SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-19732
CORVAS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0238812
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3030 SCIENCE PARK ROAD, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices, including zip code)
(619) 455-9800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
Par Value
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 and 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The approximate aggregate market value of the Common Stock held by non-
affiliates of the Registrant, based upon the last sale price of the Common Stock
reported on the Nasdaq National Market was $71,032,700 as of March 17, 1997.*
The number of shares of Common Stock outstanding as of March 17, 1997 was
13,827,079.
DOCUMENTS INCORPORATED BY REFERENCE
(To the extent indicated herein)
The Registrant's definitive proxy statement to be filed in connection with
solicitation of proxies for its Annual Meeting of Stockholders to be held on May
15, 1997 is incorporated by reference into Part III of this Form 10-K.
* Calculated on the basis of 12,090,673 shares held by nonaffiliates (less
than 10% shareholders on as-converted basis) and assumes, solely for this
purpose, that the executive officers and directors of the Registrant are
affiliates as defined in Rule 405 under the Securities Act of 1933, as
amended.
PART I
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS IN
THE SECTIONS ENTITLED "BUSINESS STRATEGY," "INTEGRATED TECHNOLOGY PLATFORMS,"
"PRODUCT DEVELOPMENT PROGRAMS," "STRATEGIC ALLIANCES," "PATENTS AND PROPRIETARY
RIGHTS," AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
ITEM 1. BUSINESS
OVERVIEW
Corvas International, Inc. ("Corvas" or the "Company") is a
biopharmaceutical firm engaged in the design and development of a new generation
of therapeutic agents in the fields of blood clot formation (thrombosis) and
inflammation, and other diseases. The Company seeks to develop and
commercialize novel drugs for the improved treatment and prevention of major
cardiovascular diseases, such as heart attack, stroke, deep vein thrombosis,
pulmonary embolism, and acute inflammation associated with trauma, shock and
reperfusion injury in stroke, as well as other diseases. In contrast to
currently available therapies, the Company's candidate drugs are designed to
intervene more specifically in the disease process. Corvas intends to develop
both injectable and oral drugs to treat patients who cannot be optimally treated
with current therapeutics. The Company believes that its chronic antithrombotic
drug discovery and development program is among the most comprehensive in the
industry and that, together with its alliance partner, it is well positioned to
develop and commercialize orally-active antithrombotic agents.
Corvas has discovered its portfolio of drug candidates by integrating the
Company's in-depth knowledge of the biology of thrombosis and, more generally,
vascular biology, with advanced and proprietary drug discovery and design
technology based on a strong medicinal chemistry platform. The Company believes
that such technology has broad potential application outside the antithrombotic
field and will provide the basis for expanding its product portfolio.
Corvas' scientists are experienced in a wide range of disciplines which are
integrated in a systematic discovery approach. Current programs employ
medicinal chemistry, peptide chemistry, computer-aided drug design, structural
biology, molecular biology, biochemistry, physiology, and pharmacology
competencies. The Company's programs are based on four technology platforms:
structure-based drug design, medicinal chemistry, biological discovery, and
molecular pharmacology. The first three technology platforms generate drug
leads, while the fourth platform enables the selection of drug candidates.
The Company's structure-based drug design and medicinal chemistry programs
are the source of synthetic drug molecules, including those demonstrating oral
activity. Biological discovery methods, including novel gene discovery,
cloning, expression, and mutagenesis methods are used to identify and improve
novel proteins as drug candidates and as discovery tools. Molecular
pharmacology techniques, including IN VITRO biochemical analysis and IN VIVO
biological testing, are used to rigorously characterize the many drug leads
derived from the other platforms in order to select specific drug candidates for
preclinical and clinical development.
The Company has introduced several antithrombotic compounds into clinical
and preclinical development, including orally-active thrombin inhibitors, which
are being developed in collaboration with Schering-Plough Corporation
("Schering-Plough"). In 1995, Corvas conducted an initial exploratory human
safety study of CVS-1123, an early generation orally-active thrombin inhibitor.
In this Phase Ia study, CVS-1123 demonstrated oral activity and excellent
tolerability. In January 1997, Schering-Plough selected an advanced generation
oral thrombin inhibitor as a clinical development candidate, for which Schering-
Plough expects to begin human studies in late 1997. See "Business - Strategic
Alliances - Relationship with Schering-Plough."
-2-
Corvas is also conducting an active discovery program for inhibitors of the
coagulation serine protease Factor Xa. The primary goal of this program is the
development of another category of safe and effective orally-active drugs to be
used in clinical indications, such as chronic arterial thrombosis, that may not
be readily addressed by the oral thrombin approach. Schering-Plough acquired an
option in 1994 to expand its initial alliance with Corvas to include Factor Xa
inhibitors; this option was exercised in December 1996. See "Business -
Strategic Alliances - Relationship with Schering-Plough."
Company scientists have discovered and characterized a class of natural
small protein anticoagulants known as the Nematode Anticoagulant Protein ("NAP")
family. Specific members of this family inhibit either Factor Xa or Factor VIIa
complexed with its non-enzymatic co-factor, Tissue Factor ("Factor VIIa/TF").
The Company has completed final preclinical toxicology studies of a Factor
VIIa/TF inhibitor as an injectable agent for the treatment of acute thrombotic
indications, such as treatment of venous thrombosis and prevention of pulmonary
embolism and unstable angina, and expects to begin human testing in the first
part of 1997.
In its anti-inflammatory program, the Company has discovered a promising
novel protein, neutrophil inhibitory factor ("NIF"), which blocks certain white
blood cell functions associated with inflammation. In 1995, the Company entered
into an option agreement with Pfizer Inc. ("Pfizer") to collaborate on the
development of NIF. In February 1997, Pfizer elected to exercise its option to
enter into a license and development agreement on the NIF program, which is
intended to be used as a therapy for stroke and head injury. See "Business -
Strategic Alliances - Relationship with Pfizer."
A Phase Ia clinical trial has been completed for the Company's first drug
candidate, CORSEVIN M, an antibody-based antithrombotic which has been licensed
to, and is being further developed by, Centocor, Inc. ("Centocor"). See
"Business - Strategic Alliances - Relationship with Centocor."
In 1992, Corvas entered into an alliance with Ortho Diagnostic Systems,
Inc. ("Ortho"), a Johnson & Johnson company, to develop and commercialize a
laboratory test for blood clotting function based on Corvas' proprietary
technology. Corvas supplies a critical raw material, recombinant human tissue
factor, to Ortho and has licensed rights to Ortho. Ortho currently produces and
markets prothrombin time reagents based on such technology. See "Business -
Strategic Alliances - Relationship with Ortho Diagnostic Systems."
With regard to the foregoing discussion of the Company's research and
development programs, there can be no assurance that either the underlying
science or the related research and development being conducted will be
successful or will yield approved products.
CORVAS-Registered Trademark- is a registered trademark, and the Corvas
logo, CORTHROMBIN-TM-, CORDECIN AS-TM-, CORSEVIN AS-TM- and CORSEVIN M-TM- are
trademarks of the Company. This Form 10-K also includes names and marks of
companies other than the Company.
BUSINESS STRATEGY
Corvas was formed to discover and develop novel pharmaceutical products for
the improved treatment and prevention of acute and chronic cardiovascular
diseases, inflammatory diseases, and related vascular disorders, including deep
vein thrombosis, pulmonary embolism, myocardial infarction (heart attack),
unstable angina, atrial fibrillation, and stroke. The Company believes that it
has established a leadership position in the discovery and development of
antithrombotic agents - drugs which prevent the formation of blood clots in the
vessels of vital organs - and particularly in the design of oral drugs which
have significant clinical and commercial potential. The Company is also
pursuing the development of new injectable antithrombotic agents with unique
mechanisms of action for the treatment of acute thrombotic disorders. Using
knowledge derived from its antithrombotic program regarding inhibition of
certain proteases, Corvas is leveraging its technology platforms in biology and
chemistry to include targets in areas such as cancer and specific viral
diseases.
-3-
Key elements of the Company's strategy include the following:
- FOCUS ON ANTITHROMBOTIC DRUGS, A HIGH GROWTH SECTOR IN THE LARGE
CARDIOVASCULAR MARKETPLACE.
Corvas is developing a portfolio of antithrombotic drug candidates,
directed at three molecular targets, for multiple clinical indications
and routes of administration. The Company believes that its program
to develop inhibitors of blood coagulation enzymes is among the most
comprehensive in the industry.
- EXPAND ITS LEADERSHIP POSITION IN INHIBITION OF SPECIFIC PROTEASES AND
RECEPTORS INVOLVED IN THROMBOSIS AND RELATED DISEASE MECHANISMS.
Corvas has focused on antithrombotic drugs to exploit the potential
that has been created by advances in understanding the biology of
thrombosis and new molecular discovery technologies. The blood
coagulation enzymes targeted by the Company are members of a
structurally-related class of serine proteases. Corvas believes it
has achieved a leading position in the development of orally-active
inhibitors of one of the proteases, thrombin (CORTHROMBIN compounds).
Advances made in this specific program, and other proprietary
technologies, are being leveraged by application to other targets in
the same protease family, including Factor Xa and Factor VIIa/TF.
Corvas' drug design efforts are further enhanced over the competition
by having access to the three-dimensional structures of these three
coagulation protease targets which, in combination with state-of-the-
art expertise in molecular modeling and computer-aided drug design,
has allowed Corvas scientists to optimize and incorporate design
elements that significantly improve the chances for successful drug
development.
- INTEGRATE DRUG DISCOVERY METHODOLOGIES WITH BIOLOGICAL EVALUATION FOR
RAPID ITERATION OF DEVELOPMENT CANDIDATES.
Company scientists are experienced in a wide range of disciplines
which are all integrated in a systematic discovery approach. Active
programs exploit medicinal chemistry, peptide chemistry, computer-
aided drug design, structural biology, molecular biology,
biochemistry, physiology, and pharmacology competencies. The
Company's programs are based on four technology platforms: structure-
based drug design, medicinal chemistry, biological discovery, and
molecular pharmacology. Structure-based drug design and medicinal
chemistry programs are the source of small molecule drugs, including
those possessing oral activity. The Company uses biological discovery
methods, including novel gene discovery, cloning, expression, and
mutagenesis methods, to identify novel proteins (biologicals) as drug
candidates and discovery tools. Molecular pharmacology techniques,
including IN VITRO biochemical analysis and IN VIVO biological
testing, are used to rigorously characterize the many drug leads in
order to select specific drug candidates for preclinical and clinical
development.
- ESTABLISH A STRONG PORTFOLIO OF PATENTS AND PROPRIETARY TECHNOLOGY.
Corvas has adopted a proactive policy of filing and prosecuting patent
applications claiming a range of inventions, including a number of new
chemical classes of compounds, uses and methods of synthesis of new
molecules, discovery methods, novel genes and gene products, and novel
analytical reagents. Corvas has entered into selected agreements to
license enabling technology from third parties and intends to seek
rights to additional external technology on an ongoing basis to
complement internal discovery efforts. See "Business - Patents and
Proprietary Rights."
- ENTER INTO STRATEGIC ALLIANCES WITH ESTABLISHED PHARMACEUTICAL FIRMS
FOR PRODUCTS TARGETED AT CHRONIC INDICATIONS.
Corvas has established alliances with Schering-Plough for the
development of anticoagulant products for chronic care based on oral
thrombin inhibitors (CORTHROMBIN compounds) and Factor Xa inhibitors
(CORDECIN compounds). See "Business - Strategic Alliances -
Relationship with Schering-Plough." The Company intends to establish
additional alliances to access resources required to support the
development and commercialization of other technologies and products
for chronic clinical indications.
-4-
- ENTER INTO STRATEGIC ALLIANCES WHICH RETAIN U.S. RIGHTS TO SELECTED
ACUTE CARE PRODUCTS WHEN CONSISTENT WITH THE FIRM'S FINANCIAL
RESOURCES AND EXPECTED RETURN ON STOCKHOLDER INVESTMENT.
Corvas intends to retain exclusive, joint commercialization, or co-
promotion rights to selected acute care products for the U.S. market
when feasible and when expected to provide an appropriate economic
return, balancing the resources required and risks involved. Based on
this strategy, the Company formed a strategic alliance with Pfizer to
develop and commercialize NIF as a therapy for stroke. See "Business
- Strategic Alliances - Relationship with Pfizer." With regard to
NAPc2, a member of the NAP family, the Company has completed the
manufacturing of clinical supplies and preclinical evaluations, and
plans to begin human trials by early in the second quarter of 1997.
Corvas is seeking one or more partners to aid in the development of
NAPc2 and plans an increasing role in the development and
commercialization of this product in the U.S. Additionally, Schering-
Plough retains certain rights to injectable anticoagulants as part of
the companies' alliance for Factor Xa inhibitors. One compound in
this category is NAP5, another member of the NAP family. NAP5 is a
potent small protein inhibitor of Factor Xa.
- EXPAND PRODUCT PORTFOLIO BY APPLICATION OF TECHNOLOGY TO DISEASE
TARGETS OUTSIDE THE ANTITHROMBOTIC DRUG FIELD.
The Company's technology platforms may be broadly applied to the
discovery and development of inhibitors of new serine and cysteine
proteases. In the course of conducting its antithrombotic program,
proprietary chemical methods focusing on the synthesis of
combinatorial libraries specifically targeted to inhibitors of serine
and cysteine proteases have been discovered. The Company is currently
adapting these chemical methods to combinatorial chemistry formats
which increase the speed and economy of new lead discovery and
strengthen its ability to expand the number of target proteases in its
portfolio. The computational chemistry and drug design technology
resident at Corvas also permits the expansion and leveraging of the
firm's existing portfolio. Expansion areas being targeted include
inflammation, cancer and virology, in which specific proteases play
key roles in the pathophysiology of disease.
BACKGROUND
Thrombosis and inflammation are closely linked physiological processes
employed by the body to protect itself against injury. When these processes are
excessively or inappropriately activated, the processes themselves can result in
significant tissue injury, which can lead to specific pathologies and ultimately
death.
THROMBOSIS
The formation of a blood clot, or thrombus, results from a complex cascade
of biochemical events involving the blood coagulation proteases and cellular
fragments called platelets. Although blood clot formation is a normal vascular
repair mechanism, it can be excessively activated which may lead to local blood
clot formation (thrombosis) that can result in occlusion of a critical blood
vessel in a vital organ, such as the heart, lungs or brain. Vascular diseases
associated with thrombosis afflict more than 3,000,000 individuals annually in
the U.S. and are the causes of significant mortality and morbidity associated
with cardiovascular diseases.
-5-
Thrombosis causes several significant diseases characterized by the
location of the blood vessel where the clot is lodged. For example, acute
myocardial infarction ("MI") results from obstruction of blood flow due to the
formation of an occlusive thrombus in a coronary artery which supplies blood to
the heart muscle; stroke or transient ischemic attacks ("TIA") may result from a
thrombus in an artery which supplies blood to a part of the brain. Similarly, a
clot in the major veins of the legs, called deep vein thrombosis ("DVT"), causes
local inflammation, pain and other complications, including the dislodgment of
part of the thrombus which can travel to the lungs and result in life-
threatening pulmonary embolism ("PE"). Thrombosis can also be generalized, with
microthrombus formation occurring throughout the vascular system. This
condition, known as disseminated intravascular coagulation ("DIC"), is a
consequence of cancer and various infectious diseases including sepsis, and may
result in depletion of blood coagulation factors, multiple organ failure,
hemorrhage and death. Activation of thrombotic mechanisms in the body
contributes to unstable angina ("UA") or serious chest pain in patients that
have a significant risk of Ml due to the transient occlusion of a critical
coronary vessel in the heart. Finally, DVT and PE can be complications of
surgery indirectly involving the vasculature such as major orthopedic and
abdominal surgery.
Two classes of antithrombotic drugs are presently in clinical use:
anticoagulants and antiplatelet agents. In the U.S., heparins and warfarin are
the only drugs currently approved for use as acute and chronic anticoagulants,
respectively. Although these drugs are widely prescribed, they have significant
limitations. Heparins, which act by an indirect inhibition of one or more
coagulation proteases, can cause excessive bleeding and decreased platelet count
(thrombocytopenia) and can be administered only by injection. Low molecular
weight heparins have been introduced which may be injected subcutaneously and no
longer require routine monitoring of coagulation function. Although these
advantages have led to adoption for selected indications, low molecular weight
heparins still suffer from many of the limitations of traditional standard,
unfractionated heparins. Warfarin lacks specificity of action, may cause
bleeding, must be carefully monitored and, due to its slow onset of action, is
unsuitable for use as an acute antithrombotic drug. Additionally, there are
many adverse drug and dietary interactions that impact the effectiveness of
warfarin due to the difficulties in maintaining effective blood levels of the
drug.
Aspirin is the most commonly used antiplatelet agent for chronic therapy,
although the first in a new class of antiplatelet agents, GPIIb/IIIa
antagonists, has been recently introduced to the market for acute thrombotic
indications. Aspirin also has a relatively slow onset of action and its effect
is reversed by the natural production of new blood platelets, a process that
takes seven to eleven days. In addition, chronic administration of aspirin
carries the risk of gastrointestinal bleeding and hemorrhagic stroke.
Currently, GPIIb/IIIa antagonists can be administered acutely by intravenous
routes and must be used with an anticoagulant such as heparin. These and other
factors limit the use of currently available antithrombotic drugs, especially on
a chronic basis.
The worldwide market for antithrombotic agents is estimated to be greater
than $2,000,000,000. Approximately half of the sales are in each of the
anticoagulant and antiplatelet categories. According to market audits, 1995
sales of anticoagulants in the U.S. alone were greater than $550,000,000. Of
this total, approximately $400,000,000 was contributed by the sales of COUMADIN
- -Registered Trademark-, the DuPont-Merck brand of warfarin. Sales of COUMADIN
have been growing in recent years due to its use by many physicians for new
indications: prophylaxis and treatment of patients with atrial fibrillation
("AF"), and prevention of recurrent MI.
Approximately $100,000,000 of the U.S. anticoagulant sales reported in 1995
are in the injectable category and comprise the traditional heparins and the
newer low molecular weight heparins. In 1995, sales of LOVENOX-Registered
Trademark-, the first low molecular weight heparin introduced in the U.S. by
Rhone-Poulenc Rorer ("RPR"), approximated $67,000,000. RPR has reported that
sales of LOVENOX and related brands exceeded $300,000,000 worldwide in 1995.
LOVENOX is primarily indicated for prophylaxis of venous thrombosis in major
orthopedic surgery, such as hip and knee replacement. A second low molecular
weight heparin, FRAGMIN-Registered Trademark-, was recently approved in the U.S.
for prophylaxis against deep vein thrombosis in patients undergoing major
abdominal surgery.
-6-
The Company believes the large number of patients affected by thrombotic
and associated vascular diseases, together with the limited efficacy of, and
adverse side effects associated with, existing surgical procedures and drug
therapies, provides significant market opportunities for new drugs. The growth
in sales in the antithrombotic drug category supports the view that physicians
are adopting new agents in search of better therapeutic outcomes and economics.
Corvas is building on recent scientific advances in the understanding of the
mechanisms of blood clot formation and is developing new therapeutics designed
to intervene more specifically in the disease process to result in drugs which
the Company believes will offer important economic and therapeutic advantages
over existing therapies. As there are no selective orally-active thrombin,
Factor Xa or Factor VIIa inhibitors presently available, the compounds under
development at Corvas aim to address unmet needs in antithrombotic therapy.
INFLAMMATION
Inflammation is the body's response to injury and infection by foreign
organisms. The diverse inflammatory responses are mediated by a series of
molecular events, known as the inflammatory cascades, by which the body attempts
to limit or destroy the injurious agents, heal wounds and maintain health.
However, inflammatory responses can result in significant tissue injury and
disease. A primary event in a major class of inflammatory responses is the
attachment, or adhesion, of neutrophils, a specific type of white blood cell, to
endothelial cells which line the blood vessel walls. Adhesion is caused by the
interaction of specific receptors on the neutrophils with target adhesion
molecules on the endothelial cells. After adhesion occurs, the neutrophils
migrate across the lining of the blood vessel and into the underlying tissue
where they release toxic substances which contribute to tissue damage. These
events occur in both acute and chronic inflammatory conditions. Acute disorders
which are often accompanied by this inflammatory response include stroke,
traumatic shock and many other forms of reperfusion injury which can occur
following certain surgical procedures such as aortic aneurysm repair, artery
bypass grafting and major abdominal surgery.
Current anti-inflammatory drugs generally seek to alleviate symptoms rather
than intervene in the underlying disease processes. Blocking the activation and
adhesion of white blood cells to endothelial cells, and thereby preventing their
accumulation in tissue, is an alternate approach which could more effectively
intervene early in the inflammatory process. Using advanced understanding of
the underlying mechanisms of inflammation and tissue injury, Corvas is seeking
to develop new anti-inflammatory agents designed to intervene early in the
disease process and provide improved efficacy and safety. The Company is
focusing its NIF program on the development of a highly specific protein drug
that will treat the damage occuring after the restoration of blood flow to the
affected area following stroke and head trauma, commonly referred to as
reperfusion injury. The Company believes that a drug such as NIF that is
specific, potent and reversible could address a large unmet medical need.
INTEGRATED TECHNOLOGY PLATFORMS
In its drug discovery programs, Corvas applies a highly integrated,
multidisciplinary approach to produce novel molecules as both drug discovery
tools and drug candidates. In addition, the Company has developed combinatorial
chemistry approaches focused on protease inhibition which have yielded lead
compounds for its antithrombotic program and can be broadly applied to other
important protease targets. The Company believes that these technologies have
potential application for the discovery of drug candidates in other therapeutic
fields.
STRUCTURE-BASED DRUG DESIGN
Corvas scientists have extensive knowledge and practical experience in
computer-aided drug design and have developed novel, proprietary software to
expedite the design of synthetic drug candidates. Using computer-aided
molecular modeling techniques, along with X-ray crystal structures of native
enzymes as well as enzyme inhibitor complexes, Company scientists have gained
valuable insights regarding the unique feature of each of its specific enzyme
targets. Corvas scientists have used this information to both design novel
inhibitors and to optimize earlier lead compounds. The X-ray structure
determinations are the result of a collaboration with university-based
scientists, from whom Corvas has obtained crystal structures of candidate drugs
bound to the active site of the target enzymes thrombin and Factor Xa. Recently
the crystal structure of the Factor VIIa/TF complex has also been solved with a
Corvas proprietary inhibitor bound to the active site. By systematic iterative
synthesis, biological evaluation and modeling, Company scientists have developed
a comprehensive database correlating biological activity of candidate drugs with
their structures.
-7-
MEDICINAL CHEMISTRY
Corvas is unique among most biotechnology firms due to its strength in
medicinal chemistry. The Company's medicinal chemistry expertise is essential
to the development of synthetic pharmaceuticals and is supported and
complemented by capabilities in protein engineering, biochemistry, immunology,
monoclonal antibody technology, analytical chemistry, molecular modeling and IN
VITRO and IN VIVO biological testing. Corvas has built a team of experienced
medicinal chemists that have a broad range of experience in critical areas of
pharmaceutical chemistry. Specific areas of expertise within this group include
synthetic, peptide, combinatorial and diversity, analytical, and process
chemistry. The oral thrombin candidate selected for clinical development by
Schering-Plough was identified through the Company's medicinal chemistry
program. Novel and proprietary technologies developed by the Company, such as
the development of proprietary combinatorial chemistry approaches, may help to
speed the process of drug discovery.
This combinatorial approach is unique and was developed using several
proprietary chemical strategies for inhibiting serine protease enzymes using a
concept known as "transition state analog inhibition." In this approach, an
inhibitor is synthesized which mimics the "transition state" structure that is a
stable intermediate between that of the enzyme's substrate and its product. By
exploiting this principle, Company scientists have produced inhibitors of three
enzymes in the coagulation cascade and several other targets outside of
thrombosis. The resulting inhibitors bind in a reversible and stable manner to
the target enzyme and have been shown to exhibit excellent pharmacologic
properties, including oral bioavailability.
Company scientists are currently combining certain Corvas proprietary
transition state inhibitor chemistry with recently developed methods of
combinatorial chemistry to create novel methods of producing large libraries of
candidate protease inhibitors. It is expected that such methods, if
successfully developed, will improve the speed of lead identification and
optimization efforts and enable the Company to more rapidly expand its portfolio
to new target proteases that are relevant to disease.
BIOLOGICAL DISCOVERY
Natural products have been a source of new drugs for many years. Advances
in molecular biology permit the search for, and identification of, new
biological activities in a variety of sources when appropriate analytical assays
exist. A secondary discovery strategy used by Corvas scientists has been to
examine blood-feeding parasites which infect mammals as a source of
biologically-active agents which can serve as mechanistic probes and potential
drug candidates. Using specialized assays of coagulation enzymes and cells of
the immune system (white blood cells), Corvas scientists have discovered natural
molecules which inhibit certain blood coagulation enzymes and certain white
blood cell functions. These molecules, from the NAP and NIF families, are
further described below. Techniques used to discover these molecules include
classical protein fractionation and purification, as well as gene cloning
techniques including specialized expression cloning methods developed by Corvas
scientists. The study of the structure and function of molecules evolved by
nature to perform specialized biochemical functions often yields novel insights
into molecular mechanisms. Such studies have provided competitive advantages to
Company scientists which are being applied in its synthetic molecule drug
discovery programs. The Company anticipates using its biological discovery
competence to identify molecules that act on new drug discovery targets and to
identify novel targets for future discovery programs as well.
MOLECULAR PHARMACOLOGY
Using the technology platforms described earlier, Company scientists seek
to generate many lead molecules which must be rigorously evaluated to determine
their suitability as drug candidates for further preclinical and clinical
development. This evaluation process relies on Corvas' expertise in molecular
pharmacology. Corvas has evolved a highly specialized capability to evaluate
leads for selection as candidate antithrombotic and related drugs. Such
expertise depends on a unique blend of IN VITRO biochemical and IN VIVO
biological techniques, with testing in both small and large laboratory animal
models of disease processes. Selection of candidates from leads depends on the
specific intended use and route of administration of a drug. Company scientists
are highly experienced in evaluating molecules for bioavailability by various
routes of administration, including the oral, intravenous and subcutaneous
routes. To complement its internal resources in physiology and pharmacology,
the Company has conducted numerous animal studies in collaboration with outside
investigators, primarily in academic settings, who provide specialized models
and comparative databases which are critical to the drug selection process.
-8-
PRODUCT DEVELOPMENT PROGRAMS
The following table describes the Company's primary drug development
programs, their potential therapeutic indications and their development status.
There can be no assurance that the Company's product development efforts will
progress any further or be successfully completed. In addition, there can be no
assurance that the Company's potential products will be capable of being
produced in commercial quantities at reasonable costs, that required regulatory
approvals can be obtained or that any potential products, if introduced, will be
successfully marketed or achieve market acceptance.
PROGRAM/MOLECULAR TARGET THERAPEUTIC INDICATIONS(1) DEVELOPMENT STATUS(2)
- ------------------------ -------------------------- ---------------------
ANTITHROMBOTIC
ORAL CORTHROMBIN COMPOUNDS (3)
Thrombin DVT, PE, UA, stroke, AF Exploratory Phase Ia trial completed
in 1995; Schering-Plough expected to
start Phase I trial on later generation
compound in 1997
ORAL CORDECIN AS COMPOUNDS(4)
Factor Xa Post-MI, UA, stroke, AF, DVT Lead evaluation/optimization
INJECTABLE NAP ANTICOAGULANTS
NAPc2/Factor VIIa/TF DVT, PE, UA Phase I trial expected to begin in late
March or early April 1997
NAP5/Factor Xa MI, UA, DVT, PE Preclinical development
CORSEVIN M(5)/FACTOR VIIa Antithrombotic Phase Ia trial completed in 1993;
Centocor to conduct any future trials
ANTI-INFLAMMATORY
NIF(6) Stroke, reperfusion injury Preclinical development with Pfizer
OTHER
Hepatitis C Protease Chronic Hepatitis C infection Lead discovery
Inhibitors
Anti-Cancer-Urokinase Solid tumor metastasis and Lead discovery
Inhibitors growth
- ---------------------
(1) The following abbreviations are used in the above table: AF=atrial
fibrillation; DVT=deep vein thrombosis; MI=myocardial infarction;
PE=pulmonary embolism; UA=unstable angina.
(2) The following definitions apply to the above table: "Lead
discovery"=Identification of lead compounds with activity in appropriate IN
VITRO assay systems. These lead compounds may require additional chemical
manipulation and more extensive evaluation prior to selection of
candidates, if any, for preclinical development. "Lead
evaluation/optimization"= Extensive evaluation of lead compounds in
multiple IN VITRO assay systems and preliminary animal pharmacology
studies. "Preclinical development"=Conduct of specific studies to support
clinical testing. See "Business - Government Regulation" for a description
of the clinical trial process.
(3) Oral CORTHROMBIN has been licensed to Schering-Plough. See "Business -
Strategic Alliances - Relationship with Schering-Plough."
(4) CORDECIN AS compounds have been licensed to Schering-Plough. See "Business
- Strategic Alliances - Relationship with Schering-Plough."
(5) CORSEVIN M has been licensed to Centocor. See "Business - Strategic
Alliances - Relationship with Centocor."
(6) NIF has been licensed to Pfizer. See "Business - Strategic Alliances -
Relationship with Pfizer."
-9-
ANTITHROMBOTIC PROGRAM
Currently available antithrombotic agents, despite their limitations, are
used in a diverse range of clinical indications. In clinical practice, multiple
antithrombotic drugs are often administered concurrently, and it is expected
that drugs under development by Corvas may also be used in multidrug regimens.
The Company has therefore adopted a broad approach in its antithrombotic
program, targeting intervention at three key biochemical steps, in order to
develop agents for multiple clinical indications. Corvas is developing
compounds which inhibit thrombin, Factor Xa and Factor VIIa/TF, and believes
that these drugs may have advantages over currently available antithrombotic
drugs and over certain other antithrombotic drugs under development. As
additional preclinical and clinical data are obtained, the Company expects to
select optimal compounds for further development in specific clinical
indications, either as injectable or oral drugs. The Company believes that its
program targeting the inhibition of the key coagulation enzymes is among the
most comprehensive in the industry and that it has achieved a leading position
in the design and development of injectable and orally-active antithrombotic
agents.
CORTHROMBIN COMPOUNDS. Corvas has developed highly potent and selective
synthetic molecule inhibitors of thrombin, a key blood coagulation protease that
produces fibrin and initiates platelet aggregation. Fibrin and platelets are
the two major components of a blood clot. In December 1994, Corvas entered into
a strategic alliance with Schering-Plough to develop and commercialize oral
thrombin inhibitor drugs for the prevention and treatment of chronic
cardiovascular disorders. See "Business - Strategic Alliances - Relationship
with Schering-Plough." Corvas has discovered orally-active and selective
thrombin inhibitors upon which this alliance is based. In 1995, Corvas
conducted an initial human safety study of CVS-1123, an early generation orally-
active thrombin inhibitor. In this exploratory Phase Ia study, CVS-1123
demonstrated oral activity, and excellent safety and tolerability. In January
1997, Schering-Plough selected a more potent and selective compound as a
clinical development candidate. A $3,000,000 milestone payment was paid by
Schering-Plough upon selection of this compound for development; human trials
are expected to begin later in 1997. Corvas has filed a series of patent
applications covering novel thrombin inhibitor structures, chemical strategies
for inhibiting thrombin and related enzymes, and methods of treating thrombosis
with such inhibitors. The Company believes that it has, and will continue to
establish, a strong patent position in the field of thrombin inhibitors. See
"Business - Patents and Proprietary Rights."
CORDECIN AS COMPOUNDS. Corvas is developing synthetic inhibitors of Factor
Xa. The Company has made progress in the identification of potent and specific
Factor Xa inhibitors in IN VITRO assay systems and in IN VIVO animal models,
including compounds which exhibit oral activity in rodent models of thrombosis
and oral bioavailability in conscious dogs. Research activities are focused on
continued refinement of these molecules to identify suitable preclinical
candidates. As part of the strategic alliance with Schering-Plough to develop
and commercialize oral antithrombotic drugs, Schering-Plough obtained an
exclusive option for CORDECIN compounds, which are Factor Xa inhibitors, and
exercised its option in December 1996. Patent applications directed towards
novel Factor Xa inhibiting compounds are pending. Corvas anticipates filing
additional patent applications in this field pursuant to its alliance with
Schering-Plough. The Company believes that it has, and will continue to
establish, a strong patent position in the field of Factor Xa inhibitors. See
"Business - Strategic Alliances - Relationship with Schering-Plough."
NAP ANTICOAGULANTS. In addition to the chemistry-based approach described
above, Corvas scientists have discovered a unique family of small protein
inhibitors of Factors Xa and VIIa/TF. These NAP proteins were discovered from
blood-feeding hookworms, parasites which have evolved efficient anticoagulation
mechanisms. A family of patent applications directed towards NAP proteins and
therapeutic compositions and uses related thereto is pending. The Company
believes that it has, and will continue to establish, a strong patent position
in the field of NAP anticoagulants. Based on comparative data developed both in
the Company's laboratories and with collaborators, the Company believes that
these agents exhibit unprecedented antithrombotic potency in relevant animal
models. In addition, animal studies demonstrate that NAP proteins may be
administered by the subcutaneous route and, if similar properties are
demonstrated in humans, this is expected to be an attractive competitive feature
of these agents since the current leading clinical anticoagulant LOVENOX
is also administered in the same manner. The Company has
selected NAPc2, a novel Factor VIIa/TF inhibitor, as a development candidate and
has completed the manufacture of clinical supplies and preclinical evaluation,
including pharmacology and safety/toxicology studies. Initial human testing is
expected to begin in late March or early April of 1997.
-10-
Corvas is also beginning preclinical development activities with another
member of the NAP family of anticoagulants known as NAP5. This anticoagulant
protein is a direct and potent inhibitor of Factor Xa, in contrast to NAPc2
which principally inhibits Factor VIIa/TF. The Company has recently obtained
permission from Schering-Plough, which holds rights to NAP5, to begin
development activities through Phase I. Following completion of a Phase I
trial, Schering-Plough will again have an opportunity to evaluate NAP5 as an
additional product or, alternatively, to return all rights to Corvas. The
Company believes that NAP5 will complement its current activities with NAPc2 in
addressing specific needs in the treatment of acute thrombotic disorders.
CORSEVIN M. Corvas' CORSEVIN M, a potent and specific murine monoclonal
antibody fragment, acts at the initial step of the coagulation cascade by
binding to coagulation Factor Vlla and neutralizing its clot-forming activity.
In 1993, the Company completed a Phase Ia clinical trial of CORSEVIN M which it
believes is the first specific inhibitor of the initiation of the coagulation
cascade to have been tested in humans. In the Phase Ia clinical trial, this
compound showed potential as a safe, fast-acting, potent and reversible
anticoagulant. Because the Company is focusing its resources on non-antibody
based pharmaceuticals, it licensed this product to Centocor. The Company has
been advised that Centocor intends to continue the development of CORSEVIN M and
that Centocor is currently evaluating its future development strategy for the
agent in the light of the recent clinical trial results with its antiplatelet
agent REOPRO-TM-. The Company expects that Centocor will conduct all future
trials, if any, of CORSEVIN M. See "Business - Strategic Alliances -
Relationship with Centocor."
ANTI-INFLAMMATORY PROGRAM
NIF. Corvas is developing NIF, a highly specific and potent protein which
inhibits neutrophil activation, adhesion and transmigration into tissue. NIF,
like NAP, was originally discovered from blood-feeding hookworms. Corvas
scientists have demonstrated that NIF interacts specifically with a key cellular
adhesion receptor (integrin) on the surface of neutrophils known as CD11b/CD18
(Mac-1). The interaction of NIF with CD11b/CD18 blocks the adhesion of
neutrophils to the endothelial cells which line blood vessels, and thereby
inhibits the first step in the development of an inflammatory response. Corvas
has produced multiple recombinant forms of NIF, selected one form for
preclinical development, and has demonstrated activity of the molecule in
several animal pharmacology models of acute inflammation. The Company believes
that NIF is the first identified, naturally-occurring inhibitor of CD11b/CD18,
and that this novel molecule may have application as an acute anti-inflammatory
drug with safety and efficacy advantages over current clinical therapy and other
investigational agents. Patent applications having claims focused on the family
of NIF proteins and related subject matter were filed and remain pending. The
Company believes that it has, and will continue to establish, a strong patent
position in this area.
NIF represents a potential injectable acute-care anti-inflammatory product.
The Company has continued animal pharmacology studies of NIF, focusing on
reperfusion injury in ischemic stroke where earlier studies have shown NIF to be
highly effective. In October 1995, the Company entered into an option agreement
with Pfizer to collaborate on the development of NIF as a therapy for stroke and
head injury. In February 1997, Pfizer elected to exercise its option to enter
into an exclusive license and development agreement. See "Business - Strategic
Alliances - Relationship with Pfizer."
OTHER PROGRAMS
HEPATITIS C PROTEASE INHIBITORS. Chronic hepatitis C infection is a
substantial public health problem affecting a significant percentage of the
world's population. It has recently been confirmed that infection with
Hepatitis C may lead to an increased probability of developing more serious
chronic liver disease. Current treatment, limited to alpha-interferon combined
with other antiviral regimens, has a number of drawbacks, including side effects
and those related to it being a protein and requiring administration by
injection, which limits its use in chronic therapy. Thus, a chronic therapy to
treat this disease such as an oral drug would meet a large, unmet medical need.
-11-
It has been shown that the infectivity of the Hepatitis C virus is
dependent on the enzymatic function of a viral protease, NS3, which is analogous
to the function of the protease of the human immunodeficiency virus ("HIV").
Inhibition of this protease would be expected to halt reproduction of the virus,
potentially leading to a reduction in viral load and possibly elimination of the
virus from the patient. The NS3 protease is in the same family of proteases
(serine proteases) as the coagulation enzymes thrombin, Factor Xa and Factor
VIIa. Building on earlier success producing potent, selective and orally-active
inhibitors in its antithrombotic program, Corvas is applying its transition
state protease inhibitor expertise, both via combinatorial and parallel
synthesis, to identify appropriate orally-bioavailable inhibitors for the
Hepatitis NS3 protease. This program is still in the lead discovery stage and
will require extensive additional testing prior to selection of candidates, if
any, for preclinical development. However, it is hoped that this program will
establish Corvas' expertise in the area of novel protease inhibitor development,
which may also be applied to other viral proteases.
ANTI-CANCER-UROKINASE INHIBITORS. Corvas has recently begun to
leverage its expertise in the area of protease inhibition and vascular biology
into the area of novel therapeutic approaches in the treatment of solid tumor
growth and metastasis. The Company has targeted the serine protease urokinase
("uPA"), which is similar to the serine proteases involved in the blood
coagulation cascade. uPA has been shown to be an important mediator of the
metastatic migration of tumor cells from certain solid tumors. Additionally,
uPA has been shown to be important in the growth of new blood vessels
(angiogenesis) that are required by certain solid tumors to continue their rapid
and uncontrolled growth. The potential importance of uPA in the pathophysiology
of certain solid tumors suggests that this may be an attractive molecular target
for inhibition. Corvas has used its proprietary combinatorial protease
inhibitor technology to identify lead compounds with significant potency and
selectivity against related proteases including tissue plasminogen activator
("tPA"). Lead discovery and optimization of this early-stage program are
expected to continue as is the testing of selected inhibitors in relevant animal
models of solid tumor growth and metastasis.
Corvas has also begun exploring the possibilities of selectively
manipulating the vascular system of solid tumors to induce changes which will
rapidly cut off the blood supply that is required for uncontrolled growth of
these cancers.
DRUG DESIGN
Corvas applies a highly integrated, multidisciplinary approach in its drug
discovery programs. The Company's medicinal chemistry expertise and
combinatorial chemistry approaches have yielded lead compounds for its
antithrombotic program. The Company believes these technologies have potential
application for the discovery of drug candidates for other therapeutic
indications. Corvas scientists also have extensive knowledge and experience in
computer-aided drug design and have developed novel, proprietary software to
expedite the protein-based design of synthetic drugs. Using computer-aided
molecular modeling techniques, Company scientists have developed models of the
active sites of serine proteases and have gained valuable insights regarding the
unique features of specific targets. Corvas has also used computer modeling to
study the interaction of candidate drugs with target enzymes. By systematic
synthesis, biological evaluation and modeling, Company scientists have developed
a comprehensive database correlating biological activity of candidate drugs with
their structures.
Company scientists have extended their proprietary transition state
chemistry to design and build combinatorial libraries of potential protease
inhibitors. These libraries are specifically directed at protease targets of
interest to the Company and are designed to optimally explore a complementary
fit of the inhibitor to the enzyme active site of interest. Due to the nature
of the basic molecular templates contained in these libraries, the resultant
"hits" are expected to have significant initial potencies and a high likelihood
of oral bioavailability. This should substantially shorten the time required to
optimize the pharmacokinetic properties of these leads into viable drug
candidates.
COMMERCIAL PRODUCTS
The Company has entered into two agreements with Ortho for manufacturing
and worldwide marketing by Ortho of diagnostic tests containing recombinant
human tissue factor produced by Corvas. See "Business - Strategic Alliances -
Relationship with Ortho Diagnostic Systems." Corvas also supplies recombinant
human tissue factor and a group of tissue factor-specific monoclonal antibodies
to a distributor for use in the research market. Sales of these products have
not been significant to date and are not expected to be significant in the
future.
-12-
STRATEGIC ALLIANCES
As part of the Company's strategy for the research, development and
commercialization of its products, the Company may enter into various
arrangements with corporate partners, licensors, licensees and others. Such
arrangements may include the grant of manufacturing, marketing or other rights.
There can be no assurance that any additional arrangements beyond those detailed
below will be established, that the Company's existing or future alliances will
continue, or that new products will be successfully developed and commercialized
under existing or future alliances. If the Company is not able to establish and
maintain such arrangements, it could encounter delays in developing its products
or find that the development, manufacture or sale of its products in such
markets is adversely affected. While Corvas believes that parties to any such
arrangements will have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources they devote to
these activities will not be within the Company's control.
RELATIONSHIP WITH SCHERING-PLOUGH
In December 1994, the Company entered into a strategic alliance agreement
with Schering-Plough to collaborate on the discovery and commercialization of
oral thrombin inhibitor drugs for the prevention and treatment of chronic
cardiovascular disorders. The initial collaboration covered development of
inhibitors of thrombin, a key blood clotting enzyme.
Under the terms of the initial agreement, Schering-Plough compensated the
Company for the costs of research and preclinical development of thrombin
inhibitors over a two-year period ending December 31, 1996. Schering-Plough,
which is responsible for certain preclinical development, all future clinical
trials and regulatory activities, received exclusive worldwide manufacturing and
marketing rights for any resulting thrombin inhibitors. The Company may also
receive milestone payments and royalties on sales of therapeutics resulting from
this alliance. However, there can be no assurance that products will be
successfully developed and commercialized under this alliance. In January 1997,
Schering-Plough selected a clinical development candidate in the thrombin
program and paid the Company a $3,000,000 milestone payment. Schering-Plough is
expected to begin human trials on this candidate in 1997.
In conjunction with the December 1994 agreement, Schering-Plough acquired
an exclusive option to expand the alliance to include inhibitors of a second
significant blood coagulation enzyme, Factor Xa. In December 1996, Schering-
Plough exercised this option and, accordingly, will compensate the Company for
the costs of research and preclinical development of coagulation Factor Xa
inhibitors over two years. Schering-Plough, which is responsible for preclinical
development, all clinical trials and regulatory activities, received exclusive
worldwide marketing rights for any resulting Factor Xa inhibitors. Corvas
retained certain manufacturing rights. The Company may also receive milestone
payments and royalties on sales of therapeutics resulting from this alliance.
However, there can be no assurance that such products will be successfully
developed and commercialized.
Upon execution of the initial agreement in 1994, Schering-Plough paid
certain fees and purchased 1,000,000 shares of Series A Convertible Preferred
Stock of the Company, resulting in net proceeds of $4,864,000. Revenue of
$4,000,000 was recognized under this agreement in each of 1995 and 1996. Upon
exercise of the Factor Xa option in 1996, Schering-Plough paid certain fees and
purchased 250,000 shares of Series B Convertible Preferred Stock of the Company,
resulting in net proceeds of $2,000,000. To date, Corvas has received a total
of $24,000,000 from Schering-Plough under the alliance. Schering-Plough
beneficially owns approximately 8.3% of the outstanding securities of the
Company on an as-converted basis.
-13-
RELATIONSHIP WITH PFIZER
In October 1995, the Company entered into a research and option agreement
of up to eighteen months to collaborate on the development of NIF with Pfizer.
The option period concluded in October 1996, but Pfizer extended its option and
began to make monthly payments to retain its option rights. In February 1997,
Pfizer elected to exercise its option to enter into an exclusive license and
development agreement. Exercise of the option is subject to the Hart-Scott-
Rodino notification and waiting requirements. Pfizer will receive an exclusive,
worldwide license to further develop, manufacture and market NIF as a
therapeutic agent for stroke and head injury. Pfizer will also be responsible
for funding all further development of NIF, including costs associated with
clinical trials and limited activities performed by the Company. The agreement
required Pfizer to pay the Company an additional license fee of $1,000,000 less
$200,000 applied from amounts paid to extend the option period. Pfizer will
compensate the Company for certain costs of research and preclinical development
of NIF over a two-year period. If products are successfully commercialized from
this agreement, the Company will also receive milestone payments and royalties
on product sales. However, there can be no assurance that products will be
successfully developed and commercialized under this alliance. To date, Pfizer
has paid and committed to pay Corvas $2,459,000 under this alliance.
RELATIONSHIP WITH ORTHO DIAGNOSTIC SYSTEMS
In June 1992, the Company entered into two agreements with Ortho for
manufacturing and worldwide marketing by Ortho of diagnostic tests containing
recombinant human tissue factor produced by Corvas. These tests are used to
determine the blood clotting ability of patients. European sales of this
product commenced in 1992 and sales in the U.S. commenced in 1993. In order to
maintain its rights pursuant to these agreements, Ortho is required to make
minimum annual purchases of materials and royalty payments. A milestone payment
of $250,000 was received in 1996.
RELATIONSHIP WITH CENTOCOR
In November 1991, the Company entered into an agreement with Centocor in
which Corvas granted rights to Centocor to license and commercialize certain
monoclonal antibody products developed by Corvas. For one such monoclonal
antibody product, CORSEVIN M, Corvas completed a Phase Ia clinical trial in
1993. Centocor has informed the Company that it intends to continue the
development of CORSEVIN M. Corvas will depend on Centocor for the continued
development of CORSEVIN M and product sales. In 1994, Centocor terminated its
option rights to future monoclonal antibody products discovered or acquired by
the Company. The Company may receive a future milestone payment upon receipt of
certain regulatory approvals and royalties on product sales.
In connection with this alliance, Centocor purchased preferred stock
(subsequently converted to common stock) of the Company in 1991 for an aggregate
purchase price of $9,250,000. In connection with a lawsuit brought against
Corvas, several of its current and former directors and Centocor, Centocor
transferred 600,000 of its Corvas shares pursuant to a settlement of such
lawsuit during 1995. See "Item 3 - Legal Proceedings."
RESEARCH COLLABORATIONS AND LICENSES
Corvas has also established collaborations with scientists at a number of
leading U.S. and European academic and clinical research centers to further its
technology and product development objectives. These collaborations are
generally conducted pursuant to agreements which give the Company a license, or
the option to license, certain technology, patent rights or materials which may
be valuable to the Company. These agreements may require the Company to fund
research or to pay license fees or milestone payments and, upon commercial sale
of certain products, royalties. The Company also has several contractual
arrangements with scientific advisors and collaborators for which the Company
compensates these individuals or an affiliated entity.
-14-
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent
protection for its products, both in the U.S. and other countries. The patent
position of biotechnology and pharmaceutical companies is highly uncertain and
involves complex legal and factual questions. There is no consistent policy
regarding the breadth of claims allowed in biotechnology patents. The Company
intends to file applications as appropriate for patents covering both its
products and processes. At present, Corvas owns or holds exclusive rights in 12
U.S. patents and has been notified of 11 allowed patent applications in the U.S.
Of the issued patents, 10 are owned by the Company and two are licensed by the
Company. Corvas has filed or holds licenses to 41 additional patent
applications that currently are pending in the U.S. Patent and Trademark Office.
Approximately one-third of these pending patent applications are duplicate
applications the Company filed in anticipation of changes to U.S. patent law
that became effective in June 1995 and that may affect the term of U.S. patents.
For the most part, separate and distinct claim groups were elected for initial
prosecution in the duplicate applications, and are currently pending therein.
Foreign counterparts of certain of the U.S. applications have been filed in many
countries. In addition, Corvas holds rights in six foreign-issued patents;
Corvas owns three such patents and is the exclusive licensee, in a defined field
of use, of the remaining three foreign patents. There can be no assurance that
patents will issue from any of the patent applications owned or licensed by the
Company or that claims allowed under any issued patents will be sufficiently
broad to protect the Company's technology. In addition, there can be no
assurance that any patents issued or licensed to the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection to the Company.
As is typical in the biotechnology industry, the commercial success of the
Company will depend in part on the Company neither being found to infringe
patents issued to competitors nor to breach the technology licenses upon which
the Company's products might be based. While the Company is aware of third
party patent applications and issued patents in the Company's field, it is not
clear whether these will require the Company to alter products or processes,
obtain licenses or cease certain activities. If the Company is required to
obtain such licenses, there can be no assurance the Company will be able to
obtain any necessary licenses at a reasonable cost. Failure by the Company to
obtain a license to any technology that it requires to commercialize its
products, or to obtain approval from the U.S. Food and Drug Administration
("FDA") or any other government authority within an acceptable period of time,
if required to do so, would have a material adverse effect on the Company.
Litigation, which could result in substantial costs to the Company, may also be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of others' proprietary rights.
In 1993, the U.S. Patent and Trademark Office (the "USPTO") declared an
interference to determine the priority of invention between a patent for which
some rights are licensed to the Company (the "Licensed Patent") and a patent
application for which rights are held by other parties (the "First Patent
Application"). During the third quarter of 1996, the USPTO added a second
patent application to the proceeding (the "Second Patent Application") and
redeclared the interference. Rights to the Second Patent Application are held
by other parties, at least some of which also hold rights in the First Patent
Application. The subject matter of the patent and these applications is
recombinant tissue factor, which is used by Ortho to determine the blood
clotting abilities of patients. The Company is contesting the other parties'
claims of prior invention; however, there can be no assurance that the Licensed
Patent will be upheld. See "Item 3 - Legal Proceedings."
In addition to patents, the Company relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information and inventions agreements with its
current and prospective collaborative partners, employees, scientific advisors
and consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
-15-
Certain of the Company's research has been funded in part by the Federal
Small Business Innovation Research ("SBIR") program. As a result of such
funding, the U.S. Government will have certain rights ("Government Rights") in
any technology, including inventions, developed with the funding. These rights
include the grant of a non-exclusive, paid-up, worldwide license to such
inventions for any governmental purpose. In addition, the government has the
right to require the Company to grant an exclusive license to any of such
inventions to a third party if the government determines that (i) adequate steps
have not been taken to commercialize such inventions, (ii) such action is
necessary to meet public health or safety needs or (iii) such action is
necessary to meet requirements for public use under federal regulations.
Federal law requires any licensor of an invention that was partially funded by
federal grants to obtain a covenant from its exclusive licensee to substantially
manufacture products using the invention in the U.S. In addition, the Company's
licenses may also relate to technology developed with federal funding and,
therefore, may also be subject to Government Rights.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation by numerous
governmental authorities in the U.S. and other countries. Any drug developed by
the Company must undergo rigorous preclinical and clinical testing and an
extensive regulatory approval process mandated by FDA and equivalent foreign
authorities before it can be marketed. Various federal and, in some cases,
state statutes and regulations also govern or influence the manufacturing,
safety, labeling, storage, recordkeeping and marketing of such products. These
processes can take a number of years and require the expenditure of substantial
resources. Any failure by the Company or its collaborators or licensees to
obtain, or any delay in obtaining, regulatory approvals could adversely affect
the marketing of any products developed by the Company and its ability to
receive product or royalty revenue.
The activities required before a pharmaceutical agent may be marketed in
the U.S. begin with preclinical testing. Preclinical tests include laboratory
evaluation of product chemistry and animal studies to assess the potential
safety and efficacy of the product and its formulations. The results of these
studies must be submitted to the FDA as part of an Investigational New Drug
Application ("IND"), which must be reviewed and become effective pursuant to FDA
regulations before proposed clinical testing can begin. Typically, clinical
testing involves a three-phase process. In Phase I, clinical trials are
conducted with a small number of subjects to determine the early safety profile
and the pattern of drug distribution and metabolism. At the Company's
discretion, Phase I trials can be further broken down into Phase Ia and Phase Ib
trials. A Phase Ia study can be considered an exploratory dose-escalating
safety and tolerability study in a limited number of normal healthy volunteer
subjects. Phase Ib studies are also designed to determine safety and
tolerability in a dose-escalating manner, but may be conducted in certain
relevant patient populations that may yield preliminary efficacy information
(I.E. using surrogate markers), but is not intended to provide medical benefit
to such population. Phase II clinical trials are conducted with groups of
patients afflicted with a specified disease in order to determine preliminary
efficacy, optimal dosages and expanded evidence of safety. In Phase III, large
scale, multicenter, comparative clinical trials are conducted with patients
afflicted with a target disease in order to provide enough data for the
statistical proof of efficacy and safety required by the FDA and others.
Results of the preclinical and clinical testing are then submitted to the
FDA for a pharmaceutical product in the form of a New Drug Application ("NDA"),
or for a biological product in the form of a Product License Application
("PLA"), for approval to commence commercial sales. In responding to an NDA or
PLA, the FDA may grant marketing approval, request additional information or
deny the application if it determines that the application does not demonstrate
to the satisfaction of the FDA that the product is safe and effective for its
labeled indications. With respect to biological products, an Establishment
License Application ("ELA") must also be filed, and the FDA must approve the
manufacturing facilities for the products. There can be no assurance that
approvals will be granted on a timely basis, if at all.
Among the conditions for NDA or PLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
on an ongoing basis with Good Manufacturing Practices (''GMP"). In complying
with GMP, manufacturers must continue to expend time, money and effort in the
area of production and quality control to ensure full technical compliance.
Manufacturing facilities are subject to periodic inspections by the FDA, and
noncompliance may result in the withdrawal of previously granted approvals
and/or the imposition of other regulatory enforcement sanctions.
-16-
The Company is also subject to regulation by the Food and Drug Branch of
the California Department of Health Services ("FDB") and, prior to the
marketing of any of its products manufactured in California, the Company will be
required to secure a drug manufacturing license from the FDB. Such licenses are
issued after an FDB inspection of manufacturing facilities, and are reissued on
an annual basis after reinspection by the FDB.
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with the Company's
research. The extent of government regulation which might result from any
legislation or administrative action cannot be accurately predicted.
COMPETITION
Due to the high incidence of cardiovascular and inflammatory diseases, most
of the major pharmaceutical companies have significant research and product
development programs in these areas. The Company expects to encounter
significant competition as to each of the products it seeks to develop. Several
existing products have well-established market positions and there are a number
of new antithrombotic products in advanced clinical development. The Company's
competitors include fully-integrated pharmaceutical and biotechnology companies
which have expertise in research and development, manufacturing processes,
testing, obtaining regulatory approvals and marketing, and may have financial
and other resources greater than those of the Company. Smaller companies also
may prove to be significant competitors. Furthermore, academic institutions,
government agencies and other public and private research organizations conduct
research relating to cardiovascular and inflammatory diseases and may seek
patent protection for, and establish collaborative arrangements for, the
development and marketing of products for the treatment of the same diseases.
Products developed by these and other entities may compete directly with those
being developed by the Company. These companies and institutions may also
compete with the Company in recruiting and retaining highly qualified scientific
personnel.
The Company's competition will be determined in part by the potential
indications for which the Company's products are developed and ultimately
approved by regulatory authorities, by the timing of such approvals and market
introduction and by whether any currently available drugs, or drugs under
development by others, are effective in the same indications. Accordingly, the
relative speed with which the Company can develop products, complete the
clinical trials and approval processes, and supply commercial quantities of the
products to the market are expected to be important competitive factors. The
Company expects that competition among products approved for sale will be based,
among other things, on product efficacy, safety, reliability, availability,
price and patent position.
HUMAN RESOURCES
As of March 17, 1997, Corvas employed 72 individuals on a full-time basis,
15 of whom hold Ph.D. degrees. A significant number of the Company's management
and professional employees have had prior experience with pharmaceutical,
biotechnology or medical product companies. Corvas believes that it has been
highly successful in attracting skilled and experienced scientific personnel;
however, competition for such personnel is intense. None of the Company's
employees is covered by a collective bargaining agreement. All of the Company's
employees are covered by confidentiality and arbitration agreements, and all of
its officers have employment contracts.
-17-
ITEM 2. PROPERTIES
The Company presently occupies approximately 30,200 square feet of
laboratory and office space in San Diego pursuant to a lease that expires in
September 1997 and has two one-year renewal options remaining. The Company may
need to expand its laboratory and office facilities over the next several years.
The Company does not have manufacturing facilities for pilot scale or
commercial production of compounds under development as therapeutic products.
The Company must presently rely on third parties to manufacture its candidate
products for clinical testing.
For its diagnostic product, the Company has established a quality control
and quality assurance program, including a set of standard operating procedures.
The Company relies on outside manufacturers for production of raw materials for
this product. For therapeutic products, however, the Company will need to
establish further manufacturing, quality control and quality assurance programs.
The Company will continue to be dependent on contract manufacturers and/or
strategic partners. There can be no assurance that these manufacturers will be
available or will meet the Company's requirements for quality, quantity and
timeliness, or that the Company would be able to find substitute manufacturers,
if necessary.
ITEM 3. LEGAL PROCEEDINGS
The Company, several of its current and former directors, and Centocor were
parties to a legal proceeding filed February 18, 1993 in the U.S. District Court
for the Southern District of California. The complaint was filed by a
shareholder of the Company who represented a class of persons who purchased
Corvas stock from January 30, 1992 through April 14, 1992. The Company
continues to deny all claims of wrongdoing and maintains this denial as part of
the settlement agreement reached in 1995. All amounts due under the settlement
agreement, including the issuance of 125,000 shares of common stock, have been
distributed or paid.
In 1993, the U.S. Patent and Trademark Office (the "USPTO") declared an
interference to determine the priority of invention between a patent for which
some rights are licensed to the Company (the "Licensed Patent") and a patent
application for which rights are held by other parties (the "First Patent
Application"). During the third quarter of 1996, the USPTO added a second
patent application to the proceeding (the "Second Patent Application") and
redeclared the interference. Rights to the Second Patent Application are held
by other parties, at least some of which also hold rights in the First Patent
Application. The subject matter of the patent and these applications is
recombinant tissue factor, which is used by Ortho to determine the blood
clotting abilities of patients. The Company is contesting the other parties'
claims of prior invention; however, there can be no assurance that the Licensed
Patent will be upheld.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-18-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq National Market on
January 30, 1992 under the symbol "CVAS." Prior to January 30, 1992, there was
no public market for the Company's Common Stock. The following table sets forth
for the periods indicated the high and low sale prices of Common Stock as
reported by the Nasdaq National Market.
HIGH LOW
-------- ---------
YEAR ENDED DECEMBER 31, 1996
Fourth Quarter . . . . . . . . . . . . . . . . . $6 $2 3/4
Third Quarter. . . . . . . . . . . . . . . . . . 5 1/2 2 7/8
Second Quarter . . . . . . . . . . . . . . . . . 7 4 3/4
First Quarter. . . . . . . . . . . . . . . . . . 6 1/8 3 5/8
YEAR ENDED DECEMBER 31, 1995
Fourth Quarter . . . . . . . . . . . . . . . . . $7 3/8 $2 1/8
Third Quarter. . . . . . . . . . . . . . . . . . 4 5/8 2 3/8
Second Quarter . . . . . . . . . . . . . . . . . 2 7/8 1 5/8
First Quarter. . . . . . . . . . . . . . . . . . 2 5/8 1 7/8
On March 17, 1997, the last reported sale price of the Common Stock was
$5.88 per share. As of March 17, 1997, there were approximately 824 holders of
record of the Common Stock.
On February 2, 1996, the Company completed a private placement of equity
securities consisting of 3,000,000 units to a group of institutional
investors. Each unit consisted of one share of Common Stock and one callable
warrant to purchase one additional share of Common Stock. The warrants are
exercisable at $6.00 per share over a six-year period from the date of
purchase of the units. The aggregate offering price was $5.00 per unit,
resulting in net proceeds to the Company of $14,829,000. There were no
underwriting commissions associated with this transaction. These securities
were issued in a transaction exempt from registration under Rule 506 of
Regulation D under the Securities Act of 1933, as amended (the "Securities
Act") and were subsequently registered for resale pursuant to a Registration
Statement on Form S-3, filed February 28, 1996 and declared effective on
April 26, 1996.
On December 20, 1996, the Company completed a private placement of
equity securities consisting of 250,000 shares of Convertible Preferred Stock
to Schering-Plough in connection with the exercise of an option pursuant to
the companies' strategic collaboration. The aggregate offering price was
$8.00 per share, resulting in net proceeds to the Company of $2,000,000.
There were no underwriting commissions associated with this transaction.
These securities were issued in a transaction exempt from registration under
Section 4(2) of the Securities Act. Each of these shares of Preferred Stock
is initially convertible into one share of the Company's Common Stock at any
time subject to certain adjustments, and will automatically convert if the
market price of the Company's Common Stock for 10 consecutive trading days
exceeds $12.00 per share.
-19-
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1996, are derived from the
financial statements of Corvas International, Inc., which financial statements
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The financial statements as of December 31, 1996 and 1995, and for
each of the years in the three-year period ended December 31, 1996, and the
report thereon, are included elsewhere in this Report.
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
REVENUES:
Revenue from collaborative agreements $ 5,480 $ 4,354 $ - $ - $ -
License fees & milestones . . . . . . 400 500 - 100 100
Net product sales . . . . . . . . . . 224 406 280 323 263
Royalties . . . . . . . . . . . . . . 161 142 183 230 10
Research grants . . . . . . . . . . . - - 667 192 513
--------- --------- --------- --------- ---------
Total revenues . . . . . . . . . . 6,265 5,402 1,130 845 886
COSTS AND EXPENSES:
Research and development. . . . . . . 10,901 9,723 11,378 12,115 8,894
General and administrative. . . . . . 3,181 2,582 3,159 3,067 3,044
Cost of products sold . . . . . . . . 134 211 83 105 106
Litigation settlement and related
expenses . . . . . . . . . . . . . - - 535 - -
Restructuring charge. . . . . . . . . - - 1,575 - -
--------- --------- --------- --------- ---------
Total costs and expenses . . . . . 14,216 12,516 16,730 15,287 12,044
--------- --------- --------- --------- ---------
Loss from operations. . . . . . . . . (7,951) (7,114) (15,600) (14,442) (11,158)
Other income, net . . . . . . . . . . 1,242 821 697 1,073 1,691
--------- --------- --------- --------- ---------
Net loss. . . . . . . . . . . . . . . $ (6,709) $ (6,293) $(14,903) $(13,369) $(9,467)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share (1). . . . . . . . $ (0.52) $ (0.67) $ (1.60) $ (1.44) $ (1.08)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in calculation of net loss
per share (1). . . . . . . . . . 12,882 9,374 9,336 9,295 8,747
------ ----- ----- ----- -----
------ ----- ----- ----- -----
BALANCE SHEET DATA:
Cash, cash equivalents and investments $ 28,596 $ 12,451 $ 19,867 $ 23,180 $ 36,398
Working capital . . . . . . . . . . . 24,254 7,372 13,902 22,477 20,987
Total assets. . . . . . . . . . . . . 30,639 14,462 22,509 26,522 38,925
Accumulated deficit . . . . . . . . . (67,297) (60,588) (54,295) (39,392) (26,023)
Total stockholders' equity. . . . . . 24,347 8,768 14,647 24,474 37,592
(1) See Note 2 of the Notes to Financial Statements.
-20-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THIS SECTION, AS WELL AS IN THE SECTIONS ENTITLED "BUSINESS -
BUSINESS STRATEGY," "BUSINESS - INTEGRATED TECHNOLOGY PLATFORMS," "BUSINESS -
PRODUCT DEVELOPMENT PROGRAMS," "BUSINESS - STRATEGIC ALLIANCES" AND "BUSINESS
- - PATENTS AND PROPRIETARY RIGHTS."
OVERVIEW
Formed in 1987, Corvas International, Inc. (the "Company") is a
biopharmaceutical firm engaged in the design and development of a new generation
of therapeutic agents for the prevention and treatment of major cardiovascular,
inflammatory and other diseases. To date, the Company has not generated
significant revenues from product sales. The Company has not been profitable
since inception and expects to incur substantial additional operating losses on
an annual basis over the next several years as the Company attempts to sustain,
and possibly expand, its research and development and clinical trial efforts.
No assurance can be given that the Company will generate sufficient revenues to
become profitable on a sustained basis or at all. At December 31, 1996, the
Company had an accumulated deficit of $67,297,000.
In December 1994, the Company ceased operation of its Belgian subsidiary
and, accordingly, recorded a one-time restructuring charge for severance and
other expenses. The Belgian operation accounted for 20% of the consolidated
operating expenses in 1994, including the restructuring charge.
RESULTS OF OPERATIONS
Operating revenues increased to $6,265,000 in 1996, from $5,402,000 in 1995
and $1,130,000 in 1994. Revenue from collaborative agreements for 1996 includes
$4,000,000 attributable to the Company's strategic alliance agreement with
Schering Corporation ("Schering-Plough") to collaborate on the discovery and
commercialization of oral thrombin inhibitor drugs for the prevention and
treatment of chronic cardiovascular disorders, and an additional $1,000,000
received from Schering-Plough to extend its option on inhibitors of Factor Xa, a
second blood clotting enzyme. The remaining $480,000 of revenue from
collaborative agreements, and an additional $150,000 accounted for as license
fees and milestones, is attributable to the Company's research and option
agreement with Pfizer Inc. ("Pfizer") to collaborate on the development of
neutrophil inhibitory factor ("NIF"), an anti-inflammatory agent with
therapeutic potential for stroke and other indications. Also included in
license fees and milestones is a $250,000 milestone payment received from Ortho
Diagnostic Systems, Inc. ("Ortho"), a Johnson & Johnson company, pursuant to
agreements whereby Ortho acquired worldwide rights to produce and distribute a
Corvas product for diagnostic use in determining the blood clotting ability of
patients.
Research and development expenditures, which accounted for 77% of the total
costs and expenses in 1996, 78% in 1995 and 68% in 1994, totaled $10,901,000 in
1996, $9,723,000 in 1995 and $11,378,000 in 1994. The increase in 1996 is
primarily due to scale-up, manufacturing and preclinical testing of a
development candidate expected to begin clinical trials in late March or early
April of 1997. The decrease from 1994 to 1995 is attributable to closure of the
Belgian subsidiary.
General and administrative expenses increased to $3,181,000 in 1996, from
$2,582,000 in 1995 and $3,159,000 in 1994. Recruiting and relocation charges
associated with the hiring of a new Chief Executive Officer and business
development expenses in 1996 were the major factors contributing to this
increase.
Total other income was $1,242,000 in 1996, $821,000 in 1995 and $697,000 in
1994. Increased interest income attributable to returns on the proceeds from
two common stock offerings completed in 1996 accounted for this increase.
Subject to the availability of additional capital, the Company expects all
expenses to increase over the next several years as the Company's research and
development programs progress. However, due to revenue expected to be
recognized pursuant to the Company's collaborative agreements, operating losses
are not expected to increase significantly in 1997, if at all, beyond the 1996
amount.
-21-
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's operations have been funded primarily
through public offerings and private placements of equity securities, revenues
from collaborative agreements, research grants and license agreements, and
interest income earned on cash and investment balances. Subsequent to December
31, 1996, the Company received a $3,000,000 milestone payment from Schering-
Plough upon selection of a clinical development compound. Also subsequent to
December 31, 1996, Pfizer exercised its option on the NIF program, triggering a
remaining license fee of $800,000 and a commitment for research and development
funding over a two-year period. The Company's principal sources of liquidity
are its cash and cash equivalents, time deposits and debt securities which, net
of a restricted time deposit, totaled $28,536,000 and $12,391,000 as of December
31, 1996 and 1995, respectively. Working capital as of December 31, 1996 and
1995 was $24,254,000 and $7,372,000, respectively. These increases result from
net proceeds of $19,714,000 raised by the Company in 1996 equity offerings.
Available cash is invested in accordance with an investment policy set by the
Board of Directors, which has the objectives to preserve principal, to maintain
adequate liquidity and to maximize income. The policy provides guidelines
concerning the quality, term and liquidity of investments. The Company
presently invests its excess cash in U.S. government securities.
The Company expects to incur substantial additional costs in the
foreseeable future, including costs related to sustaining, and possibly
expanding, research and development activities and preclinical and clinical
testing. The Company expects such costs to continue to increase. As a result,
the Company expects to experience substantial additional operating losses,
although these losses are not expected to increase beyond the current level in
1997 due to revenue anticipated under the Company's collaborative agreements
with Schering-Plough and Pfizer. Including the $3,000,000 milestone payment
received from Schering-Plough in January 1997 and the February 1997 license fee
from Pfizer, the Company believes its existing capital resources and interest
earned thereon will satisfy its funding requirements through 1999. In addition,
the Company may also receive capital resources through additional milestone
payments and royalties on sales of products in connection with its alliances.
However, there can be no assurance that the Company will successfully develop
and commercialize such products or that the Company will receive any additional
amounts under these or future alliances.
The Company's future capital requirements will depend on many factors,
including, but not limited to, the following: continued scientific progress in
its drug discovery programs; the magnitude of these programs; progress of
preclinical testing and clinical trials; the time and costs involved in
obtaining regulatory approvals; the costs involved in filing, prosecuting,
maintaining and enforcing patent claims; competing technological and market
developments; changes in its existing research relationships; the ability of the
Company to establish and to maintain collaborative or licensing arrangements;
the cost of manufacturing scale-up; and the effectiveness of activities and
arrangements to commercialize existing and potential products. In 1996, the
Company invested approximately $437,000 in capital equipment and leasehold
improvements. The Company leases its laboratory and office facilities and
certain equipment under operating and capital leases. The Company expects to
acquire additional property and equipment as research and development activities
progress. In addition, the Company may need to expand its laboratory and office
facilities over the next several years.
The Company's business is subject to significant risks, including but not
limited to the risks associated with its research and development efforts,
obtaining and enforcing patents, the lengthy and expensive regulatory approval
process, product reimbursement levels, competition from other products,
dependence on collaborative partners and other third parties, the possibility of
early termination of corporate collaborations, and the availability of capital.
Even if the Company's products appear promising at an early stage of
development, they may not reach the market for a number of reasons, including
the possibility that such potential products will be ineffective or found to be
unsafe during clinical trials, will not receive necessary regulatory approvals,
will be difficult to manufacture on a large scale, will be uneconomical to
market or will be precluded from commercialization by proprietary rights of
third parties.
Uncertainties associated with the duration and expense of preclinical and
clinical testing of any of the Company's products make it difficult to predict
the Company's capital requirements, and unexpected developments and/or
regulatory requirements could greatly increase the cost of development of such
products and affect the timing of anticipated revenues from such products.
Failure by the Company to obtain regulatory approval for any product will
preclude the sale of such product. In addition, failure by the Company to
obtain patent protection may make certain of its products commercially
unattractive.
-22-
To continue its product development efforts, the Company must raise
substantial additional funds through public or private sales of securities,
collaborative arrangements or other methods of financing. The Company's ability
to raise additional funds through such sales of securities depends in part on
investors' perceptions of the biotechnology industry, in general, and of the
Company, in particular. The market for biotechnology company stocks has
historically been highly volatile and, accordingly, there can be no assurance
that additional funding will be available, or, if available, that it will be
available on acceptable terms. The Company may enter into additional
collaborative relationships to develop and commercialize certain of its
technologies or products. There can be no assurance that the Company will be
able to establish such relationships on satisfactory terms, if at all, or that
agreements with collaborators will successfully reduce the Company's funding
requirements. In addition, the Company has no established bank financing
arrangements, and there can be no assurance that it will be able to establish
such arrangements on satisfactory terms, if at all. If adequate funds are not
available, the Company may be required to significantly delay, scale back or
eliminate one or more of its drug discovery programs or 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.
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $58,178,000 for federal income tax reporting
purposes which begin to expire in 2002. The net operating loss carryforwards
for state purposes, which expire five years after generation, are approximately
$24,557,000. The Company has unused research and development tax credits for
federal income tax reporting purposes of $2,624,000 at December 31, 1996. In
accordance with Internal Revenue Code Section 382, the annual utilization of net
operating loss carryforwards and credits existing prior to a change in control
may be limited.
The Company, several of its current and former directors, and Centocor,
Inc. were parties to a legal proceeding filed February 18, 1993 in the U.S.
District Court for the Southern District of California. The complaint was filed
by a shareholder of the Company who represented a class of persons who purchased
Corvas stock from January 30, 1992 through April 14, 1992. The Company
continues to deny all claims of wrongdoing and maintains this denial as part of
the settlement agreement reached in 1995. All amounts due under the settlement
agreement, including the issuance of 125,000 shares of common stock, have been
distributed or paid. See "Item 3 - Legal Proceedings."
In 1993, the U.S. Patent and Trademark Office (the "USPTO") declared an
interference to determine the priority of invention between a patent for which
some rights are licensed to the Company (the "Licensed Patent") and a patent
application for which rights are held by other parties (the "First Patent
Application"). During the third quarter of 1996, the USPTO added a second
patent application to the proceeding (the "Second Patent Application") and
redeclared the interference. Rights to the Second Patent Application are held
by other parties, at least some of which also hold rights in the First Patent
Application. The subject matter of the patent and these applications is
recombinant tissue factor, which is used by Ortho to determine the blood
clotting abilities of patients. The Company is contesting the other parties'
claims of prior invention; however, there can be no assurance that the Licensed
Patent will be upheld. See "Item 3 - Legal Proceedings."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheets as of December 31, 1996 and 1995 . . . . . . . . . . . . F-2
Statements of Operations for the three years ended December 31, 1996 . . F-3
Statements of Stockholders' Equity for the three years ended
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Cash Flows for the three years ended December 31, 1996 . . F-5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-23-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of the Company
as of March 17, 1997 is set forth below. Information regarding the compliance
with Section 16 filing requirements will be set forth under the caption
"Compliance with Section 16(a) of the Securities and Exchange Act of 1934" in
the Company's 1997 Proxy Statement and is incorporated by reference into this
Report.
DIRECTORS
THOMAS S. EDGINGTON, M.D. Dr. Edgington, age 65, a founder of Corvas, has
been a director since May 1987 and served as Chairman of the Board from that
time until February 1991. He is a Member of The Scripps Research Institute
("Scripps"), with which he has been affiliated since 1965. Since 1968, Dr.
Edgington has also been adjunct Professor of Pathology at the University of
California, San Diego, and, from 1968 to 1974, he was the head of the Department
of Pathology and Laboratory Medicine which he founded at Scripps. He has been
Vice President for Research, Chairman of the National Research Committee and a
member of the Board of Directors of the American Heart Association. He was a
member of the Board of Directors and the Past-President of the Federation of
American Societies for Experimental Biology.
JOHN H. FRIED, PH.D. Dr. Fried, age 67, was elected as Chairman of the
Board in February 1997, and has been a director of the Company since May
1992. Since March 1992, he has been President of Fried & Company, Inc. Dr.
Fried served in various executive capacities at Syntex Corporation
("Syntex"), a pharmaceutical company, from April 1964 to March 1992. He
served as President of Syntex Research from 1976 to March 1992, Senior Vice
President of Syntex from 1981 to 1985, and Vice Chairman from 1985 to January
1993. Dr. Fried is also Chairman of the Board of Alexion Pharmaceuticals, Inc.
THEODOR H. HEINRICHS. Mr. Heinrichs, age 70, joined the Board of
Directors in February 1988. He also served as Chief Executive Officer and
Chairman of the Board from February 1991 through November 1991 and January
1996 respectively. Mr. Heinrichs is a general partner with Hambrecht & Quist
Life Science Venture Partners ("H&Q LSV"), a venture capital firm, with whom
he was been affiliated since 1985. Mr. Heinrichs served as Chairman of the
Board of Directors of Telios Pharmaceuticals, Inc. ("Telios"), a
biotechnology company, from January until June 1994. Telios filed for
protection under Chapter 11 in the Federal Bankruptcy Court in January 1995
and was subsequently acquired by INTEGRA, L.S. Mr. Heinrichs also served as
Chief Executive Officer of Canji, Inc. ("Canji"), a biopharmaceutical
company, from its inception through March 1993, and was Chairman of the Board
until March 1995. Canji was acquired by Schering-Plough Corporation in 1996.
M. BLAKE INGLE, PH.D. Dr. Ingle, age 54, was elected a director in
January 1994. Dr. Ingle was the President and Chief Executive Officer of
Canji from March 1993 to February 1996, when it was acquired by
Schering-Plough. Prior to that, he was employed in a variety of capacities
with the IMCERA Group, Inc., a healthcare company, consisting of Mallinckrodt
Medical, Mallinckrodt Specialty Chemicals and Pitman Moore, from 1980 to
1993, most recently serving as President/Chief Executive Officer. Dr. Ingle
was a director of Telios and was its Chief Executive Officer from December
1994 to January 1995. He currently serves on the Boards of Directors for
Synbiotics Corporation and Vical Inc., and as a member of the Board of
Trustees at La Jolla Cancer Research Foundation.
MICHAEL SORELL, M.D. Dr. Sorell, age 49, was appointed a director in
April 1996. Since March 1996, he has been the Managing Partner of MS
Capital, an advisement firm based in New York. From July 1986 to February
1992, he was associated with Morgan Stanley & Co. ("Morgan Stanley"), an
investment banking firm, in various capacities, the last being Principal.
From March 1992 to July 1994, he was a partner in a joint venture with Essex
Investment Management of Boston, an investment management firm. In August
1994, he rejoined Morgan Stanley as the emerging growth strategist and
principal where he served until February 1996. Prior to that, he was on
staff at Memorial Sloan-Kettering Cancer Center and worked in clinical
development at Schering-Plough Corporation, a pharmaceutical company. Dr.
Sorell also serves on the Board of Directors of Dynagen, Inc.
W. LEIGH THOMPSON, JR., M.D., PH.D. Dr. Thompson, age 58, was appointed
a director in January 1996. Dr. Thompson retired in December 1994 as Chief
Scientific Officer of Eli Lilly and Company ("Eli Lilly"), a pharmaceutical
company, where he had served in various capacities since 1982. He has served
as the President and Chief Executive Officer of Profound Quality Resources,
Ltd., a consulting company, since January 1995 and serves on the Boards of
Directors for GeneMedicine, Inc., Chrysalis International Corporation
(formerly DNX Corporation), Guilford Pharmaceuticals Inc., Orphan Medical,
Inc., Ergo Science Corporation, La Jolla Pharmaceutical Co., Medarex Inc.,
and BAS, Inc.
-24-
GERARD VAN ACKER. Mr. Van Acker, age 53, has been a director since March
1991. Mr. Van Acker has been President and Chief Executive Officer of
Gewestelijke Investeringsmaatschappij voor Vlaanderen, N.V. (The Investment
Company for Flanders) ("GIMV"), based in Antwerp, Belgium, since founding it in
1980. He was a co-founder and the first President of Plant Genetic Systems,
N.V. ("Plant Genetic Systems"), (who, along with its affiliates, PGS
International, N.V., a Netherlands corporation ("PGS International Netherlands")
and PGS International, N.V., a Belgium corporation ("PGS International Belgium")
are collectively referred to herein as "PGS"). Since May 1989, Mr. Van Acker
has also been a director of BARCO, N.V.
NICOLE VITULLO. Ms. Vitullo, age 39, was appointed a director in April
1996. She has been a Vice President since November 1992, and a Senior Vice
President since November 1996, with Rothschild Asset Management, Inc., which
manages two publicly traded funds, International Biotechnology Trust and
Biotechnology Investments, Limited. She served as Director of Corporate
Communications at Cephalon, Inc., a neuropharmaceutical company, from July
1991 to November 1992. Prior to that, she was Manager, Healthcare
Investments at Eastman Kodak Company. She also serves on the Boards of
Directors of Cytel Corporation, Anergen, Inc. and Cadus Pharmaceuticals, Corp.
RANDALL E. WOODS. Mr. Woods, age 44, was appointed President and Chief
Executive Officer and elected a director of Corvas in May 1996. Prior to
joining Corvas, Mr. Woods served as President of the U.S. Operations,
Boehringer Mannheim Pharmaceuticals Corporation, a pharmaceutical company,
from March 1994 to March 1996, and was Vice President of Marketing and Sales
from December 1993 to March 1994. From 1973 to December 1993, he served in
various capacities at Eli Lilly, where he was most recently responsible for
the marketing of hospital products. Mr. Woods received an M.B.A. from
Western Michigan University.
Mr. Van Acker was nominated for election as a director in accordance with
an agreement among the Company, GIMV and PGS, entered into in March 1991 under
which the Company issued shares of preferred stock (subsequently converted into
common stock) to GIMV and PGS. Pursuant to such agreement, the Company has
agreed that, for as long as the holders of such shares of stock hold not less
than 10% of the voting power of the Company, it will nominate for election to
the Board of Directors the number of persons designated by such holders that
they would be entitled to elect under cumulative voting.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
JOHN E. CRAWFORD. Mr. Crawford, age 42, a founder of Corvas, has been
Chief Financial Officer since the Company's organization in May 1987, Executive
Vice President since April 1989 and Secretary since March 1991. Mr. Crawford
also served as President from May 1987 to April 1989, Chief Operating Officer
from April 1989 to February 1991, Secretary from May 1987 to June 1989 and as a
director from May 1987 to March 1991. Mr. Crawford received an M.B.A. from the
University of Chicago Graduate School of Business.
WILLIAM C. RIPKA, PH.D. Dr. Ripka, age 57, joined Corvas in May 1990 as
Vice President, Pharmaceutical Research. In January 1995, Dr. Ripka was
promoted to Senior Vice President, Chemical Research. Prior to joining Corvas,
he was employed for twenty-four years by E.I. duPont de Nemours & Co. in various
research positions, most recently as Research Fellow and Supervisor of Drug
Design and Molecular Modeling. Dr. Ripka received his Ph.D. in physical organic
chemistry from the University of Illinois.
GEORGE P. VLASUK, PH.D. Dr. Vlasuk, age 41, joined Corvas in August 1991
as Director, Molecular Pharmacology. He served as Executive Director, Molecular
Pharmacology from July 1993 to January 1995, and from January 1995 to September
1996 as Vice President, Biological Research. In September 1996, Dr. Vlasuk was
promoted to Executive Vice President, Research and Development. Before joining
Corvas, he was employed for six years at Merck Sharp & Dohme Research
Laboratories, most recently as Associate Director of Hematology Research. Dr.
Vlasuk received his Ph.D. in biochemistry from Kent State University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference into
this Report from the information set forth under the caption "Executive
Compensation" in the 1997 Proxy Statement.
-25-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference into
this Report from the information set forth under the caption "Stock Ownership of
Management and Certain Beneficial Owners" in the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference into
this Report from the information set forth under the caption "Certain
Transactions" in the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See Index to Financial Statements under Item 8 of this Form 10-K.
2. Financial Statement Schedules:
Schedules are omitted because they are not required or are
inapplicable or because the information called for is included in the
financial statements or the notes thereto.
3. Exhibits -- See (c) below
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
(c) Exhibits
The following documents are exhibits to this Form 10-K:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 Amended and Restated Certificate of Incorporation.(8)
3.2 Bylaws.(8)
3.3 Certificate of Designation of the Series A Convertible Preferred
Stock, dated as of December 14, 1994 (Filed as part of Exhibit 10.35).
3.4 Certificate of Designation of the Series B Convertible Preferred
Stock, dated as of December 20, 1996.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 10.19, 10.24, 10.25,
10.38 and 10.40.
4.2 Specimen stock certificate.(1)
10.1* Form of Indemnification Agreement between the Company and each
director and executive officer.(1)
10.2* Stock Option Plan of the Company, as amended.(1)
10.3* Form of Incentive Stock Option Agreement under the Stock Option
Plan.(1)
10.4* Form of Non-Incentive Stock Option Agreement under the Stock Option
Plan.(1)
10.5* Second Stock Option Plan of the Company.(1)
10.6* Incentive Stock Option Agreement between the Company and David S.
Kabakoff, dated as of October 2, 1989.(1)
10.7* Non-Statutory Stock Option Agreement of Theodor H. Heinrichs, dated
October 17, 1991.(2)
10.8* Form of Employee Stock Purchase Plan.(1)
-26-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.9* 1991 Incentive and Compensation Plan of the Company, as amended.(1)
(18)
10.10* Form of Incentive Stock Option Agreement under the 1991 Incentive and
Compensation Plan of the Company.(2)
10.11* Form of Non-Qualified Stock Option Agreement under the 1991 Incentive
and Compensation Plan of the Company.(2)
10.12* Form of Restricted Stock Purchase Agreement between the Company and
certain individuals or entities, and attached schedule.(1)
10.13 Second Amended and Restated Stock Registration Rights Agreement
between the Company and certain investors and warrantholders named
therein, dated as of February 14, 1991, as amended on March 19, 1991,
November 13, 1991 and December 4, 1991, and supplemental letter
agreement dated December 12, 1991.(1)
10.14* Employment Agreement between the Company and David S. Kabakoff, dated
as of March 6, 1989.(1)
10.15* Employment Agreement between the Company and John E. Crawford, dated
as of April 17, 1989 (Replaced by Exhibit 10.53).(1)
10.16* Consulting Agreement between the Company and Thomas S. Edgington,
dated as of May 21, 1987, with attachments and addenda, as extended
and assigned pursuant to the Consulting Agreement Extension, dated as
of May 21, 1991.(1)
10.17* Consulting Agreement between the Company and John H. Fried, dated as
of June 3, 1992.(6)
10.18 Antibody Option Agreement between the Company and Centocor, Inc.,
dated as of November 7, 1991, with exhibit.(1) (4)
10.19 Voting Agreement between Centocor Delaware, Inc. and certain equity
security holders of the Company dated November 20, 1991.(1)
10.20 Standstill Letter Agreement between the Company and Centocor, Inc.,
dated November 20, 1991.(1)
10.21 Research and License Agreement for Human Tissue Factor for Diagnostic
Purposes between the Company and Scripps Clinic and Research
Foundation, dated May 19, 1988, as amended, including exhibits.(1) (4)
10.22 Agreement for International Business Combination (Series C and D
Preferred Stock (subsequently converted to Common Stock)) between the
Company and Plant Genetic Systems, N.V. and Take Off Fonds, N.V.,
dated as of March 6, 1991.(1)
10.23 Series E, F and G Preferred Stock Purchase Agreement (subsequently
converted to Common Stock) between the Company and Centocor Delaware,
Inc., dated as of November 20, 1991.(1)
10.24 Warrant to purchase Series B Preferred Stock of the Company
(subsequently converted to Common Stock) issued to Comdisco, Inc. on
June 19, 1990, as amended on January 2, 1992.(1)
10.25 Warrant to purchase Series B Preferred Stock of the Company
(subsequently converted to Common Stock) issued to Praktikerfinans AB
on November 30, 1990, as amended on January 15, 1992.(1)
10.26 Lease Agreement for 3030 Science Park Road, San Diego, California
between the Company and Hartford Accident and Indemnity Company, dated
as of March 28, 1989, as amended on March 23, 1990, May 18, 1990 and
May 16, 1991.(1)
10.27 Fourth Lease Amendment to Lease Agreement for 3030 Science Park Road,
San Diego, California between the Company and Hartford Accident and
Indemnity Company, dated as of January 21, 1992.(1)
10.28 Waiver of Conversion Price Adjustment Agreement between the Company
and Centocor Delaware, Inc., dated as of January 10, 1992.(1)
10.29 Supply Agreement and License Agreement between the Company and Ortho
Diagnostic Systems, Inc., dated June 8, 1992, amended as to
confidential treatment pursuant to a Form 8 filed March 18, 1993.(3)
(5)
-27-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.30 Fifth Lease Amendment to Lease Agreement for 3030 Science Park Road,
San Diego, California between the Company and Hartford Accident and
Indemnity Company, dated as of April 15, 1992, Sixth Lease Amendment
dated as of July 16, 1992, Seventh Lease Amendment dated as of January
18, 1993.(6)
10.31 Permanent Waiver of Right of Centocor, Inc. to nominate second
director under Series E, F and G Preferred Stock Purchase Agreement
filed as Exhibit 10.23 herein.(8)
10.32 Assignment of Lease Agreement for 3030 Science Park Road, San Diego,
California from Corvas International, Inc., a California corporation,
to Corvas International, Inc., a Delaware corporation, dated September
14, 1993.(8)
10.33* Corvas International, Inc. 401(k) Compensation Deferral Savings Plan
and Trust Agreement (Amended and Restated as of January 1, 1989)
(Revised to incorporate amendments to plan).(10)
10.34 Research and License Agreement for Oral Thrombin Inhibitor Drugs
between the Company and Schering Corporation and Schering-Plough LTD.,
dated as of December 14, 1994.(10)(11)
10.35 Series A Preferred Stock Purchase Agreement between the Company and
Schering Corporation, dated as of December 14, 1994.(10)(11)
10.36 Eighth Lease Amendment to Lease Agreement for 3030 Science Park Road,
San Diego, California between the Company and Hartford Accident and
Indemnity Company, dated as of July 7, 1995.(12)
10.37* Extension of Consulting Agreement between the Company and Thomas S.
Edgington and Molecular Biology Consultants, dated as of May 21,
1995.(13)
10.38 Form of Warrant Agreement to purchase Common Stock of the Company
issued to certain individuals affiliated with Ventana Leasing, Inc. on
June 16, 1995.(13)
10.39 Collaborative Research and Option Agreement between the Company and
Pfizer Inc. and Pfizer Limited, dated as of October 14, 1995.(13)(15)
10.40 Common Stock and Warrant Purchase Agreement between the Company and
certain purchasers, dated as of February 2, 1996, with exhibits.(13)
10.41* Employment Agreement between the Company and Donald H. Picker, dated
as of February 2, 1996, with certain exhibits thereto.(13)
10.42* Loan Agreement between the Company and Donald H. Picker, dated
February 23, 1996, the Promissory Notes and letter agreement and Deed
of Trust related thereto.(14) (18)
10.43 Ninth Lease Amendment to Lease Agreement for 3030 Science Park Road,
San Diego, California between the Company and Hartford Accident and
Indemnity Company, dated as of March 15, 1996.(14)
10.44 Permanent Waiver of Right of Centocor, Inc. to nominate director under
Series E, F and G Preferred Stock Purchase Agreement (see Exhibit
10.23).(14)
10.45* Consulting Agreement between the Company and David S. Kabakoff, dated
as of May 1, 1996.(16)
10.46* Consulting Agreement between the Company and Theodor H. Heinrichs,
dated as of May 1, 1996.(17)
10.47* Employment Agreement by and between the Company and Randall E. Woods,
dated as of May 10, 1996, with certain exhibits thereto (Replaced by
Exhibit 10.56). (17)
10.48* Promissory Note between the Company and Randall E. Woods, dated as of
June 25, 1996, and Deeds of Trust related thereto. (18)
10.49* Separation Agreement between the Company and Donald H. Picker, dated
as of July 18, 1996. (18)
10.50* Extension of Promissory Note between the Company and Randall E. Woods,
dated as of December 7, 1996 (see Exhibit 10.48).
10.51* Separation Agreement between the Company and Howard R. Soule, dated as
of January 28, 1997.
-28-
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.52* Extension of Consulting Agreement between the Company and David S.
Kabakoff, dated as of February 20, 1997.
10.53* Employment Agreement by and between the Company and John E. Crawford,
dated as of March 18, 1996.
10.54* Employment Agreement by and between the Company and William C. Ripka,
dated as of March 18, 1996.
10.55* Employment Agreement by and between the Company and George P. Vlasuk,
dated as of March 18, 1996.
10.56* Employment Agreement by and between the Company and Randall E. Woods,
dated as of March 18, 1996.
21.1 Subsidiary of the Company.(1)
23.1 Independent Auditors' Consent.
24.1 Power of Attorney. Reference is made to page 30.
27.1 Financial Data Schedule.
- --------------------
(1) Incorporated by reference to Registration Statement on Form S-1 (No.
33-44555), as amended, filed December 13, 1991.
(2) Incorporated by reference to Registration Statement on Form S-8 (No.
33-45607), as amended, filed February 10, 1992.
(3) Incorporated by reference to Quarterly Report on Form 10-Q, filed
August 14, 1992.
(4) Portions of this exhibit have been granted confidential treatment
pursuant to an order granted by the Securities and Exchange Commission
on January 30, 1992.
(5) Portions of this exhibit have been granted confidential treatment
pursuant to an order granted by the Securities and Exchange Commission
on December 10, 1992.
(6) Incorporated by reference to Annual Report on Form 10-K, filed March
30, 1993.
(7) Incorporated by reference to Quarterly Report on Form 10-Q, filed May
14, 1993.
(8) Incorporated by reference to Annual Report on Form 10-K, filed
February 23, 1994.
(9) Incorporated by reference to Quarterly Report on Form 10-Q, filed
November 14, 1994.
(10) Incorporated by reference to Annual Report on Form 10-K, filed March
30, 1995.
(11) Portions of this exhibit have been granted confidential treatment
pursuant to an order granted by the Securities and Exchange Commission
on May 11, 1995.
(12) Incorporated by reference to Quarterly Report on Form 10-Q, filed
November 13, 1995.
(13) Incorporated by reference to Annual Report on Form 10-K, filed
February 28, 1996.
(14) Incorporated by reference to Registration Statement on Form S-1 (No.
333-2644), filed March 25, 1996.
(15) Portions of this exhibit have been granted confidential treatment
pursuant to an order granted by the Securities and Exchange Commission
on April 26, 1996.
(16) Incorporated by reference to Quarterly Report on Form 10-Q, filed May
13, 1996.
(17) Incorporated by reference to Registration Statement on Form S-1 (No.
333-2644), as amended, filed May 31, 1996.
(18) Incorporated by reference to Quarterly Report on Form 10-Q, filed
August 12, 1996.
* Indicates executive compensation plan or arrangement.
-29-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CORVAS INTERNATIONAL, INC.
Date: March 27, 1997 By: /s/ RANDALL E. WOODS
-------------------------
Randall E. Woods
President and Chief Executive Officer
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Randall E. Woods and John E. Crawford, or
either of them, his attorney-in-fact, with the full power of substitution for
him in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Titles Date
---------- ------ ----
/s/ RANDALL E. WOODS President, Chief Executive March 27, 1997
- ------------------------------ Officer and Director
Randall E. Woods (Principal Executive
Officer)
/s/ JOHN E. CRAWFORD Executive Vice President March 27, 1997
- ------------------------------ and Chief Financial Officer
John E. Crawford (Principal Financial and
Accounting Officer)
/s/ JOHN H. FRIED, PH.D. Chairman of the Board of March 27, 1997
- ------------------------------ Directors
John H. Fried, Ph.D.
/s/ THOMAS S. EDGINGTON, M.D. Director March 27, 1997
- ------------------------------
Thomas S. Edgington, M.D.
/s/ THEODOR H. HEINRICHS Director March 27, 1997
- ------------------------------
Theodor H. Heinrichs
/s/ M. BLAKE INGLE, PH.D. Director March 27, 1997
- ------------------------------
M. Blake Ingle, Ph.D.
Director
- ------------------------------
Michael Sorell, M.D.
/s/ W. LEIGH THOMPSON, JR., M.D., PH.D. Director March 27, 1997
- ---------------------------------------
W. Leigh Thompson, Jr., M.D., Ph.D.
/s/ GERARD VAN ACKER Director March 27, 1997
- ------------------------------
Gerard Van Acker
/s/ NICOLE VITULLO Director March 27, 1997
- ------------------------------
Nicole Vitullo
-30-
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Corvas International, Inc.:
We have audited the accompanying balance sheets of Corvas International, Inc. as
of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Corvas International, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
February 19, 1997
F-1
CORVAS INTERNATIONAL, INC.
BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
----------------------------
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,202 $ 1,427
Short-term debt securities held to maturity and time
deposits, partially restricted (notes 2 and 6) 26,394 11,024
Receivables 438 338
Notes receivable from related parties (note 11) 200 ---
Other current assets 312 250
-------- --------
Total current assets 29,546 13,039
-------- --------
Property and equipment, net (note 3) 1,093 1,423
-------- --------
$ 30,639 $ 14,462
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 358 $ 272
Accrued expenses 713 461
Accrued vacation 194 205
Accrued litigation settlement expenses (note 12) --- 313
Current portion of capital lease obligation (note 6) 27 77
Deferred rent (note 6) --- 34
Deferred revenue (note 7) 4,000 4,305
-------- --------
Total current liabilities 5,292 5,667
-------- --------
Long-term capital lease obligation (note 6) --- 27
Deferred revenue (note 7) 1,000 ---
Stockholders' equity (note 4):
Convertible preferred stock, $.001 par value,
authorized 10,000,000 shares, issued and outstanding:
Series A: 1,000,000 shares in 1996 and 1,000,000 shares
in 1995 (liquidating preference $5 per share) 1 1
Series B: 250,000 shares in 1996 and no shares in 1995
(liquidating preference $8 per share) --- ---
Common stock, $.001 par value, authorized 50,000,000
shares, issued and outstanding 13,717,000 shares
in 1996 and 9,448,000 shares in 1995 14 9
Additional paid-in capital 91,629 69,346
Accumulated deficit (67,297) (60,588)
-------- --------
Total stockholders' equity 24,347 8,768
Commitments and contingencies (notes 6, 7 and 12)
Subsequent events (note 13)
-------- --------
$ 30,639 $ 14,462
-------- --------
-------- --------
See accompanying notes to financial statements.
F-2
CORVAS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
REVENUES:
Revenue from collaborative
agreements (note 7) $ 5,480 $ 4,354 $ ---
License fees & milestones (note 7) 400 500 ---
Net product sales 224 406 280
Royalties (note 7) 161 142 183
Research grants (note 10) --- --- 667
-------- -------- --------
Total revenues 6,265 5,402 1,130
-------- -------- --------
COSTS AND EXPENSES:
Research and development (notes 7 and 10) 10,901 9,723 11,378
General and administrative 3,181 2,582 3,159
Cost of products sold 134 211 83
Litigation settlement and related
expenses (note 12) --- --- 535
Restructuring charge (note 8) --- --- 1,575
-------- -------- --------
Total costs and expenses 14,216 12,516 16,730
-------- -------- --------
Loss from operations (7,951) (7,114) (15,600)
-------- -------- --------
OTHER INCOME:
Interest income, net 1,191 835 686
Other income (expense) 51 ( 14) 11
-------- -------- --------
1,242 821 697
-------- -------- --------
Net loss $ (6,709) $ (6,293) $(14,903)
-------- -------- --------
-------- -------- --------
Net loss per share $ (0.52) $ (0.67) $ (1.60)
-------- -------- --------
-------- -------- --------
Shares used in calculation
of net loss per share 12,882 9,374 9,336
-------- -------- --------
-------- -------- --------
See accompanying notes to financial statements.
F-3
CORVAS INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1996
(In thousands)
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Balance as of December 31, 1993 --- $ --- --- $ --- 9,326 $ 9
Common stock issued upon exercise of
stock options --- --- --- --- 14 ---
Common stock issued pursuant to employee stock
purchase plan --- --- --- --- 12 ---
Series A preferred stock issued for cash, net of
issuance costs 1,000 1 --- --- --- ---
Amortization of deferred compensation --- --- --- --- --- ---
Foreign currency translation adjustment --- --- --- --- --- ---
Net loss --- --- --- --- --- ---
---------- ---------- ---------- ---------- ---------- ----------
Balance as of December 31, 1994 1,000 1 --- --- 9,352 9
Common stock issued upon exercise of
stock options --- --- --- --- 74 ---
Common stock issued pursuant to employee stock
purchase plan --- --- --- --- 16 ---
Common stock issued pursuant to employee
performance stock award --- --- --- --- 6 ---
Amortization of deferred compensation --- --- --- --- --- ---
Foreign currency translation adjustment --- --- --- --- --- ---
Net loss --- --- --- --- --- ---
---------- ---------- ---------- ---------- ---------- ----------
Balance as of December 31, 1995 1,000 1 --- --- 9,448 9
Common stock issued for cash, net of issuance costs --- --- --- --- 4,000 4
Common stock issued upon exercise of
stock options --- --- --- --- 133 1
Common stock issued pursuant to employee stock
purchase plan --- --- --- --- 11 ---
Common stock issued pursuant to litigation
settlement --- --- --- --- 125 ---
Series B preferred stock issued for cash, net of
issuance costs --- --- 250 --- --- ---
Net loss --- --- --- --- --- ---
---------- ---------- ---------- ---------- ---------- ----------
Balance as of December 31, 1996 1,000 $ 1 250 $ --- 13,717 $ 14
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Foreign
Additional Currency Total
Paid-in Accumulated Deferred Translation Stockholders'
Capital Deficit Compensation Adjustment Equity
---------- ----------- ------------ ----------- -------------
Balance as of December 31, 1993 $ 64,354 $ (39,392) $ (379) $ (118) $ 24,474
Common stock issued upon exercise of
stock options 11 --- --- --- 11
Common stock issued pursuant to employee stock
purchase plan 30 --- --- --- 30
Series A preferred stock issued for cash, net of
issuance costs 4,863 --- --- --- 4,864
Amortization of deferred compensation (109) --- 296 --- 187
Foreign currency translation adjustment --- --- --- (16) (16)
Net loss --- (14,903) --- --- (14,903)
---------- ----------- ------------ ----------- -------------
Balance as of December 31, 1994 69,149 (54,295) (83) (134) 14,647
Common stock issued upon exercise of
stock options 150 --- --- --- 150
Common stock issued pursuant to employee stock
purchase plan 35 --- --- --- 35
Common stock issued pursuant to employee
performance stock award 12 --- --- --- 12
Amortization of deferred compensation --- --- 83 --- 83
Foreign currency translation adjustment --- --- --- 134 134
Net loss --- (6,293) --- --- (6,293)
---------- ----------- ------------ ----------- -------------
Balance as of December 31, 1995 69,346 (60,588) --- --- 8,768
Common stock issued for cash, net of issuance costs 19,710 --- --- --- 19,714
Common stock issued upon exercise of
stock options 248 --- --- --- 249
Common stock issued pursuant to employee stock
purchase plan 27 --- --- --- 27
Common stock issued pursuant to litigation
settlement 298 --- --- --- 298
Series B preferred stock issued for cash, net of
issuance costs 2,000 --- --- --- 2,000
Net loss --- (6,709) --- --- (6,709)
---------- ----------- ------------ ----------- -------------
Balance as of December 31, 1996 $ 91,629 $ (67,297) $ --- $ --- $ 24,347
---------- ----------- ------------ ----------- -------------
---------- ----------- ------------ ----------- -------------
See accompanying notes to financial statements.
F-4
CORVAS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years ended December 31,
------------------------------------------
1996 1995 1994
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,709) $ (6,293) $(14,903)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 767 834 814
Amortization of premiums and discounts on investments (160) (377) (26)
Amortization of deferred compensation --- 83 187
Stock compensation expense 4 12 ---
Translation loss --- 92 ---
Loss on disposal of property and equipment --- 154 ---
Change in assets and liabilities:
(Increase) decrease in receivables (100) (32) 346
(Increase) decrease in other current assets (62) (8) 107
Increase (decrease) in accounts payable, accrued
expenses, accrued benefits, accrued vacation and
accrued litigation settlement expenses 314 (1,191) 738
Decrease in deferred rent (34) (211) (99)
Increase (decrease) in deferred revenue 695 (695) 5,000
---------- --------- ---------
Net cash used in operating activities (5,285) (7,632) (7,836)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity (39,195) (14,927) (23,587)
Proceeds from maturity of investments held to maturity 23,985 20,460 28,728
Purchases of property and equipment (437) (577) (443)
Proceeds from sale of property and equipment --- 256 ---
Repayments from (loans to) related parties (200) --- 150
---------- --------- ---------
Net cash provided by (used in) investing activities (15,847) 5,212 4,848
---------- --------- ---------
(Continued)
F-5
CORVAS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
Years ended December 31,
------------------------------------
1996 1995 1994
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligation $ (77) $ (71) $ (46)
Net proceeds from issuance of preferred stock 2,000 --- 4,864
Net proceeds from issuance of common stock 19,984 185 41
--------- --------- --------
Net cash provided by financing activities 21,907 114 4,859
Effect of exchange rate changes on cash --- 46 (69)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents 775 (2,260) 1,802
Cash and cash equivalents at beginning of period 1,427 3,687 1,885
--------- --------- --------
Cash and cash equivalents at end of period $ 2,202 $ 1,427 $ 3,687
--------- --------- --------
--------- --------- --------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 6 $ 11 $ 9
Noncash financing activities:
Equipment acquisitions under capital lease $ --- $ --- $ 221
Common stock issued under litigation settlement agreement $ 298 $ --- $ ---
See accompanying notes to financial statements.
F-6
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements
December 31, 1996 and 1995
(l) THE COMPANY
Corvas International, Inc. (the "Company") was incorporated on March 27,
1987 under the laws of the State of California. In July 1993, the Company
reincorporated in the state of Delaware. The Company is engaged in the
design and development of a new generation of therapeutic agents for the
prevention and treatment of major cardiovascular, inflammatory and other
diseases. Prior to December 1994, the Company was considered to be in the
development stage for financial reporting purposes.
The 1994 financial statements were consolidated to include the Company's
Belgian subsidiary, Corvas International, N.V. All material intercompany
balances and transactions were eliminated in consolidation. Operating
activities ceased in December 1994 at the Belgian subsidiary, which was
liquidated in December 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH EQUIVALENTS:
Cash equivalents consist of an investment in a short-term government
fund and are stated at cost, which approximates market value.
(b) SHORT-TERM DEBT SECURITIES HELD TO MATURITY AND TIME DEPOSITS:
Short-term debt securities consist of government-backed debt
instruments. Short-term debt securities are carried at amortized cost
which approximates market value and mature at various dates through
June 11, 1997. At both December 31, 1996 and 1995, a $60,000 time
deposit was restricted related to the facility lease. See Note 6.
The Company has the ability and intent to hold its investments until
their maturity and, therefore, records its investments at amortized
cost, adjusted for the amortization or accretion of premiums or
discounts.
(c) DEPRECIATION AND AMORTIZATION:
Depreciation for financial reporting purposes is provided using the
straight-line method over estimated useful lives of three to five
years. Leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or estimated useful life of the
asset. Assets held under capital lease are amortized over the life of
the lease.
(d) RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are expensed in the period incurred.
(e) PATENTS:
Costs to obtain and maintain patents are expensed as incurred.
F-7
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(f) NET LOSS PER SHARE:
Net loss per share is computed using the weighted average number of
common and common share equivalents outstanding. Common equivalent
shares from convertible preferred stock, stock options and warrants
are excluded from the computation as their effect is antidilutive.
(g) REVENUE RECOGNITION:
Revenue from collaborative agreements is generally recognized over the
term of the agreement or upon achievement of certain milestones.
Advance payments received in excess of amounts earned are classified
as deferred revenue.
Revenue on product sales is recorded at the time of shipment.
Research grant revenue is recognized as research and development
activities are performed under the terms of the research contracts.
(h) 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 those estimates.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" ("SFAS 107"), defines the
fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying amount of cash and cash equivalents, short-term
debt securities held to maturity and time deposits, receivables, other
current assets, accounts payable, accrued expenses, accrued vacation,
accrued litigation settlement expenses, capital lease obligations,
deferred rent and deferred revenue, included in the accompanying
balance sheets, approximate the estimated fair value of those
instruments because of their short maturities. The fair value of the
notes receivable from related parties cannot be determined due to
their related party nature.
(j) ACCOUNTING FOR STOCK OPTIONS:
The Company accounts for its stock option plans in accordance with the
recognition provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, stock compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 permits companies to recognize
as expense over the vesting period the fair value of all stock-based
awards on the date of grant, or to continue measuring compensation
expense for those plans using the intrinsic value method prescribed in
APB Opinion No. 25. SFAS 123 requires that companies electing to
continue using the intrinsic value method must provide pro forma net
income and pro forma earnings per share disclosures for grants made in
1995 and future years as if the fair-value method defined in SFAS 123
had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123.
F-8
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(3) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are summarized as follows
(in thousands).
DECEMBER 31,
----------------------
1996 1995
---- ----
Machinery and equipment $ 3,235 $ 2,906
Furniture and fixtures 143 135
Leasehold improvements 782 732
------- -------
Total property and equipment 4,160 3,773
Less accumulated depreciation and amortization (3,067) (2,350)
-------- --------
$ 1,093 $ 1,423
------- -------
------- -------
(4) STOCKHOLDERS' EQUITY
(a) CONVERTIBLE PREFERRED STOCK:
In December 1996, in conjunction with a strategic alliance with
Schering-Plough Corporation ("Schering-Plough") (See Note 7), the
Company issued 250,000 shares of Series B Convertible Preferred Stock,
resulting in net proceeds of $2,000,000. Each share of Series B
preferred stock is convertible into one share of the Company's common
stock, and will automatically convert if the market price of the
Company's common stock for 10 consecutive trading days exceeds $12.00
per share. As a result, 250,000 shares of common stock have been
reserved for the potential conversion of Series B preferred stock.
Each share of Series B preferred stock is entitled to a fixed,
cumulative dividend of $.64 per share per annum, when and if declared
by the Board of Directors. No such dividends have been declared. In
addition, each share is entitled to one vote and has a liquidating
preference of $8.00 plus any declared and unpaid dividends.
Also in conjunction with its strategic alliance with Schering-Plough,
the Company issued 1,000,000 shares of Series A Convertible Preferred
Stock in December 1994, resulting in net proceeds of $4,864,000. Each
share of Series A preferred stock is convertible into one share of the
Company's common stock, and will automatically convert if the market
price of the Company's common stock for 10 consecutive trading days
exceeds $7.50 per share. As a result, 1,000,000 shares of common
stock have been reserved for the potential conversion of Series A
preferred stock. Each share of Series A preferred stock is entitled
to a fixed, cumulative dividend of $.40 per share per annum, when and
if declared by the Board of Directors. No such dividends have been
declared. In addition, each share is entitled to one vote and has a
liquidating preference of $5.00 plus any declared and unpaid
dividends.
The Company is authorized to issue a total of 10,000,000 shares of
preferred stock.
F-9
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(b) COMMON STOCK:
In July 1996, the Company completed a public offering of 1,000,000
shares of registered common stock to an institutional investor,
resulting in net proceeds of $4,885,000.
In February 1996, the Company completed a private placement of equity
securities consisting of 3,000,000 units to a group of institutional
buyers, resulting in net proceeds of $14,829,000. Each unit consisted
of one share of common stock and one callable warrant to purchase one
additional share of common stock.
In February 1992, the Company completed its initial public offering of
3,000,000 shares of common stock, resulting in net proceeds of
$32,470,000. The Company filed Restated Articles of Incorporation in
February 1992 which increased to 50,000,000 the number of authorized
common shares.
(c) STOCK OPTIONS:
The Company has several plans and arrangements under which incentive
stock options, non-statutory stock options, stock appreciation rights,
restricted stock awards, dividend equivalents, performance awards and
stock payments can be granted to key personnel, including officers,
directors, and outside consultants. The grants are authorized by the
Compensation and Stock Option Committee of the Board of Directors.
Options have a term of 10 years, and become exercisable over a four-
year period beginning one year from the date of grant at a price per
share equal to the fair market value on the date of grant, except for
grants to outside directors which have an exercise price of 85% of the
fair market value on the date of grant. All options granted to
employees and consultants after December 1, 1994 vest 25% at the end
of the first year and 6.25% per quarter each quarter thereafter.
Activity under these plans and arrangements from 1994 through 1996
is as follows (in thousands except per share amounts).
Number of Weighted-Average
Options Exercise Price
------- --------------
Outstanding, December 31, 1993 840 $ 4.59
Granted 305 $ 2.90
Exercised (14) $ 0.86
Cancelled (43) $ 5.94
------
Outstanding, December 31, 1994 1,088 $ 4.11
Granted 755 $ 2.26
Exercised (74) $ 2.02
Cancelled (711) $ 4.73
------
Outstanding, December 31, 1995 1,058 $ 2.44
Granted 1,079 $ 4.56
Exercised (133) $ 1.86
Cancelled (350) $ 4.17
------
Outstanding, December 31, 1996 1,654 $ 3.51
------
------
A total of 2,225,000 shares are authorized for issuance, and an
additional 695,000 shares are reserved for future grant. As of
December 31, 1996, the range of exercise prices and the weighted-
average remaining contractual life of options outstanding was $0.70 -
$7.06 and 8.22 years, respectively.
F-10
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
At December 31, 1996 and 1995, the number of options exercisable was
615,000 and 342,000, respectively, and the weighted-average exercise
price of those options was $2.47 and $2.28, respectively.
In January 1995, the Company offered certain holders of stock options,
excluding outside directors of the Company, the opportunity to
exchange an issued option for a new stock option on a one-for-one
basis at the market value on January 16, 1995. After a waiting period
of 6 months (12 months for officers), vesting of the exchanged options
was restored to the level existing prior to the exchange. A total of
608,000 options at an average exercise price of $4.83 were exchanged
for options with an exercise price of $2.19 per share. These options
are included as grants and cancellations in the preceding table.
For certain options granted prior to the Company's initial public
offering, deferred compensation expense was recognized for the excess
of the deemed fair value over the exercise price at the date of grant.
This deferred compensation was amortized to expense ratably over the
vesting period of each option. All such deferred compensation expense
was amortized prior to December 31, 1995.
The Company applies APB Opinion No. 25 in accounting for its plans
and, accordingly, no compensation cost has been recognized for stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated
below (in thousands):
1996 1995
----------------------- ----------------------
As reported Pro Forma As reported Pro Forma
----------- --------- ----------- ---------
Net loss $(6,709) $(8,149) $(6,293) $(7,221)
Net loss per share $ (0.52) $ (0.63) $ (0.67) $ (0.77)
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over
the options' vesting period of 4 years and compensation cost for
options granted prior to January 1, 1995 is not considered.
The per share weighted-average fair value of stock options granted
during 1996 and 1995 at an exercise price equal to the fair market
value on the date of grant was $4.17 and $1.98 on the date of grant
using the Black-Scholes option-pricing model. The per share weighted-
average fair value of stock options granted during 1996 and 1995 at an
exercise price less than the fair market value on the date of grant
was $3.95 and $1.90 on the date of grant. The following weighted-
average assumptions were used: 1996 - expected dividend yield of 0%,
risk-free interest rate of 5.86%, expected life of 7.64 years, and
expected volatility of 92.67%; 1995 - expected dividend yield of 0%,
risk-free interest rate of 6.61%, expected life of 8.39 years, and
expected volatility of 96.35%.
(d) PERFORMANCE AWARDS:
In January 1995, the Company granted a total of 6,000 shares of common
stock as a performance award to all employees, excluding senior
management of the Company. These shares were fully vested and non-
restrictive. No such shares were issued in the year ended December
31, 1996.
F-11
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(e) WARRANTS:
In conjunction with the private placement of equity securities in
February 1996, the Company issued 3,000,000 warrants to purchase an
equal number of shares of common stock. The warrants are exercisable
at $6.00 per share over a six-year period from the date of purchase.
As of December 31, 1996, no warrants had been exercised.
In conjunction with the negotiation of equipment leases entered into
in 1990, the Company issued warrants to purchase 9,000 shares of
preferred stock (subsequently converted to common stock) to the
lessors in lieu of security deposits. The warrants are exercisable at
$6.13 or $7.00 per share over a period of ten years from the inception
of the leases. As of December 31, 1996, no warrants had been
exercised. The lease agreements are described in Note 6.
(f) STOCK PURCHASE PLAN:
In December 1991, the Company adopted an employee stock purchase plan
that provides for the issuance of up to 150,000 shares of common
stock. The plan is intended to qualify under Section 423 of the
Internal Revenue Code and is for the benefit of qualifying employees,
as designated by the Compensation and Stock Option Committee of the
Board of Directors. Under the terms of the plan, participating
employees are eligible to have a maximum of 10% of their compensation
withheld through payroll deductions to purchase shares of common stock
at the lower of 85% of the fair market value at the beginning of each
offering period or of the fair market value on predetermined dates.
As of December 31, 1996, 58,000 shares of common stock have been
issued pursuant to this plan. Had the Company determined compensation
cost based on the fair value at the date of grant for these shares
under SFAS 123, the effect would not have been material to the
Company's net loss and loss per share for 1996 and 1995.
(5) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The Company has no net, taxable temporary differences which would require
recognition of deferred tax liabilities and, due to the uncertainty of
future realizability, has recorded a valuation allowance against any
deferred tax assets for deductible temporary differences and tax operating
loss carryforwards. The Company increased its valuation allowance by
approximately $2,100,000 and $2,400,000 for the years ended December 31,
1996 and 1995, respectively, primarily as a result of the increase in tax
operating loss carryforwards.
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $58,178,000 for federal income tax reporting
purposes which begin to expire in 2002. The net operating loss
carryforwards for state purposes, which expire five years after generation,
are approximately $24,557,000. The Company has unused research and
development tax credits for federal income tax purposes of $2,624,000 at
December 31, 1996.
In accordance with Internal Revenue Code Section 382, the annual
utilization of net operating loss carryforwards and credits existing prior
to a change in control may be limited.
F-12
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(6) COMMITMENTS
(a) LEASE COMMITMENTS:
The Company currently leases its principal facility under an operating
lease and certain equipment under a capital lease. The facility lease
expires in September 1997 and has two one-year renewal options
remaining. Terms of the lease provide for escalating rent payments
during the lease term. For financial reporting purposes, rent expense
was recognized on a straight-line basis over the term of the base
lease. Accordingly, rent expense recognized in excess of cash rent
paid was reflected as deferred rent through expiration of the base
lease on September 30, 1996. Total rent expense recognized under this
lease for the years ended December 31, 1996, 1995 and 1994 was
$846,000, $733,000 and $722,000, respectively.
In 1994, the Company had a lease commitment with a related party for
its former Belgian operation. See Notes 8 and 11. Rent expense for
this operation for the year ended December 31, 1994 was $74,000.
In 1994, the Company entered into a capital equipment lease for
$221,000 to be paid over 36 months. The amortization expense on this
lease for the years ended December 31, 1996, 1995 and 1994 was
$44,000, $44,000 and $30,000, respectively.
The Company has entered into various operating leases for the purchase
of equipment. All of these leases have expired and, accordingly, no
lease expense was recognized pursuant to these leases in the year
ended December 31, 1996. Lease expense on these leases for the years
ended December 31, 1995 and 1994 was $58,000 and $247,000,
respectively.
Annual future minimum commitments under these leases for year ending
December 31, 1997 are as follows (in thousands).
Operating Capital
Lease Lease
Total minimum lease payments $ 684 28
--------
--------
Less amount representing interest (1)
--------
Current capital lease obligation $ 27
-------
-------
(b) LETTER OF CREDIT:
The Company has an unused standby letter of credit of $60,000 that
bears interest at the prime rate plus 1% and expires on September 30,
1997 with provisions for annual renewal. This letter of credit,
collateralized by a $60,000 time deposit, is pledged in lieu of a
security deposit against the principal facility lease discussed above.
F-13
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
(7) COLLABORATIVE AGREEMENTS
In October 1995, the Company entered into a research and option agreement
of up to eighteen months with Pfizer Inc. ("Pfizer") to collaborate on the
development of neutrophil inhibitory factor ("NIF"), an anti-inflammatory
agent with therapeutic potential for stroke and other indications. Of the
$1,159,000 payment received from Pfizer in 1995, license fees of $500,000
and revenue from collaborative agreements of $354,000 were recorded on the
statements of operations and the balance of $305,000 was included in
deferred revenue on the balance sheets as of December 31, 1995. Revenue
recognized in 1996 includes $480,000 of revenue from collaborative
agreements, $150,000 of license fees and $50,000 of other income. Of these
amounts, $305,000 was recorded as deferred revenue as of December 31, 1995.
The option period concluded in October 1996, but Pfizer extended its option
and began to make monthly payments of $125,000 to retain its option rights.
If this option is exercised by April 1997, pursuant to a license and
development agreement, Pfizer will receive an exclusive, worldwide license
to further develop, manufacture and market NIF as a therapeutic agent.
Pfizer will also be responsible for funding all further development of NIF
including costs associated with clinical trials and limited activities at
Corvas. Pfizer will pay the Company an additional license fee and will
compensate the Company for certain costs of research and preclinical
development of NIF over a two-year period if this option to enter into the
license and development agreement is exercised. See Note 13. The Company
will also receive milestone payments and royalty payments on product sales
if products are successfully commercialized from this agreement.
In December 1994, the Company entered into a strategic alliance agreement
with Schering-Plough to collaborate on the discovery and commercialization
of oral thrombin inhibitor drugs for the prevention and treatment of
chronic cardiovascular disorders. Under the terms of the agreement,
Schering-Plough compensated the Company for the costs of research and
preclinical development of thrombin inhibitors over a two-year period which
ended December 31, 1996. Of the $5,000,000 payment received in December
1994, revenue of $4,000,000 was recognized in 1995; the remaining
$1,000,000 and an additional $3,000,000 received in 1995 were recorded as
deferred revenue on the balance sheets as of December 31, 1995. This
$4,000,000 was recognized as revenue from collaborative agreements in 1996.
The Company may also receive milestone payments and royalties on sales of
therapeutics resulting from this alliance. See Note 13. Schering-Plough,
which is responsible for certain preclinical development and all future
clinical trials and regulatory activities, received exclusive worldwide
manufacturing and marketing rights for any resulting thrombin inhibitors.
Under a separate agreement also completed in December 1994, Schering-Plough
purchased 1,000,000 shares of Series A convertible preferred stock of the
Company which resulted in net proceeds of $4,864,000.
In conjunction with the agreements completed in December 1994, Schering-
Plough acquired an exclusive one-year option (renewable for one additional
year) to expand the alliance to include a second blood clotting enzyme,
Factor Xa. Schering-Plough renewed this option in January 1996; the
$1,000,000 option extension fee was recorded as revenue from collaborative
agreements in 1996. In December 1996, Schering-Plough exercised this
option and, accordingly, will compensate the Company for the costs of
research and preclinical development of coagulation Factor Xa inhibitors
over two years. Exercise of this option resulted in payment of $5,000,000,
which has been recorded as deferred revenue on the balance sheets as of
December 31, 1996 and, along with an additional payment, will be recognized
as revenue over the two-year research program. An additional $2,000,000
payment received upon the option exercise resulted in the issuance of
250,000 shares of Series B convertible preferred stock.
F-14
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
In June 1992, the Company entered into two agreements with Ortho Diagnostic
Systems, Inc. ("Ortho"), a Johnson & Johnson company, granting Ortho
exclusive worldwide rights to market certain diagnostic reagents. Ortho is
obligated to order stipulated minimum amounts each year, or must pay the
Company the deficiency between the minimum and the amount actually ordered.
Net product sales for the years ended December 31, 1996, 1995 and 1994 were
$130,000, $282,000 and $169,000, respectively. These agreements provide
that Ortho pay royalties based on unit sales of this product, as well as
two milestone payments. A $250,000 milestone payment received in November
1996 was included as revenue in 1996; the first milestone payment was
received in 1992. For the years ended December 31, 1996, 1995 and 1994,
royalties under this agreement amounted to $161,000, $142,000 and $183,000,
respectively.
The Company has also entered into research and licensing agreements with
scientific consultants, universities and other research institutions which
have required the Company to make royalty payments for the years ended
December 31, 1996, 1995 and 1994 of $17,000, $15,000 and 14,000,
respectively.
(8) RESTRUCTURING CHARGE AND LIQUIDATION OF SUBSIDIARY
In December 1994, the Company ceased operation of its Belgian subsidiary,
Corvas International, N.V. The Belgian operation accounted for 20% of the
consolidated operating expenses in 1994, including a restructuring charge.
In connection with this restructuring, the statements of operations reflect
a one-time charge to earnings in 1994 of $1,575,000 for severance and other
expenses.
Corvas International, N.V. was liquidated on December 19, 1995.
Substantially all of the assets were liquidated and any remaining or future
liabilities were assumed by the Company.
(9) EMPLOYEE BENEFITS PLAN
Effective January 1, 1988, the Board of Directors approved the Corvas
401(k) Compensation Deferral Savings Plan ("The Plan"), adopting provisions
of the Internal Revenue Code Section 401(k). The Plan was approved by the
IRS in 1989, and was amended and restated in 1994. The Plan is for the
benefit of all qualifying employees, and permits employee voluntary
contributions, qualified nonelective contributions and company profit
sharing contributions. No employer contributions have been approved by the
Board of Directors through December 31, 1996.
(10) RESEARCH GRANTS
Research grant revenue of $667,000 was recorded in the year ended December
31, 1994. No such revenue was recorded in 1996 or 1995. The related
expenses, which equal research grant revenues, are recorded as research and
development expenses in the statements of operations.
(11) RELATED PARTY TRANSACTIONS
Notes receivable from related parties as of December 31, 1996 consist of
two loans evidenced by promissory notes. The Company granted a $200,000
short-term loan to an executive officer of the Company on June 25, 1996 in
connection with the officer's relocation to San Diego. This secured loan,
which was extended in December 1996, bears no interest and is due and
payable in full on the earlier of (i) December 7, 1997, (ii) the closing of
the sale of the secured property or any transfer thereof, or (iii) within
90 days of such officer's termination of employment with the Company.
On February 23, 1996, the Company granted two loans to an executive officer
of the Company who resigned on July 8, 1996 (the "Former Officer"). The
first loan, in the principal amount of $180,000, was repaid on December 3,
1996. The Company also granted a second loan in the amount of $120,000 to
such Former Officer on February 23, 1996. Of such loan, $60,000 was repaid
on April 25, 1996, and the remaining $60,000 has been reserved as of
December 31, 1996.
F-15
CORVAS INTERNATIONAL, INC.
Notes to Financial Statements, Continued
Pursuant to the acquisition of the Belgian subsidiary, the Company entered
into a facility and equipment services agreement in 1991 with one of its
principal shareholders. The Company was charged $410,000 in 1994 pursuant
to this agreement. See Notes 6 and 8.
(12) LEGAL MATTERS
The Company, several of its current and former directors, and Centocor,
Inc. were parties to a legal proceeding filed February 18, 1993, in the
U.S. District Court for the Southern District of California. The complaint
was filed by a shareholder of the Company who represented a class of
persons who purchased Corvas stock from January 30, 1992 through April 14,
1992. The Company continues to deny all claims of wrongdoing and maintains
this denial as part of the settlement agreement reached in 1995. All
amounts due under the settlement agreement, including the issuance of
125,000 shares of common stock, have been distributed or paid.
In 1993, the U.S. Patent and Trademark Office (the "USPTO") declared an
interference to determine the priority of invention between a patent for
which some rights are licensed to the Company (the "Licensed Patent") and a
patent application for which rights are held by other parties (the "First
Patent Application"). During the third quarter of 1996, the USPTO added a
second patent application to the proceeding (the "Second Patent
Application") and redeclared the interference. Rights to the Second Patent
Application are held by other parties, at least some of which also hold
rights in the First Patent Application. The subject matter of the patent
and these applications is recombinant tissue factor, which is used by Ortho
to determine the blood clotting abilities of patients. The Company is
contesting the other parties' claims of prior invention; however, there can
be no assurance that the Licensed Patent will be upheld.
(13) SUBSEQUENT EVENTS
On January 8, 1997, the Company received a $3,000,000 milestone payment
from Schering-Plough, which will be recorded as revenue in 1997. This
milestone payment, made pursuant to the companies' strategic alliance
agreement, was paid upon selection of a clinical development compound in
the thrombin inhibitor program. See Note 7.
Subject to the notification and waiting requirements of Hart-Scott-Rodino,
the Company was notified on February 14, 1997 that Pfizer has elected to
exercise its option to enter into an exclusive license and development
agreement on the NIF program. Under the agreement, Pfizer will pay the
Company $1,000,000 upon execution of the agreement, less $200,000 applied
from amounts paid to extend the option period from October 1996 to February
1997.
F-16