UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ________________
COMMISSION FILE NUMBER 000-30231
TANOX, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 76-0196733
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
10301 STELLA LINK, SUITE 110
Houston, Texas 77025-5497
(Address of Principal Executive Offices) (ZIP CODE)
(713) 578-4000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of May 11, 2001, the registrant had 44,104,233 shares of Common Stock
issued and outstanding.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TANOX, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2001 DECEMBER 31,
(UNAUDITED) 2000
----------------------------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 115,889,000 $ 29,264,000
Short-term investments 103,723,000 149,020,000
Accounts receivable 431,000 435,000
Interest receivable 2,312,000 4,156,000
Income taxes receivable 132,000 132,000
Prepaid and deferred expenses 618,000 506,000
----------------------------------
Total current assets 223,105,000 183,513,000
LONG-TERM INVESTMENTS 56,327,000 97,637,000
PROPERTY AND EQUIPMENT:
Land 1,675,000 719,000
Laboratory and office equipment 11,522,000 10,669,000
Leasehold improvements 3,232,000 2,711,000
Furniture and fixtures 600,000 230,000
----------------------------------
17,029,000 14,329,000
Accumulated depreciation and amortization (6,024,000) (5,717,000)
----------------------------------
Net property and equipment 11,005,000 8,612,000
OTHER ASSETS, net of accumulated amortization 1,727,000 1,216,000
of $92,000 and $92,000
----------------------------------
TOTAL ASSETS $ 292,164,000 $ 290,978,000
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,030,000 $ 1,590,000
Accrued liabilities 4,891,000 2,863,000
Accrued arbitration award 3,881,000 3,751,000
----------------------------------
Total current liabilities 9,802,000 8,204,000
NOTE PAYABLE TO RELATED PARTY 10,000,000 10,000,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none outstanding - -
Common stock, $.01 par value; 120,000,000 shares
authorized; 44,029,715 shares in 2001 and 43,603,955
shares in 2000 issued and outstanding 440,000 436,000
Additional paid-in capital 306,819,000 304,647,000
Deferred compensation (209,000) (555,000)
Loans receivable from employees (442,000) (442,000)
Other comprehensive income, cumulative translation adjustment 233,000 196,000
Retained earnings (deficit) (34,479,000) (31,508,000)
----------------------------------
TOTAL STOCKHOLDERS' EQUITY 272,362,000 272,774,000
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 292,164,000 $ 290,978,000
==================================
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TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
For the Three Months Ended
March 31, 2001 March 31, 2000
-----------------------------------
REVENUES:
Development agreement with related party $ - $ 1,000
Other development agreements and licensing fees 121,000 148,000
---------------- ---------------
Total revenues 121,000 149,000
OPERATING COSTS AND EXPENSES:
Research and development 4,253,000 5,403,000
General and administrative 2,723,000 1,191,000
---------------- ---------------
Total operating costs and expenses 6,976,000 6,594,000
LOSS FROM OPERATIONS (6,855,000) (6,445,000)
OTHER INCOME (EXPENSE):
Interest income and gain on investment sales 4,193,000 716,000
Interest expense (309,000) (200,000)
Other - (38,000)
---------------- ---------------
Total other income 3,884,000 478,000
---------------- ---------------
NET LOSS $ (2,971,000) $ (5,967,000)
================ ===============
LOSS PER SHARE - BASIC AND DILUTED $ (0.07) $ (0.18)
================ ===============
SHARES USED IN COMPUTING BASIC AND DILUTED LOSS PER SHARE
Basic and Diluted 43,715,000 33,527,000
================ ===============
COMPREHENSIVE LOSS:
Net loss $ (2,971,000) $ (5,967,000)
Foreign currency translation adjustment 37,000 26,000
---------------- ---------------
TOTAL COMPREHENSIVE LOSS $ (2,934,000) $ (5,941,000)
================ ===============
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TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,971,000) $ (5,967,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 307,000 287,000
Amortization of deferred compensation related to stock options 71,000 144,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts and interest receivables 1,848,000 (124,000)
Increase in prepaid and deferred expenses (112,000) (53,000)
Increase in accounts payable and accrued liabilities 1,598,000 3,023,000
---------------------------------
Net cash provided by (used in) operating activities 741,000 (2,690,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (51,223,000) (15,428,000)
Proceeds from maturities/sales of investments 137,752,000 3,012,000
Purchases of property and equipment (2,700,000) (54,000)
Change in other assets (511,000) 13,000
---------------------------------
Net cash provided by (used in) investing activities 83,318,000 (12,457,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred offering expenses - (1,200,000)
Proceeds from the issuance of stock 2,529,000 943,000
---------------------------------
Net cash provided by financing activities 2,529,000 (257,000)
IMPACT OF EXCHANGE RATES ON CASH 37,000 26,000
---------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 86,625,000 (15,378,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 29,264,000 44,242,000
---------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 115,889,000 $ 28,864,000
=================================
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TANOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
NOTE 1. BASIS OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X and include the accounts of Tanox,
Inc. and its wholly owned subsidiaries (collectively the "Company" or "Tanox").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all normal, recurring adjustments considered
necessary for fair presentation have been included. These condensed consolidated
interim financial statements and notes thereto should be considered in
conjunction with the Company's Consolidated Financial Statements and
accompanying Notes for the year ended December 31, 2000. Results for the interim
period ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2001.
NOTE 2. LICENSE AGREEMENT WITH PROTEIN DESIGN LABS, INC.
During March 2000, Tanox entered into an agreement with Protein Design
Labs, Inc. ("PDL") to acquire the right to take non-exclusive licenses to
patents and patent applications owned by PDL for up to four of the Company's
antibodies. Under the agreement, Tanox agreed to pay initial license fees to
PDL of $2.5 million, in addition to $1.5 million that was previously paid to PDL
in 1998 under a prior licensing agreement. Tanox also agreed to pay up to $4.0
million ($1.0 million per antibody), plus maintenance fees, to PDL if Tanox
exercises its option to license all four antibodies. In addition, Tanox agreed
to pay royalties on future sales if a product using the PDL technology is
successfully commercialized. During the first quarter of 2000, Tanox recorded a
research and development expense of $2.5 million, representing the cost of the
initial option payment.
NOTE 3. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of
basic and diluted earnings per share (EPS). Basic EPS is computed by dividing
net income by the weighted average number of shares of common stock outstanding
during the period. Diluted EPS is computed in the same manner as basic EPS,
except that diluted EPS reflects the potential dilution that would occur if
outstanding options and warrants were exercised.
Since Tanox incurred net losses for the three-month periods ended
March 31, 2001 and 2000, basic and diluted EPS are the same for these periods.
NOTE 4. SHORT-TERM AND LONG-TERM INVESTMENTS
At December 31, 2000, all of Tanox's investments were classified as
held-to-maturity and carried at amortized cost that approximated fair value.
During the quarter ended March 31,
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2001, Tanox sold $18.6 million of these investments prior to the maturity date
due to a deterioration in the investment issuer's creditworthiness. In
connection with this sale, a realized gain of $205,000 was recognized in the
accompanying consolidated statement of operations and comprehensive loss.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Tanox is currently engaged in litigation and arbitration relating to
a fee dispute with the law firms that represented Tanox in a lawsuit with
Genentech relating to, among other things, the intellectual property rights
surrounding the development of anti-IgE technology. An arbitration panel issued
an award in 1999 entitling the attorneys to receive approximately $3.5 million,
including interest, payments ranging from 33 1/3% to 40% of the future payments
Tanox may receive from Genentech following product approval, and 10% of the
royalties that Tanox may receive on all sales of anti-IgE products by Genentech
and Novartis. The Company is contesting this award. In July 2000, Tanox posted
with the court a $3.7 million supersedeas bond to continue the appeals process
and to secure payment of the award. At March 31, 2001, Tanox had reflected an
accrued expense of $3.9 million for the arbitration award, including accrued
interest thereon, in its consolidated financial statements.
In connection with Tanox's acquisition of Tanox Pharma B.V. (formerly
known as PanGenetics B.V.) in March 1998, Tanox paid initial consideration of
$508,000 and 226,409 shares of its Common Stock, and agreed to pay future
consideration, in two installments, totaling up to $667,000 and 484,147 shares
of Common Stock, subject to the occurrence of specified contingencies. Tanox
believes that certain contingencies did not occur, and, in accordance with the
terms of the Stock Purchase Agreement, the total consideration payable should be
reduced by 20%. The former stockholders of Tanox Pharma B.V. have disputed this
position, and Tanox has sought a declaratory judgment in state court in Harris
County, Texas to resolve the dispute. The final installment will be accounted
for upon resolution of the dispute.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Tanox identifies and develops therapeutic monoclonal antibodies to
address significant unmet medical needs in the areas of asthma, allergy,
autoimmune, inflammation and other diseases affecting the human immune system.
Xolair(TM) (tradename for Omalizumab), our most advanced product in development,
is a humanized monoclonal antibody that blocks immunoglobulin E (or IgE), which
we are developing in collaboration with Novartis Pharmaceutical Corporation and
Genentech, Inc. Xolair has successfully completed Phase III clinical trials in
both allergic asthma and seasonal allergic rhinitis (hay fever). Based on the
results of these trials, on June 2, 2000, our collaboration partners filed for
marketing approval in the United States, the European Union, Switzerland,
Australia and New Zealand for both indications. In addition, we are developing a
number of monoclonal antibodies to address unmet medical needs in allergic
diseases or conditions, such as severe allergic reactions to peanuts, autoimmune
diseases, and inflammation related conditions.
We currently have no products on the market. We are focusing our
efforts on research and product development activities necessary to advance our
product opportunities, including process development and clinical trial
activities for products that are currently in the clinic or will commence
clinical development in the next 12 months. We have incurred substantial losses
since inception, and incurred an accumulated deficit through March 31, 2001, of
$34.5 million. We expect to continue to incur substantial operating losses for
the foreseeable future, particularly as we expand our research and development
activities, produce clinical material and initiate additional clinical trials,
as well as provide additional administrative support for these and other
activities. We expect that losses will continue until such time, if ever, that
we generate sufficient revenue from Xolair or our other products to cover our
expenses.
Historically, we have earned revenues primarily from license fees,
milestone payments and sponsored research under our collaboration agreements.
In the future, we expect our principal revenues will be milestone payments,
royalties and profit-sharing payments from Novartis Pharmaceutical Corporation
and Genentech, Inc. We may also receive royalties from Hoffman-La Roche Ltd.
should it participate in selling Xolair in Europe. Our revenues will depend
particularly on the success of our collaboration partners in developing,
manufacturing, obtaining regulatory approvals for and marketing Xolair. Because
a substantial portion of our revenues for the foreseeable future will depend on
achieving development and commercialization milestones, we anticipate that our
results of operations will vary substantially from year to year and even quarter
to quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000
Revenues. Revenues in the first quarter of 2001 of $121,000 were little
changed compared to $149,000 in the first quarter of 2000. Revenues were derived
from
7
technology licensing fees and government research grants in each of the three-
month periods ended 2001 and 2000.
Research and Development Expenses. Research and development expenses
decreased to $4.3 million in 2001 from $5.4 million in 2000, a decrease of $1.1
million. Research and development expenses in the first quarter of 2000 included
a charge of $2.5 million to acquire the right to certain non-exclusive licenses
for up to four antigens from Protein Design Labs, Inc. Excluding this charge,
research and development expenses in 2000 were $2.9 million. The $1.4 million
increase in other research and development expenses in the current quarter was
attributable primarily to the increase in personnel, product development
activities and contract research activities.
General and Administrative Expenses. General and administrative
expenses increased to $2.7 million in 2001 from $1.2 million in 2000, an
increase of $1.5 million. This increase was attributable primarily to increases
in personnel and litigation costs.
Other Income. Other income increased to $3.9 million in 2001 from $0.5
million in 2000, an increase of $3.4 million. This increase was due principally
to an increase in interest income on investments from higher cash balances in
2001, a result of the proceeds from our initial public offering (IPO) in April
2000.
Net Loss. As a result of the above factors, the net loss decreased to
$3.0 million or $0.07 per share in the first quarter of 2001 from $6.0 million
or $0.18 per share in the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities generated $0.7 million during the
first quarter of 2001. Net cash generated from financing activities in the first
quarter of 2001 totaled $2.5 million and represents proceeds from the issuance
of common stock upon the exercise of employee stock options. Outlays during the
first quarter of 2001 for capital expenditures and other assets totaled $3.2
million.
From 1994 through 1998, Novartis advanced us $10.0 million, pursuant
to a loan agreement, to finance our new clinical manufacturing facility. The
loan bears interest at the London Interbank Offered Rate, or LIBOR, plus two
percent (8.1% and 7.3% at December 31, 1999 and 2000, respectively). Through
December 31, 2000, Novartis has agreed to forgive interest on the loan. For the
years 1998, 1999 and 2000, the interest Novartis has forgiven has been reflected
as interest expense and a contribution to capital. Although the loan is
currently scheduled to be due in full on December 31, 2005, Novartis may
partially or totally forgive the principal and future interest payments based on
the future use of the facility. We pledged all of the assets of the new clinical
manufacturing facility as security for the Novartis loan.
We have financed our operations since inception primarily through
collaboration and grant revenues, sales of equity securities through private
placements and our April 2000 initial public offering, interest income and
equipment financing agreements. As of March 31, 2001, we had $275.9 million in
cash, cash equivalents and investments, of which $219.6 million were classified
as current assets.
8
Our current and anticipated development projects will require
substantial additional capital to complete. We anticipate that the amount of
cash we will need to fund operations, including research and development,
manufacturing and other costs, and for capital expenditures, will grow
substantially in the future as our projects move from research to pre-clinical
and clinical development. We also expect that we will need to expand our
administrative, clinical development, facilities and business development
activities to support the future development of our programs. Consequently, we
may need to raise substantial additional funds. We expect that cash on hand and
revenue from operations will be sufficient to fund our operations for the next
five years. However, our future capital needs will depend on many factors,
including successfully commercializing Xolair, receiving payments from our
collaboration partners, progress in our research and development activities, the
magnitude and scope of these activities, the progress and level of unreimbursed
costs associated with pre-clinical studies and clinical trials, the costs and
magnitude of product or technology acquisitions, the cost of preparing, filing,
prosecuting, maintaining and enforcing patent claims and other intellectual
property rights, competing technological and market developments, changes in or
terminations of existing collaboration and licensing arrangements, establishing
additional collaboration and licensing arrangements, and manufacturing scale-up
costs and marketing activities, if we undertake those activities. We do not have
committed external sources of funding and we cannot assure that we will be able
to obtain additional funds on acceptable terms, if at all. If adequate funds are
not available, we may be required to:
. delay, reduce the scope of or eliminate one or more of our programs;
. obtain funds through arrangements with collaboration partners or others that
may require us to relinquish rights to technologies, product candidates or
products that we would otherwise seek to develop or commercialize ourselves;
or
. license rights to technologies, product candidates or products on terms that
are less favorable to us than might otherwise be available.
We are currently engaged in litigation and arbitration relating to a
fee dispute with the law firms that represented us in a litigation with
Genentech relating to, among other things, the intellectual property rights
surrounding the development of anti-IgE technology. An arbitration panel issued
an award entitling the attorneys to receive approximately $3.5 million
(including interest), payments ranging from 33 1/3% to 40% of the future
payments we would receive from Genentech following product approval, and 10% of
the royalties that we would receive on all sales of anti-IgE products by
Genentech and Novartis. We are contesting this award. During the appeals
process, we are required to post a bond or place amounts in escrow to secure
payment of the award. We have posted a $3.7 million letter of credit with the
Court to continue the appeals process and to secure payment of the award.
We have sought a declaratory judgment to resolve a dispute with the
former shareholders of Tanox Pharma B.V. arising under the Stock Purchase
Agreement providing for our purchase of that company. We believe that certain
contingencies set forth in the Stock Purchase Agreement did not occur and that
the total consideration payable to the former shareholders should, in accordance
with the terms of the Agreement, be reduced by 20%. The final installment under
the Stock Purchase Agreement will be accounted for upon resolution of the
dispute.
9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
exchange fluctuations and changes in interest rates. In the normal course of
business, we have established policies and procedures to manage these risks.
Foreign Currency Exchange Rates. At March 31, 2001 the balance sheet
reflects a foreign currency translation adjustment of $0.2 million. We are
subject to foreign currency exchange risk because:
. we invest in our foreign subsidiaries;
. we incur a significant portion of our costs and expenses and a
smaller portion of our revenues in the local currencies of the
countries where we do business; and
. we finance part of the cost of our subsidiaries' operations through
dollar-denominated inter-company loans and equity investments that
are recorded on their books in the respective local currencies.
Fluctuations in exchange rates have not had a material impact on our revenues or
costs and expenses, but have affected the value of our equity investments and
inter-company loans. As a result of our international operations and our
current financing approach, fluctuations in exchange rates of the local
currencies versus the U.S. dollar impact our operating results. We are
primarily exposed to gains and losses with respect to Dutch guilders and Taiwan
dollars because our subsidiaries conduct business in these currencies. To date,
we have not implemented a program to hedge our foreign currency risk, but we may
do so in the future.
Interest Rate Risk. Cash and investments were approximately $275.9
million at March 31, 2001. These assets were primarily invested in investment
grade commercial paper and corporate bonds with maturities of less than two
years, which we generally hold to maturity. We do not invest in derivative
securities. Although our portfolio is subject to fluctuations in interest rates
and market conditions, no gain or loss on any security would actually be
recognized in earnings unless we sell the asset. In addition, our loan from
Novartis is based on a premium over LIBOR. As such, if general interest rates
increase, our interest costs will increase.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 6, 2000, the Securities and Exchange Commission declared
effective our Registration Statement on Form S-1, Commission File No. 333-96025,
registering the sale of 8,568,000 shares of our Common Stock (including the
over-allotment option) for net proceeds of $225,837,000. None of the proceeds
from the initial public offering were used during the three months ended March
31, 2001; however, we expect that our use of these proceeds will be as described
in the prospectus to our Registration Statement. Pending such use, the net
proceeds are being invested in interest-bearing investment-grade securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
We filed a current report on Form 8-K on January 19, 2001 to report, pursuant to
Item 5, certain statements by Genentech regarding clinical development
activities with respect to Xolair and the anticipated launch of Xolair.
We filed a current report on Form 8-K on March 8, 2001 to report, pursuant to
Item 5, that Genentech and Novartis had been advised by the FDA that it will not
convene the scheduled Pulmonary-Allergy Drugs Advisory Committee meeting on
April 26, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANOX, INC.
Date: May 11, 2001 By: /s/ Michael A. Kelly
------------------------------------
Michael A. Kelly
Vice President of Finance and Chief
Financial Officer
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