UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 August 6, 2001, the registrant had 44,155,961 shares of Common Stock
issued and outstanding.
TANOX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2001 December 31, 2000
------------- -----------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $156,875,000 $ 29,264,000
Short-term investments 67,474,000 149,020,000
Accounts receivable - 435,000
Interest receivable 3,427,000 4,156,000
Income taxes receivable 132,000 132,000
Prepaid and other 575,000 506,000
------------ ------------
Total current assets 228,483,000 183,513,000
LONG-TERM INVESTMENTS 45,898,000 97,637,000
PROPERTY AND EQUIPMENT:
Land 1,684,000 -
Laboratory and office equipment 11,242,000 11,388,000
Leasehold improvements 3,701,000 2,711,000
Furniture and fixtures 743,000 230,000
------------ ------------
17,370,000 14,329,000
Accumulated depreciation and amortization (6,213,000) (5,717,000)
------------ ------------
Net property and equipment 11,157,000 8,612,000
OTHER ASSETS, net of accumulated amortization
$178,000 and $92,000, respectively 1,377,000 1,216,000
------------ ------------
TOTAL ASSETS $286,915,000 $290,978,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 381,000 $ 1,590,000
Accrued liabilities 6,237,000 2,863,000
Accrued arbitration award 3,940,000 3,751,000
------------ ------------
Total current liabilities 10,558,000 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 442,000 436,000
authorized; 44,152,761 shares and 43,603,955
shares issued and outstanding, respectively
Additional paid - in capital 309,028,000 304,647,000
Deferred compensation (126,000) (555,000)
Loans receivable from employees (276,000) (442,000)
Other comprehensive income, cumulative translation adjustment 84,000 196,000
Accumulated deficit (42,795,000) (31,508,000)
------------ ------------
Total stockholders' equity 266,357,000 272,774,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $286,915,000 $290,978,000
============ ============
See accompanying notes to condensed consolidated financial statements.
2
TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ----------- ------------ -----------
REVENUES:
Development agreement with related party $ - $ 2,007,000 $ - $ 2,008,000
Other development agreements and licensing fees 163,000 10,105,000 284,000 10,253,000
------------ ----------- ------------ -----------
Total revenues 163,000 12,112,000 284,000 12,261,000
OPERATING COSTS AND EXPENSES:
Research and development 6,353,000 4,057,000 11,006,000 9,460,000
General and administrative 2,053,000 1,286,000 4,376,000 2,477,000
Restructuring charge 3,876,000 - 3,876,000 -
------------ ----------- ------------ -----------
Total operating costs and expenses 12,282,000 5,343,000 19,258,000 11,937,000
INCOME (LOSS) FROM OPERATIONS (12,119,000) 6,769,000 (18,974,000) 324,000
OTHER INCOME (EXPENSE):
Interest income 3,928,000 3,599,000 8,121,000 4,315,000
Interest expense (124,000) (206,000) (433,000) (406,000)
Other, net - (13,000) - (51,000)
------------ ----------- ------------ -----------
Total other income 3,804,000 3,380,000 7,688,000 3,858,000
INCOME (LOSS) BEFORE INCOME TAXES (8,315,000) 10,149,000 (11,286,000) 4,182,000
Income tax expense - 1,700,000 - 1,700,000
------------ ----------- ------------ -----------
NET INCOME (LOSS) $ (8,315,000) $ 8,449,000 $(11,286,000) $ 2,482,000
============ =========== ============ ===========
EARNING (LOSS) PER SHARE:
Basic $(0.19) $0.21 $(0.26) $0.07
Diluted $(0.19) $0.20 $(0.26) $0.06
SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE:
Basic 44,090,000 41,092,000 43,904,000 37,309,000
Diluted 44,090,000 43,232,000 43,904,000 39,528,000
COMPREHENSIVE INCOME (LOSS):
Net income (loss) $ (8,315,000) $ 8,449,000 $(11,286,000) $ 2,482,000
Foreign currency translation adjustment (149,000) 13,000 (112,000) 39,000
------------ ----------- ------------ -----------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (8,464,000) $ 8,462,000 $(11,398,000) $ 2,521,000
============ =========== ============ ===========
See accompanying notes to condensed consolidated financial statements.
3
TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2001 2000
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(11,286,000) $ 2,482,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 684,000 569,000
Restructuring charge 3,876,000 -
Amortization of deferred compensation related to stock options 94,000 322,000
In-process research and development 1,066,000 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts and interest receivables 793,000 (3,559,000)
Increase in taxes payable - 1,700,000
Increase in prepaid and other (38,000) (553,000)
Increase (decrease) in accounts payable and accrued liabilities (32,000) 568,000
------------ -------------
Net cash provided by (used in) operating activities (4,843,000) 1,529,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,619,000) (143,000)
Purchases of investments (38,748,000) (224,997,000)
Maturities and sales of investments 172,033,000 22,436,000
Other, net (169,000) (38,000)
------------ -------------
Net cash provided by (used in) investing activities 129,497,000 (202,742,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in employee loans in connection with stock option exercises 166,000 (1,013,000)
Proceeds from issuance of stock 2,903,000 226,912,000
------------ -------------
Net cash provided by financing activities 3,069,000 225,899,000
IMPACT OF EXCHANGE RATES ON CASH (112,000) 39,000
------------ -------------
INCREASE IN CASH AND CASH EQUIVALENTS 127,611,000 24,725,000
CASH AND CASH EQUIVALENTS:
Beginning of period 29,264,000 44,242,000
------------ -------------
End of period $156,875,000 $ 68,967,000
============ =============
OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
Common stock issued for acquisition $ 1,818,000 $ -
Receivable related to income tax benefit from stock options exercised $ - $ 1,433,000
The accompanying notes are an integral part of these financial statements.
4
TANOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 in the United States 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 of the interim
period ended June 30, 2001 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2001.
NOTE 2. ACQUISITION OF PANGENETICS B.V.
In March 1998, Tanox acquired the common stock of Tanox Pharma B.V. (formerly
PanGenetics B.V.), a biotechnology company located in Amsterdam, The
Netherlands. Tanox recorded the transaction for accounting purposes as a
purchase, and the consolidated financial statements include the operations of
Tanox Pharma subsequent to the acquisition date. Under the terms of the stock
purchase agreement, Tanox purchased Tanox Pharma for an initial cash payment of
$508,000 and 226,409 shares of common stock, valued at $11.25 per share, for a
total initial consideration of $3,055,000. In addition, Tanox agreed to pay
future consideration, in two installments, totaling up to $667,000 in cash and
484,147 shares of common stock upon occurrence of specified future events.
These events include originating at least three additional research projects
within a three year period, retaining the services of two individuals for 36
months and maintaining a certain level of government grants and subsidies. In
September 1999, Tanox made the second installment payment of $333,000 in cash
and 242,075 shares of common stock valued at $12.50 per share, for a total
additional consideration of $3,359,000.
Tanox management believes that certain events upon which full payment of the
purchase price was dependent did not occur and, in accordance with the stock
purchase agreement, the total consideration should be reduced by 20%. The third
installment payment was recorded in the second quarter of 2001 and consisted of
$133,000 in cash and 60,518 shares of common stock, totaling $2.0 million, which
reflects the 20% reduction in total consideration. Based on the appraisal
performed at the time of the acquisition, the third payment was allocated to in-
process research and development and goodwill for $1,066,000 and $886,000,
respectively. As discussed in Note 10, the amount due in the third installment
is being disputed by the sellers.
NOTE 3. RESTRUCTURING CHARGE
In connection with a periodic review and assessment of Tanox's research
programs, management made the decision to streamline its research activities and
to consolidate the Taiwan, Dutch and U.S. research operations into a single site
at the Company's headquarters in Houston. In June 2001, management approved a
formal restructuring plan ("the Plan") to close Tanox's research facility in
Amsterdam. Tanox recorded a restructuring charge for the Plan of $3.9 million or
$0.09 per share in June 2001.
5
The restructuring charge is comprised primarily of the following components:
Severance and related costs $ 450,000
Impairment of goodwill from the
acquisition of Tanox Pharma, see Note 2 886,000
Write-down of assets 738,000
Termination of government grants and subsidies 646,000
Termination of leases and research agreements 969,000
Other 187,000
----------
$3,876,000
==========
As part of the closure, the Company will incur incremental costs to terminate 17
employees, exit licensing, research and office lease arrangements, and make
payments for idle facilities. The Company will dispose of certain identifiable
assets including, but not limited to, laboratory and office equipment which have
been written down to the lower of book or estimated fair value. In addition,
goodwill of $886,000 generated from the third installment payment related to the
Tanox Pharma acquisition was written off.
The Company expects to substantially complete the Plan within one year. As of
June 30, 2001 no restructuring expenses had been paid, and a restructuring
liability of $2.3 million is reflected in the accompanying balance sheet at June
30, 2001. The restructuring charge of $3.9 million is preliminary and based on
certain assumptions and estimates. The actual expenses may differ from the
estimates, and any adjustments will be reflected in future results.
NOTE 4. 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 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 5. 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.
6
Since Tanox incurred net losses for the three-month and six-month periods ended
June 30, 2001, basic and diluted EPS are the same for these periods. The
following table reconciles basic and diluted EPS for the three and six-month
periods ended June 30, 2000.
Per Share
Net Income Shares Amount
---------------------- ---------------------- ---------------
For the three months ended June 30, 2000:
Basic EPS $8,449,000 41,092,000 $0.21
=====
Effect of dilutive securities -
Options outstanding - 2,140,000
---------- -----------
Diluted EPS $8,449,000 43,232,000 $0.20
========== ========== =====
For the six months ended June 30, 2000:
Basic EPS $2,482,000 37,309,000 $0.07
=====
Effect of dilutive securities -
Options outstanding - 2,219,000
---------- ----------
Diluted EPS $2,482,000 39,528,000 $0.06
========== ========== =====
Note 6. Initial Public Offering
On April 12, 2000, Tanox concluded the principal part of its initial public
offering of common stock and, on May 11, 2000, completed the offering with the
exercise by the underwriters of their over-allotment option. In the offering,
Tanox sold 8,568,000 shares of common stock at $28.50 per share for gross
proceeds of approximately $244.2 million, including the underwriters' over-
allotment option. The net proceeds from the offering were approximately $225.8
million. Both the shares issued and the proceeds of the offering are reflected
in Tanox's financial results for the three and six months ended June 30, 2000.
The proceeds of the IPO have been invested principally in money markets
investments, investment grade commercial paper and corporate bonds with
maturities of less than two years and which are classified as held-to-maturity.
NOTE 7. SHORT-TERM AND LONG-TERM INVESTMENTS
At December 31, 2000 and June 30, 2001, all of Tanox investments were classified
as held-to-maturity and carried at amortized cost. During the six months ended
June 30, 2001, Tanox sold $18.6 million of these investments prior to the
maturity date, due to the deterioration in the investment issuer's credit
worthiness. A realized gain of $205,000 was recognized as interest income in
the accompanying consolidated statement of operations and comprehensive loss for
the six months ended June 30, 2001. At December 31, 2000 and June 30, 2001 the
fair value of investments was $246.7 million and $112.6 million, respectively.
As long-term investments matured, during 2001, the Company has reinvested in
cash equivalents and short-term investments to mitigate risk versus return.
NOTE 8. LOANS TO EMPLOYEES
In April 2000, Tanox loaned certain employees an aggregate of $1.2 million for
payment of their tax obligations pursuant to the exercise of stock options in
1999. All loans are full recourse, secured by shares of Tanox common stock
owned by the employees, bear interest at a rate of 8.5 percent, and are due and
payable in full in September 2001. The loans, net of repayments, have been
reflected as contra-equity in the accompanying financial statements.
NOTE 9. SHAREHOLDER RIGHTS AGREEMENT
On July 27, 2001, the Board of Directors of Tanox, Inc. declared a dividend of
one right ("Right") for each outstanding share of the common stock of record at
the close of business on August 10, 2001. Each Right
7
entitles the registered holder to purchase from the Company a unit consisting of
one one-hundredth of a share (a "Fractional Share") of Series A Junior
Participating Preferred Stock, par value $0.01 per share, at a purchase price of
$140 per Fractional Share, subject to adjustment. The Rights generally become
exercisable if an acquiring party accumulates 20% or more of the common stock
and, in such event, the holders of the Rights (other than the acquiring person)
would be entitled to purchase either the Company's stock or shares in an
acquiring entity at half of market value. The Company would generally be
entitled to redeem the Rights at $0.01 per Right at any time until the tenth day
following the time the Rights become exercisable. The Rights will expire on
August 10, 2011. A description and terms of the Rights are set forth in the
rights agreement dated as of July 27, 2001 between the Company and American
Stock Transfer & Trust Company, as rights agent.
NOTE 10. 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 sales of anti-IgE products by Genentech and Novartis. The
Company is contesting this award. During the appeals process, the Company is
required to post a bond or place amounts in escrow to secure payment of the
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
June 30, 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 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
events. Tanox believes that certain events did not occur, and, in accordance
with the terms of the Stock Purchase Agreement, the total consideration payable
was reduced by 20%. The former stockholders of Tanox Pharma have disputed this
position, and Tanox sought a declaratory judgment in state court in Harris
County, Texas to resolve the dispute. The former stockholders have brought
claims for the full amount of the third installment (asserting all contingencies
had been met), as well as for a return of 51% of the stock of Tanox Pharma.
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Tanox, Inc. is a biopharmaceutical company with demonstrated expertise in
monoclonal antibody technology. We are engaged in the discovery and development
of therapeutic monoclonal antibodies designed to address significant unmet
medical needs in the areas of asthma, allergy, inflammation and other diseases
affecting the human immune system. Xolair(TM), Tanox's most advanced product in
development, is an anti-immunoglobulin E, or anti-IgE, antibody which is being
developed for allergic asthma, seasonal allergic rhinitis (hay fever) and
perennial allergic rhinitis in collaboration with Novartis Pharmaceutical
Corporation and Genentech, Inc. Xolair successfully completed Phase III
clinical trials in both allergic asthma and seasonal allergic rhinitis, and,
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 July 2001,
Genentech and Novartis received a complete response letter from the U.S. Food
and Drug Administration ("FDA") on the Xolair marketing application. According
to Genentech and Novartis, the letter requests additional preclinical and
clinical data analyses, as well as confirmation that the pharmacokinetics of the
Xolair drug substance were consistent throughout the development program. With
the requirement of additional data,
8
Genentech and Novartis have concluded that there will not be an FDA approval of
Xolair in 2001. Although no specific deadline has been set for the re-
submissions by Genentech and Novartis, they are considering different scenarios,
with a conservative estimate being resubmissions ranging from 2002 to early
2003. Once filed, the FDA has up to six months to review and act upon additional
data. The information collected by Genentech and Novartis to respond to the FDA
letter will also be provided to health authorities in the EU, Switzerland,
Australia and New Zealand in support of marketing applications filed with them.
In addition to Xolair, 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 several months. We have incurred substantial losses since
inception, and incurred an accumulated deficit through June 30, 2001, of $42.8
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 and Genentech. 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.
RECENT DEVELOPMENTS
Restructuring Charge. During the second quarter of 2001 and in connection with
a periodic assessment of ongoing research and development programs, management
determined that consolidating Tanox's research operation (then being conducted
in Taiwan, Amsterdam and Houston) into a single site would enhance the Company's
capability to discover and develop products for commercialization. The
consolidation of research activities is anticipated to generate cost
efficiencies by eliminating potentially duplicative operating costs. In June
2001, Tanox implemented a plan to close our facility in Amsterdam and recorded a
restructuring charge of $3.9 million or $0.09 per share. For the six months
ended June 30, 2001 Tanox Pharma incurred $964,000 in operating costs.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30,
2000
Revenues. Revenues totaled $163,000 in the second quarter of 2001, compared to
$12.1 million in the second quarter of 2000. The decrease in revenues was due
to milestone payments of $12.0 million being received in the second quarter 2000
with no corresponding payments received in the second quarter of 2001. This
revenue was earned under Tanox's agreements with Novartis and Genentech upon the
submission of the Biologics Licensing Application (BLA) for Xolair to the U.S.
FDA.
9
Research and Development Expenses. Research and development expenses were $6.4
million in the second quarter of 2001 compared to $4.1 million in the second
quarter of 2000. The increase is primarily due to increased salary costs,
clinical and contract research charges, and an in-process research and
development charge of $1.1 million related to the third purchase price
installment for Tanox Pharma B.V. ("Tanox Pharma Acquisition").
General and Administrative Expenses. General and administrative expenses
increased to $2.1 million in the second quarter of 2001 from $1.3 million in the
second quarter 2000. The increase relates primarily to (i) increases in
personnel and related expenses associated with building management and
infrastructure, and (ii) increased legal costs associated with increased
litigation activity.
Restructuring Charge. In June 2001, Tanox implemented a plan to consolidate
research operations in Houston, Texas. In connection with the closure of the
facility in Amsterdam, Tanox recorded a restructuring charge of $3.9 million.
The restructuring charge primarily consists of $450,000 for severance, $886,000
of goodwill impairment, $738,000 for write-down of assets, and $1.8 million for
contract termination and exit costs.
Other Income. Other income increased to $3.8 million in the second quarter of
2001 from $3.4 million in the second quarter 2000. This increase was
principally due to an increase in interest income resulting from higher cash and
investment balances in the current period relating to net proceeds from Tanox's
initial public offering (IPO) in April 2000.
Income Taxes. The provision for income taxes was $1.7 million in the second
quarter of 2000; there was no provision for income taxes in the second quarter
of 2001. This decrease was due to the change in the Company's profitability
from a pretax income of $10.1 million in the second quarter of 2000 to pretax
loss of $8.3 million in the second quarter of 2001.
Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000
Revenues. Revenues totaled $284,000 during the first six months of 2001,
compared to $12.3 million during the same period in 2000. The decrease in
revenues during the first six months of 2001 resulted primarily from $12.0
million in milestone revenues earned under our collaborative agreements with
Novartis and Genentech when the BLA for Xolair was submitted to the FDA in June
2000.
Research and Development Expenses. Research and development expenses were $11.0
million in the first six months of 2001, compared to $9.5 million in the same
period of 2000. The increase in research and development expense is primarily
due to higher salary costs due to increased staffing, increased clinical and
process development expenses related to ongoing projects, and an in-process
research and development charge of $1.1 million related to the Tanox Pharma
Acquisition. The amount of increase was partially offset by a $2.5 million
charge in the first quarter of 2000 to acquire the right to non-exclusive
licenses to patents and patent applications owned by Protein Design Labs, Inc.
for up to four of our products in development.
General and Administrative Expenses. General and administrative expenses
increased $1.9 million to $4.4 million in the first six months of 2001 as
compared to $2.5 million in the first six months of 2000. The increase relates
primarily to (i) increases in personnel and related expenses associated with
building management and infrastructure, and (ii) increased legal costs due
primarily to increased litigation activity associated with the preparation and
filing of significant briefs in connection with our appeal of the arbitration
award relating to attorney fees and our lawsuit with Genentech and Novartis
regarding Tanox's independent development rights.
Restructuring Charge. In June 2001, Tanox implemented a plan to consolidate
research operations in Houston, Texas. In connection with the closure of the
facility in Amsterdam, Tanox recorded a restructuring charge of
10
$3.9 million. The restructuring charge primarily consists of $450,000 for
severance, $886,000 of goodwill impairment, $738,000 for write-down of assets,
and $1.8 million for contract termination and exit costs.
Other Income. Other income increased $3.8 million to $7.7 million in the first
six months of 2001 from $3.9 million in the same period of 2000. This increase
was principally due to an increase in interest income in 2001 resulting from
higher cash and investment balances as a result of the net proceeds from the IPO
in April 2000.
Income Taxes. There was no provision for income taxes in the first six months
of 2001, compared to $1.7 million in the same period of 2000. This decrease was
due to the change in the Company's profitability from a pretax income of $4.2
million in the first six months of 2000 to pretax loss of $11.3 million in the
first six months of 2001.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through collaboration
and grant revenues, sales of equity securities, interest income and equipment
financing agreements. As of June 30, 2001, we had $270.2 million in cash, cash
equivalents and investments, of which $224.3 million were classified as current
assets.
During the first six months of 2001, we used $4.8 million of cash for operating
activities. A net loss of $11.3 million included non-cash charges of $3.9
million for a restructuring charge, $1.1 million of in-process research and
development and non-cash depreciation and amortization of $778,000. Working
capital assets provided $723,000 in cash, primarily from a decrease in accounts
and interest receivable. Investing activities provided $129.5 million of cash
in the first six months of 2001, primarily from the maturity of short-term and
long-term investments. Financing activities generated $3.1 million of cash
during the first six months of 2001, primarily from the exercise of stock
options. The combination of the above items resulted in a cash and cash
equivalents increase of $127.6 million during the first six months of 2001.
From 1994 through 1998, Novartis advanced us $10.0 million, pursuant to a loan
agreement, to finance our 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 1997,
1998, 1999 and 2000, the interest Novartis has forgiven has been reflected as
interest expense and a capital contribution. 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.
Our current and anticipated development projects will require substantial
additional capital to complete. We anticipate that the amount of cash we 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
and business development activities, as well as our facilities, to support the
future development of our programs. Consequently, we may need to raise
substantial additional funds. We expect that the net proceeds from our IPO,
together with cash on hand and revenue from operations, will be sufficient to
fund our operations for the next four to 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
licensing arrangements, manufacturing scale-up costs and marketing activities,
if we
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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 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 we may receive from
Genentech following product approval, and 10% of the royalties that we may
receive on 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. In July 2000,
we posted with the court a $3.7 million supersedeas bond to continue the appeals
process and to secure payment of the award.
RECENT ACCOUNTING DEVELOPMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for business
combinations and requires that all business combinations be accounted for using
one method, the purchase method. The Statement applies to all business
combinations initiated after June 30, 2001. SFAS No. 142 addresses financial
accounting and reporting at the point of acquisition for intangible assets
acquired individually or with a group of other assets, other than those acquired
in a business combination, and the financial accounting and reporting for
goodwill and other intangible assets subsequent to their acquisition. Under
this Statement, all goodwill and those intangible assets with indefinite useful
lives will no longer be amortized, but rather will be tested at least annually
for impairment. Intangible assets with finite useful lives will continue to be
amortized over those useful lives. The provisions of SFAS No. 142 are required
to be applied for fiscal years beginning after December 15, 2001, except that
goodwill and intangibles that arise from business combinations after June 30,
2001 will not be amortized. As such, we will adopt the Statement in its
entirety on January 1, 2002 and will apply the appropriate provisions to any
business combinations we may complete between June 30, 2001 and that date. As
of June 30, 2001, Tanox has no goodwill and therefore this statement will not
have an impact on the financial statements.
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 June 30, 2001 the balance sheet reflects a
foreign currency translation adjustment of $84,000. We are subject to foreign
currency exchange risk because:
. we invest in our foreign subsidiaries;
. we incur a portion of our costs, expenses and revenues in the local currencies
of the countries where we do business outside the U.S.; and
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. 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. 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 $270.2 million at
June 30, 2001. These assets were primarily invested in money market
investments, investment grade commercial paper and corporate bonds with
maturities of less than two years, which we intend to 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 or
the asset's decline in value is judged to be other-than-temporary. 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.
Factors Affecting Forward-Looking Statements. Some of the information in this
Quarterly Report on Form 10-Q contains forward-looking statements. We typically
identify forward-looking statements by using terms such as "may," "will,"
"should," "could," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue" or similar words, although we express some
forward-looking statements differently. You should be aware that actual events
could differ materially from those suggested in the forward-looking statement
due to a number of factors, including:
. the ability to develop safe and efficacious drugs;
. failure to achieve positive results in clinical trials;
. failure to receive, or delay in receiving, marketing approval for our
products;
. failure to successfully commercialize our products;
. relationships with our collaboration partners;
. variability of royalty, licenses and other revenues;
. ability to enter into future collaboration agreements;
. competition and technological change; and
. existing and future regulations affecting our business.
You should also consider carefully the other factors identified in our Annual
Report on Form 10-K for the year ended December 31, 2000 that could cause our
actual results to differ from those set forth in the forward-looking statements.
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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 June 30, 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.
On March 12, 2001, we issued 60,518 shares of Common Stock, having a market
value per share equal to $26.125 (based on that day's closing sale price of a
share of Common Stock on the Nasdaq), as part of a third installment payment to
eight persons in connection with our acquisition of Tanox Pharma B.V. and as
provided by the terms of the Stock Purchase Agreement dated as of March 12,
1998. The transactions were exempt from registration in reliance on Section
4(2) of the Securities Act of 1933, as amended, as transactions not involving a
public offering.
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our 2001 Annual Meeting of Stockholders held on May 16, 2001, the
stockholders of the Company elected Osama Mikhail to serve as Class I director
for a term of three years by the following votes:
Number of Shares For: 35,698,147
Number of Votes Withheld: 72,508
The other directors whose terms of office as a director continue after the
meeting are as follows: Nancy T. Chang, Tse Wen Chang, William J. Jenkins, Heinz
W. Bull.
The stockholders also ratified the appointment of Arthur Andersen LLP as Tanox's
independent accountants for 2001 as follows:
Number of Shares For: 35,761,989
Number of Shares Against: 7,603
Number of Shares Abstained: 1,063
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Amendment No. 1 to the 2000 Non-Employee Directors' Stock Option Plan
(b) Reports on Form 8-K.
We filed a current report on Form 8-K on July 10, 2001 to report, pursuant to
Item 5, the receipt by Genentech, Inc. and Novartis AG of a complete response
letter from the FDA regarding Xolair.
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We filed a current report on Form 8-K on August 3, 2001 to report, pursuant to
Item 5, the adoption by the Board of Directors of a Stockholder Rights Plan,
with the rights to be issuable to stockholders of record on August 10, 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: August 14, 2001 By: /s/ Michael A. Kelly
---------------------------------
Michael A. Kelly
Vice President of Finance and
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit No. Description
10.1 Amendment No. 1 to 2000 Non-Employee Director's Stock Option Plan
17