1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED
SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-12574
TEXAS BIOTECHNOLOGY CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3532643
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7000 Fannin, 20th Floor, Houston, Texas 77030
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
(713) 796-8822
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 31, 2000
----- -------------------------------
common stock, $0.005 par value 40,962,142
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TEXAS BIOTECHNOLOGY CORPORATION
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 1
Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999 and the nine months ended September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES 14
ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 15
ITEM 2: Changes in Securities 15
ITEM 3: Defaults Upon Senior Securities 15
ITEM 4: Submission of Matters to a Vote of Security Holders 15
ITEM 5: Other Information 15
ITEM 6: Exhibits and Reports on Form 8-K 15
SIGNATURES 16
INDEX TO EXHIBITS 17
3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 34,635,549 $ 2,804,270
Short-term investments 47,291,184 11,366,066
Other current receivables 572,326 1,067,738
Receivable from related party under collaborative arrangement 2,769,617 --
Prepaids 1,155,926 1,453,090
------------- -------------
Total current assets 86,424,602 16,691,164
Long-term investments 10,000,000 1,000,000
Equipment and leasehold improvements, at cost less
accumulated depreciation and amortization 2,596,759 2,998,431
Other assets 59,591 115,096
------------- -------------
Total assets $ 99,080,952 $ 20,804,691
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,023,274 $ 556,664
Accrued expenses 2,562,200 1,657,706
------------- -------------
Total current liabilities 3,585,474 2,214,370
Liability to related party 1,955,366 --
Deferred income from related party 1,737,928 --
Commitments and contingencies -- --
Minority interest in Revotar 4,286,982 --
Stockholders' equity:
Preferred stock, par value $.005 per share. At September 30, 2000,
5,000,000 shares authorized; none outstanding. At December 31, 1999,
5,000,000 shares authorized;
none outstanding -- --
Common stock, par value $.005 per share. At September 30, 2000,
75,000,000 shares authorized; 40,951,208 shares issued and
outstanding. At December 31, 1999, 75,000,000 shares
authorized; 34,392,909 shares issued and outstanding 204,756 171,964
Additional paid-in capital 188,107,747 118,317,599
Accumulated deficit (100,797,301) (99,899,242)
------------- -------------
Total stockholders' equity 87,515,202 18,590,321
------------- -------------
Total liabilities and stockholders' equity $ 99,080,952 $ 20,804,691
============= =============
See accompanying notes to consolidated financial statements
FORM 10-Q Page 1
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Research agreements $ 908,002 516,262 1,961,839 1,546,317
Collaborative research and development from related party 548,023 -- 701,425 --
License fee and milestone income 193,548 -- 10,758,064 --
----------- ----------- ----------- -----------
Total revenues 1,649,573 516,262 13,421,328 1,546,317
----------- ----------- ----------- -----------
Expenses:
Research and development 2,391,299 3,259,081 9,581,698 9,473,841
Charge for purchase of in-process research
and development -- -- 965,970 --
General and administrative 1,393,672 1,438,100 4,762,411 4,374,632
----------- ----------- ----------- -----------
Total expenses 3,784,971 4,697,181 15,310,079 13,848,473
----------- ----------- ----------- -----------
Operating loss 2,135,398 4,180,919 1,888,751 12,302,156
Equity in loss of affiliate 1,388,708 -- 1,955,366 --
Investment income 1,486,408 282,683 2,817,090 969,457
----------- ----------- ----------- -----------
Net loss before minority interest $ 2,037,698 3,898,236 1,027,027 11,332,699
Minority interest in loss of Revotar 128,968 -- 128,968 --
----------- ----------- ----------- -----------
Net loss $ 1,908,730 3,898,236 898,059 11,332,699
=========== =========== =========== ===========
Net loss per common share, basic and diluted: 0.05 0.11 0.02 0.33
Weighted average common shares used to
compute net loss per common share, basic
and diluted: 40,880,185 34,237,568 38,517,172 34,207,956
See accompanying notes to consolidated financial statements
FORM 10-Q Page 2
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------------ -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (898,059) (11,332,699)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 636,647 639,389
Equity in loss of affiliate 1,955,366 --
Amortization of deferred revenue (262,072) --
Minority interest in loss of Revotar (128,968) --
Purchase of in-process research and development 965,970 --
Expenses paid with stock and warrants 23,196 17,377
Loss on disposition of fixed assets 6,568 227
Change in operating assets and liabilities
Decrease (increase) in prepaids 297,164 (756,706)
Decrease in receivables 495,412 630,697
Decrease in other assets 55,505 --
Increase in receivable from related party under collaborative arrangement (2,769,617) --
Increase in other current assets -- (2,395)
Increase (decrease) in current liabilities 1,371,104 (195,411)
------------ ------------
Net cash provided by (used in) operating activities 1,748,216 (10,999,521)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (241,543) (570,915)
Proceeds from disposition of fixed assets -- 731
Purchases of investments (77,740,272) (16,203,533)
Maturities of investments 33,621,722 29,150,567
(Increase) decrease in interest receivable included in short-term investments (806,568) 321,921
Increase in deferred revenue 2,000,000 --
------------ ------------
Net cash (used in) provided by investing activities (43,166,661) 12,698,771
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and exercises of
options and warrants, net 68,833,774 212,197
Contribution from minority interest in consolidated subsidiary 4,415,950 --
------------ ------------
Net cash provided by financing activities 73,249,724 212,197
------------ ------------
Net increase in cash and cash equivalents 31,831,279 1,911,447
Cash and cash equivalents at beginning of period 2,804,270 4,176,911
------------ ------------
Cash and cash equivalents at end of period $ 34,635,549 6,088,358
============ ============
Supplemental disclosure of noncash financing activities:
Expenses and purchase of in-process research and development paid with stock $ 989,166 17,377
============ ============
See accompanying notes to consolidated financial statements
FORM 10-Q Page 3
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Texas Biotechnology Corporation (the "Company" or "TBC") is a
biopharmaceutical company focused on the discovery, development
and commercialization of novel synthetic small molecule compounds
for the treatment of a variety of vascular diseases. Since its
formation in 1989, the Company has been engaged principally in
research and drug discovery programs and clinical development of
certain drug compounds. On July 25, 1994, the Company acquired all
of the outstanding common stock of ImmunoPharmaceutics, Inc.
("IPI") in exchange for common stock, par value $.005 per share
(the "Common Stock"), of the Company. On June 6, 2000, TBC and
ICOS Corporation ("ICOS") entered into an agreement and formed
ICOS-Texas Biotechnology, Limited Partnership, a Delaware limited
partnership ("ICOS-TBC"), to develop and globally commercialize
endothelin-A receptor antagonists. TBC and ICOS are both 50%
owners in ICOS-TBC. During the third quarter 2000, TBC formed
Revotar Biopharmaceuticals AG ("Revotar"), a German corporation,
to conduct research and development for novel small molecule
compounds and to develop and commercialize TBC's selectin
antagonists. The Company retained a majority interest in Revotar.
The Company is presently working on a number of long-term
development projects which involve experimental and unproven
technology, which may require many years and substantial
expenditures to complete, and which may be unsuccessful. The
Company anticipates the launch of its first product, Argatroban,
for the treatment of heparin-induced thrombocytopenia ("HIT") in
2000.
(b) Basis of Consolidation
The Company's consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, IPI and
TBC-ET, Inc., a Delaware corporation ("TBC-ET"), and Revotar, a
majority owned subsidiary. All material intercompany transactions
have been eliminated.
(c) Cash, Cash Equivalents, Short-Term Investments and Long-Term
Investments
Cash equivalents are considered to be those securities or
instruments with original maturities, when purchased, of three
months or less. At September 30, 2000, approximately $5,834,000
was invested in demand and money market accounts. Short-term
investments are those investments which have an original maturity
of less than one year and greater than three months at the
purchase date. At September 30, 2000, the Company's short-term
investments consisted of approximately $13,308,000 in government
agency discount bonds and $33,983,000 in corporate commercial
paper and loan participations. Long-term investments consist of
approximately $10,000,000 in government agency discount bonds with
a remaining maturity of one year or more. Cash equivalents,
short-term and long-term investments are stated at cost plus
accrued interest, which approximates market value. Interest income
is accrued as earned. The Company classifies all short-term and
long-term investments as held to maturity.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation of
furniture and equipment is provided on the straight-line method
over the estimated useful lives of the respective assets (3 to 10
years). Amortization of leasehold improvements is provided on the
straight-line method over the shorter of the useful life or the
remaining minimum lease term.
FORM 10-Q Page 4
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(e) Investment in ICOS - TBC
ICOS-TBC is accounted for using the equity method. Accordingly,
the investment is recorded at cost, adjusted for the Company's
share of income or loss of the entity and amortization of revenues
for upfront and milestone payments. See footnote 8 below.
(f) Research and Development Costs
All research and development costs are expensed as incurred and
include salaries of research and development employees, certain
rent and related building services, research supplies and
services, clinical trial expenses and other associated costs.
Salaries and benefits for the three months ended September 30,
2000 and 1999 were approximately $1,719,000 and $1,696,000,
respectively, of which approximately $1,324,000 and $1,305,000,
respectively, was charged to research and development. Salaries
and benefits for the nine months ended September 30, 2000 and
1999, were approximately $5,160,000 and $5,024,000, respectively,
of which approximately $3,930,000 and $3,877,000, respectively,
was charged to research and development. Payments related to the
acquisition of in-process research and development are expensed.
(g) Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the net
loss by the weighted average number of common shares outstanding
during the period. For the three and nine months ended September
30, 2000 and 1999, there were no common dilutive shares used in
the calculation of weighed average common shares outstanding. For
the three months ended September 30, 2000 and 1999, the weighted
average common shares used to compute basic net loss per common
share totaled 40,880,185 and 34,237,568, respectively. For the
nine months ended September 30, 2000 and 1999, the weighted
average common shares used to compute basic net loss per common
share totaled 38,517,172 and 34,207,956, respectively. The
exercise of stock options and warrants was not assumed in the
calculation of diluted net loss per common share because the
effect would have been antidilutive.
(h) Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform with the September 30, 2000 presentation
with no effect on net loss previously reported.
(i) Revenue Recognition
Revenue from research agreements is recognized as the services are
performed and/or milestones are met. Milestone payments related to
contractual agreements are recognized as the milestones are
achieved. Revenue from licensing fees is recorded when the license
is granted subject to section (m) of this footnote (1) regarding
accounting pronouncements dealing with revenue recognition.
(j) Patent Application Costs
Costs incurred in filing for patents are expensed as incurred.
(k) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
these estimates.
FORM 10-Q Page 5
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(l) Interim Financial Information
The Consolidated Balance Sheet as of September 30, 2000, and the
related Consolidated Statement of Operations for the three and
nine months ended September 30, 2000 and 1999 and Consolidated
Statements of Cash Flows for the nine months ended September 30,
2000 and 1999 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year. The consolidated financial
statements and notes are presented as permitted by Form 10-Q and
do not contain certain information included in the Company's
Annual Consolidated Financial Statements and Notes which should be
read in conjunction with these consolidated financial statements
and notes.
(m) New Accounting Bulletins
In December 1999, the United States Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No. 101
("SAB101"), Revenue Recognition in Financial Statements. SAB101
summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company will be required to implement SAB101 in
the fourth quarter of the year ended December 31, 2000. The
Company may be required to adjust current year revenues and record
a cumulative effect adjustment for previously reported amounts
based on implementation of SAB101.
In March 2000, the Financial Accounting Standards Board issued
FASB Interpretation No. 44 ("FIN44"), Accounting for Certain
Transactions involving Stock Compensation. The provisions of FIN44
which were effective July 1, 2000 have not had a material effect
on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued FASB
Statement No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137 and
SFAS No. 138. SFAS 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to
carry all derivative instruments in the statement of financial
position at fair value. We will adopt SFAS 133 beginning in fiscal
year 2001. We do not expect the adoption of SFAS 133 will have a
material effect on our financial condition or results of operation
because we, historically, have not entered into derivative or
other financial instruments for trading or speculative purposes
nor do we use or intend to use derivative financial instruments or
derivative commodity instruments.
(2) CAPITAL STOCK
In April 2000, the Company sold 5,750,000 shares of Common Stock for
$12.50 per share in an underwritten public offering. The net proceeds to
the Company from this offering were approximately $65.2 million after
deducting selling commissions and expenses of approximately $4.6 million
related to the offering and approximately $2.1 million in proceeds
allocable to selling shareholders.
FORM 10-Q Page 6
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(3) STOCK OPTIONS AND WARRANTS
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations in
accounting for its plans and applies Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation and related
interpretations in reporting for its plans.
A summary of stock options as of September 30, 2000, follows:
Exercise Price Exercised/ Available
Stock Option Plans Per Share Authorized Outstanding Other Exercisable for Grant
------------------ -------------- ---------- ----------- ---------- ----------- ---------
1990 Plan $ 1.38 - $21.59 285,715 190,495 95,220 139,496 --
1992 Plan $ 1.41 - $21.59 1,700,000 948,934 749,749 670,154 1,317
1995 Plan $ 1.31 - $21.59 2,000,000 1,490,112 334,360 1,156,028 175,528
1999 Plan $20.13 - $20.13 1,000,000 181,000 -- -- 819,000
Director Plan $ 3.50 - $ 4.54 71,429 34,242 37,187 34,242 --
1995 Director Plan $ 1.38 - $11.31 500,000 259,096 36,860 175,096 204,044
--------- --------- --------- --------- ---------
TOTALS 5,557,144 3,103,879 1,253,376 2,175,016 1,199,889
========= ========= ========= ========= =========
As of March 6, 2000, the Compensation and Personnel Committee of the
Board of Directors approved an increase in the number of shares
authorized of 200,000 shares in the Amended and Restated 1995
Non-Employee Director Stock Option Plan which was approved by
stockholders at the annual meeting on June 8, 2000 and are included
above.
(4) INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
At September 30, 2000 the net deferred tax asset, representing primarily
net operating loss carryforwards and deferred start-up costs, totaled
approximately $36,891,000. The Company has established a valuation
allowance for the full amount of these deferred tax assets, as management
believes that it is not more likely than not that the Company will
recover these assets. The Company did not incur any tax expense in any
year due to operating losses.
At September 30, 2000 the Company had net operating loss carryforwards of
approximately $64,750,000 and deferred start-up costs of approximately
$36,174,000 for federal income tax return purposes. Utilization of the
Company's net operating loss carryforwards is subject to certain
limitations due to specific stock ownership changes which have occurred
or may occur. To the extent not utilized, the carryforwards will expire
during the years beginning 2002 through 2020.
FORM 10-Q Page 7
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(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
September 30, 2000 December 31, 1999
------------------ -----------------
Laboratory and office equipment $ 5,941,394 $ 5,760,113
Leasehold improvements 3,974,942 3,974,942
----------- -----------
9,916,336 9,735,055
Less accumulated depreciation and amortization (7,319,577) (6,736,624)
----------- -----------
$ 2,596,759 $ 2,998,431
=========== ===========
(6) COMMON STOCK RESERVED
The Company has reserved Common Stock for issuance as of September 30,
2000 as follows:
Stock option plans 4,303,768
Publicly traded warrants outstanding 3,866,509
Other warrants outstanding 627,105
---------
Total shares reserved 8,797,382
=========
(7) REGULATORY FILING
On June 30, 2000, the Company received final approval from the FDA for
Argatroban as an anticoagulant for prevention or treatment of thrombosis
in patients with heparin-induced thrombocytopenia ("HIT").
(8) LICENSE AGREEMENTS
Pursuant to the terms of the limited partnership agreement for ICOS-TBC,
TBC and ICOS will equally fund the cost of research and development of
sitaxsentan and second-generation endothelin antagonist compounds,
commercialize resulting products, and share equally in the profits from
this worldwide collaboration. ICOS made an upfront payment and will make
milestone payments to TBC that together could be as much as $55.5 million
for the development and commercialization of products resulting from the
collaboration. The immediate focus of ICOS-TBC will be to initiate a
Phase IIb/III pulmonary hypertension clinical trial for sitaxsentan,
continue clinical development for sitaxsentan in chronic heart failure,
and explore applications for second-generation endothelin antagonists
including TBC3711.
Pursuant to the terms of the limited partnership agreement, ICOS-TBC has
been initially capitalized by a cash contribution from ICOS and the
Company's contribution of intellectual property associated with
sitaxsentan sodium. The intellectual property contributed to ICOS-TBC had
no basis for financial reporting purposes and, accordingly, the Company
has recorded the transfer of this technology to ICOS-TBC at zero. The
Company received a license fee from ICOS-TBC upon transfer of this
technology and conducts research and development activities on behalf of
ICOS-TBC and is paid for such services based upon costs incurred. The
Company has deferred full recognition of the license fee and has recorded
approximately $1,955,000 of expenses representing its proportionate share
of ICOS-TBC's net losses. Also, the Company recorded approximately $2.8
million for cost reimbursements for the nine months ended September 30,
2000 related to the research and development activities provided to
ICOS-TBC of which approximately $701,000 was recognized as revenue. The
license fee and any future milestones paid to the Company will be
amortized over the anticipated development period. Pursuant to the
partnership agreement, TBC assigned one-half of the remaining payments
under the agreement with LG Chemical to the partnership.
On June 30, 2000, TBC and Schering-Plough Corporation ("Schering-Plough")
entered into a worldwide research collaboration and license agreement to
discover, develop and commercialize VLA-4 antagonists. VLA-4 antagonists
represent a new class of compounds that has shown promise in multiple
preclinical animal models of asthma. The primary focus of the
collaboration will be to discover orally available VLA-4 antagonists as
treatments for asthma.
Under the terms of the agreement, Schering-Plough obtains the exclusive
worldwide rights to develop, manufacture and market all compounds from
TBC's library of VLA-4 antagonists, as well as the rights to a second
integrin antagonist. TBC will be responsible for optimizing a lead
compound and additional follow-on compounds. Schering-Plough will support
research at TBC and will be responsible for all costs associated with the
worldwide
FORM 10-Q Page 8
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product development program and commercialization of the compound. In
addition to reimbursing research costs, Schering-Plough paid an upfront
license fee and will pay development milestones and royalties on product
sales resulting from the agreement. Total payments to TBC for both
programs, excluding royalties, could reach $87.0 million.
On June 30, 2000, TBC issued 71,429 shares of Common Stock to the former
licensor of Argatroban in conjunction with the approval of the NDA for
Argatroban in patients with HIT. The Company recorded a $965,970 non-cash
charge to in-process research and development during the second quarter
of 2000 related to the issuance. This transaction represents the final
amount to be paid in exchange for the license to the Argatroban
technology from the former licensee.
(9) FOREIGN SUBSIDIARY
During the third quarter 2000, TBC formed Revotar to conduct research and
development of novel small molecule compounds and to develop and
commercialize selectin antagonists. Upon formation, Revotar received
certain development and commercialization rights to the Company's
selectin antagonist compounds as well as rights to certain other TBC
research technology. Revotar also received approximately $5 million in
funding from three German venture capital funds. The Company retained
ownership of approximately 55% of the outstanding common stock and has
consolidated the financial results of Revotar into TBC's consolidated
financial statements.
(10) COMMITMENTS AND CONTINGENCIES
Lease Agreements
On June 30, 2000, the Company extended the lease agreement for its
facilities in Houston, Texas for a period of five years beginning January
1, 2001. The lease extension contains terms substantially similar to
those contained in the original lease agreement.
FORM 10-Q Page 9
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ITEM 2.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
OVERVIEW
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes to the financial statements included in Form
10-K for the year 1999 and our consolidated financial statements and the related
notes to the financial statements included in this Form 10-Q.
Since our inception in 1989, we have primarily devoted our resources to
funding drug discovery research and development. We have been unprofitable to
date and expect to incur substantial operating losses for the next several years
as we invest in product research and development, preclinical and clinical
testing and regulatory compliance. We have sustained net losses of approximately
$100.8 million from the date of our inception through September 30, 2000. We
have primarily financed our operations to date through private and public
offerings of our common and preferred stock.
During October 1996, we signed a research and common stock purchase
agreement with LG Chemical. LG Chemical purchased 1,250,000 shares of our common
stock for $5.0 million and committed to pay us up to $10.7 million over a
five-year period to develop two compounds in clinical development. Of this
amount, $7.1 million has been paid. Furthermore, $1.0 million will be paid on
December 31, 2000, and $1.3 million will be paid on June 30 and December 31,
2001. In June 2000, we assigned one-half of the remaining payments under the LG
Chemical agreement, or approximately $1.9 million, to ICOS-TBC.
In August 1997, we entered into an agreement with SmithKline Beecham plc,
commonly known as SmithKline, whereby we granted SmithKline the exclusive right
to work with us in the development and commercialization of Argatroban in the
U.S. and Canada for specified indications. Under this agreement, SmithKline has
paid an aggregate of $21.0 million in the form of license fees and milestone
payments for Argatroban. Future milestone payments for the acute myocardial
infarction indication are subject to SmithKline's agreement to market Argatroban
for the acute myocardial infarction indication. At this time, SmithKline has no
plans to conduct development work for the acute myocardial infarction and stroke
indications. We are evaluating the feasibility of developing Argatroban for
ischemic stroke and possibly other indications. In connection with the
agreement, SmithKline purchased 176,922 shares of our common stock for $1.0
million and an additional 400,000 shares of our common stock for $2.0 million in
conjunction with our public offering, which closed during October 1997.
On June 6, 2000, we and ICOS entered into the ICOS-TBC limited
partnership agreement. The partnership will seek to develop and globally
commercialize endothelin-A receptor antagonists. ICOS-TBC will make upfront and
milestone payments to us that could be as much as $55.5 million for the
development and commercialization of products resulting from the collaboration.
See footnote 8 to the Consolidated Financial Statements for a discussion of this
transaction.
On June 30, 2000, we and Schering-Plough Corporation entered into a
worldwide research collaboration and license agreement to discover, develop and
commercialize VLA-4 antagonists. In addition to research costs, Schering-Plough
will pay an upfront license fee, development milestones and royalties on product
sales resulting from the agreement. Total payments to us for both programs,
excluding royalties, could reach $87.0 million. See footnote 8 to the
Consolidated Financial Statements for a discussion of this transaction.
During September 2000, we founded Revotar Biopharmaceuticals, AG and
transferred to Revotar certain development and commercialization rights to our
selectin antagonist program as well as rights to other proprietary technology.
See footnote 9 to the Consolidated Financial Statements for a discussion of this
transaction. During the third quarter, the primary focus of Revotar has been on
the design and initiation of a Phase I trial for TBC1269 using the inhaled
formulation of the drug, which is scheduled to begin in the first half of 2001.
Also during the third quarter, Dr. Gunter Roskamp, formerly with the
Industrial Investment Council of Germany and Schering AG, joined Revotar as
Chief Operating Officer.
FORM 10-Q Page 10
13
Our operating results have fluctuated significantly during each quarter,
and we anticipate that such fluctuations, which are largely attributable to
varying research and development commitments and expenditures, will continue for
the next several years.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues were $516,262 and $1,649,573 during the three months ended
September 30, 1999 and 2000, respectively. Revenues were composed of amounts
recognized under license agreements and research and development agreements and
increased 220% due to amortization of the license fee received in connection
with the formation of ICOS-TBC, reimbursement from ICOS-TBC for labor costs
incurred on behalf of ICOS-TBC and the research collaboration payments from
Schering-Plough, all of which occurred during 2000. Interest income for the
three months ended September 30, 1999 was 426% lower than the same period of
2000 due primarily to higher investment balances in 2000.
Research and development expenses decreased 27% from $3,259,081 during
the three months ended September 30, 1999 to $2,391,299 for the same period of
2000. The decrease was due primarily to expenses of the endothelin development
program which are now the responsibility of ICOS-TBC offset partially by
increased costs to the program. However, we expect ICOS-TBC research and
development expenditures to increase in the future as clinical trials for the
endothelin program progress.
During the third quarter of 2000, we recognized approximately $1.4
million of losses related to our 50% equity interest in ICOS-TBC which commenced
in June 2000.
General and administrative expenses decreased 3% from $1,438,100 during
the three months ended September 30, 1999 to $1,393,672 during the same period
of 2000. The decrease was due primarily to decreased patent legal fees related
to the sitaxsentan program which are now the responsibility of ICOS-TBC.
We incurred net losses of $3,898,236 and $1,908,730 for the three months
ended September 30, 1999 and 2000, respectively.
RESULTS OF OPERATIONS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues were $1,546,317 and $13,421,328 during the nine months ended
September 30, 1999 and 2000, respectively. Revenues were composed of amounts
recognized under license agreements and research and development agreements and
increased 768% due to an increase in license fees received in connection with
the formation of ICOS-TBC and the research collaboration and license agreement
with Schering-Plough and a $7.5 million milestone payment related to final
approval of Argatroban due under the license agreement with SmithKline. Interest
income for the nine months ended September 30, 1999 was 191% lower than the same
period of 2000 due primarily to higher investment balances in 2000.
Research and development expenses increased 1% from $9,473,841 during the
nine months ended September 30, 1999 to $9,581,698 for the same period of 2000.
The increase was due primarily to the decrease in expenses of the endothelin
development program which are now the responsibility of ICOS-TBC and the
increase in preclinical costs related to the endothelin development program
incurred prior to initiation of ICOS-TBC.
General and administrative expenses increased 9% from $4,374,632 during
the nine months ended September 30, 1999 to $4,762,411 during the same period of
2000. The increase was due primarily to increases in premarketing and consulting
costs related to Argatroban. We have recently added additional staff in the
marketing and clinical departments and expect to add additional senior staff in
the research and administrative areas in 2001. Accordingly, we expect general
and administrative expenses to increase as a result of these staff increases. We
had 86 employees at September 30, 1999 and 88 employees at September 30, 2000.
We incurred net losses of $11,332,699 and 898,059 for the nine months
ended September 30, 1999 and 2000, respectively.
FORM 10-Q Page 11
14
We expect that revenue for the fourth quarter of 2000 will be in the
range of $1.5 to $2.0 million, which will include revenues from the
collaboration agreements with Schering-Plough, LG Chemical and ICOS-TBC.
Additionally, royalties associated with the sale of Argatroban are expected to
commence during this quarter. We may be required to adjust revenues based on
implementation of SEC Staff Accounting Bulletin 101 which concerns recognition
of revenue. Expenses for the fourth quarter are expected to range from $5.0 to
$6.5 million including operating expenses and our share of ICOS-TBC losses.
At this time, management expects that expenses in 2001 will increase over
the year 2000 due to the initiation of additional clinical trials for Argatroban
and the ICOS-TBC endothelin antagonist compounds and the operating expenses of
Revotar. Revenues for 2001 will include revenues and potential milestones from
the agreements with Schering-Plough, LG Chemical, ICOS-TBC and a full year of
Argatroban royalties.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our research and development activities to date
principally through:
o private and public offerings of our common and preferred stock;
o issuances of common stock in conjunction with acquisitions, research and
collaboration agreements and upon exercises of stock options and
warrants;
o milestone and research payments received in conjunction with research and
collaborative agreements; and
o investment income, net of interest expense.
In April 2000, we raised approximately $65.2 million from an underwritten
public offering of our common stock. At September 30, 2000 we had cash, cash
equivalents, short-term and long-term investments of approximately $91.9 million
which includes approximately $4.5 million from Revotar, our majority owned
subsidiary.
We expect to incur substantial research and development expenditures as
we design and develop biopharmaceutical products for the prevention and
treatment of cardiovascular and other diseases. We anticipate that our operating
expenses will increase during 2000 and subsequent years because:
o We will incur significant clinical trial costs for sitaxsentan and
TBC1269 compounds and expect to begin to incur costs for clinical trials
related to additional compounds and indications. These costs include:
o hiring personnel to direct and carry out all operations related to
clinical trials;
o hospital and procedural costs;
o services of a contract research organization; and
o purchasing and formulating large quantities of the compound to be
used in such trials.
o There will be additional costs in future periods related to Argatroban in
complying with ongoing FDA requirements and possible clinical trial
expenditures for additional therapeutic indications.
Furthermore, we anticipate that the administrative costs associated with
our efforts will be significant. The amount and timing of expenditures will
depend, among other things, on our progress in ongoing research, clinical
development and commercialization efforts. On June 30, 2000 we received final
approval from the FDA for Argatroban as an anticoagulant for prevention or
treatment of thrombosis in patients with HIT. As a result, we expect to begin to
accrue royalty revenues from sales of Argatroban by SmithKline by year-end.
Therefore, we expect royalty revenues to begin during the fourth quarter.
However, increases in revenue, if any, may be partially, if not fully, offset by
increases in expenses related to ICOS-TBC's development of sitaxsentan and
continued research and development of our other programs.
FORM 10-Q Page 12
15
We anticipate that our existing capital resources and our other revenue
sources, should be sufficient to fund our cash requirements for the foreseeable
future which is contingent upon various factors, including royalty revenues from
Argatroban, the rates of patient enrollment and spending associated with
clinical trials for Argatroban and TBC1269, the level of expenditures of
ICOS-TBC and the level of research and development expenditures for our other
compounds. Our publicly traded warrants are scheduled to expire on December 31,
2000. As of September 30, 2000, there were approximately 3.8 million warrants
outstanding. The exercise price of the warrants is $8.44. We believe that some
warrant holders will exercise their warrants before the expiration date. There
can be no assurance given as to the number or timing of warrant exercises, or
the amount of additional funds, if any, generated from warrant exercises.
We anticipate that we may need to raise substantial funds for future
operations, which may be raised through collaborative arrangements, public or
private issuance of debt and equity, or other arrangements. We expect that
additional expenditures will be required if additional product candidates enter
clinical trials, which may require additional expenditures for laboratory space,
scientific and administrative personnel, and services of contract research
organizations. We cannot assure you that we will be able to obtain such
additional financings on acceptable terms or in time to fund any necessary or
desirable expenditures. In the event such financings are not obtained, our drug
discovery or development programs may be delayed, scaled back or eliminated; or
we may be required to obtain funds through arrangements with collaborative
partners or others that may require that we relinquish rights to certain of our
technologies, product candidates or products that would not otherwise be
relinquished. Our ability to raise additional funding is contingent upon a
number of factors which include:
o the market acceptance and commercial success of Argatroban;
o the ongoing cost of research and development activities;
o the attainment of research and clinical goals of product candidates;
o the continuance of research agreements with collaboration partners;
o the timely approval of our product candidates by appropriate governmental
and regulatory agencies;
o the presence and effect of competitive products;
o our ability to manufacture and market products commercially;
o the retention of key personnel; and
o conditions in the capital markets.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
Our research and development processes involve the controlled use of
hazardous materials, chemicals and radioactive materials and produce waste
products. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of hazardous
materials and waste products. Although we believe that our safety procedures for
handling and disposing of hazardous materials comply with the standards
prescribed by laws and regulations, the risk of accidental contamination or
injury from these materials cannot be eliminated completely. In the event of an
accident, we could be held liable for any damages that result. This liability
could exceed our resources or not be covered by our insurance. Although we
believe that we are in compliance in all material respects with applicable
environmental laws and regulations, there can be no assurance that we will not
be required to incur significant costs to comply with environmental laws and
regulations in the future. There can also be no assurance that our operations,
business or assets will not be materially adversely affected by current or
future environmental laws or regulations.
FORM 10-Q Page 13
16
IMPACT OF INFLATION AND CHANGING PRICES
The pharmaceutical research industry is labor intensive, and wages and
related expenses increase in inflationary periods. The lease of space and
related building services for our Houston facility contains a clause that
escalates rent and related services each year based on the increase in building
operating costs and the increase in the Houston Consumer Price Index,
respectively. To date, inflation has not had a significant impact on our
operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Form 10-Q are forward-looking statements. When used in this
Form 10-Q, the words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate" and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. These forward-looking statements include, without
limitation, statements regarding our estimate of the sufficiency of our existing
capital resources and our ability to raise additional capital to fund cash
requirements for future operations, and regarding the uncertainties involved in
the drug development process. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot give any
assurance that such expectations reflected in these forward-looking statements
will prove to have been correct. Important factors that could cause actual
results to differ materially from our expectations include those discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and without limitation:
o market acceptance and commercial success of Argatroban;
o ongoing cost of research and development activities;
o cost of clinical development of product candidates;
o attainment of research and clinical goals of product candidates;
o timely approval of our product candidates by appropriate governmental and
regulatory agencies;
o effect of any current or future competitive products;
o ability to manufacture and market products commercially;
o retention of key personnel; and
o capital market conditions.
We cannot guarantee any future results, levels of activity, performance
or achievements. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this Form 10-Q after the date of this
Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any debt instruments with variable, or floating, interest
rates. Accordingly, to date, interest rate risk has not had a material impact on
the results of our operations.
FORM 10-Q Page 14
17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
During the third quarter 2000, we issued an aggregate of 38,400 shares of
our common stock to certain institutions and individuals, pursuant to the
exercise of outstanding warrants for an aggregate purchase price of $25,062
including 31,442 shares issued pursuant to a cashless exercise of privately held
warrants. The issuance of common stock was exempt from registration under
Section 4 (2) of the Securities Act of 1933, as amended. The warrants and the
common stock underlying the warrants may not be sold in the United States absent
registration or an applicable exemption from registration requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Three reports on Form 8-K (Item 5) were filed during the quarter ended
September 30, 2000. The first report was filed with the SEC on July 5, 2000
regarding the FDA's approval of the anticoagulant Argatroban for the prevention
or treatment of thrombosis associated with heparin-induced thrombocytopenia. The
second report was filed with the SEC on July 12, 2000 regarding the signing with
Schering-Plough Corporation of a worldwide research collaboration and license
agreement to discover, develop and commercialize VLA-4 antagonists. The third
report was filed with the SEC on August 7, 2000 regarding the formation of
Revotar Biopharmaceuticals, AG.
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule
FORM 10-Q Page 15
18
TEXAS BIOTECHNOLOGY CORPORATION
SEPTEMBER 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 14th day of November, 2000.
TEXAS BIOTECHNOLOGY CORPORATION
By: /s/ David B. McWilliams
----------------------------------------
David B. McWilliams
President and Chief Executive Officer
By: /s/ Stephen L. Mueller
----------------------------------------
Stephen L. Mueller
Vice President, Finance and Administration
Secretary and Treasurer
(Principal Financial and Accounting
Officer)
FORM 10-Q Page 16
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule
Form 10-Q Page 17