementing the Company's Y2K Compliance Program ("Y2K Program"). The Y2K Program has been designed to identify those issues (both internal and external) that would cause material interruption to the Company's "business as usual" and consists of the following phases: (1) identification of all Y2K issues; (2) assigning priorities to identified items; (3) assessing the Y2K compliance of items determined to be material to the Company; (4) repairing or replacing items that are determined to be material to the Company; (5) testing material items; and (6) designing contingency and business continuation plans. Currently, the Company has completed the identification, assignment and assessment phases for all material Y2K issues. The repair or replacement, testing and contingency planning phases are currently underway with various expected completion dates through mid-1999. No material costs have been incurred to date in the Company's effort to address its Y2K issues and the Company does not anticipate the amounts to become material in the future. 30 33 The failure to correct a material Y2K issue could result in an interruption in, or a failure of the Company's business as usual. Due to the general uncertainty inherent in the Y2K issue, resulting in part from the uncertainty of the Y2K readiness of third-party suppliers and service providers, the Company is unable to determine at this time whether the consequences of Y2K failures will have a material impact on the Company's results of operations, liquidity and financial condition. The Company's Y2K program is expected to significantly reduce the Company's level of uncertainty about the Y2K issue and, in particular, about the Y2K readiness of its suppliers and service providers. The Company believes that with the completion of the Y2K program as scheduled, the possibility of significant interruptions of normal operations will be greatly reduced. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market-rate risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company employs established policies and procedures to manage its exposure to fluctuations in interest rates. The Company places its investments with high quality issuers and, by policy, limits the amount of credit exposure to any one issuer and does not use derivative financial instruments in its investment portfolio. The Company maintains an investment portfolio of various issuers, types and maturities, which consist mainly of fixed rate financial instruments. These securities are classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component in stockholders' equity. At any time, sharp changes in interest rates can affect the fair value of the investment portfolio and its interest earnings. Currently, the Company does not hedge these interest rate exposures. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data of the Company required by this item are filed as exhibits hereto, are listed under Item 14, and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the information under the caption "Election of Directors" contained in the Company's definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the Company's 1999 Annual Meeting of Stockholders to be held on May 26, 1999 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information under the caption "Compensation of Executive Officers" contained in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information under the caption "Certain Transactions" contained in the Proxy Statement. 31 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1)FINANCIAL STATEMENTS Index to financial statements appears on page F-1. (2)FINANCIAL STATEMENT SCHEDULES None required. (3)EXHIBITS See paragraph (c) below. (b) REPORTS ON FORM 8-K Not applicable (c) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 3.1 Amended and Restated Certificate of Incorporation of the Registrant.(4) 3.2 Amended and Restated Bylaws of the Registrant.(4) 3.3 Registrant's Certificate of Designation of Series A Junior Participating Preferred Stock.(2) 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3. 4.2 Specimen stock certificate.(1) 10.1 Form of Indemnification Agreement entered into between Registrant and its directors and officers.(1)(5) 10.2 Registrant's 1992 Stock Option and Restricted Stock Plan, as amended (the "1992 Option Plan").(4)(5) 10.3 Form of Incentive Stock Option Agreement under the 1992 Option Plan.(1)(5) 10.4 Form of Nonstatutory Stock Option Agreement under the 1992 Option Plan.(1)(5) 10.5 Registrant's 1996 Equity Incentive Plan, as amended (the "1996 Equity Plan").(4)(5) 10.6 Form of Incentive Stock Option Agreement under the 1996 Equity Plan.(1)(5) 10.7 Form of Nonstatutory Stock Option Agreement under the 1996 Equity Plan.(1)(5) 10.8 Registrant's 1996 Non-Employee Directors' Stock Option Plan, as amended (the "Non-Employee Directors' Option Plan").(4)(5) 10.9 Form of Nonstatutory Stock Option Agreement under the Non-Employee Directors' Option Plan.(1)(5) 10.10 Registrant's Employee Stock Purchase Plan.(1)(5) 10.11 Registrant's Management Change of Control Plan, as amended (the "Change of Control Plan").(5) 10.12 Form of Nonqualified Stock Option Agreement under the Change of Control Plan.(1)(5) 10.13 Lease Agreement dated April 7, 1989 between Registrant and Regency Associates Limited, as subsequently amended on March 1, 1993, and July 1, 1995.(1) 10.14 Equipment Lease Line Agreement dated June 30, 1992 between Registrant and GE Capital, as amended.(1)
32 35
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.15 Investment Agreement dated August 10, 1995 between Registrant and Bristol-Myers Squibb Company.(1) 10.16 Collaborative Research and License Agreement dated August 10, 1995 between Registrant and Bristol-Myers Squibb Company.(1) 10.17 Stockholders Agreement dated as of October 1, 1991, by and among Registrant, Phillips Petroleum Company, The Salk Institute for Biological Studies, Skandigen AB and the Stockholders of Protease Corporation.(1) 10.18 License Agreement dated March 8, 1988 between Registrant and The Salk Institute for Biological Studies, as amended by that certain First Amendment to License Agreement dated March 10, 1996.(1) 10.19 License Agreement dated December 15, 1990 between Registrant and The Salk Institute for Biological Studies, as amended by that certain First Amendment to License Agreement dated March 10, 1996.(1) 10.20 Stock Purchase and Stockholders Agreement dated April 11, 1988 among Registrant, Phillips Petroleum Company, The Salk Institute for Biological Studies and Skandigen AB, as amended by that certain Amendment to Stock Purchase and Shareholders Agreement dated April 12, 1990.(1) 10.21 Agreement dated December 20, 1991 between Registrant, Phillips Petroleum Company, The Salk Institute for Biological Studies and Skandigen AB.(1) 10.22 License Agreement dated December 20, 1991 between Registrant and Phillips Petroleum Company.(1) 10.23 Amended and Restated Research and Development and License Agreement dated March 20, 1996 between Registrant and CIBA-GEIGY Limited.(1) 10.24 Stock Purchase Agreement dated September 15, 1992 between Registrant and CIBA-GEIGY Limited.(1) 10.25 Subscription Agreement dated April 11, 1994 between Registrant and CIBA-GEIGY Limited.(1) 10.26 Stock Purchase Agreement dated March 20, 1996 between Registrant and CIBA-GEIGY Limited.(1) 10.27 Agreement dated May 1, 1992 between Registrant and Eli Lilly and Company, as amended and extended by that certain Extension Agreement dated May 1, 1995.(1) 10.28 Stock Purchase Agreement dated May 7, 1992 between Registrant and Eli Lilly and Company.(1) 10.29 Option and License Agreement dated April 30, 1995 between Registrant and Eli Lilly and Company.(1) 10.30 License Agreement dated March 5, 1992 between Registrant and Cephalon, Inc., as amended by that certain Letter dated March 22, 1995.(1) 10.31 Patent License Agreement dated June 21, 1993 between Registrant and Affymax Technologies, N.V., as amended by that certain Letter dated July 15, 1993.(1) 10.32 Agreement dated October 1, 1993 between Registrant and Hafslund Nycomed Pharma AG.(1) 10.33 Development and License Agreement dated February 28, 1997 between Registrant and Meiji Seika Kaisha, Ltd.(3) 10.34 Further Extension Agreement dated November 1, 1996 between Registrant and Eli Lilly and Company.(3)
33 36
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.35 Third Amendment to Lease dated December 31, 1996 between Registrant and Regency Properties, L.P.(3) 10.36 Equipment Lease Line Agreement dated March 4, 1997 between Registrant and G.E. Capital.(3) 10.37 Rights Agreement dated as of March 17, 1997 among Registrant and ChaseMellon Shareholder Services, L.L.C.(2) 10.38 Specimen Rights Certificate.(2) 10.39 Employment Agreement dated February 23, 1998 between Registrant and Jeffrey F. McKelvy, Ph.D.(5)(6) 10.40 Employment Agreement dated June 4, 1998 between Registrant and Michael M. Harpold, Ph.D.(5)(7) 10.41 Employment Agreement dated October 27, 1998 between Registrant and Stephen F. Keane.(5) 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney. Reference is made to page 35. 27.1 Financial Data Schedule.
- --------------- (1) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No. 333-2586) or amendments thereto and incorporated herein by reference. (2) Filed as an exhibit to Registrant's report on Form 8-K filed with the Commission on March 31, 1997 and incorporated herein by reference. (3) Filed as an exhibit to Registrant's annual report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. (4) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference. (5) Constitutes a "management contract or compensatory plan or arrangement," pursuant to Item 14(a)(3) (6) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. (7) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference. 34 37 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. SIBIA NEUROSCIENCES, INC. By: /s/ THOMAS A. REED ------------------------------------ Thomas A. Reed, Vice President, Finance/Administration, & CFO Date: March 30, 1999 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William T. Comer and Thomas A. Reed, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or resubstitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM T. COMER President, Chief Executive March 30, 1999 - ----------------------------------------------------- Officer William T. Comer, Ph.D. and Director (Principal Executive Officer) /s/ THOMAS A. REED Vice President, March 30, 1999 - ----------------------------------------------------- Finance/Administration and Thomas A. Reed Chief Financial Officer (Principal Financial and Accounting Officer) /s/ WILLIAM R. MILLER Chairman of the Board March 30, 1999 - ----------------------------------------------------- William R. Miller /s/ STANLEY T. CROOKE Director March 30, 1999 - ----------------------------------------------------- Stanley T. Crooke, M.D., Ph.D. /s/ GUNNAR EKDAHL Director March 30, 1999 - ----------------------------------------------------- Gunnar Ekdahl /s/ JEFFREY F. MCKELVY Director March 30, 1999 - ----------------------------------------------------- Jeffrey F. McKelvy, Ph.D. /s/ FREDERICK B. RENTSCHLER Director March 30, 1999 - ----------------------------------------------------- Frederick B. Rentschler /s/ JAMES D. WATSON Director March 30, 1999 - ----------------------------------------------------- James D. Watson, Ph.D.
35 38 SIBIA NEUROSCIENCES, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheet as of December 31, 1998 and 1997.............. F-3 Statement of Operations for the years ended December 31, 1998, 1997 and 1996....................................... F-4 Statement of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.......................... F-5 Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996....................................... F-6 Notes to Financial Statements............................... F-7
F-1 39 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of SIBIA Neurosciences, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of SIBIA Neurosciences, Inc. at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP - -------------------------------------- PRICEWATERHOUSECOOPERS LLP San Diego, California February 19, 1999 F-2 40 SIBIA NEUROSCIENCES, INC. BALANCE SHEET ASSETS
DECEMBER 31, ---------------------------- 1998 1997 ------------ ------------ Current assets: Cash and cash equivalents................................. $ 4,595,000 $ 4,972,000 Investment securities..................................... 12,592,000 28,375,000 Contracts and accounts receivable......................... 501,000 588,000 Prepaid expenses and other current assets................. 683,000 550,000 ------------ ------------ Total current assets.............................. 18,371,000 34,485,000 Property and equipment, net................................. 2,638,000 1,599,000 Other assets................................................ 190,000 96,000 ------------ ------------ $ 21,199,000 $ 36,180,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 2,567,000 $ 1,611,000 Accrued liabilities....................................... 2,142,000 1,660,000 ------------ ------------ Total current liabilities......................... 4,709,000 3,271,000 Long-term debt, less current portion........................ 1,350,000 695,000 Commitments and contingencies (Note 9) Stockholders' equity: Preferred Stock, $.001 par value; 5,000,000 shares authorized Common Stock, $.001 par value; 25,000,000 shares authorized; 9,515,588 and 9,338,744 shares issued and outstanding at December 31, 1998 and 1997, respectively........................................... 10,000 9,000 Additional paid-in capital................................ 60,206,000 59,946,000 Deferred compensation..................................... (273,000) (580,000) Notes receivable from stockholders........................ (83,000) (87,000) Net unrealized gain on investment securities available-for-sale..................................... 373,000 2,212,000 Accumulated deficit....................................... (45,093,000) (29,286,000) ------------ ------------ Total stockholders' equity........................ 15,140,000 32,214,000 ------------ ------------ $ 21,199,000 $ 36,180,000 ============ ============
See accompanying notes to financial statements. F-3 41 SIBIA NEUROSCIENCES, INC. STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ------------ ----------- ----------- Revenue: Contract......................................... $ 6,613,000 $ 7,537,000 $ 8,215,000 License and royalty.............................. 430,000 3,660,000 266,000 ------------ ----------- ----------- Total revenue (Note 1)................... 7,043,000 11,197,000 8,481,000 ------------ ----------- ----------- Expenses: Research and development......................... 18,247,000 15,819,000 12,268,000 General and administrative....................... 7,340,000 5,146,000 3,561,000 ------------ ----------- ----------- Total expenses........................... 25,587,000 20,965,000 15,829,000 ------------ ----------- ----------- (18,544,000) (9,768,000) (7,348,000) ------------ ----------- ----------- Other income (expense): Interest income.................................. 1,523,000 2,231,000 1,834,000 Interest expense................................. (91,000) (59,000) (68,000) Gain on sale of investment (Note 5).............. 1,305,000 Other............................................ 3,000 18,000 ------------ ----------- ----------- 2,737,000 2,175,000 1,784,000 ------------ ----------- ----------- Net loss........................................... (15,807,000) (7,593,000) (5,564,000) Other comprehensive income -- unrealized holding gains (losses) arising during period............. (534,000) 2,023,000 110,000 Less: reclassification adjustment for gains included in net loss............................. 1,305,000 ------------ ----------- ----------- Comprehensive loss................................. $(15,036,000) $(5,570,000) $(5,454,000) ============ =========== =========== Basic and diluted net loss per common share........ $ (1.68) $ (0.82) $ (0.73) ============ =========== =========== Shares used in computing basic and diluted net loss per common share................................. 9,421,057 9,247,521 7,596,380 ============ =========== ===========
See accompanying notes to financial statements. F-4 42 SIBIA NEUROSCIENCES, INC. STATEMENT OF STOCKHOLDERS' EQUITY
SERIES A, B AND C CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK RECEIVABLE --------------------- --------------------- ADDITIONAL DEFERRED FROM SHARES SHARES PAID-IN COMPEN- STOCK- OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL SATION HOLDERS ----------- ------- ----------- ------- ----------- ----------- ---------- BALANCE AS OF DECEMBER 31, 1995........... 476,211 4,899,884 $ 5,000 $31,869,000 $ (635,000) $ (82,000) Issuance of Common Stock.................. 2,554,545 3,000 25,842,000 Stock option compensation expense......... 1,167,000 (404,000) Exercise of stock options................. 120,200 288,765 815,000 (593,000) Stock purchase plan....................... 9,408 54,000 Payments on notes receivable.............. 35,000 Conversion of Preferred Stock............. (596,411) 1,401,566 1,000 (1,000) Net increase in unrealized gain on investment securities available-for-sale...................... Cancellation of partial shares............ (11) Net loss.................................. -------- ------- --------- ------- ----------- ----------- --------- BALANCE AS OF DECEMBER 31, 1996........... 9,154,157 9,000 59,746,000 (1,039,000) (640,000) Stock option compensation expense......... (109,000) 459,000 Exercise of stock options................. 162,766 174,000 Stock purchase plan....................... 21,821 135,000 Payments on notes receivable.............. 553,000 Net increase in unrealized gain on investment securities available-for-sale...................... Net loss.................................. -------- ------- --------- ------- ----------- ----------- --------- BALANCE AS OF DECEMBER 31, 1997........... 9,338,744 9,000 59,946,000 (580,000) (87,000) Stock option compensation expense......... (60,000) 399,000 Issuance of stock options................. 92,000 (92,000) Exercise of stock options................. 144,442 1,000 94,000 Stock purchase plan....................... 32,402 134,000 Payments on notes receivable.............. 4,000 Net increase (decrease) in unrealized gain on investment securities available-for-sale...................... Net loss.................................. -------- ------- --------- ------- ----------- ----------- --------- BALANCE AS OF DECEMBER 31, 1998........... 9,515,588 $10,000 $60,206,000 $ (273,000) $ (83,000) ======== ======= ========= ======= =========== =========== ========= NET UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES TOTAL AVAILABLE- ACCUMULATED STOCKHOLDERS' FOR-SALE DEFICIT EQUITY ------------- ------------ ------------- BALANCE AS OF DECEMBER 31, 1995........... $ 79,000 $(16,129,000) $ 15,107,000 Issuance of Common Stock.................. 25,845,000 Stock option compensation expense......... 763,000 Exercise of stock options................. 222,000 Stock purchase plan....................... 54,000 Payments on notes receivable.............. 35,000 Conversion of Preferred Stock............. Net increase in unrealized gain on investment securities available-for-sale...................... 110,000 110,000 Cancellation of partial shares............ Net loss.................................. (5,564,000) (5,564,000) ----------- ------------ ------------ BALANCE AS OF DECEMBER 31, 1996........... 189,000 (21,693,000) 36,572,000 Stock option compensation expense......... 350,000 Exercise of stock options................. 174,000 Stock purchase plan....................... 135,000 Payments on notes receivable.............. 553,000 Net increase in unrealized gain on investment securities available-for-sale...................... 2,023,000 2,023,000 Net loss.................................. (7,593,000) (7,593,000) ----------- ------------ ------------ BALANCE AS OF DECEMBER 31, 1997........... 2,212,000 (29,286,000) 32,214,000 Stock option compensation expense......... 339,000 Issuance of stock options................. Exercise of stock options................. 95,000 Stock purchase plan....................... 134,000 Payments on notes receivable.............. 4,000 Net increase (decrease) in unrealized gain on investment securities available-for-sale...................... (1,839,000) (1,839,000) Net loss.................................. (15,807,000) (15,807,000) ----------- ------------ ------------ BALANCE AS OF DECEMBER 31, 1998........... $ 373,000 $(45,093,000) $ 15,140,000 =========== ============ ============
See accompanying notes to financial statements. F-5 43 SIBIA NEUROSCIENCES, INC. STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net loss....................................... $(15,807,000) $ (7,593,000) $ (5,564,000) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization............... 858,000 667,000 598,000 Compensation from issuance of common stock options................................... 339,000 350,000 763,000 Gain on disposal of property................ (3,000) (1,000) Gain on sale of investment.................. (1,305,000) Net amortization of premium and discount on investment securities..................... (32,000) (127,000) (447,000) Increase (decrease) in cash resulting from changes in: Contracts and accounts receivable........... 87,000 (520,000) (33,000) Prepaid expenses and other assets........... (227,000) 488,000 (813,000) Accounts payable and accrued liabilities.... 1,242,000 764,000 237,000 Deferred revenue............................ (431,000) 181,000 ------------ ------------ ------------ Net cash used by operating activities........................... (14,845,000) (6,405,000) (5,079,000) ------------ ------------ ------------ Cash flows from investing activities: Maturities of investment securities held-to-maturity............................ 13,992,000 Purchase of investment securities available-for-sale.......................... (7,232,000) (13,383,000) (42,624,000) Maturities and sales of investment securities available-for-sale.......................... 22,452,000 23,181,000 7,300,000 Principal payments received on investment securities available-for-sale............... 61,000 29,000 51,000 Proceeds from disposal of property and equipment................................... 4,000 5,000 Acquisition of property and equipment.......... (332,000) (172,000) (182,000) ------------ ------------ ------------ Net cash provided (used) by investing activities........................... 14,949,000 9,659,000 (21,458,000) ------------ ------------ ------------ Cash flows from financing activities: Payments on notes receivable from stockholders................................ 4,000 553,000 35,000 Proceeds from issuance of stock................ 229,000 309,000 26,121,000 Principal payments on capital lease obligations................................. (714,000) (556,000) (481,000) ------------ ------------ ------------ Net cash provided (used) by financing activities........................... (481,000) 306,000 25,675,000 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents.................................... (377,000) 3,560,000 (862,000) Cash and cash equivalents at beginning of year... 4,972,000 1,412,000 2,274,000 ------------ ------------ ------------ Cash and cash equivalents at end of year......... $ 4,595,000 $ 4,972,000 $ 1,412,000 ============ ============ ============ Supplemental Information: Income taxes paid -- Note 6 Interest paid -- Note 9 Equipment under capital leases -- Note 9
See accompanying notes to financial statements. F-6 44 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company SIBIA Neurosciences, Inc. (the "Company" or "SIBIA") was founded by The Salk Institute for Biological Studies ("The Salk Institute") and incorporated in Delaware in 1981. SIBIA is engaged in the discovery and development of novel small molecule therapeutics for the treatment of nervous system disorders. The Company is pursuing a molecular target-based approach to drug discovery, and its targets have been selected based on their known or postulated roles in molecular processes critical to normal and pathologic neuronal function. The Company's focus is on the development of therapeutics for the treatment of neurodegenerative, neuropsychiatric and neurological disorders, many of which have large patient populations and represent critical unmet medical needs. The Company has been funded to date principally through equity financings, research contracts (generally conducted on a best efforts basis), and option, license and royalty revenues. Significant Ownership The Salk Institute owned 20%, 21% and 22% of the Company's outstanding Common Stock as of December 31, 1998, 1997, and 1996, respectively. Skandigen AB owned 10%, 11% and 11% of the Company's outstanding Common Stock as of December 31, 1998, 1997, and 1996, respectively. Novartis AG, formerly CIBA-GEIGY Limited, owned 11% of the Company's outstanding Common Stock as of December 31, 1998, 1997 and 1996. Use of Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments It is management's belief that the carrying amounts shown for the Company's financial instruments, including cash, investment securities, contracts and accounts receivable, and accounts payable and accrued liabilities, are reasonable estimates of their fair value (Notes 2 and 3). Concentration of Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and investment securities. No significant losses have been incurred related to these investments. During the years ended December 31, 1998, 1997, and 1996, the Company had three, four and three collaborative research agreements that accounted for 93%, 95% and 97%, respectively, of total revenue (Note 4). Collaborative Agreements The Company enters into collaborative agreements from time to time with third parties. Such agreements may call for an equity investment by the collaborative partner as well as a commitment for current and future research funding in exchange for best efforts research to be provided by the Company. The collaborative agreements may also provide for license fees, milestone payments and royalties. Such agreements define the F-7 45 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) rights of each party related to the results of such research. Amounts related to research funding and license and royalty rights are recognized in accordance with the specific terms of each collaborative agreement to the extent the Company determines that such recognition is consistent with the substance of the agreement (Note 4). Revenue Recognition Contract revenue is recognized as the research is performed using the percentage-of-completion method of accounting, primarily based on contract costs incurred to date compared with total estimated costs at completion. Contract revenue related to milestones is recognized upon the achievement of the related milestone and when collection is probable. License revenue is recognized when earned as generally evidenced by certain factors including: receipt of such fees, satisfaction of any performance obligations and the non-refundable nature of such fees. Royalty revenue is recognized when earned and collection is probable. Total revenue for the years ended December 31, 1998, 1997, and 1996, includes related party revenue of $2,381,000, $3,496,000 and $6,606,000, respectively. Research and Development Costs Research and development costs are expensed as incurred and include costs associated with collaborative agreements. These costs consist of direct and indirect internal costs related to specific projects as well as fees paid to other entities which conduct certain research activities on behalf of the Company. Cash Equivalents Cash equivalents are liquid investments purchased with an original maturity of three months or less. As of December 31, 1998, $4,562,000 of the $4,595,000 total cash and cash equivalents was invested in money market funds. As of December 31, 1997, the cash and cash equivalents balance of $4,972,000 was primarily made up of $2,317,000 in money market funds and $2,474,000 in commercial paper. Investment Securities Management determines the appropriate classification of its investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company has classified its investment securities as "available-for-sale" or "held-to-maturity." Available-for-sale securities are recorded at fair value with the corresponding unrealized gain or loss reflected as a component of stockholders' equity. Held-to-maturity securities are recorded at amortized cost. Actual gains or losses, if any, on investment securities are reflected in the statement of operations when the underlying securities are sold. Property and Equipment Property and equipment is recorded at cost and depreciated over estimated useful lives of 4 to 8 years using the straight-line method. Property and equipment acquired under capital leases is amortized over the shorter of the useful life or the related lease terms using the straight-line method. Long-Lived Assets The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. No such impairment losses have been recorded by the Company. F-8 46 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Income Taxes Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences resulting from the differences in the financial reporting and tax bases of assets and liabilities. The Company establishes a valuation allowance, if necessary, to reflect the likelihood of realization of net deferred tax assets. Deferred income tax expense is the change during the year in the deferred income tax asset or liability. Net Loss Per Share The Company applies Statement of Financial Accounting Standards No. 128 and related Interpretations in computing its net loss per share. Basic net loss per common share is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding. Diluted EPS is computed similarly to basic EPS, except that the weighted average number of shares of Common Stock outstanding are increased to include the number of additional shares of Common Stock that would have been outstanding if dilutive potential common shares had been issued. Accounting for Stock-Based Compensation The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock-based compensation. Compensation expense, as appropriate, has been recorded related to option grants and is being amortized to operations over the related vesting period. No compensation expense has been recognized for its stock purchase plan. Adoption of New Accounting Standard In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This pronouncement, which was adopted by the Company effective January 1, 1998, requires the presentation of a statement of comprehensive income. Comprehensive income is defined as the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances from nonowner sources. Comprehensive loss for the Company, in addition to net loss, includes unrealized gains and losses on marketable securities available for sale, currently recorded in stockholders' equity. Reclassifications Certain reclassifications have been made to the 1997 amounts to conform to the presentation used in 1998. F-9 47 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2. INVESTMENT SECURITIES The following is a summary of all of the Company's investment securities. All of the Company's securities are classified as available-for-sale. Determination of estimated fair value is based on quoted market prices:
DECEMBER 31, 1998 ------------------------------------------------------ GROSS GROSS ESTIMATED UNREALIZED UNREALIZED COST FAIR VALUE GAINS LOSSES ----------- ----------- ---------- ---------- U.S. Treasury obligations and obligations of U.S. government agencies............ $ 5,004,000 $ 5,027,000 $ 23,000 $ =========== =========== ========== ======= U.S. corporate debt securities........... $ 7,002,000 $ 7,007,000 $ 5,000 $ =========== =========== ========== ======= U.S. corporate equity securities......... $ $ 289,000 $ 289,000 $ =========== =========== ========== ======= Mortgage-backed securities............... $ 214,000 $ 269,000 $ 61,000 $ 6,000 =========== =========== ========== =======
DECEMBER 31, 1997 ------------------------------------------------------ GROSS GROSS ESTIMATED UNREALIZED UNREALIZED COST FAIR VALUE GAINS LOSSES ----------- ----------- ---------- ---------- U.S. Treasury obligations and obligations of U.S. government agencies............ $21,859,000 $21,923,000 $ 67,000 $ 3,000 =========== =========== ========== ======= U.S. corporate debt securities........... $ 4,033,000 $ 4,013,000 $ $20,000 =========== =========== ========== ======= U.S. corporate equity securities......... $ 1,000 $ 2,100,000 $2,099,000 $ =========== =========== ========== ======= Mortgage-backed securities............... $ 271,000 $ 339,000 $ 73,000 $ 5,000 =========== =========== ========== =======
The amortized cost and estimated fair value of the debt securities as of December 31, 1998 by contractual maturity are shown below. Actual maturities may differ from the contractual maturities as the issuers of the securities may have the right to call the obligation.
ESTIMATED COST FAIR VALUE ----------- ----------- Due in one year or less................................... $12,006,000 $12,034,000 =========== =========== Due after ten years....................................... $ 214,000 $ 269,000 =========== ===========
F-10 48 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- PROPERTY AND EQUIPMENT Lab equipment........................................... $ 6,247,000 $ 4,463,000 Computer equipment...................................... 398,000 354,000 Other................................................... 224,000 171,000 ----------- ----------- 6,869,000 4,988,000 Accumulated depreciation and amortization............... (4,231,000) (3,389,000) ----------- ----------- $ 2,638,000 $ 1,599,000 =========== =========== ACCRUED LIABILITIES Current portion of long-term debt....................... $ 725,000 $ 528,000 Accrued vacation........................................ 397,000 335,000 Accrued bonuses......................................... 657,000 531,000 Other................................................... 363,000 266,000 ----------- ----------- $ 2,142,000 $ 1,660,000 =========== ===========
NOTE 4. SIGNIFICANT COLLABORATIVE AGREEMENTS Novartis AG (Formerly CIBA-GEIGY Limited) In October 1992, the Company entered into a collaborative research and license agreement (which included research funding and a $5,000,000 equity investment) with Novartis AG ("Novartis") to develop and utilize SIBIA's receptor/ion channel technology in the area of excitatory amino acid receptors ("EAARs") for the discovery of drugs that interact with these molecular targets. In March 1996, the Company executed an agreement with Novartis to extend the term of its collaborative research funding to September 1998. In exchange for providing a certain level of scientific research under the agreement, the Company received payments from Novartis; additional payments may be received by the Company upon the achievement of certain development milestones and the Company may receive royalties in the event there are sales of products containing a compound developed under the agreement. Pursuant to the extended agreement, Novartis paid SIBIA $500,000 to fund certain capital expenditures and agreed to purchase $7,500,000 of the Company's Common Stock, $5,000,000 of which was purchased in conjunction with the initial public offering of the Company's Common Stock and the remaining $2,500,000 of which will be purchased upon the achievement of certain research milestones. Subsequent to completion of the collaborative research, SIBIA retained the rights to use the program technology for its own drug discovery efforts and may screen molecules from other sources against EAARs and pursue development of these molecules. The Company recognized contract revenue related to this agreement of $2,381,000, $3,496,000 and $3,383,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Bristol-Myers Squibb Company In August 1995, the Company entered into a collaborative research and license agreement with Bristol-Myers Squibb Company ("Bristol-Myers Squibb") relating to the discovery and development of compounds relating to amyloid precursor protein. In exchange for providing a certain level of scientific research under the agreement, the Company will receive research funding payments from Bristol-Myers Squibb for a term of four years; additional payments may be received by the Company upon the achievement of certain development milestones. Bristol-Myers Squibb will also pay royalties based on the level of its net sales of products, if any, F-11 49 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) developed under the agreement. The Company recognized contract revenue related to this agreement of $3,622,000, $3,262,000 and $3,223,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Concurrent with the execution of the agreement, Bristol-Myers Squibb paid a non-refundable $3,000,000 license fee for an exclusive commercialization license to use certain related existing proprietary technologies and purchased 280,000 shares of the Company's Series C Convertible Preferred Stock. Bristol-Myers Squibb also agreed to make an additional equity investment of $6,000,000 in shares of Common Stock upon the initiation of clinical trials relating to any product developed from the collaboration. Meiji Seika Kaisha, Ltd In February 1997, the Company entered into a development and license agreement with Meiji Seika Kaisha, Ltd ("Meiji") for the development and commercialization of the Company's proprietary nicotinic acetylcholine receptor agonist, SIB-1508Y, as a treatment for Parkinson's disease and other nervous system disorders in Japan and other Asian countries. Under the agreement, the Company received a one-time license fee of $3,000,000 for the license of certain technology to Meiji. In addition, the Company recognizes contract revenue and related development costs related to certain cost sharing provisions of the agreement and may receive development milestone payments and royalties on future product sales, if the product is successfully commercialized in such countries. SIBIA has retained rights to develop and commercialize SIB-1508Y outside of Japan and certain other Asian countries, and has retained rights to manufacture clinical supplies and commercial material worldwide. The Company recognized contract revenue related to this agreement of $611,000 and $114,000 for the years ended December 31, 1998 and 1997, respectively. Eli Lilly & Company In May 1992, the Company entered into a collaborative research and license agreement with Eli Lilly & Company ("Lilly") providing for the discovery and development of drugs which specifically interact with human neuronal calcium channels. As part of the agreement, Lilly purchased 276,470 shares of Common Stock. The term of the collaborative research was revised, extended and ultimately completed in October 1997. The Company is entitled to receive milestone payments and royalties on sales of products identified by Lilly within a certain period of time and commercialized, and is free to develop compounds and other technology it discovers in this area on its own or with other partners. The Company recognized contract revenue related to this agreement of $665,000 and $1,609,000 for the years ended December 31, 1997, and 1996, respectively. Total costs incurred under the Company's various collaborative agreements for the years ended December 31, 1998, 1997 and 1996, including certain administrative costs, aggregated $5,777,000, $7,313,000, and $5,671,000, respectively. NOTE 5. SIGNIFICANT OPTION AND LICENSE AGREEMENTS The Salk Institute In 1988, SIBIA entered into a license agreement with The Salk Institute covering a number of nAChR subunit clones. This agreement was amended in March 1996 such that the license to the issued U.S. patents and related patent applications became an exclusive worldwide license. Pursuant to the agreement, as amended, SIBIA is obligated to pay royalties to The Salk Institute on sales of products resulting from The Salk Institute's nAChR technology. In addition, the Company is required to make certain minimum annual royalty payments to The Salk Institute beginning in 2002. Failure to pay such royalties will result in the related license becoming non-exclusive. F-12 50 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) In 1990, SIBIA entered into a three-year agreement with The Salk Institute in the area of EAARs. This agreement provided for the support of certain research in 1992 and 1993 at The Salk Institute by SIBIA and the transfer of research materials and research results in the EAAR area from The Salk Institute to SIBIA. SIBIA also received an exclusive worldwide license to certain EAAR-related patents and patent applications held by The Salk Institute. The agreement was amended in March 1996. Pursuant to the agreement, as amended, SIBIA began making certain annual minimum royalty payments to The Salk Institute beginning in 1998. Failure to pay such royalties will result in the related license agreement becoming non-exclusive. Cephalon, Inc. In October 1991, the Company entered into a development and option-to-license agreement with Cephalon, Inc. ("Cephalon") for certain proprietary technology related to the development and production of recombinant insulin-like growth factor ("IGF-1"), known as Myotrophin, on a commercial basis for certain applications. The option-to-license was subsequently expanded to include additional applications. All options-to-license the IGF-1 technology were exercised and the license agreements, as executed, include a provision for the payment of licensing fees upon the occurrence of certain development milestones and royalties on the sales of products using licensed technology. In 1995, the Company received a non-refundable payment of $1,750,000 from Cephalon to reduce the royalty percentage on sales of an IGF-1 product within the neurology field. Aurora Biosciences Corporation In January 1997, the Company entered into an agreement with Aurora Biosciences Corporation ("Aurora"). Under the agreement, the Company gave Aurora non-exclusive rights to practice under its patents for transcription-based assays and certain other patents related to automated drug screening. In return, the Company received 160,000 shares of Aurora's Common Stock and non-exclusive rights to several assay technologies, including novel reporter molecules, that will facilitate the Company's high throughput screening and drug discovery efforts directed to certain receptor, ion channel and enzyme targets associated with nervous system disorders. Both parties received limited sublicensing rights to each other's patents. In December 1997, Aurora entered into agreements with Lilly and Merck and Company to sublicense certain of SIBIA's patents when used in conjunction with Aurora technologies. During 1998, the Company sold 115,000 shares of Aurora Common Stock resulting in a gain of $1,305,000. NOTE 6. INCOME TAXES As of December 31, 1998, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $44,335,000 and $18,972,000 respectively, which expire beginning in 2006 and 2002, respectively. As of December 31, 1998, the Company had federal and state tax credits for research activities totaling approximately $2,210,000 and $814,000, respectively, which are available to offset future income taxes and expire beginning in 2004 and 2000, respectively. The Company's ability to utilize net operating loss carryforwards and tax credits is subject to limitations as set forth in applicable federal and state tax laws. As specified in the Internal Revenue Code, an ownership change of more than 50% by a combination of the Company's significant stockholders during any three-year period would result in certain limitations on the Company's ability to utilize its net operating loss and credit carryforwards. F-13 51 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Deferred tax liabilities and assets are summarized as follows:
DECEMBER 31, ---------------------------- 1998 1997 ------------ ------------ Deferred tax liabilities: Depreciation.......................................... $ (667,000) $ (517,000) ------------ ------------ Deferred tax assets: Net operating loss carryforwards...................... 16,181,000 10,228,000 Research and development credits...................... 3,025,000 1,774,000 Research and development capitalized for state tax purposes........................................... 391,000 708,000 Capital lease obligations............................. 637,000 487,000 Other................................................. 530,000 449,000 ------------ ------------ Total deferred tax assets..................... 20,764,000 13,646,000 ------------ ------------ Net deferred tax assets................................. 20,097,000 13,129,000 Valuation allowance..................................... (20,097,000) (13,129,000) ------------ ------------ Deferred taxes.......................................... $ -- $ -- ============ ============
As of December 31, 1998, the Company has provided a deferred tax asset valuation allowance for net deferred tax assets which more likely than not will not be realized based on recent and expected trends in operating results. The Company paid state franchise taxes of $25,000, $25,000 and $31,000 during 1998, 1997 and 1996, respectively. NOTE 7. STOCKHOLDERS' EQUITY Share Purchase Rights Plan In March 1997, the Board of Directors of the Company designated 150,000 shares of $.001 par value Preferred Stock as Series A Junior Participating Preferred Stock and adopted a Share Purchase Rights Plan pursuant to which preferred share purchase rights (the "Rights") were distributed for each share of Common Stock of the Company held as of the close of business on April 2, 1997. Each Right, under certain circumstances, entitles the holder thereof to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock (each a "Preferred Share") at an exercise price of $60.00 per one one-hundredth of a Preferred Share. Each one one-hundredth of a share of Preferred Share has rights, preferences and privileges equal to the value of a share of Common Stock. The Rights will expire on March 17, 2007, unless the Rights are earlier redeemed or exchanged by the Company. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors. NOTE 8. EMPLOYEE BENEFIT PLANS Stock-Based Compensation The Company has adopted the disclosure-only provision of Statement of Financial Accounting Standards No. 123 ("SFAS 123"). Accordingly, no compensation expense has been recognized for the stock option plans. Had compensation cost for the Company's stock-based compensation awards issued during 1998, 1997 and 1996 been determined based on the fair value at the grant dates of awards consistent with the method of F-14 52 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Statement of Financial Accounting Standards No. 123, the Company's actual net loss and net loss per share would have been increased to the pro forma amounts indicated below:
DECEMBER 31, ------------------------------------------ 1998 1997 1996 ------------ ----------- ----------- Net loss: As reported.............................. $(15,807,000) $(7,593,000) $(5,564,000) Pro forma................................ (16,605,000) (8,215,000) (5,856,000) Basic and diluted net loss per common share: As reported.............................. $ (1.68) $ (0.82) $ (0.73) Pro forma................................ (1.76) (0.89) (0.77)
For purposes of determining the pro forma amounts, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the years ended December 31, 1998, 1997 and 1996, respectively: dividend yield of 0.0% for all years, risk-free interest rates of 4.76%, 5.70% and 6.16%, expected volatility of 64.0%, 66.0% and 34.2%, and expected lives of 7.50, 7.50 and 5.81 years. The weighted average fair value of options granted during 1998, 1997 and 1996 for which the exercise price equals the market price on the grant date was $3.34, $4.79 and $5.29, respectively. The weighted average fair value of options granted during 1996 for which the exercise price was less than the market price on the grant date was $6.21. The fair value of the employees' purchase rights is estimated using the Black-Scholes model with the following weighted average assumptions used for purchase rights granted during the years ended December 31, 1998, 1997 and 1996, respectively: dividend yield of 0.0% for all years, risk-free interest rate of 4.64%, 5.43% and 5.41%, expected volatility of 64.1%, 66.6% and 66.8% and an expected life of 1.21, 1.47 and 1.26 years. The weighted average fair value of those purchase rights granted in 1998, 1997 and 1996 was $1.99, $5.22 and $4.91, respectively. Stock Option and Equity Incentive Plans The Company has various stock option plans and an equity incentive plan whereby 2,694,306 shares of the Company's Common Stock have been reserved for issuance to its officers, directors, employees and consultants. The plans are administered by the Board of Directors or its designees and provide generally that, for incentive stock options, the exercise price shall not be less than the fair market value of the shares on the date of grant and, for non-qualified stock options, the price shall not be less than 85% of the fair market value of the shares on the date of grant as determined by the Board of Directors. The options expire not later than ten years from the date of grant and are generally subject to vesting over four years, as determined by the F-15 53 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Board of Directors. A summary of the changes in options outstanding under the plans for the three years ended December 31, 1998 is as follows:
WEIGHTED OPTIONS AVERAGE OUTSTANDING EXERCISE PRICE ----------- -------------- Balance, December 31, 1995.................................. 1,368,979 $1.31 Options granted: Price equal to the market price of stock on grant date................................................. 173,975 7.32 Price less than the market price of stock on grant date................................................. 186,282 2.01 Options exercised......................................... (570,706) 1.43 Options forfeited......................................... (36,910) 3.06 --------- Balance, December 31, 1996.................................. 1,121,620 2.24 Options granted: Price equal to the market price of stock on grant date................................................. 257,892 6.82 Options exercised......................................... (151,545) 1.02 Options forfeited......................................... (40,400) 5.20 --------- Balance, December 31, 1997.................................. 1,187,567 3.29 Options granted: Price equal to the market price of stock on grant date................................................. 535,788 4.87 Options exercised......................................... (144,442) 1.13 Options forfeited......................................... (102,110) 5.01 --------- Balance, December 31, 1998.................................. 1,476,803 3.96 ========= Exercisable, December 31, 1998.............................. 674,537 3.24 ========= Available for future grant, December 31, 1998............... 869,794 =========
Included as options outstanding as of December 31, 1998, 1997 and 1996 in the above table are options to purchase 264,237, 355,374 and 373,062 shares, respectively, of Common Stock under the Management Change of Control Plan which, in the event of a change of control, may have options for which vesting may accelerate as determined by the value of the Company on the date of such a change of control. Also included as options outstanding as of December 31, 1998, 1997 and 1996 in the above table are options to purchase 826,871, 385,186 and 155,455 shares, respectively, of Common Stock under the 1996 Equity Incentive Plan. Shares of Common Stock issued under the 1996 Equity Incentive Plan may be subject to a repurchase feature in favor of the Company in accordance with a vesting schedule to be determined by the Board of Directors; however; the right to repurchase at the original purchase price will lapse at a minimum rate of 20% per year over the five-year period following the date that the award was granted. The repurchase feature can be exercised by the Company within the 90-day period following the stockholder's termination of employment or the relationship as a director or consultant. F-16 54 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information concerning currently outstanding and exercisable stock options:
WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- ----------- -------------- ----------- -------------- $0.85 - 1.23 298,312 5.42 $0.89 216,064 $0.91 1.45 - 2.13 300,620 1.54 1.71 212,185 1.69 3.75 - 5.00 447,732 9.44 4.72 47,985 4.87 5.63 - 8.38 405,588 8.40 6.68 177,002 6.74 9.75 - 9.88 24,551 7.41 9.78 21,301 9.77 --------- ------- 1,476,803 6.70 3.96 674,537 3.24 ========= =======
Employee Stock Purchase Plan In February 1996, the Company adopted the Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code in which eligible employees may use funds from accumulated payroll deductions to purchase shares of Common Stock at the end of each designated purchase period. Employees may contribute up to 15% of base salary toward such purchases, not to exceed $25,000 per calendar year. The purchase price is 85% of the fair market value of Common Stock determined at either the beginning or end of each purchase period, whichever is lower. The Company has reserved 500,000 shares of Common Stock for issuance under the plan. In 1998, 1997 and 1996 the Company issued 32,402, 21,821 and 9,408 shares of Common Stock, respectively, under the plan. Retirement Savings Plan The Company has a savings plan under Section 401(k) of the Internal Revenue Code which covers all employees who meet minimum age requirements. Employees can contribute up to 15% of their salaries, but not in excess of the amount deductible for income tax purposes. The Company currently matches 50% of employee contributions up to 6% of an employee's salary, limited to the maximum contribution allowable for income tax purposes. Employer contributions are vested proportionately over five years of service. The plan may be amended or discontinued at anytime by the Company. During 1998, 1997 and 1996, the Company contributed $184,000, $161,000, and $121,000, respectively, to the plan. NOTE 9. COMMITMENTS AND CONTINGENCIES Leases and Equipment Notes Payable Certain scientific instrumentation, computer equipment and other equipment have been acquired under capital lease and equipment note payable agreements. These agreements mature at various dates through September 2002 and have interest rates between 4.2% and 9.5%. As of December 31, 1998, $3,302,000 ($2,109,000 net of accumulated amortization) of equipment under these agreements is included in property and equipment. For the years ended December 31, 1998, 1997 and 1996, $721,000, $542,000 and $483,000 in amortization expense, respectively, was recorded related to property acquired under such agreements. During 1998, 1997 and 1996, $90,000, $58,000 and $66,000, respectively, was paid in imputed interest on capital leases. For the years ended December 31, 1998, 1997 and 1996, the Company had non-cash financing activities in the form of capital leases and equipment loans for $1,565,000, $778,000 and $330,000, respectively. F-17 55 SIBIA NEUROSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Operating Leases The Company leases its principal facilities under a long-term operating lease that expires December 31, 2001. The Company has the option to extend the lease for a period of five years. Rent expense was $991,000, $967,000, and $705,000 net of sub-lease income of $490,000, $400,000 and $586,000 for 1998, 1997 and 1996, respectively. Future minimum payments for capital leases, equipment notes and operating leases as of December 31, 1998 are as follows (operating lease payments are net of noncancellable sub-lease income of $441,000).
CAPITAL LEASES AND OPERATING EQUIPMENT NOTES LEASES ------------------ ---------- 1999.................................................... $ 832,000 $1,032,000 2000.................................................... 717,000 1,518,000 2001.................................................... 648,000 1,563,000 2002.................................................... 79,000 ---------- ---------- Total minimum lease payments............................ 2,276,000 $4,113,000 ========== Amount representing interest............................ 201,000 ---------- Obligations under capital leases........................ 2,075,000 Less portion due within one year........................ 725,000 ---------- Long-term capital lease obligations..................... $1,350,000 ==========
Legal Proceedings On July 9, 1996, the Company filed an action for patent infringement against Cadus Pharmaceutical Corporation ("Cadus") in the United States District Court for the Southern District of California. The complaint asserted that Cadus' assay technology infringes the Company's United States Patent No. 5,401,629 (the "'629 Patent"), entitled "Assay Methods and Compositions Useful for Measuring the Transduction of an Intercellular Signal." The Company sought damages in an unspecified amount and injunctive relief in the complaint. Cadus responded by asserting that the '629 Patent and the Company's United States Patent No. 5,436,128 (the "'128 Patent"), entitled "Assay Methods and Compositions for Detecting and Evaluating the Intercellular Transduction of an Extracellular Signal," are invalid, unenforceable and not infringed, and further asserting claims for intentional interference with prospective economic advantage and unfair competition. Cadus sought declaratory relief and compensatory and punitive damages against the Company. On August 3, 1998, the Court granted summary judgment for the Company on Cadus' counterclaims. Cadus subsequently dismissed its counterclaim alleging invalidity and unenforceability of the '128 Patent. On December 18, 1998, the jury returned a verdict in favor of the Company, finding that the '629 Patent is valid and enforceable and awarding the Company damages in the amount of $18 million to compensate the Company for Cadus' past direct and indirect infringement of the '629 Patent. On January 29, 1999, the Court granted the Company's request for a permanent injunction preventing Cadus, and all persons acting in concert or otherwise participating with Cadus from practicing the methods claimed in the '629 Patent. Cadus has requested that the Court grant a new trial and/or reduce the jury's damage award. The Court has not yet ruled on that request. Cadus has indicated publicly that it intends to appeal the decision if that request is denied. The Company has recently been notified that the Patent & Trademark Office has granted a request for reexamination of the '629 Patent. The Company's management intends to vigorously defend the '629 Patent in that proceeding. F-18 EX-10.11 2 EXHIBIT 10.11 1 EXHIBIT 10.11 CONFIDENTIAL SIBIA NEUROSCIENCES, INC. AMENDED AND RESTATED MANAGEMENT CHANGE-OF-CONTROL PLAN AMENDED AND RESTATED AS OF DECEMBER 10, 1998 INTRODUCTION This SIBIA Neurosciences, Inc. (formerly, "The Salk Institute Biotechnology/Industrial Associates, Inc."), a Delaware corporation (the "Company"), Management Change-of-Control Plan (the "Plan") was adopted by the Board of Directors (the "Board") of the Company, effective November 10, 1994. The Plan is intended to provide members of management who are Participants in the Plan with the Benefits specified herein in the event of a Change of Control. WHEREAS, the Plan was previously amended by the Board in November 1995, March 1996 and June 1997 and amended and restated on February 26, 1998 (the "Prior Amendments"); WHEREAS, the Board wishes to amend and restate the Plan to include Stephen F. Keane as a Plan participant, to exclude former Plan participants, and to provide participants with severance benefits in the event of certain transactions not currently contemplated or provided for in the Plan and to provide for administrative ease. NOW, THEREFORE, upon authorization duly granted by the Board, the undersigned parties hereto agree to amend and restate the Plan as provided herein. Certain capitalized terms used in the Plan are defined in Article 13. ARTICLE 1 ESTABLISHMENT OF THE PLAN AND ELIGIBILITY 1.1 ESTABLISHMENT OF PLAN. As of the Effective Date, the Company hereby establishes a plan to be known as the "Management Change-of-Control Plan" (the "Plan"), as set forth herein. 1.2 APPLICABILITY OF PLAN. The benefits provided by the Plan shall be available to all Participants, unless otherwise specifically provided. 1. 2 ARTICLE 2 ELIGIBILITY 2.1 PARTICIPATION. William T. Comer will be a Participant in the Plan and will serve in the position of Chief Executive Officer. Jeffrey McKelvy will be a Participant in the Plan and will serve in the position of Executive Vice President. The following members of management shall also be Participants in the Plan and shall each serve in a position of Vice President: Stephen F. Keane, G. Kenneth Lloyd, Ian A. McDonald, David E. McClure, and Thomas A. Reed. The Board or the Compensation Committee of the Board (the "Compensation Committee") may, in its sole discretion, designate additional members of management or employees to be Participants in the Plan and, subject to the terms of Section 2.2, may decide that members of management or employees who have been designated as Participants in the Plan shall no longer be Participants. 2.2 DURATION OF PARTICIPATION. A Participant shall cease to be a Participant in the Plan upon a determination thereof by the Board or the Compensation Committee; provided, however, that in no event shall any such determination impair a Participant's rights under this Plan with respect to Benefits that have accrued prior to such determination. Without limiting the foregoing, if a Participant is then entitled to payment of Benefits as a result of a Change of Control that occurred prior to such determination, such Participant shall remain a Participant in the Plan until the full amount of such Benefits has been paid to such Participant. In no event shall any Participant be entitled to Benefits pursuant to this Plan with respect to a Change of Control that occurs after the termination of such Participant's employment with the Company, for any reason or for no reason, and nothing in this Plan shall alter the status of each Participant as an at-will employee of the Company. ARTICLE 3 BENEFITS Participants shall be entitled to the following Benefits pursuant to this Plan: Bonus Payments, as provided in Article 4; Stock Options, as provided in Article 5 (except Dr. David McClure, Dr. Jeffrey McKelvy, and Stephen F. Keane shall not be entitled to any benefits provided to Plan Participants under Article 5); and Severance Benefits, as provided in Article 6. ARTICLE 4 BONUS PAYMENTS 4.1 BONUS PAYMENT UPON CHANGE OF CONTROL. If a Change of Control occurs, then each Participant (i) who remains employed by the Company or its successor for a period of six months following such Change of Control (the "Bonus Service Period") or (ii) whose employment shall be Terminated Without Cause (including without limitation and as defined in Section 13.12, a reduction of the Participant's rate of compensation or a change in Participant's responsibilities, authority, titles or offices) during the Bonus Service Period, shall receive a 2. 3 Bonus Payment based upon the Company's valuation at the time of the Change of Control in accordance with the following schedule: VALUE OF COMPANY BONUS AMOUNT AS A UPON CHANGE OF CONTROL PERCENT OF BASE SALARY Less than $10,000,000 0% $10,000,000 to $20,000,000 10% Greater than $20,000,000 25%
4.2 DETERMINATION OF VALUE OF THE COMPANY. For purposes of determining the Bonus amounts to be paid under this Article 4 and the number of Stock Options under Article 5, the value of the Company shall be determined as of the closing date of the applicable Change of Control transaction (the "Value Determination Date ") and shall be equal to the market capitalization of the Company immediately prior to such closing. 4.3 TIME OF BONUS PAYMENT. The Bonus Payments under this Article 4 shall be paid in a cash lump sum no later than fifteen (15) days following the earliest of (i) the Bonus Completion Date, or (ii) the date the Participant's employment is Terminated Without Cause. ARTICLE 5 STOCK OPTIONS AND OTHER INCENTIVES 5.1 STOCK OPTIONS. Participants (except Dr. David McClure, Dr. Jeffrey McKelvy, and Stephen F. Keane who shall not be entitled to any benefits provided under this Article 5) shall receive a one-time grant of nonqualified stock options to acquire the Company's common stock ("Stock Options"). The number of such Stock Options granted shall be based upon the Participant's position with the Company on the date the Participant is initially designated as a Participant by the Board or the Compensation Committee and in accordance with the schedule set forth in this Section 5.1. Notwithstanding the foregoing, in the event the Board or Compensation Committee subsequently promotes a Participant (other than Dr. David McClure, Dr. Jeffrey McKelvy, or Steven F. Keane) to a more senior officer position, such Participant shall be entitled to receive an additional grant of Stock Options in an amount equal to that required to make the total Stock Options granted to such Participant equal to that number of Stock Options granted to other Participants serving in like positions with the Company. Each Stock Option granted under this Article 5 shall have an exercise price of $2.00 per share (which price does not reflect the 2.35-to-1 reverse stock split effected by the Company in May of 1996). Each Stock Option shall not be granted pursuant to the Company's Amended and Restated 1992 Stock Option and Restricted Stock Plan, but shall incorporate the terms of such plan to the extent not inconsistent with this Plan, as determined by the Board or the Compensation Committee in its sole discretion, including terms related to the transferability of stock options granted hereunder. 3. 4 OFFICER STATUS WITH COMPANY NUMBER OF STOCK OPTIONS GRANTED Vice President 25,000 shares Chief Executive Officer (CEO) 40,000 shares
5.2 TIME AND EXERCISE OF STOCK OPTION GRANT. The Stock Options granted under this Article 5 shall be granted as of the Effective Date or, if later, the date the Participant is initially designated as a Participant by the Board or the Compensation Committee; provided that Stock Options granted to a Participant by reason of the promotion of such Participant to a more senior officer position pursuant to Section 5.1 shall be granted as of the effective date of such promotion. Except as set forth below, the Stock Options granted under this Section 5 shall be subject to vesting and shall not become exercisable in any respect until seven (7) years following the date of grant, at which time they shall become fully vested and exercisable pursuant to the terms thereof. Notwithstanding the foregoing, in the event that at any time subsequent to the Effective Date the Company shall consummate an initial public offering of its Common Stock, 25% of all then outstanding options under the Plan shall vest and become fully exercisable immediately prior to the effective date of the registration statement pursuant to which such shares of Common Stock are being registered, with the remaining 75% of the then outstanding options vesting in three equal annual installments commencing on the anniversary date of the effectiveness of the registration statement. In addition to the foregoing, vesting of options outstanding under the Plan shall be accelerated and the Stock Options will become fully vested and exercisable pursuant to their terms effective immediately prior to a Change of Control. Stock Options granted to each eligible Participant hereunder shall be exercisable for not more than thirty (30) days following such Participant's termination of employment (for any reason or for no reason) and shall also be subject to the terms and conditions specified in a standard form of stock option agreement as set forth in Appendix A. ARTICLE 6 SEVERANCE BENEFITS 6.1 RIGHT TO SEVERANCE BENEFITS. Each Participant shall be entitled to receive Severance Benefits from the Company as set forth in Section 6.2 in the event such Participant is Terminated Without Cause at any time during the period commencing one (1) month before and ending thirteen (13) months after the effective date of a Change of Control. 6.2 DETERMINATION OF SEVERANCE BENEFITS. Severance Benefits payable pursuant to Section 6.1 shall be determined as follows: (a) Each Vice-President and Executive Vice-President participating in the Plan will receive as a Severance Payment the equivalent of one and one-half (1 1/2) times Base 4. 5 Salary and his or her prorated annual bonus. The Chief Executive Officer (CEO) will receive as a Severance Payment the equivalent of two (2) times Base Salary and his or her prorated annual bonus. (b) The Company shall pay the premiums for the terminated Participant and for the eligible spouse and other COBRA qualified beneficiaries of the terminated Participant for the health insurance continuation benefits provided under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), and Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), for the maximum period provided by law for such qualified beneficiary's COBRA continuation rights. (c) The Company shall reimburse the Participant for outplacement expenses incurred during the three months following the Date of Termination as a result of the Participant's search for other employment. In no event, however, will such outplacement expenses exceed a total of seven thousand five hundred dollars ($7,500) per Participant. The Participant shall provide to the Company proof of such outplacement expenses in a form mutually acceptable to the Company and the Participant. 6.3 TIME OF SEVERANCE PAYMENT. The Severance Payment shall be paid in lump sum in cash not later than thirty (30) days following the Date of Termination. 6.4 NO MITIGATION. The Participant shall not be required to mitigate the amount of the Severance Benefits by seeking other employment or otherwise, and any amount earned by the Participant as the result of employment by another employer after the Date of Termination shall not reduce the amount of the Severance Payment. 6.5 WITHHOLDING. The Company shall withhold appropriate federal, state, local and foreign income and employment taxes from any payments hereunder. 6.6 NOTICE OF TERMINATION. Any termination by the Company for Cause or by the Participant for Good Reason shall be communicated by Notice of Termination to the other party hereto given by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, if to the Participant, to the Participant at the Participant's address as set forth in the Company's records, and, if to the Company, to SIBIA, 505 Coast Boulevard South, La Jolla, California 92037-4641, or to such other address as may be designated by the Company. Any notices given pursuant to this Section 6.6 shall be effective on the earlier of the date on which such notice is actually received by the addressee or the date that is three days after such notice is sent by the addressor. For purposes of the Plan, a "Notice of Termination" means a written notice which (i) indicates the provisions in the Plan that are affected by such termination and (ii) if the Date of Termination, as defined below, is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen (15) days after the giving of such notice). The failure by the Company or the Participant to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause or of Good Reason shall not waive any right of the Company or of the Participant, respectively, hereunder or 5. 6 preclude the Company or the Participant, respectively, from asserting such fact or circumstance in enforcing its or his rights hereunder. 6.7 DATE OF TERMINATION. "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, that (i) if the Participant's employment terminates by the Company other than by reason of death or Disability, or for Cause, the Date of Termination shall be the date on which the Company notifies the Participant of such termination and (ii) if the Participant's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death or determination of termination of employment on account of Disability pursuant to Section 13.9, as the case may be. 6.8 CERTAIN REDUCTION OF PAYMENTS. In the event that any distribution received or to be received by a Participant pursuant to the Plan ("Distribution") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Code and (ii) be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then such Distribution shall be reduced to the largest amount which would result in no portion of the Distribution being subject to the Excise Tax or such Distribution may be paid in full, whichever produces the better after-tax result for the Participant. Necessary calculations will be prepared by a mutually acceptable accounting firm. ARTICLE 7 PAYMENTS TO AND FROM THE PLAN The cash benefits under the Plan shall be paid from the general funds of the Company (by certified or official bank check or wire transfer of immediately available funds to an account designated by the applicable Participant), and the Participants shall be no more than unsecured general creditors of the Company. ARTICLE 8 OTHER RIGHTS AND BENEFITS NOT AFFECTED 8.1 NONEXCLUSIVITY. Nothing in the Plan shall prevent or limit any Participant's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which a Participant may otherwise qualify, nor shall anything herein limit or otherwise affect such rights as any Participant may have under any stock option or other agreements with the Company. Except as otherwise expressly provided herein, amounts which are vested benefits or which a Participant is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program. 6. 7 8.2 EMPLOYMENT STATUS. The Plan does not constitute a contract of employment or impose on any Participant or the Company any obligation to retain any Participant as an employee, to change the status of the Participant's employment, or to change the Company's policies regarding termination of employment. In no event shall any Participant be entitled to Benefits pursuant to this Plan with respect to a Change of Control that occurs after the termination of such Participant's employment with the Company, for any reason or for no reason, and nothing in this Plan shall alter the status of each Participant as an at-will employee of the Company. ARTICLE 9 SUCCESSOR TO COMPANY The Plan shall be binding upon any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, and any such successor or assignee shall be required to perform the Company's obligations under the Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company," as used in the Plan, shall mean the Company as hereinafter defined and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of the Plan. ARTICLE 10 DURATION, AMENDMENT AND TERMINATION; RIGHT TO INTERPRETATION 10.1 DURATION. Beginning on December 31, 1995, and on each subsequent anniversary of such date, one year shall be added to the term of the Plan, unless, prior to such date or anniversary, the Company, by resolution of the Board, shall have notified each Participant in writing that such extension will not become effective. If such resolutions are adopted by the Board, the term of the Plan will not be extended and the Plan will terminate on the December 31 on or following the first anniversary date of the date that such resolutions are adopted. No termination of the Plan will occur any earlier than thirteen (13) months following the Change of Control. Notwithstanding the foregoing, the Plan shall not terminate or expire with respect to any Participant who becomes entitled to Benefits hereunder until such Participant has received such payments or other rights in full. 10.2 NO AMENDMENT OR TERMINATION. Except as set forth in Section 10.1 above, the Company may not change or terminate this Plan with respect to any Participant without the written consent of such Participant. 10.3 EXCLUSIVE DISCRETION. The Company shall have the exclusive discretion and authority to establish rules, forms and procedures for the administration of the Plan, and to construe and interpret the Plan and to decide any and all questions of fact, interpretation, definition, computation or administration arising in connection with the operation of the Plan, 7. 8 including, but not limited to, the eligibility to participate in the Plan and amount of benefits paid under the Plan. The rules, interpretations, computations and other actions of the Company shall be binding and conclusive on all persons. ARTICLE 11 NON-TRANSFER OF BENEFITS No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. ARTICLE 12 LEGAL CONSTRUCTION AND ARBITRATION 12.1 APPLICABLE LAW. This Plan shall be construed in accordance with the laws of the State of California without regard to the conflict of laws provisions thereof. 12.2 ARBITRATION. Any and all disputes or controversies, whether of law or fact of any nature whatsoever, arising from or respecting the application of the Plan to any Participant shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association, or by any other arbitration body mutually agreed upon by the parties. Pre-arbitration discovery shall be permitted at the request of either party to a dispute under appropriate protection for proprietary and confidential business information. The arbitrators shall be selected as follows: the Company and the Participant who is a party to the dispute shall each select one independent, qualified arbitrator and the two arbitrators so selected shall select the third arbitrator. The Company reserves the right to disqualify any individual arbitrator who shall be employed by or affiliated with a competing organization. The Company will pay all of the costs of any arbitrator hired to resolve a dispute as determined by the American Arbitration Association. Arbitration shall take place in San Diego County, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy and, in such case, all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for inspection only by the parties to the arbitration, their respective attorneys, and their respective expert consultants or witnesses who shall agree, in advance and in writing, to receive all such information confidentially and to maintain such information in secrecy, and make no use of such information except for the purposes of the arbitration, until such information shall become generally known. The arbitrators, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary injunction, or a permanent injunction, and shall also be able to award damages, with 8. 9 or without an accounting and costs. The decree or judgment of an award rendered by the arbitrators may be entered and enforced in any court having jurisdiction over the parties. Reasonable notice of the time and place of arbitration shall be given to persons other than the parties, if such notice is required by law, in which case such persons or their authorized representatives shall have the right to attend or participate in the arbitration hearing in such manner as the law shall require. If any action is necessary to enforce or interpret the application of the Plan to a Participant, then that Participant shall be entitled to reasonable attorneys fees, costs, and necessary disbursements in addition to any other relief to which that Participant may be entitled, if any, under all circumstances regardless of the outcome of the action. ARTICLE 13 DEFINITIONS For purposes of the Plan, the following terms shall have the meanings set forth below. 13.1 "BASE SALARY" means, as of December 10, 1998 (or if the individual named below became a participant in the Plan following December 10, 1998, the date as of which such individual first became a Participant), the following salaries for each Participant: William T. Comer, $280,000; Stephen F. Keane, $150,000; G. Kenneth Lloyd, $200,000; Ian A. McDonald, $173,000; David E. McClure, $170,000; Thomas A. Reed; $165,000 and Jeffrey McKelvy, $250,000. The Base Salary for each Participant or any Participant may be increased by the Compensation Committee in its sole discretion and such increased Base Salary in effect on the Value Determination Date shall constitute Base Salary for purposes of payments under the Plan. 13.2 "BENEFITS" means, collectively, the various benefits payable or awarded under this Plan, which are the Bonus Payments, the Stock Options, and the Severance Benefits. 13.3 "BONUS COMPLETION DATE" means the last date of the Bonus Service Period. 13.4 "BONUS PAYMENTS" means the payments described in Article 4. 13.5 "BONUS SERVICE PERIOD" shall have the meaning assigned in Section 4.1 herein. 13.6 "CAUSE" means (a) gross or habitual failure to perform assigned duties of the Participant's job, that is, performance failure not corrected within thirty (30) days after written notice to the Participant thereof or (b) misconduct, including but not limited to: (i) conviction of a crime, or entry of a plea of nolo contendere, with regard to a crime involving moral turpitude or dishonesty, (ii) illegal drug use or alcohol abuse on Company premises or at a Company sponsored event, (iii) conduct by the Participant which in the good faith and reasonable determination by two-thirds (2/3) of the Board demonstrates gross unfitness to serve, or (iv) intentional, material violation by the Participant of any contract between the Participant and the Company or any statutory duty of the Participant to the Company. 9. 10 Provided that in the event that any of the events described in (iii) above may be cured, the Company shall provide written notice to the Participant describing the nature of such event and the Participant shall thereafter have thirty (30) days to cure such event. 13.7 "CHANGE OF CONTROL" means any one of the following: (a) a sale of all or substantially all of the assets of the Company; (b) a merger or consolidation in which the Company is not the surviving corporation (other than a transaction the principal purpose of which is to change the state of the Company's incorporation or a transaction in which the voting securities of the Company are exchanged for beneficial ownership of at least 50% of the voting securities of the controlling acquiring corporation); (c) a merger or consolidation in which the Company is the surviving corporation and less than 50% of the voting securities of the Company which are outstanding immediately after the consummation of such transaction are beneficially owned, directly or indirectly, by the persons who owned such voting securities immediately prior to such transaction; (d) any transaction or series of related transactions after which any person (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended), other than any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, becomes the beneficial owner of voting securities of the Company representing 50% or more of the combined voting power of all of the voting securities of the Company. (e) during any period of two consecutive years, individuals who at the beginning of such period constitute the membership of the Company's Board of Directors ("Incumbent Directors") cease for any reason to have authority to cast at least a majority of the votes which all directors on the Board of Directors are entitled to cast, unless the election, or the nomination for election by the Company's stockholders, of a new director was approved by a vote of at least two-thirds of the votes entitled to be cast by the Incumbent Directors, in which case such director shall also be treated as an Incumbent Director in the future; or (f) the liquidation or dissolution of the Company. 13.8 "COMPANY" means SIBIA Neurosciences, Inc., a Delaware corporation, and any successor as provided in Article 9 hereof. 13.9 "DATE OF TERMINATION" has the meaning set forth in Section 6.7. 13.10 "DISABILITY" means that the Participant has exhausted any short-term disability benefits to which he is entitled and is permanently unable, by reason of a physical or mental incapacity, to perform the normal duties of the work for which he was employed by the Company. 10. 11 13.11 "EFFECTIVE DATE" shall mean November 10, 1994. 13.12 "GOOD REASON" means any action taken by the Company or its successor, as the case may be, that results in a (i) reduction of the Participant's rate of compensation as in effect immediately prior to the Change of Control, (ii) failure to provide a package of welfare benefit plans which, taken as a whole, provide substantially similar benefits to those in which the Participant is entitled to participate immediately prior to the Change of Control (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect the Participant's participation or reduce the Participant's benefits under any of such plans, (iii) change in the Participant's responsibilities, authority, titles or offices resulting in diminution of position, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by the Company promptly after notice thereof is given by the Participant, (iv) request that the Participant relocate to a worksite that is more than 35 miles from his prior worksite, unless the Participant accepts such relocation opportunity, (v) material reduction in duties, (vi) failure or refusal of the successor company to assume the Company's obligations under this Plan, as required by Article 9, or (vii) material breach by the Company or any successor company of any of the material provisions of the Plan. 13.13 "NOTICE OF TERMINATION" has the meaning set forth in Section 6.6. 13.14 "PARTICIPANT" shall mean an employee who has been designated as a Participant as provided in Section 2.1. 13.15 "PLAN" has the meaning set forth in Section 1.1. 13.16 "SEVERANCE BENEFITS" has the meaning set forth in Section 6.2. 13.17 "SEVERANCE PAYMENT" has the meaning set forth in Section 6.2. 13.18 "STOCK OPTIONS" means the options to purchase Company stock described in Article 5. 13.19 "TERMINATED WITHOUT CAUSE" shall occur if a Participant's employment with the Company: (a) shall be involuntarily terminated, unless the Company terminates the employment of the Participant for Cause, or unless the Participant's employment is terminated by reason of death or Disability; or (b) shall be voluntarily terminated by the Participant for Good Reason. 11. 12 ARTICLE 14 MISCELLANEOUS 14.1 SEVERABILITY. If any term, provision, covenant or restriction of the Plan is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of the Plan shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 14.2 CONSTRUCTION OF PLAN. Any gender, where appearing in the Plan, shall be deemed to include the other gender, the singular shall include the plural, and the plural shall include the singular, unless the context otherwise requires. Descriptive headings of the several Articles of the Plan are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. In the event of a conflict between the text of the Plan and any summary, description or other information regarding the Plan, the text of the Plan shall control. 14.3 ADJUSTMENTS TO STOCK. If any change is made in the stock subject to options granted under the Plan (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the number of shares remaining subject to such options will be appropriately adjusted in the type(s) and maximum number. Such adjustments shall be made by the Board or the Compensation Committee of the Board, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company".) ARTICLE 15 CLAIMS, INQUIRIES AND APPEALS 15.1 APPLICATIONS FOR BENEFITS AND INQUIRIES. Any application for benefits, inquiries about the Plan or inquiries about present or future rights under the Plan must be submitted to the Plan Administrator in writing. The Company, or any successor, shall at all times maintain a Plan Administrator, and shall give each Participant written notice of any change in the Plan Administrator or the address to which benefits or inquiries should be sent. The Plan Administrator is: SIBIA Neurosciences, Inc. Attention: Treasurer 505 Coast Boulevard South La Jolla, CA 92037-4641 12. 13 15.2 DENIAL OF CLAIMS. In the event that any application for benefits is denied in whole or in part, the Plan Administrator must notify the applicant, in writing, of the denial of the application. The written notice of denial will be set forth in a manner designed to be understood by the Participant, and will include specific reasons for the denial, specific references to the Plan provision upon which the denial is based and a description of any information or material that the Plan Administrator needs to complete the review. This written notice will be given to the employee within 20 days after the Plan Administrator receives the application. 15.3 LEGAL ACTION. No legal action for benefits under the Plan may be brought until the claimant (i) has submitted a written application for benefits in accordance with the procedures described by Section 15.1 above and (ii) has been notified by the Plan Administrator that the application is denied (or the application is deemed denied due to the Plan Administrator's failure to act on it within the established time period). ARTICLE 16 OTHER PLAN INFORMATION 16.1 EMPLOYER AND PLAN IDENTIFICATION NUMBERS. The Employer Identification Number assigned to the Company (which is the "Plan Sponsor" as that term is used in ERISA) by the Internal Revenue Service is 95-3616229. The Plan Number assigned to the Plan by the Plan Sponsor pursuant to the instructions of the Internal Revenue Service is 530. 16.2 ENDING DATE FOR PLAN'S FISCAL YEAR. The date of the end of the fiscal year for the purpose of maintaining the Plan's records is December 31. 16.3 AGENT FOR THE SERVICE OF LEGAL PROCESS. The agent for the service of legal process with respect to the Plan is: SIBIA Neurosciences, Inc., 505 Coast Boulevard South, La Jolla, CA 92037-4641, Attn: Treasurer. Service of legal process also may be made upon the Plan Administrator. 16.4 PLAN SPONSOR AND ADMINISTRATOR. The "Plan Sponsor" and the "Plan Administrator" of the Plan is SIBIA Neurosciences, Inc., 505 Coast Boulevard South, La Jolla, CA 92037-4641. The Plan Sponsor's and Plan Administrator's telephone number is (619) 452-5892. The Plan Administrator is the named fiduciary charged with the responsibility for administering the Plan. 13. 14 ARTICLE 17 EXECUTION Having been originally adopted by the Board on November 10, 1994, and having been amended, this Amended and Restated Management Change of Control Plan is executed by a duly authorized officer and the Chairman of the Board as of the 26th day of February, 1998. SIBIA NEUROSCIENCES, INC. By: ----------------------------------------- William T. Comer, Chief Executive Officer By: ----------------------------------------- William R. Miller, Chairman of the Board PARTICIPANTS: William T. Comer -------------------------------------------- Stephen F. Keane -------------------------------------------- G. Kenneth Lloyd -------------------------------------------- David E. McClure -------------------------------------------- Ian A. McDonald -------------------------------------------- Jeffrey McKelvy -------------------------------------------- Thomas A. Reed -------------------------------------------- 14. EX-10.41 3 EXHIBIT 10.41 1 EXHIBIT 10.41 October 27, 1998 Stephen F. Keane 2780 Angell Avenue San Diego, CA 92122 Dear Steve: SIBIA Neurosciences, Inc., is pleased to offer you the position of Vice President, Corporate Development reporting to me, the President and CEO. Your main responsibility will be to establish value-building relationships with pharmaceutical and biotechnology companies as well as with academic institutions, especially to initiate, structure and negotiate business development agreements that maximize the company's assets and support its strategic mission. Duties will include overseeing Intellectual Property, Investor Relations and developing the rationale for acquisition of products/businesses that significantly enhance the realization of the company's vision. Your starting salary will be $12,500.00 per month and you will be eligible for SIBIA benefits which include medical, dental, long term disability, 401(k), life insurance, vacation, and sick leave. These benefits may be amended from time to time. After your acceptance of this offer, and commencement of employment at SIBIA, I will recommend to the Compensation and Stock Option Committee of SIBIA's Board of Directors that you be granted an option to purchase 60,000 shares of SIBIA Common Stock under our 1996 Equity Incentive Plan. You will also be eligible for additional stock option grants on a yearly basis under the company's long-term incentive policy. Additionally, SIBIA has adopted an incentive plan which consists of a bonus pool, established at the discretion of the Board of Directors, reviewed each year, and based on overall company performance. As a Vice President, your bonus opportunity will be established at 15% of salary with the actual amount dependent upon an assessment of your performance and your contribution to the team effort. For the 1998/99 bonus year, you will be guaranteed a minimum of $20,000 of which $5,000 will be paid as a sign-on bonus with the remaining $15,000 paid after your performance review on April 15, 1999. A Patent/Confidentiality Agreement will need to be executed by you as part of your employment with SIBIA. A copy of this agreement is enclosed for your review. 2 Stephen F. Keane Page Two October 27, 1998 As an officer of the company you will be entitled to certain benefits in the Change of Control Plan attached. Both SIBIA and you have the right to terminate your employment at any time for any reason, with or without cause, and with or without notice. Similarly, promotions, transfers, demotions, suspensions and employee discipline may be effected or administered at the will of SIBIA at any time for any reason, with or without cause, and with or without notice. This letter agreement contains the entire agreement between the parties. It supersedes any and all other agreements, either oral or in writing, between you and SIBIA with respect to your employment by SIBIA. SIBIA and you both acknowledge that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and acknowledge that no other agreement, statement or promise not contained in this letter agreement shall be valid or binding. This letter agreement may not be modified by oral agreement, or course of conduct, but only by an agreement in writing signed by the President of SIBIA and you. We would like to have your decision regarding this offer by October 30, 1998 and would like to anticipate a start date of no later than November 15, 1998. To formally accept this offer on the above terms, please sign one copy of this letter and return it to me. The members of the SIBIA staff and I personally hope that you will decide to join us and I very much look forward to working with you. Yours very sincerely, /s/ William T. Comer - ----------------------- William T. Comer, Ph.D. President and CEO Accepted and agreed to this 27th day of October, 1998. /s/ Stephen F. Keane - -------------------- ______________________________ Stephen F. Keane Social Security Number EX-23.1 4 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-03519) of SIBIA Neurosciences, Inc. of our report dated February 19, 1999 appearing on page F-2 of this Form 10-K. PRICEWATERHOUSECOOPERS LLP San Diego, California March 29, 1999 EX-27.1 5 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 4,595,000 12,592,000 501,000 0 0 18,371,000 2,638,000 0 21,199,000 4,709,000 0 0 0 10,000 15,130,000 21,199,000 0 7,043,000 0 0 25,587,000 0 91,000 (15,807,000) 0 (15,807,000) 0 0 0 (15,807,000) (1.68) (1.68) FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
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