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 March 31, 2002
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 April 25, 2002, the registrant had 44,178,841 shares of Common Stock
issued and 44,098,841 shares of Common Stock outstanding.
TANOX, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002
INDEX
PAGE
------------
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2002 and December 31, 2001.......... 1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three
Months Ended March 31, 2002 and 2001.................................................. 2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2002 and 2001......................................................................... 3
Notes to Condensed Consolidated Financial Statements................................... 4
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................. 7
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..................... 10
Part II - Other Information
Item 2 - Changes in Securities and Use of Proceeds...................................... 12
Item 6 - Exhibits and Reports on Form 8-K............................................... 12
Signature................................................................................. 13
PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TANOX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001
-------------- -----------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 58,574,000 $142,883,000
Short-term investments:
Held-to-maturity................................................... 57,033,000 62,720,000
Available-for-sale................................................. 780,000 --
Interest receivable................................................... 3,186,000 2,722,000
Other receivables..................................................... 5,000 110,000
Prepaid and other..................................................... 781,000 750,000
------------ ------------
Total current assets................................................. 120,359,000 209,185,000
LONG-TERM INVESTMENTS - HELD-TO-MATURITY 137,551,000 55,499,000
PROPERTY AND EQUIPMENT:
Land.................................................................. 1,619,000 1,619,000
Laboratory and office equipment....................................... 12,918,000 12,089,000
Leasehold improvements................................................ 4,397,000 4,135,000
Furniture and fixtures................................................ 779,000 779,000
------------ ------------
19,713,000 18,622,000
Less - Accumulated depreciation and amortization...................... (7,535,000) (7,024,000)
------------ ------------
Net property and equipment........................................... 12,178,000 11,598,000
OTHER ASSETS, net of accumulated amortization of
$178,000 in 2002 and 2001............................................. 185,000 1,252,000
------------ ------------
TOTAL ASSETS......................................................... $270,273,000 $277,534,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.............................. $ 5,486,000 $ 7,190,000
Accrued arbitration award............................................. 3,950,000 3,903,000
------------ ------------
Total current liabilities............................................ 9,436,000 11,093,000
NOTE PAYABLE TO RELATED PARTY.......................................... 10,000,000 10,000,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none outstanding......................................... -- --
Common stock, $.01 par value; 120,000,000 shares
authorized; 44,157,881 and 44,156,601 shares issued; 44,077,881 and
44,076,601 shares outstanding....................................... 442,000 442,000
Additional paid-in capital............................................ 309,778,000 309,892,000
Treasury stock, at cost; 80,000 shares................................ (1,009,000) (1,009,000)
Deferred compensation................................................. (124,000) (83,000)
Accumulated other comprehensive loss, cumulative translation
adjustment........................................................... 84,000 84,000
Accumulated deficit................................................... (58,334,000) (52,885,000)
------------ ------------
Total stockholders' equity........................................... 250,837,000 256,441,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $270,273,000 $277,534,000
============ ============
See accompanying notes to condensed consolidated financial statements.
1
TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------- -----------
DEVELOPMENT AGREEMENT AND LICENSING FEE REVENUES................................. $ 3,000 $ 121,000
OPERATING COSTS AND EXPENSES:
Research and development........................................................ 4,683,000 4,653,000
General and administrative...................................................... 2,538,000 2,323,000
------------ ------------
Total operating costs and expenses............................................. 7,221,000 6,976,000
LOSS FROM OPERATIONS............................................................. (7,218,000) (6,855,000)
OTHER INCOME (EXPENSE):
Interest income................................................................. 2,123,000 4,193,000
Interest expense................................................................ (142,000) (309,000)
Other, net...................................................................... (212,000) --
------------ ------------
Total other income............................................................. 1,769,000 3,884,000
------------ ------------
NET LOSS......................................................................... $ (5,449,000) $(2,971,000)
============ ============
LOSS PER SHARE - Basic and diluted............................................... $ (0.12) $(0.07)
============ ============
SHARES USED IN COMPUTING LOSS PER SHARE - Basic and diluted...................... 44,077,000 43,715,000
============ ============
COMPREHENSIVE LOSS:
Net loss........................................................................ $ (5,449,000) $(2,971,000)
Foreign currency translation adjustment......................................... -- 37,000
------------ ------------
TOTAL COMPREHENSIVE LOSS......................................................... $ (5,449,000) $(2,934,000)
============ ============
See accompanying notes to condensed consolidated financial statements.
2
TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2002 2001
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (5,449,000) $(2,971,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:........................
Depreciation and amortization................................... 1,112,000 307,000
Loss on available-for-sale investment........................... 220,000 --
Compensation expense related to stock options................... (166,000) 71,000
Other, net...................................................... 53,000 --
Changes in operating assets and liabilities:
Decrease (increase) in receivables and other assets............. (388,000) 1,736,000
Increase (decrease) in current liabilities...................... (1,657,000) 1,598,000
------------ ------------
Net cash provided by (used in) operating activities............ (6,275,000) 741,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................... (1,091,000) (2,700,000)
Purchases of investments.......................................... (101,912,000) (51,223,000)
Maturities and sales of investments............................... 24,958,000 137,752,000
Other, net........................................................ -- (511,000)
------------ ------------
Net cash provided by (used in) investing activities............ (78,045,000) 83,318,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock................................... 11,000 2,529,000
------------ ------------
Net cash provided by financing activities...................... 11,000 2,529,000
IMPACT OF EXCHANGE RATES ON CASH.................................... -- 37,000
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... (84,309,000) 86,625,000
CASH AND CASH EQUIVALENTS:
Beginning of period............................................... 142,883,000 29,264,000
------------ ------------
End of period..................................................... $ 58,574,000 $115,889,000
============ ============
See accompanying notes to condensed consolidated financial statements.
3
TANOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(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, 2001. Results of the interim
period ended March 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002.
NOTE 2. ACQUISITION OF TANOX PHARMA 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 $3.1 million. 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. Any additional consideration would be paid to all former
shareholders in proportion to their ownership at the acquisition date. 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 $3.4 million.
Tanox management believes that certain events upon which full payment of the
third installment 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
reflected a 20% reduction in total consideration. As discussed in Note 7, the
former shareholders are disputing the sufficiency of the amount paid in the
third installment. Due to the dispute, the cash portion of the payment was
returned by the former shareholders and is classified in accrued liabilities at
March 31, 2002.
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 $2.2 million and non-cash charges of $1.7 million for impairment of
goodwill and write-down of assets.
4
The Plan's activity, as it relates to cash expenses for quarter ended March
31, 2002, was as follows:
Balance at Amount Balance at
December 31, 2001 Paid March 31, 2002
------------------ --------------- -----------------
Severance and related costs.................... $ 300,000 $ (11,000) $ 289,000
Termination of government grants and
subsidies..................................... 646,000 -- 646,000
Termination of leases and research agreements.. 444,000 (349,000) 95,000
Other exit costs............................... 294,000 (74,000) 220,000
---------- --------- ----------
Total....................................... $1,684,000 $(434,000) $1,250,000
========== ========= ==========
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 March 31, 2002, all employees have been
terminated. However, one severance amount is being disputed.
The Company expects to substantially complete the Plan by June 30, 2002. As
of March 31, 2002, $946,000 of the restructuring expenses had been paid, and a
restructuring liability of $1.3 million is classified in accrued liabilities in
the accompanying balance sheet. The accrual as of March 31, 2002 represents
management's best estimate, based on available information, 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. HELD-TO-MATURITY INVESTMENTS
Held-to-maturity investments consist of investment grade corporate bonds and
commercial paper with maturities of less than two years from the balance sheet
date. Tanox's policy is to hold all investments in bonds and commercial paper
until maturity; therefore, these investments are classified as held-to-maturity
and carried at amortized cost. Tanox has no trading securities.
During the three months ended March 31, 2002 and 2001, Tanox sold $2.5
million and $18.6 million, respectively, of held-to-maturity investments prior
to the maturity date, due to the deterioration in the investment issuers' credit
worthiness. A realized gain of $12,000 and $46,600, respectively, was recognized
in the accompanying consolidated statements of operations and comprehensive
loss. Realized gains and losses from sales prior to maturity are classified as
interest income.
Tanox's net carrying value of held-to-maturity investments in bonds and
commercial paper at March 31, 2002 and December 31, 2001, was $194.6 million and
$118.2 million, respectively. The fair value of these investments at March 31,
2002 and December 31, 2001, was $193.1 million and $118.9 million, respectively.
At March 31, 2002, unrealized gains on these investments totaled $399,000, and
unrealized losses on these investments totaled $1.9 million.
NOTE 5. AVAILABLE-FOR-SALE INVESTMENT
On November 2, 2000, Tanox made an equity investment in a privately held
biotechnology company for $1.0 million. At December 31, 2001, this investment
was included in other assets and carried at cost, which management believed
approximated the fair market value. In March 2002, the privately held company
merged with a public company, and the equity investment was converted into an
available-for-sale marketable security. As a result, Tanox's investment was
reclassified to an available-for-sale investment and carried at fair market
value. At March 31, 2002, the fair value of Tanox's investment was $780,000. The
decline in the value of
5
$220,000 since December 31, 2001 was not considered by management to be
temporary, and as a result, Tanox recognized a loss in the quarter ended March
31, 2002. Subsequent temporary changes in fair market value will be included in
comprehensive loss and classified as a component of stockholder's equity.
NOTE 6. EARNINGS (LOSS) 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
(loss) 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 were exercised. Tanox incurred net losses for the three-
month periods ended March 31, 2002 and 2001; therefore, options outstanding for
each of the periods were excluded from the computation of diluted EPS because
they would have been antidilutive. Due to the antidilutive effect of the stock
options, basic and diluted EPS are the same for these periods.
NOTE 7. 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,
Inc. 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 (i) approximately $3.5
million, including interest, (ii) payments ranging from 33-1/3% to 40% of the
future payments that Tanox may receive from Genentech following product approval
and (iii) 10% of the royalties that Tanox may receive on sales of anti-IgE
products. Tanox sought a court order vacating this arbitration award. However, a
judgment was entered confirming the award. Tanox intends to pursue all available
remedies, including appealing the decision. During the appeals process, Tanox is
required to post a bond or place amounts in escrow to secure payment of the
award. Tanox posted a $4.1 million supersedeas bond with the court to continue
the appeals process and to secure payment of the award. If Tanox is ultimately
required to pay all or part of the award to the attorneys, Tanox's future
revenues, results of operations, cash flow and financial condition could be
materially adversely affected.
Tanox is also engaged in a dispute with Novartis Pharma AG and Genentech,
Inc. over Tanox's right to independently develop certain of its anti-IgE
monoclonal antibodies, which are not being developed in connection with the
collaborative agreement among Tanox, Genentech and Novartis. Following a
favorable summary judgment from a Federal district court regarding certain key
issues in the dispute, Tanox and Novartis will submit remaining issues to an
arbitration panel. Tanox and Genentech are also seeking resolution of remaining
issues in arbitration. If Tanox ultimately loses its right to independently
develop the anti-IgE monoclonal antibodies, Tanox would be required to
discontinue development of its TNX-901 product.
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 counterclaims in the Texas lawsuit, as well as claims
in a parallel litigation in the Netherlands, which assert that the total
consideration should not have been reduced, 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 stock purchase
agreement is $333,336 in cash 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 that the outcome of this
litigation will have a material adverse effect on its financial position or
liquidity.
6
From time to time Tanox is a defendant in other lawsuits incidental to its
business. Management believes that the outcome of these lawsuits will not be
material to Tanox's financial statements.
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 related diseases. Tanox's products are genetically
engineered antibodies that target a specific substance, or antigen. In 1987, we
discovered a novel approach for treating allergies and asthma by using anti-
immunoglobulin E, or anti-IgE, antibodies capable of blocking IgE, a causative
agent of the allergy pathway, thus preventing the onset of disease symptoms.
Xolair(TM), our most advanced product in development, is a humanized monoclonal
antibody that blocks IgE. Its therapeutic effect has been validated through
clinical trials in patients suffering from allergic asthma, seasonal allergic
rhinitis (hay fever) and perennial allergic rhinitis. We are developing Xolair
in collaboration with Novartis Pharma AG and Genentech, Inc. In June 2000, our
collaboration partners filed a Biologics License Application (BLA) with the U.S.
Food and Drug Administration (FDA) and a submission for marketing approval with
health authorities in the European Union, Switzerland, Australia, and New
Zealand for allergic asthma and hay fever in adults, adolescents and children.
Following receipt of a Complete Response Letter in July 2001, our collaboration
partners are expected to submit an amendment to the BLA in 2002 or early 2003,
which will narrow the proposed initial claim to allergic asthma in adults and
adolescents.
Using our knowledge of the human immune system, we are building a diverse
pipeline of monoclonal antibody product candidates. We are conducting clinical
trials with three additional monoclonal antibodies. TNX-901, a humanized anti-
IgE monoclonal antibody distinct from Xolair, is currently in a Phase 2 trial to
evaluate the potential of TNX-901 to reduce the sensitivity to peanut allergen
in patients suffering from severe peanut allergy. TNX-355, an anti-CD4
antibody, is in a Phase 1 trial for treating HIV. We recently completed an open-
label, single dose, dose escalation, Phase 1 trial with intravenous TNX-100, an
anti-CD40 antibody, in 18 patients with moderately active Crohn's disease
(Crohn's Disease Activity Index of 220 to 400). TNX-100 appeared to be well
tolerated, although some patients experienced headache, muscle aches, or joint
pains, which may have been related to disease or to the study drug. Response
rates (CDAI decreasing by at least 70 points) throughout a 2-month evaluation
period following dosing ranged from 39-67% (44% at day 28), and rates of
remission (CDAI of 150 points or less) were from 6-33% (28% at day 28).
Improvements were also seen in endoscopy scores and mucosal biopsies. These
trends are viewed as encouraging, but due to the small number of patients and
the single dose and open-label design of the study, no definitive conclusions
regarding efficacy can be reached. Our future plans for this drug will depend in
part on an assessment of our product priorities and the timing and availability
of manufacturing capacity.
We currently have no products available for sale. 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. We have incurred
substantial losses since inception and incurred an accumulated deficit through
March 31, 2002, of $58.3 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
7
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.
CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
The actual results could differ from those estimates, and any adjustment will be
reflected in future results.
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents consist of highly liquid investments with an original
maturity of three months or less when purchased. Investments consist of
investment grade corporate bonds, commercial paper and one investment in equity
securities. The investments in corporate bonds and commercial paper have
maturity dates of less than two years, are classified as held-to-maturity and
carried at amortized cost. In 2002, Tanox's investment in equity securities is
classified as available-for-sale and carried at fair market value, with
temporary changes in market value included in comprehensive loss and classified
as a component of stockholder's equity.
At March 31, 2002, Tanox held investments with a net carrying value of $195.4
million and a fair market value of $193.9 million. At any point in time,
amortized cost may be greater or less than fair market value. If investments
are sold prior to maturity we could incur a realized gain or loss based on the
fair market value of the investments at the date of sale. Additionally, Tanox
could incur future losses on investments if the investment issuer becomes
impaired or the investment is down-graded.
RESEARCH & DEVELOPMENT
Research and development costs, including incidental patent costs, are
expensed as incurred. Research and development costs include estimates for
clinical trial costs. These estimates are based on patient enrollment and
clinical trial progress. Actual costs may differ from estimates, and any
adjustment will be reflected in future results.
CONTINGENT LIABILITIES
We are currently involved in certain legal proceedings as discussed in Note 7
in the Notes to the Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31,
2001
Revenues. Revenues totaled $3,000 in the first quarter of 2002, compared to
$121,000 in the first quarter of 2001. The decrease relates to a reduction in
grant funding and subsidies received by Tanox Pharma B.V. due to the closure of
the Amsterdam research facility in June 2001.
8
Research and Development Expenses. Research and development expenses in the
first quarter of 2002 remained constant at $4.7 million compared to the first
quarter of 2001. Salary costs increased in the first quarter of 2002 as
compared to the first quarter of 2001 due to staffing growth to support
increased clinical development activity and research programs. In addition,
depreciation expense increased due to capital expenditures. These expense
increases were off-set by the elimination of certain operating expenses
associated with the closure of the Amsterdam facility in June 2001, and a
reduction in contract research expense and expense related to non-employee stock
options.
General and Administrative Expenses. General and administrative expenses
increased to $2.5 million in the first quarter of 2002 from $2.3 million in the
first quarter of 2001. The increase relates primarily to personnel related
expenses associated with building management and infrastructure, which were
partially off-set by lower legal fees.
Other Income. Other income decreased to $1.8 million in the first quarter of
2002 from $3.9 million in the first quarter of 2001. The decrease is a result
of lower interest income in first quarter 2002, primarily due to lower cash and
investment balances and lower interest rates in the current period, and a
$220,000 loss on an equity investment (see Note 5 in the Notes to the Condensed
Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through sales of
equity securities, collaboration and grant revenues, interest income and
equipment financing agreements. As of March 31, 2002, we had $253.9 million in
cash, cash equivalents and investments, of which $116.4 million were classified
as current assets.
During the three months ended March 31, 2002, we used $6.3 million of cash
for operating activities. Investing activities used $78.0 million of cash in
the first quarter of 2002 for capital expenditures and investment purchases.
Investment purchases totaled $101.9 million due to re-invested funds from cash
equivalents and maturing or sold investments. These outflows were slightly off-
set by cash received from investment maturities. Financing activities generated
$11,000 of cash during 2002, from the exercise of stock options. The
combination of the above items resulted in a decrease in cash and cash
equivalents of $84.3 million for the first quarter of 2002.
From 1994 through 1998, Novartis advanced us $10.0 million, pursuant to a
loan agreement, to finance our pilot manufacturing facility. Tanox has pledged
all of the assets of the pilot manufacturing facility as security for the loan.
The loan bears interest at the London Interbank Offered Rate, or LIBOR, plus 2%.
Through December 31, 2001, Novartis has agreed to forgive interest on the loan.
Subject to modifications agreed to in principle concurrent with completion of
the tripartite collaboration among Genentech, Tanox and Novartis in July 1996,
the principal and future interest payments may be partially or totally forgiven
by Novartis based on the future use of the facility. When the facility becomes
operational, Tanox will make interest and principal payments on the loan in
amounts equal to 75% of net cash flow from the facility. If the net cash flow
payments during the ten years following the date the facility first becomes
operational are not sufficient to repay the principal and accrued interest on
the loan, Novartis has agreed to forgive the remaining principal and accrued
interest.
During the first quarter of 2002, we invested approximately $1.1 million in
property and equipment, primarily to support the expansion of our research and
product development activities.
At March 31, 2002 we had accrued restructuring expenses of approximately $1.3
million. We expect to pay these expenses in 2002.
9
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, facilities and business development activities to support the
future development of our programs. In 2002, we have budgeted to spend between
$30 million and $35 million on research development and development, depending
on the advances in our clinical trials. We expect that cash on hand and revenue
from operations will be sufficient to fund our operations for approximately 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. Consequently,
we may need to raise substantial additional funds. 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 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 (i) approximately $3.5 million (including
interest), (ii) payments ranging from 33-1/3% to 40% of the future milestone
payments we would receive from Genentech following product approval, and (iii)
10% of the royalties that we would receive on sales of anti-IgE products. Tanox
sought a court order vacating this arbitration award. However, a judgment was
entered confirming the award. Tanox intends to pursue all available remedies,
including appealing the decision. During the appeals process, we are required
to post a bond or place amounts in escrow to secure payment of the award. We
posted a $4.1 million supersedeas bond with the Court to continue the appeals
process and to secure payment of the award. If Tanox is ultimately required to
pay all or part of the award to the attorneys, our future revenues, results of
operations, cash flow and financial condition could be materially adversely
affected.
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, 2002, the balance sheet
reflects a cumulative 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 revenues and expenses in the local currencies of
the countries where we do
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business; and
. we finance part of the cost of our subsidiaries' operations through dollar
denominated intercompany 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 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 Euros 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, cash equivalents and investments were
approximately $253.9 million at March 31, 2002. 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 have the
ability and intent 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 temporary gain or loss on any security will be
recognized in earnings until 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.
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;
. difficulty in achieving or managing growth
. 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, 2001, 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 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. As of March 31, 2002,
we have used approximately $7.4 million of our initial public offering proceeds
as follows (in millions):
Research and development activities, general corporate purposes
and working capital............................................ $6.3
Capital expenditures............................................ 1.1
----
$7.4
====
The remaining portion of the net offering proceeds has been invested in cash
equivalents and held-to-maturity investments. Our use of the proceeds from the
offering does not represent a material change in the use of proceeds described
in the prospectus included as part of the Registration Statement.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
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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: April 29, 2002 By: Nancy T. Chang
-------------------------------------
Nancy T. Chang
President and Chief Executive Officer
By: Pamela A. Thompson
-------------------------------------
Pamela A. Thompson
Director of Financial Reporting
(Principal Accounting Officer)
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