10-Q 1 d10q.htm FOR QUATERLY PERIOD ENDED 03/31/02 Prepared by R.R. Donnelley Financial -- For Quaterly period ended 03/31/02
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 
 
FORM 10-Q
 
 
[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
FOR THE PERIOD ENDED MARCH 31, 2002
 
OR
 
[_]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM ___________ TO ___________ .
 
COMMISSION FILE NUMBER: 0-31265
 
 
TELIK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
Delaware
   
93-0987903
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
   
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
 
750 GATEWAY BOULEVARD, SOUTH SAN FRANCISCO, CA 94080
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
 
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:    (650) 244-9303
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:    NONE
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
COMMON STOCK $0.01 PAR VALUE
(TITLE OF CLASS)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]    No [_]
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class: Common Stock $0.01 par value
   
Outstanding at April 30, 2002:
    
27,838,970 shares

 
TELIK, INC.
 
INDEX
 
PART I.
       
Item 1:
       
      
3
      
4
      
5
      
6
Item 2:
     
8
Item 3:
     
16
PART II.
     
17
Item 1:
     
17
Item 2:
     
17
Item 3:
     
17
Item 4:
     
17
Item 5:
     
17
Item 6:
     
18
   
     SIGNATURES
  
19

2

 
 
 
TELIK, INC.
 
(In thousands, except share and per share data)
 
    
March 31, 2002
     
December 31, 2001
  
    
(Unaudited)
     
(Note 1)
  
Assets
                  
Current assets:
                  
Cash and cash equivalents
   
$
44,597
 
   
$
39,508
 
Short-term investments
   
 
4,090
 
   
 
13,722
 
Prepaid expenses and other current assets
   
 
589
 
   
 
991
 
    
  
Total current assets
   
 
49,276
 
   
 
54,221
 
Property and equipment, net
   
 
1,539
 
   
 
1,096
 
Long-term investments
   
 
—  
 
   
 
1,944
 
Other assets
   
 
55
 
   
 
54
 
    
  
    
$
50,870
 
   
$
57,315
 
    
  
Liabilities and stockholders’ equity
                  
Current liabilities:
                  
Accounts payable
   
$
1,013
 
   
$
3,338
 
Accrued clinical trials
   
 
909
 
   
 
881
 
Accrued compensation
   
 
465
 
   
 
636
 
Other accrued liabilities
   
 
630
 
   
 
460
 
Current portion of capital lease obligations
   
 
5
 
   
 
—  
 
Deferred revenue
   
 
1,265
 
   
 
662
 
    
  
Total current liabilities
   
 
4,287
 
   
 
5,977
 
Non-current portion of capital lease obligations
   
 
31
 
   
 
—  
 
Commitments
                  
Stockholders’ equity:
                  
Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued and outstanding
   
 
—  
 
   
 
—  
 
Common stock, $0.01 par value, 100,000,000 shares authorized, 27,834,911 and 27,765,484 issued and outstanding at March 31, 2002 and December 31, 2001, respectively
   
 
278
 
   
 
278
 
Additional paid-in capital
   
 
135,156
 
   
 
134,812
 
Deferred stock compensation
   
 
(1,025
)
   
 
(1,173
)
Note receivable from employee
   
 
(105
)
   
 
(105
)
Accumulated other comprehensive income
   
 
—  
 
   
 
33
 
Accumulated deficit
   
 
(87,752
)
   
 
(82,507
)
    
  
Total stockholders’ equity
   
 
46,552
 
   
 
51,338
 
    
  
Total liabilities and stockholders’ equity
   
$
50,870
 
   
$
57,315
 
    
  
 
See accompanying notes

3

 
TELIK, INC.
 
(In thousands, except per share data)
(Unaudited)
 
    
Three Months Ended March 31,
  
    
2002
     
2001
  
Contract revenue from collaborations:
                  
With related parties
   
$
397
 
   
$
397
 
Other
   
 
—  
 
   
 
67
 
Other revenues
   
 
25
 
   
 
25
 
    
  
    
 
422
 
   
 
489
 
Costs and expenses:
                  
Research and development
   
 
4,764
 
   
 
3,503
 
General and administrative
   
 
1,175
 
   
 
1,131
 
    
  
    
 
5,939
 
   
 
4,634
 
    
  
Loss from operations
   
 
(5,517
)
   
 
(4,145
)
Interest income, net
   
 
272
 
   
 
629
 
    
  
Net loss
   
$
(5,245
)
   
$
(3,516
)
    
  
Net loss per common share, basic and diluted
   
$
(0.19
)
   
$
(0.16
)
    
  
Weighted average shares used in computing net loss per common share, basic and diluted
   
 
27,738
 
   
 
22,649
 
    
  
 
See accompanying notes

4

 
TELIK, INC.
 
(In thousands, unaudited)
 
    
Three Months Ended March 31,
  
    
2002
     
2001
  
Operating activities
                  
Net loss
   
$
(5,245
)
   
$
(3,516
)
Adjustments to reconcile net loss to net cash used in operating activities
                  
Depreciation
   
 
121
 
   
 
120
 
Amortization of deferred stock compensation
   
 
133
 
   
 
181
 
Stock options granted to non-employees
   
 
36
 
   
 
—  
 
Amortization of discount on investments
   
 
3
 
   
 
287
 
Changes in operating assets and liabilities:
                  
Prepaid expenses and other assets
   
 
401
 
   
 
80
 
Accounts payable
   
 
(2,325
)
   
 
58
 
Accrued clinical trials
   
 
28
 
   
 
(192
)
Accrued compensation
   
 
(171
)
   
 
23
 
Other accrued liabilities
   
 
170
 
   
 
(203
)
Deferred revenue
   
 
603
 
   
 
1,786
 
Long-term liabilities
   
 
—  
 
   
 
(5
)
    
  
Net cash used in operating activities
   
 
(6,246
)
   
 
(1,381
)
    
  
Investing activities
                  
Sales and maturities of investments
   
 
28,450
 
   
 
32,450
 
Purchases of investments
   
 
(16,910
)
   
 
(39,300
)
Purchases of property and equipment
   
 
(527
)
   
 
(173
)
    
  
Net cash provided by (used in) investing activities
   
 
11,013
 
   
 
(7,023
)
    
  
Financing activities
                  
Principal payments under capital lease obligations
   
 
(1
)
   
 
(3
)
Net proceeds from issuance of common stock
   
 
323
 
   
 
219
 
    
  
Net cash provided by financing activities
   
 
322
 
   
 
216
 
    
  
Net increase (decrease) in cash and cash equivalents
   
 
5,089
 
   
 
(8,188
)
Cash and cash equivalents at beginning of period
   
 
39,508
 
   
 
11,959
 
    
  
Cash and cash equivalents at end of period
   
$
44,597
 
   
$
3,771
 
    
  
Supplemental cash flow information
                  
Cash paid for interest
   
$
2
 
   
$
1
 
    
  
Equipment acquired under capital leases
   
$
37
 
   
$
—    
 
    
  
 
See accompanying notes

5

 
TELIK, INC.
 
(Unaudited)
 
1.    Basis of presentation and summary of significant accounting policies
 
We have prepared the accompanying financial statements in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. We believe all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002 or any other period. You should read these financial statements and notes in conjunction with our audited financial statements for the year ended December 31, 2001, which are included in our Annual Report on Form 10-K.
 
Revenue recognition
 
Contract revenue consists of revenue from research and development collaboration agreements. Our research and development collaboration agreements provide for periodic payments in support of our research activities. We recognize contract revenue from these agreements as earned based upon the performance requirements of the agreements and we recognize payments of up-front technology access and license fees ratably over the period of the related research program. Payments received, which are related to future performance, are deferred and recognized as revenue when earned over future performance periods.
 
We have received United States government grants, which support research efforts in defined projects. We recognize revenue from such government grants as costs relating to the grants are incurred.
 
2.    Comprehensive loss
 
   
Three Months
Ended March 31,
  
    
2002
     
2001
  
    
(In thousands)
  
Net loss
   
$
(5,245
)
   
$
(3,516
)
Change in unrealized gain/(loss) on investments
   
 
(33
)
   
 
84
 
    
  
Comprehensive loss
   
$
(5,278
)
   
$
(3,432
)
    
  
 
3.    Basic and diluted net loss per share
 
We have computed net loss per common share according to the Financial Accounting Standards Board Statement No. 128, “Earnings Per Share,” which requires disclosure of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, shares subject to repurchase, warrants and convertible securities. Diluted earnings per share includes the impact of potentially dilutive securities. A reconciliation of shares used in the calculation is as follows:
 
   
Three Months Ended
March 31,
  
    
2002
     
2001
  
    
(In thousands, except per share amounts)
  
Net loss
   
$
(5,245
)
   
$
(3,516
)
    
  
Weighted average shares of common stock outstanding
   
 
27,802
 
   
 
22,745
 
Less: weighted average shares subject to repurchase
   
 
(64
)
   
 
(96
)
    
  
Weighted average shares used in computing basic and diluted net loss per share
   
 
27,738
 
   
 
22,649
 
    
  
Basic and diluted net loss per share
   
$
(0.19
)
   
$
(0.16
)
    
  

6

 
4.    Cash, cash equivalents and investments
 
The following is a summary of cash, cash equivalents and investments (in thousands):
 
    
Amortized
Cost
   
Gross
Unrealized
Gains/
(Losses)
   
Estimated
Fair Value
March 31, 2002
                     
Cash and cash equivalents:
                     
Cash and money market funds
   
$
44,597
   
$
—  
   
$
44,597
    
  
  
    
$
44,597
   
$
—  
   
$
44,597
    
  
  
Short term investments:
                     
Corporate notes
   
$
4,090
   
 
—  
   
$
4,090
    
  
  
    
$
4,090
   
$
—  
   
$
4,090
    
  
  
December 31, 2001
                     
Cash and cash equivalents:
                     
Cash and money market funds
   
$
39,508
   
$
—  
   
$
39,508
    
  
  
    
$
39,508
   
$
—  
   
$
39,508
    
  
  
Short term investments:
                     
U.S. Government notes
   
$
6,976
   
$
16
   
$
6,992
Corporate notes
   
 
6,730
   
 
—
   
 
6,730
    
  
  
    
$
13,706
   
$
16
   
$
13,722
    
  
  
Long term investments:
                     
Corporate notes
   
$
1,927
   
$
17
   
$
1,944
    
  
  
    
$
1,927
   
$
17
   
$
1,944
    
  
  
 
5.    Collaborative agreement
 
In March 2002, we received $1.0 million from Sanwa Kagaku Kenkyusho Co., Ltd., a collaborative partner, for collaborative research funding in connection with an amendment to the previously existing screening services agreement between Sanwa and Telik.

7

 
ITEM  2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Special Note Regarding Statements of Expected Future Performance
 
This Quarterly Report on Form 10-Q contains statements indicating expectations about future performance and other forward-looking statements that involve risks and uncertainties. We usually use words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “future”, “intend,” “potential,” or “continue” or the negative of these terms or similar expressions to identify forward-looking statements. These statements appear throughout the Form 10-Q and are statements regarding our current intent, belief, or expectation, primarily with respect to our operations and related industry developments. Examples of these statements include, but are not limited to, statements regarding the following: the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates using TRAP technology (our proprietary Target-Related Affinity Profiling technology, which is discussed below), the potential of such product candidates to lead to the development of safer or more effective therapies, our ability to develop the technology derived from our collaborations, our anticipated timing for filing an IND (Investigational New Drug application) with the Food and Drug Administration (FDA) or for the initiation or completion of phase 1, phase 2 or phase 3 testing for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and development and our use of proceeds from the initial and follow-on public offerings. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in the section of this Item 2 titled “Additional Factors That May Affect Future Results,” and elsewhere in this Quarterly Report on Form 10-Q.
 
The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2001.
 
Overview
 
We are engaged in the discovery, development and commercialization of small molecule therapeutics. We have incurred net losses since inception and expect to incur substantial and increasing losses for the next several years as we expand our research and development activities and move our product candidates into later stages of development. The process of carrying out the development of our own unpartnered products to later stages of development and our research programs for our corporate partners may require significant additional research and development expenditures including preclinical testing and clinical trials, as well as for obtaining regulatory approval. To date, we have funded our operations primarily through the sale of equity securities and non-equity payments from collaborative partners.
 
We received funding in the form of equity investments totaling $27.6 million in the year ended December 31, 2001 from our follow-on public offering completed in October 2001. We received funding in the form of equity investments totaling $42.5 million in the year ended December 31, 2000. This funding included net proceeds of $35.6 million from our initial public offering in August 2000 and net proceeds of $7.0 million from our issuance of Series K convertible preferred stock in March 2000. We received funding in the form of equity investments from our collaborative partner Sanwa, in an aggregate amount of $11.0 million during the years of 1996 through 1998. Since 1996, we have received $14.6 million in non-equity payments from collaborators, including $10.8 million from Sanwa. Our most recent non-equity payment from a collaborator was $1.0 million, for research funding, received from Sanwa in March 2002.
 
At March 31, 2002 our accumulated deficit was $87.8 million.

8

 
Critical accounting policies
 
We believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.
 
Revenue recognition
 
Since Telik’s inception, most of our revenues have been generated from license and research agreements with collaborators. We recognize cost reimbursement revenue under these collaborative agreements as the related research and development costs are incurred. We recognize milestone fees upon completion of specified milestones according to contract terms. Deferred revenue represents the portion of research payments received that has not been earned.
 
We also have several royalty and licensing agreements with other pharmaceutical, biotechnology and genomics companies. Under these agreements, we may receive fees for collaborative research efforts, royalties on future sales of products, or some combination of these items. We recognize nonrefundable signing or license fees that are not dependent on future performance under these agreements as revenue when received or over the term of the arrangement if we have continuing performance obligations.
 
Use of estimates
 
In preparing our financial statements to conform with accounting principles generally accepted in the United States, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates include useful lives for fixed assets for depreciation calculations and assumptions for valuing options. Actual results may differ from these estimates.
 
Results of operations
 
Three-month periods ended March 31, 2002 and March 31, 2001
 
Revenues
 
Revenues for the three-month periods ended March 31, 2002 and 2001 were $0.4 million and $0.5 million, respectively. Revenues resulted from our collaborative agreements with Sanwa and funded research related to a grant received from the National Institutes of Health.
 
We expect near-term future revenue to fluctuate depending upon our ability to enter into new collaborative research agreements, and the amounts of payments relating to such agreements.
 
Research and development expenses
 
Research and development expenses for the three-month periods ended March 31, 2002 and 2001 were $4.8 million and $3.5 million, respectively. Our research and development activities consist primarily of discovery research, screening and identification of drug candidates, preclinical studies, drug and product development and clinical activities. The increase in research and development expense in the three-month period ended March 31, 2002 compared to the same period in 2001 was principally due to costs associated with our TLK286 phase 2 clinical trials and product development costs. We expect research and development expenditures to increase in future periods as a result of increased manufacturing and clinical development costs primarily relating to our TLK286 and TLK199 product development. We initiated a phase 1-2a clinical trial of TLK199 in April 2002. The timing and the amount of this anticipated increase in expense will depend upon the outcome of our ongoing clinical trials, regulatory requirements, advancement of our preclinical programs and manufacturing product supply costs.
 
General and administrative expenses
 
General and administrative expenses for the three-month periods ended March 31, 2002 and 2001 were $1.2 million and $1.1 million, respectively. This slight increase was due primarily to additional staffing costs for administrative personnel and for investor relations activities. We expect our future general and administrative expenses will increase to support expanded business activities.

9

 
Net interest income
 
Net interest income was $0.3 million and $0.6 million for the three-month periods ended March 31, 2002 and 2001, respectively, and resulted primarily from earnings on investments. This decrease in net interest income was principally due to lower average interest rates in 2002.
 
Liquidity and Capital Resources
 
We have financed our operations from inception primarily through the private placement of equity securities, our initial public offering, our follow-on public offering, revenue from collaborative agreements, interest earned on short-term investments and equipment lease line financings. Through March 31, 2002, we have raised $128.0 million from the sale of equity securities, including $11.0 million from collaborators, and received $14.6 million in non-equity payments from collaborators.
 
Our operating activities resulted in net cash outflows of $6.2 million in the first quarter of 2002, resulting primarily from our operating loss as well as payments made to reduce accounts payable. These outflows of cash were partially offset by a collaborative research payment of $1.0 million received in March 2002. Investing activities provided cash of $11.0 million in the first quarter of 2002 primarily due to the net effect of purchases and sales of short-term securities. Purchases of property and equipment were $0.5 million in the first quarter of 2002, principally for new laboratory equipment. Financing activities provided cash of $0.3 million in the first quarter of 2002 resulting primarily from exercises of stock options and purchases of Telik stock through our employee stock purchase plan.
 
We believe our existing cash resources, plus anticipated proceeds from corporate collaborations, will be sufficient to satisfy our anticipated cash requirements for at least an additional 15 months. Changes in our research and development plans or other changes affecting our operating expenses may affect actual future consumption of existing cash resources. In any event, we will need to raise substantial additional capital to fund our operations in the future. We expect to finance our future cash needs through the sale of equity securities, strategic collaborations and possibly debt financing. Our future capital uses and requirements will depend on numerous factors, including the following:
 
 
•
 
the progress and success of preclinical studies and clinical trials of our product candidates;
 
 
•
 
the progress and number of research programs in development;
 
 
•
 
the costs and timing of obtaining regulatory approvals;
 
 
•
 
our ability to establish, and the scope of, new collaborations;
 
 
•
 
our ability to meet the milestones identified in our collaborative agreements which trigger payments; and
 
 
•
 
the costs and timing of obtaining, enforcing and defending our patent and intellectual property rights.
 
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
 
Our business is subject to various risks, including those described below. You should carefully consider these risk factors as each of these risks could adversely affect our business, operating results and financial condition.
 
We have a history of net losses, which we expect to continue for at least several years. We will never be profitable unless we develop, and obtain regulatory approval and market acceptance of, our product candidates.
 
Due to the significant research and development expenditures required to develop our TRAP technology and identify new product candidates, and the lack of any products to generate revenue, we have not been profitable and have generated operating losses since we were incorporated in 1988. As of March 31, 2002, we had an accumulated deficit of approximately $87.8 million. We expect to incur losses for at least the next several years and expect that these losses will actually increase as we expand our research and development activities and incur significant clinical testing costs. To date, we have derived substantially all of our revenues, which have not been significant, from project initiation fees and research reimbursement paid pursuant to existing collaborative agreements with third parties and achievement of milestones under current collaborations. We expect that this trend will continue until we develop, and obtain regulatory approval and market acceptance of, our product candidates. We cannot assure you when, if ever, we will receive product revenue, if any, sufficient to become profitable.

10

 
All of our product candidates are in research and development. If clinical trials of TLK286 and TLK199 are delayed or unsuccessful or if we are unable to complete the preclinical development of our diabetes or other preclinical product candidates, our business may be adversely affected.
 
Preclinical testing and clinical trials are long, expensive and uncertain processes. It may take us or our collaborators several years to complete this testing, and failure can occur at any stage of the process. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials.
 
Any clinical trial may fail to produce results satisfactory to the FDA. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be repeated or a program to be terminated. We typically rely on third-party clinical investigators to conduct our clinical trials and, as a result, we may face additional delays outside our control.
 
We do not know whether planned clinical trials will begin on time or whether any of our ongoing clinical trials will be completed on schedule, or at all. We do not know whether any clinical trials will result in marketable products. Typically, there is a high rate of attrition for product candidates in preclinical and clinical trials.
 
Only one of our product candidates, TLK286, has completed the stage of human testing designed to determine safety, known as phase 1 clinical trials and, to date, we have only limited data on safety and efficacy in humans, with respect to this product candidate. We initiated phase 2 clinical trials of TLK286 in colorectal, ovarian and non-small cell lung cancers in the first half of 2001 and in breast cancer in the first quarter of 2002. We recently initiated a phase 1-2a clinical trial for TLK199. Finally, our success depends, in part, on our ability to complete preclinical development of our diabetes or other preclinical product candidates, and take them through early clinical trials. We do not anticipate that any of our products will reach the market for at least several years.
 
We believe that our ability to compete depends, in part, on our ability to use our proprietary TRAP technology to discover, develop and commercialize new pharmaceutical products. We may not be competitive if we are unable to utilize our TRAP technology or if the technology proves ineffective.
 
TRAP, our proprietary drug discovery technology, is a relatively new drug discovery method that uses a protein panel of approximately 20 proteins selected for their distinct patterns of interacting with small molecules. This panel may lack essential types of interactions that we have not yet identified, which may result in our inability to identify active compounds that have the potential to be developed into commercially viable drugs.
 
If we are unable to continue to identify new product candidates using TRAP technology, we may not be able to maintain our product pipeline and develop commercially viable drugs.
 
If we are unable to raise adequate funds in the future, we will not be able to continue to fund our operations, research programs, preclinical testing and clinical trials to develop our products.
 
The process of carrying out the development of our own unpartnered products to later stages of development and developing other research programs to the stage that they may be partnered will require significant additional expenditures, including the expenses associated with preclinical testing, clinical trials and obtaining regulatory approval. As a result, we will require additional financing to fund our operations. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on terms favorable to our stockholders. We have expended substantial amounts of cash to date and expect capital outlays and operating expenditures to increase over the next several years as we expand our research and development activities.
 
If our competitors develop and market products that are more effective than ours, or obtain marketing approval before we do, our commercial opportunity will be reduced or eliminated.
 
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Some of the drugs that we are attempting to develop, for example TLK199, will have to compete with existing therapies. In addition, a number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. We face competition from pharmaceutical and biotechnology companies in the United States and abroad. Our competitors may develop new screening technologies and may utilize discovery techniques or partner with collaborators in order to develop products more rapidly or successfully than we, or our collaborators, are able to do. Many of our competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than we do. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competing products or technologies and may establish exclusive collaborative or licensing relationships with our competitors.
 
Our competitors may succeed in developing technologies and drugs that are more effective or less costly than any which are being developed by us or which would render our technology and potential drugs obsolete and noncompetitive. In addition, our competitors may succeed in obtaining FDA or other regulatory approvals for product candidates more rapidly than we, or our collaborators. We

11

cannot assure you that drugs resulting from our research and development efforts, or from our joint efforts with our existing or future collaborative partners, will be able to compete successfully with our competitors’ existing products or products under development or that they will obtain regulatory approval in the United States or elsewhere.
 
If we do not obtain regulatory approval to market products in the United States and foreign countries, we or our collaborators will not be permitted to commercialize our product candidates.
 
Even if we are able to achieve success in our preclinical testing, we, or our collaborators, must provide the FDA and foreign regulatory authorities with clinical data that demonstrate the safety and efficacy of our products in humans before they can be approved for commercial sale. Failure to obtain regulatory approval will prevent commercialization of our products.
 
The pharmaceutical industry is subject to stringent regulation by a wide range of authorities. We cannot predict whether regulatory clearance will be obtained for any product that we are developing or hope to develop. A pharmaceutical product cannot be marketed in the United States until it has completed rigorous preclinical testing and clinical trials and an extensive regulatory clearance process implemented by the FDA. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use.
 
Before commencing clinical trials in humans, we, or our collaborators, must submit and receive approval from the FDA of an IND application. We must comply with FDA “Good Laboratory Practices” regulations in our preclinical studies. Clinical trials are subject to oversight by institutional review boards and the FDA and:
 
 
•
 
must be conducted in conformance with the FDA’s IND regulations;
 
 
•
 
must meet requirements for informed consent;
 
 
•
 
must meet requirements for Good Clinical Practices;
 
 
•
 
may require large numbers of participants; and
 
 
•
 
may be suspended by us, our collaborators or the FDA at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds deficiencies in the IND application or the conduct of these trials.
 
Before receiving FDA clearance to market a product, we or our collaborators must demonstrate that the product is safe and effective in the patient population that will be treated. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be repeated, a program to be terminated and could delay approval. We typically rely on third party clinical investigators to conduct our clinical trials and other third party organizations to perform data collection and analysis and, as a result, we may face additional delaying factors outside our control. In addition, delays or rejections may be encountered based upon additional government regulation from future legislation or administrative action or changes in FDA policy or interpretation during the period of product development, clinical trials and FDA regulatory review. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other regulatory action. We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approval.
 
If regulatory clearance of a product is granted, this clearance will be limited to those disease states and conditions for which the product is demonstrated through clinical trials to be safe and efficacious. We cannot ensure that any compound developed by us, alone or with others, will prove to be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing clearance.
 
Outside the United States, the ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authorities. This foreign regulatory approval process typically includes all of the risks associated with FDA clearance described above and may include additional risks.
 
As our product programs advance, we will need to hire additional scientific and management personnel. Our research and development efforts will be seriously jeopardized if we are unable to attract and retain key personnel.
 
Our success depends on the continued contributions of our principal management and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions, scientists and companies in the face of intense competition for such personnel. In particular, our research programs depend on our ability to attract and retain highly skilled chemists and other scientists. As we progress to advanced phase 2 and 3 clinical trials, we will also need to expand our clinical development personnel. We do not have employment contracts with our key employees. If we lose the services of Dr. Michael Wick or any of our other key personnel, our research and development efforts could be seriously and adversely affected. There is currently a shortage of skilled executives and employees with technical expertise in the biotechnology industry, and this shortage is likely to continue. As a result, competition among numerous companies, academic and other research institutions for skilled personnel and experienced

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scientists is intense and turnover rates are high. In recent years, the cost of living in the San Francisco Bay Area has increased significantly, which we expect will adversely affect our ability to compete for qualified personnel and will increase costs. Because of this competitive environment, we may encounter increasing difficulty in attracting qualified personnel as our operations expand and the demand for these professionals increases, and this difficulty could significantly impede the achievement of our research and development objectives.
 
If physicians and patients do not accept our products, our ability to generate product revenue in the future will be adversely affected.
 
Our product candidates may not gain market acceptance among physicians, patients and the medical community. We believe that market acceptance will depend on our ability to provide acceptable evidence of safety, efficacy, convenience and ease of administration and cost effectiveness. In addition, we believe market acceptance depends on the effectiveness of our marketing strategy and the pricing of our products. Physicians may elect not to recommend our products even if we meet the above criteria. If any of our product candidates fails to achieve market acceptance, we may not be able to successfully market and sell the product, which would limit our ability to generate revenue and adversely affect our operations.
 
If we, or our licensees and licensors, cannot obtain and defend our respective intellectual property rights, or if our products or technologies are found to infringe patents of third parties, we could become involved in lengthy and costly legal proceedings that could adversely affect our business.
 
Our success will depend in a large part on our own, our licensees’ and our licensors’ ability to obtain and defend patents for each party’s respective technologies and the compounds and other products, if any, resulting from the application of these technologies. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Accordingly, we cannot predict the breadth of claims allowed in our or other companies’ patents.
 
Our success will also depend, in part, on our ability to operate without infringing the intellectual property rights of others. We cannot assure you that our activities will not infringe patents owned by others. If our products or technologies are found to infringe patents issued to third parties, the manufacture, use and sale of our products could be enjoined, and we could be required to pay substantial damages. In addition, we may be required to obtain licenses to patents or other proprietary rights of third parties. No assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to us, if at all. Failure to obtain such licenses could negatively affect our business.
 
The degree of future protection for our proprietary rights is uncertain and we cannot assure you that:
 
 
•
 
we were the first to make the inventions covered by each of our pending patent applications;
 
 
•
 
we were the first to file patent applications for these inventions;
 
 
•
 
others will not independently develop similar or alternative technologies or duplicate any of our technologies;
 
 
•
 
any of our pending patent applications will result in issued patents;
 
 
•
 
any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;
 
 
•
 
any of our issued patents will be valid or enforceable;
 
 
•
 
we will develop additional proprietary technologies that are patentable; or
 
 
•
 
the patents of others will not have an adverse effect on our ability to do business.
 
In addition, we could incur substantial costs and use of our key employees’ time and efforts in litigation if we are required to defend against patent suits brought by third parties or if we initiate these suits, and we cannot predict whether we would be able to prevail in any such suit.
 
Others may have filed and in the future may file patent applications covering small molecules or therapeutic products that are similar to ours. We cannot assure you that any patent application filed by someone else will not have priority over patent applications filed by us. Any legal action against us or our collaborators claiming damages and seeking to enjoin commercial activities relating to the affected products and processes could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain a license to continue to manufacture or market the affected products and processes. We cannot predict whether we, or our collaborators, would prevail in any of these actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources and we may not be successful in any such litigation.

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In addition, some of our patents and intellectual property rights are owned jointly by us and our collaborators. We cannot assure you that these joint owners will not use these patents and other intellectual property in ways that may negatively affect our business. We will not be able to prevent such use.
 
We also rely on trade secrets to protect technology, including our TRAP technology, where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, academic collaborators and consultants to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If the identity of specific proteins or other elements of our technology become known, our competitive advantage in drug discovery could be reduced.
 
We will be dependent upon collaborative arrangements to complete the development and commercialization of some of our product candidates. These collaborative arrangements may place the development of our product candidates outside of our control, may require us to relinquish important rights or may otherwise not be on terms favorable to us.
 
We expect to enter into collaborative arrangements with third parties for clinical trials, manufacturing, regulatory approvals or commercialization of some of our products, particularly outside North America, or in disease areas requiring larger and longer clinical trials, such as diabetes. Dependence on collaborative arrangements will subject us to a number of risks. We may not be able to control the amount and timing of resources our collaborative partners may devote to the product candidates. Our collaborative partners may experience financial difficulties. Should a collaborative partner fail to develop or commercialize a compound or product to which it has rights from us, we may not receive any future milestone payments and will not receive any royalties associated with this compound or product. Business combinations or significant changes in a collaborative partner’s business strategy may also adversely affect a partner’s willingness or ability to complete its obligations under the arrangement. Failure to enter into additional collaborative agreements on favorable terms could have a material adverse effect on our business, financial condition and results of operations.
 
Some of our collaborations are for early-stage programs and allow partners significant discretion in electing whether to pursue any of the planned activities. We do not anticipate significant revenues to result from these relationships until the collaborator has advanced products into clinical trials, which will not occur for several years, if at all. Such arrangements are subject to numerous risks, including the right of the collaboration partner to control the timing of the research and development efforts, and discretion to advance lead candidates to clinical trials and commercialization of the product. In addition, a collaborative partner could independently move forward with a competing lead candidate developed either independently or in collaboration with others, including our competitors.
 
If we are unable to contract with third parties to manufacture our products in sufficient quantities and at an acceptable cost, we may be unable to meet demand for our products and lose potential revenue.
 
We do not currently operate manufacturing facilities for clinical or commercial production of our products under development. We expect to continue to rely on third parties for the manufacture of our product. We currently lack the resources or capability to manufacture any of our products on a clinical or commercial scale. As a result, we will be dependent on corporate partners, licensees or other third parties for the manufacturing of clinical and commercial scale quantities of our products. Our products may be in competition with other products for access to these facilities. For this and other reasons, our collaborators or third parties may not be able to manufacture these products in a cost effective or timely manner. If not performed in a timely manner, the clinical trial development of our product candidates or their submission for regulatory approval could be delayed, and our ability to deliver products on a timely basis could be impaired or precluded. We are currently dependent upon two sources of supply for clinical quantities of TLK286 and a sole source of supply for clinical quantities of TLK199. If our suppliers fail to perform, our clinical trials or commercialization of TLK286 and TLK199 would be delayed. We may not be able to enter into any necessary third-party manufacturing arrangements on acceptable terms, if at all. Our current dependence upon others for the manufacture of our products may adversely affect our future profit margins and our ability to commercialize products on a timely and competitive basis.
 
If we are unable to create sales, marketing and distribution capabilities or enter into agreements with third parties to perform these functions, we will not be able to commercialize products.
 
We currently have no sales, marketing or distribution capabilities. In order to commercialize any products, we must internally develop sales, marketing and distribution capabilities, or establish collaborations or other arrangements with third parties to perform these services. We intend to market some products directly in North America and rely on relationships with one or more pharmaceutical companies with established distribution systems and direct sales forces to market other products and address other markets. We may not be able to establish in-house sales and distribution capabilities or relationships with third parties. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold our products, and any revenues we receive will depend upon the efforts of third parties, whose efforts may not be successful.

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If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our products.
 
The testing and marketing of medical products entail an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. If we are unable to obtain sufficient product liability insurance at an acceptable cost, potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with corporate collaborators.
 
If we use biological and hazardous materials in a manner that causes injury, we may be liable for damages.
 
Our research and development activities involve the controlled use of potentially harmful biological materials, hazardous materials, chemicals and various radioactive compounds, and are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources.
 
We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders.
 
Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include:
 
 
•
 
establishing a classified Board of Directors requiring that members of the Board be elected in different years lengthening the time needed to elect a new majority of the Board;
 
 
•
 
authorizing the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares or change the balance of voting control and thwart a takeover attempt;
 
 
•
 
prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;
 
 
•
 
limiting the ability of stockholders to call special meetings of the stockholders;
 
 
•
 
prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders; and
 
 
•
 
establishing advance notice requirements for nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at stockholder meetings.
 
In addition, in November 2001, we adopted a stockholder rights plan that may discourage delay or prevent a merger that a stockholder may consider favorable.
 
Our stock price may be volatile, and you may not be able to resell your shares at or above your purchase price.
 
The market prices for securities of biotechnology companies in general have been highly volatile, with recent significant price and volume fluctuations, and may continue to be highly volatile in the future. You may not be able to sell your shares quickly or at the market price if trading in our stock is not active or the volume is low. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock:
 
 
•
 
announcements of technological innovations or new commercial products by our competitors or us;
 
 
•
 
developments concerning proprietary rights, including patents;
 
 
•
 
developments concerning our collaborations;
 
 
•
 
publicity regarding actual or potential medical results relating to products under development by our competitors or us;
 
 
•
 
regulatory developments in the United States and foreign countries;
 
 
•
 
litigation;
 
 
•
 
economic and other external factors or other disaster or crisis; or
 
 
•
 
period-to-period fluctuations in financial results.

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The following discussion about our market risk exposure involves forward-looking statements. We are exposed to market risk related mainly to changes in interest rates. We do not invest in derivative financial instruments.
 
The fair value of our investments in marketable securities at March 31, 2002 was $4.1 million, with a weighted-average maturity of 20 days and a weighted-average interest rate of 2.08%. Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio. Our marketable securities portfolio is invested in corporate debt securities with an average maturity of under one year and a minimum investment grade rating of A to minimize credit risk. Although changes in interest rates may affect the fair value of the marketable securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments were sold prior to maturity.
 
We have operated primarily in the United States and all funding activities with our collaborators to date have been made in U.S. dollars. Accordingly, we do not have any exposure to foreign currency rate fluctuations.

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We are not currently involved in any legal proceedings.
 
 
On August 11, 2000, a registration statement on Form S-1 (No. 333-33868) was declared effective by the Securities and Exchange Commission, pursuant to which 5,750,000 shares of our common stock were offered and sold by us at a price of $7.00 per share, generating gross offering proceeds of $40.3 million. The managing underwriters were Lehman Brothers Inc., Chase Securities Inc., Legg Mason Wood Walker, Inc., UBS Warburg LLC and Fidelity Capital Markets, a division of National Financial Services Corporation. In connection with the offering, we incurred approximately $2.8 million in underwriting discounts and commissions, and approximately $1.9 million in other related expenses. The net proceeds from the offering, after deducting the foregoing expenses, were approximately $35.6 million.
 
From the time of receipt through March 31, 2002 we have applied the net proceeds from the offering as follows:
 
    
(Estimations, in $000’s)
Purchases and installation of machinery and equipment
   
$
962
Repayment of indebtedness
   
 
11
Working capital used in operations
   
 
14,913
Net proceeds to be applied in future periods
   
 
19,714
 
We plan to use the balance of the net proceeds of our initial public offering for clinical trials, preclinical studies and general corporate purposes, including working capital and product development. We may use a portion of the net proceeds to acquire or invest in products and technologies that are complementary to our own, although no acquisitions are planned or being negotiated as of the date of this filing, and we have not allocated any portion of the net proceeds for any specific acquisition. None of the net proceeds of the initial public offering were paid directly or indirectly to any director, officer, general partner of Telik or their associates, persons owning 10% or more of any class of equity securities of Telik, or an affiliate of Telik. We expect that our use of proceeds from the offering will conform to the intended use of proceeds as described in our initial public offering prospectus dated August 11, 2000.
 
 
Not applicable
 
 
Not applicable
 
 
Not applicable

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(a)  Exhibits
 
10.20*
 
Fourth Amendment to Screening Services Agreement between Telik and Sanwa Kagaku Kenkyusho Co., Ltd., dated March 6, 2002.
 
(b)  Reports on Form 8-K
 
No reports were filed on Form 8-K for the quarterly period ended March 31, 2002.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*
 
Portions hereof have been omitted and filed separately with the SEC pursuant to a request for confidential treatment in accordance with Rule 24(b)-2.

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Pursuant to the requirements 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.
 
TELIK, INC.
  
Dated May 7, 2002
 
By:
  
    /S/    CYNTHIA M. BUTITTA        
   
Cynthia M. Butitta
   
Chief Operating Officer and Chief Financial Officer
   
(Duly Authorized Officer and Principal Financial Officer)

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