Changes in our existing and future research and development and collaborative relationships will also impact the status of our research and development projects. Although we may, in some cases, be able to control the timing of development expenses, in part by accelerating or decelerating certain of these costs, many of these costs will be incurred irrespective of whether or not we are able to discover drug candidates or obtain collaborative partners for commercialization. As a result, we believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. If we fail to meet the research, clinical and financial expectations of securities analysts and investors, it could have a material adverse effect on the price of our common stock.
Collaborative and other research and development revenue decreased 100.0% to $0 in 2002 from $7,736,976 in 2001, primarily due to a change in accounting estimate following Ortho-McNeil and RWJPRI’s notice of termination of the worldwide license agreement with us to develop and market products to treat and prevent viral influenza. As a result of this termination, we recognized all remaining deferred revenues and expenses related to this agreement during the second and third quarters of 2001. Interest and other income decreased 48.1% to $1,774,524 in 2002 from $3,420,658 in 2001, primarily due to a reduction in cash from the funding of operations and a lower interest rate environment in 2002.
Research and development expenses increased 18.2% to $15,473,491 in 2002 from $13,091,057 in 2001. The increase in expenses is primarily attributable to the clinical trial expenses incurred to complete a Phase III trial for peramivir, prior to the termination of this program in June 2002, plus animal studies related to peramivir and our other programs.
General and administrative expenses increased 9.5% to $2,855,804 in 2002 from $2,608,392 in 2001. The increase is primarily due to an increase in expenses related to the adoption of a stockholder rights plan, insurance and other professional fees. Royalty expense decreased 100.0% to $0 in 2002 from $443,697 in 2001. This decrease is directly attributable to the change in accounting estimate resulting from the termination of our worldwide license agreement by Ortho-McNeil and RWJPRI for our neuraminidase inhibitor, peramivir. As a result of the termination of this program effective June 25, 2002, we also recorded a non-cash impairment loss of $373,900 in 2002 related to the influenza patents. There were no impairment charges recorded in 2001.
Collaborative and other research and development revenue increased 133.4% to $7,736,976 in 2001 from $3,315,594 in 2000, primarily due to a change in accounting estimate following Ortho-McNeil and RWJPRI’s notice of termination of the worldwide license agreement with us to develop and market products to treat and prevent viral influenza. As a result of this termination, we recognized all remaining deferred revenues and expenses related to this agreement during the second and third quarters of 2001. The deferred revenues from this agreement had been recorded as a result of the implementation of SAB 101 in the first quarter of 2000. Interest and other income decreased 21.3% to $3,420,658 in 2001 from $4,345,761 in 2000, primarily due to a reduction in cash from the expansion of our facilities and the funding of operations.
Research and development expenses increased 36.5% to $13,091,057 in 2001 from $9,590,352 in 2000. The increase in expenses is primarily attributable to increased facilities expenses resulting from the expansion of our facilities during 2000 and the related increases in personnel during 2000 and 2001, plus the additional clinical trial expenses associated with the continuing Phase III development of peramivir.
General and administrative expenses decreased 23.8% to $2,608,392 in 2001 from $3,424,483 in 2000. The decrease is primarily due to a reduction in stockholder expenses and the reduced Alabama share tax assessment in 2001. Royalty expense increased 234.2% to $443,697 in 2001 from $132,773 in 2000. This increase is directly attributable to the change in accounting estimate resulting from the termination of our worldwide license agreement by Ortho-McNeil and RWJPRI for our neuraminidase inhibitor, peramivir.
Liquidity and Capital Resources
Cash expenditures have exceeded revenues since the Company’s inception. Our operations have principally been funded through various sources, including the following:
• public offerings and private placements of equity and debt securities,
• equipment lease financing,
• facility leases,
• collaborative and other research and development agreements (including licenses and options for licenses),
• research grants and
• interest income.
In addition, we have attempted to contain costs and reduce cash flow requirements by renting scientific equipment and facilities, contracting with other parties to conduct certain research and development and using consultants. We expect to incur additional expenses, potentially resulting in significant losses, as we continue to pursue our research and development activities and undertake additional preclinical studies and clinical trials of compounds, which have been or may be discovered. We also expect to incur substantial expenses related to the filing, prosecution, maintenance, defense and enforcement of patent and other intellectual property claims.
On June 25, 2002, the Company announced we were discontinuing the development of peramivir, our investigational oral influenza neuraminidase inhibitor designed to treat and prevent influenza. After terminating the development of peramivir, the Company streamlined its operations in order to conserve its resources and provide a longer timeframe in which to advance its other programs.
On August 5, 2002, at the request of the compensation committee, our board of directors approved a reduction in salary by 25% for both Dr. Charles E. Bugg, our Chairman and Chief Executive Officer and Dr. J. Claude Bennett, our President, Chief Operating Officer and Medical Director, effective August 1, 2002. In the event of any change of control of the Company, any cumulative salary reductions up to the date of the change of control would become due and payable to them. The monthly amount of the reduction was $14,677 combined. This arrangement has not been documented in any formal written agreement.
The Company invests its excess cash principally in U.S. marketable securities from a diversified portfolio of institutions with strong credit ratings and in U.S. government and agency bills and notes, and by policy, limits the amount of credit exposure at any one institution. These investments are generally not collateralized and mature within three years. The Company has not realized any losses from such investments. In addition, at December 31, 2002, approximately $7.7 million was invested in the Merrill Lynch Premier Institutional Fund, which invests primarily in commercial paper, U.S. government and agency bills and notes, corporate notes, certificates of deposit and time deposits. The Merrill Lynch Premier Institutional Fund is not insured. At December 31, 2002, our cash, cash equivalents and securities held-to-maturity were $36.2 million, a decrease of $16.7 million from December 31, 2001, principally due to the funding of current operations, which included the Phase III development of peramivir, a program that was terminated in June 2002.
We have financed some of our equipment purchases with lease lines of credit. We currently have a $500,000 general line of credit with our bank, secured by a pledge of $600,000 in marketable securities. There was nothing drawn against this line as of December 31, 2002. In July 2000, we renegotiated our lease for our current facilities, which will expire on June 30, 2010. We have an option to renew the lease for an additional five years at the current market rate in effect on June 30, 2010 and a one-time option to terminate the lease on June 30, 2008 for a reasonable termination fee. The lease, as amended effective July 1, 2001 for an additional 7,200 square feet, requires us to pay monthly rent starting at $33,145 per month in July 2001 and escalating annually to a minimum of $47,437 per month in the final year, plus our pro rata share of operating expenses and real estate taxes in excess of base year amounts. As part of the lease, we have deposited a U.S. Treasury security in escrow for the payment of rent and performance of other obligations specified in the lease. This pledged amount is currently $455,000, which will be decreased by $65,000 annually throughout the term of the lease.
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During 2000, we renovated our facilities to gain additional laboratory space, update our existing laboratories, and add a small good manufacturing practices (GMP) clean room. In addition, we updated our general office facility to provide for growth and efficiencies. The total cost of these changes, including furniture and laboratory equipment, was approximately $2.7 million. This phase of renovation was completed in December 2000. Another phase of renovation was completed in February 2002 for approximately $2.6 million to add two chemistry laboratories and purchase additional equipment. Currently, there are no plans for additional renovations.
As a result of the reduction in our staff during July 2002, we now have approximately 14,000 square feet of excess space we are currently attempting to sublease.
At December 31, 2002, we had long-term operating lease obligations, which provide for aggregate minimum payments of $580,803 in 2003, $594,897 in 2004 and $605,139 in 2005. These obligations include the future rental of our operating facility.
We plan to finance our needs principally from the following:
• our existing capital resources and interest earned on that capital;
• payments under collaborative and licensing agreements with corporate partners; and
• through lease or loan financing and future public or private financing.
We believe that our available funds will be sufficient to fund our operations at least through 2004. However, this is a forward-looking statement, and there may be changes that would consume available resources significantly before such time. Our long-term capital requirements and the adequacy of our available funds will depend upon many factors, including:
• the progress of our research, drug discovery and development programs;
• changes in existing collaborative relationships;
• our ability to establish additional collaborative relationships;
• the magnitude of our research and development programs;
• the scope and results of preclinical studies and clinical trials to identify drug candidates;
• competitive and technological advances;
• the time and costs involved in obtaining regulatory approvals;
• the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
• our dependence on others for development and commercialization of our product candidates, and
• successful commercialization of our products consistent with our licensing strategy.
Additional funding, whether through additional sales of securities or collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms acceptable to us. The issuance of preferred or common stock or convertible securities, with terms and prices significantly more favorable than those of the currently outstanding common stock, could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders. In addition, collaborative arrangements may require us to transfer certain material rights to such corporate partners. Insufficient funds may require us to delay, scale-back or eliminate certain of our research and development programs.
Critical Accounting Policies
We have established various accounting policies that govern the application of accounting principles generally accepted in the United States, which were utilized in the preparation of our financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations.
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We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (“SAB 101”). Research and development revenue on cost-reimbursement agreements is recognized as expenses are incurred, up to contractual limits. Research and development fees, license fees and milestone payments are recognized as revenue when the earnings process is complete, the Company has no further continuing performance obligations and has completed its performance under the terms of the agreement, in accordance with SAB 101. License fees and milestone payments received under licensing agreements that are related to future performance are deferred and taken into income as earned over the estimated drug development period. Recognized revenues and profit are subject to revisions as these contracts or agreements progress to completion. Revisions to revenue or profit estimates are charged to income in the period in which the facts that give rise to the revision became known.
Valuation of Financial Instruments
We carry our held-to-maturity securities at amortized cost, as adjusted for other-than-temporary declines in market value. In determining if and when a decline in market value below amortized cost is other-than-temporary, we evaluate the market conditions and other key measures for our held-to-maturity investments. Future adverse changes in market conditions could result in losses or an inability to recover the carrying value of the held-to-maturity investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.
Deferred Taxes
We have not had taxable income since incorporation and, therefore, we have not paid any income tax. We have deferred tax assets related to net operating loss carryforwards and research and development carryforwards, and have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize the deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
Patents and Licenses
Patents and licenses are recorded at cost and amortized on a straight-line basis over their estimated useful lives or 20 years, whichever is lesser. These costs are reviewed periodically in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”) to determine any impairment that needs to be recognized.
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Certain Risk Factors That May Affect Future Results, Financial Condition and the Market Price of Securities
We have incurred substantial losses since our inception in 1986, expect to continue to incur such losses, may never be profitable and may need additional financing
Since our inception in 1986, we have not been profitable. We expect to incur additional losses for the foreseeable future, and our losses could increase as our research and development efforts progress. As of December 31, 2002, our accumulated deficit was approximately $92.0 million. To become profitable, we must successfully develop drug candidates, enter into profitable agreements with other parties and our drug candidates must receive regulatory approval. These other parties must then successfully manufacture and market our drug candidates. It could be several years, if ever, before we receive royalties from any future license agreements. In addition, we are not likely to generate revenue directly from product sales. If we do not generate revenue, or if our drug development expenses increase, we may need to raise additional funds through new or existing collaborations or through private or public equity or debt financing. If financing is not available on acceptable terms or not available at all, we may not have enough capital to continue our current business strategy.
Our future revenue generation is uncertain
Our revenue from collaborative agreements is dependent upon the status of our preclinical and clinical programs. If we fail to advance these programs to the point of being able to enter into successful collaborations, we will not receive any future milestone or other collaborative payments.
If our development collaborations with other parties fail, the development of our drug candidates will be delayed or stopped
We rely completely upon other parties for many important stages of our drug development programs, including:
• discovery of proteins that cause or enable biological reactions necessary for the progression of the disease or disorder, called enzyme targets;
• execution of some preclinical studies and late-stage development for our compounds and drug candidates
• management of our regulatory function; and
• manufacturing, sales, marketing and distribution of our drug candidates.
Our failure to engage in successful collaborations at any one of these stages would greatly impact our business. If we do not license enzyme targets from academic institutions or from other biotechnology companies on acceptable terms, our product development efforts would suffer. Similarly, if the contract research organizations that conduct our initial or late-stage clinical trials or manage our regulatory function breached their obligations to us, this would delay or prevent the development of our drug candidates.
Even more critical to our success is our ability to enter into successful collaborations for the late-stage clinical development, regulatory approval, manufacturing, marketing, sales and distribution of our drug candidates. Our strategy is to rely upon other parties for all of these steps so that we can focus exclusively on the key areas of our expertise. This heavy reliance upon third parties for these critical functions presents several risks, including:
• these contracts may expire or the other parties to the contract may terminate them;
• our partners may choose to pursue alternative technologies, including those of our competitors;
• we may have disputes with a partner that could lead to litigation or arbitration;
• our partners may not devote sufficient capital or resources towards our drug candidates; and
• our partners may not comply with applicable government regulatory requirements.
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Any problems encountered with our current or future partners could delay or prevent the development of our compounds, which would severely affect our business, because if our compounds do not reach the market in a timely manner, or at all, we may never receive any milestone or royalty payments.
If the clinical trials of our drug candidates fail, our drug candidates will not be marketed, which would result in a complete absence of product related revenue
To receive the regulatory approvals necessary for the sale of our drug candidates, we or our licensees must demonstrate through preclinical studies and clinical trials that each drug candidate is safe and effective. If we or our licensees are unable to demonstrate that our drug candidates are safe and effective, our drug candidates will not receive regulatory approval and will not be marketed, which would result in a complete absence of product related revenue. The clinical trial process is complex and uncertain. Because of the cost and duration of clinical trials, we may decide to discontinue development of product candidates that are either unlikely to show good results in the trials or unlikely to help advance a product to the point of a meaningful collaboration. Positive results from preclinical studies and early clinical trials do not ensure positive results in clinical trials designed to permit application for regulatory approval, called pivotal clinical trials. We may suffer significant setbacks in pivotal clinical trials, even after earlier clinical trials show promising results. Any of our drug candidates may produce undesirable side effects in humans. These side effects could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a drug candidate. These side effects could also result in the FDA or foreign regulatory authorities refusing to approve the drug candidate for any targeted indications. We, our licensees, the FDA or foreign regulatory authorities may suspend or terminate clinical trials at any time if we or they believe the trial participants face unacceptable health risks. Clinical trials may fail to demonstrate that our drug candidates are safe or effective.
Clinical trials are lengthy and expensive. We or our licensees incur substantial expense for, and devote significant time to, preclinical testing and clinical trials, yet cannot be certain that the tests and trials will ever result in the commercial sale of a product. For example, clinical trials require adequate supplies of drug and sufficient patient enrollment. Delays in patient enrollment can result in increased costs and longer development times. Even if we or our licensees successfully complete clinical trials for our product candidates, our licensees might not file the required regulatory submissions in a timely manner and may not receive regulatory approval for the drug candidate.
If we or our licensees do not obtain and maintain governmental approvals for our products under development, we or our partners will not be able to sell these potential products, which would significantly harm our business because we will receive no revenue
We or our licensees must obtain regulatory approval before marketing or selling our future drug products. If we or our licensees are unable to receive regulatory approval and do not market or sell our future drug products, we will never receive any revenue from such product sales. In the United States, we or our partners must obtain FDA approval for each drug that we intend to commercialize. The FDA approval process is typically lengthy and expensive, and approval is never certain. Products distributed abroad are also subject to foreign government regulation. The FDA or foreign regulatory agencies have not approved any of our drug candidates. If we or our licensees fail to obtain regulatory approval we will be unable to market and sell our future drug products. We have several drug products in various stages of preclinical and clinical development; however, we are unable to determine when, if ever, any of these products will be commercially available. Because of the risks and uncertainties in biopharmaceutical development, our drug candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain approval. If the FDA delays regulatory approval of our drug candidates, our management’s credibility, our company’s value and our operating results may suffer. Even if the FDA or foreign regulatory agencies approve a drug candidate, the approval may limit the indicated uses for a drug candidate and/or may require post-marketing studies.
The FDA regulates, among other things, the record keeping and storage of data pertaining to potential pharmaceutical products. We currently store most of our preclinical research data at our facility. While we do store duplicate copies of most of our clinical data offsite, we could lose important preclinical data if our facility incurs damage. If we get approval to market our potential products, whether in the United States or internationally, we will continue to be subject to extensive regulatory requirements. These requirements are wide ranging and govern, among other things:
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• adverse drug experience reporting regulations;
• product promotion;
• product manufacturing, including good manufacturing practice requirements; and
• product changes or modifications.
Our failure to comply with existing or future regulatory requirements, or our loss of, or changes to, previously obtained approvals, could have a material adverse effect on our business because we will not receive royalty revenues if our licensees do not receive approval of our products for marketing
In June 1995, we notified the FDA that we submitted incorrect data for our Phase II studies of BCX-34 applied to the skin for cutaneous T-cell lymphoma and psoriasis. The FDA inspected us in November 1995 and issued us a List of Inspectional Observations, Form FDA 483, which cited our failure to follow good clinical practices. The FDA also inspected us in June 1996. The focus was on the two 1995 Phase II dose-ranging studies of topical BCX-34 for the treatment of cutaneous T-cell lymphoma and psoriasis. As a result of the investigation, the FDA issued us a Form FDA 483, which cited our failure to follow good clinical practices. BioCryst is no longer developing BCX-34; however, as a consequence of these two investigations, our ongoing and future clinical studies may receive increased scrutiny, which may delay the regulatory review process.
If our drug candidates do not achieve broad market acceptance, our business may never become profitable
Our drug candidates may not gain the market acceptance required for us to be profitable even if they successfully complete initial and final clinical trials and receive approval for sale by the FDA or foreign regulatory agencies. The degree of market acceptance of any drug candidates that we or our partners develop will depend on a number of factors, including:
• cost-effectiveness of our drug candidates;
• their safety and effectiveness relative to alternative treatments;
• reimbursement policies of government and third-party payers; and
• marketing and distribution support for our drug candidates.
Physicians, patients, payers or the medical community in general may not accept or use our drug candidates even after the FDA or foreign regulatory agencies approve the drug candidates. If our drug candidates do not achieve significant market acceptance, we will not have enough revenues to become profitable.
If competitive products from other companies are better than our product candidates, our future revenues might fail to meet expectations
The biotechnology and pharmaceutical industries are highly competitive and are subject to rapid and substantial technological change. Other products and therapies that either currently exist on the market or are under development could compete directly with some of the compounds that we are seeking to develop and market. These other products may render some or all of our compounds under development noncompetitive or obsolete. Products marketed by our competitors may prove to be more effective than our own, and our products, if any, may not offer an economically feasible or preferable alternative to existing therapies.
If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of those rights would diminish
Our success will depend in part on our ability and the abilities of our licensors to obtain patent protection for our products, methods, processes and other technologies to preserve our trade secrets, and to operate without infringing the proprietary rights of third parties. If we or our partners are unable to adequately protect or enforce our intellectual property rights for our products, methods, processes and other technologies, the value of the drug candidates that we license to derive revenue would diminish. Additionally, if our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs. The U.S. Patent and Trademark Office has issued to us a number of U.S. patents for our various inventions and we have in-licensed several patents from various institutions. We have filed additional patent applications and provisional patent applications with the U.S. Patent and Trademark Office. We have filed a number of corresponding foreign patent applications and intend to file additional foreign and U.S. patent applications, as appropriate. We cannot assure you as to:
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• the degree and range of protection any patents will afford against competitors with similar products;
• if and when patents will issue; or
• whether or not others will obtain patents claiming aspects similar to those covered by our patent applications.
If the U.S. Patent and Trademark Office upholds patents issued to others or if the U.S. Patent and Trademark Office grants patent applications filed by others, we may have to:
• obtain licenses or redesign our products or processes to avoid infringement;
• stop using the subject matter claimed in those patents; or
• pay damages.
We may initiate, or others may bring against us, litigation or administrative proceedings related to intellectual property rights, including proceedings before the U.S. Patent and Trademark Office. Any judgment adverse to us in any litigation or other proceeding arising in connection with a patent or patent application could materially and adversely affect our business, financial condition and results of operations. In addition, the costs of any such proceeding may be substantial whether or not we are successful.
Our success is also dependent upon the skills, knowledge and experience, none of which is patentable, of our scientific and technical personnel. To help protect our rights, we require all employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information to anyone outside of our company and require disclosure and assignment to us of their ideas, developments, discoveries and inventions. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information, and if any of our proprietary information is disclosed, our business will suffer because our revenues depend upon our ability to license our technology and any such events would significantly impair the value of such a license.
If we fail to retain our existing key personnel or fail to attract and retain additional key personnel, the development of our drug candidates and the expansion of our business will be delayed or stopped
We are highly dependent upon our senior management and scientific team, the loss of whose services might impede the achievement of our development and commercial objectives. Competition for key personnel with the experience that we require is intense and is expected to continue to increase. Our inability to attract and retain the required number of skilled and experienced management, operational and scientific personnel, will harm our business because we rely upon these personnel for many critical functions of our business. In addition, we rely on members of our scientific advisory board and consultants to assist us in formulating our research and development strategy. All of the members of the scientific advisory board and all of our consultants are otherwise employed and each such member or consultant may have commitments to other entities that may limit their availability to us.
If users of our drug products are not reimbursed for use, future sales of our drug products will decline
The lack of reimbursement for the use of our product candidates by hospitals, clinics, patients or doctors will harm our business. Medicare, Medicaid, health maintenance organizations and other third-party payers may not authorize or otherwise budget for the reimbursement of our products. Governmental and third-party payers are increasingly challenging the prices charged for medical products and services. We cannot be sure that third-party payers would view our product candidates as cost-effective, that reimbursement will be available to consumers or that reimbursement will be sufficient to allow our product candidates to be marketed on a competitive basis. Changes in reimbursement policies, or attempts to contain costs in the health care industry, limit or restrict reimbursement for our product candidates, would materially and adversely affect our business, because future product sales would decline and we would receive less royalty revenue.
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If we face clinical trial liability claims related to the use or misuse of our compounds in clinical trials, our management’s time will be diverted and we will incur litigation costs
We face an inherent business risk of liability claims in the event that the use or misuse of our compounds results in personal injury or death. We have not experienced any clinical trial liability claims to date, but we may experience these claims in the future. After commercial introduction of our products we may experience losses due to product liability claims. We currently maintain clinical trial liability insurance coverage in the amount of $5.0 million per occurrence and $5.0 million in the aggregate, with an additional $2.0 million potentially available under our umbrella policy. The insurance policy may not be sufficient to cover claims that may be made against us. Clinical trial liability insurance may not be available in the future on acceptable terms, if at all. Any claims against us, regardless of their merit, could materially and adversely affect our financial condition, because litigation related to these claims would strain our financial resources in addition to consuming the time and attention of our management.
If our computer systems fail, our business will suffer
Our drug development activities depend on the security, integrity and performance of the computer systems supporting them, and the failure of our computer systems could delay our drug development efforts. We currently store most of our preclinical and clinical data at our facility. Duplicate copies of all critical data are stored off-site in a bank vault. Any significant degradation or failure of our computer systems could cause us to inaccurately calculate or lose our data. Loss of data could result in significant delays in our drug development process and any system failure could harm our business and operations.
If, because of our use of hazardous materials, we violate any environmental controls or regulations that apply to such materials, we may incur substantial costs and expenses in our remediation efforts
Our research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and some waste products. Accidental contamination or injury from these materials could occur. In the event of an accident, we could be liable for any damages that result and any liabilities could exceed our resources. Compliance with environmental laws and regulations could require us to incur substantial unexpected costs, which would materially and adversely affect our results of operations.
Because stock ownership is concentrated, you and other investors will have minimal influence on stockholder decisions
As of December 31, 2002, our directors, executive officers and some principal stockholders and their affiliates, including Johnson & Johnson Development Corporation, beneficially owned approximately 44.5% (directors and officers own 28.5%) of our outstanding common stock and common stock equivalents. As a result, these holders, if acting together, are able to significantly influence matters requiring stockholder approval, including the election of directors. This concentration of ownership may delay, defer or prevent a change in our control.
We have anti-takeover provisions in our corporate charter documents that may result in outcomes with which you do not agree
Our board of directors has the authority to issue up to 3,178,500 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of those shares without further vote or action by our stockholders. The rights of the holders of any preferred stock that may be issued in the future may adversely affect the rights of the holders of common stock. The issuance of preferred stock could make it more difficult for third parties to acquire a majority of our outstanding voting stock.
In addition, our certificate of incorporation provides for staggered terms for the members of the board of directors and supermajority approval of the removal of any member of the board of directors and prevents our stockholders from acting by written consent. Our certificate also requires supermajority approval of any amendment of these provisions. These provisions and other provisions of our by-laws and of Delaware law applicable to us could delay or make more difficult a merger, tender offer or proxy contest involving us.
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In June 2002, our board of directors adopted a stockholder rights plan and, pursuant thereto, issued preferred stock purchase rights (“Rights”) to the holders of our common stock. The Rights have certain anti-takeover effects. If triggered, the Rights would cause substantial dilution to a person or group of persons who acquires more than 15% (19.9% for William W. Featheringill, a Director who already owns more than 15%) of our common stock on terms not approved by the board of directors.
Our stock price is likely to be highly volatile and the value of your investment could decline significantly
The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. Moreover, our stock price has fluctuated frequently, and these fluctuations are often not related to our financial results. For the twelve months ended December 31, 2002, the 52-week range of the market price of our stock has been from $0.60 to $6.10 per share. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock:
• announcements of technological innovations or new products by us or our competitors;
• developments or disputes concerning patents or proprietary rights;
• status of new or existing licensing or collaborative agreements;
• we or our licensees achieving or failing to achieve development milestones;
• publicity regarding actual or potential medical results relating to products under development by us our competitors;
• regulatory developments in both the United States and foreign countries;
• public concern as to the safety of pharmaceutical products;
• actual or anticipated fluctuations in our operating results;
• changes in financial estimates or recommendations by securities analysts;
• economic and other external factors or other disasters or crises; and
• period-to-period fluctuations in our financial results.
We may be unable to maintain the standards for listing on the Nasdaq National Market, which could adversely affect the value and possibly the liquidity of our common stock
Our common stock is currently listed on the Nasdaq National Market (National Market). Nasdaq requires listed companies to maintain standards for continued listing, including a minimum bid price for shares of a company’s stock. If we are unable to maintain these standards, we may have to request a transfer to the Nasdaq SmallCap Market (SmallCap Market) and could eventually be delisted.
On January 23, 2003, we received notice from the National Market that our common stock had closed for more than 30 consecutive trading days below the minimum $1.00 per share requirement for continued inclusion on the National Market under Marketplace Rule 4450(a)(5). On March 12, 2003, we were notified by the National Market that we had regained compliance. We cannot assure you that we will be able to maintain compliance with the Nasdaq National Market listing standards. If we fail to satisfy the continued listing requirements of the National Market, but meet the requirements of the SmallCap Market, we could request a transfer to the SmallCap Market. This would provide an extended period to regain compliance and be listed again on the National Market. Failure to maintain the continued listing standards of the SmallCap Market would result in a delisting, which could adversely affect the liquidity of our common stock and could subject our common stock to the “penny stock” rules.
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7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing our risk. We invest excess cash principally in U.S. marketable securities from a diversified portfolio of institutions with strong credit ratings and in U.S. government and agency bills and notes, and by policy, limit the amount of credit exposure at any one institution. Some of the securities we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we schedule our investments to have maturities that coincide with our cash flow needs, thus avoiding the need to redeem an investment prior to its maturity date. Accordingly, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is provided.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BALANCE SHEETS
| | December 31, | |
| |
| |
| | 2002 | | 2001 | |
| |
| |
| |
| | | | | |
Assets | | | | | |
Cash and cash equivalents (Notes 1 and 3) | | $ | 13,824,289 | | $ | 18,865,326 | |
Securities held-to-maturity (Notes 1 and 3) | | 10,624,518 | | 13,121,862 | |
Prepaid expenses and other current assets | | 482,620 | | 416,555 | |
| |
| |
| |
Total current assets | | 24,931,427 | | 32,403,743 | |
Securities held-to-maturity (Notes 1 and 3) | | 11,714,151 | | 20,953,723 | |
Furniture and equipment, net (Notes 1 and 2) | | 4,557,287 | | 5,395,824 | |
Patents and licenses, less accumulated amortization of $201 in 2002 and $6,666 in 2001 (Note 1) | | 97,523 | | 343,025 | |
| |
| |
| |
Total assets | | $ | 41,300,388 | | $ | 59,096,315 | |
| |
|
| |
|
| |
| | | | | |
Liabilities and Stockholders’ Equity | | | | | |
Accounts payable | | $ | 256,038 | | $ | 617,586 | |
Accrued expenses (Note 4) | | 443,524 | | 1,132,293 | |
Accrued vacation | | 173,015 | | 232,725 | |
| |
| |
| |
Total current liabilities | | 872,577 | | 1,982,604 | |
Deferred revenue (Notes 1 and 9) | | 300,000 | | 300,000 | |
Stockholders’ equity (Notes 7 and 8): | | | | | |
Preferred stock: shares authorized — 5,000,000 | | | | | |
Series A Convertible Preferred stock, $.01 par value; shares authorized — 1,800,000; shares issued and outstanding — none | | | | | |
Series B Junior Participating Preferred stock, $.001 par value; shares authorized — 21,500; shares issued and outstanding — none | | | | | |
Common stock, $.01 par value; shares authorized — 45,000,000; shares issued and outstanding — 17,657,097 — 2002; 17,606,970 — 2001 | | 176,571 | | 176,070 | |
Additional paid-in capital | | | 131,910,935 | | | 131,668,665 | |
Accumulated deficit | | (91,959,695 | ) | (75,031,024 | ) |
| |
| |
| |
Total stockholders’ equity | | 40,127,811 | | 56,813,711 | |
| |
| |
| |
Commitments and contingencies (Notes 5 and 9) | | | | | |
Total liabilities and stockholders’ equity | | $ | 41,300,388 | | $ | 59,096,315 | |
| |
|
| |
|
| |
See accompanying notes to financial statements.
25
STATEMENTS OF OPERATIONS
| | Years Ended December 31, | |
| |
| |
| | 2002 | | 2001 | | 2000 | |
| |
| |
| |
| |
Revenues: | | | | | | | |
Collaborative and other research and development (Notes 1, 9, and 10) | | $ | 0 | | $ | 7,736,976 | | $ | 3,315,594 | |
Interest and other | | 1,774,524 | | 3,420,658 | | 4,345,761 | |
| |
| |
| |
| |
Total revenues | | 1,774,524 | | 11,157,634 | | 7,661,355 | |
| | | | | | | |
Expenses: | | | | | | | |
Research and development | | 15,473,491 | | 13,091,057 | | 9,590,352 | |
General and administrative | | 2,855,804 | | 2,608,392 | | 3,424,483 | |
Impairment of patents and licenses | | 373,900 | | 0 | | 0 | |
Royalty expense | | 0 | | 443,697 | | 132,773 | |
Interest | | 0 | | 464 | | 3,354 | |
| |
| |
| |
| |
Total expenses | | 18,703,195 | | 16,143,610 | | 13,150,962 | |
| |
| |
| |
| |
Loss before cumulative effect of change in accounting principle | | (16,928,671 | ) | (4,985,976 | ) | (5,489,607 | ) |
Cumulative effect of change in accounting principle (Note 10) | | 0 | | 0 | | (6,088,235 | ) |
| |
| |
| |
| |
Net loss | | $ | (16,928,671 | ) | $ | (4,985,976 | ) | $ | (11,577,842 | ) |
| |
|
| |
|
| |
|
| |
Amounts per common share: | | | | | | | |
Loss before cumulative effect of change in accounting principle | | $ | (.96 | ) | $ | (.28 | ) | $ | (.31 | ) |
Cumulative effect of change in accounting principle (Note 10) | | (.00 | ) | (.00 | ) | (.35 | ) |
| |
| |
| |
| |
Net loss (Note 1) | | $ | (.96 | ) | $ | (.28 | ) | $ | (.66 | ) |
| |
|
| |
|
| |
|
| |
Pro forma amounts assuming the change in accounting principle is applied retroactively: | | | | | | | |
Net loss | | $ | (16,928,671 | ) | $ | (4,985,976 | ) | $ | (5,489,607 | ) |
| |
|
| |
|
| |
|
| |
Net loss per common share | | $ | (.96 | ) | $ | (.28 | ) | $ | (.31 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | |
Weighted average shares outstanding (Note 1) | | | 17,642,746 | | | 17,560,143 | | | 17,467,381 | |
| |
|
| |
|
| |
|
| |
See accompanying notes to financial statements.
26
STATEMENTS OF STOCKHOLDERS’ EQUITY
| | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Deficit | | Total Stock-
Holders’
Equity | |
| |
| |
| |
| |
| |
Balance at December 31, 1999 | | $ | 172,639 | | $ | 129,698,040 | | $ | (58,467,206 | ) | $ | 71,403,473 | |
Exercise of stock options, 255,170 shares, net | | 2,551 | | 1,321,801 | | | | 1,324,352 | |
Employee stock purchase plan sales, 17,773 shares | | 178 | | 225,968 | | | | 226,146 | |
Compensation cost | | | | 104,529 | | | | 104,529 | |
Net loss | | | | | | (11,577,842 | ) | (11,577,842 | ) |
| |
| |
| |
| |
| |
Balance at December 31, 2000 | | 175,368 | | 131,350,338 | | (70,045,048 | ) | 61,480,658 | |
Exercise of stock options, 46,027 shares, net | | 461 | | 101,907 | | | | 102,368 | |
Employee stock purchase plan sales, 24,122 shares | | 241 | | 93,131 | | | | 93,372 | |
Compensation cost | | | | 123,289 | | | | 123,289 | |
Net loss | | | | | | (4,985,976 | ) | (4,985,976 | ) |
| |
| |
| |
| |
| |
Balance at December 31, 2001 | | 176,070 | | 131,668,665 | | (75,031,024 | ) | 56,813,711 | |
Employee stock purchase plan sales, 50,127 shares | | 501 | | 122,080 | | | | 122,581 | |
Compensation cost | | | | 120,190 | | | | 120,190 | |
Net loss | | | | | | (16,928,671 | ) | (16,928,671 | ) |
| |
| |
| |
| |
| |
Balance at December 31, 2002 | | $ | 176,571 | | $ | 131,910,935 | | $ | (91,959,695 | ) | $ | 40,127,811 | |
| |
|
| |
|
| |
|
| |
|
| |
See accompanying notes to financial statements.
27
STATEMENTS OF CASH FLOWS
| | Years Ended December 31, | |
| |
| |
| | 2002 | | 2001 | | 2000 | |
| |
| |
| |
| |
Operating activities: | | | | | | | |
Net loss | | $ | (16,928,671 | ) | $ | (4,985,976 | ) | $ | (11,577,842 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | |
Depreciation and amortization | | 1,246,417 | | 1,046,037 | | 666,714 | |
Impairment of patents and licenses | | 373,900 | | 0 | | 0 | |
Amortization of patents and licenses | | 201 | | 3,398 | | 2,500 | |
Non-monetary compensation cost | | 120,190 | | 123,289 | | 104,529 | |
Deferred expense | | 0 | | 443,698 | | (443,698 | ) |
Deferred revenue | | 0 | | (7,736,976 | ) | 7,736,976 | |
Changes in operating assets and liabilities: | | | | | | | |
Prepaid expenses and other current assets | | (66,065 | ) | 264,077 | | (3,898 | ) |
Accounts payable | | (361,548 | ) | (186,513 | ) | 512,554 | |
Accrued expenses | | (688,769 | ) | 803,200 | | (212,429 | ) |
Accrued vacation | | (59,710 | ) | 67,280 | | 36,954 | |
| |
| |
| |
| |
Net cash used in operating activities | | (16,364,055 | ) | (10,158,486 | ) | (3,177,640 | ) |
| | | | | | | |
Investing activities: | | | | | | | |
Purchases of furniture and equipment | | (407,880 | ) | (2,604,379 | ) | (2,723,296 | ) |
Purchases of patents and licenses | | (128,599 | ) | (65,438 | ) | (101,714 | ) |
Purchase of marketable securities | | (8,085,173 | ) | (26,433,622 | ) | (10,807,925 | ) |
Maturities of marketable securities | | 19,822,089 | | 49,485,497 | | 15,096,509 | |
| |
| |
| |
| |
Net cash provided by investing activities | | 11,200,437 | | 20,382,058 | | 1,463,574 | |
| | | | | | | |
Financing activities: | | | | | | | |
Principal payments of debt and capital lease obligations | | 0 | | (9,788 | ) | (12,077 | ) |
Exercise of stock options | | 0 | | 102,368 | | 1,324,352 | |
Employee stock purchase plan stock sales | | 122,581 | | 93,372 | | 226,146 | |
| |
| |
| |
| |
Net cash provided by financing activities | | 122,581 | | 185,952 | | 1,538,421 | |
| |
| |
| |
| |
| | | | | | | |
(Decrease) increase in cash and cash equivalents | | (5,041,037 | ) | 10,409,524 | | (175,645 | ) |
Cash and equivalents at beginning of year | | 18,865,326 | | 8,455,802 | | 8,631,447 | |
| |
| |
| |
| |
Cash and cash equivalents at end of year | | $ | 13,824,289 | | $ | 18,865,326 | | $ | 8,455,802 | |
| |
|
| |
|
| |
|
| |
See accompanying notes to financial statements.
28
NOTES TO FINANCIAL STATEMENTS
Note 1 — Accounting Policies
The Company
BioCryst Pharmaceuticals, Inc., a Delaware corporation, (the “Company”) is a biotechnology company focused on designing, optimizing and developing novel small molecule drugs that block key enzymes essential for cancer, cardiovascular diseases and viral infections. The Company has four research projects in different stages of development from early discovery to an ongoing Phase I trial of the Company’s most advanced drug candidate, BCX-1777. While the prospects for a project may increase as the project advances to the next stage of development, a project can be terminated at any stage of development. Until the Company generates revenues from either a research project or an approved product, its ability to continue research projects is dependent upon its ability to raise funds.
Securities Held-to-Maturity
The Company is required to classify debt and equity securities as held-to-maturity, available-for-sale or trading. The appropriateness of each classification is reassessed at each reporting date. As of December 31, 2002 and 2001, the Company classified all debt and equity securities as held-to-maturity. The only dispositions of securities classified as held-to-maturity related to actual maturities or securities called prior to their maturity. At December 31, 2002 and 2001, respectively, securities held-to-maturity consisted of $22,338,669 and $34,075,585 of U.S. Treasury and Agency securities carried at amortized cost. All of the non-current portions of securities held-to-maturity are U.S. Agency securities that mature in 2004-2005. The estimated fair value of all held-to-maturity securities at December 31, 2002 and 2001, respectively, was approximately $22,640,061 and $34,419,937. The Company has pledged $600,000 in securities to cover any future draw against its line of credit (see Note 5) and has deposited a U.S. Treasury security of $455,000 in escrow for the payment of rent and performance of other obligations specified in its lease dated July 12, 2000 (see Note 5). The amount deposited in escrow for the lease decreases $65,000 annually throughout the term of the lease.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is computed using the straight-line method with estimated useful lives of five and seven years. Laboratory equipment, office equipment, leased equipment and software are depreciated over a life of five years. Furniture and fixtures are depreciated over a life of seven years. Leasehold improvements are amortized over the remaining lease period.
Patents and Licenses
Patents and licenses are recorded at cost and amortized on a straight-line basis over their estimated useful lives or 20 years, whichever is lesser. The Company periodically reviews its patents and licenses for impairment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”) to determine any impairment that needs to be recognized. During the quarter ended June 30, 2002, the Company abandoned the development of peramivir, its influenza neuraminidase inhibitor. As a result, the Company recognized an expense of $373,900 during the quarter ended June 30, 2002 related to the patents for the neuraminidase inhibitors, as they no longer have any readily determinable value to the Company.
Income Taxes
The liability method is used in accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“Statement No. 109”). Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
29
NOTES TO FINANCIAL STATEMENTS (Continued)
Revenue Recognition
Prior to January 1, 2000, the Company recognized research and development fees, license fees and milestone payments as revenue when received. Effective January 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (“SAB 101”). Research and development revenue on cost-reimbursement agreements is recognized as expenses are incurred, up to contractual limits. Research and development fees, license fees and milestone payments are recognized as revenue when the earnings process is complete, the Company has no further continuing performance obligations and has completed its performance under the terms of the agreement, in accordance with SAB 101. License fees and milestone payments received under licensing agreements that are related to future performance are deferred and taken into income as earned over the estimated drug development period. Recognized revenues and profit are subject to revisions as these contracts or agreements progress to completion. Revisions to revenue or profit estimates are charged to income in the period in which the facts that give rise to the revision became known. The Company has not received any royalties from the sale of licensed compounds.
Net Loss Per Share
The Company computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share. Net loss per share is based upon the weighted average number of common shares outstanding during the period. Common equivalent shares from unexercised stock options are excluded from the computation, as their effect is anti-dilutive. Common stock equivalents of approximately 73,839, 57,562 and 1,314,399 shares were not used to calculate net loss per share in 2002, 2001 and 2000, respectively, because of their anti-dilutive effect. There were no reconciling items in calculating the numerator for net loss per share for any of the periods presented.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers cash equivalents to be all cash held in money market accounts or investments in debt instruments with maturities of three months or less at the time of purchase.
Stock-Based Compensation
The Company accounts for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). Under APB No. 25, the Company’s stock option and employee stock purchase plans qualify as noncompensatory plans. Under Financial Accounting Standards Board Interpretation 44, Accounting for Certain Transactions involving Stock Compensation, an Interpretation of APB No. 25, outside directors are considered employees for purposes of applying APB No. 25, if they are elected by the shareholders. Consequently, no compensation expense for employees and directors is recognized. Stock issued to non-employees is compensatory and compensation expense is recognized under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement No. 123”) as amended by Statement of Financial Accounting Standards No. 148 Accounting for Stock-Based Compensation-Transition and Disclosure (“Statement No. 148”).
The following table illustrates the pro forma effect on net loss and net loss per share had the Company applied the fair value recognition provisions of Statement No. 123 for the years ended December 31, 2002, 2001 and 2000. See Note 7 for the assumptions used to compute the pro forma amounts.
| | 2002 | | 2001 | | 2000 | |
| |
| |
| |
| |
Net loss as reported | | $ | (16,928,671 | ) | $ | (4,985,976 | ) | $ | (11,577,842 | ) |
Deduct total stock-based employee compensation expense determined under Statement No. 123 | | (1,730,496 | ) | (2,671,127 | ) | (2,842,583 | ) |
| |
| |
| |
| |
Pro forma net loss | | $ | (18,659,167 | ) | $ | (7,657,103 | ) | $ | (14,420,425 | ) |
| |
|
| |
|
| |
|
| |
30
NOTES TO FINANCIAL STATEMENTS (Continued)
| | 2002 | | 2001 | | 2000 | |
| |
| |
| |
| |
Amounts per common share: | | | | | | | |
Net loss per share, as reported | | $ | (.96 | ) | $ | (.28 | ) | $ | (.66 | ) |
Pro forma net loss per share | | $ | (1.06 | ) | $ | (.44 | ) | $ | (.83 | ) |
Use of Estimates
Management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform to the 2002 financial statement presentation. The changes had no effect on the results of operations previously reported.
Note 2 — Furniture and Equipment
Furniture and equipment consisted of the following at December 31:
| | 2002 | | 2001 | |
| |
| |
| |
Furniture and fixtures | | $ | 330,677 | | $ | 320,888 | |
Office equipment | | 561,011 | | 507,320 | |
Software | | 490,037 | | 478,783 | |
Laboratory equipment | | 3,335,835 | | 3,183,343 | |
Leased equipment | | 62,712 | | 62,712 | |
Construction-in-progress | | 0 | | 1,060,397 | |
Leasehold improvements | | 4,633,651 | | 3,392,600 | |
| |
| |
| |
| | 9,413,923 | | 9,006,043 | |
Less accumulated depreciation and amortization | | (4,856,636 | ) | (3,610,219 | ) |
| |
| |
| |
Furniture and equipment, net | | $ | 4,557,287 | | $ | 5,395,824 | |
| |
|
| |
|
| |
Effective January 1, 2002, the Company evaluates the possible impairment of its long-lived assets, including identifiable intangible assets, under Statement No. 144. The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. Evaluation of possible impairment is based on the Company’s ability to recover the asset from the expected future pretax cash flows (undiscounted and without interest charges) of the related operations. If the expected undiscounted pretax cash flows are less than the carrying amount of such asset, an impairment loss is recognized for the difference between the estimated fair value and carrying amount of the asset.
Note 3 — Concentration of Credit and Market Risk
The Company invests its excess cash principally in U.S. marketable securities from a diversified portfolio of institutions with strong credit ratings and in U.S. government and agency bills and notes, and, by policy, limits the amount of credit exposure at any one institution. These investments are generally not collateralized and mature within less than three years. The Company has not realized any losses from such investments. At December 31, 2002, $7,709,730 was invested in the Merrill Lynch Premier Institutional Fund, which invests primarily in commercial paper, U.S. government and agency bills and notes, corporate notes, certificates of deposit and time deposits. The Merrill Lynch Premier Institutional Fund is not insured.
31
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 4 — Accrued Expenses
Accrued expenses were comprised of the following at December 31:
| | 2002 | | 2001 | |
| |
| |
| |
Accrued clinical trials | | $ | 300,525 | | $ | 893,395 | |
Stock purchase plan withholdings | | 28,023 | | 83,725 | |
Accrued other | | 114,976 | | 155,173 | |
| |
| |
| |
Accrued expenses | | $ | 443,524 | | $ | 1,132,293 | |
| |
|
| |
|
| |
Note 5 — Lease Obligations and Other Contingencies
The Company paid $0, $464 and $3,354 in interest on lease obligations for the years ended December 31, 2002, 2001 and 2000, respectively. The Company had an unused line of credit of $500,000 at December 31, 2002.
The Company has the following lease obligations at December 31, 2002:
| | Operating
Leases | |
| |
| |
2003 | | $ | 580,803 | |
2004 | | 594,897 | |
2005 | | 605,139 | |
2006 | | 573,031 | |
2007 | | 528,750 | |
Thereafter | | 1,390,188 | |
| |
| |
Total minimum payments | | $ | 4,272,808 | |
| |
|
| |
Rent expense for operating leases was $651,506, $484,227 and $405,289 in 2002, 2001 and 2000, respectively. The commitment for operating leases is primarily related to the building lease, which expires in June 2010. The lease, as amended effective July 1, 2001 for additional space, requires monthly rents of $33,145 beginning in July 2001 and escalating annually to a minimum of $47,437 per month in the final year. The Company has an option to renew the lease for an additional five years at the current market rate on the date of termination and a one-time option to terminate the lease on June 30, 2008, subject to a reasonable termination fee.
On August 5, 2002, at the request of the compensation committee, our board of directors approved a reduction in salary of 25% for both Dr. Charles E. Bugg, Chairman and Chief Executive Officer and Dr. J. Claude Bennett, President, Chief Operating Officer and Medical Director, effective August 1, 2002. In the event of any change of control of the Company, any cumulative salary reductions up to the date of the change of control would become due and payable. The monthly amount of the reduction was $14,677 combined. This arrangement has not been documented in any formal written agreement.
Note 6 — Income Taxes
The Company has not had taxable income since incorporation and, therefore, has not paid any income tax. Deferred tax assets of approximately $45,750,000 and $35,017,000 at December 31, 2002 and 2001, respectively, have been recognized principally for the net operating loss and research and development credit carryforwards, and have been reduced by a valuation allowance of $45,750,000 and $35,017,000 at December 31, 2002 and 2001, respectively. The valuation allowance will remain at the full amount of the deferred tax asset until it is more likely than not that the related tax benefits will be realized.
At December 31, 2002, the Company had net operating loss and research and development credit carryforwards (“Carryforward Tax Benefits”) of approximately $92,600,000 and $8,800,000, respectively, which will expire at various dates beginning in 2005 and continuing through 2022. Use of the Carryforward Tax Benefits will be subject to a substantial annual limitation due to the change of ownership provisions of the Tax Reform Act of 1986. The annual limitation is expected to result in the expiration of a portion of Carryforward Tax Benefits before utilization, which has been considered by the Company in its computations under Statement No. 109. Additional sales of the Company’s equity securities may result in further annual limitations on the use of the Carryforward Tax Benefits against taxable income in future years.
32
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 7 — Stockholders’ Equity
In June 2002, the board of directors adopted a stockholder rights plan and, pursuant thereto, issued preferred stock purchase rights (“Rights”) to the holders of our common stock. The Rights have certain anti-takeover effects. If triggered, the Rights would cause substantial dilution to a person or group of persons who acquires more than 15% (19.9% for William W. Featheringill, a Director who already owns more than 15%) of the Company’s common stock on terms not approved by the board of directors. The rights are not exercisable until the distribution date, as defined in the Rights Agreement by and between the Company and American Stock Transfer & Trust Company, as Rights Agent. The Rights will expire at the close of business on June 24, 2012, unless that final expiration date is extended or unless the rights are earlier redeemed or exchanged by the company.
Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series B Junior Participating Preferred Stock (“Series B”), par value $0.001 per share at a purchase price of $26.00, subject to adjustment. Shares of Series B purchasable upon exercise of the Rights will not be redeemable. Each share of Series B will be entitled to a dividend of 1,000 times the dividend declared per share of common stock. In the event of liquidation, each share of Series B will be entitled to a payment of 1,000 times the payment made per share of common stock. Each share of Series B will have 1,000 votes, voting together with the common stock. Finally, in the event of any merger, consolidation, or other transaction in which shares of common stock are exchanged, each share of Series B will be entitled to receive 1,000 times the amount received per share of common stock.
In November 1991, the Board of Directors adopted the 1991 Stock Option Plan (“Plan”) for key employees and consultants of the Company and reserved 500,000 shares of common stock for issuance under the Plan. The Plan was approved by the stockholders on December 19, 1991. The original term of the Plan was for ten years and included provisions for issuance of both incentive stock options and non-statutory options. The exercise price of options granted under the Plan shall not be less than the fair market value of common stock on the grant date. Options granted under the Plan generally vest 25% after one year and monthly thereafter on a pro rata basis over the next three years until fully vested after four years and expire ten years after the grant date. Options are generally granted to all full-time employees.
The Plan was amended and restated in February 1993 to effect the following changes: (i) divide the plan into two separate incentive programs: the Discretionary Option Grant Program and the Automatic Option Grant Program, (ii) increase the number of shares of the Company’s common stock available for issuance under the plan by 500,000 shares and (iii) expand the level of benefits available under the Plan. The Board amended the Plan on December 23, 1993 to increase the number of shares issuable under the Plan by 500,000 shares and subsequently amended and restated the Plan in its entirety on February 8, 1994. On March 16, 1995, the Board authorized another 500,000 shares for issuance under the Plan. The Plan was subsequently amended and restated effective March 3, 1997, which amendment and restatement included an increase of 1,000,000 shares. The Plan (as so amended and restated) was further amended March 1, 1999 to increase the share reserve by 400,000 shares. The Board amended and restated the Plan in its entirety on March 6, 2000, which increased the reserved shares by 1,200,000 and extended the term of the Plan for ten years from the date of the amendment. This restatement was approved by the Company’s stockholders on May 17, 2000. The automatic option grant program grants options to purchase 10,000 shares to new non-employee Board members and an additional 10,000 shares annually over such period of continued service. The vesting and exercise provisions of options granted under the Plan are subject to acceleration in the event of certain stockholder-approved transactions, or upon the occurrence of a Change in Control as defined by the Plan.
33
NOTES TO FINANCIAL STATEMENTS (Continued)
The following is an analysis of stock options for the three years ended December 31, 2002:
| | Options
Available | | Options
Outstanding | | Weighted
Average
Exercise Price | |
| |
| |
| |
| |
Balance December 31, 1999 | | 174,451 | | 2,548,804 | | $ | 9.80 | |
Option plan amended | | 1,200,000 | | | | | |
Options granted | | (380,890 | ) | 380,890 | | 11.70 | |
Options exercised | | | | (256,949 | ) | 4.98 | |
Options canceled | | 51,753 | | (51,753 | ) | 22.24 | |
| |
| |
| | | |
Balance December 31, 2000 | | 1,045,314 | | 2,620,992 | | 10.30 | |
Options granted | | (522,600 | ) | 522,600 | | 4.55 | |
Options exercised | | | | (61,327 | ) | 2.82 | |
Options canceled | | 60,992 | | (60,992 | ) | 11.55 | |
| |
| |
| | | |
Balance December 31, 2001 | | 583,706 | | 3,021,273 | | 9.43 | |
Options granted | | (443,735 | ) | 443,735 | | 1.44 | |
Options canceled | | 466,523 | | (466,523 | ) | 8.14 | |
| |
| |
| | | |
Balance December 31, 2002 | | | 606,494 | | | 2,998,485 | | | 8.45 | |
| |
|
| |
|
| | | | |
There were 2,214,954, 1,986,560 and 1,718,834 options exercisable at December 31, 2002, 2001 and 2000, respectively. The weighted-average exercise price for options exercisable was $9.67, $9.69 and $9.03 at December 31, 2002, 2001 and 2000, respectively.
The following table summarizes, at December 31, 2002, by price range: (1) for options outstanding, the number of options outstanding, their weighted-average remaining life and their weighted-average exercise price; and (2) for options exercisable, the number of options exercisable and their weighted-average exercise price:
| | Outstanding | | Exercisable | |
| |
| |
| |
Range | | | Number | | Life | | Price | | Number | | Price | |
| | |
| |
| |
| |
| |
| |
$ 0 to $ 3 | | 337,035 | | 9.7 | | $1.14 | | 0 | | $0.00 | |
3 to 6 | | 815,100 | | 3.9 | | 4.71 | | 612,746 | | 5.08 | |
6 to 9 | | 1,136,553 | | 5.4 | | 7.34 | | 952,975 | | 7.27 | |
9 to 12 | | 13,956 | | 4.2 | | 9.71 | | 11,980 | | 9.67 | |
12 to 15 | | 315,558 | | 3.8 | | 14.18 | | 315,558 | | 14.18 | |
15 to 18 | | 93,894 | | 4.0 | | 16.38 | | 93,894 | | 16.38 | |
18 to 24 | | 264,664 | | 5.5 | | 22.83 | | 212,958 | | 22.83 | |
24 to 30 | | 21,725 | | 6.7 | | 26.74 | | 14,843 | | 26.68 | |
| |
| | | | | |
| | | |
0 to 30 | | 2,998,485 | | 5.3 | | 8.45 | | 2,214,954 | | 9.67 | |
| |
| | | | | |
| | | |
As of December 31, 2002, there were an aggregate of 3,815,939 shares reserved for future issuance under both the Plan and the Employee Stock Purchase Plan (“ESPP”) discussed in Note 8.
The Company follows APB No. 25 in accounting for both the Plan and the ESPP and, accordingly, does not recognize any compensation cost related to options granted to employees or non-employee directors. The Company has adopted the disclosure requirements of Statement No. 123, as amended by Statement No. 148. Since Statement No. 123 is only applied to options granted after 1994, the pro forma disclosure should not necessarily be considered indicative of future pro forma results when the full four-year vesting (the period in which the compensation cost is recognized) is included in the disclosure in 2002. The fair value of each option is estimated on the grant date using the Black-Scholes option-pricing method with the following weighted-average assumptions used for grants in 2002, 2001 and 2000, respectively: no dividends; expected volatility of 104.4, 92.5 and 88.9 percent; risk-free interest rate of 3.6, 4.6 and 5.5 percent; and expected lives of five years. The weighted-average grant-date fair values of options granted during 2002 under the Plan and ESPP were $1.12 and $2.46, respectively. The compensation cost recorded for options issued to non-employee consultants was $120,190, $123,289 and $104,529 for the years ended December 31, 2002, 2001 and 2000, respectively.
34
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 8 — Employee Benefit Plans
On January 1, 1991, the Company adopted an employee retirement plan (“401(k) Plan”) under Section 401(k) of the Internal Revenue Code covering all employees. Employee contributions may be made to the 401(k) Plan up to limits established by the Internal Revenue Service. Company matching contributions may be made at the discretion of the Board of Directors. The Company made matching contributions of $217,097, $216,897 and $190,486 in 2002, 2001 and 2000, respectively.
On May 29, 1995, the stockholders approved an employee stock purchase plan (“ESPP”) effective February 1, 1995. On May 15, 2002, the stockholders approved an amendment to the ESPP to reserve an additional 200,000 shares and eliminate the January 2005 termination date. The Company has reserved a total of 400,000 shares of common stock under the ESPP, of which 210,960 shares remain available for purchase at December 31, 2002. Eligible employees may authorize up to 15% of their salary to purchase common stock at the lower of 85% of the beginning or 85% of the ending price during the six-month purchase intervals. No more than 3,000 shares may be purchased by any one employee at the six-month purchase dates and no employee may purchase stock having a fair market value at the commencement date of $25,000 or more in any one calendar year. There were 50,127, 24,122 and 17,773 shares of common stock purchased under the ESPP in 2002, 2001 and 2000, respectively, at a weighted average price per share of $2.45, $3.87 and $12.72, respectively.
Note 9 — Collaborative and Other Research and Development Contracts
The Company granted Novartis Corporation, formerly Ciba-Geigy Corporation (“Novartis”), an option in 1990 to acquire exclusive licenses to a class of inhibitors arising from research performed by the Company by February 1991. The option was exercised and a $500,000 fee was paid to the Company in 1993. Milestone payments are due upon approval of a new drug application. The Company will also receive royalties based upon a percentage of sales of any resultant products. Up to $300,000 of the initial fee received is refundable if sales of any resultant products are below specified levels and has been recorded as deferred revenue.
On November 7, 1991, the Company entered into a joint research and license agreement with The University of Alabama at Birmingham (“UAB”). UAB performed specific research on Complement Factors for the Company for a period of approximately three years in return for research and license fees. The agreement was replaced by a new agreement on July 18, 1995 granting the Company a worldwide license in exchange for funding certain UAB research and sharing in any royalties or sublicense fees arising from the joint research. On November 17, 1994, the Company entered into another agreement for a joint research and license agreement on influenza neuraminidase granting the Company a worldwide license. Under this agreement, the Company funded certain UAB research and UAB shares in any royalties or sublicense fees arising from the joint research. The Company completed its research funding required by the agreements for both projects in 1998, but is still required to pay minimal annual license fees and share any future royalties with UAB.
In October 1996, the Company signed a research collaboration agreement with 3-Dimensional Pharmaceuticals. Under this agreement, the companies will share resources and technology to expedite the discovery of new drug candidates for the Company’s complement inhibition program. The agreement combines the Company’s capabilities in structure-based drug design with the selection power of 3-Dimensional Pharmaceuticals’ Directed Diversity® technology, a proprietary method of directing combinatorial chemistry and high throughput screening toward specific molecular targets. In June 1999, the Company updated and renewed the original agreement to concentrate on selected complement enzymes as targets for the design of inhibitors. Under the terms of the 50-50 agreement, the Company conducts joint research to identify inhibitors of key serine proteases, which represent promising targets for inhibition of complement activation. If a drug candidate emerges as a result of the joint research, the companies will negotiate the product development and commercialization rights and responsibilities.
In 1998, the Company entered into an exclusive worldwide license agreement with RWJPRI and Ortho-McNeil to develop and market our proprietary influenza neuraminidase inhibitors to treat and prevent viral influenza. The Company received an initial $6.0 million payment from Ortho-McNeil and an additional $6.0 million common stock equity investment from Johnson & Johnson Development Corporation. In June 1999, the Company received a $2.0 million milestone payment from Ortho-McNeil in connection with the initiation of Phase II clinical testing in the United States. In February 2000, the Company received a $4.0 million milestone payment from RWJPRI in connection with the initiation of Phase III clinical trials of peramivir (RWJ-270201) in North America and Europe.
35
NOTES TO FINANCIAL STATEMENTS (Continued)
On April 30, 2001, the Company announced that Ortho-McNeil and RWJPRI gave four months prior notice of termination of the worldwide license agreement to develop and market products to treat and prevent viral influenza. Termination of this agreement by RWJPRI and Ortho-McNeil was final on September 21, 2001, and all rights to peramivir and all other patented compounds were returned to the Company.
In April 1999, the Company entered into an agreement with Sunol Molecular Corporation. This agreement requires Sunol to conduct research and supply the Company with protein targets for drug design to expedite the discovery of new drug candidates designed to inhibit Tissue Factor/VIIa for the Company’s cardiovascular program.
In June 2000, the Company licensed a series of potent inhibitors of purine nucleoside phosphorylase, or PNP, from Albert Einstein College of Medicine of Yeshiva University and Industrial Research, Ltd, New Zealand. The lead drug candidate from this collaboration is BCX-1777. The Company has the rights to develop and ultimately distribute this, or any other, drug candidate that might arise from research on these inhibitors. The Company has agreed to pay certain milestone payments for future development of these inhibitors, pay certain royalties on sales of any resulting product, and to share in future payments received from other third-party collaborators, if any.
In June 2000, the Company licensed intellectual property from Emory University related to the Hepatitis C polymerase target associated with Hepatitis C viral infections. Under the terms of the agreement, the research investigators from Emory provide the Company with materials and technical insight into the target. The Company has agreed to pay Emory royalties on sales of any resulting product and to share in future payments received from other third party collaborators, if any.
Note 10 — Change in Accounting Principle
As discussed in Note 1, effective January 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with SAB 101. The cumulative effect of this change in accounting principle on prior years resulted in a charge to income of $6,088,235. This amount is included in the net loss for the year ended December 31, 2000. The effect of the change on the year ended December 31, 2000 was to increase the loss before the cumulative effect of the accounting change by $1,205,000 ($.07 per share). The pro forma amounts presented in the income statement were calculated assuming the change in accounting principle was made retroactively to prior periods. For each quarter in 2000 and the first quarter in 2001, the Company recognized net revenue of $405,882 that was included in the cumulative effect adjustment as of January 1, 2000. As a result of the termination of the agreement with Ortho-McNeil and RWJPRI, the Company changed its estimate for recognizing the deferred income and expense from this agreement so that the remaining amounts were recognized in the second and third quarters of 2001. The amount of net revenue recycled into income from the cumulative effect adjustment was $2,097,000 in 2000 and $1,961,825 in the second and third quarters of 2001. As of December 31, 2002, the balance of both the deferred revenue and deferred expense related to the Ortho-McNeil and RWJPRI agreement was $0.
Note 11 — Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“Statement No. 148”). This statement addresses transition methodologies for companies who intend to adopt the fair valuation methodology of Statement No. 123 for their employee stock-based compensation, as well as additional annual and quarterly disclosure requirements for stock-based compensation. The new disclosure rules are effective for interim or annual periods ending after December 15, 2002 and are provided in Notes 1 and 7. The Company does not expect there to be a material impact on its financial position, results of operations or cash flows as a result of adopting this accounting standard.
36
NOTES TO FINANCIAL STATEMENTS (Continued)
In November 2002, the FASB issued Interpretation No. 45, Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN No. 45”). This interpretation modifies the accounting treatment for certain guarantees and is effective for all guarantees issued or modified after December 31, 2002. The new disclosure rules are effective for interim or annual periods ending after December 15, 2002. The Company does not expect there to be a material impact on its financial position, results of operations or cash flows as a result of adopting this accounting standard.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), which is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted this statement on July 1, 2002. On July 10, 2002, the Company streamlined its operations, reducing its workforce from 75 employees to 45 employees in order to conserve its resources and provide a longer timeframe in which to advance its other programs. As a result of early implementation of SFAS 146, the Company recognized all expenses related to this reduction in staff as compensation expense during the third quarter of 2002. The total compensation paid in 2002, plus benefits, related to this staff reduction was approximately $325,000.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (“Statement No. 145”). This statement updates, clarifies and simplifies existing accounting pronouncements. As a result of rescinding FASB Statements No. 4 and 64, the criteria in Accounting Principles Board 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, will be used to classify gains and losses from extinguishment of debt. FASB Statement No. 44 was no longer necessary because the transitions under the Motor Carrier Act of 1980 were completed. FASB Statement No. 13 was amended to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and makes technical corrections to existing pronouncements. The provisions of Statement No. 145 are effective for fiscal years beginning after May 15, 2002, with earlier application encouraged. The Company will adopt SFAS 145 effective January 1, 2003. The adoption of SFAS 145 will not have a material impact on the Company’s financial position.
Note 12 — Quarterly Financial Information (Unaudited)(In thousands, except per share)
| | First | | Second | | Third | | Fourth | |
| |
| |
| |
| |
| |
2002 Quarters | | | | | | | | | |
Revenues | | $ | 539 | | $ | 461 | | $ | 412 | | $ | 363 | |
Net loss | | (5,616 | ) | (5,161 | ) | (3,415 | ) | (2,736 | ) |
Net loss per share | | (.32 | ) | (.29 | ) | (.19 | ) | (.15 | ) |
2001 Quarters | | | | | | | | | |
Revenues | | $ | 1,887 | | $ | 4,536 | | $ | 4,131 | | $ | 603 | |
Net (loss) income | | (1,383 | ) | 958 | | 417 | | (4,978 | ) |
Net (loss) income per share | | (.08 | ) | .05 | | .02 | | (.28 | ) |
Net (loss) per share for the years 2002 and 2001 differed from the total of the individual quarters due to rounding.
37
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
BioCryst Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of BioCryst Pharmaceuticals, Inc. as of December 31, 2002 and 2001, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the financial position of BioCryst Pharmaceuticals, Inc. at December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed in Notes 1 and 10 to the financial statements, in 2000 the Company changed its method of revenue recognition.
| | | |
| | | /s/ ERNST & YOUNG, LLP |
Birmingham, Alabama
January 24, 2003
| | | |
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name | | | Age | | Position(s) with the Company |
| | |
| |
|
| | | | |
Charles E. Bugg, Ph.D. | | 61 | | Chairman, Chief Executive Officer and Director |
J. Claude Bennett, M.D. | | 69 | | President, Chief Operating Officer, Medical Director and Director |
Michael A. Darwin (4) | | 41 | | Chief Financial Officer, Secretary and Treasurer |
William W. Featheringill (1)(2) | | 60 | | Director |
Edwin A. Gee, Ph.D. (1)(2) | | 83 | | Director |
Zola P. Horovitz, Ph.D. | | 68 | | Director |
John A. Montgomery, Ph.D. (3) | | 78 | | Director |
Joseph H. Sherrill, Jr. | | 62 | | Director |
William M. Spencer, III (1)(2) | | 82 | | Director |
Randolph C. Steer, M.D., Ph.D. | | 53 | | Director |
______________
(1) Member of the Compensation Committee (“Compensation Committee”).
(2) Member of the Audit Committee (“Audit Committee”).
(3) John A. Montgomery held the positions of Senior Vice President, Secretary and Chief Scientific Officer until his retirement effective January 31, 2002. He will continue to serve as a Director.
(4) Effective November 1, 2002, Michael A. Darwin was appointed Chief Financial Officer, Secretary and Treasurer.
Charles E. Bugg, Ph.D., was named Chairman of the Board, Chief Executive Officer and Director in November 1993 and President in January 1995. Dr. Bugg relinquished the position of President in December 1996 when Dr. Bennett joined the Company in that position. Prior to joining the Company, Dr. Bugg had served as the Director of the Center for Macromolecular Crystallography, Associate Director of the Comprehensive Cancer Center and Professor of Biochemistry at The University of Alabama at Birmingham (“UAB”) since 1975. He was a Founder of the Company and served as the Company’s first Chief Executive Officer from 1987-1988 while on a sabbatical from UAB. Dr. Bugg also served as Chairman of the Company’s Scientific Advisory Board from January 1986 to November 1993. He continues to hold the position of Professor Emeritus in Biochemistry and Molecular Genetics at UAB, a position he has held since January 1994.
J. Claude Bennett, M.D., was named President and Chief Operating Officer in December 1996 and elected a Director in January 1997. Since 2001, Dr. Bennett has also served as the Medical Director. Prior to joining the Company, Dr. Bennett was President of The University of Alabama at Birmingham (“UAB”) from October 1993 to December 1996 and Professor and Chairman of the Department of Medicine of UAB from January 1982 to October 1993. Dr. Bennett served on the Company’s Scientific Advisory Board from 1989-96. He is a former co-editor of the Cecil Textbook of Medicine and former President of the Association of American Physicians. He is a member of the Scientific Advisory Committee of the Massachusetts General Hospital, a member of the Scientific Advisory Boards of Zycogen, LLC and Aptamera, Inc., and continues to hold the position of Distinguished University Professor Emeritus at UAB, a position he has held since January 1997.
Michael A. Darwin joined BioCryst in June 2000 as Controller. Effective November 1, 2002, Mr. Darwin was appointed Chief Financial Officer, Secretary and Treasurer. Prior to joining BioCryst, from June 1990 to June 2000, Mr. Darwin was Chief Financial Officer of a privately held company in the food services industry. He began his career at Ernst & Young and spent six years in public accounting practice.
39
William W. Featheringill was elected a Director in May 1995. Mr. Featheringill is Chairman of the Board, since June 1995, of Electronic Healthcare Systems, a software company, and President, Chief Executive Officer and director, since 1973, of Private Capital Corporation, a venture capital company. Mr. Featheringill was Chairman and Chief Executive Officer of MACESS Corporation, which designs and installs paperless data management systems for the managed care industry, from 1988 to November 1995. MACESS Corporation merged with Sungard Data Systems in late 1995. From 1985 to December 1994, Mr. Featheringill was the developer, Chairman and President of Complete Health Services, Inc., a health maintenance organization which grew, under his direction, to become one of the largest HMOs in the southeastern United States. Complete Health Services, Inc. was acquired by United HealthCare Corporation in June 1994.
Edwin A. Gee, Ph.D., was elected a Director in August 1993. Dr. Gee, who retired in 1985 as Chairman of the Board and Chief Executive Officer of International Paper Company, has been active as an executive in biotechnology, pharmaceutical and specialty chemical companies since 1970. He is Chairman Emeritus and a director of OSI Pharmaceuticals, Inc., one of the leading biotechnology companies for the diagnosis and treatment of cancer.
Zola P. Horovitz, Ph.D., was elected a Director in August 1994. Dr. Horovitz was Vice President of Business Development and Planning at Bristol-Myers Squibb from 1991 until his retirement in April 1994 and previously was Vice President of Licensing at the same company from 1990 to 1991. Prior to that he spent over 30 years with The Squibb Institute for Medical Research, most recently as Vice President Research, Planning, & Scientific Liaison. He has been an independent consultant in pharmaceutical sciences and business development since his retirement from Bristol-Myers Squibb in April 1994. He serves on the Boards of Directors of 3-Dimensional Pharmaceuticals, Inc., Avigen, Inc., Diacrin, Inc., Geneara Pharmaceuticals, Inc., Palatin Technologies, Inc., and Synaptic Pharmaceutical Corp.
John A. Montgomery, Ph.D., was a Founder of BioCryst and has been a Director since November 1989. He was the Secretary and Chief Scientific Officer since joining the Company in February 1990. He was Executive Vice President from February 1990 until May 1997, at which time he was named Senior Vice President. Dr. Montgomery retired as an officer of the Company effective January 31, 2002, but remains on the Board of Directors. Prior to joining the Company, Dr. Montgomery served as Senior Vice President of Southern Research Institute (“SRI”) of Birmingham from January 1981 to February 1990. He continues to hold the position of Distinguished Scientist at SRI, a position he has held since February 1990.
Joseph H. Sherrill, Jr., was elected a Director in May 1995. Mr. Sherrill served as President of R. J. Reynolds (“RJR”) Asia Pacific, based in Hong Kong, where he oversaw RJR operations across Asia, including licensing, joint ventures and a full line of operating companies from August 1989 to his retirement in October 1994. Prior management positions with RJR include Senior Vice President of Marketing for R.J. Reynolds International, President and Chief Executive Officer of R.J. Reynolds Tabacos de Brazil, and President and General Manager of R.J. Reynolds Puerto Rico.
William M. Spencer, III, has been a Director of the Company since its inception. Mr. Spencer, who is retired, is also a private investor in Birmingham, Alabama. Mr. Spencer is a Founder of the Company, and served as Chairman of the Board of the Company from its founding in 1986 until April 1992. He co-founded and operated Motion Industries from 1946 through its merger into Genuine Parts Company in 1976. He has founded several businesses and has served on the Board of Directors of numerous private corporations.
Randolph C. Steer, M.D., Ph.D., was elected a Director in February 1993. Dr. Steer has been an independent pharmaceutical and biotechnology consultant since 1989, having a broad background in business development, medical marketing and regulatory affairs. He was formerly Chairman, President and CEO of Advanced Therapeutics Communications International, a leading drug regulatory group, and served as associate director of medical affairs at Marion Laboratories, and medical director at Ciba Consumer Pharmaceuticals. Dr. Steer serves on the Board of Directors of Techne Corporation and several privately held companies.
In accordance with the terms of the Company’s Certificate of Incorporation, the Board of Directors has been divided into three classes with members of each class holding office for staggered three-year terms. Dr. Bennett’s, Dr. Horovitz’s, and Dr. Steer’s terms expire at the 2003 annual meeting, Dr. Bugg’s, Dr. Montgomery’s and Dr. Gee’s terms expire at the 2004 annual meeting and Mr. Featheringill’s, Mr. Spencer’s and Mr. Sherrill’s terms expire at the 2005 annual meeting, and (in all cases subject to the election and qualification of their successors or to their earlier death, resignation or removal). At each annual stockholder meeting, the successors to the Directors whose terms expire are elected to serve from the time of their election and qualification until the third annual meeting of stockholders following their election and until a successor has been duly elected and qualified. The provisions of the Company’s Certificate of Incorporation governing the staggered Director election procedure can be amended only by a shareholder’s vote of at least 75% of the eligible voting securities. There are no family relationships among any of the directors and executive officers of the Company. The Board has by resolution established the number of directors of the Company at nine (9) commencing with the 1999 Annual Meeting of Stockholders. Currently, six of our directors are independent as defined by the current Nasdaq rules.
40
The Company has an Audit Committee, consisting of Messrs. Featheringill, Gee and Spencer, which is responsible for the review of internal accounting controls, financial reporting and related matters. The Audit Committee also recommends to the Board the independent accountants selected to be the Company’s auditors and reviews the audit plan, financial statements and audit results. The Board has adopted an Audit Committee Charter that meets all the applicable rules of the Nasdaq National Market and the Securities and Exchange Commission. The Audit Committee members are “independent” directors as defined by the Nasdaq National Market listing standards in effect as of the date hereof.
The Company also has a Compensation Committee consisting of Messrs. Featheringill, Gee and Spencer. The Compensation Committee is responsible for the annual review of officer compensation and other incentive programs and is authorized to award options under the Company’s Stock Option Plan.
The Company has a Nominating Committee comprised of all outside directors with terms not expiring in the current year. The Nominating Committee nominates persons for election or re-election as directors.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from our definitive Proxy Statement to be filed in connection with the solicitation of proxies for our 2003 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Incorporated by reference from our definitive Proxy Statement to be filed in connection with the solicitation of proxies for our 2003 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from our definitive Proxy Statement to be filed in connection with the solicitation of proxies for our 2003 Annual Meeting of Stockholders.
ITEM 14. CONTROLS AND PROCEDURES
1. The Chairman and Chief Executive Officer and the Chief Financial Officer of BioCryst Pharmaceuticals, Inc. (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by BioCryst in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by BioCryst in such reports is accumulated and communicated to the Company’s management, including the Chairman and Chief Executive Officer and Chief Financial Officer of BioCryst, as appropriate to allow timely decisions regarding required disclosure.
2. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.
41
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Financial Statements
No financial statement schedules are included because the information is either provided in the financial statements or is not required under the related instructions or is inapplicable and such schedules therefore have been omitted.
(b) Reports on Form 8-K
None
(c) Exhibits
Number | | Description |
3.1 | | Composite Certificate of Incorporation of Registrant. Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the second quarter ending June 30, 1995 dated August 11, 1995. |
3.2 | | Bylaws of Registrant. Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the second quarter ending June 30, 1995 dated August 11, 1995. |
4.1 | | Rights Agreement, dated as of June 17, 2002, by and between the Company and American Stock Transfer & Trust Company, as Rights Agent, which includes the Certificate of Designation for the Series B Junior Participating Preferred Stock as Exhibit A and the form of Rights Certificate as Exhibit B. Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A dated June 17, 2002. |
10.1 | | 1991 Stock Option Plan, as amended and restated as of March 6, 2000. Incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 Registration Statement dated June 16, 2000 (Registration No. 333-39484). |
10.2# | | License Agreement dated April 15, 1993 between Ciba-Geigy Corporation (now merged into Novartis) and the Registrant. Incorporated by reference to Exhibit 10.40 to the Company’s Form S-1 Registration Statement (Registration No. 33-73868). |
10.3 | | Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 Registration Statement dated June 14, 2002 (Registration No. 333-90582). |
10.4# | | Stock Purchase Agreement dated as of September 14, 1998 between Registrant and Johnson & Johnson Development Corporation. Incorporated by reference to Exhibit 10.24 to the Company’s Form 10-Q for the third quarter ending September 30, 1998 dated November 10, 1998. |
10.5# | | Stockholder’s Agreement dated as of September 14, 1998 between Registrant and Johnson & Johnson Development Corporation. Incorporated by reference to Exhibit 10.25 to the Company’s Form 10-Q for the third quarter ending September 30, 1998 dated November 10, 1998. |
42
Number | | Description |
10.6 | | Warehouse Lease dated July 12, 2000 between RBP, LLC an Alabama Limited Liability Company and the Registrant for office/warehouse space. Incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q for the second quarter ending June 30, 2000 dated August 8, 2000. |
10.7 | | Termination Agreement dated as of September 21, 2001 between Registrant and The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. Incorporated by reference to Exhibit 10.9 to the Company’s Form 10-Q for the second quarter ending June 30, 2002 dated August 7, 2002. |
23 | | Consent of Ernst & Young LLP, Independent Auditors. |
99.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
99.2 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
______________
# Confidential treatment granted.
43
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 Birmingham, State of Alabama, on this 21st day of March, 2003.
| | BIOCRYST PHARMACEUTICALS, INC. |
| | By: |
/s/Charles E. Bugg
|
| | |
|
| | | Charles E. Bugg, Ph.D
Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons in the capacities indicated on March 21, 2003:
Signature | | Title |
| | |
/s/ Charles E. Bugg | | Chairman, Chief Executive Officer and
Director |
| |
(Charles E. Bugg, Ph.D.) | |
| | |
/s/ J. Claude Bennett | | President, Chief Operating Officer, Medical Director
and Director |
| |
(J. Claude Bennett, M.D.) | |
| | |
/s/ Michael A. Darwin | | Chief Financial Officer (Principal Financial and
Accounting Officer), Secretary and Treasurer |
| |
(Michael A. Darwin) | |
| | |
/s/ William W. Featheringill | | Director |
| | |
(William W. Featheringill) | | |
| | |
/s/ Edwin A. Gee | | Director |
| | |
(Edwin A. Gee, Ph.D.) | | |
| | |
/s/ Zola P. Horovitz | | Director |
| | |
(Zola P. Horovitz, Ph.D.) | | |
| | |
/s/ John A. Montgomery | | Director |
| | |
(John A. Montgomery, Ph.D.) | | |
| | |
/s/ William M. Spencer | | Director |
| | |
(William M. Spencer, III) | | |
| | |
/s/ Joseph H. Sherrill, Jr. | | Director |
| | |
(Joseph H. Sherrill, Jr.) | | |
| | |
/s/ Randolph C. Steer | | Director |
| | |
(Randolph C. Steer, M.D., Ph.D.) | | |
44
CERTIFICATIONS
I, Charles E. Bugg, certify that:
1. I have reviewed this annual report on Form 10-K of BioCryst Pharmaceuticals, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Effective Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | |
/s/ CHARLES E. BUGG
|
| | |
|
| | | Charles E. Bugg
Chairman and Chief Executive Officer |
Date: March 21, 2003
45
CERTIFICATIONS
I, Michael A. Darwin, certify that:
1. I have reviewed this annual report on Form 10-K of BioCryst Pharmaceuticals, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Effective Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | |
/s/ MICHAEL A. DARWIN
|
| | |
|
| | | Michael A. Darwin
Chief Financial Officer and
Chief Accounting Officer |
Date: March 21, 2003
46
INDEX TO EXHIBITS
Number | Description | | Sequentially
Numbered
Page |
| | | |
3.1 | Composite Certificate of Incorporation of Registrant. Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the second quarter ending June 30, 1995 dated August 11, 1995. | | |
| | | |
3.2 | Bylaws of Registrant. Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the second quarter ending June 30, 1995 dated August 11, 1995. | | |
| | | |
4.1 | Rights Agreement, dated as of June 17, 2002, by and between the Company and American Stock Transfer & Trust Company, as Rights Agent, which includes the Certificate of Designation for the Series B Junior Participating Preferred Stock as Exhibit A and the form of Rights Certificate as Exhibit B. Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A dated June 17, 2002. | | |
| | | |
10.1 | 1991 Stock Option Plan, as amended and restated as of March 6, 2000. Incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 Registration Statement dated June 16, 2000 (Registration No. 333-39484). | | |
| | | |
10.2# | License Agreement dated April 15, 1993 between Ciba-Geigy Corporation (now merged into Novartis) and the Registrant. Incorporated by reference to Exhibit 10.40 to the Company’s Form S-1 Registration Statement (Registration No. 33-73868). | | |
| | | |
10.3 | Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 Registration Statement dated June 14, 2002 (Registration No. 333-90582). | | |
| | | |
10.4# | Stock Purchase Agreement dated as of September 14, 1998 between Registrant and Johnson & Johnson Development Corporation. Incorporated by reference to Exhibit 10.24 to the Company’s Form 10-Q for the third quarter ending September 30, 1998 dated November 10, 1998. | | |
| | | |
10.5# | Stockholder’s Agreement dated as of September 14, 1998 between Registrant and Johnson & Johnson Development Corporation. Incorporated by reference to Exhibit 10.25 to the Company’s Form 10-Q for the third quarter ending September 30, 1998 dated November 10, 1998. | | |
| | | |
10.6 | Warehouse Lease dated July 12, 2000 between RBP, LLC an Alabama Limited Liability Company and the Registrant for office/warehouse space. Incorporated by reference toExhibit 10.8 to the Company’s Form 10-Q for the second quarter ending June 30, 2000 dated August 8, 2000. | | |
| | | |
10.7 | Termination Agreement dated as of September 21, 2001 between Registrant and The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. Incorporated by reference to Exhibit 10.9 to the Company’s Form 10-Q for the second quarter ending June 30, 2002 dated August 7, 2002. | | |
| | | |
23 | Consent of Ernst & Young LLP, Independent Auditors. | | 48 |
| | | |
99.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | 49 |
| | | |
99.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | 50 |
______________
# Confidential treatment granted.
47
