-----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, Kmw4Tki9SDRaAhajCNeTls10ieVMhqCPD/waMJp1dUgzJILSBcfPxG3WaASS1EnX L9Km0mouR6qs4kJYgIXe1g== 0000811210-98-000015.txt : 19980805 0000811210-98-000015.hdr.sgml : 19980805 ACCESSION NUMBER: 0000811210-98-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980804 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGOURON PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000811210 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 330061928 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12445 FILM NUMBER: 98676795 BUSINESS ADDRESS: STREET 1: 10350 NORTH TORREY PINES ROAD, SUITE 100 CITY: LA JOLLA STATE: CA ZIP: 92037 BUSINESS PHONE: 6196223000 MAIL ADDRESS: STREET 1: 10350 NORTH TORREY PINES ROAD CITY: LA JOLLA STATE: CA ZIP: 92037 10-K 1 FORM 10-K FOR THE PERIOD ENDING 6/30/98 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-15609 Agouron Pharmaceuticals, Inc. (Exact name of registrant as specified in its charter) California 33-0061928 (State or other jurisdiction of (I.R.S. EmployerIdentification No.) incorporation or organization) 10350 North Torrey Pines Road, La Jolla, California 92037-1020 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (619) 622-3000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without 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 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. [ ] On July 28, 1998, the aggregate market value of the common stock held by nonaffiliates totaled approximately $724,738,000 based on the closing stock price as reported by The Nasdaq Stock Market. On July 28, 1998, there were approximately 31,097,000 shares of common stock, without par value, of the registrant issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE The registrant's definitive proxy statement to be prepared pursuant to Regulation 14A and filed in connection with solicitation of proxies for its Annual Meeting of Stockholders, to be held on October 28, 1998, is incorporated by reference into Part III of this Form 10-K. 1 PART I Item 1. BUSINESS Except for the historical information contained herein, the following "Business" section contains forward-looking statements that involve risks and uncertainties which could cause actual results to differ materially from those discussed here. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the "Business" section and Exhibit 99 to this Form 10-K. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. General Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company") was organized and incorporated in California in June 1984. Agouron is an integrated pharmaceutical company committed to the discovery, development, manufacturing and marketing of innovative therapeutic products engineered to inactivate proteins which play key roles in cancer, AIDS and other serious diseases. The Company, through its own sales and marketing organization, is currently marketing in the United States its first drug, VIRACEPT(r) (nelfinavir mesylate) for treatment of HIV infection. The Company is also conducting pivotal phase II/III clinical trials for AG3340 for treatment of lung and prostate cancer. In addition, Agouron is expected to initiate a phase II/III pivotal clinical trial of REMUN(tm) (AG1661), an immune-based therapeutic agent for treatment of HIV infection and AIDS being co-developed by Agouron and The Immune Response Corporation ("IRC"). Further, the Company has a number of programs in progress for discovery or development of other new drugs in the fields of cancer, viral disease and other serious diseases. The Company is also using the proprietary core drug discovery technology of Alanex Corporation ("Alanex"), a wholly-owned subsidiary of the Company, to accelerate the steps necessary to discover small-molecule drug candidates, from the initial identification of compounds that exhibit activity against selected biological targets to the progression of these compounds to drug candidates for human clinical trials. Agouron's long-term goal is increasing profitability from the sale of drugs generated from its own drug discovery and development efforts, and from development and commercialization of drugs originated outside of the Company. To augment its technical capabilities, to enhance the likelihood of successful commercialization of its products and to offset some of its operating costs, the Company has entered into collaborative research and development arrangements with other companies. The Company has generally retained significant commercial rights in drugs developed in its collaborative research and development programs funded in whole or in part by other companies and has secured significant commercial rights in those products that it has in-licensed from other companies. The Company anticipates that its successfully developed products will be commercialized both through its own direct sales and marketing activities in certain pharmaceutical markets and through manufacturing and marketing relationships with other pharmaceutical companies. 2 The Company's common stock capitalization has evolved through a series of public offerings and private placements of its equity securities and the exercise of various warrants and employee stock options. Five public offerings have generated net proceeds of approximately $211,600,000 and the issuance of approximately 19,788,000 shares. The most recent public offering in 1996 raised approximately $77,245,000 through the issuance of 5,470,000 shares. Private placements have generated approximately $17,100,000 in net proceeds and the issuance of approximately 5,564,000 shares. The exercise of warrants and employee stock options (including employee stock purchase plan transactions) have generated proceeds of approximately $29,750,000 and the issuance of approximately 4,250,000 shares. In 1997, the Company acquired Alanex in a purchase transaction through the issuance of approximately 1,444,000 shares of the Company's common stock valued at approximately $61,000,000. The Company has also recorded an aggregate increase to common stock of approximately $29,000,000 which reflects the tax benefit of stock options that were exercised through fiscal 1998. Narrative Description of Business Agouron is developing innovative drugs for treatment of cancer, HIV infection and other serious diseases and has expended approximately $449,000,000 on research and development since its inception, excluding a $57,500,000 write-off for in-process technology purchased in 1997 in the acquisition of Alanex. VIRACEPT In March 1997, the Company received clearance from the Food and Drug Administration ("FDA") to market its first drug, VIRACEPT, a potent HIV protease inhibitor that substantially decreases viral load and increases CD4+T cell counts when used in combination antiretroviral drug therapy. An orally administered product, VIRACEPT is available in adult and pediatric formulations. VIRACEPT sales in the United States totaled $358,321,000 in fiscal 1998. The Company estimated that 85,000 patients in the United States (over 120,000 in the world) were taking VIRACEPT at the end of June 1998. It is anticipated that continued increasing VIRACEPT sales will make a substantial contribution toward profitable financial results in the future. Agouron developed VIRACEPT in collaboration with the pharmaceutical division of Japan Tobacco Inc. ("JT"). Agouron and JT have granted exclusive royalty bearing marketing rights outside of North America and parts of Japan to F. Hoffmann-La Roche Ltd ("Roche"). The Company and JT share profits and/or royalties equally from the world-wide commercialization of VIRACEPT. In January and March 1998, VIRACEPT was approved for marketing in Europe and Japan, respectively. VIRACEPT license fees and royalties from Roche totaled $17,852,000 in 1998. Research and Development Programs Agouron's research and development programs focus on the areas of cancer, AIDS and other serious diseases. Agouron's drug discovery programs apply the Company's core technologies of 3 three-dimensional structure based drug design and high-throughput screening of chemical libraries generated by computation-directed combinatorial chemistry. The following table outlines the status of various programs in the Company's research and development portfolio. Agouron is pursuing some of these programs independently, while others are being undertaken in collaboration with other companies.
Research and Development Program Indication Stage - ------------------------------- -------------------------------------------- ------------ Cancer AG3340 Solid Tumors Phase II/III AG3433 Solid Tumors Preclinical AG2034 Solid Tumors Phase I AG2037 Solid Tumors Preclinical cdk Inhibitors Solid Tumors Research PARP(1) Inhibitors Solid Tumors Research VEGF Inhibitors Solid Tumors Research GnRH Antagonist Hormone-Dependent Solid Tumors Research Viral Disease VIRACEPT(2) HIV Infection Approved REMUNE (AG1661)(3) HIV Infection Phase II/III AG1549 (S-1153)(4) HIV Infection Phase I AG1776 (JE-2147)(5) HIV Infection Preclinical AG7088 Common Cold Preclinical Hepatitis C agents(6) Viral Disease Research HIV Integrase Inhibitors HIV Infection Research Ophthalmology AG3340 Macular Degeneration Phase II Other MMP Inhibitors Macular Degeneration Preclinical VEGF Inhibitors Macular Degeneration Research
(1) In collaboration with Cancer Research Campaign Technology Ltd. (2) In collaboration with Japan Tobacco Inc. and F. Hoffmann-La Roche Ltd. (3) In collaboration with The Immune Response Corporation. (4) In collaboration with Shionogi & Co., Ltd. (5) In collaboration with Japan Energy Corporation. (6) In collaboration with Japan Tobacco Inc. 4 Cancer Overview The development of new drugs for treatment of cancer is a key scientific and commercial focus of the Company. Cancer is the second leading cause of death in the United States and most developed nations. While much progress has been made in the treatment of certain forms of cancer, most existing anti-cancer drugs display limited efficacy and significant toxicities that restrict their clinical usefulness. As a result, there remains a critical need for new anti-cancer drugs which are less toxic and more efficacious than those currently available either as tumoricidal (tumor-killing) or tumoristatic (tumor-controlling) agents. The Company's anti-cancer drug discovery and development programs pursue inhibitors of the following enzymes: matrix metalloproteases ("MMPs"); glycinamide ribonucleotide formyltransferase ("GART"); cyclin dependent kinases ("cdk"); gonadotropin releasing hormone ("GnRH"); poly (ADP ribose) polymerase ("PARP"); and vascular endothelial growth factor ("VEGF") kinase. MMP Inhibitors: AG3340 and AG3433 AG3340 is an orally delivered anti-angiogenesis drug designed to inhibit the growth, invasion and metastasis of solid tumors by inactivating certain members of a family of enzymes known as MMPs. AG3340 selectively inhibits those MMPs believed to be involved in angiogenesis and tumor progression. A primary goal of clinical studies of AG3340 is to determine whether this distinctive selectivity results in a favorable clinical profile of safety and efficacy. In fiscal 1998, Agouron completed two phase I studies of AG3340. In one phase I study, AG3340 was administered orally twice daily (BID) in patients with advanced cancer, including lung, prostate, kidney, and colorectal cancers as well as sarcoma and melanoma. A separate phase I study found that AG3340 in combination with chemotherapy was generally well tolerated among patients with advanced prostate cancer whose disease was resistant to hormonal therapies. In preclinical studies, AG3340 has been shown to inhibit angiogenesis. AG3340 was also found to be a potent inhibitor of the growth of chemotherapy-resistant human non-small cell lung cancer tumors in mice. Here, administration of AG3340 resulted in a dose-dependent decrease in tumor growth by up to 65% as compared to controls. In May 1998, Agouron initiated phase II/III clinical trials in patients with advanced lung or prostate cancer. The Company presently retains all rights to AG3340 in the fields of cancer and ophthalmology. 5 Agouron is also conducting preclinical research on a stable of third-generation MMP inhibitors, including AG3433, which has even greater selectivity than AG3340 for those MMPs related to cancer. GART Inhibitors: AG2034 and AG2037 AG2034 is a potent, selective inhibitor of GART, a key enzyme in the biochemical pathway through which tumor cells synthesize purines, essential components of DNA. With the exception of liver cells, all normal human tissues obtain purines through an alternative pathway (the purine salvage pathway). The Company believes that inhibitors of GART will show a high degree of selectivity for tumor cells and less significant bone marrow toxicity than other chemotherapeutic agents. The Company is completing dose-ranging phase I clinical trials that will establish an appropriate dose for AG2034. AG2037 was designed to have markedly reduced binding to the membrane folate binding protein ("mFBP") because tight binding to this receptor is one likely source of the toxicity observed with lometrexol, the first molecule in this class to be tested clinically by Eli Lilly and Company (assays of mFBP binding have been routine for compounds generated in this program). AG2037 shows potent inhibition of GART as a monoglutamate and can be polyglutamylated. Because of its weaker binding to mFBP, AG2037 access is restricted to only those cells with reduced folate carrier. Preclinical studies have shown that GART inhibitors are potentially cytotoxic (kills cells) to at least certain cancer cell types with mutant p53 genes, a common genetic abnormality in human cancer. The Company retains all commercial rights to compounds resulting from its GART inhibitor programs. cdk Inhibitors Cdks are enzymes that play key roles in regulating the cell cycle. Certain members of this family of enzymes, such as cdk4 and cdk2, have been implicated as drivers of cells from a normally quiescent state to a highly proliferative state characteristic of human cancer. Agouron is engaged in a drug discovery program aimed at the design of selective small-molecule drugs with the potential to inhibit the activity of such cdks and therefore block the transition of cancer cells into their proliferative phase. The Company retains all commercial rights to compounds resulting from this program. PARP Inhibitors PARP is an enzyme which is activated by DNA-strand breaks and is important in the immediate cellular response to DNA damage. The activity of PARP is involved in recruiting repair enzymes to the site of DNA damage so that cell division can proceed faithfully. Inhibition of PARP has profound effects on the survival of cells following exposure to DNA-damaging agents; thus, PARP inhibitors may be useful in conjunction with chemo- and radio-therapy to treat tumors. PARP inhibitors discovered at Agouron have been confirmed as chemopotentiating agents in cells and preliminary testing in tumors in animals is underway. The Company has exclusive commercial rights in compounds resulting from this program, which are being pursued in collaboration with Cancer Research Campaign Technology, Ltd. 6 VEGF Inhibitors The process known as angiogenesis (the formation of new blood vessels) is a key factor in the maintenance and progression of several disease states, including the metastasis of malignant tumors. The ability of cancer cells to carry out angiogenesis depends in part upon the activity of a protein known as VEGF, which, by binding to a receptor (known as kdr) on the cell surface, triggers the development of growth factor endothelial cells. Agouron is engaged in a program to design drugs that block the kdr receptor for VEGF and, therefore, compromise the ability of tumors to carry out a key process in angiogenesis. The Company retains all commercial rights to compounds resulting from this program. GnRH Antagonist Program GnRH is a decapeptide that is synthesized in the brain and controls the pituitary and gonadal hormones that regulate fertility and the growth of certain hormone-dependent tumors (in women, this peptide is required for successful ovulation and, in men, it is necessary for spermatogenesis). The Company, through its Alanex subsidiary, is currently pursuing a program to discover certain orally active small-molecule drugs to treat two areas of human disease that depend on GnRH action: endometriosis and sex-hormone dependent tumors. The Company retains all commercial rights to compounds resulting from this program. Viral Disease Overview The development of new drugs for the treatment of certain viral diseases is another important scientific and commercial focus of the Company. The Company is presently conducting programs aimed at discovery and/or development of several classes of anti-viral drugs that block viral proteases, enzymes required by several families of pathogenic viruses to carry out replication and infection. Agouron's anti-viral drug programs include HIV protease inhibitors (VIRACEPT and AG1776), an immune-based therapeutic (REMUNE), a non-nucleoside reverse transcriptase inhibitor (AG1549), rhinovirus 3C protease inhibitors, and hepatitis C enzymes. Agouron is developing certain of its anti-viral drugs through collaborations with JT, Roche, IRC, Shionogi & Co., Ltd. and Japan Energy Corporation. HIV Protease Inhibitor: VIRACEPT HIV protease is an enzyme that performs an essential role in the infectious cycle of HIV, and clinical research has demonstrated that inhibition of the protease enzyme renders HIV unable to form new infectious virus. Today, five FDA-approved HIV protease inhibitors (including VIRACEPT) are making a significant contribution in the management of HIV disease. VIRACEPT was cleared by the FDA for marketing in the United States in March 1997 pursuant to the FDA's guidelines for accelerated approval. VIRACEPT development activities now include certain additional phase II/III studies to facilitate the full approval of the drug and certain phase IV studies designed to expand the utilization of the product. 7 Immune-based therapeutic agent: REMUNE(tm) (AG1661) An important recent goal in treatment of HIV infection is to combine such highly active drugs as HIV protease inhibitors, capable of halting replication of HIV, with agents capable of directly enhancing recovery of the immune system. REMUNE is an immune-based therapeutic agent, derived from HIV itself, which has been shown to stimulate the immune system to respond specifically to HIV infection and to produce the increases in substances such as chemokines that may provide protection to uninfected cells. Discovered by IRC, REMUNE is administered as an intramuscular injection every three months, and has been well-tolerated in clinical trials to date. In May 1997, enrollment was completed at 74 centers in the United States for a pivotal phase III, clinical end-point trial in which approximately 2,500 patients were randomized to receive conventional anti-retroviral drug therapy with or without REMUNE. This study is expected to be completed in March 1999. More than 250 patients have been enrolled in two other clinical studies which are evaluating the effect of REMUNE in combination with anti-retroviral drugs on virologic and immunologic markers in adults. A smaller study of REMUNE for treatment of HIV infection in children is in progress at the National Institutes of Health. In June 1998, Agouron and IRC began a collaboration on the final development and commercialization of REMUNE. Agouron has exclusive rights to market REMUNE in North America, Europe and certain other countries; IRC will manufacture commercial supplies of REMUNE. Agouron and IRC will share equally all profits from the commercialization of REMUNE in the licensed territory. Non-nucleoside reverse transcriptase inhibitor (NNRTI): AG1549 (S-1153) AG1549 is a second-generation NNRTI for the treatment of HIV infection. Discovered by Shionogi & Co., Ltd. ("Shionogi"), AG1549 is currently the subject of several clinical trials evaluating its dose and its concomitant use with other anti-retroviral treatments. AG1549 is of high clinical interest because it is ten times more potent in vitro than currently approved NNRTIs and because AG1549 is fully active in vitro against HIV containing the most common genetic mutation (at position 103) associated with resistance to other NNRTIs. Agouron has exclusive world-wide rights to the development and commercialization of AG1549, except in Japan, South Korea and Taiwan, subject to the payment of royalties to Shionogi. HIV Protease Inhibitor: AG1776 (JE-2147) AG1776 is a protease inhibitor for the treatment of HIV infection. Preclinical data indicate that AG1776, discovered by Japan Energy Corporation ("JE"), works synergistically in vitro with other protease inhibitors. The compound has also exhibited activity against HIV mutations commonly associated with resistance to other protease inhibitors. 8 Agouron has exclusive world-wide rights to the development and commercialization of AG1776 except in Japan, South Korea, North Korea and Taiwan, subject to the payment of royalties to JE; JE will manufacture bulk compound for use in final drug product. Rhinovirus 3C Protease Inhibitor: AG7088 Rhinoviruses are believed to be the single most frequent cause of the common cold. While rhinovirus infections are a periodic annoyance to most individuals, they may produce more severe and prolonged symptoms in people with chronic obstructive pulmonary disease, such as asthma and emphysema. All known strains of rhinoviruses depend on a critical enzyme, the 3C protease, at several stages of their life cycle for production of new infectious viruses. Agouron has designed potent, selective rhinovirus 3C protease inhibitors, including AG7088, that are currently being evaluated in preclinical pharmacological studies. The Company retains all commercial rights in compounds resulting from this program. HIV Integrase Inhibitors The drugs currently approved in the United States for treatment of HIV infection consist of reverse transcriptase inhibitors and protease inhibitors (including VIRACEPT). Another mechanism of action is inhibition of HIV-1 integrase, a key enzyme in catalyzing the integration of HIV into human cells. Agouron scientists believe that blocking HIV integrase is a viable therapeutic strategy that will abort completion of the viral life cycle, preventing infection of new, uninfected target cells. Scientists also believe that HIV integrase is an attractive target because it is extremely unlikely that an HIV integrase-specific inhibitor will nonspecifically inhibit other eukaryotic enzymes. This fact may possibly reduce the incidence of side effects of an integrase inhibitor used to treat HIV infection. The Company retains all commercial rights in compounds resulting from this program. Anti-Hepatitis C Drugs The hepatitis C virus ("HCV") is a virus that causes illnesses ranging from a mild flu-like disease to progressive liver disease, cirrhosis and primary liver cancer. The ability to treat infection by HCV represents a significant unmet clinical need, particularly in Asian countries. HCV depends upon several key enzymes for the production of new infectious virus. Agouron scientists have initiated programs to design new classes of anti-viral drugs that block such enzymes and disrupt the HCV life cycle. The Company is pursuing this research program in collaboration with JT. Ophthalmology Overview A hallmark of many serious retinal disorders, such as age-related macular degeneration, macular edema, retinopathy of prematurity, and proliferative diabetic retinopathy, is an extensive proliferation of new blood vessels in the retina and underlying choroid. This process, known as 9 angiogenesis or neovascularization, often leads to retinal hemorrage that results in the loss of ganglion cells, degeneration of the central optic nerve, and eventually loss of central and/or peripheral vision. The most common neovascular retinal disorder, namely age-related macular degeneration, has recently become a leading cause of blindness in the elderly population in the industrialized world. In common with other tissues, the growth of new blood vessels is mediated by many factors including various members of the family of MMPs, VEGF and Fibroblast Growth Factors ("FGF") and their respective receptors and some members of the integrin family of receptors involved in cell-cell and cell-matrix interactions. In ocular tissues, the production of these factors, receptors and MMPs is increased by local hypoxia, the most notable condition believed to stimulate retinal and subretinal neovascularization. Most significantly, in the ocular tissue of patients with any of the above mentioned diseases, elevated levels of growth factors, integrins and MMPs (in particular MMP-2 and MT-MMP-1) were consistently identified. Key mediators of angiogenesis have been associated with ophthalmic disorders. VEGF and basic FGF are strongly implicated as causative angiogenic agents in a variety of studies. In ocular tissues, the production of these growth factors is increased by hypoxia, the most notable condition believed to stimulate retinal angiogenesis. Most significantly, in patients undergoing surgery, high levels of VEGF in ocular fluid were found associated with macular degeneration, active diabetic retinopathy, central vein occlusion and other disorders. Current studies in the area of ophthalmology involve an assessment of the impact that inhibitors of MMPs might have on therapeutic practice and in meeting medical needs in these areas. Agouron is conducting in animal models a series of proof-of-principle preclinical studies of ocular diseases with the MMP inhibitor AG3340 in preparation for the commencement of human clinical studies. Agouron has recently demonstrated significant accumulation of AG3340 in the vitreous humor of rats and monkeys following oral dosing. Likewise, it is anticipated that when suitable inhibitors of VEGF become available, they will be tested in the existing ocular angiogenesis models prior to selection of a lead compound for clinical development. The Company retains all commercial rights in compounds resulting from this program. Business Relationships/Research and Development Agreements The Company has funded its research and development primarily from working capital generated from both private and public sales of Agouron equity, collaborative arrangements and the financial contribution resulting from product sales. The Company has an ongoing program of business development which may, from time to time, lead to the establishment of corporate collaborations in addition to those noted below. Japan Tobacco Inc. In February 1994, the Company entered into a strategic alliance with JT in the field of anti-viral drugs for the treatment of infections caused by hepatitis C and the herpes family of viruses. In December 1994, the Company added its anti-HIV drug, VIRACEPT, to the JT collaboration 10 with the execution of a world-wide development and licensing agreement. Agouron and JT share equally the costs of further development of VIRACEPT. Currently, Agouron has exclusive commercial rights to VIRACEPT (with the right to sublicense) in North America and JT has exclusive commercial rights to VIRACEPT (with the right to sublicense) in certain parts of Japan. The Company and JT share profits and/or royalties equally from the world-wide commercialization of VIRACEPT. Roche The Company and JT have granted Roche certain exclusive royalty bearing marketing rights to VIRACEPT outside of North America and parts of Japan. Further, the Company receives royalties based either on Roche's sales of VIRACEPT or, in certain circumstances, Invirase(r) and Fortavase(r) (saquinavir), Roche's HIV protease inhibitors. Roche has the right to manufacture VIRACEPT for its own use and is expected to commence such manufacturing in calendar 1999. The Immune Response Corporation In June 1998, the Company entered into a binding letter of intent with IRC to collaborate on final development and commercialization of REMUNE, an immune-based therapeutic agent discovered by IRC and currently the subject of several clinical studies including a large phase III clinical trial. The two companies intend to enter promptly into a definitive agreement and will endeavor to complete development and registration of REMUNE in 1999. IRC will manufacture commercial supplies of REMUNE, and Agouron will have exclusive rights to market REMUNE in North America, Europe and certain other countries. The two companies will share equally all profits from the commercialization of REMUNE in the licensed territory. Agouron paid an initial $10,000,000 license fee to IRC in June 1998 and also purchased 118,256 newly issued common shares of IRC for $2,000,000. Agouron may pay, assuming ongoing successful development, registration and approval of REMUNE, to IRC up to $53,000,000 in additional development and milestone payments and $12,000,000 in purchases of additional IRC common stock. Shionogi & Co., Ltd. In June 1998, the Company entered into a binding letter of intent with Shionogi to develop and commercialize AG1549, a second-generation NNRTI for the treatment of HIV infection. Discovered by Shionogi, AG1549 is currently the subject of several clinical trials evaluating its dose and its concomitant use with other antiretroviral treatments. AG1549 is of high clinical interest because it is ten times more potent in vitro than such other NNRTIs as nevirapine (Viramune(r) and delavirdine (Rescriptor(r) and because AG1549 is fully active in vitro against HIV containing the most common genetic mutation (at position 103) associated with resistance to other NNRTIs, including efavirenz (Sustiva(tm)). Agouron has exclusive world-wide rights to the development and commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron paid an initial $10,000,000 license fee to Shionogi in June 1998. Agouron may pay, assuming ongoing successful development, registration and approval of AG1549, additional license fees of up to $30,000,000. In addition, Agouron will pay Shionogi royalties based on sales, if any, of AG1549. 11 Japan Energy Corporation In June 1998, the Company entered into an agreement with JE to develop and commercialize AG1776, a novel protease inhibitor for the treatment of HIV infection. Preclinical data indicate that AG1776, discovered by JE, works synergistically in vitro with other protease inhibitors. The compound has also exhibited activity against mutations commonly associated with resistance to other protease inhibitors. Agouron has exclusive world-wide rights to the development and commercialization of AG1776 except in Japan, South Korea, North Korea and Taiwan; JE will manufacture bulk compound for use in final drug product. Agouron incurred an initial $6,000,000 license fee in June 1998. Agouron may incur, assuming ongoing successful development, registration and approval of AG1776, additional license fees of up to $20,000,000. In addition, Agouron will pay JE royalties based on sales, if any, of AG1776. Competition The pharmaceutical and biotechnology industries are subject to intense competition and rapid and significant technological change. Many companies and organizations, including major pharmaceutical, biotechnology and chemical companies, universities, and other research organizations, are engaged in discovery and development of drugs for diseases targeted by the Company. For example, the Company is aware of several pharmaceutical companies that have HIV protease inhibitors, some of which are currently being marketed, including those of Abbott Laboratories, Inc. ("Abbott"), Merck & Co., Inc. ("Merck") and Roche. Certain companies and organizations have substantially greater financial and other resources, larger research and development staffs and more extensive production and marketing organizations, experience and capabilities than the Company. In addition, many companies have significantly more experience than the Company in preclinical testing and in conducting human clinical trials of potential pharmaceutical products and in obtaining FDA and other regulatory approvals. Furthermore, many such companies and organizations maintain or pursue extensive patent portfolios that could now or in the future pose a risk to the Company's ability to obtain patent protection for, or practice, its proprietary technology. All of these companies and other research organizations compete with the Company in recruiting and retaining highly qualified scientific, sales, marketing, manufacturing, administrative and management personnel. Agouron was the first company to devote itself to the development and application of protein structure-based drug design. As such, the Company believes that it has achieved certain competitive advantages, including developmental lead-time, level of commitment to the technology and the development of certain practical or technical capabilities. In recent years, however, several pharmaceutical companies have undertaken to establish capabilities in protein structure-based drug design, either internally or through academic collaborations, and can be presumed to be engaged in the use of such technology for the same purposes as is the Company. Certain biotechnology companies and other companies have also entered into the field of protein structure-based drug design. For example, Abbott, Novartis, Glaxo Wellcome plc ("Glaxo"), Merck and Roche have developed programs focused on protein structure-based drug design. The Company expects that the technology for protein structure-based drug design will become more 12 widely implemented over time and will ultimately become more common in the pharmaceutical industry. The Company believes that its ability to compete successfully will be based on its ability to create and maintain scientifically advanced technology, attract and retain scientific personnel with a broad range of expertise, obtain patent protection or otherwise develop proprietary products or processes, conduct clinical trials and obtain required government approvals on a timely basis, select and pursue drug design projects in areas in which significant market opportunities exist or are likely to develop, manufacture (or have manufactured) its products on a cost-effective basis and successfully market its products either alone or in conjunction with others. Many of the Company's competitors have substantially greater financial resources, clinical and regulatory experience, manufacturing capabilities and sales and marketing organizations than Agouron. Moreover, the Company's competitors could obtain patents relating to Agouron's products or technology, which could have an adverse impact on the Company. Currently, five HIV protease inhibitors are available in the United States. FDA approval dates and estimated prescription market shares at June 30, 1998 are noted in the following table:
Company Product Name Generic Name Approval Market Share Agouron VIRACEPT(r) nelfinavir March, 1997 32% Roche INVIRASE(r) saquinavir December, 1995 8% Roche FORTOVASE(r) saquinavir October, 1997 13% Abbott NORVIR(r) ritonavir March, 1996 14% Merck CRIXIVAN(r) indinavir March, 1996 33%
Future competition from new HIV protease inhibitors is expected from Glaxo and other pharmaceutical companies. Additional competition may arise from non-protease inhibitor products as such products enter the market. Furthermore, competition may arise from generic manufacturers of nelfinavir, notwithstanding Agouron's patent protection discussed below. Patents and Trade Secrets The Company seeks patent protection for its proprietary technology and potential products in the United States and in foreign countries. Most of the Company's products are expected to be synthetic chemical compounds which may be afforded patent protection under principles and procedures well established by the governmental patent offices under the patent law of the particular country. The Company's strategy is to pursue a strong patent portfolio and Agouron holds several patents, including a United States patent covering the chemical composition of VIRACEPT and other United States patents covering certain compounds in development, such as AG3340. The Company is currently prosecuting a number of patent applications in the United States and in various other countries seeking protection for certain series of compounds and other proprietary technology. The Company will continue to file patent applications on its evolving technology, processes and products. The Company's and/or its collaborators' failure to obtain and maintain patent protection for its products could have an adverse impact on the Company. Moreover, since there can be no 13 assurance that Agouron's patents will be upheld as valid and enforceable in a court of law, a holding of invalidity or unenforceability of an Agouron (or its collaborators') patent(s) asserted against an alleged infringer could have an adverse impact on the Company. Many of the processes and much of the know-how of importance to the Company's technology depend upon the skills, knowledge and experience of its scientific and technical personnel, which skills, knowledge and experience are not patentable per se. To protect its rights in these areas, the Company requires all employees, significant consultants and advisors, and collaborators to enter into confidentiality agreements with Agouron. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of such trade secrets, know-how or proprietary information. Further, in the absence of patent protection, the Company may be exposed to competitors who independently develop substantially equivalent technology or otherwise gain access to the Company's trade secrets, knowledge or other proprietary information. Moreover, since there can be no assurance that another company has not or will not obtain any patent relevant to an Agouron product or technology; such a patent by another company could have an adverse impact on Agouron. Government Regulation The production and marketing of the Company's products and its ongoing research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. Pharmaceutical products intended for therapeutic use in humans are principally governed by the FDA regulations in the United States and by comparable government regulations in foreign countries. Various federal, state and local statutes and regulations also govern or influence the research and development, manufacturing, safety, labeling, storage, record keeping, distribution and marketing of such products. The process of completing preclinical and clinical testing and obtaining the approval of the FDA and similar health authorities in foreign countries to market a new drug product requires a significant number of years and the expenditure of substantial resources and may subject the Company to product liability exposure. Failures or delays by the Company or its collaborators or licensees in obtaining regulatory approvals would adversely affect the marketing of products being developed by the Company and the Company's ability to receive product revenues or royalties. The steps required by the FDA before a new human pharmaceutical or biological product may be marketed in the United States include: (a) preclinical laboratory tests, in vivo preclinical studies and formulation studies; (b) the submission to the FDA of a request for authorization to conduct clinical trials on an Investigational New Drug application ("IND"), which must become effective before human clinical trials may commence; (c) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for its intended use; (d) submission to the FDA of a New Drug Application ("NDA") or Product License Application ("PLA") and (e) review and approval of a NDA or PLA by the FDA before the drug product may be shipped or sold commercially. Prior to obtaining FDA approval for each product, each manufacturing establishment for new drugs must be registered with and receive appropriate approval by the 14 FDA. If, after receiving approval from the FDA, a material change is made in the manufacturing process or location, additional regulatory review may be required. Preclinical tests include laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the safety and efficacy of the product. Preclinical test results are submitted to the FDA as a part of the IND. Clinical trials are typically conducted in three sequential phases, although the phases may overlap. Phase I represents the initial administration of the drug to a small group of humans, either healthy volunteers or patients, to test for safety, dosage tolerance, absorption, distribution, metabolism, excretion and clinical pharmacology and, if possible, early indications of effectiveness. Phase II involves studies in a small sample of the actual intended patient population to assess the efficacy of the investigational drug for a specific clinical indication, to ascertain dose tolerance and the optimal dose range and to collect additional clinical information relating to safety and potential adverse effects. Once an investigational drug is found to have some efficacy and an acceptable clinical safety profile in the targeted patient population, phase III studies are often initiated to further establish safety and efficacy of the investigational drug in a broader sample of the target patient population. The results of the clinical trials together with the results of the preclinical tests and complete manufacturing information are submitted in a NDA or PLA to the FDA for approval. If a NDA or PLA is submitted to the FDA, there can be no assurance that such application will be reviewed and approved by the FDA in a timely manner, if at all. Even after initial FDA approval has been obtained, further studies, including post-market studies, may be required to provide additional information. Results of such post-market programs may limit or expand the further marketing of the product. The Company is also subject to foreign regulatory requirements governing development, manufacturing and sales of pharmaceutical products that vary widely from country to country. Approval of a drug by applicable regulatory agencies of foreign countries must be secured prior to the marketing of such drug in those countries. The regulatory approval process may be more or less rigorous from country to country and the time required for approval may be longer or shorter than that required in the United States. In addition to government agencies that promulgate regulations and guidelines directly applicable to the Company and its products, professional societies, practice management groups, and health/science organizations may also publish, from time to time, guidelines or recommendations to the health care and patient communities that affect the usage of certain therapies, drugs or procedures, including the Company's products. Such recommendations may relate to such matters as usage, dosage, route of administration and use of concomitant therapies and could have a material effect on the Company's results of operations. Manufacturing Agouron utilizes world-wide contract manufacturing to produce VIRACEPT. The Company procures and transfers raw materials to contracted bulk drug producers, sends the converted bulk drug to finishing facilities and moves finished goods into a distribution center. Product supply and associated raw materials have been available in sufficient quantities to meet business needs. In order to accommodate anticipated sales volume growth, capacity expansion efforts are being 15 pursued. The Company will be dependent upon its contract manufacturers to comply with good manufacturing practices and to meet its production requirements. There can be no assurance that the Company's contract manufacturers will timely deliver sufficient quantities of the Company's products or that the Company would be able to find substitute manufacturers, if necessary. Marketing The Company distributes VIRACEPT in the United States through wholesalers. Sales volumes in the United States are influenced by underlying demand and wholesale inventory management practices. VIRACEPT is covered by Medicaid programs in all states and is covered by virtually all state AIDS Drug Assistance Programs ("ADAPs"). Currently, VIRACEPT is paid for predominately by Medicaid, private insurance and ADAPs. The Company offers a patient assistance program based upon medical need for patients who have no other means of coverage. Outside of North America and parts of Japan, VIRACEPT is marketed on behalf of the Company and JT by Roche. The Company receives a royalty on Roche's world-wide sales of VIRACEPT. The Company's sales and marketing efforts utilize a field sales organization which focuses primarily on office and hospital-based physicians, including key medical thought leaders. Additionally, the Company has obtained market access and availability for its products in part by establishing relationships within key market segments, including health maintenance organizations, third-party payers and governmental agencies. Human Resources As of July 28, 1998, the Company had 991 employees, of which 619 and 146 employees, respectively, were engaged in, or directly supported, research and product development and sales and marketing efforts. The Company's employees are not covered by a collective bargaining agreement and the Company considers its relations with its employees to be excellent. The Company has entered into confidentiality agreements with all of its employees. Item 2. PROPERTIES The Company currently leases approximately 317,000 square feet of office and laboratory space in the Torrey Pines and Sorrento Valley areas of San Diego. The Company's corporate headquarters and administrative offices currently comprise approximately 118,000 square feet under lease agreements, most of which expire in calendar 1999. Research and development activities are located in approximately 197,000 square feet of leased space under agreements which expire from 1999 to 2004. These state-of-the-art facilities are designed to implement and support the Company's innovative approach to drug design. Included in the facilities are approved scale-up laboratories in which kilogram quantities of Company-designed drug compounds are manufactured under current good manufacturing 16 practices for use in clinical trials. Additionally, the Company leases approximately 2,000 combined square feet in the United Kingdom and Canada which is utilized, respectively, by its European clinical development staff and Canadian marketing organization. Item 3. LEGAL PROCEEDINGS The Company is involved in certain legal proceedings generally incidental to its normal business activities. While the outcome of any such proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any such existing matters should have a material adverse effect on its financial position or results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the year ended June 30, 1998, no matters were submitted to a vote of the Company's security holders. 17 PART II Item 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on The Nasdaq Stock Market under the symbol AGPH. There were approximately 30,000 shareholders of the common stock of the Company as of July 28, 1998. The Company has not paid cash dividends on its common stock and does not intend to do so in the foreseeable future. The following table sets forth the range of high and low selling prices as reported by The Nasdaq Stock Market for the periods indicated.
High Low --------- --------- 1997 First Quarter $ 23.125 $ 14.500 Second Quarter 35.750 21.125 Third Quarter 50.500 33.500 Fourth Quarter 45.500 29.187 1998 First Quarter $ 56.500 $ 39.250 Second Quarter 56.500 26.750 Third Quarter 40.000 29.250 Fourth Quarter 40.250 28.750
18 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table summarizes certain selected consolidated financial data for each of the five years in the period ended June 30, 1998. The information presented should be read in conjunction with the consolidated financial statements included elsewhere in this report.
(In thousands, except per share amounts) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Statement of Income (Loss) Data: Years ended June 30, Total revenues $ 466,505 $ 132,063 $ 55,955 $ 26,722 $ 16,301 Product sales 409,298 56,969 0 0 0 Research and development expenses(1) 150,657 108,137 71,010 36,317 23,957 Net income (loss) (1) and (2) 13,154 (42,806) (19,523) (12,939) (9,462) Net income (loss) per share $ .40 $ (1.59) $ (.99) $ (.89) $ (.66) Shares used in computing net income (loss) per share 33,214 26,946 19,688 14,592 14,482 Balance Sheet Data: At June 30, Working capital $ 127,728 $ 115,786 $ 70,381 $ 8,837 $ 21,039 Total assets 363,337 266,914 102,577 27,097 37,178 Long-term liabilities 6,915 7,217 1,734 1,884 2,285 Stockholders' equity(3) 236,169 191,282 75,583 12,591 24,852
(1) In 1998, includes in-licensing expenses of $26,000,000 ($15,600,000 net of tax) for commercial rights to three development stage anti-HIV products. (2) In 1997, includes the write-off of $57,500,000 of in-process technology associated with the acquisition of Alanex Corporation, partially offset by the realization of $43,800,000 of deferred tax assets associated with the Company's expectation of future taxable income. (3) The Company has never declared or paid cash dividends on its common stock. 19 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview This discussion contains forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. See "Important Factors Regarding Forward-Looking Statements" attached as Exhibit 99 to this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The Company is committed to the discovery, development, manufacturing and marketing of human pharmaceuticals targeting cancer, AIDS, and other serious diseases. Operations to date have been principally funded from the Company's equity-derived working capital, various collaborative arrangements and, most recently, from the gross margin contribution of its first product, VIRACEPT(r) (nelfinavir mesylate). The net income reported in fiscal 1998 is principally due to the commercialization of VIRACEPT while the Company's prior net operating losses reflect primarily the result of its independent research and substantial investment in the clinical and commercial development of VIRACEPT and certain anti-cancer compounds. In March 1997, the Company received clearance from the United States Food and Drug Administration ("FDA") to market VIRACEPT in the United States. For the fiscal year ended June 30, 1998, due principally to the increasing product contribution from VIRACEPT sales, license fees and royalties, the Company realized a net income of $13,154,000. Results of Operations Product sales Product sales for the fiscal years ended June 30, 1997 and 1998 were approximately $57,000,000 and $409,300,000 which included sales in the United States of $55,559,000 and $358,321,000, respectively. The Company anticipates that VIRACEPT sales in the United States will approximate $430,000,000 to $440,000,000 for fiscal 1999. Contract revenues Collaborative research and development agreements with Japan Tobacco Inc. ("JT"), Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd (collectively "HLR") accounted for substantially all of the Company's contract revenues for 1998, 1997 and 1996. Total contract revenues for 1998 decreased approximately 40% from 1997 due principally to decreased VIRACEPT program spending by Agouron, which was partially funded by JT. Additionally, the amortization to revenue over a 24 month period of JT's $24,000,000 milestone payment, which was received in August 1995, was completed in June 1997. The increase in contract revenues 20 from 1996 to 1997 of approximately 59% was due principally to increased program activity and spending on the JT collaborations. In December 1997, the Company agreed to end its collaboration with HLR in the field of cancer. As a result of the termination agreement, Agouron has regained all rights to its anti-cancer drugs previously within the scope of the HLR collaboration. The Company anticipates that contract revenues for fiscal 1999 will approximate $35,000,000 to $40,000,000. License fees and royalties The Company's license fees and royalties for 1998 and 1997 were principally derived from F. Hoffmann-La Roche Ltd ("Roche"); license fees in 1996 were earned from HLR. Total revenues for 1998 increased approximately 83% from 1997 due to European marketing approval for VIRACEPT. The 33% decrease from 1996 to 1997 is principally due to $9,000,000 for initial European marketing rights for VIRACEPT in 1997 versus $15,000,000 for initial world-wide development rights for two anti-cancer drugs in 1996. In January and March 1998, VIRACEPT was approved for marketing in Europe and Japan, respectively. Upon such approvals, the Company realized as revenue license fees totaling $12,000,000. In July 1997, the Company and JT granted Roche certain exclusive rights to VIRACEPT in several Asian countries. For such rights, the Company received a license fee of $2,000,000. Royalty revenues of approximately $3,852,000 have been recognized in 1998 based on estimated and actual Roche sales of VIRACEPT in its licensed territory. The Company anticipates that license fees and royalties for fiscal 1999 will range from $30,000,000 to $35,000,000. Cost of product sales The aggregate cost of product sales as a percentage of product sales was approximately 43% and 42% for 1997 and 1998, respectively. Gross margins on United States commercial sales were approximately 57% and 65% during 1997 and 1998, respectively. The Company anticipates that gross margins on United States commercial sales will improve as product sales volumes increase and certain manufacturing process and scale efficiencies are realized, and will approximate 71% in 1999. Aggregate gross margins will also be impacted by the size of the Company's patient assistance program (which provides free goods to indigent individuals), the Company's manufacturing supply arrangement with Roche (whereby Roche has the right to either purchase product at Agouron's cost plus contractually determined mark-ups or manufacture drug product for its own use, subject to contractually determined fees to be paid to Agouron) and the level of sales subject to Medicaid and other discounts or rebates in the United States. 21 Research and development Research and development ("R&D") spending increased by approximately 39% from 1997 to 1998 due to license fees for three development stage HIV products, increasing average R&D staff levels (approximately 28%) and staff-related spending (including occupancy and the addition of Alanex since late 1997) and increased expenditures for human clinical trial activities associated with the clinical development of certain of the Company's anti-cancer compounds. R&D spending increased by approximately 52% from 1996 to 1997 due generally to increasing average R&D staff levels (approximately 39%) and staff-related expenditures (including occupancy), increased expenditures in support of human clinical trials, an expanded access program associated with VIRACEPT and increased expenditures for clinical trial activities associated with AG3340 and other anti-cancer compounds. The Company anticipates that total R&D expenses in fiscal 1999, excluding the impact of any license fees or milestone expenses in either 1998 or 1999, will exceed fiscal 1998 expenses by approximately 40%. Selling, general and administrative Selling, general and administrative ("SG&A") expenses represented approximately 28% of total operating expenses (excluding the cost of product sales, royalties and write-off of in-process technology purchased) in 1998, 23% in 1997 and 10% in 1996. SG&A increased by approximately 76% from 1997 to 1998 due principally to a full year of expenses associated with the sales force and other marketing personnel. Spending increases from 1996 to 1997 were due chiefly to increasing staff levels (approximately 214%) and staff-related expenditures, certain premarketing and advertising and promotion costs associated with the launch of VIRACEPT in March 1997 and other costs associated with a growing sales and marketing infrastructure. The Company anticipates that total SG&A expenses will increase by approximately 40% in fiscal 1999 due to increasing sales and marketing activities and the support of VIRACEPT phase IV marketing studies. Royalties The Company's obligation to share VIRACEPT profits with JT is reflected in royalty expense for 1998 and represents approximately 19% of United States product sales. Royalties in fiscal 1997 were not significant. It is anticipated that royalty expense for fiscal 1999 will approximate 24% to 25% of United States product sales. Write-off of in-process technology purchased In 1997, the Company acquired Alanex, a research company engaged in the discovery of drug leads through the high-speed screening of diverse chemical libraries designed by computational methods and generated by combinatorial chemistry. Alanex was acquired in a purchase transaction through the issuance of approximately 1,992,000 equivalent shares (including 548,000 for options and warrants) of the Company's common stock valued at approximately $61,000,000, plus $1,300,000 of related acquisition costs. The purchase price was allocated to various tangible and intangible assets and either capitalized (approximately $4,800,000) or expensed (approximately $57,500,000) as in-process technology based on an 22 independent valuation of the Alanex assets, technology and research programs at the date of acquisition. Interest and other income Interest income increased by 1% from 1997 to 1998. Interest income increased by approximately 23% from 1996 to 1997 due principally to a higher average investment portfolio balance resulting from the July 1996 public offering, receipt of $15,000,000 and $9,000,000, respectively, in license fees from HLR (June 1996) and Roche (January 1997), significantly increased contract funding from JT and HLR and the exercise of employee stock options. The Company anticipates that, absent additional revenue sources or a significant change in interest rates, fiscal 1999 interest income will be less than that of fiscal 1998. Interest expense Interest expense increased in 1998 from 1997 due to borrowings under a line of credit which was used to partially fund quarterly royalties paid to JT throughout the year. Interest expense decreased in 1997 from 1996 by approximately 38% due to a decreasing level of debt and capital lease obligations from year to year. Income tax provision (benefit) The income tax provision in 1998 has been computed using an effective, combined federal and state rate of 40%. The cash obligation of such 1998 provision has been mostly offset by the utilization of its deferred tax assets. Based on its 1998 pre-tax profit and its estimates for future taxable income, the Company believes it is more likely than not that its deferred tax assets (comprised mostly of net operating loss carryforwards, deductions generated by the exercise of stock options, and research credits) will be realized and has, therefore, recorded the full tax benefit of its deferred tax assets. The Company's accumulated net deferred tax assets totaled approximately $55,900,000 and $64,100,000 at June 30, 1997 and 1998. The Company anticipates that its effective income tax rate for fiscal 1999 will range from 10% to 15%. Such decrease from fiscal 1998 is attributed to greater expected availability of R&D tax credits due to the anticipated increase in R&D spending and the anticipated reduction in R&D contract revenues. Year 2000 The Year 2000 issue results from computer programs and systems that were created to accept only two digit dates. Such systems may not be able to distinguish 20th century dates from 21st century dates. This could result in miscalculations and system failures. The Company has established a Year 2000 project team that is currently reviewing computer systems and computer controlled equipment that could be affected by this issue. In this process, the Company expects to both replace and upgrade certain systems and equipment. Additionally, the Company is in the process of contacting all of its significant external business partners to determine the extent to which the Company is vulnerable to their failure to obtain Year 2000 compliance. While the total cost of obtaining Year 2000 compliance is not known at this time, the Company believes such cost will not have a material effect on the Company's business, financial position, or results 23 of operation. However, even though the Company plans to have obtained Year 2000 compliance prior to the year 2000, the inability of the Company or its business partners to adequately address year 2000 issues could have a significant impact on the Company's business. Liquidity and Capital Resources Prior to fiscal 1998, the Company relied principally on equity financings and corporate collaborations to fund its operations and capital expenditures. In fiscal 1998, due primarily to the successful commercialization of VIRACEPT, operating activities have provided $827,000 of cash compared with using $73,467,000 in fiscal 1997. Commercial sales of VIRACEPT for 1997 and 1998 resulted in gross margins of approximately $32,370,000 and $236,654,000. At June 30, 1998, the Company had net working capital of approximately $127,728,000, an increase of $11,942,000 over June 30, 1997 levels due principally to the Company's pre-tax profit of $21,924,000. Individual working capital components significantly impacted by the commercialization of VIRACEPT include trade accounts receivable (an increase of $18,416,000), inventories (an increase of $44,906,000), accounts payable (an increase of $15,560,000) and accrued liabilities (an increase of $26,467,000, primarily due to accrued royalties payable to JT). It is anticipated that these working capital components and cash and short-term investments will continue to be significantly impacted as VIRACEPT sales increase. At June 30, 1998, the Company had cash, cash equivalents and short-term investments of approximately $87,123,000. The Company believes that its current capital resources, existing contractual commitments and anticipated VIRACEPT product sales contribution are sufficient to maintain its current operations through fiscal 1999. This belief is based on current research and clinical development plans, anticipated working capital requirements associated with the expanding commercialization of VIRACEPT, the current regulatory environment, historical industry experience in the development of therapeutic drugs and general economic conditions. The Company believes that additional financing may be required to meet the planned operating needs after fiscal 1999 if significant and increasing positive cash flows are not generated from commercial activities. Such needs would include the expenditure of substantial funds to continue and expand research and development activities, conduct existing and planned preclinical studies and human clinical trials and to support the increasing working capital requirements of a growing commercial infrastructure including manufacturing, sales and marketing capabilities. As a result, the Company anticipates pursuing various financing alternatives such as collaborative arrangements and additional public offerings or private placements of securities. If such alternatives are not available, the Company may be required to defer or restrict certain commercial activities, delay or eliminate expenditures for certain of its potential products under development, cancel licenses from third parties or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop or commercialize itself. During fiscal 1998, capital expenditures totaled $33,086,000 compared with $14,727,000 and $3,710,000 during 1997 and 1996, of which $1,579,000, $2,355,000 and $457,000 were financed through capital lease obligations. Of the total capital expenditures during 1998, 1997 and 1996, approximately $14,331,000, $4,728,000 and $318,000 represented leasehold improvement costs associated with certain of the Company's facilities. With the exception of the leasehold improvement costs, virtually all of the capital expenditures during 1998, 1997 and 1996 24 represented laboratory and office equipment and scientific instrumentation necessary to support an expanding research, development, and commercial infrastructure. Capital expenditures during 1999 are expected to be approximately $18,000,000 to support continued product commercialization, development and research activities. Of the total expected capital expenditures during 1999, approximately $4,000,000 is associated with the leasehold improvement of existing and anticipated new administrative and laboratory facilities. The Company may utilize lease or debt financing for certain expenditures if available on acceptable terms. 25 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE - ------------------------------------------- ---- Report of Independent Accountants F-1 Consolidated Balance Sheet as of June 30, 1998 and 1997 F-2 Consolidated Statement of Income (Loss) for the years ended F-3 June 30, 1998, 1997 and 1996 Consolidated Statement of Stockholders' Equity for the years ended June 30, 1998, 1997 and 1996 F-4 Consolidated Statement of Cash Flows for the years ended June 30, 1998, 1997 and 1996 F-5 Notes to Consolidated Financial Statements F-6 NOTE: All schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income (loss), of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Agouron Pharmaceuticals, Inc. and its subsidiaries at June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 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 an 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 San Diego, California July 16, 1998 F-1 AGOURON PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEET (Dollars in thousands)
June 30, ---------------------------- 1998 1997 ---------- ----------- ASSETS Current assets: Cash and cash equivalents $ 19,098 $ 52,484 Short-term investments 68,025 38,833 Accounts receivable, net 51,341 31,375 Inventories 103,706 58,800 Current deferred tax assets 564 500 Other current assets 5,247 2,209 ---------- ----------- Total current assets 247,981 184,201 Property and equipment, net 47,212 22,613 Deferred tax assets 64,644 56,000 Purchased intangibles 3,500 4,100 ---------- ----------- $ 363,337 $ 266,914 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 44,393 $ 28,833 Accrued liabilities 35,356 8,889 Deferred revenue and advances 23,563 27,567 Current deferred tax liabilities 1,139 600 Loan payable and current portion of long-term debt 15,802 2,526 ---------- ----------- Total current liabilities 120,253 68,415 ---------- ----------- Long-term liabilities: Long-term debt, less current portion 5,892 5,940 Accrued rent 1,023 1,277 ---------- ----------- Total long-term liabilities 6,915 7,217 ---------- ----------- Stockholders' equity: Common stock, no par value, 75,000,000 shares authorized, 31,053,380 and 29,429,920 shares issued and outstanding 348,482 317,133 Unrealized gains (losses) on short-term investments 384 0 Accumulated deficit (112,697) (125,851) ---------- ----------- Total stockholders' equity 236,169 191,282 ---------- ----------- Commitments $ 363,337 $ 266,914 ========== ===========
See accompanying notes to consolidated financial statements. F-2 AGOURON PHARMACEUTICALS, INC. CONSOLIDATED STATEMENT OF INCOME (LOSS) (In thousands, except per share amounts)
Years ended June 30, -------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Revenues: Product sales $ 409,298 $ 56,969 $ 0 Contracts 38,855 65,094 40,955 License fees and royalties 18,352 10,000 15,000 ------------- ------------- ------------- 466,505 132,063 55,955 ------------- ------------- ------------- Operating expenses: Cost of product sales 172,644 24,599 0 Research and development 150,657 108,137 71,010 Selling, general and administrative 58,012 32,941 8,082 Royalties 68,423 0 0 Write-off of in-process technology purchased 0 57,500 0 ------------- ------------- ------------- 449,736 223,177 79,092 ------------- ------------- ------------- Operating income (loss) 16,769 (91,114) (23,137) ------------- ------------- ------------- Other income (expenses): Interest and other income 5,907 5,873 4,776 Interest expense (752) (142) (228) ------------- ------------- ------------- 5,155 5,731 4,548 ------------- ------------- ------------- Income (loss) before income taxes 21,924 (85,383) (18,589) Income tax provision (benefit) 8,770 (42,577) 934 ------------- ------------- ------------- Net income (loss) $ 13,154 $ (42,806) $ (19,523) ============= ============= ============= Earnings per share: Basic $ .43 $ (1.59) $ (.99) ============= ============= ============= Diluted $ .40 $ (1.59) $ (.99) ============= ============== ============= Shares used in calculation of: Basic 30,571 26,946 19,688 Diluted 33,214 26,946 19,688
See accompanying notes to consolidated financial statements. F-3 AGOURON PHARMACEUTICALS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in thousands)
Unrealized gains (losses) on Common Stock short-term Accumulated Shares Amount investments Deficit Total ---------- ----------- ----------- ----------- ----------- Balance at June 30, 1995 14,718,564 $ 76,113 $ 0 $ (63,522) $ 12,591 Stock issuances: Public sale 6,000,000 78,579 -- 78,579 Exercise of stock options 586,412 2,990 -- 2,990 Exercise of stock warrants 90,000 283 -- 283 Employee stock purchase plan 68,398 663 -- 663 Net loss -- -- (19,523) (19,523) ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1996 21,463,374 158,628 0 (83,045) 75,583 Stock issuances: Public sale 5,470,000 77,245 -- 77,245 Acquisition of Alanex 1,444,236 61,051 -- 61,051 Exercise of stock options 980,472 6,720 -- 6,720 Employee stock purchase plan 71,838 1,389 -- 1,389 Tax benefit of stock options exercised -- 12,100 -- 12,100 Net loss -- -- (42,806) (42,806) ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1997 29,429,920 317,133 0 (125,851) 191,282 Stock issuances: Exercise of stock options 1,344,104 11,031 -- 11,031 Exercise of stock warrants 169,522 680 -- 680 Employee stock purchase plan 109,834 2,742 -- 2,742 Tax benefit of stock options exercised -- 16,896 -- 16,896 Change in unrealized gains (losses) on short-term investments 384 384 Net income -- -- 13,154 13,154 ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1998 31,053,380 $ 348,482 $ 384 $ (112,697) $ 236,169 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 AGOURON PHARMACEUTICALS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Years ended June 30, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Cash received from product sales, contracts and licenses $ 442,484 $ 116,692 $ 61,376 Cash paid to suppliers, employees and service providers (446,863) (195,890) (73,738) Interest received 5,958 5,873 4,776 Interest paid (752) (142) (228) ----------- ----------- ----------- Net cash provided (used) by operating activities 827 (73,467) (7,814) ----------- ----------- ----------- Cash flows from investing activities: Proceeds from maturities/sales of short-term investments 147,292 127,501 59,686 Purchases of short-term investments (176,100) (91,227) (118,224) Purchase of property and equipment (31,507) (12,372) (3,252) Cost to acquire Alanex, net of cash acquired 0 608 0 ----------- ----------- ----------- Net cash provided (used) by investing activities (60,315) 24,510 (61,790) ----------- ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of common stock 14,453 85,354 82,515 Proceeds from credit line 53,600 0 0 Principal payments on credit line, long-term debt, and capital leases (41,951) (364) (818) ----------- ----------- ----------- Net cash provided (used) by financing activities 26,102 84,990 81,697 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (33,386) 36,033 12,093 Cash and cash equivalents at beginning of year 52,484 16,451 4,358 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 19,098 $ 52,484 $ 16,451 =========== =========== =========== Reconciliation of net loss to net cash provided (used) by operating activities: Net income (loss) $ 13,154 $ (42,806) $ (19,523) Depreciation and amortization 9,087 3,910 2,411 Write-off of in-process technology purchased 0 57,500 0 Provision (benefit) for deferred income taxes 8,727 (43,800) 0 Net (increase) decrease in inventories (44,906) (58,547) 0 Net (increase) decrease in accounts receivable and other current assets (23,004) (28,209) (1,198) Net increase (decrease) in accounts payable, accrued liabilities, deferred revenue and advances, and other liabilities 37,769 38,485 10,496 ---------- ---------- ----------- Net cash provided (used) by operating activities $ 827 $ (73,467) $ (7,814) =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 AGOURON PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - The Company and its significant accounting policies The Company Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company") was organized and incorporated in California in June 1984. Agouron is an integrated pharmaceutical company committed to the discovery, development, manufacturing and marketing of innovative therapeutic products engineered to inactivate proteins which play key roles in cancer, AIDS and other serious diseases. The Company, through its own sales and marketing organization, is currently marketing in the United States its first drug, VIRACEPT(r) (nelfinavir mesylate) for treatment of HIV infection. The Company is also conducting pivotal phase II/III clinical trials for AG3340 for treatment of lung and prostate cancer. In addition, Agouron is expected to initiate a phase II/III pivotal clinical trial of REMUN(tm) (AG1661), an immune-based therapeutic agent for treatment of HIV infection and AIDS being co-developed by Agouron and The Immune Response Corporation ("IRC"). Further, the Company has a number of programs in progress for discovery or development of other new drugs in the fields of cancer, viral disease and other serious diseases. The Company is also using the proprietary core drug discovery technology of Alanex Corporation ("Alanex"), a wholly-owned subsidiary of the Company, to accelerate the steps necessary to discover small-molecule drug candidates, from the initial identification of compounds that exhibit activity against selected biological targets to the progression of these compounds to drug candidates for human clinical trials. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. 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, liabilities, revenues and expenses and related disclosures as of the date of the financial statements. Actual results could differ from such estimates. Cash and cash equivalents The Company considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and which mature within 90 days from date of purchase. F-6 Short-term investments Short-term investments consist principally of government or government agency securities, corporate notes and bonds, commercial paper and certificates of deposit with original maturities of three to thirty-six months, and corporate equity securities. The Company has classified its short-term investments as available-for-sale. Included in short-term investments at June 30, 1998 and 1997 is $1,262,000 and $588,000 of accrued interest receivable. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Concentration of credit and market risk The Company invests its excess cash principally in marketable securities from a diversified portfolio of institutions with strong credit ratings and, by policy, limits the amount of credit exposure at any one institution. These investments are generally not collateralized and primarily mature within one year. The Company has not realized any material losses from such investments in 1998, 1997 or 1996. Financial instruments and risk management The Company has contract manufacturing operations in Europe and Asia. Accordingly, the Company from time-to-time enters into forward contracts to manage its exposure to fluctuations in foreign currency exchange rates. At June 30, 1998, the Company had several forward contracts with maturities of less than six months to purchase Japanese Yen for approximately $9,426,000. These contracts are designated and effective as hedges and, accordingly, gains and losses are recognized in the same period the offsetting gains and losses of hedged transactions are realized and recognized. Property and equipment Property and equipment is recorded at cost. Depreciation is computed using principally the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized over the life of the lease. Purchased intangibles In conjunction with the 1997 acquisition of Alanex, the Company has recorded purchased intangibles (primarily drug discovery technology and chemical compound libraries) which are being amortized on a straight-line basis over their estimated useful lives of seven years. Deferred revenue and advances Approximately $22,414,000 of cash received from JT has been classified as deferred contract revenue and advances. Approximately $21,452,000 of the cash received from JT represents JT's F-7 advance of the Company's VIRACEPT development funding obligation which was completed in March 1998. Such amounts are to be repaid by the Company out of future profits, if any, generated by sales of VIRACEPT in the United States. The balance of the payments from JT are non-refundable and are being recognized as contract revenue on a prospective basis generally as collaborative program expenses are incurred. Product sales The Company ships VIRACEPT to wholesalers throughout the United States and recognizes sales revenue upon shipment. Sales are reported net of discounts, rebates, chargebacks and product returns. Also included in product sales for 1998 and 1997 are approximately $50,979,000 and $1,441,000 of sales (at cost plus contractually determined mark-ups) to Roche of clinical and commercial drug supplies to be used by Roche in its licensed territory. The Company receives a royalty on Roche's subsequent commercial sales of such drug supplies. Contract revenues Contract revenues are earned and recognized generally as contract research costs are incurred according to the provisions of each underlying agreement. Amounts received in advance of performance are recorded as deferred revenue. Contract milestone payments are recognized as revenues upon the completion of the milestone event or requirement. License fees and royalties License fees are recognized as revenue 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 revenues are recognized based on estimated and actual sales of licensed products in licensed territories. Research and development costs Research and development costs are expensed in the period incurred. Income tax provision (benefit) The Company records a provision (benefit) for income taxes using the liability method. Current income tax expense (benefit) generally is the amount of income taxes expected to be payable for the current year. Deferred taxes are recorded by applying applicable tax rates to cumulative temporary differences based on when and how they are expected to affect the tax return. F-8 Earnings (loss) per share The Company computes earnings per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share" Basic earnings (loss) per share is based upon the weighted average number of common shares outstanding during a period. Diluted earnings (loss) per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents during a period. Common stock equivalents are options under the Company's stock option plans which are included in the earnings per share computation under the treasury stock method and common shares expected to be issued under the Company's employee stock purchase plan. Common stock equivalents of approximately 2,643,000 shares for 1998 were used to calculate diluted earnings per share. For 1997 and 1996, common stock equivalents of approximately 3,168,000 and 2,014,000 shares were not used to calculate diluted earnings (loss) per share because of their anti-dilutive effect. There are no reconciling items in calculating the numerator for basic and diluted earnings (loss) per share for any of the periods presented. Stock-based compensation plans The Company measures compensation expense for its stock-based compensation plans using the intrinsic method and provides pro-forma disclosures of net income and earnings (loss) per share as if the fair value-based method had been applied in measuring compensation expense. Statement of cash flows For purposes of the Statement of Cash Flows, cash equivalents are highly liquid investments purchased with an original maturity of ninety days or less. Non-cash financing and investing activities are comprised primarily of capital lease obligations of $1,579,000, $2,355,000 and $457,000 for 1998, 1997 and 1996 and the acquisition of Alanex in 1997. New accounting standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("FAS 130") "Reporting Comprehensive Income," which requires additional disclosures to be adopted beginning with the quarter ending September 30, 1998. Under FAS 130, the Company will be required to display comprehensive income and its components as part of the Company's complete set of financial statements. In June 1997, the FASB also issued FAS 131, "Disclosures about Segments of an Enterprise and Related Information," which requires additional disclosures to be adopted on June 30, 1999. FAS 131 requires that the Company report financial and descriptive information about its reportable operating segments. The Company is evaluating the impact on its disclosures, if any. F-9 Note 2 - Short-term investments The cost of the Company's investment portfolio by type of security and contractual maturity in the balance sheet is as follows:
June 30, ---------------------------------- 1998 1997 -------------- -------------- (Dollars in thousands) Type of security: Corporate debt $ 46,023 $ 24,401 U.S. Treasury and agencies 10,766 11,994 Other interest-bearing 9,462 2,438 Corporate equity 1,774 0 ------------- -------------- $ 68,025 $ 38,833 ============= ============== Contractual maturity: Maturing in less than twelve months $ 41,389 $ 35,827 Maturing between twelve and thirty-two months 26,636 3,006 ------------- -------------- $ 68,025 $ 38,833 ============= ==============
The cost of securities sold, if any, is based upon the specific identification method. The net unrealized holding gain on available-for-sale securities included as a separate component of stockholders' equity at June 30, 1998 totaled $384,000. There were no material unrealized gains or losses nor any material differences between the estimated fair values and costs of securities in the investment portfolio at June 30, 1997. Realized gains and losses on the disposal of available-for-sale securities during 1998 totaled $20,000 and $2,000, respectively. During 1997 such gains and losses totaled $12,000 and $4,000, respectively. During 1996, such gains totaled $22,000. F-10 Note 3 - Composition of certain financial statement captions
June 30, -------------------------- 1998 1997 ---------- ----------- (Dollars in thousands) Accounts receivable, net: Trade $ 44,471 $ 26,055 Contract 2,451 4,668 Royalties 2,339 0 Employee 252 269 Other 1,828 383 ---------- ----------- $ 51,341 $ 31,375 ========== =========== Inventories: Raw materials and work in process $ 95,517 $ 57,883 Finished goods 8,189 917 ---------- ----------- $ 103,706 $ 58,800 ========== =========== Property and equipment, net: Scientific instrumentation $ 26,869 $ 16,614 Leasehold improvements 25,135 10,804 Computer equipment 15,619 8,892 Furniture and fixtures 3,910 2,464 ---------- ----------- 71,533 38,774 Less accumulated depreciation and amortization (24,321) (16,161) ---------- ----------- $ 47,212 $ 22,613 ========== =========== Accrued liabilities: Royalties $ 21,410 $ 0 License fees 6,000 0 Vacation 2,955 1,932 Clinical studies 2,731 3,578 Other 2,260 3,379 ---------- ----------- $ 35,356 $ 8,889 ========== ===========
F-11 Note 4 - Significant contract arrangements Japan Tobacco Inc. In February 1994, the Company entered into a strategic alliance with JT in the field of anti-viral drugs for the treatment of infections caused by hepatitis C and the herpes family of viruses. In December 1994, the Company added its anti-HIV drug, VIRACEPT, to the JT collaboration with the execution of a world-wide development and licensing agreement. Agouron and JT share equally the costs of further development of VIRACEPT. Currently, Agouron has exclusive commercial rights to VIRACEPT (with the right to sublicense) in North America and JT has exclusive commercial rights to VIRACEPT (with the right to sublicense) in parts of Japan. The Company and JT share profits and/or royalties equally from the world-wide commercialization of VIRACEPT. Under the combined terms of the JT agreements, the Company has incurred costs of $51,898,000, $71,825,000 and $46,969,000 and recognized corresponding contract revenues of $17,359,000, $48,886,000 and $37,197,000 for the years ended June 30, 1998, 1997 and 1996. Roche The Company and JT have granted Roche certain exclusive royalty bearing marketing rights to VIRACEPT outside of North America and parts of Japan. For such rights, the Company has received (and recognized as revenue) initial license fees and additional product approval license fees. The Company also receives royalties based either on Roche's sales of VIRACEPT or, in certain circumstances, Invirase(r) and Fortavase(r) (saquinavir), Roche's HIV protease inhibitors. VIRACEPT license fees and royalties from Roche totaled $17,852,000 and $9,000,000 for the years ended June 30, 1998 and 1997. HLR In June 1996, Agouron granted HLR world-wide development rights in two anti-cancer drugs and agreed to collaborate with HLR on an additional early-stage anti-cancer drug discovery program. In return for such rights, HLR paid $15,000,000 in initial license fees and agreed to bear 80% of certain future development costs and to provide annual research support to the Company of $3,000,000. In December 1997, Agouron and HLR agreed to end this anti-cancer research and development collaboration. The Company has regained all commercial rights to the anti-cancer drugs previously within the scope of the collaboration. Under the terms of the anti-cancer agreements with HLR which have been terminated, the Company incurred costs of $23,486,000 and $17,854,000 and recognized corresponding contract revenues of $15,428,000 and $14,270,000 for the years ended June 30, 1998 and 1997. The Immune Response Corporation In June 1998, the Company entered into a binding letter of intent with IRC to collaborate on final development and commercialization of REMUNE, an immune-based therapeutic agent F-12 discovered by IRC and currently the subject of several clinical studies including a large phase III clinical trial. The two companies intend to enter promptly into a definitive agreement and will endeavor to complete development and registration of REMUNE in 1999. IRC will manufacture commercial supplies of REMUNE, and Agouron will have exclusive rights to market REMUNE in North America, Europe and certain other countries. The two companies will share equally all profits from the commercialization of REMUNE in the licensed territory. Agouron paid an initial $10,000,000 license fee to IRC in June 1998 and also purchased 118,256 newly issued common shares of IRC for $2,000,000. The Company's development funding obligation commences October 15, 1998 and, assuming ongoing successful development, registration and approval of REMUNE, the Company may pay to IRC up to $53,000,000 in additional development and milestone payments and $12,000,000 in purchases of additional IRC common stock. Shionogi & Co., Ltd. In June 1998, the Company entered into a binding letter of intent with Shionogi & Co., Ltd. ("Shionogi") to develop and commercialize AG1549, a second-generation non-nucleoside reverse transcriptase inhibitor ("NNRTI") for the treatment of HIV infection. Discovered by Shionogi, AG1549 is currently the subject of several clinical trials evaluating its dose and its concomitant use with other antiretroviral treatments. Agouron has exclusive world-wide rights to the development and commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron paid an initial $10,000,000 license fee in June 1998. Agouron may pay, assuming ongoing successful development, registration and approval of AG1776, additional license fees of up to $30,000,000. In addition, Agouron will pay Shionogi royalties based on sales, if any, of AG1549. Japan Energy Corporation In June 1998, the Company entered into an agreement with Japan Energy Corporation ("JE") to develop and commercialize AG1776, a novel protease inhibitor for the treatment of HIV infection. Agouron has exclusive world-wide rights to the development and commercialization of AG1776 except in Japan, South Korea, North Korea and Taiwan; JE will manufacture bulk compound for use in final drug product. Agouron incurred an initial $6,000,000 license fee in June 1998. Agouron may pay, assuming ongoing successful development, registration and approval of AG1776, additional license fees of up to $20,000,000. In addition, Agouron will pay JE royalties based on sales, if any, of AG1776. F-13 Note 5 - Long-term debt Long-term debt and capital lease obligations are as follows:
June 30, ------------------------------- 1998 1997 ------------- -------------- (Dollars in thousands) Notespayable, secured with personal property and a certificate of deposit; interest at CD rate plus 1.5%, paid off in June 1998. $ 0 $ 142 Capital leases with interest rates between 5.86% and 16.5%, maturing at various dates through June 2003. 3,214 2,462 Line of credit, $20,000,000 secured; interest at bank reference rate or LIBOR plus 1.5%, expiring September 30, 1998. 15,000 0 Unsecured, non-interest bearing, term obligation; face value of $4,500,000; discounted to an 8.95% effective rate, includes imputed interest of $548,000 due June 28, 2001. 3,480 3,194 Term obligation for tenant improvements, interest at 11% per annum, payable in monthly installments, paid off in October 1997. 0 2,668 ------------- -------------- Total long-term debt and capital lease obligations 21,694 8,466 Current portion (15,802) (2,526) ------------- -------------- $ 5,892 $ 5,940 ============= ==============
Maturities of long-term debt, excluding capital leases, are as follows: 1999 - $15,000,000; 2000- $0; and 2001 - $4,500,000, less imputed interest of $1,020,000. F-14 Note 6 - Income taxes (Dollars in thousands) The components of the provision (benefit) for income taxes are as follows:
1998 1997 1996 --------- --------- -------- Year ended June 30, Current: Federal $ 0 $ 0 $ 0 State 43 1 1 Foreign 0 1,222 933 --------- --------- -------- 43 1,223 934 --------- --------- -------- Deferred: Federal 8,495 (37,800) 0 State 232 (6,000) 0 Foreign 0 0 0 --------- --------- -------- 8,727 (43,800) 0 --------- --------- -------- $ 8,770 $ (42,577) $ 934 ========= ========= ========
The income tax reconciliation from income (loss) before income taxes computed at the federal statutory rate (34%) to the Company's actual income tax provision is as follows:
Year ended June 30, 1998 1997 1996 --------- --------- -------- Tax at U.S. federal statutory rate $ 7,454 $ (29,030) $ (6,320) State taxes, net of federal benefit 181 1 1 Foreign taxes 0 1,222 933 Purchase accounting book/ tax basis differences 0 19,781 0 Change in valuation allowance 0 (42,449) 6,245 Other 1,135 415 75 Adjustments to carryover amounts 0 7,483 0 --------- --------- -------- $ 8,770 $ (42,577) $ 934 ========= ========= ========
The Company's deferred tax assets and liabilities are as follows: June 30 ---------------------- 1998 1997 --------- --------- Book and tax depreciation/amortization differences $ 5,891 $ 831 Accrued liabilities 1,951 1,363 Net operating loss carryforwards 51,281 49,348 Tax credits 6,956 5,676 Other (2,010) (1,318) --------- --------- 64,069 55,900 Valuation allowance 0 0 --------- --------- Deferred taxes, net $ 64,069 $ 55,900 ========= ========= The Company has not recorded current provisions for United States federal income taxes due to net operating losses for tax reporting purposes. At June 30, 1998, the Company had net operating loss carryforwards for federal tax reporting purposes of approximately $150,000,000 expiring from 2000 to 2013. The net operating loss includes the tax benefit related to the exercise of stock options, which benefit was recorded to common stock. The Company also has F-15 federal research and development credit carryforwards of approximately $4,800,000 at June 30, 1998. The future utilization of net operating loss carryforwards for federal income tax purposes may be impacted by the issuance of additional equity securities. Due to California's partial conformity with federal provisions regarding net operating loss and research and development credit carryforwards, and as a result of the Company's use of certain state tax planning strategies, for state tax reporting purposes at June 30, 1998, the Company has no net operating loss carryforwards and has research and development credit carryforwards of approximately $2,200,000. Such credits do not expire. Based on its 1998 operating results and its estimates of future taxable income, the Company believes that it is more likely than not that its deferred tax assets (comprised mostly of net operating loss carryforwards and research credits) will be realized and has therefore recorded the full tax benefit of its deferred tax assets as of June 30, 1998. Foreign tax expense represents certain withholding taxes associated with collaboration payments from JT. F-16 Note 7 - Stockholders' equity Stock Options The Company's stock option plans, as amended, 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 at the date of grant and, for certain non-qualified stock options, the price shall not be less than 85% of the fair market value of the shares at the date of grant and others may be at any price determined by the Board of Directors. The options expire not later than ten years from the date of the grant and generally become exercisable ratably over a three or four year period beginning one year from the grant date. In February 1998, the Board of Directors adopted the most recent plan and reserved 1,000,000 shares for issuance thereunder. At June 30, 1998, the Company had 1,898,556 shares of common stock available for future grant under its stock option plans. The following table summarizes stock option activity for 1996 through 1998:
Shares Prices ------------- ----------------- Outstanding June 30, 1995 5,171,384 $ .24- $12.25 Options granted 2,324,950 11.78- 23.00 Options exercised (586,412) 2.70- 9.19 Options canceled (81,208) 3.94- 19.57 ------------- Outstanding June 30, 1996 6,828,714 2.70- 23.00 Alanex options assumed 378,084 .27- 3.98 Options granted 2,798,500 15.19- 47.13 Options exercised (980,472) .27- 22.19 Options canceled (205,536) 4.32- 36.35 ------------- Outstanding June 30, 1997 8,819,290 .27- 47.13 Options granted 1,115,394 28.00- 55.13 Options exercised (1,344,104) .27- 34.82 Options canceled (169,312) .27- 55.13 ------------- Outstanding June 30, 1998 8,421,268 $ .27- $55.13 =============
F-17 The following table summarizes information concerning outstanding and exercisable options as of June 30, 1998:
Options Outstanding Options Exercisable ------------------------------------------------- -------------------------- Number Weighted Weighted Number Weighted Outstanding Average Average Exercisable Average Ranges of Exercise as of Remaining Exercise as of Exercise Prices June 30, 1998 Life (years) Price June 30, 1998 Price ------------- -------------- --------------- ------------- ---------- Less than $20.00 3,601,287 6.14 $ 8.70 2,810,426 $ 7.47 $20.00 to $40.00 3,276,381 8.25 27.18 1,149,617 23.74 Greater than $40.00 1,543,600 8.99 42.56 370,058 41.26 ------------- -------------- -------------- ------------- ------------- 8,421,268 7.48 $ 22.10 4,330,101 $ 14.68 ============= ============== ============== ============= =============
The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock option plans. Had compensation expense for the Company's stock option plans been determined based upon the fair value method prescribed under FAS 123, the Company's reported results would have been impacted as follows:
(In thousands, except per share amounts) 1998 1997 1996 --------- -------- --------- Net income (loss) As reported $ 13,154 $(42,806) $(19,523) Compensation expense: Stock options (19,891) (9,496) (1,133) Employee stock purchase plan (1,441) (394) (204) -------- ------- -------- Pro-forma $ (8,178) $(52,696) $(20,860) ======== ======== ======== Pro-forma earnings (loss) per share: Basic $ (.27) $ (1.96) $ (1.06) Diluted $ (.27) $ (1.96) $ (1.06)
The weighted-average 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 1998, 1997 and 1996, respectively: expected volatility of 50% each year; risk-free interest rate of 5.7%, 6.1% and 6.1%; an average expected life of 3 years, 4 years and 4 years; and no dividends. The weighted average fair value of stock option grants was $16.57 in 1998, $15.25 per share in 1997 and $8.97 per share in 1996. In connection with its 1997 acquisition of Alanex, the Company assumed all of the issued and outstanding options of Alanex which resulted in options to purchase an aggregate of 378,084 shares of the Company's common stock at exercise prices ranging from $.27 to $3.98 per share. Employee Stock Purchase Plan The Company has a stock purchase plan in which eligible employees may purchase shares of the Company's common stock through payroll deductions. A total of 500,000 shares of common stock have been reserved for issuance under the plan, of which 131,156 shares remain available for purchase at June 30, 1998. Funds deducted from participating employees' salaries are used to purchase common stock at prices equal to 85% of the fair market value of the common stock on either the first or last day of a purchase period. During 1998, 109,834 shares were issued at a F-18 price of $24.97 per share. During 1997, 9,730 shares were issued at a price of $14.29 per share, 47,036 shares were issued at a price of $17.37 per share and 15,072 shares were issued at a price of $28.69 per share. During 1996, 12,262 shares were issued at a price of $4.94 per share, 46,480 shares were issued at a price of $9.99 per share and 9,656 shares were issued at a price of $14.29 per share. Under FAS 123, pro-forma compensation expense equal to the fair value of the purchase rights granted under the employee stock purchase plan was estimated using the Black-Scholes model with the following assumptions for 1998, 1997 and 1996: an expected life of one year; expected volatility of 50 percent; a risk-free interest rate of 5.6 percent; and no dividends. The weighted-average fair value of purchase rights granted was $13.12 per share in 1998, $5.96 per share in 1997 and $3.47 per share in 1996. Warrants In connection with its 1997 acquisition of Alanex, the Company assumed an issued and outstanding warrant to purchase Alanex common stock. Accordingly, at June 30, 1997, a warrant to purchase an aggregate of 169,522 shares of the Company's common stock at an exercise price of $4.01 per share was outstanding. In July 1997, the warrant was exercised in its entirety generating net proceeds to the Company of approximately $679,800. Stockholder Rights Plan In November 1996, the Company's Board of Directors declared a dividend of one preferred stock purchase right ("Right") for each outstanding share of the Company's common stock held on the date (this dividend now amounts to one half of a Right per share of common stock now outstanding as a result of the two-for-one split of common stock in August 1997). The Rights will expire 10 years after issuance, and will be exercisable only if a person or group becomes the beneficial owner of 15% or more of the common stock (such person or group, a "15% holder") or commences a tender or exchange offer which would result in the offeror beneficially owning 15% or more of the common stock. Each Right will entitle stockholders to buy one one-ten thousandth of a share of Series B Participating Preferred Stock of the Company at an exercise price of $500.00 per share subject to certain anti-dilution adjustments. If a person or group accumulates 15% or more of the common stock, each Right (other than Rights held by a 15% holder and certain related parties, which will be voided) will be adjusted so that upon exercise the holder will have the right to receive that number of shares of common stock (or in certain circumstances, a combination of securities and/or assets) having a value of twice the exercise price of the Right. In addition, if following the public announcement of the existence of a 15% holder, the Company is involved in a merger or business combination or a sale of 50% or more of the Company's assets or earning power, each Right (other than Rights held by a 15% holder and certain related parties, which will be voided) will represent the right to purchase, at the exercise price, common stock of the acquiring entity having a value of twice the exercise price at the time. The Board of Directors will also have the right, following the public announcement of the existence of a 15% holder, to cause Rights (other than Rights held by the 15% holder and certain related parties, which will be voided) to be exchanged for one share of common stock (presently at an exchange ratio of two shares of common stock for each Right). F-19 Note 8 - Commitments Certain scientific instrumentation, computers and other equipment are subject to leases which are classified as capital leases. At June 30, 1998 and 1997, $4,331,000 ($3,408,000, net) and $2,895,000 ($2,629,000, net) of such leased equipment are included in property and equipment. Rental expenses (principally for leased facilities under long-term operating lease commitments) were $5,031,000, $3,509,000 and $2,548,000 for 1998, 1997 and 1996. Future minimum payments for capital and operating leases at June 30, 1998 are as follows:
Capital Leases Operating Leases -------------- ---------------- (Dollars in thousands) 1999 $ 819 $ 7,472 2000 812 5,507 2001 818 5,314 2002 578 3,943 2003 243 2,630 Thereafter 0 2,047 ------------ -------------- Total minimum lease payments 3,270 $ 26,913 ============== Less amount representing interest (56) ------------- Obligations under capital leases $ 3,214 ============
The Company is involved in certain legal proceedings generally incidental to its normal business activities. While the outcome of any such proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any such existing matters should have a material adverse effect on its financial position or results of operations. F-20 Note 9 - Alanex acquisition In April 1997, the Company executed a merger agreement with Alanex, which now operates as a wholly-owned subsidiary of Agouron. For all outstanding shares of Alanex common stock and related options and warrants, approximately 2,000,000 shares of Agouron common stock were issued, subject to certain restrictions. Such shares had an aggregate fair market value on the measurement date of approximately $61,000,000 and transaction costs were approximately $1,300,000. Of the total purchase price (including transaction costs), $57,500,000 was allocated (as more fully described below) to certain intangible assets and expensed as in-process technology and approximately $4,800,000 was allocated to certain tangible and intangible assets and capitalized. The identifiable intangibles of Alanex include several drug research and discovery programs, a proprietary drug discovery technology, a chemical compound library and an assembled work force. These intangibles were valued using either a replacement cost approach (work force, library and proprietary technology) or an income approach (research programs). Values assigned to the chemical compound library and proprietary drug discovery technology have been capitalized, as such intangibles are of a general nature and may have a number of alternative future uses. Values assigned to the drug discovery programs have been expensed, as such programs are pursuing specific drug targets or chemical compounds, the technological feasibility of which having not been demonstrated, and there may be no alternative future uses for such targets or chemical compounds if the programs are ultimately less than successful. The Company's statement of income (loss) includes the results of operations related to the acquisition since April 1997. The following are unaudited pro-forma results of operations as if the transaction had been consummated on July 1, 1995: (In thousands except for per share amounts.) Year ended June 30, 1997 1996 (unaudited) (unaudited) Revenues $ 138,872 $ 62,392 ============= ============= Net income (loss) $ 14,276 $ (19,421) ============= ============= Earnings (loss) per share $ .51 $ (.92) ============= ============= F-21 Note 10 - Quarterly financial data (unaudited) (In thousands, except for per share amounts)
Quarter Ended --------------------------------------------------------------- September 30 December 31 March 31 June 30 ------------- ------------- ------------- ---------- 1997 Product sales $ 0 $ 0 $ 13,401 $ 43,568 Gross margin from product sales 0 0 7,378 24,992 Net loss (14,447) (12,556) (4,999) (10,804) Earnings (loss) per share: Basic (.57) (.46) (.18) (.38)(1) Diluted (.57) (.46) (.18) (.38)(1) 1998 Product sales $ 79,502 $ 91,800 $ 111,950 $ 126,046 Gross margin from product sales 45,429 53,858 62,730 74,637 Net income (loss) 3,630 4,922 13,525 (8,923) Earnings (loss) per share: Basic .11 .16 .44 (.29)(2) Diluted .11 .15 .41 (.29)(2)
(1) During the fourth quarter of 1997, the Company recorded a write-off of $57,500,000 ($2.03 per share) of in-process technology associated with the acquisition of Alanex, partially offset by the realization of $43,800,000 ($1.54 per share) of deferred tax assets associated with the Company's expectation of future taxable income. (2) During the fourth quarter of 1998, the Company incurred in-licensing costs of $26,000,000 (tax-effected $.50 per share) for commercial rights to three development stage anti-HIV products. F-22 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 29 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company are as follows:
Name Age Position ---- --- -------- Peter Johnson 53 President, Chief Executive Officer and Director Marvin R. Brown, M.D. 51 Vice President, and President of Alanex Neil J. Clendeninn, M.D., Ph.D. 49 Corporate Vice President, Head of Clinical Affairs Steven S. Cowell 49 Corporate Vice President, Finance and Chief Financial Officer William C. Denby 43 Vice President, Head of Marketing and Sales Gary E. Friedman 51 Corporate Vice President, General Counsel, Secretary and Director Donna C. Nichols 41 Vice President, Head of Corporate Communications Barry D. Quart, Pharm.D. 41 Senior Vice President, Head of Drug Development R. Kent Snyder 44 Senior Vice President, Head of Commercial Affairs Michael D. Varney, Ph.D. 40 Vice President, Head of Research Stephanie Webber, Ph.D. 50 Vice President, Head of Development Pharmacology Glenn R. Zinser 55 Corporate Vice President, Head of Operations John N. Abelson, Ph.D.(1) 59 Director Patricia M. Cloherty(2) 56 Director A.E. Cohen(1) 62 Director Michael E. Herman(1) 57 Director Irving S. Johnson, Ph.D. 73 Director Antonie T. Knoppers, M.D.(2) 83 Director Melvin I. Simon, Ph.D.(2) 61 Director
(1) Member of Directors Compensation Committee (2) Member of Audit Committee 30 Peter Johnson, a founder of the Company, has served as a director and as president and chief executive officer of the Company since its inception in 1984. Through 1989, Mr. Johnson held various positions with The Agouron Institute, including executive director. Mr. Johnson received a M.A. from the University of California, San Diego. Marvin R. Brown joined the Company in 1997 as vice president, and president of Alanex. In 1991, Dr. Brown founded Alanex and, from 1993 until joining the Company, served as president, chief executive officer and chairman of the board of Alanex. Prior to joining Alanex, Dr. Brown served as professor of medicine and surgery and director of the peptide biology laboratory at the University of California, San Diego from 1986 through 1991 and was on the faculty of the Salk Institute for Biological Studies from 1975 to 1986. Dr. Brown received his M.D. from the University of Arizona. Neil J. Clendeninn joined the Company in 1993 as vice president, clinical affairs. In 1997, Dr. Clendeninn was promoted to corporate vice president, head of clinical affairs. From 1985 until joining the Company, Dr. Clendeninn held various positions with Burroughs Wellcome Co., including head of the chemotherapy section from 1988. From 1981 through 1985, Dr. Clendeninn worked with the clinical oncology and clinical pharmacology groups at the National Institutes of Health. Dr. Clendeninn received a M.D. and a Ph.D. in pharmacology from New York University. Steven S. Cowell joined the Company in 1991 as vice president, finance and chief financial officer. In 1997, Mr. Cowell was promoted to corporate vice president. From 1982 until joining the Company, Mr. Cowell held various positions, the most recent of which was vice president and controller at Cetus Corporation, a public biotechnology company primarily engaged in the development, manufacture and marketing of pharmaceutical products. Mr. Cowell is a Certified Public Accountant in California and received a B.S. in business administration from the University of California, Berkeley. William C. Denby joined the Company in 1995 and in 1997 was named vice president, head of marketing and sales. Previously, Mr. Denby served as senior director of marketing and sales. From 1978 until joining the Company, Mr. Denby held various positions at Marion Laboratories, Inc. (now Hoechst Marion Roussel), including strategic planning manager and managed care marketing manager. Mr. Denby received a B.A. in English from the State University of New York, and holds a M.B.A. in Finance from Rockhurst College. Donna C. Nichols joined the Company in 1987 and in 1997 was named vice president, head of corporate communications. Previously, Ms. Nichols held various positions within the Company, most recently as senior director, corporate communications. Ms. Nichols attended Kent State University. Gary E. Friedman, a founder of the Company, has served as a director since its inception, as the secretary of the Company since 1986 and as vice president and general counsel since 1991. In 1997, Mr. Friedman was promoted to corporate vice president. Previously, from 1982 until joining the Company, Mr. Friedman was a principal of the law firm of Friedman, Jay & Cramer, a Professional Corporation. Mr. Friedman is a California Certified Specialist in Taxation. Mr. 31 Friedman received a J.D. and a M.B.A. from the University of California, Berkeley and a L.L.M. in taxation from the University of San Diego. Barry D. Quart joined the Company in 1993 as vice president, regulatory affairs. In 1997, Mr. Quart was named to senior vice president, head of drug development. From 1983 until joining the Company, Dr. Quart held various positions with Bristol-Myers Squibb Company, including executive director of international regulatory affairs from 1992. Dr. Quart received a Pharm.D. in clinical pharmacy from the University of California, San Francisco. R. Kent Snyder joined the Company in 1991 as vice president, business development. In 1995, Mr. Snyder's title was changed to vice president, commercial affairs and in 1997, he was named senior vice president, corporate affairs. From 1982 until joining the Company, Mr. Snyder held various positions with Marion Laboratories, Inc. (now Hoechst Marion Roussel), including director of U.S./European licensing. Prior to his employment at Marion, from 1978 to 1982, he held various sales and marketing positions with Hoffmann-LaRoche Ltd. Mr. Snyder received a M.B.A. from Rockhurst College. Michael D. Varney joined the Company in 1987 and in 1997 was promoted to vice president, head of research. A synthetic organic chemist, Dr. Varney has been involved in all aspects of drug discovery at the Company since its inception. Dr. Varney received his B.S. in Chemistry from UCLA and Ph.D. in Natural Product Synthesis from the California Institute of Technology. Before joining the Company, he completed postdoctoral research in Bioorganic Chemistry at Columbia University. Stephanie Webber joined the Company in 1988 and in 1997 was promoted to vice president, head of development pharmacology. Previously, Dr. Webber served as senior director, pharmacology and toxicology. From 1980 to 1988, Dr. Webber was a research fellow at the Scripps Clinic and Research Foundation. She received her B.S. in Biology from the University of Sussex, England, and holds a Ph.D. in Zoology from the University of London. Glenn R. Zinser joined the Company in 1987 and, since 1995, has served as vice president, operations. In 1997, Mr. Zinser was promoted to corporate vice president, head of operations. Previously, from 1987 through 1995, Mr. Zinser held various management positions with the Company, including senior director, operations from 1993 through 1995. Mr. Zinser received a M.B.A. from the University of California, Los Angeles. John N. Abelson, a founder of the Company, has served as a director since its inception. Dr. Abelson, a molecular biologist, is a member of the National Academy of Sciences. Since 1982, Dr. Abelson has been a member of the faculty of the Division of Biology at the California Institute of Technology where, from 1989 until 1995, he served as chairman. Previously, Dr. Abelson was a member of the faculty in the Department of Chemistry at the University of California, San Diego. Dr. Abelson received a Ph.D. in biophysics from The Johns Hopkins University and was a postdoctoral fellow at the Laboratory of Molecular Biology in Cambridge, England. Dr. Abelson also serves as a director of The Agouron Institute. 32 Patricia M. Cloherty joined the Board in 1988. Since 1970, Ms. Cloherty has been associated with Patricof & Co. Ventures, Inc. (formerly Alan Patricof Associates, Inc.), a New York venture capital firm ("Patricof"), and has been a general partner of its funds since 1973. From1993 until 1997, she was president of Patricof. From 1997 to the present, Ms. Cloherty has been executive co-chairman as well as general partner of Patricof. Ms. Cloherty also served as deputy administrator for the U.S. Small Business Administration in 1977 and 1978. Ms. Cloherty also serves on the board of directors of several private companies. A.E. Cohen joined the Board in 1992. Mr. Cohen is an independent management consultant. From 1957 until his retirement in 1992, Mr. Cohen held various positions at Merck & Co., Inc., including senior vice president and president of the Merck Sharp & Dohme International Division. Currently, Mr. Cohen is the chairman of the board of Neurobiological Technologies, Inc. and is a member of the board of directors of Akzo Nobel N.v., Teva Pharmaceutical Industries Ltd., Smith Barney (Mutual Funds), and Pharmaceutical Product Development, Inc., all of which are public companies. Mr. Cohen also serves as a consultant to The Population Council and Chugai Pharmaceutical Co. Ltd., Tokyo ("Chugai"), and serves as chairman of the board of Chugai's U.S. subsidiary companies. Mr. Cohen also is a member of the board of directors of Lung Check, Inc. Michael E. Herman joined the Board in 1992. Mr. Herman is a private investor, as well as president and chief operating officer of the Kansas City Royals Baseball Team. From 1974 until his retirement in 1990, Mr. Herman held various positions at Marion Laboratories, Inc. (now Hoechst Marion Roussel), including executive vice president and chief financial officer. Currently, Mr. Herman serves as chairman of the finance committee of the Ewing Marion Kauffman Foundation, a private foundation located in Kansas City, where from 1985 through 1990, he was the president and chief operating officer. Mr. Herman is also a member of the board of directors of Cerner Corporation, Seafield Capital and SLH Corporation, all of which are public companies, and serves on the board of directors of several private companies. Irving S. Johnson joined the Board in 1989. Dr. Johnson is an independent consultant in biomedical research working with numerous private companies. From 1953 until his retirement in 1988, Dr. Johnson held various positions at Eli Lilly and Company, including vice president of research from 1973 until 1988. Dr. Johnson also served on several committees of the National Academy of Sciences, the Office of Technology Assessment and the National Institutes of Health. Currently, he is a member of the board of directors of Allelix Biopharmaceuticals Inc. and Ligand Pharmaceuticals Incorporated, and is on the scientific advisory board of ELAN Corporation, all of which are public companies. Dr. Johnson received a Ph.D. in developmental biology from the University of Kansas. Antonie T. Knoppers joined the Board in 1991. Dr. Knoppers is an independent management consultant. From 1952 until his retirement in 1975, Dr. Knoppers held various positions at Merck & Co., Inc., including vice chairman of the board and president and chief operating officer. Dr. Knoppers is a member of the board of directors of Centocor, Inc., a public biotechnology company. In addition, he is a former chairman of the U.S. Council of the International Chamber of Commerce and a member of the advisory board of PaineWebber Development Corporation, an affiliate of PaineWebber Incorporated. Dr. Knoppers received a 33 M.D. from the University of Amsterdam and a Ph.D. from the University of Leiden, The Netherlands. Melvin I. Simon, a founder of the Company, has served as a director since its inception. Dr. Simon, a molecular geneticist, is a member of the National Academy of Sciences. Currently, Dr. Simon is chairman of the Division of Biology at the California Institute of Technology where he has been a member of the faculty since 1982. Previously, Dr. Simon was a member of the faculty in the Department of Biology at the University of California, San Diego. Dr. Simon received a Ph.D. in biochemistry from Brandeis University. Dr. Simon also serves as a director of The Agouron Institute. Item 11. EXECUTIVE COMPENSATION Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under Part III, Items 10 (in part), 11, 12 and 13 has been omitted from this report since the Company intends to file with the Securities and Exchange Commission, not later than 120 days after the close of its fiscal year, a definitive proxy statement prepared pursuant to Regulation 14A, which information is hereby incorporated by reference. 34 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this report: (1) Financial Statements and Supplementary Data Reference is made to the Index to Financial Statements and Schedules under Item 8 in Part II hereof, where these documents are listed. (2) Exhibits - see (c) below (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of fiscal 1998. (c) Exhibits Exhibit Number Exhibit -------- ---------------------------------------------------------- 2.1(a) Agreement and Plan of Reorganization dated as of April 28, 1997, between Agouron Pharmaceuticals, Inc., Agouron Acquisition Corporation and Alanex Corporation. 3.1(b) Restated Articles of Incorporation (December 10, 1992). 3.2(c) Amended and Restated Bylaws (Restated June 17, 1991). 4.1(d) Rights Agreement dated November 7, 1996, as amended on November 27, 1996, between the Company and Chase Mellon Shareholder Services. L.L.C., which includes, as Exhibit A, the Certificate of Determination, Preferences and Rights of Series B Participating Preferred Stock as filed with the California Secretary of State on November 20, 1996. 10.01(h) 1990 Stock Option Plan (Restated November 2, 1995). 10.02(k) Form of 1990 Incentive Stock Option Agreement. 10.03(k) Form of 1990 Non-Statutory Stock Option Agreement for Employees/Officers/Directors. 10.04(k) Form of 1990 Non-Statutory Stock Option Agreement for Consultants. 10.05(c) 1985 Stock Option Plan (Last Amended August 14, 1991). 10.06(e) Agouron Pharmaceuticals, Inc. 401(k) Plan (Amended August 1992). 10.07(b) Agouron Pharmaceuticals, Inc. Employee Stock Purchase Plan (October 15, 1992). 10.08(b) Agouron Pharmaceuticals, Inc. Flexible Benefits Plan (December 10, 1992). 10.09(f) Agreement Two dated February 28, 1994 between Japan Tobacco Inc. and the Company. (Portions of the agreement receive confidential treatment pursuant to an application filed April 25, 1994; File No. 0-15609). 35 Exhibit Number Exhibit -------- ---------------------------------------------------------- 10.10(g) Development and License Agreement dated December 1, 1994 between Japan Tobacco Inc. and the Company (Portions of the agreement receive confidential treatment pursuant to an application dated January 31, 1995). 10.11(h) First Amendment to Development and License Agreement effective December 1, 1994 between Japan Tobacco Inc. and the Company. (Confidential treatment has been requested for portions of this agreement pursuant to an application dated January 31, 1996. The underlying agreement was filed as Exhibit 10.54 on Form 10-Q for the period ended December 31, 1994, and portions thereof receive confidential treatment pursuant to an order of the Securities and Exchange Commission dated June 28, 1995.) 10.12(i) Amendment effective January 1, 1996 to the Agouron Pharmaceuticals, Inc. 401(k) Plan. 10.13(j) 1996 Stock Option Plan. 10.14(j) Form of 1996 Incentive Stock Option Agreement. 10.15(j) Form of 1996 Non-Statutory Stock Option Agreement for Employees/Officers/Directors. 10.16(j) Form of 1996 Stock Option Agreement for Consultants 10.17(l) Second Amendment to Development and License Agreement effective January 17, 1997 between Japan Tobacco Inc. and the Company (Confidential treatment has been requested for portions of this agreement pursuant to an application dated August 21, 1997, as separately filed with the Securities and Exchange Commission. The underlying agreement was filed as Exhibit 10.54 on Form 10-Q for the period ended December 31, 1994, and portions thereof receive confidential treatment pursuant to an orde of the Securities and Exchange Commission dated June 28, 1995.) 10.18(l) Third Amendment to Development and License Agreement effective December 1, 1996 between Japan Tobacco Inc. and the Company. (Confidential treatment has been requested for portions of this agreement pursuant to an application dated August 21, 1997, as separately filed with the Securities and Exchange Commission. The underlying agreement was filed as Exhibit 10.54 on Form 10-Q for the period ended December 31, 1994, and portions thereof receive confidential treatment pursuant to an order of the Securities and Exchange Commission dated June 28, 1995.) 10.19(l) VIRACEPT License Agreement between the Company and Japan Tobacco Inc. and F. Hoffmann-La Roche Ltd dated June 30, 1997. (Confidential treatment has been requested for portions of this agreement pursuant to an application dated August 21, 1997, as separately filed with the Securities and Exchange Commission.) 10.20(m) Form of 1998 Employee Stock Option Plan. 10.21(m) Form of 1998 Employee Non-Statutory Stock Option Agreement. 36 Exhibit Number Exhibit -------- ---------------------------------------------------------- 10.22 License and Supply Agreement between the Company and Japan Energy Corporation effective as of June 30, 1998. (Confidential treatment has been requested for portions of this agreement pursuant to an application dated August 4, 1998, as separately filed with the Securities and Exchange Commission.) 10.23 Common Stock Purchase Agreement between The Immune Response Corporation and the Company dated June 11, 1998. (Confidential treatment has been requested for portions of this agreement pursuant to an application dated August 4, 1998, as separately filed with the Securities and Exchange Commission.) 10.24 Amendment to the VIRACEPT License Agreement between the Company and Japan Tobacco Inc. and F. Hoffmann-La Roche Ltd as of May 1, 1998. (Confidential treatment has been requested for portions of this agreement pursuant to an application dated August 4, 1998, as separately filed with the Securities and Exchange Commission.) 21 Subsidiaries of Agouron Pharmaceuticals, Inc. 23.1 Consent of Independent Accountants. 27 Financial Data Schedule. (Exhibit 27 is submitted as an exhibit only in the electronic format of this Annual Report on Form 10-K submitted to the Securities and Exchange Commission.) 99 Important Factors Regarding Forward-Looking Statements. (a) Incorporated by Reference to Form 8-K filed on May 23, 1997. (b) Incorporated by Reference to Form 10-Q filed for the quarter ended December 31, 1992. (c) Incorporated by Reference to Form 10-K filed for the year ended June 30, 1991. (d) Incorporated by Reference for Form 8-K/A filed on December 20, 1996. (e) Incorporated by Reference to Form 10-K filed for the year ended June 30, 1992. (f) Incorporated by Reference to Form 10-Q/A filed for the quarter ended March 31, 1994. (g) Incorporated by Reference to Form 10-Q filed for the quarter ended December 31, 1994. (h) Incorporated by Reference to Form 10-Q filed for the quarter ended December 31, 1995. (i) Incorporated by Reference to Form 10-Q filed for the quarter ended March 31, 1996. (j) Incorporated by Reference to Form S-8 filed on November 26, 1996. (k) Incorporated by Reference to Form 10-Q for the quarter ended December 31, 1996. (l) Incorporated by Reference to Form 10-K for the year ended June 30, 1997. (m) Incorporated by Reference to Form S-8 filed on February 19, 1998. 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. AGOURON PHARMACEUTICALS, INC. August 4, 1998 By: /s/ Peter Johnson --------------------------------- Peter Johnson President, Chief Executive Officer and Director 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 date indicated.
Signature Title Date - --------- ----- ---- /s/ Peter Johnson President, Chief Executive August 4, 1998 - ------------------------------------ Peter Johnson Officer and Director /s/ Steven S. Cowell Corporate Vice President, Finance August 4, 1998 - ------------------------------------ Steven S. Cowell and Chief Financial Officer /s/ Gary E. Friedman Corporate Vice President, August 4, 1998 - ------------------------------------ Gary E. Friedman General Counsel, Secretary and Director /s/ John N. Abelson Director August 4, 1998 John N. Abelson, Ph.D. /s/ Patricia M. Cloherty Director August 4, 1998 - ------------------------------------ Patricia M. Cloherty /s/ A. E. Cohen Director August 4, 1998 A. E. Cohen /s/ Michael E. Herman Director August 4, 1998 - ------------------------------------ Michael E. Herman /s/ Irving S. Johnson Director August 4, 1998 Irving S. Johnson, Ph.D. /s/ Antonie T. Knoppers Director August 4, 1998 Antonie T. Knoppers, M.D. /s/ Melvin I. Simon Director August 4, 1998 Melvin I. Simon, Ph.D.
38 EX-10.22 2 LICENSE AND SUPPLY AGREEMENT LICENSE AND SUPPLY AGREEMENT This License and Supply Agreement ("Agreement"), effective as of the 30th day of June 1998, is by and between Japan Energy Corporation, a corporation duly organized and existing under the laws of Japan and having its principal place of business at 10-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8407, Japan (hereinafter referred to as "JE"), and Agouron Pharmaceuticals, Inc., a corporation duly organized and existing under the laws of the State of California, U.S.A., and having its principal place of business at 10350 North Torrey Pines Road, La Jolla, California 92037, U.S.A. (hereinafter referred to as "Agouron"). JE and Agouron are sometimes hereinafter each referred to as a Party (collectively "Parties") to this Agreement. BACKGROUND JE possesses technical information and know-how pertaining to a certain pharmaceutical compound designated JE-2147 and its related compounds that may be useful in the treatment and prevention of Human Immunodeficiency Virus infections and other diseases. The Parties entered into a Confidentiality Agreement effective December 31, 1997 (the "Confidentiality Agreement") and a Material Transfer Agreement effective December 31, 1997 (the "Material Transfer Agreement"), pursuant to which Agouron has undertaken certain evaluations of JE-2147. JE holds patents rights pertaining to JE-2147 and its related compounds. Agouron desires to obtain a license from JE to enable Agouron to develop and commercialize Product (as hereinafter defined) in certain countries of the world, and JE is willing to grant such license on the terms and conditions hereinafter set forth. The Parties wish to cooperate under the terms of this Agreement to optimize the development and commercialization of Product. The Parties also wish to confirm their arrangement regarding the supply of Compound by JE to Agouron and the supply of Product by Agouron to JE (both terms as hereinafter defined). On June 30, 1998, the parties executed and delivered to each other, by telefax, a prior version of this Agreement. The parties now wish to supersede such prior version of this Agreement and to formally enter into this revised version of this Agreement. NOW, THEREFORE, in consideration of the premises, and the mutual covenants, benefits and obligations set forth herein, the Parties agree as follows: ARTICLE I - DEFINITIONS When used in this Agreement, the following terms shall have the meanings set out in this Article I. Except as otherwise explicitly provided, all references to Articles and Sections shall refer to the Articles and Sections of this Agreement, and all references to Attachments, Exhibits and Schedules shall refer to the Attachments, Exhibits and Schedules to this Agreement, all of which are incorporated herein by reference. Section 1.01 "Affiliate" means any person, organization or entity that is, directly or indirectly, controlling, controlled by, or under common control with JE or Agouron, as the case may be. The term "control" (including, with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any person, organization or entity, means the possession, directly or indirectly, of the power to direct, or cause the direction of, the management and policies of such person, organization or entity, whether through the ownership of voting securities, or by contract or court order or otherwise. The ownership of voting securities of a person, organization or entity shall not, in and of itself, constitute "control" for purposes of this definition, unless said ownership is of a majority of the outstanding securities entitled to vote of such person, organization or entity. Affiliate shall also mean a limited partnership in which a subsidiary of Agouron and/or JE is a general partner. Section 1.02 "Combination Product" means * Section 1.03 "Compound" means the chemical compound known by the JE code name JE-2147 ("JE-2147"), whose chemical structure is as follows: * (chemical structure) The definition of Compound also means: (i) * Section 1.04 "Compound Supply Plan" means the supply plan under which JE will provide Compound to Agouron in accordance with the provisions of Section 4.04. Section 1.05 "Control," "Controlled" or "Controlling" means * 2 Section 1.06 "Development Program" means * Section 1.07 "Development Program Patent Rights" means * Section 1.08 "Development Program Technology" means * 3 Section 1.09 "Dossier" means the document that is filed with and approved by a government or health authority for purposes of Registration, for example, a Marketing Authorization Application. Section 1.10 "Effective Date" means June 30, 1998. Section 1.11 "EMEA" means the European Agency for the Evaluation of Medicinal Products. Section 1.12 "FDA" means the United States Food and Drug Administration. Section 1.13 "Field" means * Section 1.14 "Initial Commercial Sale" means the first commercial sale of a Product * Section 1.15 "JE Territory" means Japan, Taiwan, South Korea and North Korea. Section 1.16 "JE Patent Rights" means: * Section 1.17 "JE Technology" means * Section 1.18 "Licensed Territory" means all countries of the world, except for Japan, Taiwan, South Korea and North Korea. Section 1.19 "MAA" means Marketing Authorization Application. 4 Section 1.20 "Major Market European Country" means the United Kingdom, France, Germany, Spain or Italy. Section 1.21 "Net Sales" means the gross amount invoiced for Product by Agouron, its Affiliates and sublicensees to non-Affiliated third parties, other than separately itemized transportation costs, and sales taxes and other taxes that are directly linked to and included in the gross amount invoiced, as computed on a product-by-product basis for the countries concerned, less: * Section 1.22 "New Drug Application" or "NDA" means a new drug application, product license application or comparable regulatory submission to the FDA, the EMEA or an equivalent agency of a country in the Territory for permission to commence commercial sale of a Product. Section 1.23 "Patent Rights" means, collectively, * Section 1.24 "Product" means any * Section 1.25 "Registration" means the official approval by the government or health authority in a country (or supra-national organization, such as the European Agency for the Evaluation of Medicinal Products) that is required for a Product to be offered for sale in such country, including such authorizations as may be required for the production, importation, pricing, reimbursement and sale of such Product, and for subsequent regulatory filings for line extensions and/or additional indications of such Product. Section 1.26 "Territory" means * Section 1.27 "Trade Dress" means any materials directly supporting the commercialization of a Product, including, but not limited to, packaging, package inserts, advertising or selling aids, brochures, mailings and/or other marketing or packaging materials. Section 1.28 "Trademark(s)" means any trademark selected and owned by a Party and registered (or applied for) by such Party, its Affiliate(s) and sublicensee(s) in the Territory for use in connection with the marketing of Products. The definition of Trademark(s) shall not refer to trade names or designs such as logos used by a Party to designate the name of such Party. 5 Section 1.29 "United States" or "U.S." means the United States of America, its territories, possessions and protectorates (including Puerto Rico), and the District of Columbia. Section 1.30 "Valid Claim" means a * ARTICLE II - COMMERCIAL RIGHTS Section 2.01 License Grants. To implement the development and commercialization of Compound and/or Products, the Parties, subject to the other applicable provisions of this Agreement, grant and accept the license rights provided below in this Article II. (a) Subject to the provisions of Section 2.01(c), and Article V, JE grants Agouron the exclusive right, even as to JE (with right of sublicense), to use, offer for sale, sell and/or import in or into the Licensed Territory, Compound and Products under applicable JE Patent Rights and Development Program Patent Rights, and using applicable JE Technology and Development Program Technology. (b) * (c) * 6 (d) * (e) Agouron grants JE * (f) Agouron grants JE * (g) Agouron grants JE * 7 (h) Subject to the provisions of Section 4.04, Agouron shall have * Subject to the provisions of Section 4.04, JE shall have a * (i) * (j) * (k) * 8 (l) Agouron agrees to use reasonable efforts to not sell Product in the Licensed Territory to persons who it knows, or has reason to know, will resell and/or transfer such Product outside of the Licensed Territory. Section 2.02 Discontinuance of the Development Program (a) Agouron shall, in a timely manner, use reasonable diligence in the development and Registration of a Product in the Field in the Licensed Territory. Reasonable diligence means a commercially reasonable standard of effort based on the commercial potential for such Product in the Licensed Territory. Development efforts undertaken by Agouron's Affiliates and sublicensees shall be attributed to Agouron. * (b) * 9 Section 2.03 Diligent Efforts to Market * ARTICLE III - SHARING AND PROTECTION OF INTELLECTUAL PROPERTY Section 3.01 Patents. (a) * 10 (b) * (c) * (d) * (e) * 11 (f) * (g) * (h) * (i) * 12 (j) * (k) * (l) * Section 3.02 Infringement of Patents of Third Parties. Each Party, its Affiliates and sublicensees, and their respective employees and agents shall use diligent efforts to avoid known 13 infringement of patents of any third party * Section 3.03 Trademarks. * 14 Section 3.04 Information Exchange. * Section 3.05 Confidentiality. Except as otherwise expressly specified in this Agreement and except for the proper exercise of any license rights granted or rights reserved under this Agreement, JE and Agouron shall each keep in confidence and shall each use its best efforts to cause its respective Affiliates, employees, directors, agents, consultants, clinical research associates, outside contractors, clinical investigators and sublicensees to whom it is permitted to disclose information pursuant to the terms of this Agreement to retain in confidence all confidential and proprietary information of the other Party, including the * Without limiting the foregoing, JE and Agouron shall each exercise the same degree of diligence and care with respect to the above-described information as it exercises with respect to its other proprietary information. Each Party represents to the other Party that it maintains policies and procedures designed to prevent the unauthorized disclosure of its proprietary data and information. * 15 The preceding obligations of confidentiality shall be waived as to information that the Party claiming waiver can demonstrate, based on written records: (i) was in the public domain at the time of disclosure hereunder; (ii) comes into the public domain through no fault of the Party claiming waiver; (iii) was known to the Party claiming waiver prior to its disclosure under this Agreement, unless such information was obtained from the other Party on a confidential basis; (iv) is disclosed on a non-confidential basis to the Party claiming waiver by a third party having a lawful right to make such disclosure on a non-confidential basis; (v) is published with the prior mutual agreement of the Parties, after having given consideration to appropriate commercial factors; (vi) comes into the public domain through governmental publication of a patent application; or (vii) is required to be disclosed to file a patent or other regulatory application or to comply with applicable laws and regulations. * The Parties acknowledge and agree that the Parties' rights and obligations under the Confidentiality Agreement and the Material Transfer Agreement between the Parties which were both originally entered into on December 22, 1997 are hereby superseded by the provisions of this Section 3.05. Section 3.06 Publication. JE and Agouron each acknowledges the interests of the other Party in publishing certain of the results of its development and Registration of a Product to obtain recognition within the scientific community and to advance the state of scientific knowledge. The Parties also recognize their mutual interests in obtaining valid patent protection for their drug products. Consequently, a Party, its employees or consultants wishing to make a publication shall * 16 ARTICLE IV - DEVELOPMENT AND COMMERCIALIZATION STRUCTURE Section 4.01 Coordination. Coordination of the Parties' development and commercialization efforts for Compound and Products in the Licensed Territory shall be carried out as specified in Sections 4.02 and 4.03. Section 4.02 Development and Registration; Responsibility for Development Costs. JE and Agouron acknowledge their mutual intention to cooperate in a commercially reasonable manner in the timely development of Compound and Products in the Territory. The Parties further acknowledge their mutual willingness to discuss ad hoc agreements to establish appropriate mechanisms for such cooperation. Recognizing the importance of timely initiation of development activities, however, JE and Agouron agree to the following basic approach to development of Compound and Products in the Licensed Territory, and to the conduct and funding of their respective development activities. (a) * (b) The Parties acknowledge that it will be necessary to amend and update the Development Program as additional information becomes available concerning the prerequisites necessary for Registration of Product in the Licensed Territory. * 17 (c) As soon as possible after the execution of this Agreement, the Parties shall promptly reach agreement on the basic terms under which JE will manufacture and supply Compound to Agouron, its Affiliates and sublicensees * (d) Agouron shall be responsible * (e) Agouron,* , shall be responsible for submission of Dossiers for a Product to the regulatory authorities in the Licensed Territory in pursuit of approvals to sell such Product and * All Dossiers for Product in the Licensed Territory shall be owned by and be in the name of Agouron. (f) JE shall cooperate with Agouron to * (g) JE will be responsible for * (h) JE shall be responsible * (i) To the extent required to support Registrations of a Product (such as for Investigational New Drug Applications and New Drug Applications), Agouron shall have 18 * (j) Each Party agrees to use its diligent efforts in responding in a timely manner, * (k) Agouron shall keep JE informed of its progress in the development and Registration of Products. This information exchange shall include, * (l) JE and Agouron shall each use qualified persons in the development activities of the Development Program. (m) All work in connection with the development of Compound or Products, to the extent required by applicable laws or regulations, shall be conducted in accordance with Good Laboratory Practices, Good Manufacturing Practices and Good Clinical Practices, as such rules of practice are amended from time to time. Each Party in the conduct of its activities shall comply with all applicable laws, rules and regulations of each jurisdiction within the Territory 19 that are applicable to the development, testing, manufacture, labeling, packaging, storage, marketing, distribution, sale, promotion and import or export of Product.distribution, sale, promotion and import or export of Product. (n) * Section 4.03 Marketing. * JE and Agouron agree to the following basic approach to the marketing of Products in the Licensed Territory, and to the conduct of their marketing activities in their respective marketing territories. (a) Agouron shall be responsible for * (b) * (c) Agouron shall keep JE informed of Agouron's current and planned marketing activities in the Licensed Territory. * JE shall keep Agouron informed of JE's marketing activities in the JE Territory. * (d) Unless prohibited by law or regulation, the labeling for a Product in the countries in the Licensed Territory shall * 20 (e) * (f) Agouron and JE shall each use qualified persons in its marketing activities for a Product in its respective marketing territories. (g) Agouron shall be responsible for responding, in a timely manner, * (h) Each Party, its Affiliates and sublicensees, agrees throughout the duration of this Agreement to notify the other Party immediately in English of * 21 (i) Each Party further agrees to immediately notify the other Party of any information * The information to be provided hereunder shall be provided in English. (j) Without limiting the foregoing, it is also understood that each Party may notify its Affiliates or sublicensees of * Section 4.04 Supply of Compound. It is anticipated that timely development of Compound and/or a Product will require the manufacture of significant amounts of the Compound, and that successful worldwide commercialization of a Product will require annual production of large quantities of the Compound. (a) In accordance with the provisions of Section 4.04, Agouron shall purchase from JE, and JE shall timely deliver Compound for use in the development and Registration activities for Compound and/or Product, including using Compound to make Product to be used in clinical studies and trials and for special license sales. * 22 (b) In accordance with the provisions of Section 4.04, Agouron shall purchase from JE, and JE shall timely deliver Compound for use in making the finished dosage form(s) of Product to be sold in the Licensed Territory, * (c) JE shall maintain books of account and complete and accurate records of all of its FBMCC of procuring and/or producing such Compound * (d) * 23 (e) * (i) (ii) (iii) 24 (iv) Sale and delivery of Compound will be subject to an agreed-upon form of purchase order being issuedby Agouron and accepted by JE. * (v) * (vi) * (vii) * (f) * 25 (i) * (ii) * (g) * Section 4.05 Supply of Product. The details for manufacturing Product will be determined after the execution of this Agreement, according to the following conditions: (a) Agouron shall be responsible for manufacturing Product. (b) * (c) * 26 (d) * (e) * (i) * (ii) * 27 (iii) * (iv) * (v) * (f) * (g) * 28 (h) * ARTICLE V - ADVANCE PAYMENTS AND ROYALTIES Section 5.01 Advanced Payments and Royalties. (a) Subject to the terms and conditions of this Agreement and in consideration for the rights granted to Agouron under this Agreement, Agouron shall make the following one-time-only payments to JE:
PAYMENT MILESTONE EVENT (U.S. Dollars) (i) Within thirty (30)days of execution of this Agreement (actually paid July 17, 1998) $6,000,000 (ii) Within thirty (30) days of the earlier of: (1) the first completion of a Phase I Clinical Study for any Product; or (2) September 30, 2000* $3,000,000 (iii)Within thirty (30) days of the earlier of: (1) the first completion of a Pilot Phase II Study for any Product; or (2) December 31, 2000* $3,000,000 (iv) Within thirty (30) days of first U.S. NDA or EMEA filing for any Product $6,000,000 (v) Within thirty (30) days of first U.S. NDA approval for any Product $3,000,000 (vi) Within thirty (30) days of the first European Commission approval for any Product (but not before receipt of pricing approval for such Product in at least one (1) Major Market European Country) $5,000,000 TOTAL PAYMENTS: $26,000,000 * *
29 * (b) * (c) The Parties agree that the calculation of the amount of royalties due shall be subject to and in accordance with the following provisions: (i) * (ii) * (iii) * 30 (iv) * (v) * (vi) * (vii) * (viii) * 31 Section 5.02 General Licensing Terms. (a) * (b) The Parties agree that the accounting and payment of royalties shall comply with the following terms and conditions: (i) * (ii) * 32 (iii) * (iv) Agouron shall maintain and cause its Affiliates and sublicensees to maintain books of account and complete and accurate records pertaining to the sale or other disposition of Products and of the royalties and other amounts payable under this Agreement in sufficient detail to * 33 (c) * (d) * Section 5.03 Foreign Currency. (a) Net Sales and any milestone and royalty amounts shall be stated in United States dollars. Remittal of milestone payments and royalties shall be made in United States dollars. * (b) * ARTICLE VI - TERM AND TERMINATION Section 6.01 Termination for Breach * 34 Section 6.02 Termination by Agouron. (a) * (b) * 35 (c) * Section 6.03 Termination by Mutual Agreement. The Parties may at any time terminate this Agreement, in part or in its entirety, by mutual written agreement. Section 6.04 Termination Upon Bankruptcy.. In the event that a Party is subject to any proceeding under the bankruptcy laws, including appointment of a receiver, trustee, liquidator or other custodian of its business or substantially all of its assets, and such proceeding, if involuntary, is not dismissed or discharged within one hundred fifty (150) days after such proceeding is instituted, or upon the liquidation, dissolution, or winding up of its business, then this Agreement, at the election of the other Party, shall be terminated in its entirety for cause upon a notice in writing of at least fifteen (15) days from the Party who is not bankrupt or insolvent. Section 6.05 Disposition of Inventory In the event of the cancellation or termination of any license rights with respect to a Product, the inventory of such Product may be sold for up to * after date of cancellation or termination, provided the required payments, if any, are paid thereon. Section 6.06 Effect of Termination. * ARTICLE VII - WARRANTIES AND COVENANTS; INDEMNITIES; INSURANCE; DISPUTE RESOLUTION Section 7.01 Warranties and Covenants. (a) Each Party represents and warrants to the other Party that it has the legal power, authority and right to enter into this Agreement and to perform all of its respective obligations set forth herein, including the attachments hereto. 36 (b) JE acknowledges and represents that the patents and patent applications listed in Schedule 2 are the only patents and patent applications included within the JE Patent Rights that are jointly owned by JE and a third party, and that such patents and patent applications are only subject to the conditions and restrictions noted on Schedule 2 and, except as otherwise noted on Schedule 2, that the license of such JE Patent Rights to Agouron under the terms of this Agreement do not require the consent of such joint owner. * (c) JE represents and warrants that, as of the date this Agreement is executed, it was not aware of the existence of any patent applications or patents owned and Controlled by a third party covering Compound that might materially prevent the Parties from commercializing Compound in the Licensed Territory, except for the patent application listed in Schedule 7.01(c). (d) JE represents and warrants that: (i) it has the right to grant the licenses set forth in Article II; and (ii) there are no suits, claims or proceedings pending in any court or by or before any governmental body or agency with respect to the JE Patent Rights or JE Technology that would materially interfere with the ability of Agouron to fully exercise the licenses granted to it under this Agreement, including the exclusive license rights under Section 2.01(a). Agouron represents that, to the best of its knowledge, it does not have any know-how, trade secret, experimental data, formula, expert opinion, experimental procedure or other confidential and/or proprietary information specifically concerning the Compound, intermediates thereof, or a Product that was developed or acquired by or on behalf of Agouron before the Effective Date of this Agreement that is necessary for either: (i) the formulation (including sustained-release formulations), manufacture, use and/or application of Product; or (ii) obtaining Registration of Product, including, but not limited to, information and data arising out of pre-clinical and clinical trials involving Product and all NDA applications for Product, and which is under the Control of Agouron. (e) Each Party covenants that it shall not commit any act or fail to take any action that, in any significant way, would be in conflict with its material obligations under this Agreement and the attachments hereto. (f) Each Party promises to comply in all material respects with the terms of the licenses granted to it under this Agreement, and with all federal, state, local and foreign laws, rules and regulations applicable to the development, manufacture, distribution, import and export, and sale of pharmaceutical products pursuant to this Agreement. (g) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, EACH OF THE PARTIES MAKES NO WARRANTIES, EXPRESSED OR IMPLIED, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF ANY SUBJECT MATTER INCLUDED WITHIN THE CLAIMS OF THE PATENT RIGHTS, INCLUDING THE COMPOUND. THE PARTIES UNDERSTAND AND AGREE THAT DEVELOPMENT AND COMMERCIALIZATION OF COMPOUND AND/OR PRODUCTS WILL INVOLVE APPROVAL BY REGULATORY AUTHORITIES, AND THAT NO PARTY IS GUARANTEEING THE SAFETY OR EFFICACY OF COMPOUND AND/OR PRODUCTS, 37 OR THAT COMPOUND AND/OR PRODUCTS WILL RECEIVE THE REQUIRED APPROVALS. Section 7.02 Indemnities; Insurance. (a) Agouron shall indemnify and hold harmless JE and its Affiliates, employees, and agents (a "JE Indemnified Party") from and against any and all liabilities, losses, damages, costs, or expenses (including reasonable investigative and attorneys' fees) which the JE Indemnified Party may incur, suffer or be required to pay resulting from or arising in connection with any product liability or other claims (other than claims for patent infringement) arising from the use by any person of any Product, to the extent such product liability or other claim results from the negligent, reckless or intentional misconduct of Agouron, its Affiliates or sublicensees, or their respective employees and agents, or on account of Agouron's failure to fulfill its obligations or undertakings under this Agreement; provided, however, that in no event shall Agouron be liable to a JE Indemnified Party for any indirect, incidental, special or consequential damages, including loss of revenues or profits from sales of Products. (b) JE shall indemnify and hold harmless Agouron and its Affiliates, employees, and agents (an "Agouron Indemnified Party") from and against any and all liabilities, losses, damages, costs, or expenses (including reasonable investigative and attorneys' fees) that the Agouron Indemnified Party may incur, suffer or be required to pay, resulting from or arising in connection with any product liability or other claims (other than claims for patent infringement) arising from the use by any person of any Product, to the extent such product liability or other claim results from the negligent, reckless or intentional misconduct of JE, its Affiliates or sublicensees, or their respective employees and agents, or on account of JE's failure to fulfill its obligations or undertakings under this Agreement; provided, however, that in no event shall JE be liable to an Agouron Indemnified Party for any indirect, incidental, special or consequential damages, including loss of revenues or profits from sales of Products. (c) To the extent that a product liability or other claim (other than a claim for patent infringement) results from the negligent, reckless or intentional misconduct of more than one Party, their Affiliates, sublicensees, or their respective employees and agents, the Parties agree to share in an equitable manner such liabilities, losses, damages, costs, or expenses in proportion to the relative fault of each of the Parties, their Affiliates, sublicensees, or their respective employees and agents. (d) Unless the Parties agree otherwise, all other liabilities, losses, damages, costs, or expenses (including reasonable investigative and attorneys' fees) under this Section 7.02 relating to or involving a Product in a country, except as provided by the terms of Sections 7.02(a), (b) and (c), shall be the responsibility of the Party marketing such Product in such country. The Party marketing a Product in a country shall indemnify the non-marketing Party in such country from and against any and all liabilities, losses, damages, costs, or expenses (including reasonable investigative and attorneys' fees) which such non-marketing Party may incur, suffer or be required to pay resulting from or arising in connection with any product liability or other claims (other than claims for patent infringement) arising from the use by any person of such Product in 38 such country. Section 3.02 sets forth the Parties' liability obligations arising from claims for patent infringement. (e) The aforesaid obligations of the indemnifying Party shall be subject to the indemnified Party fulfilling the following obligations: (i) The indemnified Party shall fully cooperate with the indemnifying Party in the defense of any claims, actions, etc., which defense shall be controlled by the indemnifying Party. (ii) The indemnified Party shall not, except at its own cost, voluntarily make any payment or incur any expense with respect to any claim or suit without the prior written consent of the indemnifying Party, which consent such Party shall not be required to give. (iii) The indemnified Party shall notify the indemnifying Party promptly after receipt of a notice of the commencement of any litigation or threat thereof that may reasonably lead to a claim for indemnification. (f) The Parties agree to maintain appropriate amounts of product liability insurance coverage and to have the other Party included as an additional insured on such policies. Section 7.03 Dispute Resolution. In the event of any controversy or claim arising out of or relating to any provision of this Agreement or any term or condition hereof, or the performance by a Party of its obligations hereunder, the Parties shall try to settle their differences amicably between themselves. If the representatives of the Parties are unable to reach agreement on any such issue, the issue shall be submitted for consideration, in the case of Agouron, to a designee of its Chief Executive Officer and, in the case of JE, to a designee of its Managing Director of Pharmaceuticals and Biobusiness Division. If such designees are unable to agree, then the issue shall be resolved, in the case of Agouron, by its Chief Executive Officer and, in the case of JE, by its Managing Director of Pharmaceuticals and Biobusiness Division. Any unresolved issues arising between the Parties relating to, arising out of, or in any way connected with this Agreement or any term or condition hereof, or the performance by a Party of its obligations hereunder, whether before or after termination of this Agreement, except as otherwise provided in this Agreement, shall be finally resolved by binding arbitration. Whenever a Party shall decide to institute arbitration proceedings, it shall give written notice to that effect to the other Party. The Party giving such notice shall refrain from instituting the arbitration proceedings for a period of sixty (60) days following such notice. If JE is the Party initiating the arbitration, the arbitration shall be held in San Diego, California, according to the rules of the American Arbitration Association ("AAA"). If Agouron is the Party initiating the arbitration, the arbitration shall be held in Tokyo, Japan, according to the rules of the Japan Commercial Arbitration Association "JCAA"). The arbitration shall be conducted by a single arbitrator mutually chosen by the Parties. If the Parties cannot agree upon a single arbitrator within fifteen (15) days after the institution of the arbitration proceeding, then the arbitration shall be conducted by a panel of three arbitrators appointed in accordance with applicable AAA or JCAA 39 rules; provided, however, that each Party shall, within thirty (30) days after the institution of the arbitration proceedings, appoint one arbitrator with the third arbitrator being chosen by the other two arbitrators. If only one Party appoints an arbitrator, then such arbitrator shall be entitled to act as the sole arbitrator to resolve the controversy. Any arbitration hereunder shall be conducted in the English language, to the maximum extent possible. All arbitrator(s) eligible to conduct the arbitration must agree to render their opinion(s) within thirty (30) days of the final arbitration hearing. The arbitrator(s) shall have the authority to grant injunctive relief and specific performance and to allocate between the Parties the costs of arbitration in such equitable manner as he/she determines; provided, however, that each Party shall bear its own costs and attorneys' and witness' fees. Notwithstanding the terms of this Section 7.03, a Party shall also have the right to obtain, prior to the arbitrator(s) rendering the arbitration decision, provisional remedies, including injunctive relief or specific performance, from a court having jurisdiction thereof. The arbitrator(s) shall, upon the request of either Party, issue a written opinion of the findings of fact and conclusions of law and shall deliver a copy to each of the Parties. Decisions of the arbitrator(s) shall be final and binding on all of the Parties. Judgment on the award so rendered may be entered in any court having jurisdiction thereof. ARTICLE VIII - DISCLOSURE OF AGREEMENT Section 8.01 Disclosure of Agreement Except as agreed to by the Parties, and as required for the performance of its obligations hereunder, neither JE nor Agouron shall release any information to any third party with respect to any of the terms of this Agreement without the prior written consent of the other Party, which consent shall not unreasonably be withheld. This prohibition includes, but is not limited to, press releases, educational and scientific conferences, promotional materials and discussions with the media. The Parties shall jointly prepare and release a public announcement regarding the existence of this Agreement. If a Party determines that it is required by law, including securities laws and regulations pertaining to publicly traded companies, to release information to any third party regarding the terms of this Agreement, it shall notify the other Party of this fact prior to releasing the information. The notice to the other Party shall include the text of the information proposed for release. The other Party shall have the right to confer with the notifying Party regarding the necessity for the disclosure and the text of the information proposed for release, but the notifying Party shall have the discretion to release the information as it deems necessary to fulfill its requirements under law. Notwithstanding the preceding, JE and Agouron shall each have the right to disclose the terms of this Agreement to persons it proposes to enter into business relationships with, if such persons are subject to confidentiality and use obligations equivalent to those applicable to the disclosing Party hereunder. ARTICLE IX - GENERAL PROVISIONS Section 9.01 No Implied Licenses Only the licenses granted pursuant to the express terms of this Agreement shall be of any legal force and effect. No license rights shall be created by implication or estoppel. 40 Section 9.02 No Waiver Any failure by a Party to enforce any right which it may have hereunder in any instance shall not be deemed to waive any right which it or the other Party may have in any other instance with respect to any provision of this Agreement, including the provision which such Party has failed to enforce. Section 9.03 Severability; Government Acts. In the event that any provision of this Agreement is judicially, or by a competent authority, determined to be unenforceable, in part or in whole, with regard to any or all of the countries in the Territory, the remaining provisions or portions of this Agreement shall be valid and binding to the fullest extent possible, and the Parties shall endeavor to negotiate additional terms, as feasible, in a timely manner so as to fully effectuate the original intent of the Parties, to the extent possible, in the applicable countries. In the event that any act, regulation, directive, or law of a country, including its departments, agencies or courts should make impossible or prohibit, restrain, modify or limit any material act or obligation of a Party under this Agreement, and if any Party to this Agreement is materially adversely affected thereby, the Parties shall attempt in good faith to negotiate a lawful and enforceable modification to this Agreement that substantially eliminates the material adverse effect; provided that, failing any agreement in that regard, the Party who is materially adversely affected shall have the right, at its option, to suspend or terminate this Agreement as to such country. Section 9.04 Ambiguities. Ambiguities, if any, in this Agreement shall not be construed against any Party, irrespective of which Party may be deemed to have authored the ambiguous provision. Section 9.05 Notification and Governmental Approvals. After execution of this Agreement, to the extent required by law, Agouron, after consultation with JE, shall notify the appropriate authorities in the Licensed Territory about the terms of this Agreement; JE, after consultation with Agouron, shall notify the appropriate authorities in the JE Territory about the terms of this Agreement. JE and Agouron shall obtain any government approval(s) required to enable this Agreement to become effective, or to enable any payment hereunder to be made, or any other obligation hereunder to be observed or performed. Third-party costs and expenses incurred in notifying governmental authorities or obtaining governmental approval shall be shared equally between the Parties. Each Party shall keep the other Party informed of its progress in notifying such governmental authorities and obtaining such government approval, and shall cooperate with the other Party in any such efforts. Section 9.06 U.S. Export Controls The Parties agree to comply with the United States laws and regulations governing exports and re-exports of the Compound, intermediates thereof, Products, Development Program Technology, JE Technology or any other technology or software developed or disclosed as a result of this Agreement. The Parties acknowledge that any performance under this Agreement is subject to any restrictions which may be imposed by the United States laws and regulations governing exports and re-exports. Each Party agrees to provide the other Party with any reasonable assistance, including written assurances which may be required by a competent governmental authority and by applicable laws and regulations as a precondition for any disclosure of technology or software by the other Party under the terms of 41 this Agreement. The obligations of this Section 9.06 shall survive termination or expiration of this Agreement. Section 9.07 No Agency. JE and Agouron shall have the status of independent contractors under this Agreement and, except as otherwise explicitly provided in this Agreement, nothing in this Agreement shall be construed as an authorization of a Party to act as an agent of the other Party. Section 9.08 Captions; Number; Official Language. The captions of the articles and sections of this Agreement are for general information and reference only, and this Agreement shall not be construed by reference to such captions. Where applicable in this Agreement, the singular includes the plural and vice versa. To the extent appropriate, the meaning of terms whose first letters are capitalized, but which are variations of terms that are defined elsewhere in this Agreement, shall each have the same meaning as the defined term. English shall be the official language of this Agreement and any license agreement provided for hereunder, and all communications between the Parties hereto shall be conducted in that language. Section 9.09 Force Majeure. A Party shall not be responsible to the other Party for any failure, delay or interruption in the performance of any of its obligations under this Agreement if such failure, delay or interruption is caused by any act of God, earthquake, fire, casualty, flood, war, epidemic, riot, insurrection, or any act, exercise, assertion or requirement of a governmental authority, or other cause beyond the reasonable control of the Party affected if the Party affected shall have used its best efforts to avoid such occurrence. If a Party believes that the performance of any of its obligations under this Agreement shall be delayed or interrupted as a result of any of the reasons stated in this Section 9.09, and provided such Party is able to do so, such Party shall promptly notify the other Party of such delay or interruption and the cause therefor, and shall provide such other Party with its estimate of when the performance of its obligations shall recommence. When the Party affected is able to recommence the performance of obligations delayed or interrupted as a result of any of the reasons stated in this Section 9.09, it shall so notify the other Party and, except as otherwise provided in this Agreement, it shall promptly resume the performance of such obligations. Section 9.10 Amendment. This Agreement, including the Attachments, Exhibits and Schedules, constitutes the full agreement of the Parties with respect to the subject matter of this Agreement, and incorporates any prior discussions between them with respect to such subject matter. This Agreement supersedes the rights and obligations of JE and Agouron under the Confidential Disclosure Agreement and the Material Transfer Agreement between the Parties which were both originally entered into on December 22, 1997. This Agreement, including the attachments hereto, shall not be amended, supplemented or otherwise modified, except by an instrument in writing signed by duly authorized officers of the Parties. Section 9.11 Applicable Law. This Agreement shall be construed and the rights of the Parties shall be determined in accordance with the laws of Japan; provided, however, that with regard to issues concerning the validity and construction of patents, trademarks and other 42 intellectual property, the rights of the Parties shall be determined in accordance with the laws of the country under which such intellectual property rights were granted.under which such intellectual property rights were granted. Section 9.12 Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be given in person, delivered by recognized overnight delivery service, sent by mail (certified or registered, or air mail for addresses outside of the continental U.S.), or by telefax (or other similar means of electronic communication), whose receipt is confirmed by confirming telefax, and addressed, in the case of JE, to its Managing Director of Pharmaceuticals and Biobusiness Division and, in the case of Agouron, to the Senior Vice President, Commercial Affairs (with a copy to the Legal Department), at the addresses shown at the beginning of this Agreement, or such other person and/or address as may have been furnished in writing to the notifying Party in accordance with the provisions of this Section 9.12. Except as otherwise provided herein, any notice shall be deemed delivered upon the earliest of: (i) actual receipt; (ii) four (4) business days after delivery to such recognized overnight delivery service; (iii) eight (8) business days after deposit in the mail; or (iv) the date of receipt of the confirming telefax. Section 9.13 Assignment. This Agreement shall be assignable by a Party to its Affiliates; if this Agreement is assigned by a Party to an Affiliate, the Party shall still be responsible for all of its obligations as specified in this Agreement. This Agreement shall only be assignable by a Party to a non-Affiliated third party with the prior written consent of the other Party, which consent may be withheld at the sole discretion of such other Party. Any such assignment without the prior written consent of the other Party shall be void. Notwithstanding the preceding, in the event of: (i) a sale or transfer of all or substantially all of a Party's assets; or (ii) the merger or consolidation of a Party with another company, this Agreement shall be assignable to the transferee or successor company. Section 9.14 Succession. This Agreement shall be binding upon all successors in interest, assigns, trustees and other legal representatives of the Parties. 43 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement at a formal signing ceremony on July 28, 1998, in duplicate originals, by their respective officers thereunto duly authorized. JAPAN ENERGY CORPORATION AGOURON PHARMACEUTICALS, INC. By: /s/ Akihiko Nimoyama By: /s/ Peter Johnson Name: Akihiko Nimoyama Name: Peter Johnson Title: Representative Director and Title: Chief Executive Officer President and President By: /s/ Ken Irino By: /s/ Gary Friedman Name: Ken Irino Name: Gary E. Friedman, Esq. Title: Senior Management Director Title: Corporate V.P. and General Counsel WITNESSED BY: By: /s/ Toshinobu Miyake By: /s/ R. Kent Snyder Name: Toshinobu Miyake Name: R. Kent Snyder Title: Assoc. Dir., General Mgr. of Title: Senior Vice President Coordination Business Development Pharmaceuticals & Biobusines Division 44 S1-1 SCHEDULE 1 JE PATENTS AND PATENT APPLICATIONS * S1-1 S2-1 SCHEDULE 2 * S2-1 * SCHEDULE 7.01(c) * S7.01(c)-1 * EXHIBIT 1 DEVELOPMENT PROGRAM * E1-1 ATTACHMENT 1 TRADEMARK LICENSE * A1-1 EX-10.23 3 COMMON STOCK PURCHASE AGREEMENT COMMON STOCK PURCHASE AGREEMENT This Common Stock Purchase Agreement ("Agreement") is made and entered into as of June 11, 1998 by and between THE IMMUNE RESPONSE CORPORATION., a Delaware corporation (hereinafter referred to as the Company) and AGOURON PHARMACEUTICALS, INC., a California corporation ("Agouron"), which parties hereby agree as follows: 1. Authorization; Commitment; Closing 1.01 Authorization. The Company proposes to authorize, issue and sell to Agouron on or before January 15, 2000, certain amounts of its common stock, $.0025 par value ("Common Stock"), as described and determined below. 1.02 Commitment. Subject to Paragraph 5.06 and the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, the Company agrees to issue and sell to Agouron, and Agouron agree to purchase from the Company as of the dates and for the consideration set forth below, the number of shares of the Company's Common Stock as determined below. The Common Stock which Agouron is acquiring pursuant to the terms of this Agreement is hereinafter referred to as "Restricted Common Stock". Agouron is hereinafter sometimes referred to as the "Purchaser." The purchases of the Common Stock shall occur on the seven purchase dates set forth below. On each purchase date, Agouron shall be entitled to acquire such number of shares of Restricted Common Stock (rounded up to the nearest whole share) as may be purchased for $2,000,000, at a purchase price equal to the stated premium set forth opposite the applicable purchase date, over the then fair market value ("FMV") of the Common Stock on The NASDAQ Stock Market. FMV shall be defined as the average closing price of the Common Stock on The NASDAQ Stock Market for the five (5) trading days immediately preceding the referenced purchase date. In the event the FMV is * on any purchase date, the premium applicable to such purchase date shall be adjusted to *
Purchase Date Purchase Price * ------------- -------------- June 11, 1998 $2,000,000 * October 15, 1998 $2,000,000 * January 15, 1999 $2,000,000 * April 15, 1999 $2,000,000 * July 15, 1999 $2,000,000 * October 15, 1999 $2,000,000 * January 15, 2000 $2,000,000 *
1.03 Closing. Separate closings of the purchase and sale of the Restricted Common Stock ("Closings") shall occur on each of the purchase dates set forth above and shall take place at such time and place as the Company and Purchaser shall agree. At each Closing the Company shall deliver to Purchaser the number of shares of Restricted Common Stock required by Paragraph 1.02, above, upon delivery to the Company by Purchaser of a certified check or wire transfer of funds in the amount of $2,000,000. The Restricted Common Stock to be delivered to Agouron hereunder at each Closing will be evidenced by a single certificate registered in Agouron's name or in the name of such nominee as Agouron may specify and, when issued in accordance with the terms of this Agreement for the consideration expressed herein, will be duly authorized, validly issued, fully paid, nonassessable and free and clear of any liens or encumbrances caused or created by the Company (except that such Restricted Common Stock of the Company will be subject to restrictions on transfer under federal and applicable state securities laws). 2. Representations 2.01 Representations of the Company. The Company represents and warrants as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority which are necessary to own and operate its business and properties and to carry on its business as it is being conducted. The Company is duly licensed and qualified and in good standing in the State of California and in such other jurisdictions in which the ownership or lease of property or the conduct of its business makes such licensing or qualification necessary. (b) There are no proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company in any court or before any governmental authority or agency or arbitration board or tribunal which involve the possibility of materially and adversely affecting the properties, business, prospects or condition (financial or otherwise) of the Company. (c) The issuance and sale of the Restricted Common Stock and compliance by the Company with all of the provisions of this Agreement are within the corporate powers of the Company and have been duly authorized by all proper corporate action on the part of the Company and will not (i) conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under the Articles of Incorporation of the Company or the Bylaws of the Company, (ii) conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under or give any party the right to terminate or accelerate performance under any other agreement or instrument to which the Company is a party (iii) require consent under any other contract to which the Company is a party, (iv) result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any other contract to which the Company is a party or (v) conflict with any provision of any applicable judgment, decree, order, statute, rule, or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company. (d) This Agreement is a valid and binding agreement of the Company and is enforceable against the Company in accordance with the terms hereof, except as such enforceability may be affected by applicable bankruptcy laws and equitable remedies. 2 (e) The authorized capital stock of the Company consists of 5,000,000 shares of preferred stock (preferred stock) and 40,000,000 shares of common stock. As of the date hereof, 200 shares of its Series F Convertible Preferred Stock are outstanding. This preferred stock is convertible into common stock initially at a conversion price equivalent to $14.07 per share of common stock. If the Company's common stock does not trade at prices higher than $14.07 per share over a period of time, the conversion price will be adjusted downward on April 24, 1999 (or sooner if the Company issues common stock at less than $14.07 per share) and quarterly thereafter. As of June 9, 1998, 22,900,350 shares of voting common stock are outstanding. As of the date hereof, 4,497,749 stock options issued pursuant to the Company's stock option plans and two (2) warrants to purchase a total of 2,051,281 shares of voting stock are outstanding. Up to 6,180,000 shares of common stock may be issued under the Company's stock option plans. Except as set forth above, there are no other options, warrants, conversion privileges, preemptive rights, or rights of first refusal granted by the Company in favor of any other person presently outstanding or in existence to purchase or acquire any of the authorized but unissued Common Stock of the Company, other than any of such items granted pursuant to this Agreement. The Company has provided to Purchaser copies of its currently in effect Articles of Incorporation and Bylaws, its Form 10-K for the year ended December 31, 1997, its 1997 Annual Report, its Proxy statement dated April 27, 1998 and its Form 10-Q for the quarter ended March 31, 1998. The Company warrants that the information contained in such documents as updated and supplemented prior to the date of the Closing is true and correct and when taken as a whole does not omit a fact necessary to make the information contained therein in light of the circumstance under which the documents were made (taking into account, without limitation, the type of transaction contemplated by this Agreement and the sophistication and nature of the Purchaser), not misleading. The Company acknowledges that the Purchaser is relying on the written documentation provided by the Company to Purchaser as described above in making its decision to purchase the Restricted Common Stock. (f) Since March 31, 1998, except for the sale of 200 shares of Series F Convertible Preferred Stock for $10 million, there has not been any change in the assets, liabilities, financial condition or operations of the Company other than changes in the ordinary course of business, none of which individually or in the aggregate have had a material adverse affect on such assets, liabilities, financial condition or operations of the Company. 2.02 Representations of the Purchaser. The Purchaser represents and warrants as follows: (a) It is the intent of the Purchaser that its purchase of the Restricted Common Stock contemplated by this Agreement shall constitute a transaction exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") and any applicable state securities laws. 3 (b) Purchaser will not offer or sell any Restricted Common Stock except pursuant to an effective registration statement under the Securities Act or in transactions which do not require registration under the Securities Act. (c) Purchaser is a corporation duly organized and validly existing under the laws of the State of California is in good standing under such laws and has all requisite corporate powers and authority to enter into this Agreement. (d) On or prior to the date of the initial Closing, Purchaser will have taken all action necessary for the authorization, execution, delivery and performance of this Agreement. (e) Purchaser has (i) reviewed this Agreement, and the written statements, and documents, delivered to Purchaser as described in Section 2.01(e); and, (ii) received satisfactory response from the Company as to matters about which Purchaser has inquired relating to this Agreement, and other documents described in Section 2.01(e) and relating to the Company's business condition, prospects and plans as necessary to evaluate the merits and risks of acquiring the Restricted Common Stock. Purchaser has informed the Company that Purchaser is relying on all such information and documents in making its decision to purchase the Restricted Common Stock. (f) Purchaser (i) has had the risks involved in the investment represented by this Agreement explained; (ii) has knowledge and experience in financial and business matters to evaluate the merits and risks of the investment represented by this Agreement; (iii) is able to bear the economic risk of the investment represented by this Agreement (including a complete loss of this investment); and (iv) has determined that this investment is suitable for Purchaser in light of Purchaser's financial circumstances and available investment opportunities. (g) Purchaser is acquiring the Restricted Common Stock for its own account and with its general assets for the purpose of investment and not with a view to the resale, transfer or distribution thereof, and has no present intention of selling, transferring, negotiating or otherwise disposing of any Restricted Common Stock. Notwithstanding anything in this Agreement to the contrary, it is agreed that the Purchaser shall have the right to assign or transfer the Restricted Common Stock to its Affiliates at any time without the consent of the Company. 3. Non-Disclosure. Except as agreed to by the parties neither the Company nor the Purchaser shall release any information to any third party with respect to any of the terms of this Agreement without the prior written consent of the other, which consent shall not unreasonably be withheld. This prohibition includes, but is not limited to, press releases, promotional materials and discussions with the media. If the Company determines that it is required by law to release information to any third party regarding the terms of this Agreement, it shall notify the Purchaser of this fact prior to releasing the information. The notice to the Purchaser shall include the text of the information proposed for release. The Purchaser shall 4 have the right to confer with the Company regarding the necessity for the disclosure and the text of the information proposed for release. 4. Compliance with Securities Act 4.01 Certain Definitions. As used herein, the following terms shall have the following respective meanings: (a) Commission. Shall mean the Securities and Exchange Commission, or any other Federal agency at the time administering the Securities Act or the Trust Indenture Act, as the case may be. (b) Securities Act. Shall mean the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the relevant time. (c) Exchange Act. Shall mean the Securities Exchange Act of 1934, as amended, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the relevant time. (d) Restricted Common Stock. Shall mean the Common Stock of the Company issued and sold pursuant to this Agreement which by the terms hereof is required to bear the legend specified in Section 4.02 hereof. 4.02 Restriction of Transferability; Legend. Shares of Restricted Common Stock shall not be resold or transferred unless registered under the Securities Act or unless an exemption from registration is available for such sale or transfer. The conditions specified below are intended to ensure compliance with the provisions of the Securities Act in respect of any transfer of stock. Each certificate for shares of Restricted Common Stock shall be stamped or otherwise imprinted with a legend in substantially the following form: The shares evidenced by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold or transferred in the absence of such registration or an exemption therefrom under said Securities Act and the transfer of such shares is subject to terms and conditions specified in the Common Stock Purchase Agreement dated as of June 11, 1998, between the Company and Agouron Pharmaceuticals, Inc. If shares of Restricted Common Stock evidenced by certificates bearing a legend required by this Section 4.02 are sold in accordance with a registration statement which has become effective under the Securities Act, or if the Company shall receive an opinion of its counsel to the effect that any legend required under this Section 4.02 is not, or is no longer, necessary or required with respect to such shares (including, without limitation, because of the availability of the exemption afforded by Rule 144 of the General Rules and Regulations of the Commission), the Company shall, or shall instruct its transfer agent and registrar to, remove such legend or issue new certificates without such legend in lieu thereof. 5 4.03 Information Requirements. The Company agrees to: (a) Make and keep public information available, as such term is understood and defined in Commission Rule 144 and Rule 144A, under the Securities Act; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) Furnish to any holder of Restricted Common Stock a copy of the most recent annual or quarterly report of the Company, and such other publicly available reports and documents of the Company, so that such holder may avail itself of any rule or regulation of the Commission allowing it to sell any such securities without registration. 4.04 Piggy-Back Registration Rights. If the Company before January 15, 2001 contemplates a public offering of shares of its Common Stock to be registered under the Securities Act, the Company shall so notify the Purchaser in writing of its intention to do so, at least twenty (20) days prior to the filing of a registration statement for such offering. If Purchaser gives written notice to the Company, within ten (10) days of receipt of the notice from the Company, of Purchaser's desire to have its Restricted Common Stock included in such registration statement, Purchaser may, subject to the provisions of this Section 4.04, have its Restricted Common Stock included in such registration statement. The Company shall bear all expenses in connection with the registration and sale of any such Restricted Common Stock, other than the fees or disbursements of any special counsel which the Purchaser may retain in connection with the registration of its Restricted Common Stock or any portion of the underwriter's commission, discounts and expenses attributable to the Restricted Common Stock being offered and sold by the Purchaser. Notwithstanding the foregoing, if the managing underwriter of any such offering determines that the number of shares proposed to be sold by the Company, by other shareholders having piggy-back rights, and/or by the Purchaser is greater than the number of shares which the underwriter believes feasible to sell at the time, at the price and upon the terms approved by the Company, then the number of shares which the underwriter believes may be sold shall be allocated for inclusion in the registration statement in the following order of priority: (i) shares being offered by the Company; and (ii) pro rata among the other shareholders and the Purchaser, based on the number of shares of Common Stock each shareholder requested to be registered. The Company shall have the right to designate the managing underwriter in respect of a public offering pursuant to this Section 4.04. 4.05 Additional Covenants Concerning Sale of Shares. (a) The Company will notify the Purchaser of the effectiveness of any registration statement in which Purchaser has exercised registration rights granted pursuant to the terms of Section 4.04, together with a list of the jurisdictions where the Company has qualified or is exempt from registration under applicable state securities laws. 6 (b) The Company will prepare and file with the Commission such amendments and supplements to any registration statement filed pursuant to the terms of Section 4.04 (and any prospectus used in connection with such registration statement) as may be necessary to comply with the provisions of the Securities Act with respect to the sale of Restricted Common Stock by the Purchaser. (c) The Company will furnish to the Purchaser a reasonable number of copies of the prospectus used in connection with a registration statement filed pursuant to the terms of Section 4.04, including a preliminary prospectus, which prospectus conforms to the requirements of the Securities Act, and such other documents as the Purchaser may reasonably request, in order to facilitate the disposition of the Purchaser's Restricted Common Stock. (d) In connection with any registration statement referred to in Section 4.04 of this Agreement, Purchaser will furnish to the Company such information as the Company may reasonably require from Purchaser for inclusion in the registration statement (and the prospectus included therein). (e) The Company's obligations under Section 4.04 shall be conditioned upon Purchaser executing and delivering to the Company its agreement, in a form satisfactory to counsel for the Company, that it will comply with all applicable provisions of the Securities Act, the Exchange Act, the securities acts of applicable states and any rules and regulations promulgated under such acts and will furnish to the Company information about sales made in such public offering. 4.06 Indemnification In the event any of the Restricted Common Stock of Purchaser is included in a registration statement under Section 4.04 of this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless the Purchaser and its Affiliates and their respective officers, directors and employees, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (hereinafter sometimes collectively referred to as a "Violation(s)"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and the Company will 7 reimburse each such indemnified party for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 4.06 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld or delayed), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon, and in conformity with, written information furnished expressly for use in connection with such registration, by any such indemnified party. (b) To the extent permitted by law, the Purchaser will indemnify and hold harmless the Company and its Affiliates and their respective officers, directors and employees against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any Violations, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon, and in conformity with, written information furnished by the Purchaser and its Affiliates and their respective officers, directors and employees to the Company expressly for use in connection with such registration; and the Purchaser will reimburse each such indemnified party for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 4.06 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Purchaser, which consent shall not be unreasonably withheld or delayed. (c) Promptly after receipt by an indemnified party under this Section 4.06 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 4.06, notify the indemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, to assume the defense thereof with counsel mutually satisfactory to the parties. 5. Miscellaneous 5.01 Expenses; Finders Fees. Neither party shall pay expenses and finder fees for or to the other in connection with this transaction. Each party agrees to indemnify and hold the other party harmless from any liability for any commission or compensation in the nature of a finder's fee to any broker or other person (and the costs and expenses of defending against such liability or asserted liability) claiming to have been hired or engaged by the party. 5.02 Replacement of Certificates for Restricted Common Stock. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of 8 any certificate evidencing any Restricted Common Stock, the Company will execute, register and deliver, in lieu thereof, a new certificate for an equal number of shares of Restricted Common Stock. In the case of loss, theft or destruction of a certificate, at the election of the Company, the Purchaser may be required to provide an indemnity reasonably satisfactory to the Company or to post a surety bond in an amount equal to the value of the shares represented by the new certificate. 5.03 Notice. Any notice required to be given under the terms of this Agreement shall be in writing, and shall be given in person, transmitted by telecopier, e-mail or similar electronic communication, delivered by a recognized overnight delivery service such as Federal Express or sent by mail (certified or registered or air mail for addresses outside of the country of origin), return receipt requested, postage prepaid and addressed to the Company at 5935 Darwin Court, Carlsbad, California 92008, or such other address as the Company may designate to Purchaser in writing and to the Purchaser, at the address appearing at the beginning of this Agreement or such other address as Purchaser may designate to the Company in writing. Except as otherwise provided herein, any notice so given shall be deemed delivered upon the earlier of (i) actual receipt; (ii) receipt by sender of confirmation if telecopied or sent by e-mail or similar electronic communication; (iii) two business days after delivery to such overnight delivery service; or (iv) five business days after deposit in the mail. 5.04 Successors and Assigns. This Agreement shall be binding upon the parties and their respective successors and assigns. 5.05 Survival of Representations, Etc. All covenants, representations and warranties made by the parties herein shall survive the Closings and the delivery of this Agreement and the shares of Restricted Common Stock purchased hereunder. 5.06 Termination. Purchaser's obligation to purchase Restricted Common Stock under this Agreement shall terminate with respect to any purchase obligations whose purchase dates under Paragraph 1.02 occur after Purchaser has elected to terminate, in its entirety, all of Purchaser's rights and obligations under the Letter of Intent ("LOI") dated June 11, 1998 and the Definitive Agreement (as defined in the LOI) between the parties. 5.07 Severability. Should any part of this Agreement for any reason be declared invalid, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in force and effect as if this Agreement had been executed with the invalid portion thereof eliminated and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any such part, parts, or portion which may, for any reason, be hereafter declared invalid. 5.08 Governing Law. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of California without regard to its conflict of law provisions. 5.09 Captions, Form of Pronouns. The descriptive headings of the various sections or parts of this Agreement are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. All pronouns used in this Agreement shall be deemed to include masculine, feminine and neuter forms. 9 5.10 Agreement is Entire Contract. This Agreement constitutes the entire contract between the parties hereto related to the purchase and sale of Restricted Common Stock and no party shall be liable or bound to the other in any manner by any warranties, representations or covenants except as specifically set forth herein. 5.11 Third Parties. Nothing in this Agreement is intended to confer upon any party, other than the parties hereto, and their respective permitted successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 5.12 Amendment and Waiver. Any provision of this Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only with the written consent of the Company and the Purchaser. 5.13 Affiliates. References to Purchaser in this Agreement shall be deemed to include direct or indirect subsidiaries of Purchaser. The term "Affiliate" shall have the meaning defined in the LOI. 5.14 Dispute Resolution. In the event of any controversy or claim arising out of or relating to any provision of this Agreement, the parties shall try to settle their differences amicably between themselves. Any unresolved disputes arising between the parties relating to, arising out of or in any way connected with this Agreement or any term or condition hereof, or the performance by either party of its obligations hereunder, whether before or after termination of this Agreement, shall be finally resolved by binding arbitration. Whenever a party shall decide to institute arbitration proceedings, it shall give written notice to that effect to the other party. The party giving such notice shall refrain from instituting the arbitration proceedings for a period of sixty (60) days following such notice The arbitration shall be held in San Diego, California according to the rules of the American Arbitration Association ("AAA") applicable to commercial securities matters of this nature. The arbitration shall be conducted by a panel of three arbitrators appointed in accordance with AAA rules; provided, however, that each party shall within thirty (30) days after the institution of the arbitration proceedings appoint one arbitrator with the third arbitrator being chosen by the other two arbitrators. If only one party appoints an arbitrator, then such arbitrator shall be entitled to act as the sole arbitrator to resolve the controversy. Any arbitration hereunder shall be conducted in the English language and the arbitrator(s) shall apply the law set forth in SectionE5.08. All arbitrator(s) eligible to conduct the arbitration must agree to render their opinion(s) within thirty (30) days of the final arbitration hearing. The arbitrator(s) shall have the authority to grant injunctive relief and specific performance, and to allocate between the parties the costs of arbitration in such equitable manner as he determines; provided, however, that each party shall bear its own costs and attorney's and witness' fees. Notwithstanding the terms of this Section 5.14, a party shall also have the right to obtain prior to the arbitrator(s) rendering the arbitration decision, provisional remedies including injunctive relief or specific performance from a court having jurisdiction thereof. The arbitrator(s) will, upon the request of either party, issue a written opinion of the findings of fact and conclusions of law and shall deliver a copy to each of the parties. Decisions of the arbitrator(s) shall be final and binding on all of the parties. Judgment on the award so rendered may be entered in any court having jurisdiction thereof. 10 The execution hereof by Purchaser shall constitute a contract between us for the uses and purposes hereinabove set forth, and this Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement. THE IMMUNE RESPONSE CORPORATION By /s/ Dennis J. Carlo By /s/ Charles J. Cashion ACCEPTED AND AGREED TO AS OF THE DAY AND YEAR AFORESAID. PURCHASER: AGOURON PHARMACEUTICALS, INC By /s/ Peter Johnson Peter Johnson President and Chief Executive Officer By /s/ Gary Friedman Gary Friedman Secretary 11 EX-10.24 4 AMENDMENT TO THE VIRACEPT LICENSE AGREEMENT AMENDMENT TO THE VIRACEPT (Nelfinavir Mesylate) LICENSE AGREEMENT This Amendment ("Amendment") to the VIRACEPT (Nelfinavir Mesylate) License Agreement ("the Agreement"), effective as of this 1st day of May, 1998 ("Effective Date"), is between Agouron Pharmaceuticals, Inc., a corporation duly organized and existing under the laws of the state of California, having a principal place of business at 10350 North Torrey Pines Road, La Jolla, California, United States of America (hereinafter referred to as "Agouron"), Japan Tobacco Inc., a corporation duly organized and existing under the laws of Japan, having its principal place of business at JT Building, 2-1, Toranomon 2-chome, Minato-ku, Tokyo, Japan (hereinafter referred to as "JT"), and F. Hoffmann-La Roche Ltd, a corporation duly organized and existing under the laws of Switzerland, having its principal place of business at CH-4002-Basel, Switzerland (hereinafter referred to as "Roche"). Agouron, JT and Roche are each sometimes hereinafter referred to as a party (collectively "parties"). The parties for good and valuable consideration hereby agree as follows: RECITALS 1. Background 1.01 All capitalized terms, except as expressly otherwise defined herein, shall have the meanings set forth in the Agreement. 1.02 Agouron, JT and Roche entered into a Letter of Intent on January 17, 1997 and the VIRACEPT (nelfinavir mesylate) License Agreement dated for reference purposes only June 30, 1997, under which Agouron and JT granted, and Roche received, a license in the Licensed Territory to use, offer for sale, sell and/or import Products in the Field under applicable Agouron/JT Patent Rights and Development Program Patent Rights and using applicable Agouron/JT Technology, Roche Technology and Development Program Technology. 1.03 Roche has certain capacities to manufacture Compound as well as formulate Product. Roche has informed Agouron and JT of its desire to manufacture Compound and formulate Product to be sold and/or distributed in the Licensed Territory with such Roche manufacturing and formulating responsibilities to be phased-in over an agreed-to period of time. 1.04 The parties, in accordance with the provisions of Section 4.04(f) of the Agreement, have discussed in good faith an arrangement under which Roche could be the manufacturer of Compound and the formulator of Product to be sold and/or distributed in the Licensed Territory. 1.05 Agouron and JT under certain conditions are willing to grant Roche certain rights to manufacture Compound and formulate Product to be sold and/or distributed in the Licensed Territory. 1.06 * 1.07 * 1.08 To effect the preceding and clarify the parties' rights and obligations under the Agreement, the parties wish to amend the Agreement as provided below. AMENDMENT 2. Grant of Rights to Roche 2.01 * 2.02 * 2.03 * 2 2.04 Except as otherwise specifically provided in the Agreement, * 2.05 All licenses granted Roche in this Amendment in a country shall become * 2.06 Roche shall not have the right to use * 3. Limitations 3.01 Roche's rights to manufacture Compound and formulate Product shall * 3.02 * 3 (a) * (b) * (c) * (d) * 4 3.03 * 5 4. Markup 4.01 For the rights granted pursuant to the provisions of Paragraphs 2.01-2.04, * 5. License grant to Agouron and JT 5.01 Roche grants Agouron and JT * 5.02 For the rights granted pursuant to the provisions of Paragraph 5.01, * 5.03 * 6 6. Exchange of Information 6.01 Immediately after execution of this Amendment by the parties, and on an ongoing basis thereafter, * 7. Supply obligations 7.01 * 7.02 * 7.03 * (a) * (b) * 7 (c) * (d) * (e) * (f) * 7.04 * 8 7.05 * 8. Schedule 2 of Agreement 8.01 * 9. Trademark/Labeling 9.01 The labeling for any Product to be sold and/or distributed by Roche, * 9 10. Remaining Agreement Terms 10.01 Except as expressly amended by the terms contained in this Amendment, the provisions of the Agreement, as previously amended, shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to enter into this Amendment to the VIRACEPT(TM)(Nelfinavir Mesylate) License Agreement, effective as of the Effective Date. AGOURON PHARMACEUTICALS, INC. JAPAN TOBACCO INC. By: /s/ Gary Friedman By: /s/ Masakazu Kakei Name: Gary Friedman Name: Masakazu Kakei Title: Corp. Vice President Title: Executive Director By:/s/ R. Kent Snyder By: /s/ Tatsuya Yoneyama Name: R. Kent Snyder Name: Tatsuya Yoneyama Title: Sr. Vice President Title: Vice President, Business Devel., Pharmaceuticals Division F. HOFFMANN-LA ROCHE LTD By /s/ St. Arnold Name: St. Arnold Title: Vice Director By: /s/ B. Scholl Name: B. Scholl Title: Vice Director 10 SCHEDULE 1 * S1-1 SCHEDULE 2 ROCHE DEMAND SCHEDULE FOR VIRACEPT PRODUCT * S2-1 SCHEDULE 2 ROCHE DEMAND SCHEDULE FOR VIRACEPT PRODUCT * S2-2 SCHEDULE 2 ROCHE DEMAND SCHEDULE FOR VIRACEPT PRODUCT * S2-3 SCHEDULE 2 ROCHE DEMAND SCHEDULE FOR VIRACEPT PRODUCT * SCHEDULE 2 ROCHE DEMAND SCHEDULE FOR VIRACEPT PRODUCT * S2-4 SCHEDULE 2 ROCHE DEMAND SCHEDULE FOR VIRACEPT PRODUCT * S2-5 ATTACHMENT 1 1. * 2. * 3. * 4. * 5. * 6. * EX-21 5 SUBSIDIARIES OF AGOURON PHARMACEUTICALS, INC. Subsidiaries of Agouron Pharmaceuticals, Inc.
Subsidiary % State of Corporation Owned Incorporation Alanex Corporation 100% Delaware Agouron Pharmaceuticals Canada Inc. 100% New Brunswick, Canada
EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-46531) of Agouron Pharmaceuticals, Inc. of our report dated July 16, 1998 appearing on page F-1 of this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP San Diego, California August 4, 1998 EX-27 7 FDS --
5 This schedule contains summary financial information extracted from the balance sheet and the statement of income (loss) and is qualified in its entirety by reference to such financial statements. 0000811210 Agouron Pharmaceuticals, Inc. 1,000 12-mos Jun-30-1998 Jun-30-1998 19,098 68,025 51,669 328 103,706 247,981 71,533 24,321 363,337 120,253 0 0 0 348,482 (112,313) 363,337 409,298 466,505 172,644 259,485 0 0 752 21,924 8,770 13,154 0 0 0 13,154 0.43 0.40
EX-99 8 REGARDING FORWARD LOOKING STATEMENTS Agouron Pharmaceuticals, Inc. Important Factors Regarding Forward-Looking Statements The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time. Uncertainty of Product Development and Market Acceptance: The Company has completed the development and commercialization of only one product and does not expect to have any additional products commercially available until calendar 2000, if at all. There can be no assurance that further research and development of these additional products will be successful or will result in drugs that will qualify for approval by regulatory authorities for commercial sale or be accepted and successful in the marketplace. Uncertainty Associated with Clinical Testing: Historical results of clinical testing of approved products and those under development are not necessarily predictive of future results. There can be no assurance that clinical studies of products under development will demonstrate the safety and efficacy of such products. The failure to adequately demonstrate the safety and efficacy of a therapeutic product could delay or prevent regulatory approval of the product. There can be no assurance that unacceptable toxicities or side effects will not occur at any time in the course of human clinical trials or commercial use of the Company's drugs. The appearance of any such unacceptable toxicities or side effects could interrupt, limit, delay or abort the development of any of the Company's drugs or, if previously approved, necessitate their withdrawal from the market. Furthermore, there can be no assurance that disease resistance will not limit the efficacy of the Company's current and future drugs, if any. Delays in planned patient enrollment in the Company's current clinical trials or future clinical trials may result in increased costs, program delays or both. Future Profitability: While the Company has recently generated significant revenues from the commercialization of its first product and has reported operating profits on a quarterly basis, there can be no assurance that the Company will maintain profitable operating results. Additional Financing Requirements and Access to Capital: Additional funding may be required for future product or business organization opportunities, capital expenditures, working capital and other general corporate needs. No assurance can be given that additional financing will be available when needed or on terms acceptable to the Company. If adequate funds are not available, the Company may be required to delay or eliminate expenditures for certain of its programs or activities or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop and commercialize itself. Dependence on Others: The Company's strategy for development and commercialization of certain of its products entails entering into various arrangements with corporate partners, licensees and others. There can be no assurance that any revenues or profits will be derived from such arrangements, that any of the Company's current strategic arrangements will be continued, or that the Company will be able to enter into future collaborations. Products Acquired from Third Parties: The Company has recently acquired rights in three development stage products focusing on the HIV/AIDS market. There can be no assurance that the Company will be successful with the commercial development of such products or, if successfully developed, that such products will make a significant contribution to the Company's future operating results. Manufacturing Capabilities: The Company is, and for the foreseeable future expects to be, dependent on a number of contract manufacturers for the commercial manufacture of its current and future products (if any) under current Good Manufacturing Practices ("GMP"). Failure to meet GMP standards would have an adverse impact on the Company's business. No assurance can be given that such manufacturers can be established or retained or that such manufacturers will timely deliver sufficient product quantities at acceptable costs. Sales and Marketing Capabilities: The Company has established its capabilities in the sales, marketing and distribution of pharmaceutical products. There can be no assurance that such capabilities will be sufficient or successfully maintained. Patents and Proprietary Technology: No assurance can be given that the Company's patent applications, and those applications to which the Company has obtained license rights, will issue as patents or that any patents that are or may be issued will provide the Company with adequate protection for the covered products or technology. Additionally, there can be no assurance that the Company's confidentiality agreements will adequately protect its trade secrets, know-how or other proprietary information. Further, there can be no assurance that the Company's activities will not infringe on the patents or proprietary rights of others or that the Company will be able to obtain licenses to any technology that it may require to conduct its business or that, if obtainable, such technology can be licensed at a reasonable cost. Technological Change and Competition: There can be no assurance that competitors will not succeed in developing technologies and products that are more effective than any which have been or are being developed by the Company or which would render the Company's technology and products obsolete and noncompetitive. Many of the Company's competitors have substantially greater financial and technical resources and production, marketing and development capabilities and experience than the Company. Accordingly, certain of the Company's competitors may succeed in obtaining regulatory approvals more rapidly or effectively than the Company or enjoy greater manufacturing efficiencies and sales and marketing capabilities, areas in which the Company has less experience than its competitors. Volatility of Stock Price: The market price of the Common Stock has in recent years fluctuated significantly, and it is likely that the price of Common Stock will fluctuate in the future. Announcements by the Company or others regarding its operating results, corporate reorganization matters, existing and future collaborations, results of clinical trails, scientific discoveries, technological innovations, commercial products, patents or proprietary rights or regulatory actions may have a significant effect on the market price of the Common Stock. Fluctuations in financial performance from period to period also may have a significant impact on the market price of the Common Stock. Government Regulation: Preclinical studies, clinical trials and the production and marketing of the Company's products and its ongoing research and development activities are subject to regulation by numerous governmental authorities in the United States and other countries. If regulatory approval of a drug is obtained, such approval may involve limitations and restrictions on the drug's use. Failure of the Company, or its corporate partners, to comply with applicable regulatory requirements can, among other things, result in fines, suspension of regulatory approvals or product recalls. Additionally, the Company is or may become subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions and the use and disposal of hazardous or potentially hazardous substances. The Company is unable to predict the extent of restrictions that might arise from any governmental or administrative action. Uncertainty of Third-Party Reimbursement and Product Pricing: The Company's ability to commercialize products successfully will depend in part on the availability of reimbursement of the costs of such products and related treatments at acceptable levels from government authorities, private health insurers and other organizations, such as health maintenance organizations. There can be no assurance that reimbursement in the United States or foreign countries will be available for any products the Company has developed or may develop or, if available, will either remain available or will not be decreased in the future, or that reimbursement amounts, if any, will not reduce the demand for, or the price of, the Company's products, thereby adversely affecting the Company's business. Product Liability; Limited Insurance Coverage: The testing, marketing and sale of human health care products entail an inherent risk of allegations of product liability and there can be no assurance that product liability claims will not be asserted against the Company. There can be no assurance that the Company will be able to obtain or maintain product liability insurance on acceptable terms or that such insurance will provide adequate coverage against any potential claims. Use of Hazardous Materials: The Company's research and development activities involve the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. Although the Company believes that its safety procedures for 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 damages that result and any liability could have an adverse effect on the Company. Attraction and Retention of Personnel: The future success of the Company will depend in large part on its ability to continue to attract and retain highly qualified scientific, technical, sales and marketing and managerial personnel. Competition for such personnel is intense and there can be no assurance that the Company will be able to attract and retain the personnel necessary for the ongoing development of its business. The loss of or failure to recruit such personnel could have an adverse effect on the Company. -----END PRIVACY-ENHANCED MESSAGE-----