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 SEPTEMBER 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 October 31, 2001, the registrant had 44,156,441 shares of Common Stock
issued and 44,076,441 shares of Common Stock outstanding.
TANOX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $153,672,000 $ 29,264,000
Short-term investments 87,553,000 149,020,000
Interest receivable 3,335,000 4,156,000
Other receivables 620,000 567,000
Prepaid and other 621,000 506,000
------------ ------------
Total current assets 245,801,000 183,513,000
LONG-TERM INVESTMENTS 25,997,000 97,637,000
PROPERTY AND EQUIPMENT:
Land 1,689,000 -
Laboratory and office equipment 11,489,000 11,388,000
Leasehold improvements 3,997,000 2,711,000
Furniture and fixtures 743,000 230,000
------------ ------------
17,918,000 14,329,000
Accumulated depreciation and amortization (6,574,000) (5,717,000)
------------ ------------
Net property and equipment 11,344,000 8,612,000
OTHER ASSETS, net of accumulated amortization
$178,000 and $92,000, respectively 1,318,000 1,216,000
------------ ------------
TOTAL ASSETS $284,460,000 $290,978,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,607,000 $ 4,453,000
Accrued arbitration award 3,857,000 3,751,000
------------ ------------
Total current liabilities 12,464,000 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; 44,156,441 and 43,603,955 shares issued, respectively;
44,076,441 and 43,603,955 shares outstanding, respectively
Additional paid - in capital 309,246,000 304,647,000
Treasury stock, 80,000 and - shares, respectively; at cost (1,009,000) -
Deferred compensation (103,000) (555,000)
Loans receivable from employees (213,000) (442,000)
Other comprehensive income, cumulative translation adjustment 125,000 196,000
Accumulated deficit (46,492,000) (31,508,000)
------------ ------------
Total stockholders' equity 261,996,000 272,774,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $284,460,000 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------------------------- -------------------------------
REVENUES:
Development agreement with related party $ - $ 2,000 $ - $ 2,010,000
Other development agreements and licensing fees 3,000 201,000 287,000 10,454,000
------------------------------- -------------------------------
Total revenues 3,000 203,000 287,000 12,464,000
OPERATING COSTS AND EXPENSES:
Research and development 4,499,000 4,468,000 15,505,000 13,928,000
General and administrative 2,214,000 1,509,000 6,590,000 3,986,000
Restructuring charge - - 3,876,000 -
------------------------------- -------------------------------
Total operating costs and expenses 6,713,000 5,977,000 25,971,000 17,914,000
LOSS FROM OPERATIONS (6,710,000) (5,774,000) (25,684,000) (5,450,000)
OTHER INCOME (EXPENSE):
Interest income 3,022,000 4,612,000 11,143,000 8,927,000
Interest expense (47,000) (222,000) (480,000) (628,000)
Other, net 37,000 2,000 37,000 (49,000)
------------------------------- -------------------------------
Total other income 3,012,000 4,392,000 10,700,000 8,250,000
INCOME (LOSS) BEFORE INCOME TAXES (3,698,000) (1,382,000) (14,984,000) 2,800,000
Income tax expense - 357,000 - 2,057,000
------------------------------- -------------------------------
NET INCOME (LOSS) $(3,698,000) $(1,739,000) $(14,984,000) $ 743,000
=============================== ===============================
EARNINGS (LOSS) PER SHARE:
Basic $(0.08) $(0.04) $(0.34) $0.02
Diluted $(0.08) $(0.04) $(0.34) $0.02
SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE:
Basic 44,153,000 42,630,000 43,988,000 39,096,000
Diluted 44,153,000 42,630,000 43,988,000 41,646,000
COMPREHENSIVE INCOME (LOSS):
Net income (loss) $(3,698,000) $(1,739,000) $(14,984,000) $ 743,000
Foreign currency translation adjustment 41,000 (20,000) (71,000) 19,000
------------------------------- -------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $(3,657,000) $(1,759,000) $(15,055,000) $ 762,000
=============================== ===============================
See accompanying notes to condensed consolidated financial statements.
3
TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2001 2000
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (14,984,000) $ 743,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,127,000 857,000
Non-cash portion of restructuring charge 1,624,000 -
In-process research and development 1,066,000 -
Expense related to stock options 307,000 470,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts and interest receivables 397,000 (4,778,000)
Increase in taxes payable - 1,967,000
Increase in prepaid and other (160,000) (523,000)
Increase in accounts payable and accrued liabilities 4,125,000 1,569,000
---------------- --------------
Net cash provided by (used in) operating activities (6,498,000) 305,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (4,282,000) (1,153,000)
Purchases of investments (44,123,000) (327,152,000)
Maturities and sales of investments 177,230,000 94,213,000
Other, net - 79,000
---------------- --------------
Net cash provided by (used in) investing activities 128,825,000 (234,013,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (1,009,000) -
Change in employee loans 229,000 (809,000)
Proceeds from issuance of stock 2,932,000 227,253,000
---------------- --------------
Net cash provided by financing activities 2,152,000 226,444,000
IMPACT OF EXCHANGE RATES ON CASH (71,000) 20,000
---------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 124,408,000 (7,244,000)
CASH AND CASH EQUIVALENTS:
Beginning of period 29,264,000 44,242,000
---------------- --------------
End of period $ 153,672,000 $ 36,998,000
================ ==============
OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
Common stock issued for acquisition $ 1,818,000 $ -
The accompanying notes are an integral part of these financial statements.
4
TANOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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, upon the 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 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 sufficiency of the amount paid 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, which includes a restructuring accrual for cash
expenses of $2.3 million and non-cash charges of $1.6 million for impairment of
goodwill and write-down of assets.
5
The activity in the accrual for the quarter ended September 30, 2001, was as
follows:
Balance at Estimate Less: Balance at
June 30, 2001 Revision Amount Paid September 30, 2001
------------- ---------- ----------- ------------------
Severance and related costs $ 450,000 $ 160,000 $265,000 $ 345,000
Termination of government grants
and subsidies 646,000 - - 646,000
Termination of leases and research
agreements 969,000 (301,000) - 668,000
Other 187,000 141,000 34,000 294,000
---------- --------- -------- ----------
Total $2,252,000 $ - $299,000 $1,953,000
========== ========= ======== ==========
Included in the restructuring charge are incremental costs to terminate 17
employees, exit licensing, research and office lease arrangements, and make
payments for idle facilities. As of September 30, 2001, all employees have been
terminated.
The Company expects to substantially complete the Plan within one year. As of
September 30, 2001, $299,000 of the restructuring expenses had been paid, and a
restructuring liability of $2.0 million is reflected in the accompanying balance
sheet. The remainder of the accrual represents managements best estimate, based
on available information as of September 30, 2001, of identifiable and
quantifiable costs that the Company will incur as a result of the Plan. 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.
Since Tanox incurred net losses for the three-month period ended September 30,
2000 and three-month and nine-month periods ended September 30, 2001, basic and
diluted EPS are the same for these periods. The following table reconciles
basic and diluted EPS for the nine-month period ended September 30, 2000:
6
Per Share
Net Income Shares Amount
---------- ------ ------
Basic EPS $743,000 39,096,000 $0.02
=====
Effect of dilutive securities -
options outstanding - 2,550,000
-------- ----------
Diluted EPS $743,000 41,646,000 $0.02
======== ========== =====
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 $244.2 million, including the underwriters' over-allotment option.
The net proceeds from the offering were $225.8 million. 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 September 30, 2001, all of Tanox investments were
classified as held-to-maturity and carried at amortized cost. During the nine
months ended September 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 nine months ended September 30, 2001. At December
31, 2000 and September 30, 2001, the fair value of investments was $246.7
million and $113.1 million, respectively. As long-term investments matured
during 2001, the Company has reinvested in cash equivalents and investments with
maturities of less than 2 years.
NOTE 8. TREASURY STOCK
In September 2001, the Board of Directors of Tanox authorized the repurchase, at
management's discretion, of up to $4.0 million of the Company's common stock,
and, in September 2001 the Company purchased 80,000 shares for a total of $1.0
million. The purchase was made in September 2001, and settled in October 2001;
therefore, the purchase price of $1.0 million is included in accounts payable
and accrued liabilities in the accompanying balance sheet at September 30, 2001.
NOTE 9. SHAREHOLDER RIGHTS AGREEMENT
On July 27, 2001, the Board of Directors of Tanox 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 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
7
$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, with 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. Tanox posted with the court a $4.1 million supersedeas bond to continue
the appeals process and to secure payment of the award. At September 30, 2001,
Tanox had reflected an accrued liability 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, 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 which assert that all contingencies had been
met, therefore requesting payment of the full amount of the third installment,
as well as return of 51% of the stock of Tanox Pharma. The full amount of the
third installment under the parties' agreement is $333,336 and 151,294 shares of
common stock. In addition, the former stockholders have asserted that they are
entitled to additional shares because Tanox declared a stock dividend in
February 2000. Tanox also disagrees with this assertion. Tanox does not
believe the outcome will have a material adverse effect on its financial
position or liquidity.
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
("EU"), 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(TM) 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.
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
8
them.
In addition to Xolair, we are developing the following monoclonal
antibodies to address unmet medical needs in allergic diseases or conditions:
. TNX-901 for severe peanut allergy is in Phase II development
. TNX-100 for Crohn's disease is in Phase I development
. TNX-355 for HIV/AIDS is in Phase I development
. TNX224 for cardiopulmonary bypass is in preclinical development
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 September 30, 2001, of
$46.5 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 milestone payments, license
fees 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
Xolair(TM) Update. On October 30 and November 1, 2001, Novartis Pharma AG and
Genentech, Inc. updated certain public statements regarding the marketing
applications that have been filed for Xolair. In Europe, Novartis will propose
a label change from allergic asthma to "at risk" asthma patients, defined as
persons who, during the previous year, experienced an overnight hospitalization,
underwent an intensive care unit stay, were intubated, or needed to visit an
emergency room, in each case, due to asthma. Novartis will initiate new studies
in late 2001 or early 2002 in this population and expects that the results will
be submitted in the European Medical Evaluations Agency by 2003. In the United
States, Genentech and Novartis reported that they have had several discussions
with the FDA and have set the end of 2002 as their goal for submitting a Xolair
Biologics License Application ("BLA") amendment. Genentech and Novartis are
currently proposing an indication in allergic asthma in adolescents and adults.
Once filed, the FDA has up to six months to review and act upon additional data.
Restructuring Charge. During the second quarter of 2001 and in connection with
a periodic assessment of ongoing research and development programs, we
determined that consolidating our research operation (then being conducted in
Taiwan, Amsterdam and Houston) into a single site would enhance our 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, we 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.
9
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared to the Three Months Ended
September 30, 2000
Revenues. Revenues totaled $3,000 in the third quarter of 2001, compared to
$203,000 in the third quarter of 2000. The decrease in revenues was primarily
due to a reduction in licensing fee revenue.
Research and Development Expenses. Research and development expenses in the
third quarter of 2001 remained consistent at $4.5 million compared to the third
quarter of 2000. Salary costs for the three months ended September 30, 2001
increased due to staffing growth to support increased clinical development
activity. The increase in expense for 2001 was off-set by the elimination of
certain operating expenses associated with the closure of the Amsterdam facility
in June 2001, and the effect of a $0.6 million charge in the third quarter of
2000 to acquire certain technologies from LXR Biotechnology, Inc.
General and Administrative Expenses. General and administrative expenses
increased to $2.2 million in the third quarter of 2001 from $1.5 million in the
third quarter of 2000. The increase relates primarily to increases in personnel
and related expenses associated with building management and infrastructure, and
to higher legal costs from increased litigation activity.
Other Income. Other income decreased to $3.0 million in the third quarter of
2001 from $4.4 million in the third quarter 2000. The decrease is a result of
lower interest income in third quarter 2001, primarily due to lower cash and
investment balances and lower interest rates in the current period.
Income Taxes. In third quarter 2001, there was no provision for income taxes
due to the pre-tax loss of $3.7 million. This pre-tax loss generated a tax
benefit, which was fully off-set by an increase in Tanox's valuation allowance.
For the three months ended September 2000, the provision for income taxes was
$357,000, due to income generated in the U.S. The Company had losses from
foreign subsidiaries that were not tax deductible in the U.S., and did not off-
set the U.S. tax provision. In addition, the Company generated a tax benefit
from non-qualified stock option exercises in the third quarter of 2000. The
benefit was reflected as a reduction to additional paid-in capital in the
accompanying financial statements.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September
30, 2000
Revenues. Revenues totaled $287,000 during the first nine months of 2001,
compared to $12.5 million during the same period in 2000. The decrease in
revenues during the first nine months of 2001 resulted primarily from $12.0
million in milestone revenues earned in June 2000 under our collaborative
agreements with Novartis and Genentech when the BLA for Xolair was submitted to
the FDA.
Research and Development Expenses. Research and development expenses were $15.5
million in the first nine months of 2001, compared to $13.9 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 off-set 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, and the effect of a $0.6 million
charge in the third quarter of 2000 to acquire certain technologies from LXR
Biotechnology, Inc.
General and Administrative Expenses. General and administrative expenses
increased $2.6 million to $6.6 million in the first nine months of 2001 as
compared to $4.0 million in the first nine months of 2000. The increase relates
primarily to increases in personnel and related expenses associated with
building management and infrastructure, and to higher legal costs from increased
litigation activity associated with the preparation
10
and filing of significant briefs in connection with our appeal of the
arbitration award and our lawsuit with Genentech and Novartis regarding our
independent development rights.
Restructuring Charge. In June 2001, we implemented a plan to consolidate
research operations in Houston, Texas. In connection with the closure of our
facility in Amsterdam, we recorded a restructuring charge of $3.9 million. The
restructuring charge primarily consisted of $610,000 for severance, $886,000 of
goodwill impairment, $738,000 for write-down of assets, and $1.6 million for
contract termination and exit costs.
Other Income. Other income increased $2.5 million to $10.7 million in the first
nine months of 2001 from $8.3 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 April 2000 IPO proceeds.
Income Taxes. There was no provision for income taxes for the first nine months
of 2001, due to the pre-tax loss of $15.0 million. This pre-tax loss generated
a tax benefit, which was fully off-set by an increase in the Tanox's valuation
allowance. For the nine months ended September 2000 our effective tax rate
significantly differed from the U.S. federal statutory rate. The provision for
income taxes was $2.1 million, due to income generated in the U.S. The Company
had losses from foreign subsidiaries that were not tax deductible in the U.S.,
and did not off-set the U.S. tax provision. In addition, we generated a tax
benefit from non-qualified stock option exercises for the nine months ended
September 2000. The benefit was reflected as a reduction to additional paid-in
capital in the accompanying financial statements.
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 September 30, 2001, we had $267.2 million in cash,
cash equivalents and investments, of which $241.2 million were classified as
current assets.
During the first nine months of 2001, we used $6.5 million of cash for operating
activities. A net loss of $15.0 million included non-cash charges of $1.6
million for a restructuring charge, $1.1 million of in-process research and
development and non-cash depreciation and amortization of $1.1 million.
Investing activities provided $128.8 million of cash in the first nine months of
2001, primarily from the maturity of short-term and long-term investments.
Financing activities generated $2.2 million of cash during the first nine months
of 2001, primarily from the exercise of stock options, slightly off-set by the
purchase of treasury stock. The combination of the above items resulted in a
cash and cash equivalents increase of $124.4 million during the first nine
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 8.4% 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 have pledged all the clinical manufacturing facility
assets 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
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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 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, with
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. We posted with
the court a $4.1 million supersedeas bond to continue the appeals process and
to secure payment of the award.
RECENT ACCOUNTING DEVELOPMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. Under this Statement, the FASB established a
single accounting model for valuation of long-lived assets. The provisions of
SFAS No. 144 are required to be applied by Tanox for the 2002 fiscal year, and
as such, we will adopt the Statement on January 1, 2002. We believe that our
valuation of long-lived assets is in accordance with SFAS No. 144.
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 September 30, 2001, the balance sheet
reflects a foreign currency translation adjustment of $125,000. We are subject
to foreign currency exchange risk because:
. we invest in our foreign subsidiaries;
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. 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
. 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 $267.2 million at
September 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", "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;
. the outcome of various legal proceedings;
. 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, which 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 1. LEGAL PROCEEDINGS.
Tanox, Inc. vs. Novartis Pharma AG, American Arbitration Association No.
50 T 153 00119 99; Genentech, Inc., Genentech International Limited and Novartis
Pharma AG vs. Tanox, Inc., Case No. C 99-2060; and Tanox, Inc. vs. Genentech,
Inc. and Genentech International Limited, American Arbitration Association No.
74 Y 181 1113 99. On October 9, 2001, the U.S. District Court for the Northern
District of California ruled on the motions for limited summary judgment that
were filed by Tanox, Genentech and Novartis earlier this year. The Court granted
summary judgment in our favor, finding that, pursuant to the Development and
Licensing Agreement we have with Novartis, we have independent development
rights and that nothing in the Outline of Terms among Tanox, Genentech and
Novartis superseded those rights. The Court noted that we may proceed with the
development of TNX-901 and that we may use information acquired under our
tripartite agreement with Genentech and Novartis in connection with our
development of TNX-901. The Court also lifted the stays on arbitration
proceedings that we have pending with each of Genentech and Novartis.
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 $225,838,000. None of the proceeds from the initial
public offering were used during the nine months ended September 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 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.
In September 2001, we repurchased 80,000 shares of our common stock on the open
market for $1.0 million. These shares have been recorded as treasury stock in
the accompanying September 30, 2001 balance sheet.
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 July 10, 2001 to report, pursuant to
Item 5, the receipt by Genentech and Novartis of a Complete Response letter from
the U.S. FDA for the Biologics License Application for 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 declaration of a rights dividend on outstanding shares of our common
stock and the adoption of the Rights Agreement between Tanox and American Stock
Transfer & Trust Company, as rights agent.
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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: November 12, 2001 By: Michael A. Kelly
-----------------------------
Michael A. Kelly
Vice President of Finance and
Chief Financial Officer
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