10-K405 1 h95317e10-k405.txt TEXAS BIOTECHNOLOGY CORP - YEAR END 12/31/2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-12574 TEXAS BIOTECHNOLOGY CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 13-3532643 (State of Incorporation) (I.R.S. Employer Identification Number) 7000 FANNIN, 20TH FLOOR HOUSTON, TEXAS 77030 (713) 796-8822 (Address and telephone number of principal executive offices and zip code) Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.005 par value Nasdaq National Market
Securities Registered Pursuant to Section 12(g) of the Act: NONE 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 [ ] The approximate aggregate market value of voting stock held by nonaffiliates of the registrant is $272,517,000 as of March 25, 2002. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The number of shares outstanding of each of the registrant's classes of common stock as of March 25, 2002:
TITLE OF CLASS NUMBER OF SHARES -------------- ---------------- Common Stock, $.005 par value 43,690,105
Documents incorporated by reference:
DOCUMENT FORM 10-K PARTS -------- --------------- Definitive Proxy Statement, to be filed within III 120 days of December 31, 2001 (specified portions)
================================================================================ CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in and incorporated by reference into this Form 10-K are forward-looking statements. These forward-looking statements include, without limitation, statements regarding our estimate of the sufficiency of our existing capital resources and our ability to raise additional capital to fund cash requirements for future operations, and regarding the uncertainties involved in the drug development process and the timing of regulatory approvals required to market these drugs. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can not give any assurance that such expectations reflected in these forward-looking statements will prove to have been correct. When used in this Form 10-K, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Additional Risk Factors" and elsewhere in this Form 10-K. You should read these statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our future financial condition, or state other "forward-looking" information. You should be aware that the occurrence of any of the events described in the risk factors and elsewhere in this Form 10-K could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline, and you could lose all or part of your investment. We cannot guarantee any future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this Form 10-K after the date of this Form 10-K. This Form 10-K may contain trademarks and service marks of other companies. 1 PART I ITEM 1 -- BUSINESS OVERVIEW Texas Biotechnology Corporation was incorporated in Delaware in 1989 and is sometimes referred to in this report as TBC, we or us. We are a biopharmaceutical company focused on the discovery, development and commercialization of novel, synthetic, small molecule compounds for the treatment of a variety of cardiovascular, vascular and related inflammatory diseases. Our research and development programs are focused on inhibitors (also referred to as antagonists or blockers) that can interrupt certain disease processes. Our programs seek to address unmet medical needs in areas where our compounds will have the greatest likelihood of improving the lives of patients suffering from cardiovascular diseases, thrombocytopenia, pulmonary arterial hypertension, heart failure and inflammatory diseases such as asthma. Argatroban is our first marketed product. Argatroban was approved by the U.S. Food and Drug Administration ("FDA") in 2000, and is indicated for prophylaxis or treatment of thrombosis in patients with heparin-induced thrombocytopenia ("HIT"). The drug is being marketed by GlaxoSmithKline, plc ("GSK") and has been on the market since November 2000. GSK is our development, manufacturing and marketing partner for Argatroban. Presently, we have four major product development programs. o Thrombosis. We are conducting a Phase II human clinical trial for Argatroban as a treatment for acute ischemic stroke. Additionally with GSK, we are evaluating the use of Argatroban in hemodialysis patients and for use in percutaneous coronary intervention ("PCI"). o Vasospasm Program. We are developing sitaxsentan as an endothelin(A) receptor antagonist, or ET(A), for the treatment of pulmonary arterial hypertension. During June 2000, we formed a partnership, ("ICOS-TBC"), with ICOS Corporation ("ICOS") to develop and commercialize ET(A) receptor antagonists. ICOS-TBC is currently conducting a Phase IIb/III clinical trial in pulmonary arterial hypertension with sitaxsentan and has completed Phase I clinical trials for TBC3711, a second generation ET(A) receptor antagonist that may be developed for cardiovascular or other disease. We are also conducting research of the role of urotensin in hypertension. o Vascular Inflammation Program. We are developing a selectin antagonist, TBC1269, for the treatment of asthma and psoriasis. The intravenous form of the drug demonstrated positive anti-inflammatory effects in Phase II clinical trials. During 2000, we formed Revotar Biopharmaceuticals AG ("Revotar"), a majority owned German subsidiary located in Berlin, to further the development of this program. Revotar completed Phase I clinical trials for asthma utilizing an inhaled form of TBC1269. A Phase IIa proof-of-concept clinical trial in psoriasis is being conducted with an injectable form of TBC1269,. We are also conducting research with respect to cell adhesion molecules including vascular cell adhesion molecules, or VCAM, junctional adhesion molecules, or JAM, 2/3 and integrins including very late antigen 4, or VLA-4, a member of the integrin family, (alpha)4(beta)7 and (alpha)v(beta)3 antagonists for the treatment of asthma, rheumatoid arthritis, multiple sclerosis, restenosis and inflammatory bowel disease. We have signed a collaboration and license agreement for the VLA-4 program with Schering-Plough LTD and Schering-Plough Corporation (collectively "Schering-Plough") and are currently conducting research on VLA-4 antagonists for Schering-Plough under this agreement. TBC4746, a VLA-4 antagonist, is currently in preclinical development. o Vascular Remodeling. Many disease states involve the remodeling of blood vessels and tissues such as the heart. Several distinct processes including angiogenesis, vascular proliferation, and apoptosis contribute to tissue remodeling. We are conducting research into each of these processes. Our objective is to identify inhibitors which could be useful in treating diseases including congestive heart failure, or CHF, ischemic stroke, rheumatoid arthritis, and acute myocardial infarction. 2 BUSINESS STRATEGY The key elements of our business strategy are as follows: Maximize sales of Argatroban by expanding indications for its use Our marketing, manufacturing and distribution partner, GSK, began selling Argatroban during November 2000 as an anticoagulant for prophylaxis or treatment of thrombosis in patients with HIT. In addition: o during 2001, we received an approvable letter from the FDA on our supplementary NDA ("sNDA") for Argatroban for use in HIT patients undergoing PCI; o during 2001 we received approval to market Argatroban in Canada for patients with HIT; o we are conducting a Phase II human clinical trial to evaluate the use of Argatroban for use in acute ischemic stroke, an indication for which Argatroban is approved and sold in Japan by Mitsubishi-Tokyo Pharmaceuticals ("Mitsubishi"), the licensor of Argatroban and by their licensee; and o we are evaluating the use of Argatroban for use in hemodialysis patients and for use in PCI. Focus on the identification and development of new drugs for the treatment of diseases involving the vascular endothelium Injury to the vascular endothelium is a common cause of many of the most profound diseases affecting patients today, such as ischemic heart disease, hypertension, congestive heart failure, and asthma. By concentrating on this area, we can be relatively efficient in our drug discovery, development and commercialization efforts. This efficiency extends to the following areas: o Research -- Our efforts are predominantly focused toward the treatment and prevention of interrelated diseases of the vascular endothelium, and our research group has expertise in the area of vascular biology; o Computer aided drug design -- We utilize computers to rapidly develop drug candidates derived from our vascular biological efforts and to identify new targets from information discovered by the Human Genome Project; o Clinical investigators and consultants -- We work with key opinion leaders and consultants experienced in diseases of the vascular endothelium to assist in clinical development, product planning and the regulatory approval process. Focus on the identification and development of small molecule drug candidates Small molecule therapeutics have several advantages over large molecules, such as proteins, peptides and monoclonal antibodies. Small molecules can frequently be administered orally on an outpatient basis. By contrast, large molecule therapeutics can rarely be formulated to accommodate oral outpatient administration. Since small molecules generally are not immunogenic, use of small molecules avoids the potential for immune reactions that can occur with protein therapeutics. In addition, small molecules can typically be protected with composition-of-matter patents that generally provide a large degree of intellectual property protection. Our emphasis on small molecule therapeutics means that our drug candidates can be produced by conventional pharmaceutical manufacturing methods with the potential for modest cost of goods sold. Participate in the sales and marketing in the United States and Canada of the drugs we develop In the biopharmaceutical industry, a substantial percentage of the profits generated from successful drug development are typically retained by the entity directly involved in the sales and marketing of the drug. Licensing our drug candidates to a third party who will complete development and provide sales and marketing resources in exchange for upfront payments, milestone payments and a royalty on sales may reduce some of our risks, particularly for diseases outside our strategic interest or in territories outside of the United States and Canada. However, in the future, we may decide that the risk-return profile favors developing and then marketing and selling products on a co-promotion basis or by ourselves. Therefore, when and if we deem it appropriate, we intend to participate in the sales and marketing of our products in the United States and Canada. Our participation in ICOS-TBC will allow us to participate in commercialization of products that may result from our endothelin antagonist program. 3 THERAPEUTIC PROGRAMS AND PRODUCTS IN DEVELOPMENT The following table summarizes the potential therapeutic indications and development status for certain of our clinical, preclinical and research product candidates and is qualified in its entirety by the more detailed information appearing elsewhere in this Form 10-K.
TARGET COMPOUND/ PROGRAM DOSE FORM INDICATION STATUS(1) ------- ---------------- ---------- --------- THROMBOSIS ARGATROBAN Intravenous Anticoagulant therapy for Marketed product prophylaxis or treatment of patients with HIT Intravenous Anticoagulant therapy in HIT for Approvable letter received from patients undergoing PCI the FDA Intravenous Anticoagulant therapy for Phase II patients with ischemic stroke Intravenous Anticoagulant therapy for Phase II patients on hemodialysis Intravenous Anticoagulant therapy for Phase II patients undergoing PCI VASOSPASM/ ENDOTHELIN(A) RECEPTOR HYPERTENSION ANTAGONIST Sitaxsentan (TBC11251) Oral Pulmonary Arterial Hypertension Phase IIb/III TBC3711 Oral Cardiovascular or other disease Phase I completed TBC3214 Oral Cancer pain Preclinical UROTENSIN RECEPTOR Congestive Heart Failure Research ANTAGONIST VASCULAR SELECTIN ANTAGONIST INFLAMMATION TBC1269 Intravenous Asthma Phase II Inhaled Asthma Phase II Topical Psoriasis Preclinical VCAM/VLA-4 ANTAGONIST TBC4746 Oral Asthma Preclinical Multiple Sclerosis Preclinical Rheumatoid Arthritis Preclinical (ALPHA)V(BETA)3 Restenosis Research JAM 2/3 Myocarditis Research (ALPHA)4(BETA)7 ANTAGONIST TBC3804 Oral Inflammatory Bowel Disease Research VASCULAR REMODELING CASPASE INHIBITOR TBC4521 Acute Myocardial Infarction Research Ischemic Stroke Research CX3CR Coronary Artery Disease Research TNF(ALPHA) ANTAGONIST Rheumatoid Arthritis Research
(1) Preclinical compounds are compounds undergoing toxicology and pharmaceutical development in preparation for human clinical testing. Research compounds are compounds undergoing basic evaluation and optimization to establish a lead clinical candidate. 4 THROMBOSIS PROGRAM ARGATROBAN Background. Thrombosis, the lodging of a blood clot in a vessel, causes various vascular diseases, depending on the location of the clot. An arterial clot may lead to heart attack if lodged in a coronary artery, or stroke if lodged in an artery that supplies oxygen to the brain. Venous clots occur principally in the arms or legs (deep vein thrombosis), and may cause local inflammation, chronic pain and other complications. In some cases, a venous clot can cause lung injury (pulmonary embolism) by migrating from the veins to the lungs. Thrombosis can be treated surgically or through drug therapy with anticoagulant and thrombolytic drugs. Anticoagulant drugs, which prevent clots from forming, are characterized as either antithrombotic or antiplatelet drugs. Antithrombotic drugs block the action of the blood protein thrombin and may be used to treat both arterial and venous clots. Antiplatelet drugs prevent platelets from clumping together and are only effective in treating arterial clots. Heparin and aspirin are the most widely used antithrombotic and antiplatelet drugs, respectively. Heparin, first discovered over 80 years ago, is the most widely used injectable anticoagulant. In the U.S., approximately ten million patients annually receive therapeutic heparin to treat a variety of conditions that require inhibition of the body's natural clotting mechanism. Each year over 300,000 of these patients develop a profound immunological reaction to heparin that is known as heparin-induced thrombocytopenia. The condition is characterized by a strong tendency to clot that puts the patient at risk of major complications such as acute myocardial infarction, ischemic stroke, amputation or death. It is also very difficult to administer heparin dosages. Current Therapies. In conjunction with GSK, we obtained approval for Argatroban as an anticoagulant for prophylaxis or treatment of thrombosis in patients with HIT in the U.S and Canada. GSK began marketing Argatroban in the U.S. in November 2000. Argatroban is a synthetic direct thrombin inhibitor that directly and selectively binds to and inactivates thrombin in the blood plasma. Argatroban is manufactured and marketed in Japan by Mitsubishi where it is approved as a treatment for ischemic stroke, peripheral arterial occlusion and hemodialysis in patients with antithrombin III deficiency, a clotting disorder that does not respond to heparin. Since the product's introduction in 1990, more than 100,000 patients have been treated with Argatroban in Japan. Other measures, such as inline filters, are sometimes used to remove clots, but are highly invasive and involve patient trauma. Simply stopping heparin alone may be insufficient, as a significant number of patients will progress to experience severe outcomes. Clinical studies that we conducted in the U.S. have shown a significant correlation between the administered dose of Argatroban and the degree of anticoagulation achieved. This is potentially important as it suggests that the relationship between dose and effect of Argatroban is generally very predictable over the expected dose-range. As a result, we believe there is little risk of either insufficient or excessive anticoagulation occurring from small dose changes of Argatroban. Other product advantages for Argatroban include a rapid onset of action, a relatively short half-life and an absence of immunogenicity. Clinical Trial Status. Currently, we are conducting a multi-center, placebo-controlled Phase II clinical trial (ARGIS-I) for the use of Argatroban in patients with ischemic stroke and expect the Phase II trial results in the second half of 2002. With GSK, we are conducting clinical trials to evaluate the use of Argatroban in hemodialysis patients and for use in PCI, and we expect the Phase II trial results for use of Argatroban in PCI in the second half of 2002. Competition in HIT. Primary competitors for Argatroban in its initial indication are Refludan(R) (lepirudin), marketed by Berlex Laboratories, Orgaran(R) (danaparoid sodium), manufactured by N.V. Organon, a unit of Akzo Nobel, and Angiomax (R) (bivalirudin) manufactured by The Medicines Company. Refludan(R) (lepirudin, Berlex). This product received approval in Europe in 1997 and in the U.S. in 1998 for anticoagulation in patients with HIT to prevent further thromboembolic (clotting) complications. Refludan(R) has been associated with the development of an adverse immune response in up to 40% of patients receiving Refludan(R). Although the full clinical impact of development of these antibodies is unknown, we understand that the anticoagulant effects of Refludan(R) may become unpredictable in patients developing these antibodies. Additionally Refludan (R) is renally excreted while Argatroban is hepatically excreted. Berlex has stated they plan to submit for a HIT prevention label claim in the future. Orgaran(R) (danaparoid sodium, N.V. Organon). This product is a low molecular weight heparinoid, a heparin-like compound extracted from pigs. The product has been approved in the U.S. for prevention of deep venous thrombosis following hip surgery. However, approximately one in ten HIT patients receiving Orgaran(R) will develop the HIT syndrome exactly as if the patient received heparin. Orgaran(R) is not approved in the U.S. for HIT and is used on an off-label basis only. 5 Angiomax(R) (bivalirudin, The Medicines Company). This product received approval in the United States in 2001 for use as an anticoagulant in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty ("PTCA"). Angiomax(R) represents the third direct thrombin inhibitor approved in the United States. Angiomax(R) is not approved for the treatment of HIT but has data from an uncontrolled, open label trial. The Medicines Company has stated their intention to expand the Angiomax(R) label to include the treatment and prevention of HIT. Competition in Ischemic Stroke. The only approved therapy for ischemic stroke is Activase(R) ("tPA"), which is manufactured and sold by Genentech, Inc. Activase(R) is indicated for use within three hours of the onset of an ischemic stroke event. We are evaluating Argatroban for use in ischemic stroke patients within twelve hours of the onset of an ischemic stroke event. The mechanism of action of Argatroban is different than tPA. Other Indications. Argatroban may be useful in other disease settings where predictable anticoagulation is desired. Argatroban may be effective in hemodialysis and PCI, particularly in patients who develop problems when given heparin. Competition for Argatroban in Other Indications. Competitors for Argatroban in other applications include other direct thrombin inhibitors with the same mechanism of action: o Revasc(R) (desirudin, Aventis/Novartis A.G.), recombinant hirudin, is approved in Europe for the prevention of deep vein thrombosis following hip surgery, but has been associated with intracranial hemorrhage and antibody production; o Angiomax(R) (bivalirudin, The Medicines Company) is approved for use in patients with unstable angina undergoing PTCA; and o Melagatran (AstraZeneca plc) is in Phase III trials and is being developed as a treatment for deep vein thrombosis. o Arixtra(R) (pentasaccharide, Sanofi-Synthelabo) is approved for the prevention of deep vein thrombosis and pulmonary embolism. VASOSPASM/HYPERTENSION PROGRAM ICOS-TBC Background. Smooth muscle cells in the blood vessel are responsible directly for mediating vessel diameter. The regulation of blood flow depends on a delicate balance between physical and chemical stimuli that cause smooth muscle cells to relax (vasodilatation) or contract (vasoconstriction). Chronic periods of excessive vasoconstriction in the peripheral circulation can lead to disturbances in blood pressure (hypertension) or heart function (congestive heart failure), whereas acute episodes of intense vasoconstriction (vasospasm) can restrict blood flow leading to severe tissue damage and organ failure (myocardial infarction or kidney failure). Recently, it has been determined that the vascular endothelium (innermost lining) plays a pivotal role in maintaining normal blood vessel tone, including blood flow, by producing substances that regulate the balance between vasodilatation and vasoconstriction. Endothelins are a family of three peptides that are believed to play a critical role in the control of blood flow. It has been determined that the multiplicity of endothelin actions on different cell types can be explained by endothelins' interactions with two distinct receptors, ET(A) and ET(B), on cell surfaces. In general, ET(A) receptors are associated with vasoconstriction, while ET(B) receptors are primarily associated with vasodilatation. There is substantial evidence that endothelins are involved in a variety of diseases where blood flow is important. These include vasospasm, congestive heart failure and certain types of hypertension. Current Therapies. Congestive heart failure and systemic hypertension are currently treated with a combination of drugs depending on the severity of the disease. CHF therapy may include diuretics to lower fluid volume, digoxin and beta-blockers to improve heart performance and angiotensin converting enzyme inhibitors (ACE inhibitors), which lower blood pressure. Even with these existing therapies, five year mortality rates for CHF are greater than 50%. Endothelin antagonists have been demonstrated to provide additional benefits to animals and patients when used with these existing therapies. In the case of hypertension, similar existing therapies are used; however, not all patients respond to currently available drugs. The only approved therapies for severe pulmonary arterial hypertension are Flolan(R), a drug marketed by GSK, an intravenous form of prostacyclin and Tracleer(R), an oral drug marketed by Actelion Ltd. that is a non-selective, endothelin antagonist. With Flolan(R), patients must wear a continuous delivery infusion pump and the cost of therapy is quite high. Tracleer(R) is indicated to improve exercise ability and decrease the rate of clinical worsening in pulmonary arterial hypertension ("PAH") patients with significant limitation 6 of physical activity (WHO Class III and IV). No drug is currently approved for moderately ill patients with pulmonary arterial hypertension. An oral endothelin antagonist, if successful, may provide a significant benefit to these patients. Partnership. During 2000, we formed ICOS-TBC, a partnership with ICOS , to co-develop and commercialize endothelin antagonist compounds. The partnership is allowing us to apply additional scientific and financial resources to the research and development of our endothelin program that includes sitaxsentan and TBC3711, a second-generation endothelin antagonist compound. The partners are equally funding the cost of research and development and will share equally in the profits from this worldwide collaboration. ICOS has made an upfront payment and a milestone payment and could make additional milestone payments to ICOS-TBC, which will, in turn distribute these payments to TBC, that together could be as much as $55.5 million. The partnership is currently conducting a Phase IIb/III clinical trial to evaluate sitaxsentan in pulmonary arterial hypertension and has completed Phase I clinical trials of TBC3711 for possible use in heart failure. Product Candidate -- TBC11251 - Sitaxsentan. Our research program in the vasospasm/hypertension area is aimed at developing small molecules that inhibit the binding of endothelin ("ET") to its cell surface receptors. Our scientists believe that specific agents for each receptor subtype may provide the best clinical utility and safety. Our initial focus has been to develop a highly potent and selective small molecule based ET(A) receptor antagonist. An antagonist, or inhibitor, blocks the effects of a ligand at its receptor. A ligand is a chemical messenger which binds to a specific site on a target molecule or cell. Our scientists have discovered a novel class of low molecular weight compounds that antagonize ET binding to the ET(A) receptor with high potency. We identified lead compounds which mimicked the ability of ET to bind to the ET(A) receptor. We then used further optimization techniques to develop more potent compounds until the current series of lead candidates were identified. In addition to their ability to block ET, binding to its receptor, these compounds functionally inhibit ET action on isolated blood vessels in vitro acting as full, competitive antagonists. The lead compounds in this series have been shown to exhibit in vivo efficacy using various animal models. Pulmonary arterial hypertension afflicts approximately 100,000 people worldwide. Product Candidate -- TBC3711. TBC3711 is our second endothelin antagonist compound and has been selected as the next clinical candidate. We believe TBC3711 is more selective and more potent than sitaxsentan and that a substantial market opportunity for TBC3711 exists for the treatment of cardiovascular or other disease. Clinical Trial Status. --We filed an investigational new drug application, also referred to as an IND, with the FDA for sitaxsentan in late 1996. To date, three Phase IIa clinical trials have been completed, one in congestive heart failure patients, one in essential hypertension patients and one in pulmonary arterial hypertension patients. In a follow-on extension trial, treatment-related hepatitis was observed in two patients and one of these patients died. Following analysis of the open-label Phase IIa clinical trial and extension studies and discussions with the FDA, ICOS-TBC initiated a Phase IIb/III clinical trial (STRIDE) of sitaxsentan, at lower doses, for the treatment of PAH in the second quarter of 2001. We expect trial results in the second half of 2002. Once these results have been analyzed, the partnership will be better able to finalize requirements for NDA submission. ICOS-TBC has completed Phase I clinical studies with TBC3711 and is in the process of evaluating a Phase II clinical trial in CHF or other disease. Based on concerns FDA has raised regarding the class, such as hepatic toxicity and reproductive abnormalities, which may or may not be associated with our compounds, we are pursuing indications with unmet medical needs such as PAH and CHF. We have decided to not pursue essential hypertension at this time. Other Indications. We believe endothelin antagonist compounds may provide therapeutic value in several other indications. Our endothelin antagonist, TBC3214, which is still undergoing preclinical development, is a potential candidate for the indication of prostate cancer pain. Competition. A number of companies including Abbott Laboratories, Bristol-Meyers Squibb Company, Myogen, Inc. and Tanabe Seiyaku Co., Ltd., have ET(A) receptor selective antagonist compounds in Phase I/II clinical development. ET(A) receptor-selective compounds from Abbott are in early Phase III development. We believe our compounds are competitive with those from the other companies in terms of bioavailability (how much reaches the appropriate body system), half-life (how long the drugs last in the body) and potency. Several companies have non-selective ET antagonists in development. Actelion Ltd., a biotechnology company located in Switzerland, and Genentech, Inc. received approval from the FDA to market Tracleer (TM) (bosentan) for the treatment of PAH during 2001. We believe that selective ET blockers like sitaxsentan will be preferred therapy by physicians and patients for cardiopulmonary diseases since selective ET(A) blockers are likely to block the negative effects of endothelin while preserving the beneficial effects of endothelin by not inhibiting the ET(B) receptor. Non-selective antagonists block both the ET(A) and the ET(B) receptors. GSK's development of enrasentan and Actelion's development of Tracleer (TM) for heart failure have generated negative data. It is not known if the negative clinical data is due to a class effect, trial design or specific to the compounds themselves. 7 VASCULAR INFLAMMATION PROGRAM Background. Inflammation is the body's natural defense mechanism that fends off bacterial, viral and parasitic infections. The inflammatory response involves a series of events by which the body attempts to limit or destroy a foreign agent. These steps include the production of proteins that attract white blood cells, or leukocytes, to the site of inflammation, the production of chemicals to destroy the foreign agent and the removal of the resulting debris. This process is normally self-limiting and not harmful to the individual. However, in certain instances, the process may be overly active, such as during an acute asthma attack where an immediate inflammatory reaction occurs. In addition, in diseases such as atherosclerosis or rheumatoid arthritis, the inflammatory reaction leads to a build up of white blood cells and debris at the inflammation site that causes tissue damage over longer periods of time. The initial interaction between white blood cells and the endothelial cell layer is mediated by a group of adhesion molecules known as selectins. The selectins are a family of three proteins, two of which are found on inflamed endothelium, which bind to the carbohydrate sialyl Lewis x, also referred to as sLe(X), found on the surface of white blood cells. White blood cells are able to migrate into inflamed areas because sLe(X) present on the surface of white blood cells binds to selectin molecules present on activated endothelium. This binding slows the flow of white blood cells or leukocytes through the bloodstream. This is one of the first steps in the movement of white blood cells from the blood into the tissue. The second step in this process is vascular cell adhesion molecule, referred to as VCAM, mediated white blood cell attachment and migration which helps to localize white blood cells in areas of injury or infection. The presence of VCAM at sites of endothelial injury leads to an accumulation at these sites of the integrin very late antigen-4, or VLA-4, which are contained in white blood cells. Such accumulation can provoke an inflammatory response. Current Therapies. The major anti-inflammatory compounds are steroids, leukotriene blockers and immunosuppressants such as cyclosporin. While effective, the time to onset of action of these compounds may be significant. Steroids also have significant side effects including growth suppression in children, cataract formation, and general intolerance. The antagonist compounds we are developing may provide efficacy with fewer of these side effects. Product Candidate -- TBC1269. Our scientists have developed a computer model of the selectin/sLe(X) complex and used it to produce a novel class of synthetic, small molecule compounds that inhibit the selectin-mediated cellular adhesion that occurs during inflammation. The lead compound in the series, TBC1269, has shown efficacy both in cell-based and biochemical assays, and in animal models of inflammation. A Phase IIa clinical trial for TBC1269's intravenous use in asthma was completed in 1998. Results of this trial, which involved 21 patients, demonstrated significant reductions in cellular inflammation and allowed improved breathing. The inhaled form of TBC1269 has been tested in Phase I clinical trials completed during 2001 for the treatment of asthma (estimated 14 million U.S. patients) and a Phase IIa clinical trial is currently being conducted utilizing an injectable form of TBC1269 as a proof-of-concept for psoriasis. The topical form is in preclinical trials for use in the treatment of psoriasis (estimated 5.5 million U.S. patients). German Subsidiary -- Revotar Biopharmaceuticals, AG. During 2000, we formed Revotar Biopharmaceuticals, AG , a German subsidiary that is 55.2% owned by TBC. With headquarters in Berlin, Germany, Revotar was formed to perform research and development of novel small molecule compounds and to develop and commercialize selectin antagonists that TBC licensed to Revotar. Upon formation, Revotar received certain development and commercialization rights to the Company's selectin antagonist compounds as well as rights to certain other TBC research technology for use in certain territories. Revotar also received approximately $5 million in funding from three German venture capital funds and has access to certain government scientific grants and loan programs. During 2001, Revotar entered into a research agreement regarding macrophage migration inhibitory factor (MIF) with the Fraunhofer Institute in Stuttgart, Germany. Clinical Trial Status. - The inhaled form of TBC1269 has been tested by Revotar in Phase I clinical trials completed during 2001 for the treatment of asthma and a Phase IIa clinical trial is currently being conducted in Germany utilizing an injectable form of TBC1269 as a proof-of-concept for psoriasis. The topical form is in preclinical trials for use in the treatment of psoriasis. We expect to initiate Phase IIa clinical trials for asthma and psoriasis in the first half of 2002, and we expect to have results from these trials in the second half of 2002. Product Candidate -- VCAM/VLA-4 Antagonists. We have also identified antagonists for the VCAM-dependent intercellular adhesion observed in asthma, which blocks the ability of white blood cells to interact through VCAM and VLA-4. VLA-4 antagonists represent a new class of compounds that has shown promise in multiple preclinical animal models of asthma. These lead compounds are being modified in an attempt to develop an orally available clinical candidate. In preclinical animal studies, 8 our scientists have demonstrated that a small molecule VLA-4 antagonist can be effective in blocking acute inflammation, suggesting that VCAM/VLA-4 plays a role in this disease process. During 2001, TBC4746 entered preclinical development. Product Candidate - (alpha)v(beta)3 Antagonists. The integrin (alpha)v(beta)3 is involved in the proliferation of smooth muscle cells and bone cells. An inhibitor of this integrin could be useful for the treatment of restenosis or osteoporosis. Product Candidate - JAM 2/3. The junctional adhesion molecules, JAM 2/3, are involved in the trafficking of white blood cells to heart tissue. Inhibition of these molecules could be useful in treating inflammatory diseases of the heart such as myocarditis. Product Candidate -- (alpha)4(beta)7 Antagonists. The integrin (alpha)4(beta)7, which is closely related to VLA-4, is present on leukocytes which locate in the gastrointestinal system. Inhibitors of (alpha)4(beta)7 may be useful in treating inflammatory conditions of the gut such as inflammatory bowel disease (estimated 300,000 U.S. patients). Research Collaboration with Schering-Plough. -- On June 30, 2000, we entered into a worldwide research collaboration and license agreement to discover, develop and commercialize VLA-4 antagonists with Schering-Plough. The primary focus of the collaboration will be to discover orally available VLA-4 antagonists as treatments for asthma. Under the terms of the agreement, Schering-Plough obtains the exclusive worldwide rights to develop, manufacture and market all compounds from TBC's library of VLA-4 antagonists, as well as the rights to a second integrin antagonist. TBC is responsible for optimizing a lead compound and additional follow-on compounds. Schering-Plough is supporting research at TBC and will be responsible for all costs associated with the worldwide product development program and commercialization of the compound. In addition to reimbursing research costs, Schering-Plough paid an upfront license fee and will pay development milestones and royalties on product sales resulting from the agreement. Total payments to TBC for both the VLA-4 and an additional program, excluding royalties, could reach $87.0 million. Competition. Several companies have programs aimed at inhibiting cell adhesion molecules and integrins, like (alpha)4(beta)7 and VCAM/VLA-4. We are not aware of any competing product antagonists of these classes, which are currently in clinical development. While no oral VCAM/VLA-4 inhibitors are in clinical development, Biogen, Inc. and Elan Corporation plc have obtained positive Phase II data with Antegren, a monoclonal antibody against VLA-4, in multiple sclerosis and inflammatory bowel disease. They are planning to conduct Phase III studies with this product. VASCULAR REMODELING Background. Over the past several years it has become evident that many diseases result from remodeling of blood vessels and tissue. Heart failure is a result of changes in the shape and makeup of the heart in response to a variety of factors which ultimately do not allow the heart to function and pump blood. Several distinct processes are involved in tissue remodeling, including apoptosis, angiogenesis and smooth muscle proliferation. Apoptosis is the programmed death of cells in response to cytokines or injury following hypoxia. In conditions such as ischemic stroke or acute myocardial infarction, much of the tissue damage that occurs in the days following the event is due to the apoptotic death of cells outside of the area of initial injury. In addition, the growth of new cells contributes to the remodeling process as in the case of rheumatoid arthritis where the proliferation of cells in joints leads to irritation and subsequent inflammation and injury. Angiogenesis is the development of new blood vessels, which can have both beneficial and deleterious properties. In the case of tumors, angiogenesis is required to allow the tumor to grow and develop. In myocardial infarction, new blood vessel growth can be beneficial to allow blood to flow around the blocked artery. Current Therapies. There are currently no therapies that prevent apoptotic cell death. The current therapies for treating ischemic stroke include treatment with tPA to reopen arteries, but only if the patient arrives at the hospital within three hours of the onset of the stroke. Otherwise, symptomatic treatment is all that can be done. For acute myocardial infarction, treatments include thrombolytic therapy, angioplasty, and coronary artery bypass grafts. These procedures are useful at restoring blood flow to the heart. However, they do not address the role of apoptotic death in the growth of the necrotic area. Product Candidates -- Caspase Inhibitors and TNF(alpha) Antagonist. Our research in this area is focused on the identification of factors which contribute to apoptotic death in the heart and brain following a heart attack or stroke, which occur in approximately 1.5 million and approximately 450,000 patients, respectively, in the U.S. annually. One of the factors which has been identified as being important in these and other disease settings is tumor necrosis factor, or TNF(alpha). Our scientists have identified small molecule antagonists which block TNF(alpha)'s ability to kill cells in vitro. These compounds are currently undergoing additional optimization prior to selection of a clinical candidate. In addition to use in acute myocardial infarction or ischemic stroke, we estimate that there are approximately two million rheumatoid arthritis patients in the U.S. that could utilize a TNF(alpha) antagonist. Caspases are proteases which are responsible for mediating the cell death signal in various cell types. We 9 have identified lead inhibitors of caspases which may be useful in preventing cell death following ischemic stroke or acute myocardial infarction. Competition. Although there are no competing small molecule drugs currently approved, we are aware of many research programs into apoptosis. To the extent one of these projects reaches the market ahead of ours, our sales results, if any, in this program could be materially adversely affected. Two TNF(alpha) antagonists, Enbrel(R) and Remicade(R), have been approved for use in rheumatoid arthritis and Crohn's disease. These are recombinant proteins. If developed, our small molecule drugs may prove to have advantages over these approved products because recombinant proteins cannot be administered orally and are difficult to manufacture. RESEARCH AND DEVELOPMENT COLLABORATIONS AND LICENSING AGREEMENTS We have established, and intend to continue to establish, collaborations with a number of corporations, research institutions and scientists to further our research and development objectives and expedite the commercialization of our products. Our major licensing and collaboration agreements are summarized below: Mitsubishi-Tokyo Pharmaceuticals. We have entered into an agreement with Mitsubishi to license Mitsubishi's rights and technology relating to Argatroban and to license Mitsubishi's own proprietary technology developed with respect to Argatroban (the "Mitsubishi Agreement"). Under the agreement with Mitsubishi, we have an exclusive license to use and sell Argatroban in the U.S. and Canada for all cardiovascular, renal, neurological and immunological purposes other than use for the coating of stents. We are required to pay Mitsubishi specified royalties on net sales of Argatroban by us and our sublicensees after its commercial introduction in the U.S. and Canada. Either party may terminate the agreement with Mitsubishi on 60 days notice if the other party defaults in its material obligations under the agreement, declares bankruptcy or becomes insolvent, or if a substantial portion of its property is subject to levy. Unless terminated sooner, the agreement with Mitsubishi expires on the later of termination of patent rights in a particular country or 20 years after first commercial sale of products in a particular country. Under the Mitsubishi Agreement, we have access to an improved formulation patent granted in the U.S. in 1993 which expires in 2010 and a use patent in the U.S. which expires in 2009. We have agreed to pay a consultant involved in the negotiation of this agreement a royalty based on net sales of Argatroban. During 2000, we signed an additional agreement with Mitsubishi that provides us with royalties on sales of Argatroban in certain European countries, up to a total of $5.0 million in milestones for the development of ischemic stroke and certain other provisions. During 2001, we received $2.0 million of these milestones less certain Japanese withholding taxes. GlaxoSmithKline. In connection with our development and commercialization of Argatroban, on August 5, 1997, we entered into an agreement with GSK whereby GSK was granted an exclusive sublicense in the U.S. and Canada for the indications of Argatroban that we have licensed from Mitsubishi. GSK has paid $8.5 million in upfront license fees and $12.5 million in milestone payments and has agreed to pay up to an additional $7.5 million in additional milestone payments based on the clinical development and FDA approval of Argatroban for the acute myocardial infarction indication. At this time, GSK is not participating in the development work for, and has forfeited commercial rights to, the ischemic stroke indication and there are no plans to conduct additional development work in acute myocardial infarction. We are evaluating the feasibility of development of Argatroban for other indications including use in hemodialysis and PCI. The agreement with GSK provides for the formation of a joint development committee to analyze the development of additional Argatroban indications (such as PCI) covered by our license from Mitsubishi. The joint development is to be funded 60% by GSK, except Phase IV trials are paid 100% by GSK. Except as discussed below, GSK has the exclusive right to commercialize all products arising out of the collaboration, subject to the obligation to pay royalties on net sales to us and our rights to co-promote these products through our own sales force in certain circumstances. We will retain the rights to any indications that GSK determines it does not wish to pursue (such as ischemic stroke), subject to the requirement that we may not grant marketing rights to any third parties, and must use our own sales force to commercialize any such indications. Any indications that we and GSK elect not to develop will be returned to Mitsubishi, subject to the rights of GSK and us to commercialize these indications at our election, with GSK having the first opportunity to commercialize. Mitsubishi may also request the joint development committee to develop new indications inside or outside the licensed field of use, and if the joint development committee determines that it does not want to proceed with any such indication, all rights under the agreement with Mitsubishi regarding such indication will revert to Mitsubishi subject to our and GSK's right to commercialize the indication, with GSK having the first opportunity to commercialize. The agreement with GSK generally terminates on a country by country basis upon the earlier of the termination of our rights under the agreement with Mitsubishi, the expiration of applicable patent rights, or in the case of certain royalty payments, the commencement of substantial third-party competition. GSK also has the right to terminate the agreement on a country by country 10 basis by giving us at least three months written notice that the commercial profile of the product in question would not justify continued development or marketing in that country. In addition, either party may terminate the agreement on 60 days notice if the other party defaults in its obligations under the agreement, declares bankruptcy or becomes insolvent. We agreed to pay an agent involved in the negotiation of this agreement a fee based on a percentage of all consideration we receive, including royalties, from sales of Argatroban. At present, Mitsubishi is the only manufacturer of Argatroban, and has entered into an agreement with GSK to supply Argatroban in bulk to meet GSK's and our needs. Should Mitsubishi fail during any consecutive nine-month period to supply GSK at least 80% of its requirements, and such requirements cannot be satisfied by existing inventories, the agreement provides for the nonexclusive transfer of the production technology to GSK. If GSK cannot commence manufacturing of Argatroban in a timely manner or if alternate sources of supply are unavailable or uneconomical, our results of operations would be harmed. In connection with the execution of our agreement with GSK, GSK purchased 176,922 shares of common stock for $1.0 million and an additional 400,000 shares of common stock for $2.0 million in connection with the secondary public offering which closed on October 1, 1997. ICOS-TBC L.P. In June, 2000, we entered into a limited partnership agreement with ICOS to form ICOS-TBC. The partnership was formed to develop and globally commercialize endothelin-A receptor antagonists from the TBC endothelin antagonist program. ICOS-TBC has made an upfront license fee payment and a milestone payment and could make additional milestone payments to us that together could be as much as $55.5 million for the development and commercialization of products resulting from the collaboration. See Footnote 8 to the Consolidated Financial Statements for a discussion of this transaction. Schering-Plough. In June, 2000, we and Schering-Plough entered into a worldwide research collaboration and license agreement to discover, develop and commercialize VLA-4 antagonists and Schering-Plough has rights on a second integrin antagonist. In addition to funding research costs, Schering-Plough paid us an upfront license fee and will pay us development milestones and royalties on product sales resulting from the agreement. Total payments to us for both programs, excluding royalties, could reach $87.0 million. See Footnote 8 to the Consolidated Financial Statements for a discussion of this transaction. Revotar Biopharmaceuticals, AG. During September 2000, we founded Revotar and transferred to Revotar certain development and commercialization rights to our selectin antagonist program as well as rights to other proprietary technology. See Footnote 9 to the Consolidated Financial Statements for a discussion of this transaction. The primary focus of Revotar has been on the design and initiation of a Phase I trial for TBC1269 using the inhaled formulation of the drug, which was completed during 2001. Also Dr. Gunter Rosskamp, formerly with the Industrial Investment Council of Germany and Schering AG, joined Revotar as Chief Operating Officer and Dr. Rainer Zahlten, formerly of Aventis S.A., joined the Company as Chief Scientific Officer. LG Chemical. In October, 1996, we signed a strategic alliance agreement with LG Chemical, Ltd ("LG Chemical") to develop and market compounds derived from our endothelin receptor and selectin antagonist programs in Korea, China, India and certain other Asian countries, excluding Japan for certain disease indications. LG Chemical had committed to pay a total of $10.7 million in research payments. In conjunction with the agreement with ICOS-TBC, we assigned one-half of the remaining payments to ICOS-TBC. The agreement with LG Chemical was terminated in August 2001 after a total of $8.1 million in research payments had been paid. See Footnote 7 to the Consolidated Financial Statements for a discussion of this transaction. LICENSES AND PATENTS Because of the substantial length of time and expense associated with developing new pharmaceutical products, the biotechnology industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Our policy is to file patent applications to protect technology, inventions and improvements that are important to the development of our business. We have 25 pending U.S. patent applications and 27 issued U.S. patents covering compounds including selectin inhibitors, endothelin antagonists and VCAM/VLA-4 antagonists. In addition, we have exclusive licenses to three patents covering rational drug design technology. We have also filed patent applications in certain foreign jurisdictions covering projects that are the subject of U.S. applications and intend to file additional patent applications as our research projects develop. We in-licensed the U.S. and Canadian rights to Argatroban in 1993, which included access to an improved formulation patent granted in 1993 which expires in 2012 and a use patent for the use of Argatroban as a fibrinolysis-enhancing agent which expires in 2009. The Mitsubishi composition of matter patent on Argatroban has expired. Argatroban received FDA approval on June 30, 2000 and we have applied for a patent term extension of approximately two years for the formulation patent. Although we believe that the expiration of the Argatroban patents will not have a material adverse effect on the commercialization of Argatroban, we cannot assure you that we will be able to take advantage of the patent term extension 11 provisions of the Waxman/Hatch Act. Moreover, even if we receive either a patent term extension or NDA exclusivity, we cannot assure you that generic pharmaceutical manufacturers will not ultimately enter the market and compete with us or that competitors might develop a different formulation of Argatroban. We have licensed all patent rights and know-how regarding the endothelin antagonists to ICOS-TBC and certain patent rights and know-how regarding the selectin antagonists to Revotar. The patent positions of biopharmaceutical firms, including us, are uncertain and involve complex legal and factual questions. Consequently, we do not know whether any of our applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the U.S. are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first creator of inventions covered by our pending patent applications or that we were the first to file patent applications for such inventions. Moreover, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office, commonly known as the PTO, to determine priority of invention, which could result in substantial cost to us, even if the eventual outcome is favorable to us. We have no interference proceedings pending which involve compounds currently of commercial interest to us. We cannot assure you that our patents, if issued, would be held valid by a court of competent jurisdiction. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using such technology. The development of therapeutic products for cardiovascular applications is intensely competitive. Many pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in this field. Some of these applications or patents may be competitive with our applications or conflict in certain respects with claims made under our applications. Such conflict could result in a significant reduction of the coverage of our patents, if issued. In addition, if patents are issued to other companies that contain competitive or conflicting claims and such claims are ultimately determined to be valid, we cannot assure you that we would be able to obtain licenses to these patents at a reasonable cost or develop or obtain alternative technology. We also rely upon trade secret protection for our confidential and proprietary information. We cannot assure you that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our trade secrets. We require our employees, consultants, members of our scientific advisory board, outside scientific collaborators and sponsored researchers and certain other advisors to enter into confidentiality agreements with us that contain assignment of invention clauses. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of our employees, the agreements provide that all inventions conceived by the employee are our exclusive property. We cannot assure you, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information. GOVERNMENT REGULATION The research, testing, manufacture and marketing of drug products are extensively regulated by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic Act, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, record keeping, labeling, promotion and marketing and distribution of pharmaceutical products. Failure to comply with applicable regulatory requirements may subject a company to administrative or judicially imposed sanctions such as: o warning letters; o civil penalties; o criminal prosecution; o injunctions; o product seizure; o product recalls; 12 o total or partial suspension of production; and o FDA refusal to approve pending New Drug Application ("NDA") applications or NDA supplements to approved applications. The steps ordinarily required before a new pharmaceutical product may be marketed in the United States include: o preclinical laboratory tests, animal tests and formulation studies; o the submission to the FDA of an IND, which must become effective before clinical testing may commence; o adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication; o the submission of an NDA to the FDA; and o FDA review and approval of the NDA prior to any commercial sale or shipment of the drug. Preclinical tests include laboratory evaluation of product chemistry and formulation, as well as animal trials to assess the potential safety and efficacy of the product. Preclinical tests must be conducted in compliance with Good Laboratory Practice guidelines and compounds for clinical use must be formulated according to compliance with Good Manufacturing Practice, or cGMP, requirements. The results of preclinical testing are submitted to the FDA as part of an IND. A 30-day waiting period after the filing of each IND is required prior to the commencement of clinical testing in humans. If the FDA has not commented on or questioned the IND within this 30-day period, clinical trials may begin. If the FDA has comments or questions, the questions must be answered to the satisfaction of the FDA before initial clinical testing can begin. In addition, the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. In some instances, the IND application process can result in substantial delay and expenses. Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with Good Clinical Practice guidelines, under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. The study protocol and informed consent information for patients in clinical trials must also be approved by the institutional review board at each institution where the trials will be conducted. Clinical trials to support NDAs are typically conducted in three sequential phases, which may overlap. In Phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses. Phase II usually involves trials in a limited patient population to: o determine dosage tolerance and optimal dosage; o identify possible adverse effects and safety risks; and o preliminarily support the efficacy of the drug in specific, targeted indications. If a compound is found to be effective and to have an acceptable safety profile in Phase II evaluation, Phase III trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical trial sites. There can be no assurance that Phase I, Phase II or Phase III testing of our product candidates will be completed successfully within any specified time period, if at all. After completion of the required clinical testing, generally an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing may begin in the United States. The NDA must include the results of extensive clinical and other testing and the compilation of data relating to the product's chemistry, pharmacology and manufacture. The cost of an NDA is substantial. 13 The FDA has 60 days from its receipt of the NDA to determine whether the application will be accepted for filing based on the threshold determination that the NDA is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Currently, for a standard review, the FDA takes approximately twelve months in which to review the NDA and respond to the applicant. In 1997, Congress enacted the Food and Drug Administration Modernization Act, in part, to ensure the availability of safe and effective drugs by expediting the FDA review process for certain new products. This act establishes a statutory program for the approval of fast track products (those drugs which address unmet medical needs for serious and life-threatening conditions). Under this act, the FDA has six months in which to review the NDA and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. The FDA typically will refer the application to the appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. If FDA evaluations of the NDA and the manufacturing facilities are favorable, the FDA may issue an approval letter, or, in some cases, an approvable letter followed by an approval letter. Both letters may contain a number of conditions that must be met in order to secure final approval of the NDA. When and if those conditions have been met to the FDA's satisfaction, the FDA will issue an approval letter. The approval letter authorizes commercial marketing of the drug for specific indications. As a condition of NDA approval, the FDA may require postmarketing testing and surveillance to monitor the drug's safety or efficacy, or impose other conditions, commonly referred to as Phase IV trials. If the FDA's evaluation of either the NDA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter. The not approvable letter outlines the deficiencies in the submission and often requires additional testing or information. Notwithstanding the submission of any requested additional data or information in response to an approvable or not approvable letter, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems occur following initial marketing. Manufacturing. Each domestic drug manufacturing facility must be registered with FDA. Domestic drug manufacturing establishments are subject to periodic inspection by the FDA and must comply with cGMP. Further, we or our third party manufacturer must pass a preapproval inspection of its manufacturing facilities by the FDA before obtaining marketing approval of any products. To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP and are subject to periodic inspection by the FDA or corresponding regulatory agencies in countries under reciprocal agreements with the FDA. We use and will continue to use third party manufacturers to produce our products in clinical and commercial quantities. There can be no guarantee that future FDA inspections will proceed without any compliance issues requiring the expenditure of money or other resources. Foreign Regulation of Drug Compounds. Whether or not FDA approval has been obtained, approval of a product by comparable regulatory authorities is necessary in foreign countries prior to the commencement of marketing of the product in those countries. The approval procedure varies among countries and can involve additional testing. The time required may differ from that required for FDA approval. Although there are some procedures for unified filings for some European countries with the sponsorship of the country which first granted marketing approval, in general each country has its own procedures and requirements, many of which are time consuming and expensive. Thus, there can be substantial delays in obtaining required approvals from foreign regulatory authorities after the relevant applications are filed. In Europe, marketing authorizations may be submitted at a centralized, a decentralized or a national level. The centralized procedure is mandatory for the approval of biotechnology products and provides for the grant of a single marketing authorization which is valid in all European Union member states. As of January 1995, a mutual recognition procedure is available at the request of the applicant for all medicinal products which are not subject to the centralized procedure. We will choose the appropriate route of European regulatory filing to accomplish the most rapid regulatory approvals. There can be no assurance that the chosen regulatory strategy will secure regulatory approvals on a timely basis or at all. Hazardous Materials. Our research and development processes involve the controlled use of hazardous materials, chemicals and radioactive materials and produce waste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. Although we believe that our safety procedures for handling and disposing of hazardous materials comply with the standards prescribed by laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated completely. In the event of an accident, we could be held liable for any damages that result. This liability could exceed our resources or not be covered by our insurance. Although we believe that we are in compliance in all material respects with applicable environmental laws and regulations, there can be no assurance that we will not be required to incur significant costs to comply with environmental laws and regulations in 14 the future. There can also be no assurance that our operations, business or assets will not be materially adversely affected by current or future environmental laws or regulations. COMPETITION The development and sale of new drugs for the treatment of vascular and inflammatory diseases is highly competitive and we will face intense competition from major pharmaceutical companies and biotechnology companies all over the world. Competition is likely to increase as a result of advances made in the commercial application of technologies and greater availability of funds for investment in these fields. Companies that complete clinical trials, obtain required regulatory approvals and initiate commercial sales of their products before their competitors may achieve a significant competitive advantage. In addition, significant research in biotechnology and vascular medicine may occur in universities and other nonprofit research institutions. These entities have become increasingly active in seeking patent protection and licensing revenues for their research results. They also compete with us in recruiting talented scientists and business professionals. We believe that our ability to compete successfully will depend on our ability to create and maintain scientifically-advanced technology, develop proprietary products, attract and retain scientific and other personnel, obtain patent or other protection for our products, obtain required regulatory approvals and manufacture and successfully market products through other companies, through co-promotion agreements or alone. Many of our competitors have substantially greater financial, marketing, and human resources than we do. We expect to encounter significant competition. MANUFACTURING AND MARKETING We rely on our internal resources and third-party manufacturers to produce compounds for preclinical development. Currently, we have no manufacturing facilities for either the production of biochemicals or the manufacture of final dosage forms. We believe small molecule drugs are less expensive to manufacture than protein-based therapeutics, and that all of our existing compounds can be produced using established manufacturing methods, including traditional pharmaceutical synthesis. We have established supply arrangements with third-party manufacturers for certain clinical trials and have established and will establish supply arrangements ultimately for commercial distribution, although there can be no assurance that such arrangements will be established on reasonable terms. Our long-range plan may involve establishing internal manufacturing of small molecule therapeutics, including the ability to formulate, fill, label, package and distribute our products. However, for the foreseeable future we plan to outsource such manufacturing. We do not anticipate developing an internal manufacturing capability for some time, nor are we able to determine which of our potential products, if any, will be appropriate for internal manufacturing. The primary factors we will consider in making this determination are the availability and cost of third-party sources, the expertise required to manufacture the product and the anticipated manufacturing volume. Pursuant to our agreement with GSK, GSK entered into an agreement with Mitsubishi regarding the manufacture and supply of Argatroban, and we will not, therefore, have any direct responsibility regarding the manufacture and supply of Argatroban as it relates to the agreement with GSK. EMPLOYEES As of December 31, 2001, we employed 110 individuals. Of our work force, 91 employees are engaged directly in research and development activities and 19 in general and administrative positions. None of our employees are represented by a labor union. We have experienced no work stoppages and believe that relations with our employees are good. We also maintain consulting agreements with a number of scientists at various universities and other research institutions. We intend to increase our scientific, clinical and administrative staff to approximately 122 persons during the next twelve months due to the requirements of ongoing research and clinical programs. SCIENTIFIC ADVISORY BOARD AND CONSULTANTS We have assembled a scientific advisory board composed of distinguished professors from some of the most prestigious medical schools. The scientific advisory board assists us in identifying research and development opportunities, in reviewing with management the progress of our projects and in recruiting and evaluating scientific staff. Although we expect to receive guidance from the members of our scientific advisory board, all of its members are employed on a full-time basis by others and, accordingly, are able to devote only a small portion of their time to us. Management expects to meet with its scientific advisory board members as a group approximately once each year and individually from time to time on an informal basis. We have entered into a consulting agreement with each member of the scientific advisory board. The Scientific Advisory Board includes James T. Willerson, M.D., as Chairman, and the following scientists. 15 Ferid Murad, M.D., Ph.D. is Professor and Chairman of the Department of Integrative Biology and Pharmacology at the University of Texas-Houston Medical School and the Director of the Institute of Molecular Medicine. Dr. Murad has received many honors including the Nobel Prize in Medicine in 1998, the Ciba Award in 1988 and the Albert and Mary Lasker Award in Basic Medical Research in 1996. He is also a member of many professional and honorary societies and is the author or co-author of more than 300 scientific articles. Joseph F. Sambrook, Ph.D. is a Professor of Pathology at Melbourne University, Australia and Director of Research at Peter MacCallum Cancer Institute. He is a member of various honorary and professional societies, editorial boards and is the author of more than 150 scientific articles. Professor Sambrook previously worked for 20 years in the U.S. where he served on many blue ribbon government and non-government committees. Ajit Varki, M.D. has been a Professor of Medicine since 1991 and is currently serving in that position as well as leader of the glycobiology program at the University of California, San Diego. Dr. Varki served as Instructor in Medicine at Washington University School of Medicine from 1980 to 1982. He also served as Assistant Professor of Medicine from 1982 to 1987 and as Associate Professor of Medicine from 1987 to 1991 at the University of California, San Diego. In 1975, Dr. Varki received an M.D. from Christian Medical College and his Post-Doctorate in Biochemistry from Washington University from 1979 to 1982. He is a member of various professional societies and has won numerous awards since 1969. He is currently president of the American Society for Clinical Investigation. Dr. Varki is the author or co-author of 160 scientific publications. Denton Cooley, M.D., Surgeon-in-Chief of the Texas Heart Institute, acts as an advisory director to us. We also have agreements with various outside scientific consultants who assist us in formulating our research and development strategy. All of our consultants and advisors are employed by other employers and may have commitments to or consulting or advisory contracts with other entities that may affect their ability to work with us. 16 ADDITIONAL RISK FACTORS Stockholders and potential investors in shares of our stock should carefully consider the following risk factors, in addition to other information in this Form 10-K. We are identifying these risk factors as important factors that could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by or on behalf of us. We are relying upon the safe-harbor for forward-looking statements and any such statements made by or on behalf of us are qualified by reference to the following cautionary statements, as well as to those set forth elsewhere in this Form 10-K. RISKS RELATED TO OUR BUSINESS, INDUSTRY AND STRATEGY THERE IS UNCERTAINTY IN THE DEVELOPMENT OF OUR PRODUCTS AND IF WE DO NOT SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE WILL NOT BE PROFITABLE. In November 2000, we began to market our first product, Argatroban, through our agreement with GSK. However, the royalties produced to date by Argatroban have not made us profitable. To date, the majority of our resources have been dedicated to the research and development of Argatroban and other small molecule drugs for certain vascular and related inflammatory diseases. The commercial applications of our product candidates will require further investment, research, development, preclinical and clinical testing and regulatory approvals, both foreign and domestic. We cannot assure you that we will be able to develop, produce at reasonable cost, or market successfully, any of our product candidates. Further, these product candidates may require complex delivery systems that may prevent or limit their commercial use. All of our products will require regulatory approval before they may be commercialized. Products, if any, resulting from our research and development programs other than Argatroban, are not expected to be commercially available for a number of years, and we cannot assure you that any successfully developed products will generate substantial revenues or that we will ever be profitable. WE FACE SUBSTANTIAL COMPETITION THAT MAY RESULT IN OTHERS DEVELOPING AND COMMERCIALIZING PRODUCTS MORE SUCCESSFULLY THAN WE DO. The biopharmaceutical industry is highly competitive. Our success will depend on our ability to develop products and apply technology and to establish and maintain a market for our products. Potential competitors in the U.S. and other countries include major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. Many of our competitors have substantially greater research and development capabilities and experience and greater manufacturing, marketing and financial resources than we do. Accordingly, our competitors may develop products or other novel technologies that are more effective, safer or less costly than any that have been or are being developed by us or may obtain FDA approval for products more rapidly than we are able. We expect significant competition for Argatroban for the treatment of HIT. The products that compete with Argatroban include: o Refludan(R), which was approved by the FDA in 1997 for the treatment of HIT; o Orgaran(R), which is a low molecular weight heparinoid that has been approved for the treatment of deep vein thrombosis, but is believed to be used without an approved indication ("off-label") for the treatment of HIT in the U.S.; and o Angiomax(R), which is approved for use in the U.S. as an anticoagulant in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty. We may also face competition for Argatroban in indications other than HIT, when and if such indications are approved by the FDA, including: o Revasc(R), which is used in the treatment of deep vein thrombosis following hip surgery and has received regulatory approval in Europe; o Angiomax(R), which is in Phase III clinical trials for acute coronary syndromes and conducting clinical trials in HIT patients; and o Arixtra(R), which is approved for the prevention of deep vein thrombosis and pulmonary embolism. 17 o Melagatran, which is being developed as a treatment for deep vein thrombosis and is in Phase III trials. We cannot assure you that technological development by others will not render our products or product candidates uncompetitive or that we will be successful in establishing or maintaining technological competitiveness. WE ARE DEPENDENT ON THIRD PARTIES TO FUND, MARKET AND DEVELOP OUR PRODUCTS, INCLUDING ARGATROBAN. We rely on strategic relationships with our corporate partners to provide the financing, marketing and technical support and, in certain cases, the technology necessary to develop and commercialize certain of our product candidates. We have entered into an agreement with Mitsubishi to license rights and technology relating to Argatroban in the U.S. and Canada for specified therapeutic indications. Either party may terminate the Mitsubishi agreement on 60 days notice if the other party defaults in its material obligations under the agreement, declares bankruptcy or becomes insolvent, or if a substantial portion of its property is subject to levy. Unless terminated sooner due to the above described termination provisions, the agreement with Mitsubishi expires on the later of the termination of patent rights in a particular country or 20 years after the first commercial sale of products in a particular country. We also entered into an agreement with GSK in 1997 whereby we granted an exclusive sublicense to GSK relating to the continued development and commercialization of Argatroban. This agreement provides for the payment of royalties and certain milestone payments upon the completion of various regulatory filings and receipt of regulatory approvals. The agreement generally terminates on a country by country basis upon the earlier of the termination of our rights under the agreement with Mitsubishi, the expiration of applicable patent rights, or in the case of certain royalty payments, the introduction of a substantial competitor for Argatroban by another pharmaceutical company. GSK also has the right to terminate the agreement on a country by country basis by giving us at least three months written notice based on a reasonable determination by GSK that the commercial profile of the therapeutic indication in question would not justify continued development or marketing in that country. In addition, either we or GSK may terminate our agreement on 60 days notice if the other party defaults in its obligations under the agreement, declares bankruptcy or becomes insolvent. ICOS-TBC has the responsibility for developing endothelin antagonist compounds from our research program. Should the partners not be able to successfully conduct the research and clinical development of the compounds, we could be adversely affected. There is no guarantee that the partnership will have adequate funds to pursue its research and clinical goals or that the effort will be successful. Our collaboration and license agreement with Schering-Plough for VLA-4 antagonists, contains a provision that allows for termination of the research program upon one hundred eighty days written notice to us. Our success will depend on these and any future strategic alliances. There can be no assurance that we will satisfy the conditions required to obtain additional research or milestone payments under the existing agreements or that we can prevent the termination of these agreements. We cannot assure you that we will be able to enter into future strategic alliances on acceptable terms. The termination of any existing strategic alliances or the inability to establish additional collaborative arrangements may limit our ability to develop our technology and may have a material adverse effect on our business or financial condition. RISKS RELATING TO CLINICAL AND REGULATORY MATTERS THE REGULATORY APPROVAL PROCESS IS COSTLY AND LENGTHY AND WE MAY NOT BE ABLE TO SUCCESSFULLY OBTAIN ALL REQUIRED REGULATORY APPROVALS. The preclinical development, clinical trials, manufacturing, marketing and labeling of pharmaceuticals are all subject to extensive regulation by numerous governmental authorities and agencies in the U.S. and other countries. We must obtain regulatory approval for each of our product candidates before marketing or selling any of them. It is not possible to predict how long the approval processes of the FDA or any other applicable federal, state or foreign regulatory authority or agency for any of our products will take or whether any such approvals ultimately will be granted. Positive results in preclinical testing and/or early phases of clinical studies offer no assurance of success in later phases of the approval process. Generally, preclinical and clinical testing of products can take many years, and require the expenditure of substantial resources, and the data obtained from these tests and trials can be susceptible to varying interpretation that could delay, limit or prevent regulatory approval. Any delay in obtaining, or failure to obtain, approvals could adversely affect the marketing of our products and our ability to generate product revenue. 18 The risks associated with the approval process include: o delays or rejections in the regulatory approval process based on the failure of clinical or other data to meet expectations, or the failure of the product to meet a regulatory agency's requirements for safety, efficacy and quality; and o regulatory approval, if obtained, may significantly limit the indicated uses for which a product may be marketed. OUR CLINICAL TRIALS COULD TAKE LONGER TO COMPLETE AND COST MORE THAN WE EXPECT, WHICH MAY RESULT IN OUR DEVELOPMENT PLANS BEING SIGNIFICANTLY DELAYED. We will need to conduct clinical studies of all of our product candidates. These studies are costly, time consuming and unpredictable. Any unanticipated costs or delays in our clinical studies could cause us to expend substantial additional funds or to delay or modify our plans significantly, which would harm our business, financial condition and results of operations. The factors that could contribute to such cost, delays or modifications include: o the cost of conducting human clinical trials for any potential product. These costs can vary dramatically based on a number of factors, including the order and timing of clinical indications pursued and the development and financial support from corporate partners; and o intense competition in the pharmaceutical market, which may make it difficult for us to obtain sufficient patient populations or clinician support to conduct our clinical trials as planned. EVEN IF WE OBTAIN MARKETING APPROVAL, OUR PRODUCTS WILL BE SUBJECT TO ONGOING REGULATORY OVERSIGHT WHICH MAY AFFECT THE SUCCESS OF OUR PRODUCTS. Any regulatory approvals that we receive for a product may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for potentially costly post-marketing follow-up Phase IV studies. After we obtain marketing approval for any product, the manufacturer and the manufacturing facilities for that product will be subject to continual review and periodic inspections by the FDA and other regulatory authorities. The subsequent discovery of previously unknown problems with the product or with the manufacturer or facility, may result in restrictions on the product or manufacturer, including withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. RISKS RELATING TO FINANCING OUR BUSINESS WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, AND WE MAY NOT BE SUCCESSFUL IN RAISING ADDITIONAL FUNDS IN THE FUTURE. We have been unprofitable to date and expect to incur operating losses for the next several years as we invest in product research and development, preclinical and clinical testing and regulatory compliance. We will require substantial additional funding to complete the research and development of our product candidates, to establish commercial scale manufacturing facilities, if necessary, and to market our products. We have accumulated approximately $124.7 million in net losses through December 31, 2001. Estimates of our future capital requirements will depend on many factors, including: o market acceptance and commercial success of Argatroban; o expenses and risks associated with clinical trials to expand the indications for Argatroban; o continued scientific progress in our drug discovery programs; o the magnitude of these programs; o progress with preclinical testing and clinical trials; o the time and costs involved in obtaining regulatory approvals; 19 o the costs involved in filing, prosecuting and enforcing patent claims; o competing technological and market developments and changes in our existing research relationships; o our ability to maintain and establish additional collaborative arrangements; and o effective commercialization activities and arrangements. Subject to these factors, we anticipate that our existing capital resources and other revenue sources, should be sufficient to fund our cash requirements through 2003 without considering the impact of revenues from Argatroban. Notwithstanding revenues, which may be produced through sales of potential future products if approved, we anticipate that we will need to secure additional funds to continue the required levels of research and development to reach our long-term goals. We intend to seek such additional funding through collaborative arrangements and/or through public or private financings. We cannot assure you that additional financing will be available, or, if available, that it will be available on acceptable terms. If additional funds are raised by issuing securities, further dilution of the equity ownership of existing stockholders will result. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our drug discovery or development programs or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or products that we would not otherwise relinquish. WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR OPERATING RESULTS. We have historically experienced, and expect to continue to experience for the foreseeable future, significant fluctuations in our operating results. These fluctuations are due to a number of factors, many of which are outside of our control, and may result in volatility of our stock price. Future operating results will depend on many factors, including: o demand for our products; o regulatory approvals for our products; o the timing of the introduction and market acceptance of new products by us or competing companies; and o the timing and magnitude of certain research and development expenses. RISKS RELATED TO ONGOING OPERATIONS WE ARE DEPENDENT ON QUALIFIED PERSONNEL. Our success is highly dependent on our ability to attract and retain qualified scientific and management personnel. The loss of the services of the principal members of our management and scientific staff including Bruce D. Given, M.D., our President and Chief Executive Officer, and Richard A.F. Dixon, Ph.D., our Senior Vice President, Research and Chief Scientific Officer, may impede our ability to bring products to market. In order to commercialize products, we must maintain and expand our personnel as needs arise in the areas of research, clinical trial management, manufacturing, sales and marketing. We face intense competition for such personnel from other companies, academic institutions, government entities and other organizations. We cannot assure you that we will be successful in hiring or retaining qualified personnel. Managing the integration of new personnel and our growth in general could pose significant risks to our development and progress. We also rely on consultants and advisors to assist us in formulating our research and development strategy. All our consultants and advisors are either self-employed or employed by other organizations, and they may have other commitments such as consulting or advisory contracts with other organizations that may affect their ability to contribute to us. 20 THE HAZARDOUS MATERIAL WE USE IN OUR RESEARCH AND DEVELOPMENT COULD RESULT IN SIGNIFICANT LIABILITIES, WHICH MAY EXCEED OUR INSURANCE COVERAGE. Our research and development activities involve the use of hazardous materials. While we believe that we are currently in substantial compliance with federal, state and local laws and regulations governing the use of these materials, accidental injury or contamination may occur. Any such accident or contamination could result in substantial liabilities, which could exceed the policy limits of our insurance coverage and financial resources. Additionally, the cost of compliance with environmental and safety laws and regulations may increase in the future. WE MAY BE SUED FOR PRODUCT LIABILITY, WHICH MAY PREVENT OR INTERFERE WITH THE DEVELOPMENT OR COMMERCIALIZATION OF OUR PRODUCTS. Because our products and product candidates are new treatments, with limited, if any, past use on humans, serious undesirable and unintended side effects may arise. We may be subject to product liability claims that are inherent in the testing, manufacturing, marketing and sale of pharmaceutical products. These claims could expose us to significant liabilities that could prevent or interfere with the development or commercialization of our products and seriously impair our financial position. Product liability insurance is generally expensive for biopharmaceutical companies such as ours. We maintain product liability insurance coverage for claims arising from the use of our products in clinical trials prior to FDA approval. Under the agreements with Mitsubishi and GSK, we maintain product liability insurance to cover claims that may arise from the sale of Argatroban. Our existing coverage will not be adequate as we further develop products and continue to sell Argatroban. We cannot assure you that we will be able to maintain our existing insurance coverage or obtain additional coverage on commercially reasonable terms for liability arising from the use of our other products in the future. Also, this insurance coverage and our resources may not be sufficient to satisfy any liability resulting from product liability claims and a product liability claim may have a material adverse effect on our business, financial condition or results of operations. RISKS RELATING TO PRODUCT MANUFACTURING AND SALES WE HAVE VERY LIMITED MANUFACTURING, MARKETING OR SALES EXPERIENCE. We have very limited manufacturing, marketing or product sales experience. If we develop any additional commercially marketable products, we cannot assure you that contract manufacturing services will be available in sufficient capacity to supply our product needs on a timely basis. If we decide to build or acquire commercial scale manufacturing capabilities, we will require additional management and technical personnel and additional capital. If in the future, we decide to perform sales and marketing activities ourselves, we would face a number of additional risks, including: o we may not be able to attract and build a significant marketing or sales force; o the cost of establishing a marketing or sales force may not be justifiable in light of product revenues; and o our direct sales and marketing efforts may not be successful. WE CANNOT ASSURE YOU THAT THE RAW MATERIALS NECESSARY FOR THE MANUFACTURE OF OUR PRODUCTS WILL BE AVAILABLE IN SUFFICIENT QUANTITIES OR AT A REASONABLE COST. Complications or delays in obtaining raw materials or in product manufacturing could delay the submission of products for regulatory approval and the initiation of new development programs, each of which could materially impair our competitive position and potential profitability. We can give no assurance that we will be able to enter into any other supply arrangements on acceptable terms, if at all. 21 WE ARE DEPENDENT ON A SINGLE SUPPLIER OF ARGATROBAN. At the present time, Mitsubishi is the only manufacturer of Argatroban in bulk form. Mitsubishi has entered into a supply agreement with GSK to supply Argatroban in bulk to meet GSK's and our needs. Should Mitsubishi fail during any consecutive nine-month period to supply GSK with at least 80 percent of its requirements, and such requirements cannot be satisfied by existing inventories, the supply agreement with Mitsubishi provides for the nonexclusive transfer of the production technology to GSK. However, in the event Mitsubishi terminates manufacturing Argatroban or defaults in its supply commitment, we cannot assure you that GSK will be able to commence manufacturing of Argatroban in a timely manner or that alternate sources of bulk Argatroban will be available at reasonable cost, if at all. If GSK cannot commence the manufacturing of Argatroban or alternate sources of supply are unavailable or are not available on commercially reasonable terms, it could harm our profitability. In addition, finishing and packaging has only been arranged with one manufacturing facility in the U.S. OUR PRODUCTS, EVEN IF APPROVED BY THE FDA OR FOREIGN REGULATORY AGENCIES, MAY NOT BE ACCEPTED BY HEALTH CARE PROVIDERS, INSURERS OR PATIENTS. If any of our products, including Argatroban, after receiving FDA or other foreign regulatory approval, fail to achieve market acceptance, our ability to become profitable in the future will be adversely affected. We believe that market acceptance will depend on our ability to provide acceptable evidence of safety, efficacy and cost effectiveness. In addition, market acceptance depends on the effectiveness of our marketing strategy and the availability of reimbursement for our products. THE SUCCESSFUL COMMERCIALIZATION OF OUR PRODUCTS IS DEPENDENT ON PHARMACEUTICAL PRICING AND THIRD-PARTY REIMBURSEMENT. In recent years, there have been numerous proposals to change the health care system in the United States. Some of these proposals have included measures that would limit or eliminate payments for medical procedures and treatments or subject the pricing of pharmaceuticals to government control. In addition, government and private third-party payors are increasingly attempting to contain health care costs by limiting both the coverage and the level of reimbursement of drug products. Consequently, the reimbursement status of newly approved health care products is highly uncertain, and there can be no assurance that third-party coverage will be available or that available third-party coverage will enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Our long-term ability to market products successfully may depend in part on the extent to which reimbursement for the cost of such products and related treatment will be available. Third-party payors are increasingly challenging the prices of medical products and services. Furthermore, inadequate third-party coverage may reduce market acceptance of our products. Significant changes in the health care system in the United States or elsewhere could have a material adverse effect on our business and financial performance. RISKS RELATING TO INTELLECTUAL PROPERTY WE MAY NOT BE ABLE TO PROTECT PROPRIETARY INFORMATION AND OBTAIN PATENT PROTECTION. We actively seek patent protection for our proprietary technology, both in the U.S. and in other areas of the world. However, the patent positions of pharmaceutical and biotechnology companies, including us, are generally uncertain and involve complex legal, scientific and factual issues. Intellectual property is an uncertain and developing area of the law that is potentially subject to significant change. Our success will depend significantly on our ability to: o obtain patents; o protect trade secrets; o operate without infringing upon the proprietary rights of others; and o prevent others from infringing on our proprietary rights. 22 We cannot assure you that patents issued to or licensed by us will not be challenged, invalidated or circumvented, or that the rights granted will provide competitive advantages to us. We cannot assure you that our patent applications or pending patent applications, if and when issued, will be valid and enforceable and withstand litigation. We cannot assure you that others will not independently develop substantially equivalent, generic equivalent or superseding proprietary technology or that an equivalent product will not be marketed in competition with our products, thereby substantially reducing the value of our proprietary rights. We may experience a significant delay in obtaining patent protection for our products as a result of a substantial backlog of pharmaceutical and biotechnology patent applications at the PTO. Because patent applications in the U.S. are maintained in secrecy until patents issue, other competitors may have filed or maintained patent applications for technology used by us or covered by pending applications without our being aware of these applications. In addition, patent protection, even if obtained, is affected by the limited period of time for which a patent is effective. The Mitsubishi composition of matter patent on Argatroban has expired. Moreover, even if we have a patent or NDA exclusivity, we cannot assure you that generic pharmaceutical manufacturers will not ultimately enter the market and compete with us or that competitors might develop a different formulation of Argatroban. We could also incur substantial costs in defending any patent infringement suits or in asserting any patent rights, including those granted by third parties, in a suit with another party. The PTO could institute interference proceedings involving us in connection with one or more of our patents or patent applications, and such proceedings could result in an adverse decision as to priority of invention. The PTO or a comparable agency in a foreign jurisdiction could also institute re-examination or opposition proceedings against us in connection with one or more of our patents or patent applications and such proceedings could result in an adverse decision as to the validity or scope of the patents. We may be required to obtain licenses to patents or other proprietary rights from third parties. We cannot assure you that any licenses required under any patents or proprietary rights would be made available on acceptable terms, if at all. If we are unable to obtain required licenses, we could encounter delays in product introductions while we attempt to design around blocking patents, or we could find that the development, manufacture or sale of products requiring such licenses could be foreclosed. IF WE ARE UNABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US. We rely significantly on trade secrets, know-how and continuing technological advancement to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with our employees and consultants, which contain assignment of invention provisions. Notwithstanding these agreements, others may gain access to these trade secrets, such agreements may not be honored and we may not be able to protect effectively our rights to our unpatented trade secrets. Moreover, our trade secrets may otherwise become known or independently developed by our competitors. RISKS RELATED TO OUR COMMON STOCK OUTSTANDING OUR STOCK PRICE COULD BE VOLATILE. The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In particular, the market price of our common stock, like that of the securities of other biopharmaceutical companies, has been and may be highly volatile. Factors such as announcements concerning technological innovations, new commercial products or procedures by us or our competitors, proposed governmental regulations and developments in both the U.S. and foreign countries, disputes relating to patents or proprietary rights, publicity regarding actual or potential medical results relating to products under development by us or our competitors, public concern as to the safety of biotechnology products, and economic and other external factors, as well as period-to-period fluctuations and financial results, may have a significant effect on the market price of our common stock. From time to time, there has been limited trading volume with respect to our common stock. In addition, there can be no assurance that there will continue to be a trading market or that any securities research analysts will continue to provide research coverage with respect to our common stock. It is possible that such factors will adversely affect the market for our common stock. THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE, INCLUDING WARRANTS WHICH ARE CURRENTLY EXERCISABLE, COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR STOCK. As of December 31, 2001, we have reserved approximately 6.4 million shares of common stock for issuance under outstanding options, warrants and other contingent agreements. Approximately 6.1 million of these shares of common stock are registered for sale or resale on currently effective registration statements, and the holders of substantially all of the remaining 23 shares of common stock are entitled to registration rights. The issuance of a significant number of shares of common stock upon the exercise of stock options and warrants, or the sale of a substantial number of shares of common stock under Rule 144 or otherwise, could adversely affect the market price of the common stock. CERTAIN ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY DETER OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY, EVEN IF THAT CHANGE WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Our Certificate of Incorporation and the provisions of Section 203 of the Delaware General Corporation Law contain certain provisions that may delay or prevent an attempt by a third party to acquire control of us. Additionally, we adopted a Shareholder Rights Plan in January 2002 that may delay or prevent such attempt by a third party to acquire control of us. In addition, the severance provisions of employment agreements with certain members of management could impede an attempted change of control by a third party. ITEM 2 -- PROPERTIES We lease 37,500 square feet of office and laboratory space in Houston, Texas, including a 21,621 square foot laboratory facility and a 3,909 square foot animal facility. The remaining area is being used for clinical development, computer modeling, administrative and marketing offices, storage space and additional offices for scientists. Our lease expires in December 2005. Additionally, we lease 658 square feet in the building for use as storage space on a monthly basis. We have also leased 15,205 square feet of office space in another building in Houston, Texas for our Clinical Development and Regulatory departments. The lease is effective April 1, 2002 and expires July 31, 2005 with an option to extend the lease to December 31, 2005, provided we give ninety (90) days prior written notice. Revotar leases 8,800 square feet of office and laboratory space in Berlin, Germany. Our lease expires in September 2006. We may require additional space to accommodate future research and laboratory needs as necessary to bring products into development and clinical trials. We continue to plan for further expansion of facilities in the future. ITEM 3 -- LEGAL PROCEEDINGS The Company is presently involved in several legal actions, none of which are expected to have a material adverse effect upon the results of operations or financial condition of the Company when considered either individually or in the aggregate. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our shareholders during the fourth quarter of our fiscal year ended December 31, 2001. 24 PART II ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock began trading on the Nasdaq National Market on June 19, 2001 under the symbol "TXBI" before which our common stock was traded on the American Stock Exchange under the symbol "TXB". The following table sets forth, for the periods indicated, the high and low sale prices for the common stock and redeemable common stock purchase warrants as reported by the consolidated transaction reporting system.
COMMON STOCK PUBLIC WARRANTS --------------------- -------------------- HIGH LOW HIGH LOW ---- --- ---- --- YEAR ENDED DECEMBER 31, 2000 First Quarter...................................... 23.75 6.375 15.00 1.500 Second Quarter..................................... 19.875 8.75 11.375 2.25 Third Quarter...................................... 19.50 13.875 11.00 6.00 Fourth Quarter..................................... 17.39 7.80 8.58 .01 YEAR ENDED DECEMBER 31, 2001 First Quarter...................................... 10.90 4.62 (1) (1) Second Quarter..................................... 9.00 4.51 (1) (1) Third Quarter...................................... 8.60 4.90 (1) (1) Fourth Quarter..................................... 7.47 5.02 (1) (1) YEAR ENDING DECEMBER 31, 2002 First Quarter (through March 15)................... 7.10 5.03 (1) (1)
As of March 15, 2002 there were approximately 467 holders of record of our common stock and approximately 16,500 beneficial owners. (1) The last day of trading of the public warrant on the American Stock Exchange was December 29, 2000 and the last date to exercise the warrant was January 2, 2001. ITEM 201 DISCLOSURE - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) NUMBER OF SECURITIES REMAINING NUMBER OF SECURITIES TO WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE BE ISSUED UPON EXERCISE EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (a)) ------------- ----------------------- -------------------- ------------------------------- Equity compensation plans approved by security holders 4,131,252 $6.87 2,014,491 Equity compensation plans not approved by security holders 247,858 $9.87 --- ------------------------- ------------------------- ----------------------------------- Total 4,379,110 $7.04 2,014,491 ========================= ========================= ===================================
25 DIVIDEND POLICY We have never declared or paid dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any future earnings to finance our growth strategy and ongoing business. Payment of future dividends, if any, will be at the discretion of the board of directors after reviewing various factors, including our financial condition and operating results, current and anticipated cash needs and restrictions which may be in effect in any future financing agreement. RECENT SALES OF UNREGISTERED SECURITIES In February 2001, we issued an aggregate of 124,913 shares of common stock to certain individuals pursuant to the exercise of outstanding warrants for an aggregate purchase price of $449,916. The issuance of common stock was exempt from registration under Section 4 (2) of the Securities Act of 1933 as amended. The warrants and the common stock underlying the warrants may not be sold in the United States absent registration or an applicable exemption from registration requirements. 26 ITEM 6 -- SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The selected financial data set forth below for each of the years in the five-year period ended December 31, 2001 are derived from our audited consolidated financial statements. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our 2001, 2000 and 1999 financial statements and notes thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues ................................................... $ 8,917 $ 15,692 $ 2,083 $ 2,252 $ 16,908 Expenses: Research and development ................................. 17,462 13,513 13,080 14,399 17,150 Equity in loss of affiliate .............................. 9,450 3,487 -- -- -- Charge for purchase of in-process research and development ....................................... -- -- -- 134 1,075 General and administrative ............................... 7,132 6,552 5,512 4,321 5,443 -------- -------- -------- -------- -------- Total expenses ................................... 34,044 23,552 18,592 18,854 23,668 -------- -------- -------- -------- -------- Operating loss ............................................. (25,127) (7,860) (16,509) (16,602) (6,760) Investment income, net ................................... 5,236 4,362 1,212 2,088 1,123 Other .................................................... -- -- -- -- 2 -------- -------- -------- -------- -------- Loss before minority interest .............................. (19,891) (3,498) (15,297) (14,514) (5,635) Minority interest in loss of Revotar ....................... 749 209 -- -- -- -------- -------- -------- -------- -------- Loss before cumulative effect of change in accounting principle .......................... (19,142) (3,289) (15,297) (14,514) (5,635) Cumulative effect of change in accounting principle ........ -- (2,366) -- -- -- -------- -------- -------- -------- -------- Net loss ................................................... (19,142) (5,655) (15,297) (14,514) (5,635) Preferred dividend requirement ........................... -- -- -- (2) 1,153 -------- -------- -------- -------- Net loss applicable to common shares ..................... $(19,142) $ (5,655) $(15,297) $(14,516) $ (6,788) ======== ======== ======== ======== ======== Net loss per share basic and diluted ....................... $ (0.44) $ (0.14) $ (0.45) $ (0.43) $ (0.24) ======== ======== ======== ======== ======== Weighted average common shares used to compute basic and diluted net loss per share ............. 43,637 39,150 34,226 33,930 27,746 ======== ======== ======== ======== ========
DECEMBER 31, ---------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short and long-term investments ..................... $ 95,427 $ 92,533 $ 15,170 $ 30,376 $ 43,707 Working capital ............................. 52,322 85,041 14,477 27,907 42,815 Total assets ................................ 104,362 98,969 20,805 36,106 48,798 Shareholders' equity ........................ 84,237 84,027 18,590 33,236 46,167
27 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to the financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements based on current expectations that are subject to risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. When used in this discussion, the words "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Our actual results and the timing of events could differ materially from those anticipated or implied by the forward-looking statements discussed here as a result of various factors, including, among others, those set forth under the "Cautionary Note Regarding Forward-Looking Statements", herein. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this discussion after the date of this report. OVERVIEW Since our inception in 1989, we have primarily devoted our resources to funding drug discovery, research and development. We are a biopharmaceutical company focused on the discovery, development and commercialization of novel, synthetic, small molecule compounds for the treatment of a variety of cardiovascular, vascular and related inflammatory diseases. Our research and development programs are focused on inhibitors (also referred to as antagonists or blockers) that can interrupt certain disease processes. Our programs seek to address unmet medical needs in cardiovascular diseases, thrombocytopenia, pulmonary arterial hypertension, heart failure and inflammatory diseases such as asthma. Our strategy is to identify and develop novel product candidates for underserved indications, and to commercialize those candidates through collaborations with other pharmaceutical and biotechnology companies. An important part of our strategy is the selection of corporate partners to enhance our drug discovery and development efforts. We and our partners currently have four products in clinical development. In addition, during 2001, our VCAM/VLA-4 antagonist, TBC4746, entered preclinical development for the treatment of asthma. Further clinical development of this compound will be conducted by our research and development partner, Schering-Plough. For additional information about our programs and business strategy, see "Overview" and "Business Strategy" in Item 1, "Business" included herein. MAJOR COMPOUNDS IN RESEARCH AND DEVELOPMENT PROGRAMS ARGATROBAN Argatroban was approved by the U.S. FDA in 2000, is indicated for prophylaxis or treatment of thrombosis in patients with HIT and began shipping in November 2000. A key element of our continuing development strategy is to seek regulatory approvals and expand the marketed uses of Argatroban for other indications. GSK is our development, manufacturing and marketing partner for Argatroban. During 2001, we received an approvable letter from the FDA on our sNDA for Argatroban for use in HIT patients undergoing PCI, and we received approval to market Argatroban in Canada for patients with HIT. Argatroban is in an on-going Phase II human clinical trial to evaluate its use in acute ischemic stroke, and we are evaluating, in conjunction with GSK, the use of Argatroban for use in hemodialysis patients and for use in PCI. SITAXSENTAN In June 2000, we established ICOS-TBC, a 50/50-owned limited partnership with ICOS, to develop and commercialize endothelin receptor antagonists, including sitaxsentan and TBC3711. During 2001, we initiated a pivotal phase IIb/III clinical trial for pulmonary arterial hypertension ("PAH"). TBC3711 TBC3711 is our second oral endothelin A receptor selective antagonist to enter clinical development. Endothelin receptor antagonists are believed to be effective in the treatment of a variety of diseases where the regulation of vascular constriction and tone is important. Two Phase I clinical studies of TBC3711 were completed in year 2001 to determine the safety and tolerability of TBC3711. The product candidate is being developed as a potential treatment for cardiovascular diseases beyond PAH. 28 TBC1269 We are developing a selectin antagonist, TBC1269, for the treatment of asthma and psoriasis. The intravenous form of the drug has been tested in Phase II clinical trials. During 2000, we formed Revotar, a majority owned German subsidiary located in Berlin, to further the development of this program. Revotar completed Phase I clinical trials for asthma utilizing an inhaled form of TBC1269 and a Phase IIa clinical trial in psoriasis is being conducted with an injectable form of TBC1269 as a proof-of-concept. RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES Revenue Recognition o We recognize revenue from service contracts as services are performed. o Royalty revenue is recognized as products are sold by a licensee and we have received sufficient information to record a receivable. o We defer the recognition of milestone payments related to contractual agreements which are still in the developmental stage. Such deferred revenues are amortized into income over the estimated remaining developmental period. Milestone payments received under contractual agreements which have completed the developmental stage are evaluated, and either recognized into income when earned, or amortized over a future period, depending upon whether or not the Company continues to have obligations under the terms of the arrangement. o License fees received under the terms of licensing agreements for our intellectual property are similarly deferred, and amortized into income over the estimated developmental period of the licensed item or items. o Revenue from grants is recognized as earned under the terms of the related grant agreements, typically as expenses are incurred. Amounts received in advance of services being performed under contracts are recorded as deferred revenue, and recognized as services are performed. We periodically evaluate our estimates of remaining development periods, and adjust the recognition of remaining deferred revenues over the adjusted development period remaining. Partnership Accounting We recognize our share of the operating results of ICOS-TBC in proportion to our ownership interest and record it as equity in loss of ICOS-TBC. Operating results of ICOS-TBC include expenses related to our internal research staff that we recognize as revenue and record as collaborative research and development revenue from ICOS-TBC. Due to the nature of the ICOS-TBC collaborative agreement, our collaborative research and development revenue from ICOS-TBC largely depends on the continued progression of clinical trial and development activities, and can be expected to vary from quarter to quarter and year to year. GENERAL Our operating results have fluctuated significantly during each quarter and year, and we anticipate that such fluctuations, which are largely attributable to varying research and development commitments and expenditures, will continue for the next several years. We have been unprofitable to date and expect to incur substantial operating losses for the next several years as we invest in product research and development, preclinical and clinical testing and regulatory compliance. We have sustained net losses of approximately $124.7 million from the date of our inception to December 31, 2001. We have primarily financed our operations to date through a series of private placement and public offerings of our common stock and several collaborative agreements with third parties to jointly pursue product research and development. See discussion of "Liquidity and Capital Resources" below. See also "Additional Risk Factors" in Item 1 "Business" herein. 29 Year ended December 31, 2001 Compared with Year ended December 31, 2000 Revenues in the year ended December 31, 2001 decreased $6,775,000, compared with the year ended December 31, 2000. License fee and milestone income in year 2000 included a milestone payment of $7,500,000 from GSK which was earned upon the approval of Argatroban by the FDA in June 2000, and the recognition of $2,366,000 in remaining unrecognized license fees and milestones related to Argatroban. After taking the $9,866,000 in revenues related to Argatroban into consideration, revenues from other license fees and milestones increased $967,000, as a result of the recognition of a portion of the license fees and milestones received from Schering-Plough, Mitsubishi and ICOS-TBC in 2000 and 2001. See Notes 7 and 8 to the Consolidated Financial Statements, included herein. Revenues from sources other than license fees and milestones increased $2,124,000 in 2001, compared with 2000. Royalties earned on the sale of Argatroban, which was first shipped in the fourth quarter of 2000, increased $1,352,000 in year 2001 compared with year 2000. Research payments in year 2001 increased $453,000, which is comprised of payments received from Schering-Plough, partially offset by the loss of revenues received from LG Chemical in 2000, but not in 2001. Research payments from ICOS-TBC increased $319,000 in year 2001. The partnership was formed in June 2000, however, and the prior year period only included six months of operations. Research and development expenses increased $3,949,000 in year 2001, compared with year 2000. The increase is primarily due to costs associated with ongoing clinical trials. During year 2001, the Company and its research partners initiated two Phase II trials for Argatroban, for ischemic stroke and PCI, and a Phase I study of TBC1269 for asthma. Our equity in the losses of ICOS-TBC increased $5,963,000 in year 2001 compared with year 2000. Since the partnership was formed in June 2000, year 2000 results only included six months of operations. The increase, however, is primarily due to clinical trials conducted in year 2001. In 2001, ICOS-TBC initiated a phase IIb/III clinical trial for sitaxsentan as a treatment of PAH, and two Phase I clinical studies of TBC3711. General and administrative expense increased $580,000 in year 2001, compared to year 2000. The increase is primarily due to the expenses of Revotar, which was formed late in the third quarter of year 2000. Investment income increased $874,000 in year 2001, due to higher levels of invested funds in the current year. We received approximately $20.1 million in proceeds from the exercise of publicly traded warrants in January 2001. The effect on investment income of higher availability of funds was partially offset, however, by the lower interest rates which have prevailed during year 2001. The interest of the minority shareholders of Revotar, who collectively hold approximately 45% of the Revotar common stock, increased $540,000 in year 2001, compared with 2000, due to higher operating expenses of Revotar in the current year. As discussed above, Revotar was formed late in the third quarter of year 2000. Loss before cumulative effect of change in accounting principle increased $15,853,000 in year 2001, compared with year 2000. The increased loss in year 2001 is primarily due to (i) the $9,866,000 in license fee and milestone revenues related to Argatroban included in year 2000, discussed above, (ii) increased research and development costs of $3,949,000, discussed above, (iii) increased equity in loss of ICOS-TBC, primarily due to increased development costs, discussed above, and (iv) increased general and administrative costs of $580,000, primarily due to the expenses of Revotar, as discussed above. Partially offsetting the effect of reduced revenues and increased costs, investment income increased $874,000 in year 2001, due to higher levels of available funds, as discussed above. Net loss in year 2000 included a charge of $2,366,000 for the cumulative effect, on January 1, 2000, of the change in accounting principle resulting from our adoption of Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB101"). Such revenue is being recognized into income over future development periods. Year ended December 31, 2000 Compared with Year ended December 31, 1999 Revenues increased $13,609,000 in year 2000 to $15,692,000, compared with revenues of $2,083,000 in year 1999. Research agreement income increased $1,806,000, primarily due to research payments received from Schering-Plough related to our collaborative agreement, which began in 2000. Collaborative research and development from ICOS-TBC increased $1,123,000, due to the formation of the ICOS-TBC partnership in June 2000. Royalty income of $234,000 in year 2000 reflected royalties 30 earned from GSK's sales of Argatroban, which began shipping late in the fourth quarter of 2000. License fee and milestone income increased $10,446,000 in year 2000. The increase is primarily due to $9,866,000 recognized upon the approval of Argatroban by the FDA in June 2000, as discussed above. The remaining $580,000 license fee and milestone income in year 2000 is related to payments received from ICOS-TBC and Schering-Plough upon the consummation of our collaborative agreements in year 2000. Research and development expenses in year 2000 of $13,513,000 reflected an increase of $433,000 from the $13,080,000 in year 1999. The increase was primarily due to the research and development activities of Revotar, which began in the third quarter of 2000, partially offset by general reductions in research and development costs resulting from the collaborative efforts begun in 2000 with ICOS-TBC. Equity in loss of affiliate of $3,487,000 in year 2000 reflects our 50% interest in the operating results of ICOS-TBC, which began in June 2000. The expenses of ICOS-TBC are primarily research and development costs related to the endothelin antagonist program. General and administrative expenses increased $1,040,000 in year 2000, compared with year 1999. The increase is primarily the result of higher employment expenses and costs associated with the recruiting of additional senior staff, the addition of Revotar in 2000, and costs associated with the management of our collaborative efforts, partially offset by reduced patent legal expenses related to endothelin antagonist compounds, which since June 2000 are the responsibility of ICOS-TBC. Investment income increased $3,150,000 to $4,362,000 in year 2000, compared with $1,212,000 in year 1999. The increase is primarily due to the increase in funds available for investment in year 2000, resulting from the license fees and milestone payments received in 2000 and proceeds from the sale of common stock in a public offering in April 2000. The interest of the minority shareholders of Revotar, who collectively hold approximately 45% of the Revotar common stock, in Revotar's loss was $209,000 in year 2000, reducing our consolidated net loss. As discussed above, we implemented SAB101 on October 1, 2000, effective January 1, 2000. The adoption of SAB101 resulted in a cumulative increase in the Company's losses for the years 1997 through 1999 of $2,366,000 resulting from the amortization of license fees and milestone payments received in 1997, through the development period, which ended June 30, 2000. Revenues in year 2000 include the $2,366,000 deferred from 1997, as discussed above. We incurred net losses applicable to common shares of $5,665,000 in year 2000, compared with $15,297,000 in year 1999. The net loss in year 2000 includes the $2,366,000 non-cash cumulative effect of the change in accounting principle, discussed above. The reduction in our net loss in 2000, as compared with 1999, is due to the increased revenues and investment income, partially offset by increased expenses in 2000. LIQUIDITY AND CAPITAL RESOURCES Year 2000 and 2001 At December 31, 2001, we had cash, cash equivalents, investment securities and accrued interest of $95,427,000, compared with $92,533,000 at December 31, 2000. We used $13,103,000 in cash on operating activities in year 2001, compared to cash generated by operating activities of $2,815,000 in 2000. The primary operating uses of cash in 2001 were to fund the ongoing research and development programs conducted by TBC, Revotar and ICOS-TBC, reduced by cash received from investment income, milestones, and research payments from our collaborative partners. Cash generated in year 2000 is primarily due to the $7,500,000 milestone payment received from GSK upon the approval of Argatroban by the FDA, and license fees received from Schering-Plough and ICOS-TBC. Investing activities used $44,040,000 in year 2001, compared with cash used by investing activities of $32,036,000 in 2000. Year 2001 investing activities was primarily comprised of capital expenditures of $2,762,000, and increases in investment securities and accrued interest thereon of $41,278,000. Year 2000 investing activities was primarily comprised of increases in investment securities and accrued interest thereon of $31,712,000 and capital expenditures of $324,000. The increased capital expenditures in year 2001 was primarily due to purchases of laboratory and office equipment at Revotar, and an expansion of laboratory facilities in Houston. Cash generated by financing activities in year 2001 was $19,043,000, compared with $74,887,000 in year 2000. Year 2001 included proceeds from the exercise of publicly traded warrants in January 2001, for net proceeds of $20,143,000 and proceeds 31 from the exercise of employee stock options and other warrants for proceeds of $502,000, partially reduced by the acquisition of 213,000 shares of treasury stock for total proceeds of $1,602,000. Cash generated by financing activities in year 2000 was primarily due to net proceeds received from the public offering and other issuances of our common stock of $70,096,000, and cash contribution to Revotar by its minority shareholders of $4,791,000. Material Commitments Our only material contractual commitments are comprised of a loan commitment to Revotar and office and laboratory facility leases. We and the minority shareholders of Revotar have committed to lend Revotar approximately $5 million of which our commitment will be approximately $3.4 million. The terms of the loans require quarterly interest payments and repayment of all principal on or before April 1, 2007. Our portion of the loan is denominated in U.S. dollars at an interest rate of seven percent fixed for the first two years and resets to the greater of seven percent or U.S. prime plus two and one-half percent on April 1, 2004. It is likely that Revotar may need to seek additional funding through collaborative arrangements and/or through public or private financings. The Company had long-term obligations under our office and laboratory leases as follows (in thousands):
Less than 1-3 4-5 After 5 Contractual Obligations Total 1 year years years years Operating Leases $7,826 $1,617 $3,573 $2,636 ---
Outlook for 2002 We expect revenues in year 2002 to be in the range of $8.5 to $11.0 million, including royalties on Argatroban sales, reimbursements from collaborative partners of research and development expenses, research reimbursements from ICOS-TBC for the development of endothelin antagonist products, and amortization of earned license fees and milestones. We believe investment income will be in the range of $1.8 million to $2.5 million, depending upon prevailing interest rates and invested balances. Expenses in year 2002 are expected to be between $45 and $48 million. The expected increase over actual year 2001 expenses is primarily in the area of clinical development and reflects the Company's intention to expand the use of Argatroban in ischemic stroke and PCI, demonstrate the safety and efficacy of sitaxsentan as a treatment of PAH, advance the development of TBC3711 and continue development work of TBC1269 as a treatment for asthma and other indications. For a number of reasons discussed elsewhere in this Form 10-K, we cannot estimate, with a reasonable degree of certainty, total completion costs or dates of completion of our ongoing research and development projects. See "Risk Factors" in Item 1, "Business" and "Longer-Term Outlook", below. Below is a summary of our ongoing research and development projects, and an estimation of the distribution of our year 2002 research and development expenditures for each of them.
Expected Distribution of R&D Expenditures Research and Development Programs in Year 2002 --------------------------------- ---------------- Argatroban 21% Endothelin Antagonist 27% (Sitaxsentan and TBC3711) Selectin Antagonist (TBC1269) 13% VCAM/VLA-4 10% Other 29% ---------------- Total 100%
32 Longer-Term Outlook We expect to incur substantial research and development expenditures as we design and develop biopharmaceutical products for the prevention and treatment of cardiovascular and other diseases. We anticipate that our operating expenses will increase in subsequent years because: o We expect to incur significant expenses in conjunction with the ICOS-TBC partnership for endothelin antagonists associated with clinical trial costs for sitaxsentan and TBC3711 and research and clinical trial costs for development of TBC1269 compounds and expect to begin to incur costs for clinical trials related to additional compounds. These costs include: - hiring personnel to direct and carry out all operations related to clinical trials; - hospital and procedural costs; - services of a contract research organization; and - purchasing and formulating large quantities of the compound to be used in such trials. o We anticipate that expenditures for completion of the ongoing Argatroban Phase II clinical trial for ischemic stroke and the magnitude of additional trials beyond Phase II will be significant. It is difficult at this time to estimate the magnitude of costs until results are obtained from the ongoing trial. o There will be additional costs in future periods related to Argatroban in complying with ongoing FDA requirements and possible clinical trial expenditures for additional therapeutic indications. o Our administrative costs and costs to commercialize our products will increase as our products are further developed and marketed. We have been unprofitable to date and expect to incur operating losses for the next several years as we invest in product research and development, preclinical and clinical testing and regulatory compliance. We will require substantial additional funding to complete the research and development of our product candidates, to establish commercial scale manufacturing facilities, if necessary, and to market our products. Estimates of our future capital requirements will depend on many factors, including: o market acceptance and commercial success of Argatroban; o expenses and risks associated with clinical trials to expand the indications for Argatroban; o continued scientific progress in our drug discovery programs; o the magnitude of these programs; o progress with preclinical testing and clinical trials; o the time and costs involved in obtaining regulatory approvals; o the costs involved in filing, prosecuting and enforcing patent claims; o competing technological and market developments and changes in our existing research relationships; o our ability to maintain and establish additional collaborative arrangements; and o effective commercialization activities and arrangements. 33 Subject to these factors, we anticipate that our existing capital resources and other revenue sources, should be sufficient to fund our cash requirements through year 2003 without considering the impact of revenues from Argatroban. Notwithstanding revenues, which may be produced through sales of potential future products, if approved, we anticipate that we will need to secure additional funds to continue the required levels of research and development to reach our long-term goals. We intend to seek such additional funding through collaborative arrangements and/or through public or private financings. Off-Balance Sheet Arrangements We do not engage in off-balance sheet financing arrangements; however we are obligated to fund its proportionate share (50%) of any contractual obligations of ICOS-TBC. As of December 31, 2001, ICOS-TBC is not obligated for any leases, long-term debt, or other fixed obligations, except for contractual obligations for the manufacturing of drug product of approximately $800,000, and with outside research organizations for management of clinical and preclinical trials for approximately $1,700,000. IMPACT OF INFLATION AND CHANGING PRICES The pharmaceutical research industry is labor intensive, and wages and related expenses increase in inflationary periods. The lease of space and related building services for the Houston facility contains a clause that escalates rent and related services each year based on the increase in building operating costs and the increase in the Houston Consumer Price Index, respectively. To date, inflation has not had a significant impact on our operations. ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN CURRENCY EXCHANGE RISK We are exposed to market risk primarily from changes in foreign currency exchange rates. The following describes the nature of this risk that is not believed to be material to us. We have a majority-owned subsidiary in Berlin, Germany and consolidate the results of operations into our consolidated financial results. Although not material to date, our reported expenses and cash flows from this subsidiary are exposed to changing exchange rates. We also have contracts with entities in other areas outside the U.S. that are denominated in a foreign currency. To date, these currencies have not fluctuated materially. At this time, we have not deemed it to be cost effective to engage in a program of hedging the effect of foreign currency fluctuations on our operating results using derivative financial instruments. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The financial statements we are required to include in this Item 8 are set forth in Item 14 of this Form 10-K. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 34 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers and their respective ages and positions are as follows:
NAME AGE POSITION ---- --- -------- John M. Pietruski(1)(2)......................... 68 Chairman of the Board of Directors Bruce D. Given, M.D.(1)(4)...................... 47 President, Chief Executive Officer and Director Richard A. F. Dixon, Ph.D.(1)................... 48 Senior Vice President, Research and Chief Scientific Officer and Director Stephen L. Mueller.............................. 54 Vice President, Finance and Administration, Secretary and Treasurer Pamela M. Murphy................................ 51 Vice President, Corporate Communications James T. Willerson, M.D.(1)(3).................. 62 Chairman of the Scientific Advisory Board and Director Ron J. Anderson, M.D.(2)........................ 55 Director Frank C. Carlucci(2)............................ 71 Director Robert J. Cruikshank(3)......................... 71 Director Suzanne Oparil, M.D.(3)......................... 60 Director William R. Ringo, Jr.(3)........................ 56 Director James A. Thomson, Ph.D.(2)...................... 56 Director
---------- (1) Member, Executive Committee of the Board of Directors (2) Member, Compensation, Personnel and Nominating Committee of the Board of Directors (3) Member, Audit Committee of the Board of Directors (4) From July 1992 until his retirement in March 2002, David B. McWilliams held the office of President and Chief Executive Officer and was a director. The additional information requested by this item will be contained on the Company's definitive Proxy Statement ("Proxy Statement") for its 2002 Annual Meeting of Stockholders to be held on May 23, 2002 and is incorporated by reference from the sections titled "Election of Directors" and "Other Information -- Executive Officers and -- Section 16(a) Beneficial Ownership Reporting Compliance". Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to December 31, 2001. ITEM 11 -- EXECUTIVE COMPENSATION The information requested by this item is incorporated by reference from the section titled "Other Information -- Executive Compensation" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2002. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information requested by this item is incorporated by reference from the section titled "Other Information -- Principal Stockholders" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2002. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information requested by this item is incorporated by reference from the sections titled "Other Information -- Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2002. 35 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reference is made to the Consolidated Financial Statements, the reports thereon, and the notes thereto commencing at Page F-1 of this Annual Report on Form 10-K. Set forth below is an index to such Financial Statements.
PAGE ---- Independent Auditors' Report................................................... F-1 Consolidated Balance Sheets.................................................... F-2 Consolidated Statements of Operations and Comprehensive Loss................... F-3 Consolidated Statements of Stockholders' Equity................................ F-4 Consolidated Statements of Cash Flows.......................................... F-6 Notes to Consolidated Financial Statements..................................... F-7
2. INDEX TO EXHIBITS Information with respect to this Item is contained in the attached Index to Exhibits. The Company will furnish a copy of any one or more of these exhibits to a shareholder who so requests upon receipt of payment for the costs of duplication and mailing the requested item. (b) REPORTS ON FORM 8-K One report on Form 8-K dated October 30, 2001 was filed during the quarter ended December 31, 2001, regarding the Company's third quarter 2001 financial results, market growth for Argatroban and clinical trials status. Four reports on Form 8-K were filed after December 31, 2001 but prior to the filing of this Form 10-K. A report on Form 8-K dated January 3, 2002 was filed regarding the issuance of rights under the Shareholder Rights Plan. A report on Form 8-K dated February 5, 2002 was filed regarding confirmation of the Company's 2001 guidance and a review of the outlook for 2002. A report on Form 8-K dated February 26, 2002 was filed regarding the Company's 2001 fourth quarter and year-end financial results. A report on Form 8-K dated March 21, 2002 was filed regarding Bruce D. Given, M.D. being named as President and CEO and the retirement of David B. McWilliams. All schedules have been omitted since the information is not required or is not material to require submission of the schedule, or because the information is included in the financial statements or the notes thereto. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston and State of Texas on the 28 day of March, 2002. TEXAS BIOTECHNOLOGY CORPORATION By: /s/ STEPHEN L. MUELLER ------------------------------------------- Stephen L. Mueller Vice President, Finance and Administration, Secretary and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons and in the capacities indicated on the 28th day of March, 2002.
SIGNATURE TITLE --------- ----- /s/ JOHN M. PIETRUSKI Chairman of the Board of Directors --------------------------------------------------------------- John M. Pietruski /s/ BRUCE D. GIVEN Director, President and Chief Executive Officer --------------------------------------------------------------- (Principal Executive Officer) Bruce D. Given, M.D. /s/ RICHARD A.F. DIXON Director and Senior Vice President, Research and --------------------------------------------------------------- Chief Scientific Officer Richard A.F. Dixon, Ph.D. /s/ STEPHEN L. MUELLER Vice President, Finance and Administration, --------------------------------------------------------------- Secretary and Treasurer Stephen L. Mueller (Principal Financial and Accounting Officer) /s/ RON J. ANDERSON Director --------------------------------------------------------------- Ron J. Anderson, M.D. /s/ FRANK C. CARLUCCI Director --------------------------------------------------------------- Frank C. Carlucci /s/ ROBERT J. CRUIKSHANK Director --------------------------------------------------------------- Robert J. Cruikshank /s/ SUZANNE OPARIL Director --------------------------------------------------------------- Suzanne Oparil, M.D. /s/ WILLIAM R. RINGO, JR. Director --------------------------------------------------------------- William R. Ringo, Jr. /s/ JAMES A. THOMSON Director --------------------------------------------------------------- James A. Thomson, Ph.D. /s/ JAMES T. WILLERSON Director --------------------------------------------------------------- James T. Willerson, M.D.
37 INDEPENDENT AUDITORS' REPORT The Board of Directors Texas Biotechnology Corporation: We have audited the accompanying consolidated balance sheets of Texas Biotechnology Corporation and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Texas Biotechnology Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Houston, Texas February 25, 2002 F-1 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN $ THOUSANDS, EXCEPT SHARE DATA)
ASSETS DECEMBER 31, ------ ------------------------ 2001 2000 ---------- ---------- Current assets: Cash and cash equivalents ................................................. $ 10,086 $ 48,470 Short-term investments .................................................... 46,465 39,068 Accounts receivable ....................................................... 655 238 Other current receivables ................................................. 618 626 Receivable from related party under collaborative arrangement ............. 1,144 882 Prepaids .................................................................. 1,350 1,349 ---------- ---------- Total current assets .................................................. 60,318 90,633 Long-term investments .......................................................... 38,876 4,995 Equipment and leasehold improvements, net ...................................... 4,300 2,368 Other assets ................................................................... 868 973 ---------- ---------- Total assets .......................................................... $ 104,362 $ 98,969 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................... $ 2,187 $ 942 Accrued expenses .......................................................... 3,902 3,621 Deferred revenue from related party ....................................... 1,159 484 Deferred revenue from unrelated parties ................................... 748 545 ---------- ---------- Total current liabilities ............................................. 7,996 5,592 Liability to related party ..................................................... 3,533 1,376 Deferred revenue from related party ............................................ 1,722 1,210 Deferred revenue from unrelated parties ........................................ 3,041 2,182 Other deferred credit .......................................................... 2,620 2,620 Minority interest in Revotar ................................................... 1,213 1,962 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.005 per share. At December 31, 2001, and December 31, 2000 5,000,000 shares authorized; none outstanding ......... -- -- Common stock, par value $.005 per share. At December 31, 2001, 75,000,000 shares authorized; 43,783,638 shares issued. At December 31, 2000, 75,000,000 shares authorized, 41,203,197 shares issued ............ 218 206 Additional paid-in capital ................................................ 210,616 189,390 Treasury stock, 213,000 shares at December 31, 2001 ....................... (1,602) -- Other comprehensive loss .................................................. (299) (15) Accumulated deficit ....................................................... (124,696) (105,554) ---------- ---------- Total stockholders' equity ............................................ 84,237 84,027 ---------- ---------- Total liabilities and stockholders' equity ............................ $ 104,362 $ 98,969 ========== ==========
See accompanying notes to consolidated financial statements. F-2 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN $ THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Revenues: Research agreements ............................................. $ 4,342 $ 3,889 $ 2,083 Collaborative research and development from ICOS-TBC, L.P. ...... 1,442 1,123 -- Royalty income .................................................. 1,586 234 -- License fee and milestone income ................................ 1,547 10,446 -- -------- -------- -------- Total revenues .............................................. 8,917 15,692 2,083 -------- -------- -------- Expenses: Research and development ........................................ 17,462 13,513 13,080 Equity in loss of ICOS-TBC, L.P. ................................ 9,450 3,487 -- General and administrative ...................................... 7,132 6,552 5,512 -------- -------- -------- Total expenses .............................................. 34,044 23,552 18,592 -------- -------- -------- Operating loss .............................................. (25,127) (7,860) (16,509) Investment income, net ............................................... 5,236 4,362 1,212 -------- -------- -------- Loss before minority interest ............................... (19,891) (3,498) (15,297) Minority interest in loss of Revotar ................................. 749 209 -- -------- -------- -------- Loss before cumulative effect of change in accounting principle .............................. (19,142) (3,289) (15,297) Cumulative effect of change in accounting principle ............. -- (2,366) -- -------- -------- -------- Net loss applicable to common shares ........................ $(19,142) $ (5,655) $(15,297) ======== ======== ======== Other Comprehensive Loss: Unrealized loss on foreign currency translation ................. (284) (15) -- -------- -------- -------- Comprehensive loss .......................................... $(19,426) $ (5,670) $(15,297) ======== ======== ======== Net loss per share basic and diluted ................................. $ (0.44) $ (0.14) $ (0.45) ======== ======== ======== Weighted average common shares used to compute net loss per share: basic and diluted ............................. 43,637 39,150 34,226 ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN $ THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ----------------------- ADDITIONAL OTHER TOTAL SHARES PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS' ISSUED AMOUNT CAPITAL LOSS DEFICIT EQUITY ---------- ---------- ---------- ------------- ----------- ------------- Balance at January 1, 1999 ............. 34,128,017 $ 171 $ 117,667 $ -- $ (84,602) $ 33,236 Issuance of common stock for stock option exercises ............ 257,720 1 515 -- -- 516 Issuance of common stock for warrant exercises ................. 1,400 -- 11 -- -- 11 Issuance of common stock in lieu of board fees ................ 5,772 -- 24 -- -- 24 Compensation expense related to stock options ..................... -- -- 100 -- -- 100 Net loss ............................... -- -- -- -- (15,297) (15,297) ---------- ---------- ---------- ------------- ----------- ------------- Balance at December 31, 1999 ........... 34,392,909 $ 172 $ 118,317 $ -- $ (99,899) $ 18,590 Issuance of common stock in public offering ................... 5,584,591 28 65,206 -- -- 65,234 Issuance of common stock for stock option exercises ............ 618,904 3 2,319 -- -- 2,322 Issuance of common stock for warrant exercises ................. 531,128 3 2,537 -- -- 2,540 Issuance of common stock in payment of expenses ............... 2,236 -- 30 -- -- 30 Issuance of common stock in payment for consulting services ... 2,000 -- 16 -- -- 16 Issuance of common stock in payment for research and development ...... 71,429 -- 965 -- -- 965 Net loss ............................... -- -- -- -- (5,655) (5,655) Other comprehensive loss ............... -- -- -- (15) -- (15) ---------- ---------- ---------- ------------- ----------- ------------- Balance at December 31, 2000 ........... 41,203,197 $ 206 $ 189,390 $ (15) $ (105,554) $ 84,027
(Continued) F-4 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN $ THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK ------------------- ADDITIONAL OTHER TOTAL PAID-IN TREASURY COMPREHENSIVE ACCUMULATED STOCKHOLDERS SHARES AMOUNT CAPITAL STOCK LOSS DEFICIT EQUITY ---------- ------ ---------- -------- ------------- ----------- ------------ Balance at December 31, 2000 ...... 41,203,197 $ 206 $ 189,390 $ -- $ (15) $ (105,554) $ 84,027 Issuance of common stock for stock option exercises ....... 12,268 -- 52 -- -- -- 52 Issuance of common stock for warrant exercises ............ 2,511,558 12 20,581 -- -- -- 20,593 Issuance of common stock in payment of expenses .......... 56,615 -- 530 -- -- -- 530 Compensation expense related to stock options ................ -- -- 63 -- -- -- 63 Purchase of treasury shares ....... -- -- -- (1,602) -- -- (1,602) Net loss .......................... -- -- -- -- -- (19,142) (19,142) Other comprehensive loss .......... -- -- -- -- (284) -- (284) ---------- ------ ---------- -------- ------------- ----------- ------------ Balance at December 31, 2001 ...... 43,783,638 $ 218 $ 210,616 $ (1,602) $ (299) $ (124,696) $ 84,237 ========== ====== ========== ======== ============= =========== ============
See accompanying notes to consolidated financial statements. F-5 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN $ THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------- 2001 2000 1999 --------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ............................................................. $ (19,142) $ (5,655) $(15,297) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .................................... 923 998 891 Equity in loss of ICOS-TBC, L.P. ................................. (9,450) (3,487) -- Minority interest in loss of Revotar ............................. (749) (209) -- Expenses paid with stock ......................................... 530 46 24 Compensation expense related to stock options .................... 63 -- 100 Loss on disposition of fixed assets .............................. 12 9 -- Change in operating assets and liabilities, net of effect of acquisition: Increase in accounts receivable .................................. (417) (237) -- (Increase) decrease in prepaids .................................. (1) 104 (490) Decrease in other current receivables ............................ 8 441 359 (Increase) decrease in receivable from related party under collaborative agreement ............................ (262) (882) 10 Decrease (Increase) in other assets .............................. -- 55 (55) Increase (decrease) in accounts payable and accrued expenses ............................................... 1,526 2,348 (655) Increase in liability to related party ........................... 11,607 4,864 -- Increase in deferred revenue from unrelated parties .............. 1,062 2,727 -- Increase in deferred revenue from related party .................. 1,187 1,693 -- --------- --------- -------- Net cash (used in) provided by operating activities ............ (13,103) 2,815 (15,113) --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements .................... (2,762) (324) (621) Proceeds from disposition of equipment and leasehold improvements ............................................. -- -- 1 Purchase of investments .............................................. (154,272) (104,143) (17,184) Maturity of investments .............................................. 112,863 72,996 30,826 Decrease (increase) in interest receivable included in short-term and long-term investments ............................ 131 (565) 191 --------- --------- -------- Net cash (used in) provided by investing activities ............ (44,040) (32,036) 13,213 --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Acquisition of treasury stock ........................................ (1,602) -- -- Contribution from minority interest in consolidated subsidiary ....... -- 4,791 -- Proceeds from issuance of common stock and option and warrant exercises, net ......................................... 20,645 70,096 527 --------- --------- -------- Net cash provided by financing activities ...................... 19,043 74,887 527 --------- --------- -------- Effect of exchange rate changes on cash ................................... (284) -- -- --------- --------- -------- Net (decrease) increase in cash and cash equivalents ................. (38,384) 45,666 (1,373) Cash and cash equivalents at beginning of year ............................ 48,470 2,804 4,177 --------- --------- -------- Cash and cash equivalents at end of year .................................. $ 10,086 $ 48,470 $ 2,804 ========= ========= ======== Supplemental schedule of noncash financing activities: Issuance of common stock for research and development, license fee and services ........................................... $ 530 $ 1,011 $ 24 ========= ========= ========
See accompanying notes to consolidated financial statements. F-6 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (a) Organization Texas Biotechnology Corporation (the "Company" or "TBC"), a Delaware Corporation, is a biopharmaceutical company focused on the discovery, development and commercialization of novel synthetic small molecule compounds for the treatment of a variety of cardiovascular, vascular and related inflammatory diseases. Since its formation in 1989, the Company has been engaged principally in research and drug discovery programs and clinical development of certain drug compounds. On July 25, 1994, the Company acquired all of the outstanding common stock of ImmunoPharmaceutics, Inc. ("IPI") in exchange for common stock, par value $.005 per share (the "Common Stock"), of the Company. On June 6, 2000, TBC, through its wholly owned subsidiary, TBC-ET, Inc., a Delaware Corporation, and ICOS Corporation, a Delaware Corporation, ("ICOS") entered into an agreement and formed ICOS-Texas Biotechnology L.P., a Delaware limited partnership ("ICOS-TBC"), to develop and globally commercialize endothelin-A receptor antagonists. TBC and ICOS are both 50% owners in ICOS-TBC. During the third quarter of 2000, TBC formed Revotar Biopharmaceuticals AG ("Revotar"), a German corporation, to conduct research and development for novel small molecule compounds and to develop and commercialize TBC's selectin antagonists. The Company retained a majority interest in Revotar. The Company is presently working on a number of long-term development projects that involve experimental and unproven technology, which may require many years and substantial expenditures to complete, and which may be unsuccessful. Sales of the Company's first product, for which it receives royalty income, Argatroban, began during November 2000. (b) Basis of Consolidation The Company's consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, IPI and TBC-ET, Inc., and its majority controlled subsidiary, Revotar. All material intercompany balances and transactions have been eliminated. (c) Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments Cash equivalents are considered to be those securities or instruments with original maturities, when purchased, of three months or less. At December 31, 2001, approximately $690,000 was invested in demand and money market accounts. Short-term investments are those investments which have an original maturity of less than one year and greater than three months at the purchase date. At December 31, 2001, the Company's short-term investments consisted of approximately $817,000 in government agency bonds and $44,083,000 in corporate commercial paper and loan participations, time deposits of $1,255,000 and accrued interest of $310,000. Long-term investments consist of approximately $30,989,000 in government agency bonds, and $7,476,000 in corporate bonds and loan participations and $411,000 in accrued interest thereon, all with a remaining maturity of one year or more. Cash equivalents, short-term and long-term investments are stated at cost plus accrued interest, which approximates market value. Interest income is accrued as earned. The Company classifies all short-term and long-term investments as held to maturity. (d) Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is provided on the straight-line method over the estimated useful lives of the respective assets (3 to 10 years). Amortization of leasehold improvements is provided on the straight-line method over the remaining minimum lease term. (e) Investment in ICOS - TBC ICOS-TBC is accounted for using the equity method. Accordingly, the investment is recorded at cost, adjusted for the Company's share of income or loss of the entity and amortization of revenues for upfront and milestone payments. See Note 8. F-7 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (f) Research and Development Costs All research and development costs are expensed as incurred and include salaries of research and development employees, certain rent and related building services, research supplies and services, clinical trial expenses and other associated costs. With respect to research and development, salaries and benefits for the years ended December 31, 2001, 2000 and 1999, of approximately $6,898,000, $5,902,000 and $5,376,000, respectively, were charged to research and development. Payments related to the acquisition of in-process research and development, if any, are expensed as incurred. (g) Net Loss Per Common Share Basic net loss per common share is calculated by dividing the net loss applicable to common shares after preferred dividend requirements by the weighted average number of common and common equivalent shares outstanding during the period. For the years 2001, 2000 and 1999, there were no potential common shares used in the calculation of weighted average common shares outstanding. For the years ended December 31, 2001, 2000 and 1999, the weighted average common shares used to compute basic net loss per common share totaled 43,636,548, 39,149,882 and 34,226,224, respectively. Securities convertible into Common Stock comprised of stock options and warrants totaling 4,379,110, 5,924,687 and 7,985,191 shares at December 31, 2001, 2000 and 1999 respectively, were not assumed in the calculation of diluted net loss per common share because the effect would have been antidilutive. (h) Revenue Recognition Revenue from service contracts is recognized as services are performed. Royalty revenue is recognized as products are sold by a licensee and we have received sufficient information to record a receivable. As a result of the Company's adoption at October 1, 2000, effective January 1, 2000, of Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB101"), promulgated by the United States Securities and Exchange Commission ("SEC") in December 1999, the Company defers the recognition of milestone payments related to contractual agreements which are still in the developmental stage. Such deferred revenues are amortized into income over the estimated remaining developmental period. Milestone payments received under contractual agreements which have completed the developmental stage are evaluated, and either recognized into income when earned, or amortized over a future period, depending upon whether or not the Company continues to have obligations under the terms of the arrangement. License fees received under the terms of licensing agreements for the Company's intellectual property are similarly deferred, and amortized into income over the estimated developmental period of the licensed item or items. The Company periodically evaluates its estimates of remaining development periods, and adjusts the recognition of remaining deferred revenues over the adjusted development period remaining. Revenue from grants is recognized as earned under the terms of the related grant agreements, typically as expenses are incurred. Amounts received in advance of services being performed under contracts are recorded as deferred revenue, and recognized as services are performed. (i) Patent Application Costs Costs incurred in filing for patents are expensed as incurred. (j) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. (k) Intangible Assets Intangible assets, consisting of FDA approved products, are amortized on a straight-line basis over their estimated useful lives. The Company periodically reviews the useful lives of its intangible and long-lived assets, which may result in future adjustments to the amortization periods. Related amortization expense for the years ended December 31, 2001 and 2000 was $105,000 and $53,000, respectively. Amortization of intangible assets is included in general and administrative expense in the consolidated statements of operations and comprehensive loss. F-8 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (l) Treasury Stock Treasury stock is recorded at cost. On May 3, 2001, the Company announced that its Board of Directors had authorized a stock repurchase program to buy up to 3 million shares, or approximately 7 percent of the Company's outstanding Common Stock over an 18 month period. Pursuant to the stock repurchase program, the Company has repurchased 213,000 shares for net proceeds of approximately $1,602,000 during the year ended December 31, 2001. (m) Stock Based Compensation The Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans. Had compensation costs for the Company's stock-based compensation plans been determined consistent with SFAS No. 123, the Company's pro forma net loss and pro forma net loss applicable to common shares for the year ended December 31, 2001 would have been $23,260,000 and $0.53, respectively, for December 31, 2000, would have been $8,604,873 and $0.22, respectively and for December 31, 1999 would have been $17,178,428 and $0.50, respectively. The fair value of options granted during the years ended December 31, 2001, 2000 and 1999 for employee services were estimated on the date of grant using the Black-Scholes Pricing Model with the following weighted average assumptions: risk-free interest rate of between 3.99 and 6.63 percent, expected life of between 4 and 7 years, expected volatility of between 57 and 78 percent and no dividends. (n) Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (o) Impairment of Long-lived Assets As circumstances dictate, the Company evaluates the recoverability of its intangible and long-lived assets by comparing the projected undiscounted net cash flows associated with such assets against their respective carrying values. Impairment, if any, is based on the excess of the carrying value over the fair value. (p) New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 (SFAS141), "Business Combinations." SFAS141 eliminates the pooling of interests method of accounting and requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method. The Company adopted SFAS141 effective July 1, 2001, and such adoption did not have any effect on the results of 2001. In July 2001, the FASB also issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS142) which will be effective for the Company as of January 1, 2002. SFAS142 requires goodwill and other intangible assets with indefinite lives no longer be amortized. SFAS142 further requires the fair value of goodwill and other intangible assets with indefinite lives be tested for impairment upon adoption of this statement, annually and upon the occurrence of certain events and be written down to fair value if considered impaired. The Company does not expect the adoption of SFAS142 to have a material impact on its business because it currently has no goodwill or other intangible assets with indefinite lives. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," (SFAS143) which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities that F-9 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) have legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the assets. SFAS143 is effective for all fiscal years beginning after June 15, 2002. The Company does not expect the adoption of SFAS143 to have a significant impact on its financial condition or results of operations. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," (SFAS144) which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," it retains many of the fundamental provisions of that statement. SFAS144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those years. The Company does not expect the adoption of SFAS144 to have a significant impact on its financial condition or results of operations. (q) Reclassifications Certain reclassifications have been made to prior period financial statements to conform with the December 31, 2001 presentation with no effect on net loss previously reported. (2) CAPITAL STOCK In December 1993, the Company completed an initial public offering comprised of 4,082,500 units, each unit consisting of one share of Common Stock (par value $.005 per share) and one warrant to purchase one share of Common Stock. Proceeds to the Company were approximately $24.2 million, net of selling expenses of approximately $3.3 million. The securities included in the unit subsequently separated into its Common Stock and warrant components. The warrants were exercisable at $8.44 per share. On December 13, 1998, the expiration date of the warrants was extended from December 14, 1998 to September 30, 1999 for those warrant holders electing such extension. On September 13, 1999, the expiration date of the warrants was further extended to December 31, 2000. There were 2,386,645 warrants outstanding as of December 31, 2000 which were exercised on January 3, 2001 for proceeds of approximately $20.1 million. In April 2000, the Company sold 5,584,591 shares of Common Stock for $12.50 per share in an underwritten public offering. The net proceeds to the Company from this offering were approximately $65.2 million after deducting selling commissions and expenses of approximately $4.6 million related to the offering. The Company has reserved Common Stock for issuance as of December 31, 2001 as follows: Stock option plans ................ 6,145,743 Warrants outstanding .............. 247,858 --------- Total shares reserved ....... 6,393,601 =========
Shareholders' Rights Plan In January 2002, the Company adopted a shareholder rights plan under which the Board of Directors declared a dividend of one preferred stock purchase right ("Right") for each outstanding share of the Company's common stock held of record as of the close of business on January 22, 2002. Each Right initially entitles a shareholder to purchase a one one-thousandth fraction of a share of Preferred Stock - Junior Participating Series A (the "Preferred Stock") for $55.00. Each such fraction of a share of Preferred Stock has terms designed to make it essentially equivalent to one share of Common Stock. The Rights will become exercisable only in the event a person or group acquires 15% or more of the Company's Common Stock or commences a tender or exchange offer which, if consummated, would result in that person or group owning 15% of the Common Stock. Prior to such an event, the Rights will be evidenced by and traded in tandem with the Common Stock. F-10 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) If a person or group acquires a 15% or larger position in the Company, each Right (except those held by the acquiring party) will then entitle its holder to purchase, fractional shares of Preferred Stock having twice the value of the $55 exercise price, with each fractional Preferred Share valued at the market price of the Common Stock. Also, if following an acquisition of 15% or more of the Company's Common Stock, the Company is acquired by that person or group in a merger or other business combination transaction, each Right would then entitle its holder to purchase Common Stock of the acquiring company having a value of twice the $55.00 exercise price. The effect will be to entitle the Company's shareholders to buy stock in the acquiring company at 50% of its market price. The Company may redeem the Rights at $.001 per Right at any time on or prior to the tenth business day following the acquisition of 15% or more of its Common Stock by a person or group or commencement of a tender offer for such 15% ownership. The Rights expire on January 2, 2012. (3) STOCK OPTIONS AND WARRANTS The Company has in effect the following stock option plans: The Amended and Restated 1990 Incentive Stock Option Plan ("1990 Plan") allows for the issuance of incentive and non-qualified options to employees, directors, officers, non-employee independent contractors and non-employee directors, pursuant to which 185,495 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. The Amended and Restated 1992 Incentive Stock Option Plan ("1992 Plan") allows for the issuance of incentive and non-qualified options to employees, directors, officers, non-employee independent contractors and non-employee directors, pursuant to which 910,029 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. The Amended and Restated Stock Option Plan for Non-Employee Directors ("Director Plan") allows for the issuance of non-qualified options to non-employee directors, pursuant to which 34,242 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company to be issued to non-employee members of the Board of Directors of the Company based on a formula. No new issuances are being made under the Director Plan. The Amended and Restated 1995 Stock Option Plan ("1995 Plan") allows for the issuance of incentive and non-qualified options, shares of restricted stock and stock bonuses to employees, officers, and non-employee independent contractors, pursuant to which 1,609,868 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. The Amended and Restated 1995 Non-Employee Director Stock Option Plan ("1995 Director Plan") allows for the issuance of non-qualified options to non-employee directors, pursuant to which 457,160 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company to be issued to non-employee members of the Board of Directors of the Company based on a formula. The Company's shareholders approved, at the annual shareholders meeting in June 2000, an amendment to the 1995 Director Plan which increased the number of shares of Common Stock reserved for issuance to 500,000 shares from 300,000 shares. The 1999 Stock Incentive Plan ("1999 Plan") allows for the issuance of incentive and non-qualified options, shares of restricted stock and stock bonuses to directors, employees, officers and non-employee independent contractors, pursuant to which 2,948,949 shares of Common Stock are reserved for issuance out of authorized but unissued shares of the Company. During 2001, the Board of Directors amended the 1999 Plan to allow a total of 3,000,000 shares of Common Stock to be reserved for issuance. The amendment was approved by the stockholders at the Company's annual meeting in 2001. F-11 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) A summary of stock options as of December 31, 2001, follows:
EXERCISE PRICE EXERCISED/ AVAILABLE STOCK OPTION PLANS PER SHARE AUTHORIZED OUTSTANDING OTHER EXERCISABLE FOR GRANT --------------------- -------------- ----------- ----------- --------- ----------- --------- 1990 Plan............ $ 1.38-$21.59 285,715 185,495 100,220 153,831 -- 1992 Plan............ $ 1.41-$21.59 1,700,000 886,380 789,971 756,635 23,649 Director Plan........ $ 3.50-$ 4.54 71,429 34,242 37,187 34,242 -- 1995 Plan............ $ 1.31-$21.59 2,000,000 1,603,589 390,132 1,404,512 6,279 1995 Director Plan... $ 1.38-$11.31 500,000 326,596 42,840 264,103 130,564 1999 Plan............ $ 5.51-$21.59 3,000,000 1,094,950 51,051 176,100 1,853,999 ------------ ----------- --------- ---------- --------- TOTALS........ 7,557,144 4,131,252 1,411,401 2,789,423 2,014,491 ============ =========== ========= ========== =========
A summary of the status of the Company's stock option plans as of December 31, 2001, 2000 and 1999 and the changes during the years then ended is presented below:
WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE ----------- ---------------- Outstanding at January 1, 1999............................................ 3,333,294 $ 4.42 Granted................................................................ 441,050 4.27 Canceled............................................................... (292,405) 5.13 Exercised.............................................................. (257,720) 2.51 ----------- Outstanding at December 31, 1999.......................................... 3,224,219 4.53 Granted................................................................ 624,160 18.66 Canceled............................................................... (77,159) 9.13 Exercised.............................................................. (618,904) 3.75 ----------- Outstanding at December 31, 2000.......................................... 3,152,316 7.36 Granted................................................................ 1,042,700 5.69 Canceled............................................................... (51,496) 13.77 Exercised.............................................................. (12,268) 4.15 ----------- Outstanding at December 31, 2001.......................................... 4,131,252 $ 6.87 ===========
In 2001, the Company issued 51,051 shares of restricted Common Stock as compensation to certain of its employees, which will vest over the three year period subsequent to its issuance.
DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 1999 --------------- --------------- --------------- Weighted-average fair value of options granted during the period at an exercise price equal to market at issue date ...... $ 5.69 $ 12.26 $ 2.16
F-12 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following tables summarize information about the Company's stock options outstanding as of December 31, 2001, 2000 and 1999, respectively:
WEIGHTED WEIGHTED OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE EXERCISE PRICE AS OF 12/31/2001 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2001 OF EXERCISABLE -------------- ---------------- ---------------- -------------- ---------------- -------------- $ 1.31 - $ 4.19 1,050,454 3.68 $ 3.21 951,041 $ 3.11 $ 4.20 - $ 5.51 1,526,834 6.44 $ 5.17 734,486 $ 4.80 $ 5.52 - $11.31 1,035,970 6.07 $ 6.85 909,478 $ 6.79 $11.32 - $21.59 517,994 8.02 $ 19.36 194,418 $ 19.37 --------------- --------------- $ 1.31 - $21.59 4,131,252 5.84 $ 6.87 2,789,423 $ 5.89 =============== ===============
WEIGHTED WEIGHTED OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE EXERCISE PRICE AS OF 12/31/2000 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2000 OF EXERCISABLE -------------- ---------------- ---------------- -------------- ---------------- -------------- $ 1.31 - $ 3.50 638,719 2.86 $ 2.64 637,886 $ 2.64 $ 3.51 - $ 5.88 1,459,624 6.09 $ 4.83 1,208,453 $ 4.98 $ 5.89 - $ 8.13 451,146 7.17 $ 7.19 297,282 $ 7.19 $ 8.14 - $21.59 602,827 9.36 $ 18.63 23,752 $13.86 --------------- --------------- $ 1.31 - $21.59 3,152,316 5.84 $ 7.36 2,167,373 $ 4.69 =============== ===============
WEIGHTED WEIGHTED OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE EXERCISE PRICE AS OF 12/31/1999 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/1999 OF EXERCISABLE -------------- ---------------- ---------------- -------------- ---------------- -------------- $1.31 - $3.50 890,096 3.77 $ 2.33 888,430 $ 2.33 $3.51 - $5.88 1,793,473 6.92 $ 4.81 1,187,886 $ 4.93 $5.89 - $8.13 540,650 8.17 $ 7.20 205,741 $ 7.20 --------------- --------------- $1.31 - $8.13 3,224,219 6.26 $ 4.53 2,282,057 $ 4.12 =============== ===============
Warrants The fair value of warrants issued during the year ended December 31, 1999 for other than employee services was estimated on the date of grant using the Black-Scholes Pricing Model with the following weighted average assumptions: risk-free interest rate of between 6.12 and 6.63 percent, expected life of between 3 and 7 years, expected volatility of between 57 and 75 percent and no dividends. Several existing warrants were exchanged by the original holder for the benefit of a new holder with terms identical to those of the original. F-13 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) A summary of the status of the Company's warrants as of December 31, 2001, 2000 and 1999, and changes during the years then ended is presented below:
WEIGHTED-AVERAGE WARRANTS EXERCISE PRICE ------------ ---------------- Outstanding at January 1, 1999 ............................................ 4,655,972 8.10 Issued ................................................................. 105,000 4.25 Canceled ............................................................... (54,773) 3.60 Forfeited .............................................................. -- -- Exercised .............................................................. (1,400) 8.44 Reissued ............................................................... 56,173 3.60 ------------ Outstanding at December 31, 1999 .......................................... 4,760,972 8.01 Issued ................................................................. -- -- Canceled ............................................................... (1,457,473) 8.37 Forfeited .............................................................. -- -- Exercised .............................................................. (531,128) 4.76 ------------ Outstanding at December 31, 2000 .......................................... 2,772,371 8.33 Issued ................................................................. -- -- Canceled ............................................................... -- -- Forfeited .............................................................. (12,955) 4.40 Exercised .............................................................. (2,511,558) 8.20 ------------ Outstanding at December 31, 2001 .......................................... 247,858 $ 9.87 ============
On November 12, 1998, the Company announced an extension of the exercise period of the Company's publicly traded redeemable common stock purchase warrants from December 14, 1998 to September 30, 1999 for those warrant holders electing such extension. On September 13, 1999, the expiration date of the warrants was further extended to December 31, 2000. These publicly traded warrants comprised 2,386,645 of the 2,772,371 warrants outstanding at December 31, 2000. The exercise price of $8.44 remained unchanged. On January 3, 2001, publicly traded warrants to purchase 2,386,645 shares were exercised and the Company received cash proceeds of $20,143,000. In February 2001, warrants to purchase 124,913 shares at a weighted-average exercise price of $3.60, originally issued in 1996, were exercised for total cash proceeds of $450,000. The warrants issued in 1999 were granted in connection with non-employee services at an exercise price equal to market price at issue date, which was accounted for in accordance with EITF 96-18. F-14 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (4) INCOME TAXES The Company did not incur any tax expense in any year due to operating losses and the related increase in the valuation allowance. The reconciliation of income taxes at the statutory rate of 35% applied to income before taxes is as follows:
DECEMBER 31, ------------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ Computed "expected" tax expense .................. $ (6,700,000) $ (1,979,000) $ (5,080,000) Effect of: Permanent differences ....................... 525,000 (2,020,000) (583,000) Increase in valuation allowance ............. 6,175,000 3,999,000 5,663,000 ------------ ------------ ------------ Tax expense ...................................... $ -- $ -- $ -- ============ ============ ============
The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets as of December 31, 2001 and 2000 are as follows:
DECEMBER 31, ------------------------------ 2001 2000 ------------ ------------ Loss carryforwards ................ $ 30,472,000 $ 22,551,000 Start-up costs .................... 10,775,000 13,521,000 Property, plant and equipment ..... 993,000 776,000 Deferred revenue .................. 2,333,000 1,546,000 Other ............................. 891,000 895,000 ------------ ------------ Gross deferred tax assets .... 45,464,000 39,289,000 Valuation allowance .......... (45,464,000) (39,289,000) ------------ ------------ Net deferred tax assets ...... $ -- $ -- ============ ============
The Company has established a valuation allowance for the full amount of these deferred tax assets, as management believes that it is more likely than not that the Company will not recover these assets. Utilization of the Company's net operating loss carryforwards is subject to certain limitations due to specific stock ownership changes which have occurred or may occur. To the extent not utilized, the carryforwards will expire during the years beginning 2005 through 2021. (5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following:
DECEMBER 31, DECEMBER 31, 2001 2000 ------------ ------------ Laboratory and office equipment .................. $ 8,407,000 $ 6,069,000 Leasehold improvements ........................... 4,302,000 3,924,000 ------------ ------------ 12,709,000 9,993,000 Less accumulated depreciation and amortization ... 8,409,000 7,625,000 ------------ ------------ $ 4,300,000 $ 2,368,000 ============ ============
F-15 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (6) ENTITY-WIDE GEOGRAPHIC DATA The Company operates in a single business segment that includes research and development of pharmaceutical products. The following table summarizes the Company's long-lived assets in different geographic locations:
DECEMBER 31, ----------------------------- 2001 2000 ------------ ------------ Long-lived assets: United States ................... $ 4,446,000 $ 3,336,000 Germany ......................... 722,000 5,000 ------------ ------------ Total ........................... $ 5,168,000 $ 3,341,000 ============ ============
(7) RESEARCH AGREEMENTS On October 10, 1996, the Company signed a strategic alliance agreement with LG Chemical, a Korean corporation, to develop and market compounds derived from the Company's endothelin receptor antagonist and selectin antagonist programs for certain disease indications. Upon consummation of the transaction, LG Chemical purchased 1,250,000 shares of Common Stock for $4.00 per share for a total of $5 million. In addition, LG Chemical had committed to pay $10.7 million in research payments. Of this amount, $8.1 million had been paid as of December 31, 2000. Effective June 6, 2000, the Company assigned one-half of the research payment to ICOS-TBC which amounted to $577,000, before commissions, during the year 2000. In August 2001, the Company and LG Chemical mutually agreed to terminate the strategic alliance agreement. No research payments were received in 2001 from LG Chemical and LG Chemical's rights under the agreement have ended. Under the terms of the Company's agreement with ICOS-TBC, the Company will provide, and be reimbursed for, research and development activities conducted on behalf of ICOS-TBC. See Note 8, below. The Company also receives reimbursement for certain research costs pursuant to its agreements with GlaxoSmithKline, plc ("GSK") (Note 10), Schering-Plough (Note 8) and Revotar (Note 9). (8) LICENSE AGREEMENTS Mitsubishi-Pharma Agreement TBC has entered into an agreement with Mitsubishi Pharma Corporation, formerly Mitsubishi-Tokyo Pharmaceuticals, Inc. ("Mitsubishi") to license Mitsubishi's rights and technology relating to Argatroban and to license Mitsubishi's own proprietary technology developed with respect to Argatroban (the "Mitsubishi Agreement"). Under the Mitsubishi Agreement, the Company has an exclusive license to use and sell Argatroban in the U.S. and Canada for all specified indications. The Company is required to pay Mitsubishi specified royalties on net sales of Argatroban by the Company and its sublicensees after its commercial introduction in the U.S. and Canada. Either party may terminate the Mitsubishi Agreement on 60 days notice if the other party defaults in its material obligations under the agreement, declares bankruptcy or is insolvent, or if a substantial portion of its property is subject to levy. Unless terminated sooner pursuant to the above described termination provisions, the Mitsubishi Agreement expires on the later of termination of patent rights in a particular country or 20 years after first commercial sale of products. Under the Mitsubishi Agreement, TBC has access to an improved formulation patent granted in 1993 which expires in 2010 and a use patent which expires in 2009. During 2000, TBC signed an additional agreement with Mitsubishi that provides TBC with royalties on sales of Argatroban in certain European countries, up to a total of $5.0 million in milestones for the development of ischemic stroke and certain other provisions. In conjunction with the Mitsubishi Agreement, a consulting firm involved in negotiations related to the agreement will receive a percentage of net sales received as a result of the agreement. Mitsubishi further agreed to supply the Company with its requirements of bulk Argatroban throughout the term of the Mitsubishi Agreement for TBC's clinical testing and commercial sales of Argatroban in the U.S. and Canada. In the event Mitsubishi should discontinue the manufacture of Argatroban, Mitsubishi and TBC have agreed to discuss in good faith the means by which, and the party to whom, Argatroban production technology will be transferred. The transferee may be a person or entity other than TBC. At present, Mitsubishi is the only manufacturer of Argatroban. See Note 10. F-16 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In exchange for the license to the Genentech, Inc, (the "Former Licensor") Argatroban technology, TBC issued the Former Licensor 285,714 shares of Common Stock during 1993 and issued an additional 214,286 shares of Common Stock on October 9, 1997, after acceptance of the filing of the first New Drug Application ("NDA") with the United States Food and Drug Administration (the "FDA") for Argatroban. On June 30, 2000, the Company issued an additional 71,429 shares of Common Stock to Genentech in conjunction with the approval of the NDA for Argatroban in patients with HIT. The value of $965,000 has been recorded as an intangible asset and is being amortized over the estimated useful life of the asset. Amortization expense recorded in 2001 and 2000 was $105,000 and $53,000, respectively and will be approximately $106,000 annually in future periods. Additionally, on October 9, 1997, upon acceptance of the filing of the first NDA for Argatroban with the FDA, the Company granted the Former Licensor a warrant to purchase an additional 142,858 shares of Common Stock at an exercise price of $14.00 per share, subject to adjustment, which expires on October 9, 2004. TBC has also granted the Former Licensor demand and piggyback registration rights with regard to shares of Common Stock issued to the Former Licensor. During the third quarter of 1997, the Company sublicensed certain rights to Argatroban to GSK. In conjunction with this agreement, the Company agreed to make certain payments to Mitsubishi, which are included in research and development expense, to pay an additional royalty to Mitsubishi, beginning January 1, 2002 and to provide access to certain Argatroban clinical data to Mitsubishi in certain circumstances. In certain circumstances, Mitsubishi and TBC will share equally in all upfront payments and royalties should Mitsubishi use TBC's regulatory documents and data for registration in certain territories. See Note 10. ICOS Corporation Partnership On June 6, 2000, the Company and ICOS entered into the ICOS-TBC limited partnership agreement. The partnership will seek to develop and globally commercialize ET(A) receptor antagonists. As a result of its contribution of technology, ICOS-TBC paid a license fee to TBC in June 2000. In July 2001, the Company earned a milestone, as a result of the achievement of an objective defined in the partnership agreement. Under the terms of the agreement, the partnership could make additional milestone payments to TBC that together, including the milestone payment received in July 2001, could be as much as $53.5 million for the development and commercialization of products resulting from the collaboration. The license fee is being amortized over the estimated development period of the licensed technology and the Company recognized approximately $484,000 and $307,000 of it as revenue during 2001 and 2000, respectively. The milestone payment received in July 2001 is also being amortized over the estimated development period, and the Company recognized approximately $333,000 of it as revenue during 2001. For further discussion of the Company's revenue recognition policies, see Note 1 (h), Revenue Recognition, above. Pursuant to the terms of the limited partnership agreement for ICOS-TBC, TBC and ICOS will equally fund the cost of research and development of sitaxsentan and second-generation endothelin antagonist compounds, commercialize resulting products, and share equally in the profits from this worldwide collaboration. During the years ended December 31, 2001 and 2000, the Company recognized a loss of $9,450,000 and $3,487,000, respectively, representing the Company's proportionate share of the losses of ICOS-TBC. The loss of ICOS-TBC in 2001 includes amounts billed to the partnership by the Company, which totaled $1,442,000 in charges for the Company's internal labor costs, and $4,748,000 in direct research and development costs. In year 2000, the Company billed $1,123,000 in charges for internal labor costs, and $4,623,000 in direct research and development costs, all of which were included in the loss of the partnership. F-17 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Summarized unaudited financial information for ICOS-TBC is as follows:
FINANCIAL POSITION - DECEMBER 31: 2001 2000 ------------ ------------ Total assets - all current ....................................... $ 1 $ 491 ============ ============ Total liabilities - all current, payable to partners ............. $ 7,060 $ 3,397 Partners' deficit ................................................ (7,059) (2,906) ------------ ------------ $ 1 $ 491 ============ ============
OPERATING RESULTS - FOR THE YEAR ENDED DECEMBER 31: 2001 2000 ------------ ------------ Revenue .......................................................... $ -- $ 547 Research and development expenses, related parties ............... (18,873) (7,515) Contribution of technology, related party ........................ (4,000) (4,000) Administrative expenses .......................................... (27) (8) ------------ ------------ Net loss ......................................................... $ (22,900) $ (10,976) ============ ============
Schering-Plough Research Collaboration and License Agreement On June 30, 2000, TBC and Schering-Plough entered into a worldwide research collaboration and license agreement to discover, develop and commercialize VLA-4 antagonists. VLA-4 antagonists represent a new class of compounds that has shown promise in multiple preclinical animal models of asthma. The primary focus of the collaboration will be to discover orally available VLA-4 antagonists as treatments for asthma. Under the terms of the agreement, Schering-Plough obtains the exclusive worldwide rights to develop, manufacture and market all compounds from TBC's library of VLA-4 antagonists, as well as the rights to a second integrin antagonist. TBC will be responsible for optimizing a lead compound and additional follow-on compounds. Schering-Plough is supporting research at TBC and will be responsible for all costs associated with the worldwide product development program and commercialization of the compound. In addition to reimbursing research costs, Schering-Plough paid an upfront license fee and will pay development milestones and royalties on product sales resulting from the agreement. This upfront license fee is being amortized into revenue over the expected development period, and the Company recognized $456,000 and $273,000 of the license fee as revenues in years 2001 and 2000, respectively. Total payments to TBC for both programs, excluding royalties, could reach $87.0 million. (9) FOREIGN SUBSIDIARY During the third quarter 2000, TBC formed Revotar to conduct research and development of novel small molecule compounds and to develop and commercialize selectin antagonists. Upon formation, Revotar received certain development and commercialization rights to the Company's selectin antagonist compounds as well as rights to certain other TBC research technology. Revotar also received approximately $5 million in funding from three German venture capital funds. The Company retained ownership of approximately 55% of the outstanding common stock of Revotar and has consolidated the financial results of Revotar into TBC's consolidated financial statements. Since the developmental and commercialization rights contributed by the Company to Revotar had no basis for financial reporting purposes, the Company assigned no value to its contribution of intellectual property rights. The Company's equity in the originally contributed assets by the minority shareholders is reported as a deferred credit of $2,620,000 on the consolidated balance sheets at December 31, 2001 and 2000. The minority interest in Revotar at December 31, 2001 and December 31, 2000, was $1,213,000 and $1,962,000, respectively. The Company's consolidated net loss for the years ended December 31, 2001 and 2000 was reduced $749,000 and $209,000, respectively, by the Revotar minority shareholders' approximately 45% interest in Revotar's losses. (10) COMMERCIALIZATION AGREEMENT In connection with TBC's development and commercialization of Argatroban, in August 1997, TBC entered into a Product Development, License and CoPromotion Agreement with GSK (the "GSK Agreement") whereby GSK was granted exclusive rights to work with TBC in the development and commercialization of Argatroban in the U.S. and Canada for F-18 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) specified indications. GSK paid $8.5 million in upfront license fees during August 1997, a $5 million milestone payment in October 1997, and a $7.5 million milestone payment in June 2000. Additional milestone payments may be earned upon the clinical development and FDA approval for the acute myocardial infarction indication. Future milestone payments for the acute myocardial infarction indication are subject to GSK's agreement to market Argatroban for such indication. The parties have also formed a joint development committee to analyze the development of additional Argatroban indications to be funded 60% by GSK except for certain Phase IV trials which shall be funded entirely by GSK. At this time, GSK has no plans to conduct development work for the acute myocardial infarction and stroke indications. TBC began a Phase II clinical trial in March 2001 to evaluate the use of Argatroban for ischemic stroke. GSK has the exclusive right to commercialize all products arising out of the collaboration, subject to the obligation to pay royalties on net sales to TBC and to the rights of TBC to co-promote these products through its own sales force in certain circumstances. TBC will retain the rights to any indications which GSK determines it does not wish to pursue (such as ischemic stroke), subject to the requirement that TBC must use its own sales force to commercialize any such indications. Any indications which TBC elects not to pursue will be returned to Mitsubishi. In conjunction with the GSK Agreement, a consulting firm involved in negotiations related to the agreement will receive a percentage of all consideration received by TBC as a result of the agreement. At present, Mitsubishi is the only manufacturer of Argatroban, and has entered into the Mitsubishi Supply Agreement with GSK to supply Argatroban in bulk in order to meet GSK and TBC's needs under the GSK Agreement. Should Mitsubishi fail during any consecutive nine-month period to supply GSK at least 80% of its requirements, and such requirements cannot be satisfied by existing inventories, the Mitsubishi Supply Agreement provides for the nonexclusive transfer of the production technology to GSK. If GSK cannot commence manufacturing of Argatroban or alternate sources of supply are unavailable or uneconomic, the Company's results of operations would be materially and adversely affected. The GSK Agreement generally terminates on a country by country basis upon the earlier of the termination of TBC's rights under the Mitsubishi Agreement, the expiration of applicable patent rights or, in the case of royalty payments, the commencement of substantial third-party competition. GSK also has the right to terminate the agreement on a country by country basis by giving TBC at least three months written notice at any time before GSK first markets products in that country based on a reasonable determination by GSK that the commercial profile of the product in question would not justify continued development in that country. GSK has similar rights to terminate the GSK Agreement on a country by country basis after marketing has commenced. In addition, either party may terminate the GSK Agreement on 60 days notice if the other party defaults in its obligations under the agreement, declares bankruptcy or is insolvent. In connection with the execution of the GSK Agreement, GSK purchased 176,992 shares of TBC's Common Stock for $1.0 million and additional 400,000 shares of Common Stock for $2.0 million in connection with the secondary public offering, which closed on October 1, 1997. (11) 401(K) PLAN The Company adopted a 401(k) plan which became effective on September 1, 1993. Under the plan, all employees with three months of service are eligible to participate in the plan and may contribute up to 15 percent of their compensation, with a maximum of $10,500 per employee in 2001. Effective on January 1, 2001, the Compensation Committee of the Board of Directors approved an employer matching contribution of $0.50 on the dollar of employee contributions up to 6% of salaries and the 401(k) plan was amended effective January 1, 2001. Total cost of the employer match was $158,000 in 2001. Annual costs associated with administering the plan totaled approximately $10,000 in 2001 and 2000. (12) COMMITMENTS AND CONTINGENCIES (a) Employment Agreements Since inception, the Company has entered into employment agreements with certain officers and key employees. Additionally, the Company has signed agreements with six of its officers and key employees to provide certain benefits in the event of a "change of control" as defined in these agreements and the occurrence of certain other events. The agreements provide for a lump-sum payment in cash equal to eighteen months to three years of annual base salary and annual bonus, if any. The base salary portion of the agreements would aggregate approximately $3.4 million at the current rate of compensation. In addition, the agreements provide for gross-up for certain taxes on the lump-sum payment, continuation of F-19 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) certain insurance and other benefits for periods of eighteen months to three years and reimbursement of certain legal expenses in conjunction with the agreements. These provisions are intended to replace compensation continuation provisions of any other agreement in effect for an officer if the specified event occurs. (b) Lease Agreements The Company's lease on its office and laboratory facility in Houston, Texas expires on December 31, 2005. The Company also leases parking spaces during the lease at the facility established rate charged, which currently approximates $78,000 per year. The lease also includes a provision for the Company to pay certain additional charge to obtain utilities and building services during off-business hours. Currently, the amount of these charges is approximately $286,000 per annum, payable in monthly installments. These charges are subject to annual adjustments based on the local consumer price index. In October 2001, Revotar, the Company's majority-owned subsidiary, leased an 8,800 square foot office and laboratory facility in Berlin, Germany. The lease expires on September 30, 2006. Under the terms of the lease, the Company is obligated to pay $119,000 in year 2002 for rent and parking. Under the terms of the lease, base rent will increase at three percent per year on the anniversary date of the lease. In addition to the base rent and parking, the Company is obligated to pay $44,000 in year 2002 for related building services. The charge for related building services is subject to annual adjustments, based upon actual increases in costs, up to six percent per year. In April 2002, the Company leased a 15,205 square foot facility in Houston, Texas, which will house the Company's clinical development staff. Under the terms of the lease, which expires on July 31, 2005, the Company is obligated to pay $117,000 in year 2002, and approximately $281,000 annually thereafter, for base rent, related building services and parking. The Company has the right to extend the term of this lease agreement under the same terms and conditions to December 31, 2005, upon notice to the lessor. The Company could be subject to additional charges for related building services in years 2003 and thereafter, based upon increases in actual building costs, not to exceed six percent annually. For the years ended December 31, 2001, 2000 and 1999, rent and related building services totaled approximately $1,200,000, $1,100,000 and $945,000, respectively. At December 31, 2001, the Company's minimum aggregate commitments under long-term, non-cancelable operating leases are as follows: 2002........................................................ $ 1,617,000 2003........................................................ 1,785,000 2004........................................................ 1,788,000 2005........................................................ 1,675,000 2006........................................................ 961,000 ------------- $ 7,826,000 =============
(c) Foreign Currency Exchange Risk The Company is exposed to market risk primarily from changes in foreign currency exchange rates. The Company has a majority-owned subsidiary in Berlin, Germany and consolidates the results of operations into its consolidated financial results. Although not significant to date, the Company's reported expenses and cash flows from this subsidiary are exposed to changing exchange rates. The Company had an intercompany receivable from our Berlin subsidiary at December 31, 2000; however this amount was denominated in U.S. dollars and was not exposed to exchange risk. The Company contracts with entities in other areas outside the U.S. that are denominated in a foreign currency. To date, the currencies of these countries have not fluctuated materially. At this time, management has not deemed it cost effective to engage in a program of hedging the effect of foreign currency fluctuations on the Company's operating results using derivative financial instruments. F-20 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (d) Legal Proceedings The Company is presently involved in several legal actions, none of which are expected to have a material adverse effect upon the results of operations or financial condition of the Company when considered either individually or in the aggregate. (13) QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited quarterly results of operations (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 2001 ------------------------------------------------------------------------------ QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------------- --------------- --------------- --------------- Total revenues $ 2,269 $ 2,463 $ 1,704 $ 2,481 Operating loss $ (4,224) $ (6,107) $ (5,707) $ (9,089) Net loss $ (2,510) $ (4,539) $ (4,289) $ (7,804) =============== =============== =============== =============== Net loss per share data: Basic and diluted $ (0.06) $ (0.10) $ (0.10) $ (0.18)
YEAR ENDED DECEMBER 31, 2000 ----------------------------------------------------------------------------- QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------------- --------------- --------------- --------------- Total revenues $ 1,706 $ 9,414 $ 1,732 $ 2,840 Operating (loss) income $ (4,007) $ 4,001 $ (3,468) $ (4,386) (Loss) income before cumulative effect of change in accounting principle $ (3,804) $ 5,129 $ (1,853) $ (2,761) Net (loss) income $ (6,170) $ 5,129 $ (1,853) $ (2,761) =============== =============== =============== =============== Net (loss) income per share data: Basic $ (0.11) $ 0.13 $ (0.05) $ (0.07) Diluted $ (0.11) $ 0.12 $ (0.05) $ (0.07)
Because of the method used in calculating per share data, the quarterly per share data will not necessarily add to the per share data as computed for the year. F-21 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company's Form 10 (Commission File No. 0-20117) effective June 26, 1992 (as amended)) 3.2 -- Amendment to the Certificate of Incorporation dated November 30, 1993 (incorporated by reference to Exhibit 3.4 to the Company's Form 10-Q (Commission File No. 0-20117) filed with the Commission on November 14, 1994) 3.3 -- Amendment to the Certificate of Incorporation dated May 20, 1994 (incorporated by reference to Exhibit 3.5 to the Company's Form 10-Q (Commission File No. 0-20117) filed with the Commission on November 14, 1994) 3.4 -- Certificate of Amendment of Certificate of Incorporation dated May 3, 1996 (incorporated by reference to Exhibit 3.6 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended June 30, 1996) 3.5 -- Amended and Restated By-laws of Texas Biotechnology Corporation adopted September 6, 1996 (incorporated by reference to Exhibit 3.7 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended September 30, 1996) 3.6 -- Amendment to Article II of By-laws adopted June 29, 2000 (incorporated by reference to Exhibit 3.8 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 3.7 -- Certificate of Designations, Preferences, Limitations and Relative Rights of The Series A Junior Participating Preferred Stock of Texas Biotechnology Corporation (incorporated by reference to Exhibit 2 to the Company's Form 8-A (Commission File No. 0-20117) with the commission on January 3, 2002) 4.1 -- Rights Agreement, dated as of January 2, 2002, between Texas Biotechnology Corporation and The Bank of New York, as Rights Agent, including exhibits thereto. (incorporated by reference to Exhibit 1 to the Company's Form 8-A (Commission File No. 0-20117) with the commission on January 3, 2002) 4.2 -- Form of Rights Certificate (incorporated by reference to Exhibit 3 to the Company's Form 8-A (Commission File No. 0-20117) with the commission on January 3, 2002) 10.1 -- Employment Agreement with Dr. Richard A.F. Dixon dated July 15, 1990 (incorporated by reference to Exhibit 10.3 to the Company's Form 10 (Commission File No. 0-20117) effective June 26, 1992 (as amended)) 10.2 -- Consulting Agreement with Mr. John M. Pietruski dated January 1, 1992 (incorporated by reference to Exhibit 10.6 to the Company's Form 10 (Commission File No. 0-20117) effective June 26, 1992 (as amended)) 10.3 -- Employment Agreement with David B. McWilliams dated July 15, 1992 (incorporated by reference to Exhibit 19.1 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1992) 10.4 -- Consulting Agreement with Hennessey & Associates, Ltd. (incorporated by reference to Exhibit 19.1 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended September 30, 1992) 10.5* -- Sublicense and License Agreement dated May 27, 1993 between Company and Genentech, Inc., together with exhibits (incorporated by reference to Exhibit 10.17 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1993 and incorporated by reference to Exhibit 10.17 to the Company's Form 10-Q/A-1 (Commission File No. 0-20117) for the quarter ended June 30, 1993) 10.6* -- Stock Agreement dated May 27, 1993 between the Company and Genentech, Inc. (incorporated by reference to Exhibit 10.18 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1993) 10.7 -- Lease Agreement dated, February 24, 1995 between Texas Biotechnology Corporation and Doctors Center, Inc. (incorporated by reference to Exhibit 10.31 to the Company's Form 10-K (Commission File No. 0-20117) for the year ended December 31, 1994) 10.8 -- Amended and Restated 1990 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.33 to the Company's Form 10-K (Commission File No. 0-20117) for the year ended December 31, 1994)
10.9 -- Amended and Restated 1992 Incentive Stock Option Plan (as of March 3, 1995) (incorporated by reference to Exhibit 10.34 to the Company's Form 10-K (Commission File No. 0-20117) for the year ended December 31, 1994) 10.10 -- Amended and Restated Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.39 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1995) 10.11 -- 1995 Stock Option Plan (incorporated by reference to Exhibit 10.40 to the Company's Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1995) 10.12 -- Amended and Restated 1995 Non-Employee Director Stock Option Plan (as amended by the Board of Directors on June 30, 1996) (incorporated by reference to Exhibit 10.55 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended June 30, 1996) 10.13* -- Strategic Alliance Agreement between Texas Biotechnology Corporation and LG Chemical, Ltd. dated October 10, 1996 (incorporated by reference to Exhibit 10.56 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended September 30, 1996) 10.14 -- Common Stock Purchase Agreement between Texas Biotechnology Corporation and LG Chemical, Ltd. dated October 10, 1996 (incorporated by reference to Exhibit 10.57 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended September 30, 1996) 10.15 -- Amendment to the 1995 Stock Option Plan of Texas Biotechnology Corporation dated March 4, 1997 (incorporated by reference to Exhibit 10.62 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended June 30, 1997 with the Commission on August 14, 1997) 10.16 -- Amendment to the 1995 Non-Employee Director Stock Option Plan of Texas Biotechnology Corporation dated March 4, 1997 (incorporated by reference to Exhibit 10.63 to the Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended June 30, 1997 with the Commission on August 14, 1997) 10.17 -- Agreement between Joseph M. Welch and Texas Biotechnology Corporation dated June 1, 1993 (incorporated by reference to Exhibit 10.66 to the Company's Form 10-K (Commission File No. 1-12574) with the Commission on March 25, 1999) 10.18 -- Employment Agreement with Pamela M. Murphy and Texas Biotechnology Corporation dated February 26, 1998 (incorporated by reference to Exhibit 10.68 to the Company's Form 10-Q (Commission File No. 1-12574) for the Quarter ended March 31, 1999 with the Commission on May 13, 1999) 10.19 -- Texas Biotechnology Corporation 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.71 to the Company's Form 10-Q (Commission File No. 1-12574) for the Quarter ended March 31, 1999 with the Commission on May 13, 1999) 10.20 -- Amendment to Lease Agreement between Texas Biotechnology Corporation and the University of Texas Health Science Center at Houston, dated April 1, 1999 (incorporated by reference to Exhibit 10.71 to the Company's Form 10-Q (Commission File No. 1-12574) for the Quarter ended September 30, 1999 with the Commission on November 15, 1999) 10.21* -- License and Research and Development Agreement dated July 21, 2000 between Revotar Biopharmaceuticals AG and Texas Biotechnology Corporation. (incorporated by reference to Exhibit 10.74 to the Company's Form 10-K (Commission File No. 000-20117) for the year ended December 31, 2000 with the Commission on April 2, 2001) 10.22 -- Fifth amendment dated January 1, 2000 to Consulting Agreement with John M. Pietruski dated January 1, 1992 (incorporated by reference to Exhibit 10.75 to the Company's Form 10-K (Commission File No. 000-20117) for the year ended December 31, 2000 with the Commission on April 2, 2001) 10.23 -- Notice to the University of Texas Health Science Center at Houston dated June 30, 2000 of exercise of renewal option in Lease Agreement (incorporated by reference to Exhibit 10.76 to the Company's Form 10-K (Commission File No. 000-20117) for the year ended December 31, 2000 with the Commission on April 2, 2001)
10.24 -- Amendment to Lease Agreement dated January 1, 2001 between Texas Biotechnology Corporation and the Board of Regents of The University of Texas System (incorporated by reference to Exhibit 10.77 to the Company's Form 10-K (Commission File No. 000-20117) for the year ended December 31, 2000 with the Commission on April 2, 2001) 10.25+ -- Form of Employee Agreement between Texas Biotechnology Corporation and Bruce D. Given, M.D. and Richard A.F. Dixon, Ph.D. dated March 12, 2002. 10.26+ -- Form of Employee Agreement between Texas Biotechnology Corporation and Stephen L. Mueller, Pamela M. Murphy, Philip M. Brown and R. Duane Clark dated March 12, 2002. 10.27+ -- Form of Indemnification Agreement between Texas Biotechnology Corporation and its officers and directors dated March 12, 2002. 10.28+ -- Retirement Agreement between Texas Biotechnology Corporation and David B. McWilliams dated March 21, 2002. 10.29+ -- Employment Agreement between Texas Biotechnology Corporation and Bruce D. Given, M. D. dated March 21, 2002 10.30 -- Amendment to Amended and Restated 1995 Non-Employee Director Stock Option Plan, dated March 6, 2000 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Commission File No. 333-41864) with the commission on July 20, 2000) 10.31 -- Amendment to the 1999 Stock Incentive Plan adopted on March 13, 2001 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Commission File No. 333-72468) with the commission on October 30, 2001) 99.1 -- Agreement between Mitsubishi Chemical Corporation, Texas Biotechnology Corporation and SmithKline Beecham plc dated August 5, 1997 (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K (Commission File No. 1-12574) with the Commission on August 25, 1997) 99.2 -- Product Development License and Co-Promotion Agreement between Texas Biotechnology Corporation and SmithKline Beecham plc dated August 5, 1997 (incorporated by reference to Exhibit 99.2 to the Company's Form 8-K (Commission File No. 1-12574) with the Commission on August 25, 1997) 99.3 -- Common Stock Purchase Agreement between Texas Biotechnology Corporation and SmithKline Beecham plc dated August 5, 1997 (incorporated by reference to Exhibit 99.3 to the Company's Form 8-K (Commission File No. 1-12574) with the Commission on August 25, 1997) 99.4 -- Agreement of Limited Partnership of ICOS-Texas Biotechnology L.P. among ICOS-ET-LP LLC and Texas Biotechnology Corporation, as Limited Partners, and ICOS-ET-GP LLC and TBC-ET, Inc., as General Partners dated June 6, 2000. (incorporated by reference to Exhibit 99.4 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 99.5* -- Endothelin License Agreement by and between Texas Biotechnology Corporation and ICOS-Texas Biotechnology L.P. dated June 6, 2000. (incorporated by reference to Exhibit 99.5 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 99.6* -- Formation and Performance Agreement by and between ICOS Corporation and Texas Biotechnology Corporation dated June 6, 2000. (incorporated by reference to Exhibit 99.6 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 99.7* -- Research and Development Service Agreement by and between ICOS Corporation, Texas Biotechnology Corporation and ICOS-Texas Biotechnology L.P. dated June 6, 2000. (incorporated by reference to Exhibit 99.7 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 99.8* -- Research Collaboration and License Agreement by and between Texas Biotechnology Corporation and Schering-Plough LTD. dated June 30, 2000. (incorporated by reference to Exhibit 99.8 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000)
99.9* -- Research Collaboration and License Agreement by and between Texas Biotechnology Corporation and Schering Corporation dated June 30, 2000. (incorporated by reference to Exhibit 99.9 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000) 21.0+ -- Subsidiaries of the Registrant 23.1+ -- Independent Auditors' Consent
---------- * The Company has omitted certain portions of these agreements in reliance on Rule 24b-2 under the Securities and Exchange Act of 1934, as amended. + Filed herewith