CONFORMED COPY
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR QUARTER ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-12574
TEXAS BIOTECHNOLOGY CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3532643
- --------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7000 Fannin, Suite 1920, Houston, Texas 77030
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
(713) 796-8822
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 15, 1996
----- -------------------------------
Common Stock, $0.005 par value 25,454,434
TEXAS BIOTECHNOLOGY CORPORATION
TABLE OF CONTENTS
-----------------
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 1
Consolidated Statements of Operations for the three months ended September 30, 1996
and 1995, the nine months ended September 30, 1996 and 1995, and the period from
August 2, 1989 (date of incorporation) through September 30, 1996 2
Consolidated Statements of Cash Flows the nine months ended
September 30, 1996 and 1995, and the period from August 2, 1989
(date of incorporation) through September 30, 1996 3
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 19
ITEM 2: Changes in Securities 19
ITEM 3: Defaults Upon Senior Securities 19
ITEM 4: Submission of Matters to a Vote of Security Holders 20
ITEM 5: Other Information 20
ITEM 6: Exhibits and Reports on Form 8-K 20
SIGNATURES 21
INDEX TO EXHIBITS 22
PART I FINANCIAL INFORMATION
- -------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
ASSETS ------------- ------------
------ (UNAUDITED)
Current assets:
Cash and cash equivalents $ 808,126 $ 5,724,264
Short term investments 11,738,650 8,195,307
Short term note receivable 122,500 122,500
Prepaids 278,072 554,208
Other current assets 385,267 547,391
------------- -------------
Total current assets 13,332,615 15,143,670
Equipment, furniture and fixtures, and leasehold improvements 7,611,538 7,529,415
Less: Accumulated depreciation and amortization (4,294,237) (3,746,586)
------------- -------------
Net property 3,317,301 3,782,829
------------- -------------
Total assets $ 16,649,916 18,926,499
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,983,544 2,566,264
Deferred revenue 250,000 650,110
------------- -------------
Total current liabilities 3,233,544 3,216,374
Commitments and contingencies --- ---
Stockholders' equity:
Preferred stock, par value $.005 per share. At September 30, 1996 and
December 31, 1995, 5,000,000 shares authorized; none outstanding. --- ---
Common stock, par value $.005 per share. At September 30, 1996,
75,000,000 shares authorized; 24,203,600 shares issued and
outstanding. At December 31, 1995, 40,000,000 shares authorized;
17,439,365 shares issued and outstanding (notes 2, 3 and 5) 121,017 87,198
Additional paid-in capital 73,149,358 59,540,730
Deferred compensation expense (note 3) --- (46,177)
Deficit accumulated during the development stage (59,854,003) (43,871,626)
------------- -------------
Total stockholders' equity 13,416,372 15,710,125
------------- -------------
Total liabilities and stockholders' equity $ 16,649,916 $ 18,926,499
============= =============
FORM 10-Q See accompanying notes to consolidated financial statements Page 1
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
AUGUST 2, 1989
(DATE OF
INCORPORATION)
THREE MONTHS ENDED NINE MONTHS ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995 1996
---------- ---------- ---------- ---------- --------------
Revenues:
Research agreements $ 1,100,000 3,338,027 4,295,110 5,638,247 15,333,796
Products and services 2,500 35,600 6,439 207,801 403,080
Grant revenue --- 30,391 1,727 206,939 668,951
----------- ---------- ---------- ---------- -----------
Total revenues 1,102,500 3,404,018 4,303,276 6,052,987 16,405,827
----------- ---------- ---------- ---------- -----------
Expenses:
Research and development 5,980,096 3,753,107 17,484,641 10,560,959 51,072,296
Charge for purchase of in-process
research and development --- --- --- 1,973,883 9,465,610
General and administrative 952,299 1,223,671 3,076,936 3,928,417 18,481,570
Restructuring and impairment of
intangible assets (note 9) --- --- 421,165 --- 1,064,915
----------- ---------- ---------- ---------- -----------
Total expenses 6,932,395 4,976,778 20,982,742 16,463,259 80,084,391
----------- ---------- ---------- ---------- -----------
Operating loss 5,829,895 1,572,760 16,679,466 10,410,272 63,678,564
----------- ---------- ---------- ---------- -----------
Other income (expense):
Interest income 199,811 285,333 697,089 960,540 3,916,208
Interest expense --- --- --- (969) (91,647)
----------- ---------- ---------- ---------- -----------
Net loss $ 5,630,084 1,287,427 15,982,377 9,450,701 59,854,003
=========== ========== ========== ========== ===========
Net loss per share $ 0.23 0.07 0.69 0.57 5.96
=========== ========== ========== ========== ===========
Weighted average common shares used to
compute net loss per share 24,188,708 17,439,365 23,053,607 16,516,343 10,045,776
=========== ========== ========== ========== ===========
FORM 10-Q See accompanying notes to consolidated financial statements Page 2
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
AUGUST 2, 1989
(DATE OF
NINE MONTHS ENDED INCORPORATION)
SEPTEMBER 30, THROUGH
SEPTEMBER 30,
1996 1995 1996
------------ ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,982,377) (9,450,701) (59,854,003)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of deferred offering costs related
to delayed offering --- --- 324,938
Depreciation and amortization 547,651 607,097 4,400,490
Interest expense converted on notes payable
to stockholders --- --- 87,755
Expenses paid with stock --- --- 24,500
Non cash acquisition costs expensed --- 1,973,883 9,465,610
Deferred compensation expense 46,177 70,505 287,158
Impairment of intangible assets --- --- 643,750
Change in operating assets and liabilities, net of
effect of acquisition:
(Increase) decrease in prepaids 276,136 --- (100,412)
(Increase) decrease in receivables 7,291 87,500 (82,995)
(Increase) decrease in other current assets 154,833 (75,833) (500,450)
Decrease in inventories --- --- 61,245
Increase in current liabilities 417,280 333,295 2,917,426
(Decrease) in deferred revenue (400,110) (1,378,620) (1,422,122)
-------------- ------------ ------------
Net cash used in operating activities (14,933,119) (7,832,874) (43,747,110)
-------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (82,123) (184,257) (7,303,078)
Purchase of short term investments (24,007,757) (20,949,220) (75,928,978)
Redemption of short term investments 20,464,414 25,049,002 64,190,328
Acquisition of subsidiary, net of cash acquired --- --- (167,331)
-------------- ------------ ------------
Net cash (used in) provided by investing activities (3,625,466) 3,915,525 (19,209,059)
-------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to stockholders and
related trusts --- --- 1,852,500
Proceeds from sale of common stock and option and
warrant exercises, net 13,642,447 --- 62,240,483
Repurchase of common stock --- --- (3,750)
Cost of delayed offering --- --- (324,938)
-------------- ------------ ------------
Net cash provided by financing activities 13,642,447 --- 63,764,295
-------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (4,916,138) (3,917,349) 808,126
Cash and cash equivalents at beginning of period 5,724,264 7,199,942 ---
-------------- ------------ ------------
Cash and cash equivalents at end of period $ 808,126 3,282,593 808,126
============== ============ ============
Supplemental schedule of noncash financing activities
$ --- 2,061,383 11,405,865
============== ============ ============
FORM 10-Q See accompanying notes to consolidated financial statements Page 3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Texas Biotechnology Corporation (the "Company" or "TBC"), a
biopharmaceutical company, applies innovative drug discovery
techniques and its specialized knowledge of the role of vascular cell
biology in cardiovascular disease to the design and development of
novel pharmaceutical compounds. The Company was incorporated in the
state of Delaware in 1989.
During the period from August 2, 1989, (date of incorporation)
through March 1990, the Company was largely inactive. Since that
time, the Company has been engaged principally in research and drug
discovery programs and clinical development of a drug compound. On
July 25, 1994, the Company acquired all of the outstanding common
stock of ImmunoPharmaceutics, Inc. ("IPI"), a San Diego, California
based company, in exchange for common stock of the Company. TBC
decided to consolidate the IPI operation into TBC in the first half
of 1996. (See note 9)
The Company is presently working on a number of long-term development
projects which involve experimental and unproven technology, which
may require many years and substantial expenditures to complete, and
which may be unsuccessful. To date, other than small amounts of
monoclonal antibody compounds and services produced and sold by IPI
(now discontinued), the Company has not developed or sold any
products, and no assurance can be given that the Company will be able
to develop, manufacture or market any products in the future. In
addition, no assurance exists that future revenues will be
significant, that any sales will be profitable, or that the Company
will have sufficient funds available to complete its research and
development programs or market any products which it may develop.
Accordingly, the Company is considered to be in the development stage
as it has not to date derived significant revenues from its planned
principal operations.
(b) Basis of Consolidation
The Company's consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, IPI. All material
intercompany transactions have been eliminated. The Company's
consolidated financial statements include the activity related to IPI
since August 1, 1994.
(c) Cash, Cash Equivalents and Short Term Investments
Cash equivalents are considered to be those securities or instruments
with original maturities, when purchased, of three months or less. At
September 30, 1996, approximately $808,000 was invested in demand and
money market accounts. Short term investments are those investments
which have an original maturity of less than one year and greater
than three months. At September 30, 1996, the Company's short term
investments consisted of approximately $998,000 in U.S. Treasury
Bills and $10,741,000 in Corporate Commercial Paper. Cash equivalents
and short term investments are stated at cost, which approximates
market value. Interest income is accrued as earned.
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (Statement 115), Accounting for Certain
Investments in Debt and Equity Securities. Statement 115 provides for
the use of the amortized cost method for investments in debt
securities when
FORM 10-Q Page 4
management has the positive intent and ability to hold such
securities to maturity. In connection with the adoption of Statement
115, the Company classified all short term investments as held to
maturity.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation of furniture
and equipment is provided on the straight-line method over the
estimated useful lives of the respective assets (3 to 10 years).
Amortization of leasehold improvements is provided on the straight-
line method over the remaining minimum lease term.
(e) Intangible Assets
Intangible assets are amortized on a straight line basis over ten
years.
(f) Research and Development Costs
All research and development costs are expensed as incurred and
include salaries of research and development employees. For the three
months ended September 30, 1996 and 1995, salaries and benefits
totaled approximately $1,469,000 and $1,797,000, respectively, of
which approximately $1,179,000 and $1,396,000, respectively, was
charged to research and development. For the nine months ended
September 30, 1996 and 1995, salaries and benefits totaled
approximately $4,936,000 and $5,223,000, respectively, of which
approximately $3,872,000 and $4,005,000, respectively, was charged to
research and development. Payments related to the acquisition of in-
process research and development are expensed.
(g) Net Loss Per Share
Net loss per share is calculated using the weighted average shares of
common stock outstanding during the period. For the three months
ended September 30, 1996 and 1995, the weighted average common shares
used to compute net loss per share totaled 24,188,708 and 17,439,365
respectively. For the nine months ended September 30, 1996 and 1995,
and the period from August 2, 1989 (date of incorporation) through
September 30, 1996, the weighted average common shares used to
compute net loss per share totaled 23,053,607, 16,516,343 and
10,045,776 respectively. Stock options and stock warrants are
considered common stock equivalents, however are not included in the
loss per share computations as their effect is anti-dilutive. Shares
held in escrow through June 30, 1995, pending satisfaction of certain
future conditions, and shares related to contingent stock issue
rights related to the IPI acquisition have been excluded from the net
loss per share calculation until such shares were released or issued.
(h) Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform with the September 30, 1996 presentation with
no effect on net loss reported.
(i) Revenue Recognition
Revenue from grants is recognized as earned under the terms of the
related grant agreements. Revenue from service contracts is
recognized as the services are performed and/or as milestones are
achieved. Revenue from products and services is recognized when the
products are shipped or the services are performed. Amounts received
in advance of services to be performed under contracts are recorded
as deferred revenue.
FORM 10-Q Page 5
(j) Patent Application Costs
Costs incurred in filing for patents are expensed as incurred.
(k) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
(l) Interim Financial Information
The Consolidated Balance Sheet as of September 30, 1996, and the
related Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1996 and 1995, and the period from
August 2, 1989 (date of incorporation) through September 30, 1996,
and Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1996 and 1995, and the period from August 2, 1989
(date of incorporation) through September 30, 1996, are unaudited. In
the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included. Such
adjustments consisted of normal recurring items. Interim results are
not necessarily indicative of results for a full year. The
consolidated financial statements and notes are presented as
permitted by Form 10-Q and do not contain certain information
included in the Company's Annual Consolidated Financial Statements
and Notes which should be read in conjunction with these consolidated
financial statements and notes.
(m) Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (Statement 121).
The Company has adopted the statement effective December 31, 1995.
Statement 121 requires that long-lived assets and certain
identifiable intangible assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
In addition, Statement 121 requires that certain long-lived assets
and certain identifiable intangible assets to be disposed of be
reported at the lower of carrying amount or fair value less costs to
sell. The Company believes the goodwill associated with IPI,
$643,750, is impaired due to the decision to cease operations at IPI
and the sale of the QED business unit and has recorded a charge to
expense during 1995. (See note 9)
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation"
(Statement 123). Statement 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans using
a fair value based methodology as an alternative to intrinsic value
based methodology. In addition, Statement 123 establishes the fair
value as the measurement basis for transactions in which an entity
issues its equity instruments to acquire goods or services from non-
employees. The accounting and reporting requirements of Statement 123
are effective beginning January 1, 1996. The Company intends to
continue using the intrinsic value method.
(2) CAPITAL STOCK
In February, 1996, the Company completed a private placement of common
stock. The Company issued 6,550,990 shares of Common Stock at $2 1/8 per
share with proceeds of approximately $13.0 million, net of selling
commissions and expenses of approximately $900,000. In accordance with
the terms of the offering, the Company filed, pursuant to Rule 415 of the
Securities Act, a Shelf Registration Statement as to the shares of Common
Stock sold to the purchasers in the private placement which became
effective on June 4, 1996.
FORM 10-Q Page 6
In connection with the private placement, the co-exclusive agent, Harris,
Webb & Garrison received a $634,630 selling commission, 49,775 warrants
with an exercise price of $3.05 per share and no registration rights, and
497,749 warrants with an exercise price of $3.66 per share with the
underlying common stock being registered, under certain circumstances, on
a "piggyback" basis in the event of a public offering of common stock by
the Company. The co-exclusive agent, Aurora Capital Corp., received a
$124,653 selling commission, 25,587 warrants with an exercise price of
$3.36 per share, and 149,002 warrants with an exercise price of $4.58 per
share. The common stock underlying Aurora's warrants will be registered
with the Common Stock issued in the private placement. The co-exclusive
agents assigned some of these warrants to others.
In May 1996, the Board of Directors proposed, and stockholders approved,
an amendment to the Company's Certificate of Incorporation to increase
the authorized number of shares of the Company's common stock from 40
million shares to 75 million shares.
On October 10, 1996 the Company signed a strategic alliance agreement
with LG Chemical, Ltd. ("LG Chem"), a Korean corporation. In conjunction
with the agreement, LG Chem purchased 1,250,000 shares of common stock
for $4.00 per share for a total of $5 million. In addition, LG Chem has
the option to purchase up to $5 million of common stock on one of four
exercise dates ending at December 31, 1997. The minimum purchase amount
is $1,000,000 and LG Chem and TBC must agree on the purchase price or the
option cannot be exercised on the given exercise date. These shares were
issued pursuant to "Regulation S" and may not be sold by LG Chem for a
period of one year per the agreement. The Company's agents in the
contract negotiations, Raymond James & Associates, Inc. and Mitani & Co.,
Inc. received $420,000 in commissions and 113,636 warrants exercisable at
$4.40 per share with the underlying common stock being subject to certain
piggyback registration rights.
(3) STOCK OPTIONS
The Company has in effect the following stock option plans:
The Amended and Restated 1990 Incentive Stock Option Plan ("1990 Plan")
allows for the issuance of incentive and non-qualified options to
employees, directors, officers, non-employee independent contractors and
non-employee directors, pursuant to which 230,590 shares of common stock
are reserved for issuance out of authorized but unissued shares of the
Company.
The Amended and Restated 1992 Incentive Stock Option Plan ("1992 Plan")
allows for the issuance of incentive and non-qualified options to
employees, directors, officers, non-employee independent contractors and
non-employee directors, pursuant to which 1,597,843 shares of common
stock are reserved for issuance out of authorized but unissued shares of
the Company.
The Stock Option Plan for Non-Employee Directors ("Director Plan") allows
for the issuance of non-qualified options to non-employee directors,
pursuant to which 71,429 shares of common stock are reserved for issuance
out of authorized but unissued shares of the Company to be issued to non-
employee members of the Board of Directors of the Company based on a
formula.
The 1995 Stock Option Plan ("1995 Plan") allows for the issuance of
incentive and non-qualified options, shares of restricted stock and stock
bonuses to employees, officers, and non-employee independent contractors,
pursuant to which 1,000,000 shares of common stock are reserved for
issuance out of authorized but unissued shares of the Company.
The 1995 Amended and Restated Non-Employee Director Stock Option Plan
("1995 Director Plan") allows for the issuance of non-qualified options
to non-employee directors, pursuant to which 200,000 shares of common
stock are reserved for issuance out of authorized but unissued shares of
the Company to be issued to non-employee members of the Board of
Directors of the Company based on a formula. In June 1996,
FORM 10-Q Page 7
the 1995 Director Plan was amended with respect to the election date
requirement for a director to request stock in lieu of cash payment of
director fees.
A summary of stock options as of September 30, 1996, follows:
Exercise Price Available
Stock Option Plans Per Share Outstanding Exercised Exercisable for Grant
- ------------------- -------------- ----------- --------- ----------- ---------
1990 Plan $3.50 - $3.56 173,369 55,125 165,369 57,221
1992 Plan $1.41 - $5.36 1,422,977 102,157 710,391 174,866
Director Plan $2.40 - $4.54 42,576 --- 33,148 28,853
1995 Plan $1.31 - $4.53 564,500 --- 37,500 435,500
1995 Director Plan $1.38 - $5.19 82,806 --- 27,606 117,194
----------- -------- ---------- --------
TOTAL 2,286,228 157,282 974,014 813,634
=========== ======== ========== ========
The Company has recorded deferred compensation for the difference between
the grant price and the deemed fair value for financial statement
presentation purposes related to certain options granted in the period
subsequent to May 27, 1993 and prior to the initial public offering. Such
amount totaled $287,158, of which $46,177 has been charged to expense in
1996.
(4) INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" effective January 1, 1993. As of September
30, 1996, the Company had a net deferred tax asset of approximately
$20,934,000, primarily composed of the tax benefit associated with net
operating loss carry forwards, start-up and other capitalized costs. A
valuation allowance for the full amount of the deferred tax asset has
been established as realization of the benefit is uncertain.
(5) COMMON STOCK RESERVED
The Company has reserved common stock for issuance as of September 30,
1996 as follows:
Stock option plans 3,099,862
Agreement with Genentech, Inc. 285,715
Warrants issuable under the Genentech Agreement 142,858
Warrants outstanding 5,376,905
Underwriters purchase options and related warrants 710,000
IPI acquisition (contingent shares) 1,000,000
----------
Total shares reserved 10,615,340
==========
LG Chem has the option to purchase up to $5 million of common stock on
one of four exercise dates ending at December 31, 1997. The minimum
purchase amount is $1,000,000 and LG Chem and TBC must agree on the
purchase price or the option cannot be exercised on the given exercise
date.
FORM 10-Q Page 8
(6) CLINICAL RESEARCH AGREEMENTS
On February 10, 1995, the Company entered into an agreement with Coromed,
Inc., a contract research organization, to coordinate the clinical
evaluation of Novastan/R/ as an adjunct to Streptokinase in acute
myocardial infarction. Coromed is responsible for managing all aspects of
the clinical trial and making all financial remuneration to testing sites.
The term of the agreement is 19 months, subject to extension upon the
mutual written agreement of both parties. The parties have agreed to a
total budget of approximately $3,196,000. Of this amount, $106,000 was paid
upon execution of a letter of intent and approximately $450,000 was paid
upon execution of the agreement. Subsequent payments will be made monthly
on a per patient basis, to a maximum total of approximately $2,490,000.
Three additional payments of $50,000 each will be made upon completion of
specified tasks by Coromed. If the clinical trial is completed in less than
19 months, the Company will pay Coromed a bonus calculated as a percentage
of personnel costs as set forth in the budget, to a maximum bonus amount of
approximately $327,000. In addition, the Company has engaged Coromed to
provide various services related to other ongoing Novastan/R/ trials
being conducted by the Company.
On May 1, 1996, the Company amended the above agreement with Coromed, Inc.
The term of the contract was extended to 24 months with an additional cost
of $1,200,000. The bonus payment, if any, is now based on the completion in
less than 24 months.
(7) RESEARCH AGREEMENTS
On October 11, 1994, the Company signed a collaborative agreement with
Synthelabo, a French pharmaceutical group, to develop and market compounds
for vascular proliferation disease derived from the Company's FGF and
antisense programs. Upon consummation of the transaction, Synthelabo
purchased 1,428,571 shares of common stock for $3.50 per share for a total
of $5 million and paid a non-refundable licensing fee of $3 million. In
addition, Synthelabo has committed to pay $3 million annually in research
payments (payable in quarterly installments of $750,000) for three years.
Synthelabo has agreed, upon the achievement of certain milestones, to
further payments of up to $3 million per year for up to $18 million in
total. Synthelabo has the right to terminate the agreement any time on or
after October 15, 1996, for any reason and either party has the right to
terminate the contract for breach of any material obligation. If Synthelabo
exercises this termination right, the license granted to Synthelabo shall
terminate and TBC will pay Synthelabo a royalty on net sales of any
products sold in a certain territory for a period of time. In addition,
Synthelabo may, at its option, require that the technology be transferred
to and the development program be conducted by a joint venture owned by TBC
and Synthelabo should "net worth" as defined in the agreement be less than
$5 million as of the end of any calendar quarter during the term of the
agreement. The first quarterly research payment of $750,000 was received on
October 31, 1994, of which $500,000 was recognized in 1994. As of September
30, 1996, $250,000 is included in current deferred revenue. Synthelabo will
pay royalties to TBC, based on the net sales, in those geographic areas
covered in the agreement. In exchange for the above consideration,
Synthelabo will receive an exclusive license to manufacture, use, and sell
any products generated from the research in Europe, the Middle East, Africa
and the countries of the former Soviet Union. One of the programs, which
involves antisense, has been abandoned and may result in a redirection of
the research into another area.
During 1995, the Company and Synthelabo mutually agreed to exchange certain
clinical data. In January 1996, the Company signed two agreements with
Synthelabo with respect to the supply of information related to certain
clinical studies. Synthelabo paid TBC $500,000 upon execution of the
agreement. In addition, over the term of the agreements as certain
milestones are met, Synthelabo has committed to pay TBC additional payments
that total $2,400,000. These payments are dependent on rate of enrollment
in certain clinical studies, the completion of certain clinical studies and
date of completion of certain clinical studies. As of September 30, 1996,
TBC has received approximately $1.5 million related to these agreements.
Synthelabo is the licensee for Novastan/R/ in certain territories other
than those which were sublicensed to TBC.
FORM 10-Q Page 9
On October 10, 1996, the Company signed a strategic alliance agreement with
LG Chem, a Korean corporation, to develop and market compounds derived from
the Company's Endothelin Receptor and Selectin Antagonist for certain
disease indications. Upon consummation of the transaction, LG Chem
purchased 1,250,000 shares of common stock for $4.00 per share for a total
of $5 million. In addition, LG Chem has committed to pay $10.7 million in
research payments. Of this amount, $100,000 will be paid on or before
December 31, 1996, $1.0 million on each of June 30 and December 31 of 1997,
1998, 1999 and 2000, and $1.3 million on June 30 and December 31, 2001. LG
Chem has the right to terminate future research payments if TBC fails to
meet certain Agreement milestones, which milestones will be established by
the parties in accordance with the agreement. LG Chem will pay royalties to
TBC, based on net sales, in those geographic areas covered by the
agreement, which include Korea, China, India and certain other Asian
countries, excluding Japan. The Company will pay its agents in the contract
negotiations, Raymond James & Associates, Inc. and Mitani & Co., Inc., a
commission on all future research payments as well as a royalty on net
sales.
(8) LICENSE AGREEMENT
In May 1993, TBC entered into an agreement with Genentech to sublicense
Genentech's rights and technology relating to Novastan/R/ (argatroban)
originally licensed to Genentech by Mitsubishi Chemical Corporation
("Mitsubishi"), and to license Genentech's own proprietary technology
developed with respect to Novastan/R/ (the "Genentech Agreement"). Under
the license and sublicense, the Company has an exclusive license to use and
sell Novastan/R/ in the United States and Canada for specified human
cardiovascular indications, not including cerebral thromboembolism
(stroke). The Company is required to pay Genentech and Mitsubishi specified
royalties on net sales of Novastan/R/ by the Company and its sublicensees
after its commercial introduction in the United States and Canada.
Genentech has the right to terminate the agreement or to cause the license
to become non-exclusive if the Company fails to exercise due diligence in
performing its obligations under the agreement for a period of 60 days
after receiving written notice from Genentech or fails to maintain a
minimum consolidated tangible net worth of $5.0 million. The Genentech
Agreement, as amended, provides that Mitsubishi may terminate Genentech's
license with Mitsubishi (which results in the termination of the Genentech
Agreement as well) if TBC does not file an NDA for Novastan/R/ with the FDA
no later than June 30, 1997, subject to certain additional goals being met
by TBC. As of December 31, 1995, TBC had not met certain of those goals.
However, Mitsubishi has agreed to withhold its rights to terminate the
license with Genentech if the NDA is filed by June 30, 1997, and if TBC
accomplishes the following milestones: (i) on or before December 31, 1996,
TBC shall have met certain enrollment guidelines for certain Novastan/R/
clinical trials; (ii) on or before March 31, 1997, TBC shall complete,
report and analyze certain other Novastan/R/ clinical trials; (iii) on or
before September 30, 1997, TBC shall have agreed to proceed with the Phase
III trial in AMI, and (iv) TBC shall comply with certain reporting and
information meeting requirements. If these milestones are not met,
Mitsubishi will retain the rights to terminate the Genentech license;
provided, that if such termination results from TBC's violation of the
milestone described in (iii) above, TBC will receive a license from
Mitsubishi in the field of HIT/HITTS on the same terms, as presently
included in the Genentech Agreement. Either party may terminate the
Genentech Agreement on 60 days notice if the other party defaults in its
material obligations under the agreement, declares bankruptcy or is
insolvent, or if a substantial portion of its property is subject to
attachment. The Genentech Agreement is also subject to the continuation of
Genentech's license agreement with Mitsubishi, which is only terminable if
Genentech defaults in its material obligations under the agreement,
declares bankruptcy or is insolvent, or if a substantial portion of its
property is subject to attachment. Unless terminated sooner pursuant to the
above described termination provisions, the Genentech Agreement is expected
to expire in June 2007. Under the Genentech Agreement, TBC has access to an
improved formulation patent granted in 1993 which expires in 2010 and a use
patent which expires in 2009.
Mitsubishi further agreed to supply the Company with its requirements of
Novastan/R/ throughout the term of the Genentech Agreement for TBC's
clinical testing and commercial sales of Novastan/R/ in the United States
and Canada. In the event Mitsubishi should discontinue the manufacture of
Novastan/R/, Mitsubishi,
FORM 10-Q Page 10
Genentech and TBC have agreed to discuss in good faith the means by which,
and the party to whom, Novastan/R/ production technology will be
transferred. The transferee may be a person or entity other than Genentech
or TBC. At present, Mitsubishi is the only manufacturer of Novastan/R/.
Should Mitsubishi terminate or default in its supply commitment, there can
be no assurance that alternate sources of bulk Novastan/R/ will be
available to the Company at reasonable cost, if at all. If such alternate
sources of supply are unavailable or uneconomic, the Company's results of
operations would be materially and adversely affected.
In exchange for the license to Genentech's Novastan/R/ technology, TBC
issued Genentech 285,714 shares of Common Stock and agreed to issue (i) an
additional 214,286 shares of Common Stock to Genentech within 10 days after
the filing of the first New Drug Application ("NDA") with the FDA for
Novastan/R/, and (ii) an additional 71,429 shares of Common Stock to
Genentech within 10 days after the FDA's first approval of an NDA for
Novastan/R/. The Company has also agreed to grant Genentech a warrant to
purchase an additional 142,858 shares of Common Stock at an exercise price
of $14.00 per share, subject to adjustment, within ten days of the filing
of the first NDA for Novastan/R/ with the FDA. If the Company is unable
to issue any of the additional shares of Common Stock or the warrant to
Genentech due to circumstances beyond the Company's control, the Company
has agreed to pay Genentech, in lieu thereof, an amount equal to the value
of the securities plus interest from May 27, 1993 at the prime rate plus
one percent, compounded annually. The value of the Common Stock is deemed
to be $7.00 per share, which represents the cash consideration the Company
will be obligated to pay to Genentech as liquidated damages, and the value
of the warrants is to be determined by appraisal, based on the warrants'
market value. The Company will not be required to make any cash payment if
both of the filing and approval of the NDA do not occur. TBC has also
granted Genentech demand and piggyback registration rights with regard to
shares of Common Stock issued to Genentech.
Due to the additional research and development required to commercialize
the technologies associated with the Sublicense and License Agreement, the
Company expensed the value associated with the 285,714 shares issued to
Genentech, charging $1,000,000 to purchase of in-process research and
development expense in the year ended December 31, 1993.
In connection with the Genentech Agreement, a consultant involved in
negotiations related to the Agreement will receive a royalty on net sales
of licensed products.
(9) CONSOLIDATION OF IMMUNOPHARMACEUTICS, INC.
The Company decided to consolidate the IPI operation into TBC's in the
first half of 1996. The overall financial impact on the Company's
performance will be positive in 1996 due to expected reduction in general
and administrative expenses and the elimination of some research and
development positions associated with IPI. The Company believes the
goodwill associated with IPI, $643,750, is impaired due to the decision to
cease operations at IPI and the sale of the QED business unit and has
charged it to expense in the year ended December 31, 1995. The
restructuring costs associated with the consolidation of the IPI operation
were approximately $421,000 and have been expensed in the three months
ended March 31, 1996. This cost included waste disposal, future lease
commitments, severance pay and related taxes.
(10) COMMITMENTS AND CONTINGENCIES
a) Employment Agreements
Since inception, the Company has entered into employment agreements
with certain officers and key employees. As of September 30, 1996,
remaining commitments total approximately $120,000 in 1996 and $232,000
in 1997. These amounts include payments due to one former employee
pursuant to his severance agreement. The employment agreements of
various officers and key employees provide for salary continuation for
up to twelve months from date of termination upon dismissal by the
Company, which would approximate $465,000 currently. In addition to
salary, the Company has
FORM 10-Q Page 11
agreed to reimburse certain officers and other employees for costs of
relocation and temporary travel and living expenses.
In addition, the Company has signed agreements with five of its
officers to provide certain benefits in the event of a "change of
control" as defined in the agreement and the occurrence of certain
other events. The agreements provide for a lump-sum payment in cash
equal to eighteen (18) months to three (3) years of annual base salary
and annual bonus if any. The base salary portion of the agreements
would aggregate approximately $1.9 million at current rate of
compensation. In addition, the agreements provide for gross-up for
certain taxes on the lump-sum payment, continuation of certain
insurance and other benefits for periods of eighteen (18) months to
three (3) years and reimbursement of certain legal expenses in
conjunction with the agreements. These provisions are intended to
replace compensation continuation provisions of any other agreement in
effect for an officer if the specified event occurs.
b) Legal Proceedings
On November 21, 1994, a class action shareholders' suit was filed in
the United States District Court for the Southern District of Texas,
Houston Division seeking damages in the amount of $16 million.
Plaintiffs are two individuals who purchased shares of the Company on
December 16, 1993 following the Company's initial public offering. In
their complaint, plaintiffs have sued the Company, and certain members
of the board of directors and certain officers alleging violations of
Sections 11, 12 and 15 of the Securities Act of 1933, as amended (the
"Act"). Plaintiffs have also named David Blech, D. Blech & Co.,
Incorporated and Isaac Blech as defendants. On January 23, 1995, the
Company and the members of the board of directors filed a motion to
dismiss the plaintiffs' complaint pursuant to Rule 9(b) and Rule 12b(6)
of the Federal Rules of Civil Procedure. In addition, defendant John
Pietruski, Chairman of the Board of Directors, filed a motion to
dismiss the plaintiffs' complaint pursuant to Rule 12(b)(2) of the
Federal Rules of Civil Procedure. On February 7, 1995, the plaintiffs
filed a motion for class certification. The Court denied the motion by
the Company and by John Pietruski.
On March 28, 1995, a second class action shareholders' suit was filed
in the United States District Court for the Southern District of New
York seeking unspecified damages. Plaintiffs are eight individuals who
purchased shares in various companies for which D. Blech & Co. acted as
an underwriter (or co-underwriter) or marketmaker. In their complaint,
the plaintiffs have sued the Company alleging violations of Section
10(b) of the Securities Exchange Act of 1934, as Amended (the "Exchange
Act") and Rule 10b-5 promulgated thereunder by the Securities and
Exchange Commission (the "Commission"). Plaintiffs have named a number
of defendants, including David Blech and D. Blech & Co., four
individuals, two brokerage firms, one investment management company and
ten other companies for which D. Blech & Co. acted as underwriter or
marketmaker.
On August 14, 1995, the Judicial Panel on The Multi-District Litigation
ordered that the action filed in the United States District Court for
the Southern District of Texas, Houston Division be transferred to the
United States District Court for the Southern District of New York for
coordinated or consolidated pretrial proceedings with the action
pending there. In light of the transfer and consolidation of the Texas
case with similar cases against other companies for which Blech acted
as underwriter, the Company requested that the Court in New York
reconsider the Texas Court's denial of its motion to dismiss as a part
of the Court's consideration of similar motions to dismiss filed by
those companies. All of these motions were presented to the Court on
February 6, 1996. On June 6, 1996, the New York District Court entered
two memorandum opinions in the consolidated cases. In one of its
opinions, the Court dismissed all of the Exchange Act and common law
fraud claims filed against the Company and its officers and directors,
but afforded those plaintiffs the right to attempt to preserve those
claims by repleading them. The Court ordered that those claims be
repleaded no later than July 26, 1996. Plaintiffs did not replead those
claims by the deadline, resulting in the dismissal of all claims
against the Company in that litigation. In its opinion in the second
case, i.e., the case filed on November 21, 1994, the Court granted the
Company and its officers and directors' motion for
FORM 10-Q Page 12
reconsideration, but together with all other similar pending motions,
denied the requested relief. Pursuant to the court's order, the Company
therefore filed an answer in that case. The Company also filed a Motion
seeking leave of court to prosecute an immediate appeal of the Court's
denial of the Company's Motion to Dismiss. The Court heard argument on
that Motion on October 10, 1996, and the Company awaits the Court's
ruling. Given the early stage of that case, which is the only remaining
litigation against the Company, the Company is unable to evaluate its
potential outcome at this time. The Company disputes these claims and
intends to contest them vigorously.
FORM 10-Q Page 13
ITEM 2.
- -------
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
OVERVIEW
--------
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and uncertainties.
Since its formation in 1989, the Company has primarily devoted its resources
to fund research, drug discovery and development. The Company has been
unprofitable to date and expects to incur substantial losses for the next
several years as the Company invests in product research and development,
preclinical and clinical testing and regulatory compliance. The Company has
sustained net losses of approximately $59.8 million from inception to
September 30, 1996. The Company has primarily financed its operations to date
through private placements of Common Stock and debt, which have raised an
aggregate of $34.3 million in net proceeds, an initial public offering ("IPO")
in December 1993, which raised an aggregate of $24.2 million in net proceeds
including the over-allotment, and a collaborative agreement with Synthelabo,
which has raised an aggregate of approximately $15.5 million from research
payments, license fees and sale of stock.
On July 25, 1994, the Company acquired all of the outstanding stock of
ImmunoPharmaceutics, Inc. ("IPI") in exchange for Common Stock of the Company.
IPI's results of operations have been included in the consolidated results of
operations beginning August 1, 1994. During September 1993, IPI entered into
an agreement to provide research and development services, over a period of 30
months, to EISAI Co., LTD ("EISAI"). The agreement, which expired in March
1996, guaranteed contract research funding and allowed for additional amounts
to be received upon the attainment of certain milestones. On August 10, 1995,
IPI received a $2.0 million milestone payment from EISAI. The Company decided
to consolidate the IPI operation into TBC's in the first half of 1996. The
overall financial impact on the Company's performance will be positive in 1996
due to expected reduction in general and administrative expenses and the
elimination of some research and development positions associated with IPI.
The Company believes the goodwill associated with IPI of $643,750 was impaired
due to the decision to cease operations at IPI and the sale of IPI's QED
business unit and charged it to expense in the year ended December 1995.
Restructuring costs of $421,165 associated with the consolidation of the IPI
operation were recorded in the quarter ended March 31, 1996.
The Company signed a collaborative agreement with Synthelabo, the
pharmaceutical division of L'Oreal, on October 11, 1994 (the "Synthelabo
Agreement"). Upon consummation of the transaction, Synthelabo purchased
1,428,571 shares of Common Stock for a total of $5 million and paid the
Company a nonrefundable licensing fee of $3 million. In addition, Synthelabo
has committed to pay $3 million annually in research payments (payable in
quarterly installments) through July 31, 1997. In 1996, TBC has signed two
agreements with Synthelabo to provide to them copies of certain clinical data
for Novastan/R/. Through September 30, 1996, TBC has received approximately
$1.5 million pursuant to these two clinical data agreements. Over the life of
the agreements, TBC may receive as much as $2.9 million, including the $1.5
million received, from Synthelabo.
FORM 10-Q Page 14
On October 10, 1996 the Company signed a strategic alliance agreement with LG
Chemical, LTD. ("LG Chem"), a Korean corporation. In conjunction with the
agreement, LG Chem purchased 1,250,000 shares of common stock for $4.00 per
share for a total of $5 million. In addition, LG Chem has the option to
purchase up to $5 million of common stock on one of four exercise dates ending
at December 31, 1997. The minimum purchase amount is $1,000,000 and LG Chem
and TBC must agree on the exercise price or the stock option cannot be
exercised on the given exercise date.
The Company's operating results have fluctuated significantly during each
quarter, and the Company anticipates that such fluctuations, largely
attributable to varying research and development commitments and expenditures,
will continue for the next several years.
RESULTS OF OPERATIONS
---------------------
THREE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues decreased from $3,404,018 in the three month period ended September
30, 1995 to $1,102,500 in the same period of 1996, a decrease of 68%.
Revenues were composed of earned revenues under research agreements, sales of
products and services, and grant income. The period ended September 30, 1995,
included a $2 million milestone payment from EISAI (which agreement terminated
in March 1996).
Total operating expenses increased 38% from $4,976,778 in the three month
period ended September 30, 1995 to $6,932,395 in the same period of 1996.
Research and development expenses increased 59% from $3,753,107 in the three
month period ended September 30, 1995 to $5,980,096 in the same period of
1996. This increase was primarily attributable to continued increases in
research and development activity related to the clinical trials on the
compound Novastan/R/ (argatroban) and development work associated with the
Selectin and Endothelin programs. General and administrative expenses
decreased 26% from $1,223,671 in the three month period ended September 30,
1995 to $952,299 in the same period of 1996. The decrease was primarily
attributable to the consolidation of the IPI operation in March 1996. The
Company had 99 employees at September 30, 1995, including 25 employees at IPI,
and 80 employees at September 30, 1996, including 1 employee at IPI.
Other income and expenses was composed entirely of investment income on
invested funds and interest expense. Investment income decreased from
$285,333 in the three month period ended September 30, 1995 to $199,811 in the
same period of 1996, a decrease of 30%. The decrease is due to lower interest
rates from 1995 to 1996 and a lower investment balance throughout 1996.
The Company incurred a net loss of $1,287,427 for the three month period ended
September 30, 1995, compared with a net loss of $5,587,670 for the same period
of 1996. The increase was due to a $2.0 million milestone payment from EISAI
received in 1995 and increased research and development expenses related to
clinical trials on the compound Novastan/R/ in 1996.
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues decreased from $6,052,987 in the nine month period ended September
30, 1995 to $4,303,276 in the same period of 1996, a decrease of 29%.
Revenues were composed of earned revenues under research agreements, sales of
products and services, and grant income. The period ended September 30, 1995,
included a $2 million milestone payment from EISAI (which agreement terminated
in March 1996). The period ended September 30, 1996, included $1,645,000 from
Synthelabo related to the agreement to supply certain clinical data.
Total operating expenses increased 27% from $16,463,259 in the nine month
period ended September 30, 1995 to $20,982,742 in the same period of 1996.
Included in the 1995 operating expenses was a non-cash
FORM 10-Q Page 15
charge for in-process research and development for $1,973,883. Exclusive of
this charge, operating expenses increased 45% from $14,489,376 in the nine
month period ended September 30, 1995, to $20,982,742 in the same period of
1996. Research and development expenses increased 66% from $10,560,959 in the
nine month period ended September 30, 1995 to $17,484,641 in the same period
of 1996. General and administrative expenses decreased 22% from $3,928,417 in
the nine month period ended September 30, 1995 to $3,076,936 in the same
period of 1996. See comments under the preceding three month period comparison
for explanation of the changes.
Other income and expenses was composed entirely of investment income on
invested funds and interest expense. Investment income decreased from
$959,571 in the nine month period ended September 30, 1995 to $697,089 in the
same period of 1996, a decrease of 27%. See comments under the preceding three
month period comparison for explanation of the decrease.
The Company incurred a net loss of $9,450,701 for the nine month period ended
September 30, 1995, compared with a net loss of $15,982,377 for the same
period of 1996. See comments under the preceding three month period
comparison for explanation of the changes.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has financed its research and development activities to date
principally through (i) private sales of common stock and an initial public
offering of a unit security, (ii) issuance of common stock in conjunction with
assumption of liabilities and assets to acquire IPI and the Novastan/R/
license, (iii) revenues and proceeds from sales of common stock in connection
with corporate partner collaboration and research agreements and (iv)
investment income, net of interest expense. During the first nine months of
1996, the Company utilized $14,933,119 net cash in operating activities and
$13,642,447 was provided by financing activities. The use of cash in
operations was caused by the Company's net loss of $15,982,377. Financing
activities produced approximately $13,640,000 in net proceeds for the Company
resulting from the 1996 private placement and the remaining was from exercise
of stock options and warrants.
The Company expects to incur substantial research and development expenditures
as it designs and develops biopharmaceutical products for the prevention and
treatment of cardiovascular diseases. The Company anticipates that operating
expenses will continue to increase during 1996 and subsequent years. These
costs to develop Novastan/R/ have increased and will continue to increase
during 1996 due to the continuation of clinical trials and will continue to be
significant through the FDA approval process. These costs include, among
other things, hiring personnel to direct and carry out all operations related
to the clinical trials, paying for hospital and procedural costs, services of
a contract research organization, and purchasing and manufacturing large
quantities of the compound to be used in such trials. In addition, the
Company anticipates that the administrative costs associated with this effort
will continue to be significant. The amounts and timing of expenditures will
depend on the progress of ongoing research and clinical development and
product launch costs.
At September 30, 1996, the Company had cash, cash equivalents and short-term
investments of approximately $12.5 million. Subsequent to September 30, 1996
the Company received $5 million from LG Chem, a Korean corporation, related to
a strategic alliance agreement. The Company anticipates that its existing
capital resources and its other revenue sources should be sufficient to fund
its cash requirements into the third quarter of 1997. The Company's existing
capital resources may not be sufficient to fund the Company's operations
through commercialization of its first product. Moreover, the Genentech
Agreement and Synthelabo Agreement require the Company to maintain a tangible
net worth of at least $5.0 million during the term of these agreements. For
failure to maintain at least $5.0 million of net worth, Synthelabo may require
that the technology be transferred to, and the development program be
conducted by, a joint venture owned by TBC and Synthelabo. As of September
30, 1996, the Company's tangible net worth significantly exceeded $5.0
million. The Genentech Agreement and Synthelabo Agreement are also terminable
for other reasons. Termination of either of these agreements will have a
material adverse effect on the Company.
FORM 10-Q Page 16
The Company will need to raise substantial funds for future operations and is
actively seeking such funding through collaborative arrangements, public or
private financing, including equity financing, and other arrangements. The
Company expects that significant additional expenditures will be required to
complete the clinical trials related to Novastan/R/ and to it other product
candidates which are not yet in clinical trials. If the Company's current (or
any additional) product candidates enter clinical trials, further significant
expenditures will be necessary for laboratory space, scientific and
administrative personnel, and services of contract research organizations.
There can be no assurance that the Company will be able to obtain additional
financing on acceptable terms or in time to fund any necessary or desirable
expenditures. In the event such financing is not obtained, the Company's drug
discovery or development and programs regarding Novastan/R/ and its other
product candidates may be delayed, scaled back or eliminated; or it may be
required to obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would not
otherwise relinquish.
PENDING LITIGATION
As of September 30, 1996, one class action shareholder lawsuit remains pending
against the Company and includes certain directors and officers as defendants.
The Company disputes all claims set forth in this lawsuit and intends to
contest it vigorously. However, the Company is unable to evaluate the
potential outcome at this time.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
The Company's research and development activities involve the controlled use
of hazardous and radioactive materials. The Company is subject to federal,
state, and local laws and regulations governing the use, manufacture, storage,
handling and disposal of such materials and certain waste products.
Management believes that the Company is in compliance with all such laws,
regulations and standards currently in effect and that the cost of compliance
with such laws, regulation, and standards will not have a material adverse
effect on the Company. The Company does not expect to incur any capital
expenditures for environmental control in the foreseeable future.
IMPACT OF INFLATION AND CHANGING PRICES
The pharmaceutical research industry is labor intensive, and wages and related
expenses increase in inflationary periods. The lease of space and related
building services for the Houston facility contains a clause that escalates
rent and related services each year based on the increase in building
operating costs and the increase in the Houston Consumer Price Index,
respectively. To date, inflation has not had a significant impact on
operations.
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (Statement 121). The Company has adopted the
statement effective December 31, 1995. Statement 121 requires that long-
lived assets and certain identifiable intangible assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In addition, Statement 121 requires that certain long-lived
assets and certain identifiable intangible assets to be disposed of be
reported at the lower of carrying amount or fair value less costs to sell.
The Company believes the goodwill associated with IPI, $643,750, was impaired
due to the decision to cease operations at IPI and the sale of the QED
business unit and has recorded a charge to expense.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" (Statement 123).
Statement 123 establishes financial accounting and reporting
FORM 10-Q Page 17
standards for stock-based employee compensation plans using a fair value
based methodology as an alternative to intrinsic value based methodology. In
addition, Statement 123 established the fair value as the measurement basis
for transactions in which an entity issues its equity instruments to acquire
goods or services from non-employees. The accounting and reporting
requirements of Statement 123 were effective beginning January 1, 1996. The
adaptation of Statement 123 is not expected to have a material impact on
TBC's 1996 financial position or results of operations as the Company intends
to continue using the intrinsic value method.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this Report are forward looking
statements. Such forward looking statements include, without limitation,
statements under (a) "Organization and Significant Accounting Policies --
Organization" regarding TBC's expectations for future drug discovery and
development and related expenditures and (b) "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" - regarding TBC's estimate of sufficiency of existing
capital resources and ability to raise additional capital to fund cash
requirements for future operations. Although TBC believes that the
expectations reflected in such forward looking statements are reasonable, it
can give no assurance that such expectations reflected in such forward
looking statements will prove to have been correct. The ability to achieve
TBC's expectations is contingent upon a number of factors which include (i)
ongoing cost of research and development activities, (ii) cost of clinical
development of product candidates, (iii) attainment of research and clinical
goals of product candidates, (iv) timely approval of TBC's product
candidates by appropriate governmental and regulatory agencies, (v) effect
of any current or future competitive products, (vi) ability to manufacture
and market products commercially, (vii) retention of key personnel and
(viii) obtaining and timing of sufficient financing through capital raising
or collaborative agreements to fund operations.
FORM 10-Q Page 18
PART II OTHER INFORMATION
- -------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
On November 21, 1994, a class action shareholders' suit was filed in the
United States District Court for the Southern District of Texas, Houston
Division seeking damages in the amount of $16 million. Plaintiffs are two
individuals who purchased shares of the Company on December 16, 1993
following the Company's initial public offering. In their complaint,
plaintiffs have sued the Company, and certain members of the board of
directors and certain officers alleging violations of Sections 11, 12 and 15
of the Securities Act of 1933, as amended (the "Act"). Plaintiffs have also
named David Blech, D. Blech & Co., Incorporated and Isaac Blech as
defendants. On January 23, 1995, the Company and the members of the board of
directors filed a motion to dismiss the plaintiffs' complaint pursuant to
Rule 9(b) and Rule 12b(6) of the Federal Rules of Civil Procedure. In
addition, defendant John Pietruski, Chairman of the Board of Directors, filed
a motion to dismiss the plaintiffs' complaint pursuant to Rule 12(b)(2) of
the Federal Rules of Civil Procedure. On February 7, 1995, the plaintiffs
filed a motion for class certification. The Court denied the motion by the
Company and by John Pietruski.
On March 28, 1995, a second class action shareholders' suit was filed in the
United States District Court for the Southern District of New York seeking
unspecified damages. Plaintiffs are eight individuals who purchased shares
in various companies for which D. Blech & Co. acted as an underwriter (or co-
underwriter) or marketmaker. In their complaint, the plaintiffs have sued the
Company alleging violations of Section 10(b) of the Securities Exchange Act
of 1934, as Amended (the "Exchange Act") and Rule 10b-5 promulgated
thereunder by the Securities and Exchange Commission (the "Commission").
Plaintiffs have named a number of defendants, including David Blech and D.
Blech & Co., four individuals, two brokerage firms, one investment management
company and ten other companies for which D. Blech & Co. acted as underwriter
or marketmaker.
On August 14, 1995, the Judicial Panel on The Multi-District Litigation
ordered that the action filed in the United States District Court for the
Southern District of Texas, Houston Division be transferred to the United
States District Court for the Southern District of New York for coordinated
or consolidated pretrial proceedings with the action pending there. In
light of the transfer and consolidation of the Texas case with similar cases
against other companies for which Blech acted as underwriter, the Company
requested that the Court in New York reconsider the Texas Court's denial of
its motion to dismiss as a part of the Court's consideration of similar
motions to dismiss filed by those companies. All of these motions were
presented to the Court on February 6, 1996. On June 6, 1996, the New York
District Court entered two memorandum opinions in the consolidated cases. In
one of its opinions, the Court dismissed all of the Exchange Act and common
law fraud claims filed against the Company and its officers and directors,
but afforded those plaintiffs the right to attempt to preserve those claims
by repleading them. The Court ordered that those claims be repleaded no
later than July 26, 1996. Plaintiffs did not replead those claims by the
deadline, resulting in the dismissal of all claims against the Company in
that litigation. In its opinion in the second case, i.e., the case filed on
November 21, 1994, the Court granted the Company and its officers and
directors' motion for reconsideration, but together with all other similar
pending motions, denied the requested relief. Pursuant to the court's order,
the Company therefore filed an answer in that case. The Company also filed a
Motion seeking leave of court to prosecute an immediate appeal of the Court's
denial of the Company's Motion to Dismiss. The Court heard argument on that
Motion on October 10, 1996, and the Company awaits the Court's ruling. Given
the early stage of that case, which is the only remaining litigation against
the Company, the Company is unable to evaluate its potential outcome at this
time. The Company disputes these claims and intends to contest them
vigorously.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
FORM 10-Q Page 19
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ----------------------------------------------------
None
ITEM 5. OTHER INFORMATION
- --------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
EXHIBIT NO. DESCRIPTION
----------- -----------
3.6(2) Certificate of Amendment of Certificate of Incorporation
3.7 Amended and Restated Bylaws of Texas Biotechnology Corporation
10.51(1)* Letter Agreement regarding Argatroban Studies Information
dated December 14, 1995, between the Company and Synthelabo
Recherche
10.52(1) Amendment B to Clinical Trial Research Agreement dated
February 10, 1995 between Texas Biotechnology Corporation
and Coromed Inc.
10.53(2) Letter of Understanding between Texas Biotechnology Corporation and
Mitsubishi Chemical Corporation dated July 10, 1996
10.54(2) Form of Indemnification Agreement between Texas Biotechnology
Corporation and its officers and directors dated May 3, 1996
10.55(2) Amended and Restated 1995 Non-Employee Director Stock Option Plan
(as amended by the Board of Directors on June 30, 1996)
10.56* Strategic Alliance Agreement between Texas Biotechnology
Corporation and LG Chemical, Ltd. dated October 10, 1996
10.57 Common Stock Purchase Agreement between Texas Biotechnology
Corporation and LG Chemical, Ltd. dated October 10, 1996
27.1 Financial Data Schedule
* The Company has omitted certain portions of this agreement in reliance on
Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.
(1) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended March 31, 1996 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the
quarter ended June 30, 1996 and incorporated herein by reference.
REPORTS ON FORM 8-K
- --------------------
None
FORM 10-Q Page 20
TEXAS BIOTECHNOLOGY CORPORATION
SEPTEMBER 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 13th day of November, 1996.
TEXAS BIOTECHNOLOGY CORPORATION
By: /s/ David B. McWilliams
------------------------
David B. McWilliams
President and Chief Executive Officer
By: /s/ Stephen L. Mueller
-----------------------
Stephen L. Mueller
Vice President of Administration
Secretary and Treasurer
(Principal Financial and Accounting Officer)
FORM 10-Q Page 21
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
3.6 (2) Certificate of Amendment of Certificate of Incorporation
3.7 Amended and Restated Bylaws of Texas Biotechnology Corporation
10.51 (1)* Letter Agreement regarding Argatroban Studies Information
dated December 14, 1995, between the Company and Synthelabo
Recherche
10.52 (1) Amendment B to Clinical Trial Research Agreement dated
February 10, 1995 between Texas Biotechnology Corporation
and Coromed Inc.
10.53 (2) Letter of Understanding between Texas Biotechnology Corporation and
Mitsubishi Chemical Corporation dated July 10, 1996
10.54 (2) Form of Indemnification Agreement between Texas Biotechnology
Corporation and its officers and directors dated May 3, 1996
10.55 (2) Amended and Restated 1995 Non-Employee Director Stock Option Plan
(as amended by the Board of Directors on June 30, 1996)
10.56* Strategic Alliance Agreement between Texas Biotechnology Corporation and LG
Chemical, Ltd. dated October 10, 1996
10.57 Common Stock Purchase Agreement between Texas Biotechnology Corporation and
LG Chemical, Ltd. dated October 10, 1996
27.1 Financial Data Schedule
- --------------
* The Company has omitted certain portions of this agreement in reliance
on Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.
(1) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for
the quarter ended March 31, 1996 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for
the quarter ended June 30, 1996 and incorporated herein by reference.
FORM 10-Q Page 22