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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1998
REGISTRATION NO. 333-52901
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SIGNAL PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 8731 94-3174286
(Prior to reincorporation) (Primary Standard Industrial (I.R.S. Employer
DELAWARE Classification Code Number) Identification No.)
(After reincorporation)
(State or jurisdiction
of incorporation or organization)
5555 OBERLIN DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 558-7500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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ALAN J. LEWIS, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SIGNAL PHARMACEUTICALS, INC.
5555 OBERLIN DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 558-7500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
FREDERICK T. MUTO, ESQ. J. STEPHAN DOLEZALEK, ESQ.
MICHAEL A. NEWMAN, ESQ. TIMOTHY R. CURRY, ESQ.
COOLEY GODWARD LLP BROBECK, PHLEGER & HARRISON LLP
4365 EXECUTIVE DRIVE TWO EMBARCADERO PLACE
SUITE 1100 2200 GENG ROAD
SAN DIEGO, CA 92121 PALO ALTO, CA 94303
(619) 550-6000 (650) 424-0160
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 6, 1998
PROSPECTUS
2,500,000 SHARES
LOGO
COMMON STOCK
All of the 2,500,000 shares of Common Stock offered hereby are being sold
by the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price of the Common Stock will be between $11.00 and $13.00 per share.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The Company has applied to have
the Common Stock approved for quotation on the Nasdaq National Market under the
symbol SIGL.
The DuPont Merck Pharmaceutical Company ("DuPont Merck") has entered into a
collaborative agreement with the Company. As part of such collaboration, DuPont
Merck has agreed to purchase $2.0 million of the Company's Common Stock in a
private transaction concurrent with the closing of this offering at a price per
share equal to the initial public offering price. See "Business--Research and
Development Partners."
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share........................ $ $ $
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Total(3)......................... $ $ $
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
LEHMAN BROTHERS
, 1998
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[Graphic depicting the integrated discovery of gene regulating targets and drugs
and
the gene regulating drug discovery programs of the Company. The left side of the
graphic depicts the progression from target discovery to drug discovery to drug
commercialization. The right side of the graphic depicts the progression of
cellular models of disease from identification and validation of gene regulating
targets to high throughput screening to combinatorial, computational and
structural chemistry to gene regulating drugs. The base of the graphic
elucidates the Company's gene regulating drug discovery programs: autoimmunity,
inflammation, bone metabolism, neurology, cardiovascular, cancer and virology.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR OVER-ALLOTMENTS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
Signal Pharmaceuticals(TM) and the Company's stylized logo are trademarks
of the Company. All other trade names or trademarks appearing in this Prospectus
are the property of their respective owners.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. The Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
THE COMPANY
Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated
target and drug discovery company focused on identifying new classes of small
molecule drugs that regulate genes and the production of disease-causing
proteins. The Company applies advanced cellular, molecular and genomic
technologies to map gene regulating pathways in cells and to identify
proprietary molecular targets that activate or deactivate genes and result in
disease. Signal is advancing the application of genomics beyond identifying and
elucidating the functions of genes to designing novel classes of
disease-modifying drugs that selectively regulate the activation of
disease-causing genes. The Company conducts its target and drug discovery
programs both independently and with its five collaborative partners: Ares
Trading S.A. ("Ares-Serono"), an affiliate of Ares-Serono S.A.; the Roche
Bioscience division ("Roche Bioscience") of Syntex (U.S.A.) Inc., a member of
the Roche Group of Companies; Nippon Kayaku Co., Ltd. ("Nippon Kayaku"); N.V.
Organon ("Organon"), a business unit of Akzo Nobel N.V.; and The DuPont Merck
Pharmaceutical Company ("DuPont Merck").
Signal's target and drug discovery programs are focused on intracellular
gene regulating pathways that play a fundamental role in controlling cell
proliferation, cell metabolism and cell death, as well as the replication of
viral pathogens. These pathways provide important new targets for treating
autoimmune and inflammatory diseases, diseases associated with bone metabolism,
neurological and cardiovascular diseases, cancer and viral infections. Pathways
targeted by Signal include the Nuclear Factor-kB ("NF-kB") pathway, the jun
N-terminal kinase ("JNK") and p38 mitogen-activated protein kinase ("MAP
kinase") pathways, an estrogen-regulated gene ("ERG") pathway and five viral
pathways. These pathways provide multiple drug targets for therapeutic
intervention, many of which regulate the activation of multiple genes involved
in disease. The Company pursues patent exclusivity for its drug targets and
related drug leads, and owns or has licensed five issued U.S. patents relating
principally to MAP kinase pathways, 21 pending U.S. patents and 43 pending
foreign patents.
Signal has developed an integrated target and drug discovery platform that
enables the Company to proceed rapidly from target identification and validation
through lead discovery and optimization. Signal's target discovery capabilities
combine proprietary human cell lines with molecular biology and functional
genomic and proteomic technologies to identify key gene regulating pathways and
associated drug targets. To date, Signal has built a portfolio of 18 clinically
important drug targets, including IkB kinases ("IKKs"), JNKs and p38-2 (a
subtype of p38). The Company's drug discovery capabilities include proprietary
biochemical and cell-based screening assays and high throughput screening
systems for rapid, target-directed screening of diverse compound libraries. The
Company develops drug leads by integrating combinatorial and computational
chemistry with structure-based drug design technologies to optimize the activity
of drug leads on gene regulating targets. Applying its expertise in gene
regulating kinase targets, Signal has developed a kinase array screening
technology ("KAST") and a signaling kinase inhibitor library ("SKIL") to enhance
the speed and quality of Signal's drug discovery activities. The Company has
initiated screening in 16 drug discovery assays and has demonstrated efficacy of
certain of its drug leads in animal models of arthritis and osteoporosis.
Signal's business objective is to develop and commercialize a broad
pipeline of clinically important drug targets and drug candidates, initially in
collaboration with pharmaceutical partners and academic institutions. These
collaborations facilitate the discovery of targets and drug leads in multiple
therapeutic fields, significantly expanding the Company's commercial
opportunities and diversifying Signal's scientific risk. Pharmaceutical partners
also provide Signal with multiple sources of revenue, as well as substantial
development, manufacturing and marketing resources, which reduce the Company's
financial risk. In addition to its five current pharmaceutical partners, Signal
has target discovery
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collaborations with researchers at 24 academic institutions. The Company's
strategy is to retain U.S. co-commercialization rights in certain of its
pharmaceutical collaborations. To date, Signal has secured U.S.
co-commercialization rights in its collaboration with Ares-Serono and worldwide
co-commercialization rights (excluding Japan) in its drug development
collaboration with Nippon Kayaku. On a select basis, Signal plans to
independently develop and commercialize drugs for specialty clinical markets in
the U.S., principally in the fields of oncology and inflammation.
To date, Signal has entered into collaborative discovery agreements with
five pharmaceutical partners: Ares-Serono for the discovery and development of
small molecule modulators of the NF-kB pathway to treat autoimmune,
cardiovascular and neurodegenerative diseases and cancer; Roche Bioscience for
the development of human neuronal cell lines for use in discovering new classes
of drugs for the treatment of pain and other disorders of the peripheral nervous
systems ("PNS"); Nippon Kayaku for the optimization of drug leads for the
treatment of PNS disorders, including neuropathies resulting from diabetes and
cancer chemotherapy; Organon for the identification of genomic targets and the
development of screening assays for neurological, cardiovascular, gynecological
and other diseases; and DuPont Merck for the identification of new classes of
anti-viral drugs that inhibit gene regulating targets of the hepatitis C virus
("HCV") and the human immunodeficiency virus ("HIV"). Signal also has licensed
worldwide rights for a drug lead discovered by the Company to a sixth partner,
Tanabe Seiyaku Co., Ltd. ("Tanabe"), for the treatment of autoimmune,
inflammatory and other diseases. The Company has multiple additional partnering
opportunities in its other drug discovery programs.
The Company was incorporated in California in July 1992 and intends to
reincorporate in Delaware prior to the completion of this offering. Unless the
context otherwise requires, references in this Prospectus to "Signal" and the
"Company" refer to Signal Pharmaceuticals, Inc., a Delaware corporation, and,
where applicable, to its California predecessor. The Company's offices are
located at 5555 Oberlin Drive, San Diego, California 92121, and its telephone
number is (619) 558-7500.
THE OFFERING
Common Stock offered by the
Company............................. 2,500,000 shares
Common Stock to be outstanding
after the offering................ 9,433,929 shares(1)
Use of proceeds..................... For research and development, including
internal discovery programs and joint
research and development with corporate
and academic collaborators, the
acquisition of research and development
technologoies, compound screening
libraries and product rights, capital
investments and working capital and
general corporate purposes
Proposed Nasdaq National Market
Symbol.............................. SIGL
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
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1993 1994 1995 1996 1997 1997 1998
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STATEMENT OF OPERATIONS DATA:
Revenue......................... $ -- $ 22 $ 299 $ 3,933 $ 7,579 $ 1,549 $ 4,644
Expenses:
Research and development... 682 3,799 5,173 7,724 10,337 2,459 3,288
General and
administrative........... 603 1,288 1,937 2,471 2,791 671 1,203
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Total expenses........... 1,285 5,087 7,110 10,195 13,128 3,130 4,491
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Income (loss) from operations... (1,285) (5,065) (6,811) (6,262) (5,549) (1,582) 153
Interest income (expense),
net........................... (45) 161 329 53 (192) (92) 182
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Net income (loss)............... $(1,330) $(4,904) $(6,482) $(6,209) $(5,740) $(1,673) $ 335
======= ======= ======= ======= ======= ======= =======
Pro forma net income (loss) per
share, basic and diluted...... $ (1.20) $ 0.05
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Shares used in computing
pro forma net income (loss)
per share(2):
Basic...................... 4,776 6,628
Diluted.................... 4,776 6,875
MARCH 31, 1998
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ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 20,671 $ 49,971
Working capital............................................. 14,635 43,935
Total assets................................................ 24,755 54,055
Long-term obligations (including current portion)........... 2,661 2,661
Accumulated deficit......................................... (24,410) (24,410)
Total stockholders' equity.................................. 15,649 44,949
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(1) Based on the number of shares outstanding at March 31, 1998. Includes the
sale of 166,666 shares of Common Stock to DuPont Merck in a private
transaction concurrent with the closing of this offering at an assumed
initial public offering price of $12.00 per share. Excludes 1,581,097 shares
of Common Stock reserved for issuance under the Company's stock option
plans, of which 662,676 shares were subject to outstanding options as of
March 31, 1998 at a weighted average exercise price of $0.87 per share.
Subsequent to March 31, 1998, the Company granted options to purchase an
aggregate of 221,525 shares of Common Stock at a weighted average exercise
price of $2.00 per share. Also excludes 62,500 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants as of March 31,
1998 at an exercise price of $8.40 per share. See "Capitalization,"
"Management--Equity Incentive Plan" and Note 5 of Notes to Financial
Statements.
(2) Computed on the basis described in Note 1 of Notes to Financial Statements.
(3) As adjusted to reflect the receipt of $1,999,992 from DuPont Merck in
exchange for 166,666 shares of Common Stock to be issued in a private
transaction concurrent with the closing of this offering and the sale of
2,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $12.00 per share and the receipt of the estimated proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
------------------------------
Except as otherwise noted, all information in this Prospectus assumes: (i)
no exercise of the Underwriters' over-allotment option, (ii) a 4-for-1 reverse
split of the Common Stock and the Company's reincorporation in Delaware, both to
be effected prior to the completion of this offering, and (iii) the conversion
of all outstanding shares of Series A, B, C, C-1, D, E and F Preferred Stock
(collectively, the "Preferred Stock") into shares of Common Stock, which will
occur upon the closing of the offering. See "Description of Capital Stock,"
"Underwriting" and Notes to Financial Statements.
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RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to other information in this
Prospectus before purchasing the shares of Common Stock offered hereby. See
"Special Note Regarding Forward-Looking Statements" on page 17 of this
Prospectus.
Limited Operating History; Early Stage of Development. The Company was
formed in 1992, has a limited operating history and is at an early stage of
development. All of the Company's active compounds are in the research stage,
and there can be no assurance that any such compounds will enter clinical
trials, be commercialized or will generate revenue in the future. The Company
has experienced significant operating losses since inception and, as of March
31, 1998, had an accumulated deficit of approximately $24.4 million. The Company
expects to continue to incur significant operating losses for the foreseeable
future as it continues to incur increasing costs of research and development,
acquisition of technologies, compound libraries and product rights, expansion of
its operations and initiation of clinical trials. The Company has completed less
than six years of operations, and its business is subject to all of the risks
inherent in the establishment of a new business enterprise, including all of the
problems, expenses and delays frequently encountered in connection with the
development of pharmaceutical products, the utilization of unproven technology
and the competitive environment in which the Company operates. Accordingly, the
extent of future losses and the time required to achieve profitability, if ever,
is highly uncertain. Payments, if any, from corporate collaborators, interest
income, and academic and governmental grants are expected to be the Company's
only sources of revenue for the foreseeable future. The Company has not yet
received any milestone payments under its collaborative agreements. Royalties or
other revenue from commercial sales of products based upon any target or
compound identified by the Company are not expected for a number of years, if at
all, and are dependent on the Company's ability, alone or with others, to
successfully research, develop, obtain regulatory approval for, manufacture and
market its products under development. See "--Dependence on Pharmaceutical and
Biopharmaceutical Collaborations and Milestone Payments," "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business--Research and Development Partners."
Technological Uncertainty. Target and drug discovery and development
methods directed toward intracellular signaling pathways and gene regulation are
relatively new. The Company is working on a number of costly long-term discovery
and development projects which involve experimental and unproven methods and
which may ultimately prove unsuccessful. There is limited scientific
understanding relating to the role of genes in most diseases, and relatively few
products based on gene discoveries have been developed and commercialized. In
addition, the Company is not aware of any drugs that have been developed and
commercialized that were designed specifically to target intracellular signaling
pathways. There can be no assurance that the Company's techniques for
elucidating intracellular signaling pathways and identifying drug targets will
lead to the discovery or development of commercial pharmaceutical products.
Moreover, as the technology of the Company and its competitors continues to
evolve, the Company will need to continue to develop novel and innovative
technologies, enter into relationships with additional corporate collaborators
and aggressively pursue patent and other protection for the Company's
proprietary rights. The Company's failure to properly address the changing
technological landscape, enter into collaborations to pursue development of its
technologies or develop additional competitive technologies could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Uncertainties Associated with Product Development. The development of new
pharmaceutical products is highly uncertain and subject to a number of
significant risks. Lead compounds and drug candidates that appear to be
promising at early stages of development may not advance to and through clinical
trials and reach the market for a number of reasons. Such reasons include the
possibilities that the drug candidates will be found ineffective or cause
harmful side effects during preclinical testing or
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clinical trials, fail to receive necessary regulatory approvals, be difficult to
manufacture on a large scale, be uneconomical, fail to generate market demand or
be precluded from commercialization by proprietary rights of third parties. To
date, none of the compounds generated by the Company or through its
collaborations has been approved for clinical testing, and there can be no
assurance that any of such current or proposed compounds will be submitted for
clinical testing. In addition, the safety and efficacy of compounds generated by
the Company or through its collaborations has not been conclusively demonstrated
in animal models or humans. If any potential products are identified by the
Company, either independently or through its collaborations, such products will
require significant additional development, extensive preclinical and clinical
testing, regulatory approval and additional investment in manufacturing scale-up
and sales and marketing prior to their commercialization, and there can be no
assurance that any of these efforts will be successful. No assurance can be
given that any of the Company's discovery and development programs will be
successfully completed, any investigational new drug application ("IND") will be
accepted by the United States Food and Drug Administration (the "FDA") or other
applicable regulatory authorities, clinical trials will commence or be completed
as planned, required regulatory approvals will be obtained on a timely basis, if
at all, or any products for which approval is obtained will be commercially
successful. If any of the Company's or its collaborators' development programs
are not successfully completed, required regulatory approvals are not obtained
or products for which approvals are obtained are not commercially successful,
the Company's business, financial condition and results of operation could be
materially adversely affected.
Dependence on Pharmaceutical and Biopharmaceutical Collaborations and
Milestone Payments. The Company's strategy for the discovery, development and
commercialization of new gene regulating targets and drugs involves the
formation of multiple collaborations in addition to focused internal development
efforts. To date, substantially all revenue received by the Company has been
from its collaborations, and the Company expects that substantially all revenue
for the foreseeable future will be generated by collaborations. The Company has
not yet entered into collaborations for a number of its existing or prospective
programs. The Company's ability to continue to fund its research and development
programs, maintain adequate capital reserves and, ultimately, achieve
profitability will be dependent upon the ability of the Company to achieve
certain milestones under existing collaborations with Ares-Serono, Roche
Bioscience, Nippon Kayaku, Organon and DuPont Merck, and under an existing
license agreement with Tanabe, and its ability to enter into additional
collaborations. Because pharmaceutical and biopharmaceutical companies engaged
in drug discovery activities have historically conducted target and drug
discovery through their own internal research departments, these companies must
be convinced that the Company's technologies and research discoveries justify
entering into collaborative agreements with the Company. The Company also must
compete with other companies for the limited number of existing opportunities to
enter into such collaborative arrangements with pharmaceutical and
biopharmaceutical companies. There can be no assurance that the Company will be
able to negotiate additional collaborative agreements in the future on
acceptable terms, if at all, that current or future collaborative agreements
will be successful, or that current or future collaborators will not pursue or
develop alternative technologies either on their own or in collaboration with
others, including the Company's competitors, as a means for identifying targets
or lead compounds. To the extent the Company chooses not to or is unable to
enter into such agreements, it will require substantially greater capital to
undertake the research, development, clinical testing, manufacturing, sales and
marketing of products at its own expense. In the absence of such collaborative
agreements, the Company may be required to delay or curtail its research and
development activities to a significant extent.
The Company has not received any milestone payments from its corporate
collaborators to date. The Company's future revenue will depend in part on its
ability to realize milestone payments and royalties triggered by the development
and commercialization of drugs identified through the use of the Company's
technologies. The Company's research and development efforts may result in
developed and commercialized pharmaceutical products generating milestone
payments and royalties only after lengthy and costly preclinical and clinical
development efforts, the receipt of requisite regulatory
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approvals, the development and integration of manufacturing capabilities, the
receipt of patents and successful marketing efforts. The Company's collaborators
are not obligated to develop or commercialize potential products identified
through the use of the Company's technologies. Development and commercialization
of potential products will therefore depend not only on the achievement of
research and development objectives by the Company and its collaborators, which
cannot be assured, but also on each collaborator's own financial, technical,
competitive, marketing and strategic considerations, all of which are outside
the Company's control. Such strategic considerations may include the relative
advantages of alternative products being marketed or developed by the Company's
collaborators and others, including relevant patent and proprietary positions.
There can be no assurance that the interests and motivations of the Company's
collaborators are, or will remain, aligned with those of the Company, that
current or future collaborators will not pursue alternative technologies or
potential products in preference to those of the Company or that such
collaborators will successfully perform their development, regulatory,
compliance, manufacturing or marketing and sales functions. In general, should
the Company or a collaborator fail to develop or commercialize a potential
product identified through the use of the Company's or its collaborators'
technologies, or should such a potential product be determined to be unsafe, of
no therapeutic benefit, uneconomical, or not sufficiently superior to competing
products, the Company may not receive any future milestone payments or royalties
associated with such potential products, and the Company may have only limited
or no rights to independently develop and commercialize such potential products.
There can be no assurance that any potential product will be developed and
commercialized as a result of such collaborations, that any such development or
commercialization would be successful or that disputes will not arise over the
application of payment provisions to such potential products.
Modification or termination of the Company's existing or future
collaborative agreements, or the failure to enter into a sufficient number of
additional collaborative agreements on favorable terms, could result in loss of
anticipated revenue as well as potential delay or curtailment of ongoing
research and development activities and have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
collaborations may generally be terminated upon a breach by either party.
Moreover, certain of the Company's collaborations may be terminated by its
collaborators if Signal fails to achieve certain research and development
milestones. The Company has in the past encountered, and may in the future
encounter, difficulty in satisfying certain milestones under its collaboration
agreements due to the early stage of development of the Company's technology,
the inherent uncertainties associated with product development and the
aggressive discovery and developmental timetables presented by certain
milestones. Accordingly, the Company has in the past renegotiated, and may in
the future need to renegotiate, its collaboration agreements to modify the
timing and requirements of certain milestones. There can be no assurance that
the Company would be able to renegotiate any milestone requirements in the
future, and any failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. In March
1998, Signal and Tanabe mutually agreed to conclude their research collaboration
and Tanabe paid an additional license fee to Signal for an exclusive worldwide
license to a lead compound that was discovered during the collaboration.
Moreover, regardless of whether Signal satisfies future milestone obligations,
beginning in August 1998, Roche Bioscience can terminate its collaboration
agreement with the Company at its discretion upon ninety days' written notice.
Additionally, Organon may terminate its funding of certain Signal research
effective January 1999 if the Company does not meet specified milestones by
October 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Research and Development Partners."
Future Capital Requirements; Uncertainty of Additional Funding. The
Company has expended and will continue to expend substantial funds to continue
the research, development and testing of its potential products. The Company's
future capital requirements will depend on, and could increase substantially as
a result of, many factors, including progress in its research and development
programs; the scope, prioritization and number of programs; the acquisition and
development of enabling technologies; the expansion or initiation of academic
licensing arrangements; the acquisition of potential products; the progress of
preclinical and clinical testing; the Company's ability to enter into
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additional collaborations; the receipt of milestone, royalty and other payments
from its collaborations; the modification or termination of any of the Company's
current corporate collaborations or any future collaborations; the time and
costs involved in obtaining regulatory approvals; the costs involved in
preparing, filing, prosecuting, maintaining, enforcing and defending patent
claims; competing technological and market developments; the costs of
establishing manufacturing facilities for clinical or commercial production; and
the costs inherent in retaining and developing commercialization rights for
certain compounds. The Company currently depends on its corporate collaborators
for substantially all of its research and development funding. As of March 31,
1998, the Company had received approximately $20.8 million from its
collaborators. There can be no assurance that the Company will continue to
receive funding under its existing collaborative agreements or that the
Company's existing or potential future collaborative arrangements will be
adequate to fund the Company's operations. The Company also may seek alternative
sources of financing or financing structures in the future to efficiently
discover and develop its potential products, and there can be no assurance that
such alternative financing arrangements will be available, and if available,
will lead to the successful development of potential products. The Company
believes that the net proceeds of this offering, together with its existing
capital resources, committed revenue from its existing collaborations and
interest income should be sufficient to fund its anticipated operating expenses
and capital requirements through the end of the year 2000.
The Company intends to raise additional funds through additional equity or
debt financings, research and development financings, collaborative
relationships or other joint venture relationships and may seek to finance
certain of its programs through other financing mechanisms. Because of its
long-term capital requirements, the Company may seek to access the public or
private equity markets whenever it deems conditions to be favorable, even if it
does not have an immediate need for additional capital at that time. There can
be no assurance that any such funding will be available to the Company, or, if
available, that it will be available on acceptable terms. If additional funds
are raised by issuing equity securities, further dilution to stockholders may
result, and debt financing, if available, may involve restrictive covenants. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of or eliminate one or more of its research, development or clinical
programs which would materially adversely affect the Company's business,
financial condition and results of operations. The Company also may be required
to seek funds through arrangements with collaborative partners or others that
require the Company to relinquish rights to certain of its technologies,
potential products, products or marketing territories that the Company would
otherwise seek to retain, develop or commercialize itself. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence on Patents and Proprietary Rights. The Company's success will
depend in part on its ability to obtain and retain patent protection for its
proprietary technologies, targets and potential products, effectively preserve
its trade secrets and to operate without infringing the proprietary rights of
third parties. Because of the substantial length of time and expense associated
with bringing potential products through the development and regulatory approval
processes to reach the marketplace, the pharmaceutical industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, the Company seeks patent
protection for its proprietary technology, targets and potential products. As of
April 30, 1998, the Company owned or had licensed five issued U.S. patents, 15
notices of allowance from the U.S. Patent and Trademark Office, no corresponding
issued foreign patents, 21 pending U.S. patent applications, as well as seven
corresponding international filings under the Patent Cooperation Treaty, and 43
pending foreign national patent applications. However, there can be no assurance
that the Company or its collaborators have developed or will continue to develop
potential products or processes that are patentable or that patents will issue
from any of the Company's pending applications, including patent applications
that have been allowed. There also can be no assurance that the Company's or its
collaborators' current patents, or patents that issue on pending applications,
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to the
Company. Patent applications in the United
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States are maintained in secrecy until patents issue, patent applications are
not generally published until many months or years after they are filed and
publication of technological developments in the scientific and patent
literature often occurs long after the date of such developments. Accordingly,
the Company cannot be certain that it or one of its collaborators was the first
to invent the subject matter covered by the patent applications or that it or
one of its collaborators was the first to file patent applications for such
inventions. Further, there can be no assurance as to the success or timeliness
in obtaining any patents, that the breadth of claims obtained, if any, will
provide adequate protection of the Company's proprietary technology, targets or
potential products, or that the Company or its licensors will be able to or will
in fact adequately enforce any such claims to protect its proprietary
technology, targets or potential products.
Patent law relating to the scope and enforceability of claims in the fields
in which the Company operates is still evolving. The patent positions of
biopharmaceutical and pharmaceutical companies, including the Company, are
highly uncertain and involve complex legal and technical questions for which
legal principles are not firmly established. The degree of future protection for
the Company's proprietary rights, therefore, is highly uncertain. In this
regard, there can be no assurance that independent patents will issue from the
Company's and its licensors' patent applications, which include many
interrelated applications directed to common or related subject matter. Further,
there may be issued patents and pending applications owned by others directed to
technologies relevant to the Company's, its licensors' or its collaborators'
research, development and commercialization efforts. There can be no assurance
that the Company's or its collaborators' technology can be developed and
commercialized without a license to such patents or that such patent
applications will not be granted priority over patent applications filed by the
Company, its licensors or one of its collaborators. Furthermore, there can be no
assurance that third parties will not independently develop similar or
alternative technologies to those of the Company, its licensors or any of its
collaborators, duplicate any of the Company's, its licensors' or its
collaborators' technologies or design around the patented technologies developed
by the Company, its licensors or its collaborators, any of which may have a
material adverse effect on the Company's business, financial condition and
results of operations.
The commercial success of the Company depends significantly on its ability
to operate without infringing the patents and proprietary rights of third
parties, and there can be no assurance that the Company's, its licensors' and
its collaborators' technologies do not and will not infringe the patents or
proprietary rights of others. A number of pharmaceutical companies,
biopharmaceutical companies, independent researchers, universities and research
institutions may have filed patent applications or may have been granted patents
that cover technologies similar to the technologies owned, optioned by or
licensed to the Company or its collaborators. For instance, a number of patents
may have issued and may issue in the future on certain targets or their use in
screening assays that could prevent the Company and its collaborators from
developing screens using such targets, compounds relating to such targets or
relate to certain other aspects of technology utilized or expected to be
utilized by the Company. In addition, the Company is unable to determine all of
the patents or patent applications that may materially affect the Company's or
its collaborators' ability to make, use or sell any potential products. The
Company is aware of one allowed U.S. patent application relating to certain
methods for transcriptional modulation. The Company believes that it has not
infringed, and is not currently infringing, the claims of the allowed
application. Nonetheless, the Company may in the future be required to obtain a
license to such allowed patent, and there can be no assurance that such a
license will be available on commercially reasonable terms, if at all. In
addition, the Company is aware of an issued U.S. patent claim for certain human
MAP kinases, including MAP kinases in the p38 pathway, which may be useful as
targets for drug discovery. The Company is negotiating a license to patent
rights covering such MAP kinase targets that may be useful in the Company's
research programs, although there can be no assurance that such a license will
be available on commercially reasonable terms, if at all. Any conflicts
resulting from third-party patent applications and patents could significantly
reduce the coverage of the patents owned, optioned by or licensed to the Company
or its collaborators and limit the ability of the Company or its collaborators
to obtain meaningful patent protection. If patents are issued to third parties
that contain competitive or conflicting claims, the
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Company, its licensors or its collaborators may be enjoined from pursuing
research, development or commercialization of potential products or be required
to obtain licenses to these patents or to develop or obtain alternative
technology. There can be no assurance that the Company or its collaborators will
not be so enjoined or will be able to obtain any license to the patents and
technologies of third parties on acceptable terms, if at all, or be able to
obtain or develop alternative technologies. If the Company or any of its
collaborators is enjoined from pursuing its research, development or
commercialization activities or if any such license is or alternative
technologies are not obtained or developed, the Company or such collaborator may
be delayed or prevented from commercializing its potential products, which would
result in a material adverse effect on the Company's business, financial
condition and results of operations.
The drug discovery industry has a history of patent litigation and there
will likely continue to be numerous patent litigation suits concerning drug
discovery technologies and potential products. The patent positions of
pharmaceutical, biopharmaceutical and drug discovery companies, including the
Company, generally are uncertain and involve complex legal and factual
questions. Litigation to establish the validity of patents, to defend against
patent infringement claims of others and to assert infringement claims against
others can be expensive and time consuming, even if the outcome is favorable. An
outcome of any patent prosecution or litigation that is unfavorable to the
Company or one of its licensors or collaborators may have a material adverse
effect on the Company. In particular, litigation may be necessary to enforce any
patents issued or licensed to the Company, its licensors or its collaborators,
to protect trade secrets or know-how of the Company, its licensors or its
collaborators, or to determine the scope and validity of a third party's
proprietary rights. The Company could incur substantial costs if litigation is
required to defend itself in patent suits brought by third parties, if the
Company participates in patent suits brought against or initiated by its
licensors or collaborators or if the Company initiates such suits, and there can
be no assurance that funds or resources would be available to the Company in the
event of such litigation. Additionally, there can be no assurance that the
Company, its licensors or its collaborators would prevail in any such action. An
adverse outcome in litigation or an interference to determine priority or other
proceeding in a court or patent office could subject the Company to significant
liabilities, require disputed rights to be licensed from or to other parties or
require the Company, its licensors, or its collaborators to cease using certain
technology, any of which may have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to patent protection, the Company also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities. In an effort to maintain the confidentiality and
ownership of trade secrets and proprietary information, the Company requires
employees, consultants and certain collaborators to execute confidentiality and
invention assignment agreements upon commencement of a relationship with the
Company. These agreements generally provide that all confidential information
developed or made known to the individual by the Company during the course of
the individual's relationship with the Company will be kept confidential and not
disclosed to third parties except in specific circumstances. The agreements also
generally provide that all inventions conceived by the individual in the course
of rendering services to the Company shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets, confidential information
or inventions in the event of unauthorized use or disclosure of such information
or that adequate remedies would exist in the event of such unauthorized use or
disclosure. The loss or exposure of trade secrets possessed by the Company could
materially adversely affect its business. Like many high technology companies,
the Company may from time to time hire scientific personnel formerly employed by
other companies involved in one or more areas similar to the activities
conducted by the Company. Although the Company requires its employees to
maintain the confidentiality of all confidential information of previous
employers, there can be no assurance that the Company or these individuals will
not be subject to allegations of trade secret misappropriation or other similar
claims as a result of their prior affiliations. See "Business--Patents and
Proprietary Rights."
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Substantial Competition. Competition among pharmaceutical and
biopharmaceutical companies to identify drug targets and drug candidates for
development is intense and is expected to increase. In the pharmaceutical
industry, the Company competes with the research and development departments of
pharmaceutical and biopharmaceutical companies and other commercial enterprises,
as well as numerous academic and research institutions and governmental
agencies. In addition, the pharmaceutical and biopharmaceutical industries are
subject to rapid and substantial technological change. Pharmaceutical and
biopharmaceutical companies and others are conducting research in various areas
which overlap with the Company's technology platform, either on their own or in
collaboration with others. There can be no assurance that pharmaceutical and
biopharmaceutical companies which compete with the Company in specific areas
will not merge or enter into collaborations or joint ventures or other alliances
with one or more other such companies or academic and research institutions and
become substantial competitors or that the Company's collaborators will not
initiate or expand their own internal target and drug discovery and development
efforts.
At the present time, the Company has not conducted any clinical trials and
has no commercial manufacturing capability, sales or marketing force. Many of
the Company's competitors and potential competitors have substantially greater
capital resources, research and development resources, manufacturing, sales and
marketing experience and production facilities than does the Company.
Additionally, many of these competitors have significantly greater experience
than does the Company in undertaking target and drug discovery, preclinical
product development and testing and clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals. Smaller companies
also may prove to be significant competitors, particularly through proprietary
research discoveries and collaborative arrangements with large pharmaceutical
and established biopharmaceutical companies. Many of these competitors have
significant products that have been approved or are in development and operate
large, well funded research and development programs. Academic institutions,
governmental agencies and other public and private research organizations also
conduct research, seek patent protection and establish collaborative
arrangements for the discovery, development and commercialization of potential
products. In addition, these companies and institutions compete with the Company
in recruiting and retaining highly qualified scientific and management
personnel. There can be no assurance that the Company's competitors will not
discover lead compounds, develop more effective, safer, more affordable or more
easily administered potential products or achieve patent protection or
commercialize potential products sooner than the Company. Failure to compete
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business--Signal's
Drug Discovery Programs" and "--Competition."
Attraction and Retention of Key Employees and Consultants. The Company's
success is highly dependent on the principal members of its scientific and
management staff, as well as its scientific advisors and consultants. The loss
of one or more of these individuals could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not maintain "key person" insurance on any of its employees. The Company's
future success also will depend in part on its ability to identify, recruit and
retain additional qualified personnel. There is intense competition for such
personnel in the areas of the Company's activities, and there can be no
assurance that the Company will be able to continue to attract and retain
personnel with the advanced technical qualifications necessary for the
development of the Company's business. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Scientific
Advisory Board" and "Management."
Government Regulation; No Assurance of Regulatory Approvals. The Company's
and its collaborators' research, preclinical testing and clinical trials of
their respective potential products, if any, and the manufacturing and marketing
of their potential products, will be subject to extensive and rigorous
regulation by numerous government authorities in the United States and in other
countries where the Company and its collaborators intend to test, manufacture
and market their potential products. Prior to marketing any product developed by
the Company, the Company or its collaborators, as applicable,
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must undergo an extensive regulatory approval process. This regulatory process,
which includes preclinical testing and clinical trials of each potential product
to establish its safety and efficacy, will take many years and require the
expenditure of substantial resources, and also may include post-marketing
surveillance. Data obtained from preclinical testing and clinical trials are
susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. In addition, delays or rejection may be encountered based
upon changes in FDA policy for drug approval during the period of product
development and FDA regulatory review of each submitted new drug application
("NDA") or product license application ("PLA"). Similar delays or rejection also
may be encountered in foreign countries. There can be no assurance that
regulatory approval will be obtained for any potential products developed by the
Company or its collaborators. Moreover, regulatory approval may entail
limitations on the indicated uses of a drug. Further, even if regulatory
approval is obtained, a marketed drug and its manufacturer are subject to
continuing review, and discovery of previously unknown problems with a drug or
manufacturer can result in the withdrawal of a drug from the market or a
significant decrease in market demand, which would have an adverse effect on the
Company's business, financial condition and results of operations. Violations of
regulatory requirements at any stage, including preclinical testing and clinical
trials, the approval process or post-approval, may result in various adverse
consequences including a delay by the FDA or other applicable regulatory
authority in approving or its refusal to approve a potential product, withdrawal
of an approved drug from the market and the imposition of criminal penalties
against the manufacturer and NDA or PLA holder. Neither the Company nor its
collaborators has submitted any IND applications for any potential product of
the Company, and none has been approved for commercialization in the United
States or internationally. No assurance can be given that the Company or its
collaborators will be able to obtain FDA or other applicable regulatory
authority approval for any potential products. Failure to obtain requisite
regulatory approvals or failure to obtain approvals of the scope requested will
delay or preclude the Company or its collaborators from marketing the Company's
or its collaborators' products or limit the commercial use of the potential
products and would have material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
Expansion of Operations; Management of Growth. The Company will need to
expand and effectively manage its operations and facilities in order to
successfully complete its existing corporate collaborative agreements,
facilitate additional pharmaceutical and biopharmaceutical collaborations and
pursue future internal research, development and commercialization efforts.
There can be no assurance that the Company will be able to manage its growth, to
meet the staffing requirements of current or additional collaborative
relationships or internal programs or to successfully assimilate, train and
manage its new employees. In addition, the Company will be required to expand
its management capabilities, enhance its operating and financial systems and
expand its facilities to manage its growth effectively. If the Company continues
to grow, there can be no assurance that the management or scientific skills,
systems and facilities currently in place will be adequate or that the Company
will be able to manage any additional growth effectively. Failure to achieve any
of these goals could have a material adverse effect on the Company's business,
financial condition and results of operations.
No Manufacturing Experience; Reliance on Third-Party Manufacturing. To
date, the Company has not manufactured any products for preclinical, clinical or
commercial purposes and does not have any manufacturing facilities. The Company
intends to utilize third-party contract manufacturers or its corporate
collaborators for the production of material for use in preclinical and clinical
trials and for the manufacture of future products for commercialization. In the
event that the Company is unable to secure such outside manufacturing
capabilities, it will not be able to conduct preclinical product development,
clinical trials or commercialize its potential products as planned. Even if the
Company were able to establish its own internal manufacturing capability, doing
so would require the expenditure of significant resources which could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company or any outside
manufacturers can produce potential products of suitable quality in sufficient
quantity in a cost-effective manner, if at all. The manufacture of the Company's
potential products for preclinical
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and clinical trials and commercial purposes is subject to current Good
Manufacturing Practices ("cGMP") regulations promulgated by the FDA and other
applicable domestic and foreign regulations. No assurance can be given that in
the future the Company or any outside manufacturers can maintain full compliance
with cGMP regulations or other applicable regulations. See "Business--Research
and Development Partners" and "--Manufacturing."
Possible Volatility of Stock Price. The market prices for securities of
comparable companies have been highly volatile, and the market in general has
experienced significant price and volume fluctuations that often are unrelated
to the operating performance of particular companies. Announcements of
technological innovations, collaborations or new products by the Company or its
competitors, disputes or other developments concerning proprietary rights,
including patents and litigation matters, publicity regarding actual or
potential results with respect to technologies, collaborations or products under
development by the Company, its collaborators or its competitors, changes in the
terms or status of the Company's collaborations, regulatory developments in both
the United States and foreign countries, public concern as to the feasibility of
new technologies, changes in recommendations of securities analysts, general
market conditions, as well as quarterly fluctuations in the Company's revenues
and financial results and other factors, may have a significant impact on, and
may cause significant fluctuation in, the market price and liquidity of the
Common Stock. In particular, the realization of any of the risks described in
these "Risk Factors" could have a dramatic and materially adverse impact on such
market price.
Hazardous Materials. The research and development processes of the Company
involve the controlled use of hazardous materials, including microbial organisms
and other biological materials, chemicals and various radioactive compounds. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. The risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. There can be no
assurance that the Company will not be required to incur significant costs to
comply with environmental laws and regulations in the future.
Uncertainty of Pharmaceutical Pricing and Reimbursement. The Company's
business and the availability of capital in the future may be materially
adversely affected by the continuing efforts of government and third-party
payors to contain or reduce the costs of health care through various means. For
example, in certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to governmental control. In the United States, there
have been, and the Company expects that there will continue to be, a number of
federal and state proposals to implement similar government control on pricing
or profitability of prescription pharmaceuticals in such jurisdictions. In
addition, an increasing emphasis on managed care in the United States has put,
and will continue to put, pressure on pharmaceutical pricing and product demand.
Such initiatives and proposals, if adopted, could decrease the demand or the
price that the Company receives for any products it or its collaborators may
develop and sell in the future, and thereby have a material adverse effect on
the Company's business, financial condition and results of operations. Further,
to the extent that such proposals or initiatives have a material adverse effect
on other pharmaceutical companies that are collaborators or prospective
collaborators for certain of the Company's potential products, the Company's
ability to commercialize its potential products may be materially adversely
affected.
The ability of the Company and its collaborators to commercialize products
may depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health insurers and other third-party
payors. Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and third-party payors are increasingly
challenging the prices charged for medical products and services. There can be
no assurance that any third-party insurance coverage will be available to
patients for any products developed by the Company or its collaborators.
Government and other third-party payors are increasingly attempting to contain
health care costs by limiting both
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coverage and the level of reimbursement for new therapeutic products, and by
refusing, in some cases, to provide coverage for uses of approved products for
disease indications for which the FDA or other applicable regulatory authorities
have not granted marketing approval. If adequate coverage and reimbursement
levels are not provided by government and third-party payors for the Company's
or its collaborators' products, the market acceptance of these products would be
materially adversely affected.
Potential Product Liability Exposure and Limited Insurance Coverage. The
use of any of the Company's or its collaborators' drug candidates in clinical
trials, and the sale of any approved products, may expose the Company to
liability claims resulting from the use of its products. These claims might be
made directly by consumers, consumer groups, health care providers,
pharmaceutical companies, governmental agencies or others selling such products.
The Company intends to obtain limited product liability insurance coverage for
clinical trials and plans to expand any such insurance coverage to include the
sale of commercial products if marketing approval is obtained for any products
in development and intends to receive certain indemnities from its
collaborators. However, insurance coverage is becoming increasingly expensive
and difficult to obtain, and no assurance can be given that the Company will be
able to maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect the Company against losses due to liability. A successful
product liability claim or series of claims brought against the Company could
have a material adverse effect on its business, financial condition and results
of operations.
Control By Management and Existing Stockholders. Upon completion of this
offering, the Company's principal stockholders, executive officers, directors
and affiliated individuals and entities together will beneficially own
approximately 55.5% of the outstanding shares of Common Stock (53.4% if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders, acting together, will be able to influence significantly and
possibly control most matters requiring approval by the stockholders of the
Company, including approvals of amendments to the Company's Certificate of
Incorporation, mergers, a sale of all or substantially all of the assets of the
Company, going private transactions and other fundamental transactions. In
addition, the Company's Certificate of Incorporation, as it is proposed to be
amended and restated concurrently with the closing of this offering (the
"Restated Certificate"), does not provide for cumulative voting with respect to
the election of directors. Consequently, the present directors and executive
officers of the Company, together with the Company's principal stockholders,
will be able to control the election of the members of the Board of Directors of
the Company. Such a concentration of ownership could have an adverse effect on
the price of the Common Stock, and may have the effect of delaying or preventing
a change in control of the Company, including transactions in which stockholders
might otherwise receive a premium for their shares over then current market
prices. See "Management" and "Principal Stockholders."
No Prior Public Market for Common Stock. Prior to this offering, there has
been no public market for the Common Stock, and there can be no assurance that
an active trading market will develop or be sustained after this offering. The
initial public offering price will be determined by negotiations between the
Company and the representatives of the Underwriters and may not be indicative of
the market price at which the Common Stock of the Company will trade after this
offering. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.
Availability of Preferred Stock for Issuance; Anti-Takeover
Provisions. The Restated Certificate authorizes the Board of Directors of the
Company, without stockholder approval, to issue additional shares of Common
Stock and to fix the rights, preferences and privileges of and issue up to
5,000,000 shares of Preferred Stock with voting, conversion, dividend and other
rights and preferences that could adversely affect the voting power or other
rights of the holders of Common Stock. The issuance of Preferred Stock, rights
to purchase Preferred Stock or additional shares of Common Stock may have the
effect of delaying or preventing a change in control of the Company. In
addition, the possible issuance of Preferred Stock or additional shares of
Common Stock could discourage a proxy contest, make more difficult the
acquisition of a substantial block of the Company's Common Stock or limit the
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price that investors might be willing to pay for shares of the Company's Common
Stock. Further, the Restated Certificate provides that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by
written consent. Special meetings of the stockholders of the Company may be
called only by the Chairman of the Board of Directors, the Chief Executive
Officer of the Company, by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors or by the
holders of 10% of the outstanding voting stock of the Company. The Restated
Certificate also provides for staggered terms for the members of the Board of
Directors. These and other provisions contained in the Restated Certificate and
the Company's Bylaws, as well as certain provisions of Delaware law, could delay
or make more difficult certain types of transactions involving an actual or
potential change in control of the Company or its management (including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices) and may limit the ability of
stockholders to remove current management of the Company or approve transactions
that stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of the Company's Common Stock. See "Description of
Capital Stock--Preferred Stock" and "--Delaware Anti-Takeover Law and Certain
Charter Provisions."
Shares Eligible for Future Sale and Potential Adverse Effect on Market
Price. Sales of Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock. Upon completion of this
offering, the Company will have 9,433,929 shares of Common Stock outstanding,
assuming no exercise of currently outstanding options or warrants. Of these
shares, the 2,500,000 shares sold in this offering (plus any additional shares
sold upon exercise of the Underwriters' over-allotment option) will be freely
transferable without restriction under the Securities Act of 1933, as amended
(the "Securities Act"), unless they are held by "affiliates" of the Company as
that term is used under the Securities Act and the regulations promulgated
thereunder. The remaining 6,933,929 shares of Common Stock held by existing
stockholders are restricted securities as that term is defined in Rule 144 under
the Securities Act (the "Restricted Shares"). Restricted Shares may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act. As a result of
agreements limiting the resale of such shares (the "Lock-up Agreements") and the
provisions of Rules 144 and 701, additional shares will be available in the
public market as follows: (i) no Restricted Shares will be eligible for
immediate sale on the effective date of this offering; (ii) 6,677,325 Restricted
Shares (plus 623,687 shares of Common Stock issuable upon exercise of vested
stock options) will be eligible for sale upon expiration of Lock-up Agreements
180 days after the date of this Prospectus; and (iii) the remainder of the
Restricted Shares will be eligible for sale from time to time thereafter upon
expiration of their respective one-year holding periods, and could be sold
earlier if the holders exercise any available registration rights. The holders
of 6,058,449 shares of Common Stock have the right in certain circumstances to
require the Company to register their shares under the Securities Act for resale
to the public beginning at the end of the 180-day lock-up period. If such
holders, by exercising their demand registration rights, cause a large number of
shares to be registered and sold in the public market, such sales could have an
adverse effect on the market price for the Company's Common Stock. If the
Company were required to include in a Company-initiated registration shares held
by such holders pursuant to the exercise of their piggyback registration rights,
such sales may have an adverse effect on the Company's ability to raise needed
capital. In addition, the Company expects to file a registration statement on
Form S-8 registering shares of Common Stock subject to outstanding stock options
or reserved for issuance under the Company's stock option plans. Such
registration statement is expected to be filed and to become effective as soon
as practicable after the effective date of this offering. Shares registered
under such registration statement will, subject to Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market, unless such
shares are subject to vesting restrictions with the Company or the lock-up
agreements described above. See "Management," "Description of Capital
Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
Immediate and Substantial Dilution. Purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution in the
net tangible book value of their investment
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from the initial public offering price. Additional dilution will occur upon
exercise of outstanding options and outstanding warrants. See "Dilution" and
"Shares Eligible for Future Sale."
Broad Discretion in Application of Net Proceeds. The net proceeds to the
Company from the sale of the shares of Common Stock offered hereby plus the sale
of shares of Common Stock to DuPont Merck to be issued in a private transaction
concurrent with the closing of this offering at an assumed initial public
offering price of $12.00 per share are estimated to be approximately $29.3
million ($33.5 million if the Underwriters' over-allotment option is exercised
in full). The Company intends to use the net proceeds from this offering
principally for research and development, including internal discovery programs
and joint research and development with corporate and academic collaborators,
the acquisition of research and development technologies, compound screening
libraries and product rights, capital investments and working capital and
general corporate purposes. The Company's management and Board of Directors have
broad discretion with respect to the application of such proceeds, and the
amounts actually expended by the Company for working capital purposes may vary
significantly depending on a number of factors, including the amount and timing
of revenues from the Company's current or future collaborators, including any
amendments of the terms of such collaborative arrangements, the expense incurred
in pursuing the Company's research and development programs and the amount of
cash, if any, generated by the Company's operations. See "Use of Proceeds."
Year 2000 Compliance. Some older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than 2000. This failure to use four digits to define the
applicable year has created what is commonly referred to as the "Year 2000
Issue" and could cause a system failure or miscalculations causing disruption of
operations, including a temporary inability to process transactions or engage in
similar normal business activities.
The Company recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 Issue. The Company does not believe that it
has material exposure to the Year 2000 Issue with respect to its own information
systems since its existing systems correctly define the Year 2000. Any required
expenditures will be expensed as incurred. The Company intends to assess its
position regarding the Year 2000 Issue with respect to external information
systems by the end of 1998. This process will entail communications with
significant business partners, customers, suppliers, financial institutions,
insurance companies and other parties that provide significant services to the
Company. There can be no assurance that any of such third parties are using
systems that are Year 2000 compliant or will address any Year 2000 issues in a
timely fashion, or at all. Any Year 2000 compliance problems of either the
Company or the third parties with whom the Company does business or from whom it
receives services, could have a material adverse effect on the Company's
business, operating results and financial condition.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
Prospectus, including without limitation, statements containing the words
"believes," "anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). The safe harbor provided in
the Reform Act for such forward-looking statements does not apply to initial
public offerings. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements include, but are not limited to, statements concerning the Company's
plans to continue development of its current potential products; conduct
clinical trials with respect to potential products; evaluate potential products
under development for subsequent clinical development; utilize the Company's
capital resources and the net proceeds from this offering and the
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time periods related thereto; seek regulatory approvals; engage third-party
contract manufacturers to supply its clinical trials and commercial
requirements; and establish a marketing and distribution capability. These
forward-looking statements may be found in the "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." Forward-looking statements
not specifically set forth above may also be found in these and other sections
of this Prospectus. The Company disclaims any obligation to update any such
factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby and the sale of shares of Common
Stock to DuPont Merck to be issued in a private transaction concurrent with the
closing of this offering at an assumed initial public offering price of $12.00
per share are estimated to be approximately $29.3 million ($33.5 million if the
Underwriters' over-allotment option is exercised in full) after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The Company intends to use the net proceeds from this offering primarily
for research and development, including internal discovery programs and joint
research and development with corporate and academic collaborators, the
acquisition of research and development technologies, compound screening
libraries and product rights, capital investments and working capital and
general corporate purposes. The amounts actually expended by the Company for
working capital purposes will vary significantly depending on a number of
factors, primarily the amount and timing of revenues from the Company's current
or future collaborators, including amendments of the terms of such collaborative
arrangements. The Company's management will retain broad discretion in the
allocation of the net proceeds of this offering. The Company also may use a
portion of the net proceeds to fund acquisitions of complementary technologies,
products or businesses, although the Company has no current agreements or
commitments for any such acquisition. Pending such uses, the Company intends to
invest the net proceeds of this offering in interest-bearing, investment-grade
securities. The Company believes that the net proceeds of this offering,
together with its existing capital resources, interest income and committed
revenue from its existing collaborations should be sufficient to fund its
anticipated operating expenses and capital requirements at least through the end
of the year 2000.
DIVIDEND POLICY
The Company has never declared nor paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for funding growth
and, therefore, does not intend to pay any cash dividends on its Common Stock in
the foreseeable future. In addition, the Company is prohibited from paying any
dividends and making any distributions, and also is limited in its ability to
repurchase stock, pursuant to the terms of a secured loan to the Company by
MMC/GATX Partnership No. 1. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 (i) on an actual basis and (ii) as adjusted to reflect the
automatic conversion of all shares of Preferred Stock, the receipt of $1,999,992
from DuPont Merck for the purchase of 166,666 shares of Common Stock to be
issued in a private transaction concurrent with the closing of this offering at
an assumed initial public offering price of $12.00 per share, and the sale by
the Company of the 2,500,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere in this
Prospectus.
MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Long-term obligations, less current portion(1).............. $ 1,344 $ 1,344
-------- --------
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 6,113,485
shares authorized and 6,050,949 shares issued and
outstanding, actual; 5,000,000 shares authorized and
no shares issued or outstanding, as adjusted.......... 6 --
Common Stock, $.001 par value; 8,750,000 shares
authorized and 716,314 shares issued and outstanding,
actual; 25,000,000 shares authorized and 9,433,929
shares issued and outstanding, as adjusted(2)......... 1 9
Additional paid-in capital............................. 41,433 70,731
Deferred compensation.................................. (1,387) (1,387)
Accumulated other comprehensive income................. 6 6
Accumulated deficit.................................... (24,410) (24,410)
-------- --------
Total stockholders' equity........................ 15,649 44,949
-------- --------
Total capitalization......................... $ 16,993 $ 46,293
======== ========
- ------------------------------
(1) See Note 3 of Notes to Financial Statements for a description of the
Company's long-term obligations.
(2) Excludes 1,581,097 shares of Common Stock reserved for issuance under the
Company's stock option plans, of which 662,676 shares were subject to
outstanding options as of March 31, 1998 at a weighted average exercise
price of $0.87 per share. Also excludes 62,500 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants as of March 31,
1998 at an exercise price of $8.40 per share. Subsequent to March 31, 1998,
the Company granted options to purchase an aggregate of 221,525 shares of
Common Stock at a weighted average exercise price of $2.00 per share. See
"Management-- Equity Incentive Plan," "Description of Capital Stock" and
Note 5 of Notes to Financial Statements.
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DILUTION
As of March 31, 1998, the pro forma net tangible book value was
$15,649,014, or $2.31 per share. Pro forma net tangible book value per share
represents the amount of total tangible assets less total liabilities divided by
6,767,263 shares of Common Stock outstanding after giving effect to the
conversion of all outstanding shares of Preferred Stock into Common Stock.
Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the offering and the pro forma net tangible book value per share of
Common Stock immediately after completion of this offering. After giving effect
to the sale of the 2,500,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $12.00 per share and the
application of the net proceeds therefrom and the receipt of $1,999,992 from
DuPont Merck for the purchase of 166,666 shares of Common Stock to be issued in
a private transaction concurrent with the closing of this offering at an assumed
initial public offering price of $12.00 per share, the Company's pro forma net
tangible book value at March 31, 1998 would have been $44,949,006, or $4.76 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.45 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $7.24 per share to new investors. The
following table illustrates this per share dilution:
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of March
31, 1998............................................... $2.31
Increase per share attributable to new investors.......... 2.45
-----
Pro forma net tangible book value per share after this
offering.................................................. 4.76
------
Net tangible book value dilution per share to new
investors.............................................. $ 7.24
======
The following table summarizes, on a pro forma basis as of March 31, 1998,
the differences between existing stockholders and the new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
Existing stockholders.... 6,767,263 71.7% $41,038,247 56.2% $ 6.06
New investors............ 2,666,666 28.3 31,999,992 43.8 12.00
--------- ----- ----------- -----
Total.......... 9,433,929 100.0% $73,038,239 100.0%
========= ===== =========== =====
Other than as noted above, the foregoing computations assume the exercise
of no stock options or warrants after March 31, 1998. As of March 31, 1998,
options to purchase 662,676 shares of Common Stock were outstanding, with a
weighted average exercise price of $0.87, and warrants to purchase 62,500 shares
of Common Stock were outstanding, with an exercise price of $8.40 per share.
Subsequent to March 31, 1998, the Company granted options to purchase an
aggregate of 221,525 shares of Common Stock at a weighted average exercise price
of $2.00 per share. To the extent these options and warrants are exercised,
there will be further dilution to new investors. See "Risk Factors -- Immediate
and Substantial Dilution," "Capitalization," "Management," "Description of
Capital Stock" and Note 5 of Notes to Financial Statements.
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SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for the years ended December 31, 1995, 1996 and 1997
and with respect to the Company's balance sheet at December 31, 1996 and 1997,
are derived from the financial statements of the Company that have been audited
by Ernst & Young LLP, independent auditors, which are included elsewhere herein
and are qualified by reference to such financial statements. The Company's
statement of operations data for the years ended December 31, 1993 and 1994 and
the balance sheet data at December 31, 1993, 1994 and 1995 have been derived
from the financial statements audited by Ernst & Young LLP, independent
auditors, which are not included herein. The statement of operations data for
the three-months ended March 31, 1997 and 1998 and the balance sheet data at
March 31, 1998 have been derived from unaudited financial statements also
appearing herein which, in the opinion of the management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for the
unaudited interim periods. The operating results for the three months ended
March 31, 1998 are not indicative of the results that may be expected for the
full fiscal year ending December 31, 1998 or for any subsequent period. The
selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Collaborative agreements:
Related party................... $ -- $ -- $ -- $ -- $ 250 $ -- $ 750
Unrelated parties............... -- -- -- 3,586 7,065 1,476 3,794
Grant income......................... -- 22 299 347 264 72 100
------- ------- ------- ------- ------- ------- -------
-- 22 299 3,933 7,579 1,548 4,644
Expenses:
Research and development............. 682 3,799 5,173 7,724 10,337 2,459 3,288
General and administrative........... 603 1,288 1,937 2,471 2,791 671 1,203
Income (loss) from operations........... (1,285) (5,065) (6,811) (6,262) (5,549) (1,582) 153
------- ------- ------- ------- ------- ------- -------
1,285 5,087 7,110 10,195 13,128 3,130 4,491
------- ------- ------- ------- ------- ------- -------
Interest income......................... 8 237 453 187 326 60 283
Interest expense........................ (53) (76) (124) (134) (517) (152) (101)
------- ------- ------- ------- ------- ------- -------
Net income (loss)....................... $(1,330) $(4,904) $(6,482) $(6,209) $(5,740) $(1,674) $ 335
======= ======= ======= ======= ======= ======= =======
Pro forma net income (loss) per share,
basic and diluted(1)................. $ (1.20) $ 0.05
======= =======
Number of shares used in computing pro
forma net income (loss) per share(1):
Basic.............................. 4,776 6,628
Diluted............................ 4,776 6,875
DECEMBER 31,
---------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term $ 614 $ 11,384 $ 4,211 $ 5,460 $ 20,866 $ 20,671
investments............................
Working capital........................... 259 10,294 3,616 2,606 15,379 14,635
Total assets.............................. 1,756 13,669 6,866 9,047 23,838 24,755
Long-term obligations (including current 264 791 1,011 3,793 2,832 2,661
portion)...............................
Accumulated deficit....................... (1,410) (6,314) (12,796) (19,005) (24,745) (24,410)
Total stockholders' equity................ 1,188 12,065 5,574 1,512 15,164 15,649
- ------------------------------
(1) Computed on the basis described in Note 1 of Notes to Financial Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus. Except for the historical information
contained herein, the discussion in this Prospectus contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
Prospectus. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors," as well as those discussed elsewhere
herein. See "Special Note Regarding Forward-Looking Statements" on page 17 of
this Prospectus.
OVERVIEW
The Company was incorporated in July 1992 and has devoted substantially all
of its resources since that time to research and development in order to
identify proprietary drug targets and discover novel small molecule drugs that
regulate genes and the production of disease-causing proteins. Signal, through
both internally funded programs and in collaboration with its pharmaceutical and
biopharmaceutical partners, is working to identify gene regulating drug targets
and potential products for treating autoimmune and inflammatory diseases,
diseases associated with bone metabolism, neurological and cardiovascular
diseases, cancer and viral infections. The Company has incurred significant
losses since inception, with an accumulated deficit of $24.4 million as of March
31, 1998, due primarily to ongoing expenditures related to its research
programs. The Company expects to continue to incur a substantial increase in
expenditures and operating losses for at least the next several years as it
expands its target and drug discovery and development efforts. Such expansion
will result in increases in research and development expenses, general and
administrative expenses and related capital expenditures. The Company's results
of operations have fluctuated from period to period and likely will continue to
fluctuate substantially in the future based upon the timing and composition of
funding under various collaborative agreements, the initiation and expansion of
research and development programs, the acquisition of technologies, compound
libraries and product rights, as well as the progress of its research and
development programs. Results of operations for any period may be unrelated to
results of operations for any other period. In addition, historical results
should not be viewed as indicative of future operating results. See "Risk
Factors--Limited Operating History; Early Stage of Development,"
"--Technological Uncertainty," "--Uncertainties Associated with Product
Development," "--Dependence on Pharmaceutical and Biopharmaceutical
Collaborations and Milestone Payments," "--Future Capital Requirements;
Uncertainty of Additional Funding" and "--Governmental Regulation; No Assurance
of Regulatory Approvals."
A key element of the Company's strategy is to enter into collaborations
with pharmaceutical and biopharmaceutical companies in order to enhance certain
of its target and drug discovery programs and to fund its capital requirements.
The Company's principal sources of revenue for the next several years are
expected to consist of license fees and upfront payments, research funding and
milestone payments under such collaborations, payments from future
collaborations, licensing arrangements, government grants, if any, and interest
income. To date, the Company's revenue has been attributable primarily to
collaborative arrangements with the following partners: Tanabe, which was
entered into in March 1996 and concluded in March 1998; Organon, which was
entered into in July 1996; Roche Bioscience, which was entered into in August
1996; Ares-Serono, which was entered into in November 1997; DuPont Merck, which
was entered into in December 1997; and Nippon Kayaku, which was entered into in
February 1998. See "Risk Factors--Dependence on Pharmaceutical and
Biopharmaceutical Collaborations and Milestone Payments" and "Business--Research
and Development Partners."
Under the Company's collaborative arrangements, the Company has received
payments of $20.8 million to date, of which $15.4 million has been recognized as
revenue. To date, the Company has
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received no milestone payments from its collaborators. In 1995, the Company
received $167,910 in government grants and no license fees, upfront payments or
research payments from its collaborators. In 1996, the Company recognized an
aggregate of $335,414 in license fees and upfront payments and $3.2 million in
research payments from its collaborators and $170,380 in government grants. In
1997, the Company recognized an aggregate of $264,579 in license fees and
upfront payments and $4.3 million in research payments from its collaborators
and $90,449 in government grants.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenue. Since its inception, Signal has received revenue principally from
its corporate collaborators, as well as from government research grants, and has
received no revenue from product sales. Revenue for the three months ended March
31, 1998 increased to $4.6 million from $1.5 million for the three months ended
March 31, 1997. The increase was attributable primarily to (i) the additional
collaborative agreements that were in place during 1998, which resulted in the
Company's recognition of additional revenue from license fees and research
funding; (ii) the Amendment to the Collaborative Development and Licensing
Agreement with Tanabe which resulted in the one-time recognition of additional
research funding; and (iii) increased research funding from Tanabe, Organon and
Roche Bioscience as a result of increased staffing under their respective
research programs. Timing and amount of revenues from corporate collaborations
is expected to vary on a quarterly basis.
Research and Development Expenses. The Company's research and development
expenses for the three months ended March 31, 1998 increased to $3.3 million
from $2.5 million for the three months ended March 31, 1997. The increase was
due largely to the hiring of additional personnel, increased travel expenses,
equipment depreciation expenses, facility expansion, patent-related activities,
the initiation of additional academic research collaborations and amortization
of deferred compensation. The Company also recognized $83,000 in deferred
compensation expense related to research and development personnel for the three
months ended March 31, 1998, as compared to no such deferred compensation
expense for the three months ended March 31, 1997, and expects to recognize
$481,000 in deferred compensation expense for the remainder of 1998. The Company
expects research and development expenses to increase significantly in the
future.
General and Administrative Expenses. General and administrative expenses
for the three months ended March 31, 1998 increased to $1.2 million from
$671,000 for the three months ended March 31, 1997. The increase was due
primarily to the hiring of additional personnel, equipment depreciation
expenses, legal fees, fees associated with new business development activities
and amortization of deferred compensation. The Company also recognized $60,000
in deferred compensation expense related to general and administrative personnel
for the three months ended March 31, 1998, as compared to no such deferred
compensation expense for the three months ended March 31, 1997, and expects to
recognize $245,000 in deferred compensation expense for the remainder of 1998.
The Company expects general and administrative expenses to increase in the
future to support the expansion of its research and business development
activities and increased expenses associated with being a public company.
Interest Income (Expense), Net. Net interest income for the three months
ended March 31, 1998 increased to $182,000 from a net interest expense of
$92,000 for the three months ended March 31, 1997. The increase was due
primarily to increased income as a result of higher average cash balances and
lower interest expense as a result of lower average capital lease and debt
obligations.
Net Income (Loss). Net income for the three months ended March 31, 1998
increased to $335,000 from a net loss of $1.7 million for the three months ended
March 31, 1997. The Company's profitability during the three months ended March
31, 1998 was due largely to the one-time recognition of additional research
funding resulting from the amended agreement with Tanabe. The Company does not
expect continued profitability in the near future.
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COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenue. Revenue for the year ended December 31, 1997 increased to $7.6
million from $3.9 million and $299,000 for the years ended December 31, 1996 and
1995, respectively. The increase in 1997 from 1996 was attributable primarily to
the Company's recognition of an aggregate of $7.3 million in revenue from
license fees and research funding from Ares-Serono, Tanabe, Roche Bioscience and
Organon during 1997, a 104% increase over the $3.6 million recognized during
1996. Revenue for 1995 was comprised solely of a research grant from the
National Institutes of Health (the "NIH").
Research and Development Expenses. The Company's research and development
expenses for the year ended December 31, 1997 increased to $10.3 million from
$7.7 million and $5.2 million for the years ended December 31, 1996 and 1995,
respectively. These increases were due primarily to the hiring of additional
personnel, facility expansion, equipment depreciation expenses, increased
patent-related activities, acquisition of compound libraries, the purchase of
research materials and laboratory supplies for expansion of the Company's
research programs and the initiation of additional academic research
collaborations. The Company recognized $58,000 in deferred compensation expense
related to research and development personnel in 1997 and expects to recognize
$564,000, $611,000, $419,000, $226,000 and $48,000 as a result of the
amortization of such deferred compensation in the years ended December 31, 1998
through 2002, respectively.
General and Administrative Expenses. The Company's general and
administrative expenses for the year ended December 31, 1997 increased to $2.8
million from $2.5 million and $1.9 million for the years ended December 31, 1996
and 1995, respectively. These expenses increased primarily as a result of
increased compensation paid to executive management, the hiring of additional
personnel, facility expansion and related amortization expenses. The Company
recognized $46,000 in deferred compensation expense related to general and
administrative personnel in 1997 and expects to recognize $305,000, $300,000,
$202,000, $105,000 and $18,000 as a result of the amortization of such deferred
compensation in the years ended December 31, 1998 through 2002, respectively.
Interest Income (Expense), Net. Net interest income (expense) for the
years ended December 31, 1997, 1996 and 1995 was $(191,000), $53,000 and
$329,000, respectively. The decrease in net interest income from 1996 to 1997
was primarily due to an increase in interest expense attributable to a $3.0
million secured promissory note used for general corporate purposes and working
capital during 1997. The decrease in net interest income from 1995 to 1996
resulted primarily from lower average cash balances during 1996.
Net Income (Loss). Net loss for the years ended December 31, 1997, 1996
and 1995 was $5.7 million, $6.2 million and $6.5 million, respectively.
Income Taxes. At December 31, 1997, the Company had federal and state net
operating loss carryforwards of approximately $23.3 million and $4.8 million,
respectively. The federal and state tax loss carryforwards will begin expiring
in 2007 and 1998, respectively, unless previously utilized. The Company has
provided a 100% valuation allowance against the related deferred tax assets as
realization of such tax benefits is not assured. Future utilization of these
carryforwards may be limited in any one fiscal year pursuant to the Internal
Revenue Code and similar state provisions; however, the annual limitation will
not prevent the entire amount of the carryforwards from being used during the
carryforward period. Therefore, the Company does not believe any such limitation
will have a material effect upon the utilization of these carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private placements of Preferred Stock, funds provided under the Ares-Serono,
Roche Bioscience, Nippon Kayaku, Organon, DuPont Merck and Tanabe collaborative
agreements, and, to a lesser extent, through debt and equipment financings,
government research grant revenue and interest income. As of March 31, 1998, the
Company had received $39.6 million in net proceeds from the sales of equity
securities,
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$20.8 million under its collaborative agreements, $5.3 million in debt and
equipment financings, $1.0 million in research grants from the NIH and $1.5
million in interest income. As of March 31, 1998, the Company had approximately
$20.7 million in cash, cash equivalents and short-term investments.
Net cash used in operations was $2.3 million, $2.4 million and $6.7 million
in 1997, 1996 and 1995, respectively. Net cash used in operations after 1995
declined due primarily to initial license payments and research funding under
the Company's collaborative agreements, coupled with a lower net loss during
1997.
As of March 31, 1998, the Company had invested $5.4 million in property and
equipment, primarily for facility improvements and laboratory and office
equipment. The Company has financed substantially all of its equipment through
capital leases and equipment note obligations.
At March 31, 1998, the Company had outstanding long-term debt of $2.1
million under its Secured Promissory Note held by MMC/GATX Partnership No. 1
issued on December 2, 1996 (the "Secured Promissory Note"). The principal amount
of the Secured Promissory Note is payable in monthly installments of $88,334,
with the final monthly payment scheduled for May 31, 2000. The Secured
Promissory Note is secured by substantially all of the Company's assets except
for the Company's intellectual property. The terms of the loan limit the
Company's ability to incur additional debt, repurchase its stock and pay
dividends. The Company was in compliance with all covenants under the
arrangement as of March 31, 1998.
The Company believes the net proceeds of this offering, together with its
existing capital resources, committed revenue from its existing collaborations
and interest income should be sufficient to fund its anticipated operating
expenses and capital requirements at least through the end of the year 2000.
These funding requirements include continued and increased expenditures for
research and development activities, as well as expenditures related to
leasehold improvements, the purchase of additional laboratory and other
equipment, the purchase of technology, compound libraries and product rights and
the repayment of debt. The Company has not entered into any formal commitments
to use the proceeds from the offering for increased personnel, capital
expenditures or any other purpose. There can be no assurance that changes in the
Company's research and development plans and collaborations, the acquisition of
additional technology, compound libraries and product rights, or other changes
affecting the Company's operating expenses will not result in the expenditure of
available resources before such time, and in any event, the Company will need to
raise substantial additional capital to fund its operations in future periods.
The Company intends to seek additional funding through collaborative
arrangements, public or private equity or debt financings, equipment financings
or other financing sources that may be available. If additional funds are raised
through the sale of equity securities, substantial dilution to existing
stockholders may result, and debt financing, if available, may involve
restrictive covenants. Further, there can be no assurance that additional
financing will be available on acceptable terms, if at all. If adequate funds
are not available, the Company may be required to delay, or reduce the scope of,
or eliminate one or more of its research or development programs or to obtain
funds through strategic collaborations that are on unfavorable terms or that may
require the Company to relinquish rights to certain of its technologies, product
candidates, products or marketing territories that the Company would otherwise
seek to retain. The failure of the Company to raise capital when needed could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Future Capital Requirements;
Uncertainty of Additional Funding."
IMPACT OF YEAR 2000
Some older computer programs were written using two digits rather than four
to define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than 2000. This failure to use four digits to define the applicable year has
created what is commonly referred to as the "Year 2000 Issue" and could cause a
system
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failure or miscalculations causing disruption of operations, including a
temporary inability to process transactions or engage in similar normal business
activities.
The Company recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 Issue. The Company does not believe that it
has material exposure to the Year 2000 Issue with respect to its own information
systems since its existing systems correctly define the Year 2000. Any required
expenditures will be expensed as incurred. The Company intends to assess its
position regarding the Year 2000 Issue with respect to external information
systems by the end of 1998. This process will entail communications with
significant business partners, customers, suppliers, financial institutions,
insurance companies and other parties that provide significant services to the
Company. The Company is currently unable to predict the extent the Year 2000
Issue will affect these parties or the extent to which the Company would be
vulnerable to any such party's failure to remediate any Year 2000 Issue on a
timely basis.
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BUSINESS
Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated
target and drug discovery company focused on identifying new classes of small
molecule drugs that regulate genes and the production of disease-causing
proteins. The Company applies advanced cellular, molecular and genomic
technologies to map gene regulating pathways in cells and to identify
proprietary molecular targets that activate or deactivate genes and result in
disease. Signal is advancing the application of genomics beyond identifying and
elucidating the functions of genes to designing novel classes of
disease-modifying drugs that selectively regulate the activation of
disease-causing genes. The Company conducts its target and drug discovery
programs both independently and with its five collaborative partners,
Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon, and DuPont Merck.
BACKGROUND
THE ROLE OF GENES IN HEALTH AND DISEASE
Genes control all cellular functions responsible for maintaining human
health by serving as blueprints for the production of proteins in cells. When
activated, usually in response to specific stimuli, a gene is expressed and
produces a protein. Proteins, including receptors, enzymes, cytokines and
hormones, initiate and carry out biochemical reactions that direct a cell's
normal biological functions. These functions include cell growth and
differentiation, cell activation and cell death.
Recent advances in cellular and molecular biology have shown that
malfunctions in gene expression either cause or predispose humans to most
diseases. Such malfunctions cause cells to produce inappropriate amounts or
types of proteins. For example, the uncontrolled proliferation of cells
characteristic of inflammatory diseases and cancer is the result of
over-activation of specific genes and the subsequent over-production of
proteins, such as cytokines and regulatory enzymes. Conversely, under-expression
of critical genes and their protein products, such as tumor suppressors and
growth factors, also may give rise to disease, including cancer and neurological
disorders.
THE ROLE OF INTRACELLULAR SIGNALING IN GENE REGULATION
Genes are selectively activated and suppressed when molecules such as
neurotransmitters, hormones or growth factors bind to, and activate, cell
surface receptors. This event initiates a cascade of biochemical reactions
within a cell, termed "intracellular signaling," in which distinct sets of gene
regulating enzymes (typically, kinases and phosphatases) are activated serially
to relay information from surface receptors to proteins in the nucleus. These
cascades of biochemical reactions culminate in the activation or deactivation of
specialized nuclear proteins, known as "transcription factors," that act as
molecular switches by binding to the regulatory regions of specific genes to
control the level and duration of gene activation and protein production.
Together, these cascades of gene regulating enzymes and transcription factors
comprise gene regulating, or intracellular signaling, pathways. Recent advances
in molecular biology and genomics are facilitating the identification of new
gene regulating pathways and specific molecules in these pathways that may serve
as novel targets for drug discovery.
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INTRACELLULAR SIGNALING AND GENE REGULATION PATHWAYS
[Graphic depicting intracellular signaling and gene regulation pathways.
Text down the right side of the graphic identifies the location in the pathways
where receptors are stimulated, gene regulating enzymes are activated,
transcription factors activate genes, gene expression are initiated, and normal
and disease-associated proteins are produced.]
Many transcription factors maintain normal expression of essential genes.
In response to certain stimuli, transcription factors are activated or "induced"
by gene regulating enzymes to increase the level, duration and sets of genes
expressed. Gene regulation is a highly coordinated process in which the
estimated 100,000 genes that comprise the human genome are switched on and off
in specific tissues. The pathways which regulate these genes enable cells to
respond to combinations of stimuli by integrating signals from multiple
receptors to regulate distinct sets of genes. These pathways are highly
interlinked and, when correctly controlled, maintain the body's essential
functions. The activity of these pathways varies depending on cell type,
permitting the activation of only those subsets of genes that are relevant to a
specific cell or tissue type. Normally functioning pathways precisely modulate
the level and duration of gene expression, ensuring that cells respond to
extracellular stimuli in the appropriate manner. However, when activation of a
gene regulating pathway triggers either an under-or over-production of certain
proteins, a broad range of diseases can result.
LIMITATIONS OF CONVENTIONAL TARGET AND DRUG DISCOVERY
Conventional drug discovery efforts principally are focused on identifying
compounds that modulate readily accessible extracellular targets, such as cell
surface receptors and secreted proteins. Drugs directed toward these
extracellular targets have a number of potential limitations in treating complex
diseases where molecular mechanisms are located within cells. Therefore, such
complex diseases may not be effectively treated using receptor activators or
inhibitors. Many diseases, such as inflammatory, neurological and cardiovascular
diseases and cancer, continue to represent large unmet medical needs due to
difficulties in identifying and targeting the underlying intracellular
mechanisms of these diseases.
Recent advances in genomics have the potential to significantly improve
drug discovery. While initial genomics efforts were directed principally toward
the mapping and sequencing of genes, current initiatives also are focused on
discerning the functions of specific genes in health and disease. However, there
remains a gap between the generation of genomic information and its effective
application to drug discovery.
An increased understanding of the pathways that regulate the expression of
disease-related genes has paved the way for a new drug discovery process. In
this process, individual genes and their regulatory pathways may be targeted to
prevent the onset and progression of disease. The ability to identify
proprietary drug targets in gene regulating pathways provides a method for
applying genomic information to disease therapy. Drugs designed to intervene at
pivotal points in a gene regulating
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pathway can have a major impact on the downstream production of proteins which
cause disease. This approach provides the opportunity to design novel classes of
disease-modifying drugs that can alter the course of a disease by targeting
underlying mechanisms of disease rather than providing only symptomatic relief.
Additionally, drugs can be designed that selectively target gene regulating
pathways responsible for abnormal gene expression and disease without affecting
healthy cells.
SIGNAL'S APPROACH: GENE REGULATING DRUGS
Signal is a leader in identifying and elucidating gene regulating pathways
and specific targets in these pathways for use in drug discovery. The Company's
drug discovery efforts are focused on identifying new classes of small molecule
drugs designed to regulate genes through their intracellular signaling pathways.
These potential drugs may have wide-ranging clinical application by modulating
abnormal expression of genes which cause disease. Several leading
pharmaceuticals are now known to function as regulators of gene expression,
including cyclosporine for organ transplantation, tamoxifen for cancer therapy
and estrogen for osteoporosis. A fundamental advantage of Signal's approach is
the ability to target pivotal junctures in specific gene regulating pathways,
following the integration of signals from multiple cellular receptors and prior
to the production of abnormal levels of proteins.
Signal has developed an integrated target and drug discovery platform to
identify gene regulating pathways, targets and drug candidates with several
important features:
Multiple Targets for Therapeutic Intervention. Signal's target discovery
efforts are focused on identifying cascades of gene regulating enzymes that
activate or suppress genes in a broad range of cell types and disease states.
Each of these pathways contains multiple potential drug targets for therapeutic
intervention. The Company believes that identifying multiple targets in each of
its therapeutic programs increases the likelihood of successfully discovering
novel drugs. For example, Signal and its collaborators have identified four gene
regulating enzymes in the NF-kB pathway (IKK1, IKK2, NF-kB inducing kinase
("NIK") and inhibitor of kB ("IkB") ligases) which are current or planned
targets for the Company's autoimmunity and inflammation, cardiovascular disease
and cancer programs.
Individual Targets Modulate Multiple Disease-Related Genes. Signal is
designing drugs that may be effective in treating diseases where a single target
regulates the activation of multiple genes involved in disease. For instance, by
targeting a pivotal molecule in a signaling cascade, such as JNK in its
autoimmunity and inflammation disease program, the Company is screening for
compounds which block the production of a broad set of pathogenic levels of
proteins, such as interleukin-2, gamma interferon and tissue-destructive
enzymes. In addition, Signal has identified and licensed to Tanabe a lead
compound that has demonstrated, in vitro and in animal models, the ability to
modulate multiple genes regulated by the AP-1 and NF-kB signaling pathways.
Targets Selective for Specific Cell Types. While most gene regulating
enzymes, along with the genes they control, are present in each cell of the
body, many subtypes of these enzymes and genes function only in specific cell
types. Signal is using several approaches to identify drug targets, their
specific subtypes and corresponding drug leads which function in a cell-specific
manner. For example, Signal researchers and collaborators have shown that JNK3
principally is expressed in brain tissue. When activated, JNK3 has been shown to
play a key role in neuronal cell death and in animal models of epilepsy.
Targets Selectively Regulate Abnormal Gene Expression. Signal's drug
discovery programs principally target inducible gene regulating pathways that
may cause abnormal gene expression and give rise to disease. These discovery
initiatives focus on regulating genes functioning in an over- or under-
activated state, without interfering with normal levels of gene expression
required to maintain essential cellular functions. For example, Signal's
autoimmunity and inflammation disease program focuses on MAP kinase gene
regulating pathways that are selectively induced by cytokines and other stress
molecules in response to tissue injury.
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SIGNAL'S STRATEGY
The Company's goal is to be a leader in the discovery of small molecule
drugs that target gene regulating pathways fundamental to disease processes. To
accomplish this goal, the Company pursues the following technology and business
strategies:
Integrate Advanced Target and Drug Discovery Technologies. Signal
integrates an extensive set of target and drug discovery technologies to
expedite the application of genomics to the discovery of important new classes
of drugs. These technologies include proprietary human cell lines, functional
genomics and proteomics, high throughput biochemical and cell-based screening
and combinatorial and computational chemistry. Signal believes this extensive
set of discovery and preclinical development capabilities provides the Company
and its partners with a distinct combination of tools and technologies for
target and drug discovery. Applying these capabilities, the Company has
successfully elucidated the structure and functions of several clinically
important gene regulating pathways, including the NF-kB, AP-1 and p38 pathways,
developed a portfolio of 18 drug targets and demonstrated efficacy of its drug
leads in animal models of arthritis and osteoporosis.
Leverage Targets Across Multiple Diseases. Signal seeks to identify
multiple targets within each gene regulating pathway and to select for drug
discovery those targets which can be validated in multiple clinical indications.
In addition to enhancing the clinical potential of each pathway, this strategy
also serves to limit the Company's scientific risk in any one gene regulating
pathway or drug target. For example, Signal and its collaborators have
demonstrated the role of specific JNK subtypes in mediating key cellular events
that give rise to, or exacerbate, autoimmune, inflammatory and neurological
diseases and cancer.
Build Partner-Funded Business. Signal aggressively pursues collaborations
with pharmaceutical partners to fully develop and exploit its pipeline of
targets and lead compounds, as well as its discovery technologies. These
collaborations provide Signal with multiple potential sources of revenue, enable
the Company to diversify scientific and financial risk, and provide access to
its collaborators' substantial development, manufacturing and marketing
resources. By focusing its efforts on drug discovery and utilizing corporate
collaborations to fund the progression of programs from discovery into the
clinic, the Company intends to maintain a sustainable level of net cash flow. As
these programs mature or any additional corporate collaborations are initiated,
the Company may increase its funding of research and development programs. To
date, Signal has collaborative agreements with five pharmaceutical partners, has
licensed worldwide rights for a drug lead to a sixth partner and has several
additional target and drug discovery programs available for future corporate
collaborations.
Retain Significant Product Commercialization Rights. The Company has
retained certain commercialization rights in two of its existing corporate
collaborations. These include co-commercialization rights in the U.S. in the
Company's collaboration with Ares-Serono and joint worldwide commercial rights,
excluding Japan, with Nippon Kayaku. The Company expects to seek to retain
certain additional commercialization rights in future corporate collaborations.
SIGNAL'S TARGET AND DRUG DISCOVERY TECHNOLOGIES
Signal has developed complementary technology platforms designed to
identify proprietary drug targets and discover novel drugs active on these
targets. The Company believes that, together, these integrated target and drug
discovery capabilities enable it to proceed rapidly from target identification
to compound screening and lead optimization. To date, the Company and its
collaborators have identified 18 drug targets, are working to identify seven
additional targets and are continuing to elucidate new gene regulating pathways
and their targets. The Company has developed and initiated screening in 16 drug
discovery assays and is optimizing drug leads in three therapeutic areas.
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Signal's integrated discovery capabilities are depicted below:
INTEGRATED PLATFORM FOR THE DISCOVERY OF GENE REGULATING TARGETS AND DRUGS
[Graphic depicting Signal's integrated platform for the discovery of gene
regulating targets and drugs. The graphic is a flowchart depicting Signal's
capabilities in (1) target discovery as proprietary human cell lines,
functional genomics and proteomics, gene regulating target discovery and target
validation, and (2) drug discovery as assay development and compound libraries,
lead discovery, lead optimization, and gene regulating drug candidates.]
DISCOVERY PLATFORM FOR GENE REGULATING TARGETS
Signal is developing and applying advanced cellular, molecular and genomic
technologies to discover clinically important targets that are the focus of the
Company's drug discovery programs and corporate collaborations. These discovery
technologies include:
Proprietary Human Cell Lines. The Company has developed a proprietary
technology to immortalize and perpetualize human cells. Signal uses these human
cell lines to identify and validate novel gene regulating pathways and drug
targets, and in screening assays for drug discovery. These cell lines are
designed to include the full set of functional genes and related pathways
involved in both normal and pathogenic cellular functions. Signal uses
proprietary human cell lines to develop in vitro models of important disease
processes, including neurodegeneration, bone formation and resorption and
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vascular disease. Signal's proprietary human bone cell co-culture system closely
mimics the natural environment of bone metabolism, and is used by Signal for
target identification and validation, as well as for testing drug leads prior to
preclinical evaluation in animal models.
Functional Genomics and Proteomics. In many of its corporate
collaborations, Signal utilizes functional genomics and proteomics to elucidate
the role genes and their protein products play in health and disease. Signal has
implemented advanced genomic technologies to expedite the identification and
prioritization of disease-associated gene targets. These include proprietary
methods for differential gene display, subtraction hybridization and gene chip
arrays. To decipher the gene regulating pathways involved in specific diseases,
Signal is developing highly sensitive protein microanalysis capabilities that
integrate peptide chromatography, microfluidics and mass spectrometry for
identification of potential drug targets that regulate specific disease
pathways. Signal utilizes these gene and protein discovery tools, in combination
with the Company's proprietary cell lines, to generate a more comprehensive
profile of signaling pathways involved in diseases and to facilitate the rapid
identification of novel and specific therapeutic targets. For example, Signal is
applying functional genomics technologies to identify and characterize the role
of certain genomic targets and their regulatory pathways in neuronal,
cardiovascular and gynecological disease therapy.
Target Discovery and Validation. The Company applies cellular and
molecular biology techniques to elucidate the regulatory pathways of
disease-related genes. An initial step in this process involves mapping the
regulatory regions of disease-related genes to identify which transcription
factors selectively activate or inhibit each gene's expression. Signal then
utilizes genomics and proteomics to identify and characterize specific enzyme
targets in a pathway that regulate the activation of these transcription
factors. When novel gene regulating enzymes are identified, the Company applies
bioinformatic tools to search proprietary and public gene databases and to
identify subtypes of these targets with distinct therapeutic applications and
specificity for different tissues.
After a potential target has been identified, the Company utilizes
antisense, mutant enzymes, gene knockout models, antibodies and other techniques
to validate the role of the target in specific disease processes and its utility
for drug discovery. Such target validation is a critical step before committing
resources to assay development and screening for target-specific drug leads.
DISCOVERY PLATFORM FOR GENE REGULATING DRUGS
Signal develops and integrates several advanced technologies for lead
discovery and optimization. The Company's lead discovery platform permits rapid,
target-directed screening of diverse compound libraries in a broad range of high
throughput assays. The Company optimizes drug leads by integrating combinatorial
and computational chemistry with technologies for profiling the effects of drug
leads on specific targets in cellular pathways. This facilitates the design of
drugs that properly regulate gene expression and protein production. These drug
discovery activities are coordinated using an integrated cheminformatics and
bioinformatics data management system to facilitate library design, primary and
secondary screening and the subsequent design and synthesis of optimized drug
candidates.
Assay Development. Signal develops and utilizes proprietary biochemical
and cell-based assays to screen for compounds that regulate gene expression in a
target- and cell-specific manner. Signal researchers have designed modular
systems for developing biochemical and cell-based assays, enabling the Company
to substitute different drug targets into standardized assay formats for use in
various discovery programs. Signal develops and uses biochemical assays to
screen compounds for activity on specific drug targets. These biochemical assays
are designed to mimic the functional activity of a drug target in its native
cellular environment. The Company's cell-based assays facilitate the
identification of compounds that modulate gene transcription through distinct
intracellular pathways and in specific cell types. Active compounds identified
in these primary assays are rapidly qualified in a series of secondary
pharmacological assays which provide further information regarding a compound's
clinical potential. These secondary assays measure the effects of potential drug
leads on disease-related genes and proteins, including inhibition of specific
gene regulating enzymes, inhibition of abnormal protein
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production, cytotoxicity, potency and target selectivity. Signal has developed
and initiated screening in 16 drug discovery assays and also is developing
additional new high throughput screening assays.
High Throughput Screening and Compound Library. Signal utilizes
robotics-based high throughput screening systems for rapid, target-specific
screening of diverse compound libraries. These automated systems enhance the
precision, reproducibility and integration of chemical and biological data. The
Company's screening library currently consists of approximately 350,000 diverse
compounds, which include small molecule, natural product and combinatorial
compounds. For example, Signal currently screens more than 60,000 compounds per
month on four kinase targets and plans to significantly increase its screening
throughput and drug targets. To expedite lead identification, Signal researchers
have developed a KAST that enables the Company to screen on multiple kinase
targets in parallel. The KAST system provides activity and specificity data
across multiple kinase targets for a given screening library.
Lead Optimization: Combinatorial, Computational and Structural
Technologies. Combinatorial chemistry involves the rapid synthesis of large and
diverse compound libraries by sequentially adding different molecular building
blocks to a core chemical structure. Signal has developed a proprietary SKIL
based on structures of both known kinase inhibitors and data generated by its
internal screening programs. The SKIL is being applied in these programs with
the goal of rapidly identifying more selective and potent inhibitors of gene
regulating kinases. The Company uses combinatorial chemistry techniques
principally to expedite the optimization of lead compounds and also to build
target-based combinatorial libraries for subsequent screening. Signal's
combinatorial chemistry capabilities also may help strengthen the Company's
patent position in a particular chemical series by generating a relatively large
analog library around an active compound.
To expedite the lead optimization process, Signal also uses computational
chemistry to guide the design and synthesis of new compounds. Computational
chemistry involves the use of computer-based algorithms to model the structure
of an active compound and its interaction with a drug target to generate
directed libraries for screening. Alternatively, computational chemistry can be
used to construct "virtual libraries" around core chemical structures, providing
a method for examining large numbers of potential analogs prior to synthesizing
representative compounds for screening.
Signal researchers have designed a computer-generated three-dimensional
model of the JNK enzyme's structure and its active site. Using computer-based
simulation, a chemical database of more than 700,000 compounds has been
"virtually" screened to identify potential JNK inhibitors. Signal plans to use
this technology to develop other target-directed libraries. These
structure-based drug design efforts are intended to further enhance a lead
compound's potency, selectivity, bioavailability and safety.
SIGNAL'S GENE REGULATING PATHWAYS
The Company is conducting target and drug discovery programs directed
toward five mammalian gene regulating pathways. Many of these pathways regulate
the activation of multiple disease-related genes and have multiple drug targets,
allowing the Company to pursue a diverse number of therapeutic programs for each
pathway. The Company expects that ongoing efforts to map and sequence the human
genome, including Signal's internal genomics initiatives, will lead to an
expansion in the number of known disease-related genes and further enhance the
Company's ability to identify additional gene regulating pathways and drug
targets. In addition, the Company is conducting target and drug discovery
programs directed toward five viral gene regulating pathways.
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SELECTED HUMAN GENE REGULATING PATHWAYS TARGETED BY SIGNAL
[Graphic depicting selected human gene regulating pathways targeted by Signal,
specifically the NF-kB pathway, MAP kinase pathways and estrogen-regulated
gene pathway. The graphic depicts a flow chart for each pathway showing the
stimuli, intracellular signaling, gene activation and protein production.]
NF-KB GENE REGULATING PATHWAY
NF-kB plays a pivotal role in autoimmune, inflammatory and cardiovascular
disease processes by regulating cytokine genes, such as TNF-a, IL-1, IL-2, IL-6,
IL-8, along with genes which code for cell adhesion molecules and the COX-2 and
iNOS enzymes. In addition, studies published in Science link NF-kB to increased
cancer cell resistance to radiation and chemotherapies and demonstrate the
ability of NF-kB inhibitors to enhance the sensitivity of cancerous cells to
these therapies. NF-kB is a family of transcription factors held in the
cytoplasm of cells by IkB. In response to extracellular stimuli, IkB is
degraded, allowing NF-kB to migrate into the nucleus and activate select genes
which elicit important immunological and proliferative responses. Signal
researchers and collaborators have identified three proprietary drug targets
which regulate NF-kB activation by processing IkB prior to its degradation: (i)
two IkB kinases which Signal terms "IKK1" and "IKK2" and (ii) an IkB ligase,
which Signal currently is cloning and characterizing. The discovery of IKK1 and
IKK2 by Signal researchers and collaborators was reported in 1997 in the
journals Science, Nature and Cell. In addition, as part of its collaboration
with Ares-Serono, the Company has obtained rights to a fourth novel target in
the NF-kB pathway, NIK. The Company believes that drugs which inhibit IKK1
and IKK2, NIK and IkB ligases will prevent NF-kB activation and the subsequent
expression of select disease-associated genes. Signal has filed patent
applications for the IKK1 and IKK2 and an IkB ligase, and Ares-Serono's research
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collaborator, the Weizmann Institute, has filed patent applications for the NIK
gene regulating enzyme.
MAP KINASE GENE REGULATING PATHWAYS
Signal has established a leading position in the discovery of proprietary
drug targets in mitogen-activated protein kinase, or MAP kinase, pathways. MAP
kinase pathways consist of distinct cascades of regulatory enzymes that serially
activate one another to control the expression of specific sets of genes in
response to growth factors, cytokines, tumor promoters and other biological
stimuli. These pathways control cell proliferation and metabolism and cell
survival in response to tissue injury, infection, malignancy and other diseases.
MAP kinase gene regulating pathways provide novel targets for drug discovery in
a wide range of disease processes, including autoimmune and inflammatory
diseases, diseases associated with bone metabolism, neurological and
cardiovascular diseases and cancer. Signal's researchers, scientific founders
and academic collaborators have identified nine proprietary targets in MAP
kinase pathways, including targets in the JNK and p38 MAP kinase pathways.
JNK Gene Regulating Pathway
Activation of the JNK gene regulating pathway increases the expression of a
set of autoimmune and inflammatory genes, including IL-2 and gamma interferon.
There are multiple subtypes of the JNK regulatory enzyme, each of which induces
the expression of genes in a cell- and stimulus-specific manner. In 1993, Dr.
Michael Karin at the University of California, San Diego, a scientific founder
of the Company, and Dr. Roger Davis at the University of Massachusetts, a
Scientific Advisor of the Company, discovered two novel kinases in the JNK
pathway. These regulatory enzymes (termed "JNK1" and "JNK2") are pivotal
activators of c-Jun, a component of AP-1 and other transcription factors, and
genes under c-Jun's control. Signal researchers subsequently have cloned and
sequenced the upstream activator of the JNK regulatory enzymes, termed JNKK,
which also may serve as a target for drug discovery. The over-activation of JNK
causes numerous diseases, including autoimmune, inflammatory and neurological
diseases and proliferative cancers. Drugs which inhibit JNK activation are
expected to selectively block the over-activation of inducible genes, and not
affect normal cellular functions, since JNKs do not regulate normal gene
expression. One of the Company's collaborators, Dr. Roger Davis, reported in
1997 in the journal Nature that mice engineered to be deficient in the
brain-specific JNK subtype, JNK3, are resistant to experimentally induced
seizure and associated neuronal cell death. JNK3 inhibitors therefore may have
therapeutic value for treating epilepsy, as well as neurodegeneration associated
with Alzheimer's disease, Parkinson's disease, stroke and head trauma. The
Company has exclusively licensed certain rights to three issued U.S. patents and
related patent applications with regard to JNK and its use in drug discovery.
p38 Gene Regulating Pathway
Activation of the p38 gene regulating pathway causes the expression of
multiple cytokine genes, including IL-1, IL-6, IL-8 and TNF-a, which regulate
the development and proliferation of cells in response to disease and tissue
injury. To date, the Company and its academic collaborators have identified
three proprietary drug targets in the p38 pathway. One such target is p38-2, a
subtype of p38, which is highly expressed in heart and skeletal muscle and which
is activated by stress-inducing stimuli and proinflammatory cytokines. The
second target discovered in the p38 pathway is MEK6, a novel MAP kinase which
activates p38 in vivo and which is highly expressed in skeletal muscle. Signal
researchers have validated the role of MEK6 in regulating the production of IL-1
and TNF-alpha cytokines. The third target in the p38 pathway, MKK3, specifically
activates p38 and p38-2 in response to stress stimuli and pro-inflammatory
cytokines. When defective, the p38 pathway is believed to play an important role
in diseases arising from abnormal production of cytokines, including autoimmune
and inflammatory diseases, diseases associated with bone metabolism and
neurological and cardiovascular diseases. The Company has licensed exclusive
worldwide rights covering MKK3 use in drug discovery and has filed patent
applications for p38-2 and MEK6.
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c-Fos Gene Regulating Pathway
The transcription factor c-Fos controls the development and activation of
certain bone-resorbing cells, termed osteoclasts. These cells continually remove
older bone material so that new bone can be deposited in its place. Mice lacking
c-Fos demonstrate reduced bone resorption, thereby validating c-Fos as a drug
target. Signal researchers have developed a proprietary human bone cell
co-culture system to further validate the role of c-Fos in bone metabolism and
to evaluate c-Fos inhibitors identified in its screens. The Company believes
that drugs which inhibit the expression or activation of c-Fos will slow the
overactive bone resorption associated with osteoporosis. Signal is working to
map the c-Fos signaling pathway and identify key molecular targets that regulate
increased c-Fos expression.
In addition to regulating bone metabolism, c-Fos also plays a critical role
in tumor formation and cancer metastasis by regulating several properties of
malignancy, including the activation of matrix metalloproteinase ("MMP") genes
which cause tumors to metastasize. This role of c-Fos has been validated, in
part, by animal studies in which tumors induced in mice lacking c-Fos did not
metastasize. Conversely, over-expression of c-Fos in mice resulted in the
proliferation and spread of highly aggressive forms of cancers. Based on these
findings, the Company believes that inhibitors of c-Fos expression and
activation may represent an important new class of drugs for cancer therapy.
OTHER GENE REGULATING PATHWAYS
Estrogen-Regulated Gene Pathway
Signal researchers have discovered a novel estrogen-regulated gene pathway
by which estrogen inhibits production of IL-6, a cytokine that causes bone
resorption. Signal has validated the role of IL-6 in the activation of bone
resorption using a proprietary human bone cell co-culture system and in animal
models of osteoporosis. This validation is consistent with published studies
demonstrating that bone loss can be prevented in mice where the IL-6 gene was
deleted. The Company believes that drugs which inhibit IL-6 will slow overactive
bone resorption associated with osteoporosis.
Viral Gene Regulating Pathways
Viral infections occur when viruses insert their genetic material into a
host cell and then use the infected cell's biochemical machinery to express
viral proteins and produce new viruses. Viral transcription and translation
events regulate the production of these viral proteins. Signal and its
collaborators have determined the molecular mechanisms of action of key viral
transcription factors responsible for replication of HCV, HIV, human
papillomavirus ("HPV"), cytomegalovirus ("CMV") and herpes simplex virus
("HSV"). The Company has validated these viral gene regulation factors as drug
targets by using genetically modified viruses and antisense oligonucleotides
which block viral infections in cells. Signal and its collaborators also have
determined the mechanism of action of translational regulation of a key HCV
protein and have cloned and expressed another important regulatory enzyme
responsible for HCV replication. In addition, one of Signal's academic
collaborators has identified a novel function for a key HIV target which may
facilitate the discovery of novel HIV inhibitors.
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SIGNAL'S DRUG DISCOVERY PROGRAMS
Signal's drug discovery programs are directed toward autoimmunity and
inflammation, bone metabolism, neurological disease, cardiovascular disease,
cancer and viral infections, and are summarized in the following table:
PROGRAM/TARGET CURRENT INDICATIONS(1) STATUS(2) COMMERCIAL RIGHTS(3)
- ---------------------- ------------------------------- ------------------ --------------------
AUTOIMMUNITY AND
INFLAMMATION
AP-1 / NF-kB........ Lead Optimization Tanabe
JNK1 and 2.......... Rheumatoid Arthritis Lead Optimization Signal
IKK1 and 2.......... Osteoarthritis Screening Signal, Ares-Serono
p38-2............... Allergy Screening Signal
NIK................. Asthma Assay Development Signal, Ares-Serono
MEK6................ Inflammatory Bowel Disease Assay Development Signal
MKK3................ Psoriasis Assay Development Signal
JNKK1 and 2......... Transplant Rejection Assay Development Signal
IkB Ligases......... Target Discovery Signal, Ares-Serono
BONE METABOLISM
IL-6................ Osteoporosis Lead Optimization Signal
c-Fos............... Paget's Disease Assay Development Signal
Bone Mitogenesis.... Bone Repair Target Discovery Signal
NEUROLOGY
PNS................. Peripheral Neuropathies Lead Optimization Signal, Nippon Kayaku
JNK1 and 2.......... Neurodegeneration Screening Signal
JNK3................ Neurodegeneration Assay Development Signal
CNS Cell Lines...... Neurodegeneration, Stroke, Head Assay Development
Trauma Target Discovery Signal
PNS Cell Lines...... Assay Development/
Pain, Incontinence Target Discovery Roche Bioscience
CNS Genomic Neurodegeneration,
Targets............... Psychiatric Diseases Target Discovery Organon
CARDIOVASCULAR
JNK1 and 2.......... Ischemia Lead Optimization Signal
IKK1 and 2.......... Atherosclerosis Screening Signal, Ares-Serono
p38-2............... Ischemia Screening Signal
NIK................. Atherosclerosis Assay Development Signal, Ares-Serono
JNK3................ Ischemia Assay Development Signal
MEK6................ Ischemia Assay Development Signal
IkB Ligases......... Atherosclerosis Target Discovery Signal, Ares-Serono
Vascular Genomic
Targets............... Atherosclerosis, Ischemia Target Discovery Organon
CANCER
JNK1 and 2.......... Lead Optimization Signal
IL-6................ Lung Cancer Lead Optimization Signal
IKK1 and 2.......... Breast Cancer Screening Signal, Ares-Serono
NIK................. Ovarian Cancer Assay Development Signal, Ares-Serono
JNKK1 and 2......... Myeloma Assay Development Signal
c-Fos............... Leukemia Assay Development Signal
IkB Ligases......... Target Discovery Signal, Ares-Serono
VIROLOGY
Various............. Hepatitis C Virus Assay Development Signal, DuPont Merck
Various............. Human Immunodeficiency Virus Assay Development Signal, DuPont Merck
ICP4................ Herpes Simplex Virus
(Types 1, 2) Screening Signal
IE86................ Cytomegalovirus Screening Signal
E2.................. Human Papillomavirus Screening Signal
- ------------------------------
(1) All diseases referenced by brackets are potential clinical indications for
each target listed in the respective therapeutic program.
(2) LEAD OPTIMIZATION indicates that Signal and/or its pharmaceutical partners
are applying combinatorial and computational chemistry, as well as
structure-based drug design, to enhance the potency, selectivity,
bioavailability, safety and other pharmaceutical properties of active
compounds.
SCREENING indicates that Signal is testing libraries of organic small
molecules and natural products in biochemical and/or cell-based assays to
identify compounds which either inhibit or induce activation of a drug
target.
ASSAY DEVELOPMENT indicates that Signal is creating biochemical and/or
cell-based in vitro assays which incorporate a specific drug target and are
used to identify compounds which regulate the drug target.
TARGET DISCOVERY indicates that Signal is identifying new disease-related
genes and their protein products, cloning and characterizing novel enzymes
and other proteins which regulate activation of disease-related genes and is
validating the utility of these regulatory proteins as drug targets.
(3) See "--Research and Development Partners."
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AUTOIMMUNE AND INFLAMMATORY DISEASE PROGRAM
The human immune system is comprised of cells and biochemical mediators
which protect the body from infectious organisms, physical injury and abnormal
cellular events such as cancer. Key components of the immune system, such as
white blood cells, mount a localized protective or inflammatory response at
sites of injury and disease. Autoimmune and inflammatory diseases arise from the
over-activation of the immune system resulting in the over-production of immune
cells, inflammatory cytokines and tissue-destructive enzymes. These cells and
proteins attack and destroy healthy tissue, giving rise to a number of diseases
such as rheumatoid arthritis, osteoarthritis, allergies, asthma, inflammatory
bowel disease and psoriasis, as well as transplant rejection. In 1996, the U.S.
market for anti-inflammatory and immunosuppressive drugs used to treat these
diseases totaled approximately $2.0 billion. Many current drugs are relatively
non-selective and have dose-limiting side effects. More importantly, although
these current drugs alleviate many symptoms of disease, they generally do not
target the underlying mechanisms and therefore do not actually modify disease
processes.
Signal is identifying and cloning drug targets in key gene regulating
pathways and screening for new classes of small molecule drugs which regulate
autoimmune and inflammatory diseases at the level of gene function. The Company
currently is screening for inhibitors of regulatory enzymes in three distinct
pathways, NF-kB, JNK and p38. In November 1997, Signal initiated a three-year
collaborative development and license agreement with Ares-Serono to discover
novel anti-inflammatory, immunosuppressive and certain other drugs that regulate
targets in the NF-kB gene regulating pathway. Additionally, in March 1998, the
Company licensed to Tanabe worldwide rights to a dual AP-1/NF-kB drug lead with
demonstrated oral efficacy in an animal model of arthritis. See "--Research and
Development Partners."
NF-kB Inhibitor Program
NF-kB regulates the activation of multiple cytokine, adhesion molecule and
other pro-inflammatory genes. Signal has developed and initiated high throughput
screens for inhibitors of NF-kB using proprietary IKK1 and IKK2 biochemical
assays and cell-based NF-kB screening assays. The Company also is developing
secondary assays which profile the effects of active compounds on a number of
other immune-inflammatory genes and proteins. The Company has identified several
compounds active on the IKK1 and IKK2 targets. Signal plans to apply
combinatorial, computational and structure-based drug design to develop NF-kB
inhibitors with enhanced potency, specificity and bioavailability. Signal also
is working with collaborators to develop high throughput screens for the NIK
drug target and to clone and express the genes for IkB ligases as novel targets
for drug discovery.
MAP Kinase Inhibitor Program
JNK and p38 pathways control the activation of cytokine and other
pro-inflammatory genes during an inflammatory response. Company researchers have
developed and initiated high throughput screening for JNK1, JNK2, JNK3 and p38
inhibitors using proprietary biochemical and whole cell gene transcription
assays. Signal has identified several compounds which inhibit JNK activation
with a high level of specificity. The Company is utilizing its SKIL library and
a proprietary computer-generated homology model of JNK to design analog
compounds with enhanced potency and selectivity. Additionally, Signal is working
to validate the role of upstream activators of JNK, JNKK1 and JNKK2, which also
may be valid targets for drug discovery. In the p38 pathway, the Company is
developing biochemical high throughput screening assays for MEK6 and MKK3 drug
discovery, and has initiated screening on its p38-2 target.
Dual AP-1/NF-kB Inhibitor Program
Signal researchers have identified a new class of compounds that inhibit
genes regulated by both the AP-1 and NF-kB transcription factors. In vitro
assays and in vivo animal studies indicate this series of compounds is highly
selective for T-cells and has potent anti-inflammatory and immunosuppressive
activity. Signal's most advanced lead compound has demonstrated efficacy, safety
and oral bioavailability in an animal model of arthritis, and the Company has
filed patent applications covering the molecule's structure. In March 1998, the
Company licensed to Tanabe worldwide rights to this drug lead for autoimmune,
inflammatory and other diseases.
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BONE METABOLISM DISEASE PROGRAM
Bone disease results from an imbalance in the bone remodeling process,
causing either inadequate bone formation or excess bone loss. Diseases involving
abnormal bone remodeling include osteoporosis, Paget's disease, hyperthyroidism
and periodontal disease. Osteoporosis, which occurs primarily in post-menopausal
women due to loss of estrogen, is an age-related disease characterized by
persistent loss of bone mass. According to the National Osteoporosis Foundation,
in 1997 this disease afflicted more than 28 million people in the United States
and over 200 million people worldwide. In 1995, sales of therapeutics to treat
osteoporosis totaled more than $6.5 billion.
Most current osteoporosis treatments are intended to slow bone resorption.
While estrogen replacement therapy remains the primary treatment for most women
at risk for osteoporosis, it is associated with risks including cancer and heart
disease, endometriosis and abnormal blood clotting. Presently, there are no
FDA-approved therapies that increase bone formation. Signal has initiated a
broad, multi-target approach to regulating both bone resorption and formation
for the treatment of osteoporosis, bone fractures, periodontal disease and other
disorders of bone metabolism. The Company is working to develop new classes of
drugs that potently and selectively control the mechanisms of bone disease at
the level of gene function. Signal has established a target and drug discovery
program focused on identifying novel classes of drugs for treating osteoporosis
that target the IL-6, c-Fos and certain novel gene regulating targets for
inducing bone formation. See "--Research and Development Partners."
IL-6 Inhibitor Program
The cytokine IL-6 plays a fundamental role in the differentiation and
activation of bone-resorbing osteoclasts in women following menopause. Signal
has initiated a program to discover drugs that selectively inhibit the
production of IL-6 in bone cells through a novel estrogen-regulated gene
pathway. This new class of drugs is being designed to inhibit transcription
factors responsible for inducing IL-6 gene expression and resulting bone
resorption. These drugs, if successfully developed, would provide clinicians
with an alternative, non-estrogen treatment for osteoporosis which may minimize
some of the adverse side effects of traditional estrogen therapy and which may
be used to treat both women and men. Signal has identified novel classes of
compounds that inhibit IL-6 production in bone cells. These compounds have
demonstrated biological activity in an animal model of osteoporosis and
currently are undergoing further optimization. To expedite lead optimization,
Signal has developed a series of secondary assays to examine the selectivity and
potential side-effects of lead compounds by profiling the compounds' effects on
gene and protein expression.
c-Fos Inhibitor Program
Utilizing its detailed understanding of the AP-1 and other MAP kinase
signaling pathways, the Company is pursuing the discovery of drugs to prevent or
treat osteoporosis through a c-Fos signaling mechanism. Recent studies have
demonstrated that targeted knockout of the c-Fos transcription factor gene
results in excess bone resorption and osteoporosis. These academic studies,
along with data generated by Signal's in vitro bone co-culture model, establish
that the development and activation of bone-resorbing osteoclasts is highly
dependent on the presence of the c-Fos transcription factor. Based on these
recent findings, the Company is developing a high throughput screening assay to
identify novel, non-estrogenic compounds that inhibit c-Fos production and the
subsequent over-activation of osteoclasts which cause excess bone loss.
Bone Formation Program
Signal also has initiated an osteogenic program to identify drugs that
induce bone formation. Researchers at Signal have cloned key bone regulating
factors and are applying their expertise in MAP kinase signaling to characterize
novel pathways in osteoblasts that regulate genes involved in bone growth. To
facilitate this process, the Company uses proprietary human bone cell lines to
rapidly validate and evaluate drug targets and leads. This system can precisely
measure the effects of new targets and leads on each stage of osteoblast cell
development, including bone formation. Company
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researchers presently are focused on isolating regulatory mechanisms in these
pathways that would serve as targets for drug discovery. Small molecule drugs
that regulate these potential targets would complement anti-resorptive therapies
and have potentially broader application in treating multiple forms of
osteoporosis, including post-menopausal, drug-induced and age-related forms of
the disease. To date, no orally active drugs which induce bone formation are
available for the treatment of bone diseases and disorders.
NEUROLOGICAL DISEASE PROGRAM
The human nervous system consists of two distinct components: the central
nervous system ("CNS"), which includes the brain and spinal cord, and the PNS,
which includes all nerves outside the CNS. Within the PNS, neurons transmit
information such as pain to the CNS, and motor pathways transmit commands from
the CNS to muscles. Defects or damage in the CNS can lead to Parkinson's
disease, Alzheimer's disease, stroke or epilepsy, as well as psychiatric
disorders such as depression and schizophrenia. PNS disorders can lead to acute
and chronic pain, and peripheral neuropathies caused by diabetes and
chemotherapy can cause chronic motor or sensory defects. In 1996, annual
worldwide sales of neuropharmaceuticals totaled $8.5 billion, including
pharmaceuticals such as anti-depressants, analgesics, psychotropics, anxiolytics
and anti-epileptics. Many current CNS and PNS drugs exhibit undesirable side
effects. There also are disorders such as chronic pain and Alzheimer's disease
for which there are no effective treatments due to a limited understanding of
neurological disease processes at the molecular and genomic levels.
Signal researchers and collaborators have developed a proprietary cell
immortalization technology for producing cloned human neuronal cells that are
homogenous, stable and fully functional in vitro for use in target discovery and
validation, and in drug screening. This technology is designed to overcome many
current limitations of neuropharmaceutical research. Cell lines developed by
Signal express the receptors, ion channels and cytochemical markers required to
produce functional, morphologically mature human neurons. Signal's cell line
technology also can be used to "lock in" human neuronal cells to a specific
stage of maturation, providing a stable cell-based assay system for drug
screening. To date, the Company has developed human neuronal and glial cell
lines of the CNS and, it believes, the first human sensory neuronal cell lines
of the PNS. Signal's human CNS cell lines can be differentiated into a variety
of cell types, including neurons and astrocytes, and also can be induced to
undergo cell death, in vitro, in model systems characteristic of stroke,
traumatic head injury and neurological diseases.
The Company plans to continue to develop proprietary CNS and PNS cell lines
with corporate collaborators to identify and functionally validate specific
genes and their regulatory pathways involved in neurological diseases. Signal
believes genomic information obtained from these cell lines may provide a
foundation for identifying novel drugs that regulate CNS genes involved in
neurological diseases (Alzheimer's and Parkinson's disease, head trauma and
stroke) and psychiatric diseases (anxiety, depression and psychosis), and that
target disorders of the PNS (pain, incontinence and peripheral neuropathies).
Applying the Company's functional genomics capabilities, researchers at Signal
have generated a library of differentially expressed genes from an in vitro
model of Alzheimer's disease. Signal also has developed a proprietary CNS whole
cell screening assay for inhibitors of neurodegeneration induced by cytokines
and growth factor withdrawal. Further, the Company is investigating the role of
MAP kinase targets, including JNK and p38, in neurodegeneration. One such
target, JNK3, has been validated in animal models and is being formatted in a
high throughput screening assay for drug discovery. As part of its neurogenomics
initiative, Signal is collaborating with Organon to discover genomic drug
targets involved in neurological diseases.
In September 1996, Signal commenced a three-year research collaboration
with Roche Bioscience to develop human PNS cell lines for use in target and drug
discovery directed toward the treatment of pain and incontinence. Signal
subsequently developed and transferred to Roche Bioscience certain PNS cell
lines for potential use in Roche Bioscience's target and drug discovery
programs. Signal retains the right to use the PNS cell lines in other
therapeutic areas, such as peripheral neuropathies.
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In February 1998, Signal entered into a two-year research collaboration with
Nippon Kayaku to optimize a lead compound discovered by Nippon Kayaku for use in
treating diabetic and chemotherapy-induced peripheral neuropathies. See
"--Research and Development Partners."
CARDIOVASCULAR DISEASE PROGRAM
Cardiovascular disease, including congestive heart failure, myocardial
infarction and stroke, largely results from restricted blood flow caused by
atherosclerosis and hypertension. Cardiovascular disease is the leading cause of
death in the United States and Europe and results in an estimated 12 million
annual deaths worldwide according to the World Health Organization. In the
United States, approximately 58 million people are afflicted with cardiovascular
disease, leading to an estimated 960,000 deaths each year. In 1998,
pharmaceutical sales of cardiovascular drugs will exceed $14.8 billion in the
United States, according to the American Heart Association. Several classes of
cardiovascular drugs have been developed to prevent and treat chronic
cardiovascular disease, including beta blockers, calcium channel blockers and
ACE inhibitors designed to maintain proper blood vessel dilation and normal
blood flow. While these drugs reduce disease morbidity and mortality, they also
cause a number of adverse side effects such as depression, headaches and
fatigue. None of these classes of cardiovascular drugs acts on the molecular
mechanisms of cardiovascular disease which damage vessel walls and impair blood
flow.
Abnormalities in the expression of endothelial and smooth muscle genes in
vascular tissue play a fundamental role in cardiovascular disease. When
endothelial cells are activated by injury or trauma, these cells frequently
overproduce such proteins as cell adhesion molecules, growth factors and
cytokines, leading to the formation of lesions that block normal blood flow and
cause vasculitis and atherosclerosis. Many of these proteins are controlled by
the NF-kB, JNK and p38 gene regulating pathways. Activated or damaged
endothelial cells also can induce genes in vascular smooth muscle cells. These
genes cause the proliferation of smooth muscle cells, leading to vessel-wall
thickening and impaired blood flow. NF-kB and MAP kinase pathways have been
demonstrated to be over-activated in animal models of angioplasty-induced
restenosis.
The Company currently is using its KAST system to identify selective
inhibitors of its IKK1 and IKK2, JNK and p38-2 targets. The Company has
identified inhibitors of these targets in its biochemical screens, and certain
of these compounds are undergoing lead optimization. Signal plans to evaluate
active compounds in secondary assays which use proprietary human vascular cell
lines to assess their cardioprotective effects. In July 1996, the Company
entered into a three-year collaboration with Organon, amended in January 1998,
to discover genomic drug targets in cardiovascular disease. In November 1997,
the Company entered into a three-year collaboration with Ares-Serono to develop
inhibitors of NF-kB for potential treatment of cardiovascular diseases. See
"--Research and Development Partners."
CANCER PROGRAM
Cancer is characterized by uncontrolled growth, proliferation and migration
of cells. Malignancies result from abnormalities in the expression of genes that
regulate cell proliferation, migration and cell death. In 1997, cancer was the
second leading cause of death in the United States with 560,000 deaths and an
estimated 1.2 million new cancer cases. According to the American Cancer
Society, the oncolytic drug market totaled approximately $1.6 billion in the
United States and $4.7 billion worldwide in 1996.
Signal is elucidating several gene regulating pathways which play a
fundamental role in tumor growth and metastasis, including the JNK and c-Fos
pathways, the NF-kB pathway regulated by IKK1 and IKK2, NIK and the IkB ligases,
as well as the ERG pathway that controls IL-6 production. These pathways control
the expression of specific sets of genes involved in cancer, including: (i)
cytokines and growth factors which promote the growth of cancer cells, (ii) cell
adhesion molecules and tissue-destructive enzymes which enable tumors to spread
to distant sites in the body and invade normal
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tissues and organs, (iii) angiogenic growth factors that vascularize and thereby
facilitate the growth of newly established tumors, and (iv) certain other
factors which make cancer cells resistant to chemotherapy and radiation therapy.
Signal is designing new classes of drugs that target abnormalities in
inducible gene regulating pathways to inhibit the transformation, growth and
spread of cancer without affecting other essential gene regulating pathways.
Applying its high throughput screening capabilities, the Company has identified
a novel class of IL-6 inhibitors which demonstrate anti-proliferative activity
in vitro in human breast cancer cells. The Company currently is optimizing small
molecule inhibitors of IL-6, in addition to leads identified in Signal's screens
for NF-kB and JNK pathway inhibitors. Additionally, Signal and its collaborators
are developing a high throughput screening assay for c-Fos and are working to
identify IkB ligase drug targets. Signal plans to evaluate active compounds in
secondary assays that use tumor cell lines to assess anti-cancer effects. The
Company believes that drugs which selectively inhibit these targets may be
useful in treating several cancers, including lung, breast and ovarian
carcinomas, myelomas and leukemias, and may cause fewer dose-limiting side
effects than current chemotherapies.
In November 1997, the Company initiated a three-year collaboration with
Ares-Serono to develop drugs that target the NF-kB pathway for the potential
treatment of certain cancers. See " --Research and Development Partners."
VIROLOGY PROGRAM
Viruses are pathogenic microorganisms that infect cells and subsequently
use the biochemical machinery of their host cells to produce new viruses. An
estimated 30 million people are infected with HIV and 50 million people are
infected with HCV throughout the industrialized world. Other viral pathogens
being transmitted at epidemic rates include the herpes simplex-2 virus and HPV,
both of which cause chronic, lifelong genital infections, and afflict an
estimated 31 million and six million people in the United States, respectively.
Despite the high incidence of chronic viral infections, only a limited number of
antiviral drugs have been approved to date. New classes of antivirals are needed
which act on novel, virus-specific targets while overcoming problems of toxicity
and viral resistance.
Signal is applying its expertise in gene regulation to the discovery of
small molecule antiviral drugs that selectively inhibit viral genes. The Company
believes that gene regulating antivirals may provide more potent and selective
therapy due to three factors: (i) viral gene regulating targets are structurally
different from human factors and, therefore, potentially may be used to inhibit
viral replication without interfering with normal human cellular functions, (ii)
each virus possesses distinct transcription factors that distinguish it from
other viruses, facilitating the design of virus-specific therapeutics, and (iii)
drugs which target these mechanisms will be useful in the treatment of viruses
resistant to current therapies.
Signal's viral infection program is directed toward six viral gene
regulating targets: two regulatory proteins for HCV, a transcription factor for
HIV, the E2 transcription factor for HPV, the ICP4 transcription factor for HSV
and the IE86 transcription factor for CMV. The Company and its collaborators
have validated each of these targets in vitro. Signal has developed proprietary
viral infection assays for identifying novel inhibitors of HPV, HSV and CMV gene
activation. The Company is developing target-specific screening assays for small
molecule HCV and HIV inhibitors as part of its three-year collaboration with
DuPont Merck initiated in December 1997. Active compounds have been identified
in the Company's HSV and CMV screens. See "--Research and Development Partners."
RESEARCH AND DEVELOPMENT PARTNERS
Partnerships with pharmaceutical and biopharmaceutical companies are an
integral part of Signal's business strategy. To date, Signal has established a
number of collaborative agreements and has received payments of $20.8 million
thereunder. Signal's principal collaborative agreements are with Ares-Serono,
Roche Bioscience, Nippon Kayaku, Organon and DuPont Merck. In addition, the
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Company has licensed worldwide rights for a drug lead to Tanabe. There can be no
assurance that the Company will maintain its existing collaborative or licensing
arrangements or establish any additional arrangements or that its current or
future relationships, if established, will result in receipt by the Company of
milestone payments, the development of marketable pharmaceutical products or
receipt by the Company of significant royalties on sales of such products.
ARES-SERONO
In November 1997, Signal entered into a collaborative agreement with
Ares-Serono, under which Ares-Serono agreed to fund certain research for an
initial three-year period, which term will automatically be extended for
additional three-year periods unless earlier terminated as described below. The
Ares-Serono collaboration is focused on identifying compounds that modulate
NF-kB gene regulating pathways to which Ares-Serono has rights for all clinical
indications in all countries of the world excluding Asia. Ares-Serono S.A. has
purchased approximately $10.0 million of Signal's Series E and Series F
Preferred Stock. Ares-Serono also has agreed to provide Signal with annual
research and development support for Signal's cost of this program at a
percentage level approximating Ares-Serono's relative share of worldwide
marketing rights. In addition, Ares-Serono is obligated to make payments to
Signal based on the achievement of certain research and development milestones
and to pay Signal royalties on any future product sales arising from the
collaboration.
Pursuant to an exclusive license granted by Signal, Ares-Serono will be
solely responsible for preclinical and clinical development of drug candidates
and the development and commercialization of any drugs arising from the
collaboration in all countries of the world excluding Asia. Signal has co-
commercialization rights for all products marketed in the United States,
exercisable at any time during the term of the agreement and up to 30 days
following receipt of notice from Ares-Serono of the filing of an NDA or
equivalent regulatory application, with respect to products arising from the
collaboration. In the event that Signal exercises co-commercialization rights,
Signal will forego royalties in exchange for a share of product revenue, and a
portion of revenue will be payable to Ares-Serono as reimbursement for
development costs.
Unless, at least six months prior to the expiration of the initial
three-year term, Ares-Serono gives Signal notice of its decision to terminate
the research being conducted pursuant to the collaboration agreement, such
research and Ares-Serono's research support obligation will continue for an
additional three-year period, subject to each party's early termination rights.
Ares-Serono may terminate the agreement upon six months' notice any time after
the end of the initial three-year term.
ROCHE BIOSCIENCE
In August 1996, Signal entered into a three-year collaborative agreement
with Roche Bioscience. Under the agreement, Signal is applying its proprietary
cell line development technology toward the development of human PNS cell lines
for use by Roche Bioscience in target and drug discovery. Pursuant to an
exclusive, worldwide, royalty-free license granted by Signal, Roche Bioscience
may utilize these PNS cells to discover and commercialize drugs for treating
pain, incontinence and peripheral vascular disease. Under the agreement, Signal
retains the right to use the PNS cell lines for its internal target and drug
discovery programs in other therapeutic fields. Roche Bioscience has paid Signal
a license fee and has agreed to pay annual research and development support at a
level approximating Signal's cost of the PNS cell line program. To date, Signal
has developed and transferred to Roche Bioscience clonal human PNS cell lines as
specified in the collaborative agreement.
Roche Bioscience may terminate the agreement beginning in August 1998 at
its discretion upon 90 days' written notice. If the collaboration agreement is
terminated for any reason, the licenses granted to Roche Bioscience by Signal
shall survive for as long as Roche Bioscience continues to pay annual license
maintenance fees to Signal. As long as Roche Bioscience pays these annual
license maintenance fees, Signal may not enter into any other collaborations
with respect to cloned immortalized PNS cell lines in the covered fields of
pain, incontinence and peripheral vascular disease.
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NIPPON KAYAKU
In February 1998, Signal entered into a collaborative agreement with Nippon
Kayaku under which Nippon Kayaku agreed to fund certain research at Signal for
two years. Under the agreement, Signal and Nippon Kayaku will develop and
commercialize products based on or derived from a compound supplied by Nippon
Kayaku for the treatment and prevention of diseases and disorders of the CNS and
PNS. Signal will perform combinatorial chemistry and use its proprietary human
neuronal cell lines to further optimize the compound and characterize its
mechanism of action prior to the start of clinical studies. Nippon Kayaku has
agreed to provide Signal with annual research and development support at a level
approximating Signal's cost of the program. Each party also is obligated to pay
the other royalties on future product sales arising from the collaboration.
Pursuant to a commercialization agreement to be concluded by Signal and
Nippon Kayaku following the initial research phase of the collaboration, Nippon
Kayaku will be solely responsible for the development and commercialization of
products in Japan for the treatment or prevention of diseases and disorders of
the PNS and will receive co-commercialization rights in Japan with respect to
products for the treatment and prevention of CNS diseases and disorders. Under
such future commercialization agreement, development and commercialization
rights for products outside Japan for the treatment or prevention of both PNS
and CNS diseases and disorders will be agreed upon by the parties on a
product-by-product basis, with Nippon Kayaku not guaranteed any minimum level of
co-commercialization rights. Signal and Nippon Kayaku also have granted each
other co-exclusive commercialization rights outside the field with respect to
each analog compound arising from the collaboration which is developed and
commercialized by one or both of the parties.
ORGANON
In July 1996, Signal entered into a collaborative agreement with Organon
for the discovery of new genomic targets, under which Organon agreed to fund
certain research at Signal for three years. Such agreement may be extended for
up to two additional years by mutual consent of the parties. Pursuant to an
amendment dated January 1998, Organon may terminate the research, effective in
either January 1999 or July 1999, for failure to meet certain milestones by
either October 1998 or January 1999, respectively. Initially, Signal will
utilize its cellular, molecular and genomic technologies to identify and
validate novel genes in certain target tissues. Signal will then develop high
throughput screening assays for use by Organon in identifying small molecule
drugs to treat cardiovascular, neurological, gynecological and certain other
diseases. Pursuant to this collaboration, Organon has received rights for, and
will be solely responsible for, the worldwide development and commercialization
of any drugs arising from the collaboration.
To date, Organon has paid Signal a license fee and annual research and
development support payments at a level approximating Signal's cost of this
program. In addition, Organon is obligated to make payments to Signal based on
the achievement of certain research and development milestones, and Organon must
pay Signal royalties on any future product sales arising from the collaboration.
DUPONT MERCK
In December 1997, Signal entered into a collaborative agreement with DuPont
Merck, under which DuPont Merck agreed to fund certain research at Signal for
three years. The agreement may be extended for up to three additional years at
DuPont Merck's option. The DuPont Merck collaboration is focused on identifying
compounds for the treatment or prevention of HCV and HIV infections. Signal also
has granted DuPont Merck an option, exercisable through August 1998, to expand
the collaboration to include the identification of compounds directed toward an
additional viral target. Pursuant to this collaboration, Signal and Dupont Merck
will be responsible for developing target specific screening assays and will be
jointly responsible for identifying lead compounds. DuPont Merck will be solely
responsible for lead optimization and the worldwide development and
commercialization of any drugs arising from the collaboration.
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DuPont Merck has paid Signal a license fee and has agreed to provide Signal
with annual research and development support at a level approximating Signal's
cost of these programs. DuPont Merck also is obligated to make payments to
Signal and to purchase its Common Stock upon the achievement of certain research
and development milestones, and to pay Signal royalties on any future product
sales arising from the collaboration. In addition, DuPont Merck has agreed to
purchase $2.0 million of Common Stock of Signal in a private transaction
concurrent with the closing of this offering at a price per share equal to the
initial public offering price.
TANABE
From March 1996 to March 1998, Signal and Tanabe were engaged in a
collaborative program under which Tanabe funded certain research by Signal in
target and drug discovery in the fields of inflammatory disease and
osteoporosis. In connection with the collaboration, Tanabe paid Signal a license
fee and reimbursed Signal for research and development costs. Tanabe also
purchased shares of Signal's Series D Preferred Stock.
In March 1998, Signal and Tanabe mutually agreed to conclude their research
collaboration, and Tanabe licensed from Signal a lead compound that was
discovered during the collaboration. This compound has been validated in animal
models of arthritis, and may have application for the treatment of autoimmune,
inflammatory and certain other diseases. Signal retained all other intellectual
property rights, including rights to all other drug targets and drug leads,
created before or during the collaboration. Tanabe paid an additional license
fee to Signal for the exclusive worldwide license to the lead compound and is
obligated to make payments to Signal based on the achievement of certain
research and development milestones and to pay Signal royalties on any future
product sales.
LICENSE AGREEMENTS
Signal has established a number of license agreements with academic
institutions. Signal's principal license agreements are:
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
In October 1993, Signal entered into a license agreement with The Regents
of the University of California ("The Regents"), as amended in June 1997 and
February 1998, pursuant to which Signal obtained a worldwide exclusive license
for the JNK signaling enzyme based on the research of Dr. Michael Karin, a
scientific founder and advisor of the Company. The license also covers methods
for the production and screening of neuroblasts. In addition, Signal has secured
from The Regents exclusive worldwide license rights to certain patents filed by
Dr. Karin relating to specified NF-kB signaling molecules, IKK1 and IKK2. Under
the license agreement, Signal has paid initial license fees, certain extension
payments and issued Common Stock to The Regents, and is obligated to make
certain royalty and milestone payments. The term of the license remains in
effect for the life of the last-to-expire patent covered under the agreement.
THE UNIVERSITY OF MASSACHUSETTS
In October 1996 and 1997, Signal entered into worldwide exclusive license
agreements with the University of Massachusetts ("U Mass"). Pursuant to the
license agreements, Signal has exclusive rights under a certain patent
application and nonexclusive worldwide rights under certain unpatented know-how
to develop drugs targeting JNK and two intracellular signaling proteins in the
p38 pathway, MKK3 and MKK4, based on the research of Dr. Roger J. Davis, a
scientific advisor of the Company. Upon entering into both of the license
agreements, Signal paid a license fee and issued shares of Common Stock to U
Mass and is obligated to make certain royalty and milestone payments. The term
of the licenses remains in effect for the longer of 10 years or the life of the
last-to-expire patent under the agreements.
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PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain and
retain patent protection for its proprietary technologies, targets and potential
products, effectively preserve its trade secrets and to operate without
infringing the proprietary rights of third parties. Because of the substantial
length of time and expense associated with bringing potential products through
the development and regulatory approval processes to reach the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes.
Accordingly, the Company seeks patent protection for its proprietary technology,
targets and potential products. As of April 30, 1998, the Company owned or had
licensed five issued U.S. patents, 15 notices of allowance from the U.S. Patent
and Trademark Office, no corresponding issued foreign patents, 21 pending U.S.
patent applications, as well as seven corresponding international filings under
the Patent Cooperation Treaty, and 43 pending foreign national patent
applications. However, there can be no assurance that the Company or its
collaborators have developed or will continue to develop potential products or
processes that are patentable or that patents will issue from any of the
Company's pending applications, including patent applications that have been
allowed. There also can be no assurance that the Company's or its collaborators'
current patents, or patents that issue on pending applications, will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection or competitive advantages to the Company.
Patent applications in the U.S. are maintained in secrecy until patents issue,
patent applications are not generally published until many months or years after
they are filed and publication of technological developments in the scientific
and patent literature often occurs long after the date of such developments.
Accordingly, the Company cannot be certain that it or one of its collaborators
was the first to invent the subject matter covered by the patent applications or
that it or one of its collaborators was the first to file patent applications
for such inventions. Further, there can be no assurance as to the success or
timeliness in obtaining any patents, that the breadth of claims obtained, if
any, will provide adequate protection of the Company's proprietary technology,
targets or products, or that the Company or its licensors will be able to or
will in fact adequately enforce any such claims to protect its proprietary
technology, targets or potential products.
Patent law relating to the scope and enforceability of claims in the fields
in which the Company operates is still evolving. The patent positions of
biopharmaceutical and pharmaceutical companies, including the Company, are
highly uncertain and involve complex legal and technical questions for which
legal principles are not firmly established. The degree of future protection for
the Company's proprietary rights, therefore, is highly uncertain. In this
regard, there can be no assurance that independent patents will issue from the
Company's and its licensors' patent applications, which include many
interrelated applications directed to common or related subject matter. Further,
there may be issued patents and pending applications owned by others directed to
technologies relevant to the Company's, its licensors' or its collaborators'
research, development and commercialization efforts. There can be no assurance
that the Company's or its collaborators' technology can be developed and
commercialized without a license to such patents or that such patent
applications will not be granted priority over patent applications filed by the
Company, its licensors or one of its collaborators. Furthermore, there can be no
assurance that third parties will not independently develop similar or
alternative technologies to those of the Company, its licensors or any of its
collaborators, duplicate any of the Company's, its licensors' or its
collaborators' technologies or design around the patented technologies developed
by the Company, its licensors or its collaborators, any of which may have a
material adverse effect on the Company's business, financial condition and
results of operations.
The commercial success of the Company depends significantly on its ability
to operate without infringing the patents and proprietary rights of third
parties, and there can be no assurance that the Company's, its licensors' and
its collaborators' technologies do not and will not infringe the patents or
proprietary rights of others. A number of pharmaceutical companies,
biopharmaceutical companies, independent researchers, universities and research
institutions may have filed patent applications or may have been granted patents
that cover technologies similar to the technologies owned, optioned by
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or licensed to the Company or its corporate collaborators. For instance, a
number of patents may have issued and may issue in the future on certain targets
or their use in screening assays that could prevent the Company and its
collaborators from developing screens using such targets, compounds relating to
such targets or relate to certain other aspects of technology utilized or
expected to be utilized by the Company. In addition, the Company is unable to
determine all of the patents or patent applications that may materially affect
the Company's or its corporate collaborators' ability to make, use or sell any
potential products. The Company is aware of one allowed U.S. patent application
relating to certain methods for transcriptional modulation. Signal believes that
it has not infringed, and is not currently infringing, the claims of the allowed
application. Nonetheless, the Company may in the future be required to obtain a
license to such allowed patent, and there can be no assurance that such a
license will be available on commercially reasonable terms, if at all. In
addition, the Company is aware of an issued U.S. patent claim for certain human
MAP kinases, including MAP kinases in the p38 pathway, which may be useful as
targets for drug discovery. The Company is negotiating a license to patent
rights covering such MAP kinase targets that may be useful in the Company's
research programs, although there can be no assurance that such a license will
be available on commercially reasonable terms, if at all. Any conflicts
resulting from third-party patent applications and patents could significantly
reduce the coverage of the patents owned, optioned by or licensed to the Company
or its collaborators and limit the ability of the Company or its collaborators
to obtain meaningful patent protection. If patents are issued to third parties
that contain competitive or conflicting claims, the Company, its licensors or
its collaborators may be enjoined from pursuing research, development or
commercialization of potential products or be required to obtain licenses to
these patents or to develop or obtain alternative technology. There can be no
assurance that the Company or its collaborators will not be so enjoined or will
be able to obtain any license to the patents and technologies of third parties
on acceptable terms, if at all, or be able to obtain or develop alternative
technologies. If the Company or any of its collaborators is enjoined from
pursuing its research, development or commercialization activities or if any
such license is or alternative technologies are not obtained or developed, the
Company or such collaborator may be delayed or prevented from commercializing
its potential products, which would result in a material adverse effect on the
Company's business, financial condition and results of operations.
The drug discovery industry has a history of patent litigation and there
will likely continue to be numerous patent litigation suits concerning drug
discovery technologies and potential products. The patent positions of
pharmaceutical, biopharmaceutical and drug discovery companies, including the
Company, generally are uncertain and involve complex legal and factual
questions. Litigation to establish the validity of patents, to defend against
patent infringement claims of others and to assert infringement claims against
others can be expensive and time consuming, even if the outcome is favorable. An
outcome of any patent prosecution or litigation that is unfavorable to the
Company or one of its licensors or collaborators may have a material adverse
effect on the Company. In particular, litigation may be necessary to enforce any
patents issued or licensed to the Company, its licensors, or its collaborators,
to protect trade secrets or know-how of the Company, its licensors or its
collaborators or to determine the scope and validity of a third party's
proprietary rights. The Company could incur substantial costs if litigation is
required to defend itself in patent suits brought by third parties, if the
Company participates in patent suits brought against or initiated by its
licensors or collaborators or if the Company initiates such suits, and there can
be no assurance that funds or resources would be available to the Company in the
event of such litigation. Additionally, there can be no assurance that the
Company, its licensors or its collaborators would prevail in any such action. An
adverse outcome in litigation or an interference to determine priority or other
proceeding in a court or patent office could subject the Company to significant
liabilities, require disputed rights to be licensed from or to other parties or
require the Company, its licensors or its collaborators to cease using certain
technology, any of which may have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to patent protection, the Company also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities. In an effort to maintain
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the confidentiality and ownership of trade secrets and proprietary information,
the Company requires employees, consultants and certain collaborators to execute
confidentiality and invention assignment agreements upon commencement of a
relationship with the Company. These agreements generally provide that all
confidential information developed or made known to the individual by the
Company during the course of the individual's relationship with the Company will
be kept confidential and not disclosed to third parties except in specific
circumstances. The agreements also generally provide that all inventions
conceived by the individual in the course of rendering services to the Company
shall be the exclusive property of the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's trade secrets, confidential information or inventions in the event of
unauthorized use or disclosure of such information or that adequate remedies
would exist in the event of such unauthorized use or disclosure. The loss or
exposure of trade secrets possessed by the Company could adversely affect its
business. Like many high technology companies, the Company may from time to time
hire scientific personnel formerly employed by other companies involved in one
or more areas similar to the activities conducted by the Company. Although the
Company requires its employees to maintain the confidentiality of all
confidential information of previous employers, there can be no assurance that
the Company or these individuals will not be subject to allegations of trade
secret misappropriation or other similar claims as a result of their prior
affiliations.
COMPETITION
Competition among pharmaceutical and biopharmaceutical companies to
identify drug targets and drug candidates for development is intense and is
expected to increase. In the pharmaceutical industry, the Company competes with
the research and development departments of pharmaceutical and biopharmaceutical
companies and other commercial enterprises, as well as numerous academic and
research institutions and governmental agencies. In addition, the pharmaceutical
and biopharmaceutical industries are subject to rapid and substantial
technological change. Pharmaceutical and biopharmaceutical companies and others
are conducting research in various areas which overlap with the Company's
technology platform, either on their own or in collaboration with others. There
can be no assurance that pharmaceutical and biopharmaceutical companies which
compete with the Company in specific areas will not merge or enter into
collaborations or joint ventures or other alliances with one or more other such
companies or academic and research institutions and become substantial
competitors or that the Company's collaborators will not initiate or expand
their own internal target and drug discovery and development efforts.
At the present time, the Company has not conducted any clinical trials and
has no commercial manufacturing capability, sales or marketing force. Many of
the Company's competitors and potential competitors have substantially greater
capital resources, research and development resources, manufacturing, sales and
marketing experience and production facilities than does the Company.
Additionally, many of these competitors have significantly greater experience
than does the Company in undertaking target and drug discovery, preclinical
product development and testing and clinical trials of potential pharmaceutical
products and obtaining FDA and other regulatory approvals. Smaller companies
also may prove to be significant competitors, particularly through proprietary
research discoveries and collaborative arrangements with large pharmaceutical
and established biopharmaceutical companies. Many of these competitors have
significant products that have been approved or are in development and operate
large, well funded research and development programs. Academic institutions,
governmental agencies and other public and private research organizations also
conduct research, seek patent protection and establish collaborative
arrangements for the discovery, development and commercialization of new
pharmaceutical products. In addition, these companies and institutions compete
with the Company in recruiting and retaining highly qualified scientific and
management personnel. There can be no assurance that the Company's competitors
will not discover lead compounds, develop more effective, safer, more affordable
or more easily administered potential products or achieve patent protection or
commercialize potential products sooner than the Company.
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Failure to compete effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
The Company's and its collaborators' research, preclinical testing and
clinical trials of their respective potential products, if any, and the
manufacturing and marketing of their potential products, will be subject to
extensive and rigorous regulation by numerous government authorities in the
United States and in other countries where the Company and its collaborators
intend to test, manufacture and market their potential products. Prior to
marketing any product developed by the Company, the Company or its
collaborators, as applicable, must undergo an extensive regulatory approval
process. This regulatory process, which includes preclinical testing and
clinical trials of each potential product to establish its safety and efficacy,
will take many years and require the expenditure of substantial resources, and
also may include post-marketing surveillance. Data obtained from preclinical
testing and clinical trials are susceptible to varying interpretations which
could delay, limit or prevent regulatory approval. In addition, delays or
rejection may be encountered based upon changes in FDA policy for drug approval
during the period of product development and FDA regulatory review of each
submitted new drug application ("NDA") or product license application ("PLA").
Similar delays or rejection also may be encountered in foreign countries. There
can be no assurance that regulatory approval will be obtained for any potential
products developed by the Company or its collaborators. Moreover, regulatory
approval may entail limitations on the indicated uses of a drug. Further, even
if regulatory approval is obtained, a marketed drug and its manufacturer are
subject to continuing review, and discovery of previously unknown problems with
a drug or manufacturer can result in the withdrawal of a drug from the market or
a significant decrease in market demand, which would have an adverse effect on
the Company's business, financial condition and results of operations.
Violations of regulatory requirements at any stage, including preclinical
testing and clinical trials, the approval process or post-approval, may result
in various adverse consequences including a delay by the FDA or other applicable
regulatory authority in approving or its refusal to approve a potential product,
withdrawal of an approved drug from the market and the imposition of criminal
penalties against the manufacturer and NDA or PLA holder. Neither the Company
nor its collaborators has submitted any IND applications for any potential
product of the Company, and none has been approved for commercialization in the
United States or internationally. No assurance can be given that the Company or
its collaborators will be able to obtain FDA or other applicable regulatory
authority approval for any potential products. Failure to obtain requisite
regulatory approvals or failure to obtain approvals of the scope requested will
delay or preclude the Company or its collaborators from marketing the Company's
or its collaborators' products or limit the commercial use of the potential
products and would have material adverse effect on the Company's business,
financial condition and results of operations.
MANUFACTURING
To date, the Company has not manufactured any products for preclinical,
clinical or commercial purposes and does not have any manufacturing facilities.
The Company intends to utilize third-party contract manufacturers or its
corporate collaborators for the production of material for use in preclinical
and clinical trials and for the manufacture of future products for
commercialization. In the event that the Company is unable to secure such
outside manufacturing capabilities, it will not be able to conduct preclinical
product development, clinical trials or commercialize its potential products as
planned. Even if the Company were able to establish its own internal
manufacturing capability, doing so would require the expenditure of significant
resources which could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company or any outside manufacturers can produce potential products of
suitable quality in sufficient quantity in a cost-effective manner, if at all.
The manufacture of the Company's potential products for preclinical and clinical
trials and commercial purposes is subject to current Good Manufacturing
Practices ("cGMP") regulations promulgated by the FDA and other applicable
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domestic and foreign regulations. No assurance can be given that in the future
the Company or any outside manufacturers can maintain full compliance with cGMP
regulations or other applicable regulations.
EMPLOYEES
As of April 30, 1998 the Company had 82 full-time employees, including 39
with Ph.D. degrees. Of the Company's workforce, 66 employees are engaged in
discovery research and 16 are engaged in business development, finance and
administration. The Company has assembled a group of experienced scientists and
managers skilled in each phase of target and drug discovery, including cell line
development, functional genomics, molecular biology, assay development,
automated high throughput screening and medicinal chemistry. The Company also
retains outside consultants. None of the Company's employees are covered by
collective bargaining arrangements, and management considers its relationships
with its employees to be good.
FACILITIES
Signal currently leases 23,000 square feet of laboratory and office space
at 5555 Oberlin Drive, San Diego, California. The Company's lease for such
facility expires on January 31, 2001, with an option to renew the lease for two
additional periods of one year each. Signal also leases 11,000 square feet of
laboratory and office space at 5626 Oberlin Drive, San Diego, California. The
Company's lease for such facility expires on December 31, 2003. The Company
believes that its existing facilities are adequate to meet its business
requirements for the near-term and that additional space will be available on
commercially reasonable terms, if required.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings at this time.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board consists of its five scientific
founders, as well as other individuals with expertise in the fields of
immunology, cytokine biology, virology and synthetic chemistry. The Scientific
Advisory Board generally advises the Company concerning long-term scientific
planning, research and development, and also evaluates the Company's research
programs, recommends personnel to the Company and advises the Company on
specific scientific and technical issues. The Scientific Advisory Board meets at
least two times per year, and certain individual scientific advisors consult
with and meet informally with the Company on a more frequent basis. Certain
scientific advisors own shares of Common Stock of the Company, and the Company
has entered into consulting agreements with all of its scientific advisors.
None of the scientific advisors is employed by the Company, and any or all
of such advisors may have commitments to or consulting or advisory contracts
with their employers or other entities that may conflict or compete with their
obligations to Signal. Accordingly, such persons are expected to devote only a
small portion of their time to Signal. The members of Signal's Scientific
Advisory Board are:
SCIENTIFIC FOUNDERS
Fred H. Gage, Ph.D., is a Professor in the Laboratory of Genetics of the
Salk Institute for Biological Studies. He is an internationally respected
innovator in the fields of neurological diseases and transplantation. Dr. Gage
has won the IPSEN Prize, the Ameritec Prize, the Metropolitan Award, the
Chancellor's Associate Award and the Allied Signal Award.
Stephen F. Heinemann, Ph.D., is a Professor and Director of the Molecular
Neurobiology Laboratory at The Salk Institute and an external member of the Max
Planck Institute. He is considered one of the foremost experts in the field of
receptor neurobiology and is a member of the National Academy of Sciences.
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Tony Hunter, Ph.D., is a Professor at The Salk Institute, an American
Cancer Society Research Professor. Dr. Hunter is a world-renowned expert in the
field of gene regulating kinases and established their roles in the regulation
of cellular growth and tumor development. Dr. Hunter was elected a fellow of the
Royal Society of London and has received several awards for his research,
including a 1994 Gairdner Foundation International Award.
Michael Karin, Ph.D., is a Professor in the Department of Pharmacology,
University of California, San Diego. He is an internationally recognized expert
in the field of transcriptional regulation and has made fundamental
contributions to the understanding of a variety of gene regulating pathways,
including JNK, FRK and NF-k B.
Inder Verma, Ph.D., is Chairman of Signal's Scientific Advisory Board. Dr.
Verma is an American Cancer Society Professor of Molecular Biology and
Co-Director of the Laboratory of Genetics at The Salk Institute, and is a member
of the National Academy of Sciences. Dr. Verma is internationally recognized for
his work in the field of NF-k B gene regulation.
OTHER SCIENTIFIC ADVISORY BOARD MEMBERS
Elliot J. Androphy, M.D., is the Associate Chairman of the Department of
Dermatology at the New England Medical Center and Tufts University School of
Medicine, as well as a practicing physician. He is considered to be a world
expert in the field of HPV, where he has made seminal contributions.
Melanie Cobb, Ph.D., is a Professor in the Department of Pharmacology at
the University of Texas Southwestern Medical Center in Dallas. Dr. Cobb is
internationally renowned for her research on MAP kinase gene regulating
pathways.
Roger J. Davis, Ph.D., is a Professor in Molecular Medicine and the
Department of Biochemistry & Molecular Biology at the University of
Massachusetts Medical Center, and an Associate Investigator at the Howard Hughes
Medical Institute. Dr. Davis is regarded as one of the leading researchers
worldwide in the field of signal transduction. Dr. Davis is a principal or
co-discoverer of several important gene regulating kinases, including molecular
mechanisms of the JNK and p38 signaling pathways.
Neal A. DeLuca, Ph.D., is an Associate Professor in the Department of
Molecular Genetics and Biochemistry at the University of Pittsburgh School of
Medicine. Dr. DeLuca is an internationally recognized researcher in the field of
herpes virology.
Charles Dinarello, M.D., is a Professor of Medicine at the University of
Colorado School of Medicine in Denver. Dr. Dinarello is an internationally
respected expert in the field of cytokines and their role in immunological and
infectious diseases.
Anjana Rao, Ph.D., is an Associate Professor of Pathology at the Harvard
Medical School. Dr. Rao has conducted seminal research on signal transduction
mechanisms of the human immune system, including the NF-ATp and NF-k B
transcription factors. Dr. Rao is a recipient of the Leukemia Society of America
Scholar Award.
K. Barry Sharpless, Ph.D., is the William M. Keck Professor of Chemistry in
the Department of Chemistry at The Scripps Research Institute. He is an
internationally renowned synthetic chemist relating to his work in asymmetric
chemical synthesis and has received numerous honors for his work including the
King Faisal International Prize for Science. Dr. Sharpless is a fellow of the
American Academy of Arts and Sciences and the National Academy of Sciences, and
is a Guggenheim Fellow.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information regarding the Company's
executive officers, directors and key employees as of May 15, 1998:
NAME AGE POSITION
---- --- --------
Alan J. Lewis, Ph.D. ..................... 52 President, Chief Executive Officer and
Director
Carl F. Bobkoski.......................... 45 Executive Vice President
David W. Anderson, Ph.D. ................. 46 Senior Vice President, Drug Development
Bradley B. Gordon......................... 44 Vice President Finance, Chief Financial
Officer and Corporate Secretary
Merl F. Hoekstra.......................... 38 Vice President, Target Discovery
Douglas E. Richards....................... 35 Vice President, Corporate Development
Miguel S. Barbosa, Ph.D. ................. 40 Senior Director of Experimental
Therapeutics and Virology
Anthony M. Manning, Ph.D. ................ 36 Director of Inflammation and Immunology
Shripad S. Bhagwat, Ph.D. ................ 42 Director of Medicinal Chemistry
Mark J. Suto, Ph.D. ...................... 42 Director of Technology Management
John P. Walker............................ 49 Chairman of the Board
Brook H. Byers(1)......................... 52 Director
Luke B. Evnin, Ph.D.(1)................... 34 Director
Harry F. Hixson, Ph.D.(2)................. 59 Director
Patrick F. Latterell(1)(2)................ 39 Director
Arnold Oronsky, Ph.D.(2).................. 57 Director
- ------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Alan J. Lewis, Ph.D. has served the Company as Chief Executive Officer and
director since 1996 and as President of the Company since 1994. Prior to joining
the Company, Dr. Lewis worked for 15 years at the Wyeth-Ayerst Research division
of American Home Products Corporation ("Wyeth-Ayerst"), a pharmaceutical
company, where he served as Vice President of Research from 1990 to 1994. At
Wyeth-Ayerst, Dr. Lewis was responsible for research efforts in CNS,
cardiovascular, inflammatory, allergy and bone metabolism diseases. Dr. Lewis
currently serves as a director of Allergan Specialty Therapeutics, Inc., a
pharmaceutical company. He holds a Ph.D. in Pharmacology from the University of
Wales in Cardiff and completed his post-doctoral training at Yale University.
Carl F. Bobkoski has served the Company as Executive Vice President since
1995. Before joining Signal, from 1990 to 1995, Mr. Bobkoski was Executive Vice
President and a director at Gensia, Inc. ("Gensia"), a biopharmaceutical
company, where he was responsible for directing all commercialization activities
for proprietary products, overseeing the operations of Gensia Laboratories,
Ltd., a wholly-owned subsidiary of Gensia, and supervising product development,
finance, management information systems and corporate development. Mr. Bobkoski
received an M.B.A. from The University of Chicago.
David W. Anderson, Ph.D. has served as Senior Vice President, Drug
Development since May 1998 and served as Vice President, Drug Discovery and
Preclinical Development of the Company from 1994 to May 1998. Prior to joining
Signal, Dr. Anderson spent six years at Johnson & Johnson, a medical product and
pharmaceutical company, most recently as Director, Drug Discovery at the R.W.
Johnson Pharmaceutical Research Institute. He holds a Ph.D. in Medical
Microbiology and Immunology from
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the University of Missouri-Columbia and completed his post-doctoral training at
The University of Colorado Health Science Center.
Bradley B. Gordon has served the Company as Vice President Finance, Chief
Financial Officer and Corporate Secretary since 1994. For the seven years prior
to joining Signal, Mr. Gordon served in various management positions with
Viagene, Inc., a biopharmaceutical company acquired by Chiron Corp. in 1995,
including Corporate Vice President, Vice President Corporate Development and
Vice President, Finance. Mr. Gordon received an M.B.A. from the University of
Southern California.
Merl F. Hoekstra, Ph.D. has served the Company as Vice President, Target
Discovery since May 1998. From 1992 to 1998, Dr. Hoekstra was at ICOS
Corporation, most recently serving as Senior Director, Science, where he headed
target and drug discovery research directed toward novel signal transduction and
cell cycle pathways in the fields of inflammation and oncology. From 1989
through 1992, he was an Associate Professor in Molecular Biology and Virology at
The Salk Institute where he directed a laboratory conducting signal transduction
and human genome research. Dr. Hoekstra received his Ph.D. in Molecular Biology
and Immunology from Loyola University of Chicago, and conducted post-doctoral
research in Molecular Biology at The Research Institute of Scripps Clinic under
fellowships from the National Cancer Institute of Canada and as a Lucille P.
Markey Scholar in Biomedical Sciences.
Douglas E. Richards has served the Company as Vice President, Corporate
Development since May 1998. Before joining Signal, from 1995 to 1998, Mr.
Richards served most recently as Director of Biotechnology Licensing at
Bristol-Myers Squibb, Inc., a public pharmaceutical company. Between 1992 and
1995, Mr. Richards served as Manager of Technology Licensing at Gensia, where he
was responsible for partnering and technology licensing activities. Mr. Richards
received an M.B.A. from The University of Chicago and an M.S. in Molecular
Biology from the University of Wisconsin.
Miguel S. Barbosa, Ph.D. has served the Company as Senior Director of
Experimental Therapeutics and Virology since 1994. Prior to joining the Company,
from 1990 to 1994, Dr. Barbosa was an Assistant Professor of Microbiology at the
University of Texas Southwestern Medical Center, where he elucidated the
interaction between HPV oncoproteins and cellular tumor suppressor proteins that
results in human cervical cancer. Dr. Barbosa obtained his Ph.D. in the
department of Microbiology and Immunology at the University of California, Los
Angeles School of Medicine.
Anthony M. Manning, Ph.D. has served the Company as Director of
Inflammation and Immunology since 1996. Prior to joining Signal, from 1992 to
1996, Dr. Manning was Senior Research Scientist and NF-k B Drug Discovery
Program Team Leader at Pharmacia & Upjohn, Inc., a pharmaceutical company. Dr.
Manning received his Ph.D. in Biochemistry from the University of Otago, New
Zealand and pursued post-graduate studies in the Department of Pediatrics,
University of Otago and in the Institute for Molecular Genetics, Baylor College
of Medicine, where he was also an Assistant Professor in the Department of
Pediatrics.
Shripad S. Bhagwat, Ph.D. has served as Director of Medicinal Chemistry at
Signal since May 1998. Between 1994 and 1998, Dr. Bhagwat was Senior Group
Leader, Neuroscience Research at Abbott Laboratories, a pharmaceutical company,
with responsibility for managing the medicinal chemistry activities for two lead
optimization programs, including one drug candidate currently in clinical
development. From 1985 through 1994, Dr. Bhagwat was a staff scientist with
Ciba-Geigy Corp., a pharmaceutical company, where he managed several medicinal
chemistry programs in the fields of cardiology and virology. Dr. Bhagwat
received his Ph.D. in Organic Chemistry from the State University of New York at
Stony Brook and conducted post-doctoral research at Columbia University.
Mark J. Suto, Ph.D. has served the Company as Director of Technology
Management since January 1998. During the period from 1994 through 1997, Dr.
Suto was Director of Medicinal Chemistry at the Company. Prior to joining
Signal, from 1993 to 1994, Dr. Suto was Senior Director of Medicinal Chemistry
at Trega Biosciences, Inc. (formerly Houghten Pharmaceuticals, Inc.) ("Trega"),
a biopharmaceutical company. Prior to joining Trega, from 1982 to 1993, Dr. Suto
was a Senior
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Research Associate at Parke-Davis Pharmaceutical Research Division,
Warner-Lambert Company. Dr. Suto received his Ph.D. in Medicinal Chemistry from
the State University of New York at Buffalo.
John P. Walker has served as Chairman of the Board of the Company since
1996. Mr. Walker is currently Chairman, Chief Executive Officer and a director
of AxyS Pharmaceuticals, Inc., a public biopharmaceutical company ("AxyS"). From
1993 to 1997, he was President and Chief Executive Officer of Arris
Pharmaceutical Corporation ("Arris"), a predecessor corporation to AxyS. From
1991 to 1993, he was a venture capitalist at Alpha Venture Partners. In
addition, Mr. Walker was the Chairman and Chief Executive Officer of Vitaphore
Corporation, a biomaterials company which was sold to Union Carbide Corporation
in 1990, and for a period of 15 years was an executive with American Hospital
Supply Corporation. Mr. Walker also serves on the board of directors of
Microcide Corporation and Geron Corporation. He conducted graduate business
studies at Northwestern University Institute for Management.
Brook H. Byers has served as a director of the Company since 1993. Mr.
Byers is a general partner of Kleiner Perkins Caufield & Byers, a private
venture capital firm, which he joined in 1977. He has been the founding
president and chairman of four life sciences companies: Hybritech Incorporated,
IDEC Pharmaceuticals Corporation, Ligand Pharmaceuticals, Inc. and InSite
Vision, Inc. Mr. Byers currently serves as a director of AxyS. He also serves as
a director of a number of privately held technology companies and sits on the
University of California, San Francisco Foundation Board of Directors. Mr. Byers
received his M.B.A. from Stanford Graduate School of Business.
Luke B. Evnin, Ph.D. has served as a director of the Company since 1993.
Since March 1998, he has been a Managing Director at MPM Asset Management LLC,
which manages BB BioVentures, L.P., a healthcare venture capital fund. From 1990
to 1997, Dr. Evnin was involved in healthcare investing activities at Accel
Partners, a venture capital firm, and he remains a General Partner of Accel IV
L.P. and Accel V L.P. He currently serves on the Board of Directors of Epix
Medical, Inc. and several private companies, including Sonic Innovations. Dr.
Evnin received his Ph.D. in Biochemistry from the University of California-San
Francisco.
Harry F. Hixson, Ph.D. has served as a director of the Company since 1993.
Dr. Hixson was employed by Amgen Inc. from 1985 to 1991, where he last served as
President and Chief Operations Officer. From 1991 to present, Dr. Hixson has
been a private investor specializing in biotechnology start-up companies. From
1991 until its merger with Somatix Therapy Corporation in 1992, Dr. Hixson
served as President and Chief Executive Officer of GeneSys Therapeutics, Inc., a
biotechnology company. Dr. Hixson presently is a director of Neurocrine
Biosciences, Inc. Dr. Hixson holds a Ph.D. in Physical Biochemistry from Purdue
University and an M.B.A. from The University of Chicago.
Patrick F. Latterell has served the Company as a director since 1993, as
Chairman of the Board from 1993 to 1996, and as Chief Executive Officer from
1994 to 1996. Mr. Latterell is a General Partner of Venrock Associates, a
venture capital investment group, which he joined in 1989. Mr. Latterell
currently is a director of Vical, Inc. and several private biomedical companies.
Mr. Latterell holds an M.B.A. from Stanford Graduate School of Business.
Arnold Oronsky, Ph.D. has served as a director of the Company since 1994.
Since 1994, Dr. Oronsky has been a general partner at InterWest Partners, a
private venture capital firm. From 1995 to 1996, Dr. Oronsky served as President
and Chief Executive Officer of Coulter Pharmaceutical, Inc., a biopharmaceutical
company. From 1984 to 1994, Dr. Oronsky served as Vice President for Discovery
Research at Lederle Laboratories, a pharmaceutical division of American
Cyanamid, Inc., where he was responsible for the research of new drugs. Since
1988, Dr. Oronsky has served as a senior lecturer in the Department of Medicine
at Johns Hopkins Medical School. Dr. Oronsky received his Ph.D. in Physiology
and Biochemistry from Columbia University College of Physicians and Surgeons.
Under the terms of the Restated Certificate, the Company's Board of
Directors is divided into three classes, serving staggered terms of three years,
and any vacancies that occur during the year may be filled by the Company's
Board of Directors for the remainder of the full term. Dr. Lewis and
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Mr. Walker serve as Class I directors, whose term will expire at the first
annual meeting of stockholders following the closing of this offering. Dr. Evnin
and Dr. Oronsky serve as Class II directors, whose term will expire at the
second annual meeting of stockholders following the closing of this offering.
Mr. Byers, Dr. Hixson and Mr. Latterell serve as Class III directors, whose term
will expire at the third annual meeting of stockholders following the closing of
this offering. Officers serve at the discretion of the Board of Directors. There
are no family relationships between any directors or executive officers of the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee consists of Mr. Latterell, Dr. Oronsky and Dr.
Hixson. The Compensation Committee makes recommendations regarding the Company's
1998 Equity Incentive Plan, Non-Employee Directors' Stock Option Plan and
Employee Stock Purchase Plan, as well as prior stock option plans, and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.
The Audit Committee consists of Dr. Evnin, Mr. Latterell and Mr. Byers. The
Audit Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.
DIRECTOR COMPENSATION
The Company's directors currently do not receive any cash compensation for
services on the Board of Directors or any committee thereof, but directors may
be reimbursed for certain expenses in connection with attendance at Board and
committee meetings. Notwithstanding the foregoing, John P. Walker, the Chairman
of the Board of Directors, currently receives $1,000 compensation for each
meeting of the Board of Directors that he attends pursuant to a consulting
agreement dated April 1, 1996. In 1997, each non-employee director also received
options to purchase 12,500 shares of Common Stock of the Company. All directors
are eligible to participate in the Company's 1998 Equity Incentive Plan.
Non-employee directors receive automatic grants of options under the Company's
Non-Employee Directors' Stock Option Plan as described below. See
"Management--Equity Incentive Plan" and "--Non-Employee Directors' Stock Option
Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. See "Certain Transactions" for a description of transactions between
the Company and entities affiliated with members of the Compensation Committee.
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EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
awarded to, earned by, or accrued for services rendered to, the Company in all
capacities during the fiscal year ended December 31, 1997 by (i) the Company's
Chief Executive Officer and (ii) the Company's three other most highly
compensated executive officers whose salary and bonus for each year were in
excess of $100,000 (together, the "Named Officers").
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION AWARDS
-------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS (#)
--------------------------- --------- -------- ---------------------
Alan J. Lewis, Ph.D., President, Chief Executive
Officer and Director.......................... $266,815 $36,544 18,750
Carl F. Bobkoski, Executive Vice President...... 192,346 27,179 --
David W. Anderson, Ph.D., Senior Vice President,
Drug Development.............................. 198,129 27,368 25,000
Bradley B. Gordon, Vice President Finance, Chief
Financial Officer and Corporate Secretary..... 145,564 20,536 20,000
- ------------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits which are available
generally to all salaried employees of the Company and certain perquisites
and other personal benefits received which do not exceed the lesser of
$50,000 or 10% of any officer's salary and bonus disclosed in this table.
EMPLOYMENT AGREEMENTS
The Company entered into an employment letter agreement with Alan J. Lewis,
dated December 8, 1993, providing for an annual salary of $225,000, a signing
bonus of $50,000, additional bonuses and options subject to certain performance
milestones, assistance with home financing, and an opportunity to acquire
112,500 shares of Common Stock of the Company pursuant to the Company's stock
option plan. The term of the employment letter agreement was for one year,
renewable annually. See "Certain Transactions."
The Company entered into an employment letter agreement with David W.
Anderson, dated March 4, 1994, providing for an annual salary of $165,000,
subject to adjustment from time to time, a signing bonus of $25,000, and an
opportunity to acquire 50,000 shares of Common Stock of the Company pursuant to
the Company's stock option plan. The employment letter agreement indicates that
Dr. Anderson's employment is terminable at will by either party.
The Company entered into an employment letter agreement with Bradley B.
Gordon, dated August 18, 1994, providing for an annual salary of $130,000,
subject to adjustment from time to time, plus bonuses subject to certain
unspecified performance milestones, certain severance arrangements, and an
opportunity to acquire 37,500 shares of Common Stock of the Company pursuant to
the Company's stock option plan. The employment letter agreement indicates that
Mr. Gordon's employment is terminable at will by either party.
The Company entered into an employment letter agreement with Carl F.
Bobkoski, dated June 13, 1995, providing for an annual salary of $175,000,
subject to adjustment from time to time, plus bonuses and options subject to
certain performance and corporate-partnering milestones, certain severance
arrangements, and an opportunity to acquire 42,500 shares of Common Stock of the
Company pursuant to the Company's stock option plan. The employment letter
agreement indicates that Mr. Bobkoski's employment is terminable at will by
either party.
The Company entered into an employment letter agreement with Merl F.
Hoekstra, dated May 13, 1998, providing for an annual salary of $150,000,
subject to adjustment from time to time, a signing bonus of $15,000, certain
moving expenses, certain severance arrangements, and an opportunity to
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acquire 50,000 shares of Common Stock of the Company pursuant to the Company's
stock option plan. The employment letter agreement indicates that Dr. Hoekstra's
employment is terminable at will by either party.
1998 EQUITY INCENTIVE PLAN
The Company adopted its 1993 Stock Option Plan, 1993 Founders' Stock Option
Plan and 1997 Stock Option Plan (collectively, the "Prior Plans") and amended,
restated and retitled them in February 1998 as the 1998 Equity Incentive Plan
(as amended, restated and retitled, the "1998 Plan"). Outstanding options will
continue to be governed by the original terms of those grants. An aggregate of
2,016,667 shares of the Company's Common Stock have been reserved for issuance
pursuant to the exercise of stock awards granted to employees, directors and
consultants under the 1998 Plan. The 1998 Plan will terminate in April 2008,
unless sooner terminated by the Board.
The 1998 Plan permits the granting of options intended to qualify as
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers and employee directors), and options that do not
so qualify ("Nonstatutory Stock Options," and, together with Incentive Stock
Options, the "Options") to employees (including officers and employee
directors), directors and consultants (including non-employee directors). In
addition, the 1998 Plan permits the granting of stock appreciation rights
("SARs") appurtenant to or independently of Options, as well as stock bonuses
and rights to purchase restricted stock (Options, SARs, stock bonuses and rights
to purchase restricted stock are hereinafter referred to as "Stock Awards"). No
person is eligible to be granted Options and SARs covering more than 750,000
shares of the Company's Common Stock in any calendar year.
The 1998 Plan is administered by the Board or a committee appointed by the
Board. Subject to the limitations set forth in the 1998 Plan, the Board has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each Stock Award, to determine whether an
Option is to be an Incentive Stock Option or a Nonstatutory Stock Option, to
establish vesting schedules, to specify the Option exercise price and the type
of consideration to be paid to the Company upon exercise and, subject to certain
restrictions, to specify other terms of Stock Awards.
The maximum term of Options granted under the 1998 Plan is 10 years. The
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by an optionee during any calendar year (under all such plans of
the Company and its affiliates) may not exceed $100,000, or the Options or
portion thereof which exceed such limit (according to the order in which they
are granted) shall be treated as Nonstatutory Stock Options. Options granted
under the 1998 Plan generally are non-transferable and expire three months after
the termination of an optionee's service to the Company. In general, if an
optionee is permanently disabled or dies during his or her service to the
Company, such person's Options may be exercised up to 12 months following such
disability and following such death.
The exercise price of Options granted under the 1998 Plan is determined by
the Board of Directors in accordance with the guidelines set forth in the 1998
Plan. The exercise price of an Incentive Stock Option cannot be less than 100%
of the fair market value of the Common Stock on the date of the grant. The
exercise price of a Nonstatutory Stock Option cannot be less than 85% of the
fair market value of the Common Stock on the date of grant. Options granted
under the 1998 Plan vest at the rate specified in the option agreement. The
exercise price of Incentive Stock Options granted to any person who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of the Company's capital stock must be at least 110% of the
fair market value of such stock on the date of grant and the term of such
Incentive Stock Options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the
1998 Plan shall be in such form and will contain such terms and conditions as
the Board deems appropriate. The purchase price under any restricted stock
purchase agreement will not be less than 85% of the fair market value
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of the Company's Common Stock on the date of grant. Stock bonuses and restricted
stock purchase agreements awarded under the 1998 Plan are generally
non-transferable.
Pursuant to the 1998 Plan, shares subject to Stock Awards that have expired
or otherwise terminated without having been exercised in full again become
available for grant, but shares subject to exercised stock appreciation rights
will not again become available for grant. The Board of Directors has the
authority to reprice outstanding Options and SARs and to offer optionees and
holders of SARs the opportunity to replace outstanding options and SARs with new
options or SARs for the same or a different number of shares.
Upon certain changes in control of the Company, all outstanding Stock
Awards under the 1998 Plan must either be assumed or substituted by the
surviving entity. In the event the surviving entity does not assume or
substitute such Stock Awards, such Stock Awards will be terminated to the extent
not exercised prior to such change in control.
As of March 31, 1998, the Company had issued 435,570 shares of Common Stock
pursuant to the exercise of Options granted under the 1998 Plan, and had granted
additional Options to purchase an aggregate of 662,676 shares of Common Stock.
As of March 31, 1998, 918,421 shares of Common Stock remained available for
future grants under the 1998 Plan.
The following tables set forth information for 1997 concerning individual
grants of stock options to Named Officers, the exercise of stock options by
Named Officers and aggregate stock options held by the Named Officers at
year-end:
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------
NAME GRANTED(1) 1997 PER SHARE DATE 5% 10%
---- ---------- ------------ -------------- ---------- ------- -------
Alan J. Lewis........ 18,750 10.8% $ 1.12 6/3/07 $34,207 $54,469
Carl F. Bobkoski..... -- -- -- -- -- --
David W. Anderson.... 8,750 5.0 0.56 2/19/07 7,982 12,709
16,250 9.4 1.12 6/3/07 29,645 47,206
Bradley B. Gordon.... 20,000 11.5 1.12 4/17/07 36,487 58,100
- ------------------------------
(1) Twenty-five percent of such options vest on the first anniversary of the
grant date and the remaining options vest thereafter in 36 equal
installments. The Board of Directors of the Company has the right to
accelerate the vesting of such options. The term of the options is 10 years.
(2) The potential realizable value is calculated based on the term of the option
and is calculated by assuming that the fair market value of Common Stock on
the date of the grant as determined by the Board appreciates at the
indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and the Common Stock received therefore is
sold on the last day of the term of the option for the appreciated price.
The 5% and 10% rates of appreciation are derived from the rules of the
Securities and Exchange Commission. The actual value realized may be greater
than or less than the potential realizable values set forth in the table.
AGGREGATED 1997 OPTION EXERCISES AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR END AT YEAR END($)(1)
ACQUIRED ON VALUE ------------------------------ ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- -------------- ------------- ----------- -------------
Alan J. Lewis......... -- -- 106,250 -- $1,213,000 --
Carl F. Bobkoski...... 73,750(3) $ 0 -- -- -- --
David W. Anderson..... -- -- 25,000 -- 276,900 --
Bradley B. Gordon..... -- -- 57,500 -- 646,600 --
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- ------------------------------
(1) Based on an assumed initial public offering price of $12.00 per share minus
the per share exercise price multiplied by the number of shares.
(2) All stock options granted by the Company are immediately exercisable for
shares of restricted common stock, subject to a right of repurchase by the
Company pursuant to a vesting schedule. At year-end, Alan J. Lewis held
70,000 exercisable options remaining subject to a vesting schedule; David W.
Anderson held 25,000 exercisable options remaining subject to a vesting
schedule; and Bradley B. Gordon held 32,500 exercisable options remaining
subject to a vesting schedule.
(3) Includes 36,876 shares of Common Stock subject to a right of repurchase by
the Company pursuant to a vesting schedule.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In February 1998, the Company adopted its Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of Common Stock to non-employee directors of the
Company. The Directors' Plan is administered by the Board, unless the Board
delegates administration to a committee of at least two disinterested directors.
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 200,000. Pursuant to the terms of
the Directors' Plan: (i) each person who, after the effective date of this
offering, for the first time becomes a Non-Employee Director automatically will
be granted, upon the date of his or her initial appointment or election to be a
Non-Employee Director, a one-time option to purchase 20,000 shares of Common
Stock; and (ii) on the date of each annual meeting of the stockholders of the
Company after the effective date of this offering (other than any such annual
meeting held in 1998), each person who is elected at such annual meeting to
serve as a Non-Employee Director (who was also a Non-Employee Director prior to
such annual meeting) automatically will be granted an option to purchase 5,000
shares of Common Stock.
No options granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. Options granted under the
Directors' Plan vest monthly over a three-year period. The exercise price of
options under the Directors' Plan will equal 100% of the fair market value of
the Common Stock on the date of grant. Options granted under the Directors' Plan
are generally non-transferable. Unless otherwise terminated by the Board of
Directors, the Directors' Plan automatically terminates on the tenth anniversary
of the date of this offering. As of the date hereof, no options to purchase
shares of Common Stock have been granted under the Directors' Plan. Options
granted under the Directors' Plan vest in full upon certain changes in ownership
or control of the Company, unless assumed or replaced with similar options by
the entity gaining such ownership or control of the Company.
EMPLOYEE STOCK PURCHASE PLAN
In February 1998, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 200,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The initial offering
under the Purchase Plan will commence on the effective date of this offering and
terminate on July 31, 2000.
Unless otherwise determined by the Board, employees are eligible to
participate in the Purchase Plan only if they are employed by the Company or a
subsidiary of the Company designated by the Board for at least 20 hours per week
and are customarily employed by the Company or a subsidiary of the Company
designated by the Board for at least five months per calendar year. Employees
who participate in an offering may have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld is then used to purchase
shares of the Common Stock on specified dates determined by the Board. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock at the commencement date of
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each offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
In the event of a merger, reorganization, consolidation or liquidation
involving the Company, the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The Board has the
authority to amend or terminate the Purchase Plan, provided, however, that no
such action may adversely affect any outstanding rights to purchase Common
Stock.
401(K) PLAN
Effective September 15, 1994, the Company adopted the Signal
Pharmaceuticals, Inc. Employees Retirement Investment Plan & Trust which was
amended and restated on January 1, 1998 (the "401(k) Plan"), covering the
Company's employees. Pursuant to the 401(k) Plan, eligible employees may elect
to reduce their current compensation by up to the statutorily prescribed annual
limit ($10,000 in 1998) and have the amount of such reduction contributed to the
401(k) Plan. In addition, eligible employees may make roll-over contributions to
the 401(k) Plan from a tax-qualified retirement plan. The 401(k) Plan allows for
the Company to make discretionary matching and additional profit sharing
contributions, each as determined by a committee of the Board of Directors. No
discretionary or profit sharing contributions were made by the Company in 1997
and the Company has no intention of making such contributions in the near
future. Company contributions, if any, become 20% vested after two years of
service, with an additional 20% becoming vested for each year of service
thereafter. The 401(k) Plan is intended to qualify under Section 401 of the
Code, so that contributions by employees and the Company to the 401(k) Plan, and
income earned on the 401(k) Plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions by the Company,
if any, will be deductible by the Company when made. The trustees under the
401(k) Plan, at the direction of each participant, invest the 401(k) Plan
employee salary deferrals in selected investment options.
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law, except with respect to
certain proceedings initiated by such persons. The Company is also empowered
under its Bylaws to enter into indemnification contracts with its directors and
executive officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, the Company has
entered into indemnification agreements with each of its directors and executive
officers.
In addition, the Company's Restated Certificate provides that a director of
the Company will not be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which the
director derives an improper personal benefit. The Restated Certificate also
provides that if the Delaware General Corporation Law is amended after the
approval by the Company's stockholders of the Restated Certificate to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of the Company's directors shall be eliminated or
limited to the fullest extent permitted by the Delaware General Corporation Law,
as so amended. The provision does not affect a director's responsibilities under
any other law, such as the federal securities laws or state or federal
environmental laws.
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CERTAIN TRANSACTIONS
The following is a description of transactions since January 1, 1995, to
which the Company has been a party, in which the amount involved in the
transaction exceeds $60,000 and in which any director, executive officer or
holder of more than five percent of the capital stock of the Company had or will
have a direct or indirect material interest, other than compensation
arrangements that are otherwise required to be described under "Management."
In December 1997, the Company sold in a private placement 680,628 shares of
Series F Preferred Stock to Ares-Serono, a five percent holder of capital stock
of the Company, in exchange for an aggregate purchase price of $8,200,001,
pursuant to a Series F Preferred Stock Purchase Agreement dated November 25,
1997 (the "Series F Agreement"). Upon the closing of this offering, each share
of Series F Preferred Stock will automatically convert into one share of Common
Stock. See Note 5 of Notes to Financial Statements for a description of the
Series F Preferred Stock. In addition, on November 25, 1997, the Company entered
into a Research Development and License Agreement with Ares-Serono focused on
the identification of compounds that modulate NF-k B gene regulating pathways.
Ares-Serono has paid Signal a license fee and is obligated to provide Signal
with annual research and development support, make payments to Signal based on
the achievement of certain research and development milestones, and to pay
Signal royalties on any future product sales arising from the collaboration. See
"Business--Research and Development Partners."
In September 1997, the Company sold in a private placement 1,613,865 shares
of Series E Preferred Stock in exchange for an aggregate purchase price of
$11,999,997, pursuant to a Series E Preferred Stock Purchase Agreement dated
September 9, 1997 (the "Series E Agreement"). Upon the closing of this offering,
each share of Series E Preferred Stock will automatically convert into one share
of Common Stock. See Note 5 of Notes to Financial Statements for a description
of the Series E Preferred Stock. The following directors and beneficial owners
of more than five percent of the Company's Common Stock (assuming the conversion
of all shares of Preferred Stock into Common Stock) acquired beneficial
ownership of Series E Preferred Stock pursuant to the Series E Agreement:
NO. OF
DIRECTORS/5% STOCKHOLDERS SHARES
------------------------- -------
Patrick F. Latterell/Venrock Associates..................... 25,273
Luke B. Evnin/Accel Partners................................ 25,273
Brook H. Byers/Kleiner Perkins Caufield & Byers............. 25,273
Arnold Oronsky/InterWest Partners........................... 19,826
Oxford Bioscience Partners.................................. 13,217
U.S. Venture Partners....................................... 13,217
Ares-Serono S.A............................................. 246,575
Lombard Odier Immunology Fund............................... 392,670
The Company has entered into certain other agreements in connection with
the Series E and Series F Agreements. Pursuant to one such agreement, certain
stockholders acquired registration rights. See "Description of Capital
Stock--Registration Rights." Further, the Company and its stockholders agreed to
certain restrictions on the issuance and transfer of shares of the Company's
capital stock, and to certain voting rights relating to the election of
directors, all of which restrictions and voting rights are not applicable to and
shall terminate upon the closing of this offering.
In June 1994, the Company loaned $250,000 to Alan J. Lewis, the Company's
President and Chief Executive Officer and a director of the Company, to assist
with the purchase of a residence in connection with Dr. Lewis' relocation to San
Diego, California. Pursuant to the terms of a Promissory Note dated June 14,
1994, the principal amount of the loan plus accrued interest shall be amortized
over a period of five years following June 14, 1999, with monthly payments
commencing in July 1999. The principal amount of the loan will be interest-free
for five years from the date of the Promissory Note, and thereafter will accrue
interest at the per annum rate of 7.52%, compounded annually.
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Interest will also begin to accrue at the same rate in the event that Dr. Lewis'
employment is terminated for any reason. The parties also entered into a
Security Agreement on the same date whereby Dr. Lewis pledged all present and
future shares of Common Stock of the Company held by him (plus all cash and
stock dividends attributable to such shares) as security for the loan.
In May 1998, the Company loaned $62,000 to Alan J. Lewis in connection with
the exercise of options to purchase 106,250 shares of Common Stock of the
Company. Pursuant to the terms of a Promissory Note delivered to the Company by
Dr. Lewis, dated May 8, 1998, the principal amount of the loan plus accrued
interest at a per annum rate equal to 5.69%, compounded annually, shall be due
and payable five years from the date of the loan. Pursuant to a Stock Pledge
Agreement entered into on the same date, Dr. Lewis, pledged all present and
future shares of Common Stock of the Company held by him (plus all cash and
stock dividends attributable to such shares) as security for the loan.
The Company has entered into employment letter agreements with Alan J.
Lewis, its President and Chief Executive Officer, Carl F. Bobkoski, its
Executive Vice President, David W. Anderson, its Senior Vice President, Drug
Development, Bradley B. Gordon, its Vice President Finance, Chief Financial
Officer and Corporate Secretary and Merl F. Hoekstra, its Vice President, Target
Discovery. See "Management--Employment Agreements."
The Company has granted options to certain of its directors and executive
officers. The Company has also entered into an indemnification agreement with
each of its directors and executive officers. See "Management--Limitations on
Directors' and Executive Officers' Liability and Indemnification."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1998, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
holder of more than five percent of the Company's Common Stock, (ii) each of the
Company's executive officers, (iii) each of the Company's directors, and (iv)
all current directors and executive officers as a group.
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED(1)
SHARES -------------------
5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER
AND NAMED EXECUTIVE OFFICERS OWNED(1) OFFERING OFFERING
---------------------------- ------------ -------- --------
Ares-Serono S.A.......................................... 927,203 13.4% 9.7%
15bis Chemin des Mines
1202 Geneva, Switzerland
Luke B. Evnin, Ph.D.(2).................................. 745,653 10.8 7.8
Accel Partners
428 University Avenue
Palo Alto, California 94301
Patrick F. Latterell(3).................................. 743,031 10.8 7.8
Venrock Associates
755 Page Mill Road, Suite A230
Palo Alto, California 94304
Brook H. Byers(4)........................................ 720,663 10.4 7.5
Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, California 94025
Arnold Oronsky, Ph.D.(5)................................. 568,040 8.2 5.9
InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, California 94025
Lombard Odier & Cie...................................... 392,670 5.7 4.1
11, rue de la Corraterie
1204 Geneva, Switzerland
Oxford Bioscience Partners(6)............................ 370,358 5.4 3.9
650 Town Center Drive, Suite 180
Costa Mesa, California 92626
U.S. Venture Partners(7)................................. 370,358 5.4 3.9
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Alan J. Lewis, Ph.D.(8).................................. 187,500 2.7 2.0
Harry F. Hixson, Ph.D.(9)................................ 99,880 1.4 1.0
Carl F. Bobkoski(10)..................................... 98,750 1.4 1.0
David W. Anderson, Ph.D.(11)............................. 85,000 1.2 *
Bradley B. Gordon(12).................................... 70,000 1.0 *
Merl F. Hoekstra, Ph.D.(13).............................. 50,000 * *
John P. Walker(14)....................................... 37,500 * *
All directors and executive officers as a group (10
persons)(15)........................................... 3,406,017 47.4 34.7
- ------------------------------
* Represents beneficial ownership of less than one percent.
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(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 6,897,140 shares of Common
Stock outstanding as of May 31, 1998 (after giving effect to the conversion
of all outstanding shares of Preferred Stock into 6,050,949 Common Stock)
and 9,563,806 shares of Common Stock outstanding after completion of this
offering.
(2) Includes 613,658 shares held by Accel IV L.P., 27,124 shares held by Accel
Investors '93 L.P., 13,195 shares held by Accel Keiretsu L.P., 58,652
shares held by Accel Japan L.P., 16,127 shares held by Ellmore C. Patterson
Partners and 4,397 shares held by Prosper Partners, affiliated entities for
which Dr. Evnin is a General Partner or officer of some. Dr. Evnin
disclaims beneficial ownership of all such shares, except to the extent of
his pecuniary or pro rata interest in such shares. Also includes 12,500
shares subject to options exercisable within 60 days of May 31, 1998.
(3) Includes 499,600 shares held by Venrock Associates and 234,056 shares held
by Venrock Associates II, L.P., entities for which Mr. Latterell is a
general partner. Mr. Latterell disclaims beneficial ownership of all such
shares, except to the extent of his pecuniary or pro rata interest in such
shares.
(4) Includes 708,163 shares held by Kleiner Perkins Caufield & Byers VI, an
entity for which Mr. Byers is a partner. Mr. Byers disclaims beneficial
ownership of all such shares, except to the extent of his pecuniary or pro
rata interest in such shares. Also includes 12,500 shares subject to
options exercisable within 60 days of May 31, 1998.
(5) Includes 552,068 shares held by InterWest Partners V and 3,472 shares held
by InterWest Investors V, which are affiliated entities. Dr. Oronsky is a
general partner of InterWest Partners V. Dr. Oronsky disclaims beneficial
ownership of all such shares, except to the extent of his pecuniary or pro
rata interest in such shares. Also includes 12,500 shares subject to
options exercisable within 60 days of May 31, 1998.
(6) Includes 231,942 shares held by Oxford Bioscience Partners L.P., 74,071
shares held by Oxford Bioscience Partners (Adjunct) L.P. and 64,345 shares
held by Oxford Bioscience Partners (Bermuda) Limited Partnership.
(7) Includes 320,361 shares held by U.S. Venture Partners IV, L.P., 38,887
shares held by Second Ventures II, L.P. and 11,110 shares held by USVP
Entrepreneur Partners II, L.P.
(8) Includes 18,750 shares subject to options exercisable within 60 days of May
31, 1998.
(9) Includes 79,880 shares held by the Harry F. Hixson, Jr. Separate Property
Trust Dated December 15, 1995, of which Dr. Hixson is the sole trustee.
Also includes 12,500 shares subject to options exercisable within 60 days
of May 31, 1998.
(10) Includes 25,000 shares subject to options exercisable within 60 days of May
31, 1998.
(11) Includes 35,000 shares subject to options exercisable within 60 days of May
31, 1998.
(12) Includes 70,000 shares subject to options exercisable within 60 days of May
31, 1998.
(13) Includes 50,000 shares subject to options exercisable within 60 days of May
31, 1998.
(14) Includes 37,500 shares held by the Walker Living Trust Dated March 3, 1995,
of which Mr. Walker is the sole trustee.
(15) Includes 248,750 shares subject to options exercisable within 60 days of
May 31, 1998.
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DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, the authorized capital stock
of the Company will consist of 25,000,000 shares of Common Stock, $.001 par
value per share, and 5,000,000 shares of preferred stock, $.001 par value per
share.
COMMON STOCK
As of March 31, 1998, there were 6,767,263 shares of Common Stock
outstanding, after giving effect to the conversion of all outstanding shares of
Preferred Stock into 6,050,949 shares of Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preferences of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive, conversion,
subscription or other rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred
Stock will be converted into 6,050,949 shares of Common Stock. See Note 5 of
Notes to Financial Statements for a description of the currently outstanding
Preferred Stock. Following the conversion, the Company's Certificate of
Incorporation will be amended and restated to delete all references to such
shares of Preferred Stock. Under the Restated Certificate, the Board has the
authority, without further action by stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix or alter the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon any wholly unissued series of preferred stock, and to establish from time
to time the number of shares constituting any such series or any of them; and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. The issuance of preferred stock could adversely affect
the voting power of holders of Common Stock and reduce the likelihood that such
holders will receive dividend payments and payments upon liquidation. Such
issuance could have the effect of decreasing the market price of the Common
Stock. The issuance of preferred stock could have the effect of delaying,
deterring or preventing a change in control of the Company. The Company has no
present plans to issue any shares of preferred stock.
WARRANTS
As of March 31, 1998, there were warrants outstanding to purchase an
aggregate of 62,500 shares of Series C-1 Preferred Stock at an exercise price of
$8.40 per share, which will convert into warrants to purchase Common Stock upon
the closing of this offering.
REGISTRATION RIGHTS
After this offering, the holders of 6,050,949 shares of Common Stock will
be entitled to certain rights with respect to the registration of such shares
under the Securities Act, pursuant to that certain Amended and Restated Investor
Rights Agreement dated September 9, 1997, as amended on November 25, 1997 (the
"Investors' Rights Agreement"). Under the terms of the Investors' Rights
Agreement, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other security
holders exercising registration rights, such holders are entitled to notice of
such registration and are entitled, subject to certain limitations, to include
shares therein. Commencing with the date that is 180 days after this offering,
the holders may also require the
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Company to file a registration statement under the Securities Act with respect
to their shares, and the Company is required to use its best efforts to effect
to such registration. Furthermore, the holders may require the Company to
register their shares on a registration statement on Form S-3 when such form
becomes available to the Company. Such registration rights terminate on the
seventh anniversary of the effective date of this offering.
The holder of a warrant to purchase 62,500 shares of Series C-1 Preferred
Stock of the Company, granted November 23, 1996, will be entitled, upon exercise
of such warrant, to notice whenever the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights. The holder of
such warrant is entitled to include in any such registration the shares of
Common Stock into which the Series C-1 Preferred Stock underlying the warrant
may be converted. Such registration rights terminate on the seventh anniversary
of the effective date of this offering.
After this offering, a holder of 11,093 shares of Common Stock purchased
pursuant to two certain Restricted Stock Purchase Agreements dated October 26,
1993 and February 18, 1998, respectively, will be entitled, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders exercising
registration rights, to notice of such registration and, subject to certain
limitations, to include such shares therein. In addition, such holder may obtain
an additional 23,750 shares of Common Stock pursuant to the attainment of
certain regulatory milestones whereby such additional shares would be entitled
to the same registration rights as the 11,093 shares currently held.
After this offering, a holder of 7,500 shares of Common Stock purchased
pursuant to two certain Restricted Stock Purchase Agreements dated October 31,
1996 and December 7, 1997, respectively, will be entitled, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders exercising
registration rights, to notice of such registration and, subject to certain
limitations, to include such shares therein. In addition, such holder may obtain
an additional 5,625 shares of Common Stock pursuant to the attainment of certain
regulatory milestones whereby such additional shares would be entitled to the
same registration rights as the 7,500 shares currently held.
Generally, the Company is required to bear all registration and selling
expenses incurred in connection with any of the registrations described above.
The registration rights are also subject to certain conditions and limitations,
among them the right of the underwriters of a public offering to limit the
number of shares included in the registration statement filed in connection
therewith.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is governed by the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). In general, Section 203 prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales or other transactions resulting in a
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of the corporation's outstanding voting stock. This provision
could delay, discourage or prohibit transactions not approved in advance by the
Board of Directors, such as takeover attempts that might result in a premium
over the market price of the Common Stock.
The Company's Restated Certificate provides that the Board of Directors
will be divided into three classes of directors, with each class serving a
staggered three-year term. The classification system of electing directors may
tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of the Company and may maintain the composition of
the Board of Directors, as the classification of the Board of Directors
generally increases the difficulty of replacing a majority of directors. The
Company's Restated Certificate provides that any action required or
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permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing. In addition, the Company's Bylaws provide that special
meetings of the stockholders of the Company may be called only by the Chairman
of the Board of Directors, the Chief Executive Officer of the Company, by the
Board of Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors, or by the holders of 10% of the outstanding
voting stock of the Company. The Company's Restated Certificate also specifies
that the authorized number of directors may be changed only by resolution of the
Board of Directors and does not include a provision for cumulative voting for
directors. Under cumulative voting, a minority stockholder holding a sufficient
percentage of a class of shares may be able to ensure the election of one or
more directors. These and other provisions contained in the Restated Certificate
and the Company's Bylaws could delay or discourage certain types of transactions
involving an actual or potential change in control of the Company or its
management (including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices) and may limit the ability
of stockholders to remove current management of the Company or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of the Company's Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. Furthermore, since only a
limited number of shares will be available for sale shortly after the offering
because of certain contractual and legal restrictions on resale described below,
sales of substantial amounts of Common Stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and the
ability of the Company to raise equity capital in the future.
Upon completion of this offering, the Company will have 9,433,929 shares of
Common Stock outstanding, assuming no exercise of currently outstanding options
or warrants. Of these shares, the 2,500,000 shares sold in this offering (plus
any additional shares sold upon exercise of the Underwriters' over-allotment
option) will be freely transferable without restriction under the Securities
Act, unless they are held by "affiliates" of the Company as that term is used
under the Securities Act and the rules and regulations promulgated thereunder.
The remaining 6,933,929 shares of Common Stock held by existing stockholders are
Restricted Shares. Restricted Shares may be sold in the public market only if
registered or of they qualify for an exemption from registration under Rules 144
or 701 promulgated under the Securities Act, which rules are summarized below.
As a result of Lock-up Agreements and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
(i) no Restricted Shares will be eligible for immediate sale on the effective
date of this offering; (ii) 6,677,325 Restricted Shares (plus approximately
623,687 shares of Common Stock issuable upon exercise of vested stock options)
will be eligible for sale upon expiration of the Lock-up Agreements 180 days
after the date of this Prospectus; and (iii) the remainder of the Restricted
Shares will be eligible for sale from time to time thereafter upon expiration of
their respective one-year holding periods and could be sold earlier if the
holders exercise any available registration rights. The holders of 6,058,449
shares of Common Stock have the right in certain circumstances to require the
Company to register their shares under the Securities Act for resale to the
public beginning 180 days from the effective date of this offering. If such
holders, by exercising their demand registration rights, cause a large number of
shares to be registered and sold in the public market, such sales could have an
adverse effect on the market price for the Company's Common Stock. If the
Company were required to include in a Company-initiated registration shares held
by such holders pursuant to the exercise of their piggyback registration rights,
such sales may have an adverse effect on the Company's ability to raise needed
capital. In addition, the Company expects to file a registration statement on
Form S-8 registering shares of Common Stock subject to outstanding stock options
or reserved for issuance under the Company's stock option plans. Such
registration statement is expected to be filed and to become effective as soon
as practicable after the effective date of this offering. Shares registered
under such registration statement will, subject to Rule 144 volume limitations
applicable to Affiliates, be available for sale in the open market, unless such
shares are subject to vesting restrictions with the Company or the lock-up
agreements described above.
In general, under Rule 144 as in effect on the date of this Prospectus,
beginning 90 days after the effective date of this offering, an Affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares (as defined under Rule 144) for at least
one year is entitled to sell within any three-month period a number of shares
that does not exceed greater of (i) one percent of the then outstanding shares
of the Company's Common Stock or (ii) the average weekly trading volume of the
Company's Common Stock in The Nasdaq National Market during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Commission. Sales pursuant to Rule 144 are subject to certain requirements
relating to the manner of sale, notice, and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who was not an Affiliate of the Company at any time during the 90 days
immediately preceding the sale and who has beneficially owned Restricted Shares
for at least two years is entitled to sell such shares under Rule 144(k) without
regard to the limitations described above.
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An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with the
Rule 144 holding period restrictions, in each case commencing 90 days after the
effective date of this offering. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, Hambrecht & Quist LLC,
BancAmerica Robertson Stephens and Lehman Brothers Inc. (the "Representatives")
have severally agreed to purchase from the Company the following respective
numbers of shares of Common Stock:
NUMBER
NAME OF SHARES
---- ---------
Hambrecht & Quist LLC.......................................
BancAmerica Robertson Stephens..............................
Lehman Brothers Inc.........................................
---------
Total............................................. 2,500,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters. The
Representatives have advised the Company that the Underwriters do not intend to
confirm discretionary sales in excess of 5% of the shares of Common Stock
offered hereby.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling
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concession from a syndicate member in connection with the offering when shares
of Common Stock sold by the syndicate member are purchased in syndicate covering
transactions. Such transactions may be effected on the Nasdaq National Market,
in the over-the-counter market, or otherwise. Such stabilizing, if commenced,
may be discontinued at any time.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Stockholders of the Company, including the executive officers and
directors, who hold in the aggregate 6,933,929 shares of Common Stock after the
offering, have agreed that they will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock owned by them during
the 180-day period following the date of this Prospectus. The Company has agreed
that it will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock during the 180-day period following the
date of this Prospectus, except that the Company may issue shares to DuPont
Merck in accordance with its stock purchase agreement and under agreements that
may be entered into with collaborators in the future. In addition, the Company
may issue shares upon the exercise of options granted prior to the date hereof
and may grant additional options and issue stock under its 1998 Equity Incentive
Plan, and Employee Stock Purchase Plan (whereby the Company will cause any
person to whom such options are granted or shares are issued to enter into an
agreement restricting the transfer of any securities of the Company held by such
person during the 180-day period following the date of this Prospectus without
the prior written consent of Hambrecht & Quist LLC). See "Shares Eligible for
Future Sale."
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are the
prevailing market and economic conditions, revenue and earnings of the Company,
market valuations of other companies engaged in activities similar to the
Company, estimates of the business potential and prospects of the Company, the
present state of the Company's business operations, the Company's management and
other factors deemed relevant. The estimated initial public offering price range
set forth on the cover of this Prospectus is subject to change as a result of
market conditions and other factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, San Diego, California. Certain legal
matters will be passed upon for the Underwriters by Brobeck, Phleger & Harrison
LLP, Palo Alto, California.
EXPERTS
The financial statements of Signal Pharmaceuticals, Inc. as of December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
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ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Common Stock offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus, which is a part of the Registration Statement,
omits certain information, exhibits, schedules and undertakings set forth in the
Registration Statement. For further information pertaining to the Company and
the Common Stock offered hereby, reference is made to the Registration Statement
and the exhibits and schedules thereto. Statements contained in this Prospectus
as to the contents or provisions of any contract or other document referred to
herein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement may be inspected without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any
part of the Registration Statement may be obtained from such offices upon the
payment of the fees prescribed by the Commission. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's web site on the Internet at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
SIGNAL PHARMACEUTICALS, INC.
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-3
Statements of Operations for each of the three years in the
period ended December 31, 1997 and the three months ended
March 31, 1997 (unaudited) and 1998 (unaudited)........... F-4
Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1997 and the three
months ended March 31, 1998 (unaudited)................... F-5
Statements of Cash Flows for each of the three years in the
period ended December 31, 1997 and the three months ended
March 31, 1997 (unaudited) and 1998 (unaudited)........... F-6
Notes to Financial Statements............................... F-7
F-1
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Signal Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Signal Pharmaceuticals,
Inc. as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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 Signal Pharmaceuticals, Inc.
at December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
San Diego, California
January 16, 1998,
except for Note 7, as to which the date is
May 5, 1998
- --------------------------------------------------------------------------------
THE FOREGOING REPORT IS IN THE FORM THAT WILL BE SIGNED UPON THE COMPLETION OF
THE CHANGES IN CAPITALIZATION DESCRIBED IN NOTE 7 TO THE FINANCIAL STATEMENTS.
ERNST & YOUNG LLP
San Diego, California
May 5, 1998
F-2
77
SIGNAL PHARMACEUTICALS, INC.
BALANCE SHEETS
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
--------------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................... $ 5,459,696 $ 8,736,469 $ 12,916,238
Short-term investments.......................... -- 12,129,506 7,754,955
Grant revenue receivable........................ 308,062 90,449 99,931
Other current assets............................ 218,750 189,366 502,383
------------ ------------ ------------
Total current assets.............................. 5,986,508 21,145,790 21,273,507
------------ ------------ ------------
Property and equipment, net....................... 2,280,168 2,252,568 2,776,621
Deposits and other assets......................... 530,476 189,438 455,114
Note receivable from officer...................... 250,000 250,000 250,000
------------ ------------ ------------
$ 9,047,152 $ 23,837,796 $ 24,755,242
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 426,718 $ 268,714 $ 538,702
Accrued liabilities............................. 312,599 1,207,719 591,355
Current portion of promissory note.............. 583,380 1,000,080 1,000,080
Current portion of obligations under capital 395,780 205,911 209,151
leases and equipment notes payable............
Current portion of deferred revenue under 1,662,497 3,083,956 4,298,743
collaborative agreements......................
------------ ------------ ------------
Total current liabilities......................... 3,380,974 5,766,380 6,638,031
------------ ------------ ------------
Promissory note, net of current portion........... 2,255,549 1,302,612 1,064,377
Obligations under capital leases and equipment 490,849 245,669 279,324
notes payable, net of current portion...........
Deferred revenue under collaborative agreements, 1,339,579 1,281,254 1,016,675
net of current portion..........................
Deferred rent..................................... 67,851 78,167 107,821
Commitments
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 3,698 6,051 6,051 $ --
6,113,485 shares authorized; 3,698,306,
6,050,949 and 6,050,949 shares issued and
outstanding at December 31, 1996, 1997 and
March 31, 1998, respectively; liquidation
preference -- $40,909,587 at December 31, 1997
and March 31, 1998 (5,000,000 shares
authorized, no shares issued and outstanding
pro forma)....................................
Common Stock, $.001 par value; 8,750,000 shares 522 664 716 6,767
authorized; 522,424, 664,602 and 716,314
shares issued and outstanding at December 31,
1996, 1997 and March 31, 1998, respectively,
(25,000,000 shares authorized, 6,767,263
shares issued and outstanding pro forma)......
Additional paid-in capital...................... 20,513,608 40,365,615 41,433,814 41,433,814
Deferred compensation........................... -- (511,510) (1,387,318) (1,387,318)
Accumulated other comprehensive income.......... -- 48,341 6,015 6,015
Accumulated deficit............................. (19,005,478) (24,745,447) (24,410,264) (24,410,264)
------------ ------------ ------------ ------------
Total stockholders' equity........................ 1,512,350 15,163,714 15,649,014 $ 15,649,014
------------ ------------ ------------ ============
$ 9,047,152 $ 23,837,796 $ 24,755,242
============ ============ ============
See accompanying notes.
F-3
78
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
Revenue under collaborative agreements:
Related party.................................... $ -- $ -- $ 250,000 $ -- $ 750,000
Unrelated parties................................ -- 3,585,414 7,065,356 1,476,565 3,793,696
Grant income....................................... 299,152 347,198 264,257 72,261 99,932
----------- ----------- ----------- ----------- ----------
299,152 3,932,612 7,579,613 1,548,826 4,643,628
Expenses:
Research and development......................... 5,172,992 7,724,178 10,337,318 2,458,817 3,287,649
General and administrative....................... 1,937,226 2,470,910 2,791,084 671,325 1,203,118
----------- ----------- ----------- ----------- ----------
7,110,218 10,195,088 13,128,402 3,130,142 4,490,767
----------- ----------- ----------- ----------- ----------
Income (loss) from operations...................... (6,811,066) (6,262,476) (5,548,789) (1,581,316) 152,861
Interest income.................................... 452,609 187,488 325,529 59,859 282,863
Interest expense................................... (123,730) (134,019) (516,709) (152,274) (100,541)
----------- ----------- ----------- ----------- ----------
Net income (loss).................................. $(6,482,187) $(6,209,007) $(5,739,969) $(1,673,731) $ 335,183
=========== =========== =========== =========== ==========
Pro forma net income (loss) per share, basic and
diluted.......................................... $ (1.20) $ 0.05
=========== ==========
Number of shares used in computing pro forma net
income (loss) per share:
Basic.......................................... 4,775,952 6,628,046
=========== ==========
Diluted........................................ 4,775,952 6,875,100
=========== ==========
See accompanying notes.
F-4
79
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
------------------ ---------------- PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) DEFICIT
--------- ------ ------- ------ ----------- ------------ ------------- ------------
Balance at December 31,
1994........................ 3,573,306 $3,573 497,357 $497 $18,375,335 $ -- $ -- $(6,314,284)
Issuance of Common Stock,
net of repurchases...... -- -- 3,875 4 315 -- -- --
Offering costs related to
issuance of Series C
Preferred Stock......... -- -- -- -- (9,547) -- -- --
Net loss.................. -- -- -- -- -- -- -- (6,482,187)
--------- ------ ------- ---- ----------- ----------- -------- ------------
Balance at December 31,
1995........................ 3,573,306 3,573 501,232 501 18,366,103 -- -- (12,796,471)
Issuance of Series D
Preferred Stock......... 125,000 125 -- -- 1,974,875 -- -- --
Issuance of warrants...... -- -- -- -- 165,000 -- -- --
Issuance of Common Stock,
net of repurchases...... -- -- 21,192 21 7,630 -- -- --
Net loss.................. -- -- -- -- -- -- -- (6,209,007)
--------- ------ ------- ---- ----------- ----------- -------- ------------
Balance at December 31,
1996........................ 3,698,306 3,698 522,424 522 20,513,608 -- -- (19,005,478)
Issuance of Series D
Preferred Stock......... 58,150 58 -- -- (58) -- -- --
Issuance of Series E
Preferred Stock......... 1,613,865 1,614 -- -- 10,975,517 -- -- --
Issuance of Series F
Preferred Stock......... 680,628 681 -- -- 8,161,399 -- -- --
Issuance of Common Stock,
net of repurchases...... -- -- 141,774 142 99,294 -- -- --
Unrealized gain on
available for sale
securities.............. -- -- -- -- -- -- 48,341 --
Deferred compensation..... -- -- -- -- 615,855 (615,855) -- --
Amortization of deferred
compensation............ -- -- -- -- -- 104,345 -- --
Net loss.................. -- -- -- -- -- -- -- (5,739,969)
--------- ------ ------- ---- ----------- ----------- -------- ------------
Balance at December 31,
1997........................ 6,050,949 6,051 664,198 664 40,365,615 (511,510) 48,341 (24,745,447)
Issuance of Common Stock,
net of repurchases
(unaudited)............. -- -- 52,116 52 49,029 -- -- --
Unrealized loss on
available for sale
securities
(unaudited)............. -- -- -- -- -- -- (42,326) --
Deferred compensation
(unaudited)............. -- -- -- -- 1,019,170 (1,019,170) -- --
Amortization of deferred
compensation
(unaudited)............. -- -- -- -- -- 143,362 -- --
Net income (unaudited).... -- -- -- -- -- -- -- 335,183
--------- ------ ------- ---- ----------- ----------- -------- ------------
Balance at March 31, 1998
(unaudited)................. 6,050,949 $6,051 716,314 $716 $41,433,814 $(1,387,318) $ 6,015 $(24,410,264)
========= ====== ======= ==== =========== =========== ======== ============
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance at December 31,
1994........................ $12,065,121
Issuance of Common Stock,
net of repurchases...... 319
Offering costs related to
issuance of Series C
Preferred Stock......... (9,547)
Net loss.................. (6,482,187)
-----------
Balance at December 31,
1995........................ 5,573,706
Issuance of Series D
Preferred Stock......... 1,975,000
Issuance of warrants...... 165,000
Issuance of Common Stock,
net of repurchases...... 7,651
Net loss.................. (6,209,007)
-----------
Balance at December 31,
1996........................ 1,512,350
Issuance of Series D
Preferred Stock......... --
Issuance of Series E
Preferred Stock......... 10,977,131
Issuance of Series F
Preferred Stock......... 8,162,080
Issuance of Common Stock,
net of repurchases...... 99,436
Unrealized gain on
available for sale
securities.............. 48,341
Deferred compensation..... --
Amortization of deferred
compensation............ 104,345
Net loss.................. (5,739,969)
-----------
Balance at December 31,
1997........................ 15,163,714
Issuance of Common Stock,
net of repurchases
(unaudited)............. 49,081
Unrealized loss on
available for sale
securities
(unaudited)............. (42,326)
Deferred compensation
(unaudited)............. --
Amortization of deferred
compensation
(unaudited)............. 143,362
Net income (unaudited).... 335,183
-----------
Balance at March 31, 1998
(unaudited)................. $15,649,014
===========
See accompanying notes.
F-5
80
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $(6,482,187) $(6,209,007) $ (5,739,969) $(1,673,731) $ 335,183
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization............... 518,014 633,797 879,327 205,314 258,551
Amortization of warrants.................... -- 3,929 47,142 11,785 11,785
Amortization of deferred compensation....... -- -- 104,345 -- 143,362
Common stock issued for technology and
services.................................. -- -- 14,600 -- 8,400
Deferred revenue under collaborative
agreements................................ -- 3,002,076 1,363,134 (893,746) 950,208
Deferred rent............................... -- -- 10,316 (8,398) 29,654
Changes in operating assets and liabilities:
Other current assets.................... (158,072) (342,271) 246,997 150,967 (322,499)
Accounts payable........................ (546,392) 337,027 (158,004) 44,061 269,988
Accrued liabilities and other........... 14,824 188,550 895,120 139,629 (616,364)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used for) operating
activities.................................... (6,653,813) (2,385,899) (2,336,992) (2,024,119) 1,068,268
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............. (1,560,728) -- (12,081,165) -- --
Sales or maturities of short-term investments... -- 1,560,728 -- -- 4,332,225
Purchase of property and equipment.............. (1,009,941) (874,175) (630,220) (155,059) (695,502)
(Increase) decrease in deposits and other
assets........................................ 279,930 (349,074) 341,038 3,240 (265,676)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used for) investing
activities.................................... (2,290,739) 337,479 (12,370,347) (151,819) 3,371,047
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on obligations under capital
leases, equipment notes payable and promissory
note.......................................... (426,737) (503,506) (1,239,935) (144,562) (300,227)
Proceeds from issuance of promissory note....... -- 3,000,000 -- -- --
Proceeds from issuance of equipment notes
payable....................................... 646,810 379,064 -- -- --
Issuance of Preferred Stock, net................ (9,547) 1,975,000 19,139,211 -- --
Issuance of Common Stock, net................... 319 7,651 84,836 42,889 40,681
----------- ----------- ------------ ----------- -----------
Net cash provided by (used for) financing
activities.................................... 210,845 4,858,209 17,984,112 (101,673) (259,546)
----------- ----------- ------------ ----------- -----------
Increase (decrease) in cash and cash
equivalents................................... (8,733,707) 2,809,789 3,276,773 (2,277,611) 4,179,769
Cash and cash equivalents at beginning of
period........................................ 11,383,614 2,649,907 5,459,696 5,459,696 8,736,469
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents at end of period...... $ 2,649,907 $ 5,459,696 $ 8,736,469 $ 3,182,085 $12,916,238
=========== =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid................................... $ 123,730 $ 128,337 $ 469,565 $ 152,274 $ 100,541
=========== =========== ============ =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations entered into for
equipment..................................... $ -- $ -- $ 221,507 $ 221,507 $ 87,102
=========== =========== ============ =========== ===========
Warrant issued in conjunction with promissory
note.......................................... $ -- $ 165,000 $ -- $ -- $ --
=========== =========== ============ =========== ===========
Unrealized gain (loss) on investments........... $ -- $ -- $ 48,341 $ -- $ (42,326)
=========== =========== ============ =========== ===========
See accompanying notes.
F-6
81
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Signal Pharmaceuticals, Inc. ("Signal" or the "Company") was incorporated
in California in July 1992. The Company is an integrated target and drug
discovery company focused on identifying new classes of small molecule drugs
that regulate genes and the production of disease-causing proteins. The Company
applies advanced cellular, molecular and genomic technologies to map gene
regulating pathways in cells and to identify proprietary molecular targets that
activate or deactivate genes and result in disease. Signal is advancing the
application of genomics beyond identifying and elucidating the functions of
genes to designing novel classes of disease-modifying drugs that selectively
regulate the activation of disease-causing genes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
related disclosures at the date of the financial statements, and the amounts of
revenues and expenses reported during the period. Actual results could differ
from those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers instruments purchased with an original maturity of
three months or less, principally a money market account and U.S. government and
corporate debt securities, to be cash equivalents.
All investment securities are classified as available-for-sale, and are
carried at fair value. Unrealized gains and losses, if any, are reported in a
separate component of stockholders' equity. The cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
The amortization, along with realized gains and losses, is included in interest
income. The cost of securities sold is based on the specific identification
method.
FINANCIAL INSTRUMENTS
The fair values of the financial instruments approximate their carrying
value except as otherwise disclosed in the financial statements.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents and short-term investments are financial instruments
which potentially subject the Company to concentration of credit risk. The
Company invests its excess cash primarily in U.S. government securities and
marketable debt securities of financial institutions and corporations with
strong credit ratings. The Company also has established guidelines relative to
diversification and maturities to maintain safety and liquidity. These
guidelines are reviewed periodically and may be modified to take advantage of
trends in yields and interest rates. Due to Company policy, the Company has
historically held the financial instruments to maturity and has not experienced
any significant losses. However, the Company has the ability to sell these
investments before maturity.
F-7
82
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (three to five years) using the
straight-line method. Leasehold improvements are stated at cost and amortized on
a straight-line basis over the shorter of the estimated useful life of the
assets or the lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. To date, the Company has not identified any
indicators of impairment nor recorded any impairment losses.
DEFERRED RENT
Rent expense is recognized on a straight-line basis over the term of the
lease. Accordingly, rent expense incurred in excess of rent paid is accrued and
recorded as deferred rent in the accompanying balance sheets.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
In May 1998, the Board of Directors authorized management of the Company to
file a registration statement with the SEC permitting the Company to sell shares
of its common stock to the public. If the initial public offering is closed
under the terms presently anticipated, the 6,050,949 shares of preferred stock
outstanding at March 31, 1998 will automatically convert into 6,050,949 shares
of common stock. Such conversion is reflected as "Unaudited Pro Forma
Stockholders' Equity" at March 31, 1998 in the accompanying balance sheet.
REVENUE RECOGNITION
Contract revenue is recognized ratably over the period during which the
research is conducted, which approximates the actual cost and performance of the
research services. Grant revenue is recognized as services are performed and
therefore equals the related research and development expense. Up-front license
fees received under these agreements are recorded as deferred revenue and
recognized ratably over the initial term of the contract. Revenues from the
achievement of research and development milestones will be recognized when and
if the milestones are achieved. Continuation of certain contracts and grants are
dependent upon the Company achieving specific contractual milestones; however,
none of the payments received are refundable under current contracts and grants.
Ares-Serono is a related party based on its ownership interest in the
Company, and revenues received from Ares-Serono therefore are classified as
related party revenue. The Company does not
F-8
83
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
have the right or the obligation to repurchase any of the rights provided to, or
to refund any research payments received from, Ares-Serono under its
collaboration, nor does it intend to do so.
The Company's revenue is concentrated among a small number of customers, as
follows:
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
DuPont Merck........................... -- -- -- -- *
Ares-Serono............................ -- -- * -- 16%
Roche Bioscience....................... -- 11% 21% 22% *
Organon................................ -- 19% 34% 35% 15%
Nippon Kayaku.......................... -- -- -- -- *
Tanabe................................. -- 62% 39% 38% 40%
- ---------------
* Amount earned represents less than 10% of revenues for the period.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION
As permitted by SFAS 123, the Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations ("APB 25") in accounting for its employee stock options.
Under APB 25, when the exercise price of the Company's employee stock options
equals the fair value of the underlying stock on the date of grant, no
compensation expense is recognized.
NET INCOME (LOSS) PER SHARE
Historical basic net income (loss) per share is computed using the weighted
average number of common shares outstanding during the periods presented. Common
equivalent shares resulting from Convertible Preferred Stock, options to
purchase Common Stock and warrants to purchase Convertible Preferred Stock are
excluded from the computation.
Historical diluted net income per share has been computed as described
above and also gives effect to the common equivalent shares resulting from
Convertible Preferred Stock, options to purchase Common Stock, and warrants to
purchase Convertible Preferred and Common Stock.
Historical net income (loss) per share information is as follows:
F-9
84
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ---------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ----------
Basic and diluted net loss per
share............................... $ (18.25) $ (14.57) $ (11.29) $ (3.53)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share.......... 355,273 426,213 508,485 473,857
======== ======== ======== ========
Basic net income per share............ $ 0.58
==========
Diluted net income per share.......... $ 0.05
==========
Shares used in computing basic net
income per share.................... 577,097
==========
Shares used in computing diluted net
income per share.................... 6,875,100
==========
Pro Forma Net Income (Loss) Per Share
Pro forma basic net income (loss) per share has been computed as described
above for historical basic net income (loss) per share and also gives effect to
the conversion of the Convertible Preferred Stock, which will convert to Common
Stock upon completion of the Company's initial public offering, using the as
if-converted method from the original date of issuance. Pro forma diluted net
income per share has been computed as described above for historical diluted net
income per share.
NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted SFAS 130, Reporting
Comprehensive Income and SFAS 131, Disclosures about Segments of an Enterprise
and Related Information. The Company believes it operates in one business
segment, and therefore the adoption of SFAS 131 had no effect on the Company's
financial statements.
YEAR 2000 (UNAUDITED)
The Company currently has computer software and hardware which it believes
to be year 2000 compliant. The Company is working with its vendors and customers
to ensure their year 2000 compliance. Any necessary changes would be done in the
normal course of business during 1998 and 1999 at minimal incremental cost.
Therefore, the Company does not expect the year 2000 issue to have a significant
impact on its operations.
F-10
85
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
2. BALANCE SHEET INFORMATION
INVESTMENTS
The following is a summary of the Company's cash, cash equivalents and
short-term investments:
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------------ --------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
GAINS ESTIMATED GAINS ESTIMATED
COST (LOSSES) FAIR VALUE COST (LOSSES) FAIR VALUE
---------- ---------- ---------- ----------- ---------- -----------
Cash...................... $3,446,901 $-- $3,446,901 $ 5,512,634 $ -- $5,512,634
Corporate debt
securities.............. 2,012,795 -- 2,012,795 15,305,000 48,341 15,353,341
---------- -- ---------- ----------- ------- -----------
$5,459,696 $-- $5,459,696 $20,817,634 $48,341 $20,865,975
========== == ========== =========== ======= ===========
MARCH 31, 1998
---------------------------------------
GROSS
UNREALIZED
GAINS ESTIMATED
COST (LOSSES) FAIR VALUE
----------- ----------- -----------
(UNAUDITED)
Cash...................... $13,165,178 $ -- $13,165,178
Corporate debt
securities.............. 7,500,000 6,015 7,506,015
----------- ------ -----------
$20,665,178 $6,015 $20,671,193
=========== ====== ===========
There were no gross realized gains or losses on sales of available-for-sale
securities for the years ended December 31, 1996 or 1997 or the three months
ended March 31, 1998. The gross unrealized gains of $48,341 and $6,015 at
December 31, 1997 and March 31, 1998, respectively, are reflected as separate
components of stockholders' equity.
The cost and estimated fair values of cash, cash equivalents and short-term
investments at December 31, 1996 and 1997 and March 31, 1998, by contractual
maturity, are shown below:
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998
----------------------- ------------------------- -------------------------
ESTIMATED ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
---------- ---------- ----------- ----------- ----------- -----------
(UNAUDITED)
Due in one year or less....... $5,459,696 $5,459,696 $19,817,634 $19,824,100 $19,665,178 $19,668,068
Due in one year through two
years....................... -- -- 1,000,000 1,041,875 1,000,000 1,003,125
---------- ---------- ----------- ----------- ----------- -----------
$5,459,696 $5,459,696 $20,817,634 $20,865,975 $20,665,178 $20,671,193
========== ========== =========== =========== =========== ===========
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- ----------
(UNAUDITED)
Machinery and equipment............................ $2,334,021 $2,665,205 $2,826,308
Office furniture and equipment..................... 763,379 1,043,110 1,119,973
Leasehold improvements............................. 639,692 880,504 1,425,142
---------- ---------- ----------
3,737,092 4,588,819 5,371,423
Less accumulated depreciation and amortization..... (1,456,924) (2,336,251) (2,594,802)
---------- ---------- ----------
$2,280,168 $2,252,568 $2,776,621
========== ========== ==========
F-11
86
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
2. BALANCE SHEET INFORMATION (CONTINUED)
DEPOSITS AND OTHER ASSETS
Deposits and other assets consist of the following:
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- ---------
(UNAUDITED)
Restricted cash....................................... $495,000 $150,000 $150,000
Other deposits........................................ 29,450 37,243 303,650
Organization costs, net............................... 6,026 2,195 1,464
-------- -------- --------
$530,476 $189,438 $455,114
======== ======== ========
3. COMMITMENTS
LEASES
The Company leases its office and research facilities under two operating
lease agreements. The minimum annual rents are subject to specified annual
rental increases. The Company also reimburses the lessor for taxes, insurance
and operating costs associated with the leases. Under the terms of the leases,
the Company has an outstanding letter of credit for $150,000 in favor of the
lessor, fully collateralized by cash. In January 1998, the Company entered into
a six-year operating lease for additional office space. The minimum annual rents
are subject to specified increases and are included in the future minimum lease
payments.
In addition, the Company leases certain machinery, equipment and office
furniture under capital leases with three-year terms with options to extend the
lease term to five years. In January 1998, the Company entered into a $2.0
million equipment lease line to finance capital equipment and improvements.
LONG-TERM DEBT
In November 1996, the Company issued a secured promissory note for
$3,000,000. The proceeds of the note payable were used for general corporate
purposes and working capital. The note payable accrues interest at a rate of
14%, is due May 22, 2000, and is secured by certain assets of the Company. The
principal payments due on the promissory note are $1.0 million, $1.0 million and
$416,460 for 1998, 1999 and 2000, respectively.
In conjunction with the issuance of the promissory note, the Company issued
the creditor a warrant to purchase 62,500 shares of Series C-1 Preferred Stock
at a price of $8.40 per share. The warrant expires at the earliest of ten years
from the date of grant or five years from the date of an initial public
offering. The warrant is valued at $165,000, which has been recorded as a
discount on the related debt. The value of the warrant is being amortized as
interest expense over the period of the debt.
F-12
87
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
3. COMMITMENTS (CONTINUED)
In April 1995, the Company entered into a note payable to equip its
expanded research facility. The remaining balance on the note at December 31,
1996 was $377,270. The note was repaid in full in August 1997.
Annual future minimum lease and equipment note payments as of December 31,
1997, including the office lease signed in January 1998, are as follows:
OBLIGATIONS
UNDER
CAPITAL
LEASES AND
EQUIPMENT
OPERATING NOTES
YEAR ENDED DECEMBER 31, LEASES PAYABLE
----------------------- ---------- -------------
1998...................................................... $ 760,530 $228,525
1999...................................................... 793,867 221,239
2000...................................................... 792,337 34,521
2001...................................................... 283,526 --
2002...................................................... 280,910 --
Thereafter................................................ 287,443 --
---------- --------
Total minimum lease and equipment note payments........... $3,198,613 484,285
==========
Less amount representing interest......................... 32,705
--------
Present value of remaining minimum capital lease and
equipment note payments................................. 451,580
Less amount due in one year............................... 205,911
--------
Long-term portion of obligations under capital leases and
equipment notes payable................................. $245,669
========
Rent expense for equipment and facility leases was $293,719, $406,453,
$784,337, $124,377 and $267,860 for the years ended December 31, 1995, 1996,
1997 and the three months ended March 31, 1997 (unaudited) and 1998 (unaudited),
respectively.
Cost and accumulated depreciation of equipment under capital leases and
equipment notes payable were as follows:
ACCUMULATED
COST DEPRECIATION
---------- ------------
December 31, 1996.......................................... $1,978,010 $952,884
December 31, 1997.......................................... 671,482 240,087
March 31, 1998 (unaudited)................................. 759,392 285,586
F-13
88
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS
In connection with certain license agreements, the Company paid fees of
$244,631, $602,007, $205,600, $40,000 and $38,000 for the years ended December
31, 1995, 1996, 1997 and the three months ended March 31, 1997 and 1998,
respectively, which were charged to research and development, and has future
commitments of up to $4.6 million which could be payable based on the
achievement of certain milestones, as well as royalties upon commercial sales,
if any, of certain products. Such milestone commitments may also involve the
issuance of 15,000 shares of Common Stock.
DUPONT MERCK
In December 1997, Signal entered into a collaborative agreement with The
DuPont Merck Pharmaceutical Company ("DuPont Merck"), under which DuPont Merck
agreed to fund certain research at Signal for three years. The agreement may be
extended for up to three additional years at DuPont Merck's option. The DuPont
Merck collaboration is focused on identifying compounds for the treatment or
prevention of HCV and HIV infections. Signal also has granted DuPont Merck an
option, exercisable through August 1998, to expand the collaboration to include
the identification of compounds directed toward an additional viral target.
Pursuant to this collaboration, Signal and Dupont Merck will be responsible for
developing target specific screening assays and will be jointly responsible for
identifying lead compounds. DuPont Merck will be solely responsible for lead
optimization and the worldwide development and commercialization of any drugs
arising from the collaboration.
DuPont Merck has paid Signal a $1.0 million license fee and has agreed to
provide Signal with annual research and development support at a level
approximating Signal's cost of these programs. DuPont Merck also is obligated to
make payments to Signal and to purchase $1.0 million of its stock based on the
achievement of certain research and development milestones and to pay Signal
royalties on any future product sales arising from the collaboration. In
addition, DuPont Merck has agreed to purchase $2.0 million of Common Stock of
Signal in a private transaction to be completed concurrent with the closing of
this offering at a price per share equal to the initial public offering price.
ARES-SERONO
In November 1997, Signal entered into a collaborative agreement with Ares
Trading S.A. (Ares-Serono), an affiliate of Ares-Serono S.A., under which
Ares-Serono agreed to fund certain research for an initial three-year period,
which term will automatically be extended for additional three-year periods
unless terminated at least six months prior to the end of the initial three-year
term. Ares-Serono may terminate the agreement upon six months' notice any time
after the end of the initial three-year term. The Ares-Serono collaboration is
focused on identifying compounds that modulate NF-kB gene regulating pathways to
which Ares-Serono has rights for all clinical indications in all countries of
the world excluding Asia. Ares-Serono S.A. has purchased approximately $10.0
million of Signal's Series E and Series F Preferred Stock. Ares-Serono also has
agreed to provide Signal with annual research and development support for
Signal's cost of this program at a percentage level approximating Ares-Serono's
relative share of worldwide marketing rights. In addition, Ares-Serono is
obligated to make payments to Signal based on the achievement of certain
research and development milestones and to pay Signal royalties on any future
product sales arising from the collaboration.
F-14
89
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS (CONTINUED)
ROCHE BIOSCIENCE
In August 1996, Signal entered into a three-year collaborative agreement
with the Roche Bioscience division ("Roche Bioscience") of Syntex (USA) Inc., a
member of the Roche Group of Companies. Under the agreement, Signal is applying
its proprietary cell line development technology toward the development of human
PNS cell lines for use by Roche Bioscience in target and drug discovery.
Pursuant to an exclusive, worldwide, royalty-free license granted by Signal,
Roche Bioscience may utilize these PNS cells to discover and commercialize drugs
for treating pain, incontinence and peripheral vascular disease. Under the
agreement, Signal retains the right to use the PNS cell lines for its internal
target and drug discovery programs in other therapeutic fields. Roche Bioscience
has paid Signal a license fee of $500,000 and has agreed to pay annual research
and development support at a level approximating Signal's cost of the PNS cell
line program. To date, Signal has developed and transferred to Roche Bioscience
clonal human PNS cell lines as specified in the collaborative agreement.
Roche Bioscience may terminate the agreement beginning in August 1998 at
its discretion upon 90 days' written notice. If the collaboration agreement is
terminated for any reason, the licenses granted to Roche Bioscience by Signal
shall survive for as long as Roche Bioscience continues to pay annual license
maintenance fees to Signal. As long as Roche Bioscience pays these annual
license maintenance fees, Signal may not enter into any other collaborations
with respect to cloned immortalized PNS cell lines in the covered fields of
pain, incontinence and peripheral vascular disease.
ORGANON
In July 1996, Signal entered into a collaborative agreement with N.V.
Organon ("Organon"), a business unit of Akzo Nobel N.V., for the discovery of
new genomic targets, under which Organon agreed to fund certain research at
Signal for three years. Such agreement may be extended for up to two additional
years by mutual consent of the parties. Pursuant to an amendment dated January
1998, Organon may terminate the research, effective in either January 1999 or
July 1999, for failure to meet certain milestones by October 1998 or January
1999, respectively. Initially, Signal will utilize its cellular, molecular and
genomic technologies to identify and validate novel genes in certain target
tissues. Signal will then develop high throughput screening assays for use by
Organon in identifying small molecule drugs to treat cardiovascular,
neurological, gynecological and certain other diseases. Pursuant to this
collaboration, Organon has received rights for, and will be solely responsible
for, the worldwide development and commercialization of any drugs arising from
the collaboration.
To date, Organon has paid Signal an initial $1.0 million non-refundable
license fee and annual research and development support payments at a level
approximating Signal's cost of this program. In addition, Organon is obligated
to make payments to Signal based on the achievement of certain research and
development milestones, and Organon must pay Signal royalties on any future
product sales arising from the collaboration.
TANABE
From March 1996 to March 1998, Signal and Tanabe were engaged in a
collaborative program under which Tanabe funded certain research by Signal in
target and drug discovery in the fields of
F-15
90
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS (CONTINUED)
inflammatory disease and osteoporosis. In connection with the collaboration,
Tanabe paid Signal an initial $1.0 million non-refundable license fee and
reimbursed Signal for research and development costs. Tanabe also purchased
125,000 shares of Signal's Series D Preferred Stock at $16.00 per share.
Pursuant to certain anti-dilution provisions of the Series D agreement, the
Company issued an additional 58,150 shares of Series D Preferred Stock to Tanabe
during 1997. In conjunction with the collaboration and stock purchase agreement
entered into in 1996, the Company issued Tanabe a warrant for the purchase of
$2,000,000 of Common Stock, which is only exercisable in connection with the
filing of an initial public offering by the Company, at the public offering
price per common share.
In March 1998, Signal and Tanabe mutually agreed to conclude their
collaboration and Tanabe licensed from Signal a lead compound that was
discovered during the collaboration. This lead has been validated in animal
models of arthritis, for the treatment of autoimmune, inflammatory and certain
other diseases. Signal retained all other intellectual property rights,
including rights to all other drug targets and drug leads, created before or
during the collaboration. Tanabe paid an additional license fee to Signal for
the exclusive worldwide license to the lead compound and is obligated to make
payments to Signal based on the achievement of certain research and development
milestones and to pay Signal royalties on any future product sales.
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
A summary of the Convertible Preferred Stock of the Company at December 31,
1997 and March 31, 1998 is as follows:
SHARES ISSUED AND
OUTSTANDING
--------------------------
PREFERENCE IN DECEMBER 31, MARCH 31,
LIQUIDATION 1997 1998
------------- ------------ -----------
(UNAUDITED)
Series A....................................... $ 2,626,892 656,710 656,710
Series B....................................... 3,450,000 718,745 718,745
Series C....................................... 12,308,005 2,197,851 2,197,851
Series D....................................... 2,000,000 183,150 183,150
Series E....................................... 12,329,929 1,613,865 1,613,865
Series F....................................... 8,194,761 680,628 680,628
----------- --------- ---------
$40,909,587 6,050,949 6,050,949
=========== ========= =========
Each of the Series A, B, C, D, E and F Preferred Stock is convertible on a
one-for-one basis, at the option of the holder, into shares of the Company's
Common Stock, which have been reserved for issuance upon conversion of the
Preferred Stock, subject to certain anti-dilution adjustments. The Preferred
Stock will convert automatically upon the closing of an underwritten public
offering of the Company's Common Stock with proceeds to the Company of at least
$15.0 million and at a price not less than $5.00 per share after adjustment for
any stock splits. The holders of the Series A, B, C, E and F Preferred Stock are
entitled to elect four directors to the Board of Directors, and in all other
matters
F-16
91
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
5. STOCKHOLDERS' EQUITY (CONTINUED)
the holder of each share of preferred stock is entitled to one vote for each
share of Common Stock into which it would convert.
Annual dividends of $0.32, $0.38, $0.45, $1.28, $0.61 and $0.96 per share
of Series A, B, C, D, E and F Preferred Stock, respectively, are payable
whenever funds are legally available and when and as declared by the Board of
Directors.
COMMON STOCK
In connection with certain stock purchase agreements, the Company has the
option to repurchase, at the original issue price, unvested shares in the event
of termination of employment or engagement. Shares issued under these agreements
generally vest over four to five years. At December 31, 1997 and March 31, 1998,
99,567 and 126,754 shares, respectively, were subject to repurchase by the
Company.
STOCK OPTION PLANS
In June 1993, the Company adopted its 1993 Founders' Stock Option Plan (the
"Founders' Plan"), under which 137,500 shares of Common Stock were reserved for
issuance upon exercise of options granted by the Company. The Founders' Plan
provides for the grant of incentive and nonstatutory options. The exercise price
of incentive stock options must equal at least the fair value on the date of
grant, and the exercise price of nonstatutory stock options may be no less than
85% of the fair value on the date of grant. The maximum term of options granted
under the Founders' Plan is ten years. Options generally are immediately
exercisable. Common Stock or options issued under the Founders' Plan generally
vest over five years. Unvested shares issued pursuant to the exercise of options
are subject to repurchase in the event of termination of employment or
engagement.
In November 1993, the Company adopted its 1993 Stock Option Plan, under
which 112,500 shares of the Company's Common Stock were reserved for issuance
upon exercise of options granted by the Company under provisions similar to the
Founders' Plan. In 1995 and 1996, the Company authorized an additional 250,000
and 262,500 shares, respectively, of the Company's Common Stock be reserved for
issuance upon exercise of options granted by the Company under the 1993 Stock
Option Plan.
In June 1997, the Company adopted its 1997 Stock Option Plan, under which
250,000 shares of Common Stock were reserved for issuance upon exercise of
options granted by the Company. In February 1998, the Company authorized an
additional 500,000 shares of the Company's Common Stock be reserved for issuance
upon exercise of options granted by the Company under the 1997 Stock Option
Plan. The options contain similar provisions to those options issued under the
1993 Founders' Stock Option Plan and the 1993 Stock Option Plan.
The Company recorded $615,855 and $1,019,170 of deferred compensation for
options granted during the year ended December 31, 1997 and the three months
ended March 31, 1998, respectively, representing the difference between the
option exercise price and the estimated fair value for financial statement
presentation purposes. The Company is amortizing the deferred compensation over
the vesting period of the options. The Company recorded $104,345 and $143,362 of
compensation expense during the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively.
F-17
92
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
5. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity and related information
follows:
YEAR ENDED DECEMBER 31, THREE
---------------------------------------------------------------- MONTHS ENDED
1995 1996 1997 MARCH 31, 1998
------- ------- -------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- -------- --------- ------- ---------
(UNAUDITED)
Outstanding at beginning of
period......................... 192,624 $0.44 286,874 $0.48 407,324 $0.51 542,115 $0.80
Granted...................... 102,625 $0.56 146,987 $0.56 299,162 $1.10 166,050 $1.12
Exercised.................... (3,875) $0.56 (16,924) $0.48 (138,519) $0.61 (44,618) $0.99
Cancelled.................... (4,500) $0.56 (9,613) $0.56 (25,852) $0.64 (871) $0.69
------- ------- -------- -------
Outstanding at end of period..... 286,874 $0.48 407,324 $0.51 542,115 $0.80 662,676 $0.87
------- ------- -------- -------
Vested options at end of
period......................... 171,467 $0.40 283,172 $0.45 421,842 $0.45 454,525 $0.46
------- ------- -------- -------
Exercise prices for options outstanding as of March 31, 1998 ranged from
$0.08 to $1.12. The weighted average remaining contractual life of those options
is 8.4 years. The weighted average fair value of the options granted in 1995,
1996 and 1997 are $0.16, $0.16 and $0.28, respectively.
As of December 31, 1997, options for 79,433 common shares were available
for future grant. As of March 31, 1998, options for 414,254 common shares were
available for future grant.
Adjusted pro forma information regarding net loss is required to be
disclosed by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method prescribed in that
Statement. The fair value of options was estimated at the date of grant using
the minimum value pricing model with the following weighted average assumptions
for 1995, 1996 and 1997: risk-free interest rate of 6.0%, dividend yield of 0%;
and an expected life of five years.
The minimum value pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor for volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
F-18
93
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
5. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the vesting period of the related
options. The effects of applying SFAS 123 for adjusted pro forma disclosure
purposes are not likely to be representative of the effects on adjusted pro
forma net loss in future years because it does not take into consideration
adjusted pro forma compensation expense related to grants made prior to 1995.
The Company's adjusted pro forma information follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
Adjusted pro forma net loss...................... $(6,483,838) $(6,214,581) $(5,757,845)
Adjusted pro forma basic net loss per share...... $ (18.25) $ (14.58) $ (11.32)
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1996 and 1997 are shown below. A valuation allowance of $10,477,000, of
which $2,278,000 is related to 1997, has been recognized as of December 31, 1997
to offset the deferred tax assets as realization of such assets is uncertain.
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
Deferred tax assets:
Capitalized research expenses.......................... $ 825,000 $ 861,000
Net operating loss carryforwards....................... 6,576,000 8,422,000
Research and development credits....................... 825,000 1,163,000
Other, net............................................. 118,000 104,000
----------- -----------
Total deferred tax assets................................... 8,344,000 10,550,000
Deferred tax liability:
Depreciation........................................... (145,000) (73,000)
----------- -----------
Net deferred tax assets..................................... 8,199,000 10,477,000
Valuation allowance for deferred tax assets................. (8,199,000) (10,477,000)
----------- -----------
Net deferred taxes.......................................... $ -- $ --
=========== ===========
At December 31, 1997, the Company has federal and California net operating
loss carryforwards of approximately $23,276,000 and $4,789,000, respectively.
The difference between the federal and California tax loss carryforwards is
attributable to the capitalization of research and development expenses for
California tax purposes and the fifty percent limitation on California loss
carryforwards. The federal and California tax loss carryforwards will begin
expiring in 2007 and 1998, respectively, unless previously utilized. The Company
also has federal and California research and development tax credit
carryforwards of approximately $857,000 and $470,000, respectively, which will
begin expiring in 2008 unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, future
utilization of these carryforwards may be limited in any one fiscal year
pursuant to the Internal Revenue Code and similar
F-19
94
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
6. INCOME TAXES (CONTINUED)
state provisions; however, the annual limitation will not prevent the entire
amount of the carryforwards from being used during the carryforward period.
Therefore, the Company does not believe any such limitation will have a material
effect upon the utilization of these carryforwards.
7. SUBSEQUENT EVENTS
DEFERRED COMPENSATION
The Company granted an additional 221,525 options and recorded $1,267,123
of additional deferred compensation in May 1998, representing the difference
between the option exercise price and the estimated fair value of the Common
Stock for financial statement presentation purposes at the date of such grant.
CHANGES IN CAPITALIZATION
On May 5, 1998, the Company's Board of Directors authorized management of
the Company to file a Registration Statement with the Securities and Exchange
Commission for the Company to sell shares of its Common Stock in an initial
public offering and approved (subject to shareholder ratification) that, prior
to the effective date of the Offering contemplated by this Prospectus, the
Company will change the authorized shares of Preferred Stock from 6,113,482 to
5,000,000; authorized shares of Common Stock from 8,750,000 to 25,000,000 and
reincorporate the Company in Delaware and effect a 4-for-1 reverse split of the
Common Stock. The financial statements and accompanying notes have been
retroactively restated to reflect the effect of the reverse split and
reincorporation in Delaware.
AMENDMENT AND CONCLUSION OF COLLABORATIVE AGREEMENT
On March 31, 1998, Signal and Tanabe Seiyaku Co., Ltd. ("Tanabe") mutually
agreed to conclude the research and development collaboration component of their
Collaborative Development and Licensing Agreement and Tanabe subsequently
licensed from Signal a lead compound discovered during the collaboration, and
validated in animal models of arthritis, for the treatment of autoimmune,
inflammatory and other diseases. Signal retained all other intellectual property
rights, including rights to all other drug targets and drug leads, discovered
before or during the collaboration. Tanabe paid an additional $2.0 million
license fee to Signal for the exclusive worldwide license to the lead compound
and is obligated to make further payments to Signal based on the achievement of
certain research and development milestones and to pay Signal royalties on any
future product sales.
NEW COLLABORATIVE RESEARCH AGREEMENT
In February 1998, Signal entered into a collaborative agreement with Nippon
Kayaku Co., Ltd. ("Nippon Kayaku") under which Nippon Kayaku agreed to fund
certain research at Signal, totaling $4.0 million, for two years. Under the
agreement, Signal and Nippon Kayaku will develop and commercialize products
based on or derived from a compound supplied by Nippon Kayaku for the treatment
and prevention of diseases and disorders of the CNS and PNS. Signal will perform
combinatorial chemistry and use its proprietary human neuronal cell lines to
further optimize the compound and characterize its mechanism of action prior to
the start of clinical studies. Nippon Kayaku has agreed to provide Signal with
annual research and development support at a level
F-20
95
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
7. SUBSEQUENT EVENTS (CONTINUED)
approximating Signal's cost of the program. Each party also is obligated to pay
the other royalties on future product sales arising from the collaboration.
Pursuant to a commercialization agreement to be concluded by Signal and
Nippon Kayaku following the initial research phase of the collaboration, Nippon
Kayaku will be solely responsible for the development and commercialization of
products in Japan for the treatment or prevention of diseases and disorders of
the PNS and will receive co-commercialization rights in Japan with respect to
products for the treatment and prevention of CNS diseases and disorders. Under
such future commercialization agreement, development and commercialization
rights for products outside Japan for the treatment or prevention of both PNS
and CNS diseases and disorders will be agreed upon by the parties on a
product-by-product basis, with Nippon Kayaku not guaranteed any minimum level of
co-commercialization rights. Signal and Nippon Kayaku also have granted each
other co-exclusive commercialization rights outside the field with respect to
each analog compound arising from the collaboration which is developed and
commercialized by one or both of the parties.
F-21
96
[Graphic depicting logos or unstylized names of Signal's corporate
collaborators, including Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon,
and DuPont Merck. Below each logo are disease programs addressed by the
collaboration. These logos or names surround the Signal logo centered on the
page.]
(inside back cover)
97
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary....................... 3
Risk Factors............................. 6
Use of Proceeds.......................... 19
Dividend Policy.......................... 19
Capitalization........................... 20
Dilution................................. 21
Selected Financial Data.................. 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 23
Business................................. 28
Management............................... 53
Certain Transactions..................... 62
Principal Stockholders................... 64
Description of Capital Stock............. 66
Shares Eligible for Future Sale.......... 69
Underwriting............................. 71
Legal Matters............................ 72
Experts.................................. 72
Additional Information................... 73
Index to Consolidated Financial
Statements............................. F-1
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------------
- ------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
2,500,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
LEHMAN BROTHERS
, 1998
- ------------------------------------------------------------
- ------------------------------------------------------------
98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee, the NASD filing fee and
the Nasdaq listing fee.
SEC Registration fee........................................ $ 11,026
NASD filing fee............................................. 4,238
Nasdaq Stock Market Listing Application fee................. 74,625
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 125,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 100,000
Transfer agent and registrar fees........................... 15,000
Miscellaneous............................................... 15,111
--------
Total.................................................. $600,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act.
The Registrant's Second Amended and Restated Certificate of Incorporation
and Bylaws include provisions to (i) eliminate the personal liability of its
directors for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by Section 102(b)(7) of the General Corporation Law of
Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its
directors and executive officers to the fullest extent permitted by Section 145
of the Delaware Law, including circumstances in which indemnification is
otherwise discretionary. Pursuant to Section 145 of the Delaware Law, a
corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are or are threatened to be made, a party
by reason of their serving in such positions so long as they acted in good faith
and in a manner they reasonably believed to be in or not opposed to, the best
interests of the corporation and with respect to any criminal action, they had
no reasonable cause to believe their conduct was unlawful. The Registrant
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers. These provisions do not eliminate the
directors' duty of care, and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware Law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant, for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for acts or omissions that the director believes to
be contrary to the best interests of the Registrant or its stockholders, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to the
Registrant or its stockholders when the director was aware or should have been
aware of a risk of serious injury to the Registrant or its stockholders, for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Registrant or its
stockholders, for improper transactions between the director and the Registrant
and for improper distributions to stockholders and loans to directors and
officers. The provision also does not affect a director's responsibilities under
any other law, such as the federal securities law or state or federal
environmental laws.
II-1
99
The Registrant has entered into indemnity agreements with each of its
directors and executive officers that require the Registrant to indemnify such
persons against any and all expenses (including attorneys' fees), witness fees,
damages, judgments, fines, settlements and other amounts incurred (including
expenses of a derivative action) in connection with any action, suit or
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a director, an officer or
an employee of the Registrant or any of its affiliated enterprises, provided
that such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Registrant and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. The indemnification agreements also set forth certain
procedures that will apply in the event of a claim for indemnification
thereunder.
At present, there is no pending litigation or proceeding involving a
Director, officer or key employee of the Registrant as to which indemnification
is being sought nor is the Registrant aware of any threatened litigation that
may result in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1995, the Registrant has sold and issued the following
unregistered securities:
1. On July 1, 1995, the Company issued 3,750 shares of Common Stock,
valued at $0.56 per share, to the New England Medical Center in connection
with the execution of a license agreement.
2. On March 31, 1996, the Company issued a warrant to purchase $2.0
million worth of Common Stock to Tanabe Seiyaku Co., Ltd., exercisable only
in connection with the initial public offering of the Company's Common
Stock on Form S-1 at the same per share price of such offering.
3. On March 31, 1996, the Company sold 125,000 shares of Series D
Preferred Stock at a price of $1.00 per share to Tanabe Seiyaku Co., Ltd.
On September 12, 1997, the Company issued an additional 58,150 shares of
Series D Preferred Stock to Tanabe Seiyaku Co., Ltd. for no additional
consideration as part of a purchase price adjustment with respect to its
prior sale of Series D Preferred Stock.
4. On October 19, 1996, the Company issued 2,500 shares of Common
Stock, valued at $0.56 per share, to the University of Massachusetts.
5. On November 22, 1996, the Company issued a warrant to purchase
62,500 shares of Series C-1 Preferred Stock to MMC/GATX Partnership No. 1
("MMC/GATX") at an exercise price of $8.40 per share. If such warrant is
exercised, the resulting shares of Series C-1 Preferred Stock would, upon
the closing of this offering, automatically convert into 62,500 shares of
Common Stock.
6. On December 2, 1996, the Company issued to MMC/GATX a Secured
Promissory Note in the principal amount of $3.0 million in connection with
a loan to the Company of the same amount. Such promissory note bears
interest at a rate of 13.6% annually.
7. On December 31, 1996, the Company issued 1,250 shares of Common
Stock, valued at $0.56 per share to The Regents of the University of
California.
8. On September 9, 11 and 12, 1997, the Company sold an aggregate of
1,613,865 shares of Series E Preferred Stock at a price of $7.64 per share
to the following purchasers: Accel Investors
'93 L.P., (935 shares), Accel IV L.P. (21,153 shares), Accel Japan L.P.
(2,022) shares), Accel Keiretsu L.P. (455 shares), Ares-Serono S.A.
(246,575 shares), Bayview Investors Ltd.
II-2
100
(15,204 shares), Biocentive (130,890 shares), Ellmore C. Patterson Partners
(556 shares), Finsbury Worldwide Pharmaceutical Trust, plc (130,890
shares), Hambrecht & Quist LLC (10,798 shares), Harry F. Hixson, Jr.
Separate Property Trust, Dated December 15, 1995 (5,505 shares), InterWest
Investors V (124 shares), InterWest Partners V (19,702 shares), Kleiner
Perkins Caufield & Byers VI (25,273 shares), Lehman Brothers (21,596
shares), Lombard Odier & Cie (392,670 shares), Neuroscience Partners
Limited Partnership (130,890 shares), New York Life Insurance Company
(196,335 shares), Oxford Bioscience Partners (Adjunct) L.P. (2,643 shares),
Oxford Bioscience Partners (Bermuda) L.P. (2,296 shares), Oxford Bioscience
Partners, L.P. (8,277 shares), Pharma/wHealth (130,890 shares), Prosper
Partners (151 shares), Robertson, Stephens & Company LLC (10,798 shares),
Second Ventures II, L.P. (1,387 shares), The Health Care and Biotechnology
Venture Fund (65,445 shares), U.S. Venture Partners IV, L.P. (11,433
shares), USVP Entrepreneur Partners II, L.P. (396 shares), Venrock
Associates (10,867 shares), Venrock Associates II, L.P. (14,405 shares),
and Vertical Fund Associates, L.P. (3,304 shares).
9. On December 1, 1997, the Company sold 680,628 shares of Series F
Preferred Stock at a price of $12.04 per share to Ares-Serono, S.A.
10. On December 8, 1997, the Company issued 5,000 shares of Common
Stock, valued at $1.12 per share, to the University of Massachusetts.
11. On December 31, 1997, the Company issued 625 shares of Common
Stock, valued at $14.40 per share, to Dr. David J. Baylink pursuant to a
consulting agreement.
12. On January 14, 1998, the Company issued 1,250 shares of Common
Stock, valued at $1.12 per share, to The Regents of the University of
California.
13. On March 8, 1998, the Company issued 6,248 shares of Common Stock
in the aggregate, valued at $1.12 per share, to five scientists affiliated
with The Regents of the University of California.
14. As of March 31, 1998, the Company has granted options to purchase
an aggregate of 1,103,444 shares of its Common Stock to directors,
employees and consultants pursuant to its Prior Plans, and the Company has
issued an aggregate of 435,570 shares of its Common Stock upon the exercise
of stock options under its Prior Plans. The exercise price for such options
range from $0.08 to $1.12 per share.
The offers, sales and issuances of the above securities were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act, and/or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such Rule
701. The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access, through employment or other relationships,
to information about the Company.
II-3
101
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
1.1+ Form of Underwriting Agreement.
3.1+ Articles of Incorporation effective prior to reincorporation
of the Company in Delaware.
3.2+ Bylaws effective prior to reincorporation of the Company in
Delaware.
3.3+ Certificate of Incorporation of the Company's Delaware
subsidiary.
3.4+ Form of Amended and Restated Certificate of Incorporation,
to be filed and become effective prior to the effectiveness
of this Registration Statement.
3.5+ Form of Second Amended and Restated Certificate of
Incorporation, to be filed and become effective upon
completion of the offering.
3.6+ Form of Bylaws to become effective prior to the
effectiveness of this Registration Statement.
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and
3.6.
4.2++ Form of Common Stock Certificate.
5.1++ Opinion of Cooley Godward LLP.
10.1+ Second Amended and Restated Voting Agreement, dated
September 8, 1994, entered into between the Registrant and
certain of its stockholders.
10.2+ Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.3+ Registrant's 1998 Equity Incentive Plan.
10.4+ Form of Incentive and Nonstatutory Stock Option Agreements
under the 1998 Equity Incentive Plan.
10.5+ Registrant's Employee Stock Purchase Plan and related
offering document.
10.6+ Registrant's Non-Employee Directors' Stock Option Plan.
10.7+ Form of Nonstatutory Stock Option under Registrant's
Non-Employee Directors' Stock Option Plan.
10.8+ Registrant's Employees Retirement Investment Plan and Trust,
effective as of January 1, 1998.
10.9+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P., dated September 6, 1994.
10.10+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P., Second Ventures II, L.P. and USVP
Entrepreneur Partners II, L.P., dated September 8, 1994.
10.11+ Management Rights Letter delivered by the Registrant to
Oxford Bioscience Partners L.P., Oxford Bioscience Partners
(Bermuda) Limited Partnership and Oxford Bioscience Partners
(Adjunct) L.P., dated September 8, 1994.
10.12+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P. dated September 5, 1997.
10.13+ Amended and Restated Investors' Rights Agreement, dated
September 9, 1997, entered into between the Registrant and
certain of its stockholders.
10.14+ Amendment to the Amended and Restated Investors' Rights
Agreement dated November 25, 1997, entered into between the
Registrant and certain of its stockholders.
II-4
102
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
10.15+ Loan and Security Agreement, dated November 22, 1996,
entered into between the Registrant and MMC/GATX Partnership
No. 1.
10.16+ Warrant to Purchase 250,000 shares of Series C-1 Preferred
Stock, issued by the Registrant to MMC/GATX Partnership No.
1.
10.17+ Secured Promissory Note, dated December 2, 1996, issued by
the Registrant to MMC/ GATX Partnership No. 1.
10.18+ Series E Preferred Stock Purchase Agreement, dated September
9, 1997, between the Registrant and certain of its
stockholders.
10.19+ Series F Preferred Stock Purchase Agreement, dated November
25, 1997, between the Registrant and Ares-Serono S.A.
10.20+ Promissory Note, dated June 14, 1994, as amended, issued to
the Registrant by Alan J. Lewis.
10.21+ Security Agreement, dated June 14, 1994, entered into
between the Registrant to Alan J. Lewis.
10.22+ Employment letter agreement, dated December 8, 1993, between
the Registrant and Alan J. Lewis.
10.23+ Employment letter agreement, dated March 4, 1994, between
the Registrant and David W. Anderson.
10.24+ Employment letter agreement, dated August 18, 1994, between
the Registrant and Bradley B. Gordon.
10.25+ Employment letter agreement, dated June 13, 1995, between
the Registrant and Carl F. Bobkoski.
10.26+ Consulting Agreement, dated April 1, 1996, between the
Registrant and John P. Walker.
10.27+ Lease, dated April 30, 1993, as amended, between the
Registrant and Sorrento Valley Business Park.
10.28+ Master Lease Agreement, dated July 8, 1993, between the
Registrant and E.I. Dupont de Nemours & Co.
10.29+ Master Equipment Lease, dated September 1, 1993, between the
Registrant and Phoenix Leasing Incorporated.
10.30+ Master Lease Agreement, dated January 1, 1998, between the
Registrant and Transamerica Business Credit Corporation.
10.31+ Lease, dated January 1, 1998, between the Registrant and
Sorrento Valley Business Park.
10.32* Exclusive License Agreement, dated October 26, 1993, between
the Registrant and The Regents of the University of
California.
10.33* First Amendment to Exclusive License Agreement, dated June
22, 1997, between the Registrant and The Regents of the
University of California.
10.34* Second Amendment to Exclusive License Agreement, dated
February 2, 1998, between the Registrant and The Regents of
the University of California.
10.35+* Restricted Stock Purchase Agreement, dated October 26, 1993,
between the Registrant and the Regents of the University of
California.
10.36* License Agreement, dated February 18, 1998, between the
Registrant and The Regents of the University of California.
10.37+* Restricted Stock Purchase Agreement, dated February 18,
1998, between the Registrant and The Regents of the
University of California.
II-5
103
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
10.38* Collaborative Development and Licensing Agreement, dated
March 31, 1996, between the Registrant and Tanabe Seiyaku
Co., Ltd.
10.39+* Amendment to Collaborative Development and Licensing
Agreement, dated March 31, 1998, between the Registrant and
Tanabe Seiyaku Co., Ltd.
10.40+ Stock Purchase Agreement, dated March 31, 1996, between the
Registrant and Tanabe Seiyaku Co., Ltd.
10.41* Agreement dated July 30, 1996, between the Registrant and
N.V. Organon.
10.42* First Amendment to Agreement, dated January 30, 1998,
between the Registrant and N.V. Organon.
10.43+* Research Collaboration Agreement, dated August 26, 1996, and
as amended on September 5, 1997, between the Registrant and
Roche Bioscience.
10.44+* Exclusive License Agreement, dated October 1996, between the
Registrant and the University of Massachusetts.
10.45+* Restricted Stock Purchase Agreement, dated October 31, 1996,
between the Registrant and the University of Massachusetts.
10.46* License Agreement, dated October 28, 1997, between the
Registrant and the University of Massachusetts.
10.47+* Restricted Stock Purchase Agreement, dated December 7, 1997,
between the Registrant and the University of Massachusetts.
10.48* Research, Development and License Agreement, dated November
25, 1997, between the Registrant and Ares Trading S.A.
10.49* Collaborative Research and License Agreement, dated December
26, 1997, between the Registrant and The DuPont Merck
Pharmaceutical Company.
10.50+* Stock Purchase Agreement dated December 26, 1997, between
the Registrant and The DuPont Merck Pharmaceutical Company.
10.51* Collaboration Agreement, dated February 9, 1998, between the
Registrant and Nippon Kayaku Co., Ltd.
10.52+ Promissory Note, dated May 8, 1998, issued to the Registrant
by Alan J. Lewis.
10.53 Employment Letter Agreement, dated May 13, 1998, between the
Registrant and Merl F. Hoekstra.
11.1+ Computation of Net Loss per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2++ Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1+ Power of Attorney.
- ------------------------------
* Confidential Treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
+ Previously filed.
++ To be filed by amendment.
(B) SCHEDULES.
All schedules are omitted because they are not required, are not applicable
or the information is included in the consolidated Financial Statements or Notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-6
104
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 of this Registration
Statement, or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(2) That, for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
105
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, County of San Diego, State of
California, on the 5th day of August 1998.
/s/ BRADLEY B. GORDON
By:
Bradley B. Gordon
Vice President, Finance,
Chief Financial Officer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* President, Chief Executive Officer and August 5, 1998
- --------------------------------------------- Director (Principal Executive Officer)
Alan J. Lewis, Ph.D.
/s/ BRADLEY B. GORDON Vice President, Finance, Chief August 5, 1998
- --------------------------------------------- Financial Officer and Secretary
Bradley B. Gordon (Principal Financial and Accounting
Officer)
* Chairman of the Board August 5, 1998
- ---------------------------------------------
John P. Walker
* Director August 5, 1998
- ---------------------------------------------
Brook H. Byers
* Director August 5, 1998
- ---------------------------------------------
Luke B. Evnin, Ph.D.
* Director August 5, 1998
- ---------------------------------------------
Harry F. Hixson, Ph.D.
* Director August 5, 1998
- ---------------------------------------------
Patrick F. Latterell
* Director August 5, 1998
- ---------------------------------------------
Arnold Oronsky, Ph.D.
*By: /s/ BRADLEY B. GORDON
---------------------------
(Bradley B. Gordon)
(Attorney-in-fact)
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106
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
1.1+ Form of Underwriting Agreement.
3.1+ Articles of Incorporation effective prior to reincorporation
of the Company in Delaware.
3.2+ Bylaws effective prior to reincorporation of the Company in
Delaware.
3.3+ Certificate of Incorporation of the Company's Delaware
subsidiary.
3.4+ Form of Amended and Restated Certificate of Incorporation,
to be filed and become effective prior to the effectiveness
of this Registration Statement.
3.5+ Form of Second Amended and Restated Certificate of
Incorporation, to be filed and become effective upon
completion of the offering.
3.6+ Form of Bylaws to become effective prior to the
effectiveness of this Registration Statement.
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and
3.6.
4.2++ Form of Common Stock Certificate.
5.1++ Opinion of Cooley Godward LLP.
10.1+ Second Amended and Restated Voting Agreement, dated
September 8, 1994, entered into between the Registrant and
certain of its stockholders.
10.2+ Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.3+ Registrant's 1998 Equity Incentive Plan.
10.4+ Form of Incentive and Nonstatutory Stock Option Agreements
under the 1998 Equity Incentive Plan.
10.5+ Registrant's Employee Stock Purchase Plan and related
offering document.
10.6+ Registrant's Non-Employee Directors' Stock Option Plan.
10.7+ Form of Nonstatutory Stock Option under Registrant's
Non-Employee Directors' Stock Option Plan.
10.8+ Registrant's Employees Retirement Investment Plan and Trust,
effective as of January 1, 1998.
10.9+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P., dated September 6, 1994.
10.10+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P., Second Ventures II, L.P. and USVP
Entrepreneur Partners II, L.P., dated September 8, 1994.
10.11+ Management Rights Letter delivered by the Registrant to
Oxford Bioscience Partners L.P., Oxford Bioscience Partners
(Bermuda) Limited Partnership and Oxford Bioscience Partners
(Adjunct) L.P., dated September 8, 1994.
10.12+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P. dated September 5, 1997.
10.13+ Amended and Restated Investors' Rights Agreement, dated
September 9, 1997, entered into between the Registrant and
certain of its stockholders.
10.14+ Amendment to the Amended and Restated Investors' Rights
Agreement dated November 25, 1997, entered into between the
Registrant and certain of its stockholders.
107
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.15+ Loan and Security Agreement, dated November 22, 1996,
entered into between the Registrant and MMC/GATX Partnership
No. 1.
10.16+ Warrant to Purchase 250,000 shares of Series C-1 Preferred
Stock, issued by the Registrant to MMC/GATX Partnership No.
1.
10.17+ Secured Promissory Note, dated December 2, 1996, issued by
the Registrant to MMC/ GATX Partnership No. 1.
10.18+ Series E Preferred Stock Purchase Agreement, dated September
9, 1997, between the Registrant and certain of its
stockholders.
10.19+ Series F Preferred Stock Purchase Agreement, dated November
25, 1997, between the Registrant and Ares-Serono S.A.
10.20+ Promissory Note, dated June 14, 1994, as amended, issued to
the Registrant by Alan J. Lewis.
10.21+ Security Agreement, dated June 14, 1994, entered into
between the Registrant to Alan J. Lewis.
10.22+ Employment letter agreement, dated December 8, 1993, between
the Registrant and Alan J. Lewis.
10.23+ Employment letter agreement, dated March 4, 1994, between
the Registrant and David W. Anderson.
10.24+ Employment letter agreement, dated August 18, 1994, between
the Registrant and Bradley B. Gordon.
10.25+ Employment letter agreement, dated June 13, 1995, between
the Registrant and Carl F. Bobkoski.
10.26+ Consulting Agreement, dated April 1, 1996, between the
Registrant and John P. Walker.
10.27+ Lease, dated April 30, 1993, as amended, between the
Registrant and Sorrento Valley Business Park.
10.28+ Master Lease Agreement, dated July 8, 1993, between the
Registrant and E.I. Dupont de Nemours & Co.
10.29+ Master Equipment Lease, dated September 1, 1993, between the
Registrant and Phoenix Leasing Incorporated.
10.30+ Master Lease Agreement, dated January 1, 1998, between the
Registrant and Transamerica Business Credit Corporation.
10.31+ Lease, dated January 1, 1998, between the Registrant and
Sorrento Valley Business Park.
10.32* Exclusive License Agreement, dated October 26, 1993, between
the Registrant and The Regents of the University of
California.
10.33* First Amendment to Exclusive License Agreement, dated June
22, 1997, between the Registrant and The Regents of the
University of California.
10.34* Second Amendment to Exclusive License Agreement, dated
February 2, 1998, between the Registrant and The Regents of
the University of California.
10.35+* Restricted Stock Purchase Agreement, dated October 26, 1993,
between the Registrant and the Regents of the University of
California.
10.36* License Agreement, dated February 18, 1998, between the
Registrant and The Regents of the University of California.
108
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.37+* Restricted Stock Purchase Agreement, dated February 18,
1998, between the Registrant and The Regents of the
University of California.
10.38* Collaborative Development and Licensing Agreement, dated
March 31, 1996, between the Registrant and Tanabe Seiyaku
Co., Ltd.
10.39+* Amendment to Collaborative Development and Licensing
Agreement, dated March 31, 1998, between the Registrant and
Tanabe Seiyaku Co., Ltd.
10.40+ Stock Purchase Agreement, dated March 31, 1996, between the
Registrant and Tanabe Seiyaku Co., Ltd.
10.41* Agreement dated July 30, 1996, between the Registrant and
N.V. Organon.
10.42* First Amendment to Agreement, dated January 30, 1998,
between the Registrant and N.V. Organon.
10.43+* Research Collaboration Agreement, dated August 26, 1996, and
as amended on September 5, 1997, between the Registrant and
Roche Bioscience.
10.44+* Exclusive License Agreement, dated October 1996, between the
Registrant and the University of Massachusetts.
10.45+* Restricted Stock Purchase Agreement, dated October 31, 1996,
between the Registrant and the University of Massachusetts.
10.46* License Agreement, dated October 28, 1997, between the
Registrant and the University of Massachusetts.
10.47+* Restricted Stock Purchase Agreement, dated December 7, 1997,
between the Registrant and the University of Massachusetts.
10.48* Research, Development and License Agreement, dated November
25, 1997, between the Registrant and Ares Trading S.A.
10.49* Collaborative Research and License Agreement, dated December
26, 1997, between the Registrant and The DuPont Merck
Pharmaceutical Company.
10.50+* Stock Purchase Agreement dated December 26, 1997, between
the Registrant and The DuPont Merck Pharmaceutical Company.
10.51* Collaboration Agreement, dated February 9, 1998, between the
Registrant and Nippon Kayaku Co., Ltd.
10.52+ Promissory Note, dated May 8, 1998, issued to the Registrant
by Alan J. Lewis.
10.53 Employment Letter Agreement, dated May 13, 1998, between the
Registrant and Merl F. Hoekstra.
11.1+ Computation of Net Loss per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2++ Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1+ Power of Attorney.
- ------------------------------
* Confidential Treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
+ Previously filed.
++ To be filed by amendment.