1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NO. 0-20111
ARONEX PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0196535
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ARONEX PHARMACEUTICALS, INC.
8707 TECHNOLOGY FOREST PLACE
THE WOODLANDS, TEXAS 77381-1191
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(281) 367-1666
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE
ACT: None SECURITIES REGISTERED PURSUANT TO SECTION
12(G) OF THE ACT:
Common Stock, par value $.001 per share
Rights to purchase Series One Junior Participating Preferred Stock
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 23, 2001 was $17,807,571, based on the closing sales
price of the registrant's common stock on the Nasdaq National Market on such
date of $0.875 per share. For purposes of the preceding sentence only, all
directors, executive officers and beneficial owners of ten percent or more of
the common stock are assumed to be affiliates. As of March 23, 2001, 25,973,843
shares of the registrant's common stock were outstanding.
Certain sections of the registrant's definitive proxy statement
relating to the registrant's 2001 annual meeting of stockholders, which proxy
statement will be filed under the Securities Exchange Act of 1934 within 120
days of the end of the registrant's fiscal year ended December 31, 2000, are
incorporated by reference into Part III of this Form 10-K.
================================================================================
2
TABLE OF CONTENTS
PART I
Item 1. Business............................................................................1
General....................................................................1
Business Strategy..........................................................1
Clinical and Scientific Background........................................ 2
Products in Clinical Development...........................................3
Cancer.....................................................................4
Infectious Diseases........................................................8
Collaborative Agreements..................................................10
Manufacturing.............................................................11
Sales and Marketing ......................................................12
Patents and Proprietary Rights............................................12
Government Regulation.....................................................13
Competition...............................................................16
Employees.................................................................16
Additional Business Risks.................................................16
Item 2. Properties.........................................................................22
Item 3. Legal Proceedings..................................................................22
Item 4. Submission of Matters to a Vote of Security Holders................................22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............23
Item 6. Selected Consolidated Financial Data...............................................24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................25
Overview................................................................. 25
Results of Operations.................................................... 25
Liquidity and Capital Resources.......................................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.........................28
Item 8. Consolidated Financial Statements and Supplementary Data...........................28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................28
-i-
3
PART III
Item 10. Directors and Executive Officers of the Registrant....................................29
Item 11. Executive Compensation................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management........................29
Item 13. Certain Relationships and Related Transactions........................................29
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K......................30
Signatures......................................................................................34
Index to Financial Statements..................................................................F-1
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). When used in this document, the words "anticipate," "believe," "expect,"
"estimate," "project" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, expected,
estimated or projected. For additional discussion of such risks, uncertainties
and assumptions, see "Item 1. Business" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report.
-ii-
4
PART I
ITEM 1. BUSINESS
GENERAL
Aronex Pharmaceuticals (identified herein as "we", "us" or "our") is a
biopharmaceutical company engaged in the identification and development of
proprietary innovative medicines to treat cancer and infectious diseases. Our
strategy is to identify and develop medicines based upon either refinements of
proven therapies or new ways of treating specific diseases. Our focus is on
medicines for cancer and infectious diseases for which current therapy is
inadequate. The effectiveness of the current generation of anti-cancer and
anti-infective drugs is limited because of two significant factors. First,
cancer cells frequently become resistant to commonly used anti- cancer drugs,
and organisms responsible for infectious diseases may also develop resistance to
anti-infective drugs. This resistance results in the ultimate progression of
many cancers and some infections. Second, these current generation drugs,
particularly cancer drugs, are generally toxic because of their lack of
selectivity that results in significant side effects on normal cells. We are
targeting the development of drugs for cancer and infectious diseases that are
selective in their action, with unique or special ways of acting and more
favorable safety profiles.
The majority of our clinical trials have reached the stage where we
have completed patient enrollment for their current phase. At the current time,
we are gathering clinical trial data for analysis. We anticipate reporting the
data at appropriate scientific meetings. Before we initiate any new clinical
trials, we will analyze each product's likelihood for approval, the cost of the
proposed clinical trial, cash available at such time and the inherent risk
profile. We anticipate these steps will assist us in maximizing shareholder
value. See "Products in Clinical Development".
In January 2001, we received a non-approval letter from the United
States Food and Drug Administration (FDA) for our New Drug Application (NDA)
amendment for ATRAGEN(R) for acute promyelocytic leukemia (APL). Following this
event, we reduced expenditures in our development plans and activities.
Additionally, we reduced the number of full-time employees in January 2001 from
77 to 29. We plan to meet with the FDA and determine our alternatives regarding
the NDA.
We will continue to require substantial additional funds for our
operations. At December 31, 2000, we had $9.1 million in cash, cash equivalents
and investments. We believe that we can conserve our existing financial
resources to satisfy our capital and operating requirements into the fourth
quarter of 2001. Our accountants have issued a qualified opinion on our
consolidated financial statements for the year ended December 31, 2000
indicating substantial doubt about our ability to continue as a going concern.
We will, in all likelihood, need to further reduce our expenditures if we do not
obtain additional financial resources by mid 2001. We retained Robertson
Stephens, a San Francisco-based investment bank, to assist us in pursuing
strategic alliances with companies in our industry. Also, we are actively
pursuing other sources of financing. Sources of financing may not be available,
or if available, will be dilutive or may have other adverse effect to the value
of our shares. We may have to close operations and/or seek legal protection from
our creditors. See "-- Additional Business Risks."
BUSINESS STRATEGY
We have implemented a comprehensive strategy to become a commercial
biopharmaceutical company involved in the identification, development and
commercialization of novel medicines for treating cancer and infectious
diseases. We believe our most significant assets lie in two key elements:
o Therapeutic Focus. We have adopted a clear therapeutic focus aimed at
identifying and developing novel medicines to satisfy clearly-defined,
unsatisfied needs in the treatment of cancer and infectious diseases.
We believe that this focus provides synergies in the development of
products as a result of common patient populations, and will provide
synergies in the marketing and commercialization of products as a
result of the common hospital-based sales and distribution channels and
concentrated customer base associated with
-1-
5
these products. In addition, we believe our focus on medicines for
cancer and infectious diseases for which current therapy is inadequate
may facilitate expedited commercialization of our products.
o Balanced Product Portfolio. We have a portfolio of clinical products
that we believe provides a balanced development and commercialization
risk profile. Two of our products are liposomal formulations of drugs
that are currently on the market, designed to improve effectiveness and
reduce adverse side effects. Liposomal formulations trap the drug
within a lipid-based environment. We believe that this should
contribute to a reduction in the development risks associated with our
products. Two of our products are liposomal formulations of new
compounds with novel mechanisms of action against a specific disease
target. While these products are associated with a greater degree of
development risk, we believe that these products may have a substantial
impact against the diseases they are intended to treat. We believe that
this balanced development and commercialization risk profile limits our
dependence on a single product.
In addition, we have expertise in preclinical development, drug
formulation and delivery, quality assurance, quality control and analytical
chemistry, drug manufacturing, regulatory and clinical affairs. In the past, we
have relied on academic and corporate collaborations to provide opportunities to
expand our pipeline of products for commercialization. Additional opportunities
are available through our existing capabilities in drug formulation and
delivery.
Our marketing and commercialization strategy is designed to use a
combination of approaches, including the development of our own commercial
infrastructure as appropriate. We may market products in the United States
through our own sales and marketing efforts or through co-marketing, and may
elect to market products overseas through licensing arrangements with corporate
partners. We expect to market those products requiring broader marketing and
distribution efforts through licensing arrangements with corporate partners.
CLINICAL AND SCIENTIFIC BACKGROUND
Our development programs are aimed at the identification and
development of innovative medicines to treat cancer and infectious diseases for
which current therapy is inadequate. The effectiveness of the current generation
of anti-cancer and anti-infective drugs is limited because of two significant
factors. First, cancer cells frequently become resistant to commonly used
anti-cancer drugs, and organisms responsible for infectious diseases may also
acquire resistance to anti-infective drugs. This resistance results in the
ultimate progression of many cancers and some infections, such as HIV. Second,
these drugs, particularly cancer drugs, are generally toxic because their lack
of selectivity results in significant side effects on normal cells. We are
targeting the development of drugs for cancer and infectious diseases that are
selective in their actions, with unique or special ways of acting and more
favorable safety profiles.
Cancer
The American Cancer Society estimates that in the United States alone
more than 1.2 million new cases of cancer will be diagnosed and more than
500,000 people will die of cancer in 2001. According to the American Cancer
Society, major classes of cancer include:
o solid tumors, the most common of which are breast cancer,
prostate cancer and cancers of the lung;
o cancers of the lymphoid system; and
o cancers of the blood.
In the United States there are annually approximately 183,000 new cases
of breast cancer, 164,000 new cases of lung cancer, 55,000 new cases of lymphoma
and 30,800 new cases of leukemia, according to the American Cancer Society.
Chemotherapy, surgery and radiation are the major components in the treatment of
cancer. Chemotherapy is usually the primary treatment for cancers, such as
hematologic malignancies, which cannot be excised by surgery. In addition,
chemotherapy is increasingly being used as an adjunct to radiation and surgery
to improve efficacy and reduce the incidence of metastasis, or spread of cancer,
and as primary therapy for some solid tumors. The standard strategy for
chemotherapy is to destroy the malignant cells by exposing them to as much drug
-2-
6
as the patient can tolerate. Clinicians attempt to design a combination of
drugs, dosing schedule and method of administration that increases the
probability that malignant cells will be destroyed, while minimizing the harm to
healthy cells.
Most current anti-cancer drugs have significant limitations. Certain
cancers, such as colon, lung, kidney and pancreatic cancers, are inherently
unresponsive to chemotherapeutic agents. Certain other cancers may initially
respond to a chemotherapeutic agent, but cease to respond as the cancer cells
acquire resistance to the drug during the course of therapy. As cancer cells
develop resistance to a specific chemotherapeutic agent, they often
simultaneously become resistant to a wide variety of structurally unrelated
agents through a phenomenon known as "multi-drug resistance." Finally, current
anti-cancer drugs are generally highly toxic, with effects including bone marrow
suppression and irreversible cardiotoxicity, which can prevent their
administration in therapeutic doses.
Infectious Diseases
The immune system, the major line of defense against infection, may be
weakened by diseases, such as HIV and diabetes, or by drugs or agents used for
the treatment of other medical conditions, such as chemotherapy in cancer
patients or immunosuppressive, anti-rejection therapy in patients receiving
organ transplants. A weak immune system predisposes patients to opportunistic
infections caused by otherwise harmless microbes. These opportunistic infections
are caused by microbes, including fungi such as Aspergillus and Candida, viruses
or bacteria. Some of these "opportunistic" microbes can be or become resistant
to existing therapies. Drugs with new mechanisms of action and/or improved
safety profiles are needed to treat fungal, viral and bacterial diseases and to
overcome the toxicity limitations associated with certain existing drugs.
Our Approach to the Treatment of Cancer and Infectious Diseases
Our focused effort aims at identifying highly-specific, novel medicines
for the treatment of cancer and infectious diseases. Through our research and
development strategy, we seek to augment our pipeline by partnering with
academic centers such as The University of Texas M.D. Anderson Cancer Center.
These relationships are intended to permit us to identify opportunities which
have already been validated in preclinical and, in some instances, clinical
studies before we allocate resources for further evaluation and development. We
believe that utilizing this strategy will allow us to maintain a full pipeline
of innovative products for the treatment of cancer and infectious diseases. See
"-- Collaborative Agreements."
PRODUCTS IN CLINICAL DEVELOPMENT
The following table lists our clinical products, along with their
current indications and clinical status:
PRODUCT INDICATIONS CLINICAL STATUS
- --------------------------- ---------------------------------------- ----------------------------
CANCER
ATRAGEN(R)................. Acute Promyelocytic Leukemia NDA appeal pending
Acute Promyelocytic Leukemia Monotherapy Phase II enrollment closed
Non-Hodgkin's Lymphoma Phase II enrollment closed
Prostate Cancer Phase II completed
Renal Cell Carcinoma Phase I/II enrollment closed
Acute Myelogenous Leukemia Phase II enrollment closed
Kaposi's Sarcoma Phase II completed
Annamycin.................. Breast Cancer Phase II completed
Leukemia Phase I/II completed
Aroplatin(TM).............. Lung Cancer Phase II completed
Renal Cell Carcinoma Phase II completed
INFECTIOUS DISEASES
-3-
7
Nyotran(R)................. Presumed Fungal Infections Phase III completed
Cryptococcal Meningitis Phase III completed
Candidemia Phase II completed
Aspergillus Salvage Phase II
ATRAGEN(R)................. Hepatitis Preclinical
"Appeal pending" indicates that we will meet with the FDA and determine
our alternatives. "Preclinical" indicates that the compound exhibits activity
and that the product is being evaluated in animal models. "Phase I" indicates
that the first phase of human clinical studies is being conducted with a small
number of subjects in order to gain evidence of safety, establish the maximum
dose of the drug which may be safely administered to patients and to
characterize the distribution of a drug in a human patient. "Phase I/II"
indicates that a product is being tested in humans primarily for safety and drug
distribution, while preliminary measures of efficacy are also observed. "Phase
II" indicates that a product is being tested in humans for safety and
preliminary evidence of efficacy. "Phase III" indicates that a product is being
tested in multi-center studies generally designed to provide evidence of
efficacy and further safety of the product in a large number of patients.
"Enrollment closed" indicates that we are no longer recruiting patients,
recruited patients are being monitored according to the protocol and data is
being gathered.
We can give no assurance that the results of any of our clinical trials
will be favorable or that our products will obtain regulatory approval for
commercialization. See "-- Additional Business Risks -- Clinical Trial Results
May Result in Failure to Obtain FDA Approval and Inability to Sell Products."
CANCER
Our programs in cancer focus on developing medicines based upon either
refinements of proven therapies or new approaches to the treatment of specific
disease targets. The clinical program currently focuses on development of
ATRAGEN(R) for hematological malignancies and solid tumors, Annamycin for solid
tumors and hematological malignancies and AroplatinTM for solid tumors.
ATRAGEN(R) for Acute Promyelocytic Leukemia (APL) (NDA appeal pending),
APL monotherapy (Phase II enrollment closed), Non-Hodgkin's Lymphoma
(Phase II enrollment closed), Prostate Cancer (Phase II completed),
Renal Cell Carcinoma (Phase I/II enrollment closed), AML (Phase II
enrollment closed), and Kaposi's Sarcoma (Phase II completed)
ATRAGEN(R) is a lipid-based, intravenous formulation of
all-trans-retinoic acid (ATRA). Our lipid formulation has been developed to
change certain aspects of the drug's behavior in the body to overcome the known
deficiencies of oral retinoids, such as the oral formulation of ATRA. ATRAGEN(R)
has a different pharmacokinetics and distribution profile. In December 2000, we
presented ATRAGEN(R) pharmacokinetic data at the 42nd Annual Meeting of the
American Society of Hematology. These data were gathered from healthy volunteers
in our pharmacokinetic study of ATRAGEN(R) compared to Vesanoid(R) (the oral
formulation of ATRA). Analysis of pharmacokinetic parameters revealed a
statistically significant 45% decrease in the area under the plasma drug
concentration-time curve (AUC) after 9 days of oral ATRA dosing and a 32%
decrease in day 9 maximum concentrations of the drug in the plasma (Cmax). In
contrast, with ATRAGEN(R) there were no decreases in the AUC or Cmax.
Dose-normalized exposure to tretinoin was 6 to 11 times greater with ATRAGEN(R)
dosing than with oral ATRA dosing. Similarly, Cmax was 15 to 23 times higher
following ATRAGEN(R) administration. Investigators concluded that patient
exposure to tretinoin was much less variable with ATRAGEN(R) than with the oral
formulation of ATRA. Although the results from this study did not constitute
evidence of safety or effectiveness, they nevertheless provided a basis for
investigating the safety and efficacy of ATRAGEN(R) in a broad range of cancers.
Claims to methods of using ATRAGEN(R) are found in an issued United
States patent. Claims to both the composition and its method of use are pending
in continuing patent applications in the United States Patent Office. The issued
patent drawn to ATRAGEN(R) and the continuing applications are assigned jointly
to the Board of Regents of The University of Texas and Aronex Pharmaceuticals,
with Aronex Pharmaceuticals as the exclusive licensee. Claims to the ATRAGEN(R)
formulation have been allowed in the European Patent Office. See "-- Patents and
Proprietary Rights."
-4-
8
ATRAGEN(R) has been designated an orphan drug for the treatment of
acute and chronic leukemia by the FDA. See "-- Government Regulation" and "--
Additional Business Risks -- Clinical Trial Results May Result in Failure to
Obtain FDA Approval and Inability to Sell Products."
INDICATIONS
ACUTE PROMYELOCYTIC LEUKEMIA (APL) (NDA APPEAL PENDING)
According to the American Cancer Society, approximately 1,000 new cases
of APL in the United States are diagnosed annually, and each year approximately
277,000 patients in the United States develop the various types of cancer
identified as potential indications for ATRAGEN(R). ATRAGEN(R) also may be
useful in treating a variety of hematological malignancies and solid tumors.
We completed a Phase I clinical trial of ATRAGEN(R) in 1995 in patients
with cancers of the blood. Phase I data presented in the journal Blood during
1996 indicated that ATRAGEN(R) sustains levels in the blood after prolonged
dosing, is well tolerated and shows evidence of activity against certain
leukemias and lymphomas. We recently completed patient enrollment for the Phase
II clinical evaluation of ATRAGEN(R) for its potential to induce remission in
APL patients. In December 2000, pivotal Phase II efficacy and safety data
compiled from sites in the Unites States and Peru were presented at the 42nd
Annual Meeting of the American Society of Hematology. Efficacy data on 95
evaluable patients indicated that ATRAGEN(R) was an effective agent for inducing
complete remission in APL patients. Safety data from 117 APL patients indicated
that ATRAGEN(R) was safe and well tolerated at the 90 mg/m2 dose. Based on the
pivotal Phase II data, in December 1998, we submitted an NDA with the FDA for
ATRAGEN(R) for the treatment of patients with APL for whom therapy with the drug
tretinoin is necessary but for whom an intravenous administration is required.
In September 1999, we received a letter from the FDA notifying us that
the application was not approvable in its current form. In July 2000, we
submitted an amendment to the NDA and in January 2001, the FDA denied approval
of our NDA amendment for ATRAGEN(R). Based on their review of the NDA amendment,
the FDA stated that the proposed claim was not supported by the data contained
in the amendment, and did not establish an identifiable population of patients
who need tretinoin and cannot use the oral formulation. We are currently in
discussions with the FDA seeking guidance regarding our available options at
this time.
This indication represents a therapeutic area where new therapies are
needed. ATRA, or tretinoin, has been approved as an oral formulation by the FDA
as a treatment for APL. ATRA and other retinoids cause cell differentiation in
contrast to most conventional chemotherapeutic agents. Retinoids are molecules
comprising both natural and synthetic derivatives of retinol, otherwise known as
vitamin A. However, we believe the effectiveness of the oral formulation of ATRA
may be reduced by the rate at which it is metabolized, which lowers the amount
of drug that reaches the cancer target.
APL MONOTHERAPY (PHASE II ENROLLMENT CLOSED)
ATRAGEN(R) is also being assessed in Phase II clinical trials for its
use as a monotherapy in the treatment of newly-diagnosed APL patients. Interim
Phase II data presented in the journal Blood in January 2001 indicated that
ATRAGEN(R) can induce long-term remissions. Some of the patients sustained
ongoing remissions for as long as 24 months. Patient enrollment for this trial
is now closed.
NON-HODGKIN'S LYMPHOMA (PHASE II ENROLLMENT CLOSED)
In 1998, we initiated a Phase II clinical trial in relapsed and
refractory non-Hodgkin's lymphoma. In December 2000, we presented preliminary
results at the 42nd Annual Meeting of the American Society of Hematology. The
presented data represented 57 evaluable patients. In this heavily treated
patient population with a highly unfavorable prognosis, 17 patients with
cutaneous T cell lymphoma, aggressive B cell lymphoma or peripheral T cell
lymphoma responded to treatment with ATRAGEN(R). Responders, some of whom are
still being
-5-
9
monitored, had a median progression-free survival of 6 months, an encouraging
result. Toxicities were mostly mild, and most commonly were headache, dry skin,
edema, arthralgia and xerostomia. Patient enrollment for this trial is now
closed.
PROSTATE CANCER (PHASE II COMPLETED)
In 1998, we initiated a Phase II clinical trial in hormone-refractory
prostate cancer. This trial has been completed. We are reviewing the data for
this trial and anticipate presenting the data at an appropriate scientific
meeting.
RENAL CELL CARCINOMA (PHASE I/II ENROLLMENT CLOSED)
In early 1999, a Phase I/II clinical trial in renal cell carcinoma was
initiated at New York Presbyterian Hospital and the Weill Medical College of
Cornell University under an institutional Investigational New Drug application,
or IND. The Phase I/II trial was designed to determine the maximum tolerated
dose of ATRAGEN(R) in combination with interferon alpha. In May 2000,
preliminary data were presented at the American Society for Clinical Oncology
meeting. Investigators reported that the combination of ATRAGEN(R) at 15 mg/m2
and interferon alpha at 5 million units was well tolerated without toxicity. In
this report, two out of three evaluable patients had experienced a partial
remission. Patient enrollment for this Phase I/II clinical trial is now closed
and we plan to report additional data at further scientific meetings.
ACUTE MYELOGENOUS LEUKEMIA (PHASE II ENROLLMENT CLOSED)
In late 1999, we initiated a Phase II clinical trial in acute
myelogenous leukemia. Patient enrollment for this trial is closed and we
continue to monitor patients according to the protocol. We are currently
gathering the data for analysis.
KAPOSI'S SARCOMA (PHASE II COMPLETED)
ATRAGEN(R) has also been assessed in Phase II clinical trials for the
treatment of Kaposi's sarcoma. Clinical trial results indicated that ATRAGEN(R)
was generally well tolerated, with headaches and dry skin being the primary
reported adverse events. We are not presently pursuing this indication, although
we may do so in the future.
ANNAMYCIN for Refractory Breast Cancer (Phase II completed) and
Refractory Leukemia (Phase I/II completed)
Annamycin is a novel chemical entity belonging to the class of widely
prescribed anti-cancer agents known as anthracyclines. This class of drug, which
includes doxorubicin, daunorubicin and idarubicin, has been shown to be
effective, either alone or in combination, against proliferating cancer cells.
Anthracyclines currently on the market, however, suffer from two primary
limitations:
o Cancer cells often develop a resistance to them, rendering the
treatment ineffective. This resistance, once developed by
cancer cells, generally extends to include resistance to a
variety of other chemotherapeutic agents, a phenomenon
commonly referred to as multi-drug resistance. The best
understood mechanism behind multi-drug resistance involves an
increase in the production of P-glycoprotein, a trans-cell
membrane pump. This pump transports drugs, including most
types of anti-cancer drugs, out of tumor cells.
o Currently available anthracyclines also frequently result in
severe toxic effects, including irreversible cardiotoxicity.
Annamycin was designed to overcome these two major limitations. In
contrast to conventional chemotherapeutic agents, Annamycin is structured so
that it avoids the mechanism of operation of the trans-cell membrane pump
believed to be one of the mechanisms responsible for multi-drug resistance. Our
preclinical studies
-6-
10
have shown that Annamycin, which is a lipid-based formulation of a novel
anthracycline, may be active against multi-drug resistant tumor cells that
over-express at least two of the pumps that are believed to be, at least in
part, responsible for tumor cells becoming resistant to treatment. This
over-expression implies that the levels of the enzymes present in a particular
person exceed the levels found in a healthy or normal person. Our preclinical
studies of Annamycin in animals bearing human tumors also indicate that
Annamycin may be less cardiotoxic than doxorubicin. A Phase I dose-escalating
clinical trial of Annamycin was completed in August 1997. Data from this trial
were presented at the American Society of Clinical Oncology meeting in May 1997.
Annamycin has been evaluated in Phase II multi-center clinical trials in breast
cancer patients whose tumors are resistant to conventional therapies. In April
1999, we initiated a Phase I/II clinical trial in refractory leukemia patients.
All of the Annamycin clinical trials are now completed. We anticipate reporting
data on the Phase I/II leukemia trial later in 2001. We are currently evaluating
the Annamycin clinical development program. See "-- Additional Business Risks --
Clinical Trial Results May Result in Failure to Obtain FDA Approval and
Inability to Sell Products."
We believe that there is a substantial market for an agent which is
active against multi-drug resistance and exhibits an improved safety profile
over doxorubicin. The American Cancer Society estimates that each year there are
approximately 183,000 new cases of breast cancer in the United States. Annamycin
also may be useful in treating other varieties of solid tumors, leukemias and
lymphomas.
While there are a range of chemotherapeutic agents used alone and in
combination to treat breast cancer and other solid tumors, including
doxorubicin, daunorubicin, liposomal formulations of doxorubicin and
daunorubicin, taxol, platinum and cyclophosphamide, we do not believe that there
are any medicines available that are active against multi-drug resistant tumors.
We are aware of some agents currently in Phase II clinical trials that are
designed to modify multi-drug resistance, but for which no efficacy data are yet
available. These agents would potentially be used in combination with
chemotherapeutic agents.
Our liposomal formulation of Annamycin is the subject of an issued
United States patent, licensed exclusively to us by The University of Texas M.D.
Anderson Cancer Center. In addition, a patent has issued in the United States
with respect to an improved process for preparing Annamycin. This patent is
exclusively licensed to us under our agreements with M.D. Anderson and the
Regents of The University of Texas. The drug, Annamycin, is the subject of a
patent that has been non-exclusively sublicensed to us by M.D. Anderson, which
M.D. Anderson licensed from Ohio State University. See "-- Patents and
Proprietary Rights."
AROPLATINTM for Lung Cancer (Phase II completed) and Renal Cell
Carcinoma (Phase II completed)
Together with M.D. Anderson we are developing a novel liposomal
platinum analogue, Aroplatin(TM), for the treatment of solid tumors.
Aroplatin(TM) has been designed to overcome the toxicity and resistance that
currently limits the usefulness of platinum, a chemotherapeutic agent widely
used in the treatment of solid tumors. Phase I clinical trials have been
conducted under a physician's IND at M.D. Anderson.
Aroplatin(TM) has been evaluated in two Phase II clinical trials, under
institutional INDs at M.D. Anderson:
o a trial for the treatment of mesothelioma, a type of lung
cancer, funded by the Office of Orphan Drug Products at the
FDA; and
o a trial for the treatment of metastatic renal cell carcinoma
funded by us.
In November 1999, we assumed ownership of the institutional INDs for
Aroplatin(TM) and began conducting our own clinical development programs for
this product. Aroplatin(TM) has been designated an orphan drug for the treatment
of malignant mesothelioma by the FDA.
In September 2000, we presented preliminary Phase II data at the 9th
World Conference on Lung Cancer. The presented data represented 34 patients with
malignant pleural mesothelioma. Among 23 patients who had both pre- and
post-treatment tissue biopsies, 56% showed no evidence of tumor on biopsy after
treatment. Among 18 patients at baseline who had both pre- and post-treatment
cytology samples, 83% revealed no evidence of tumors in
-7-
11
cytologic specimens. Investigators concluded that Aroplatin(TM) treatment
produced a high rate of pathologic response and appeared to be a promising
therapeutic approach in patients with malignant pleural mesothelioma.
We have obtained multiple patents drawn to aspects of Aroplatin(TM).
Claims of issued United States patents cover a method of treating subjects with
Aroplatin(TM). These patents are exclusively licensed under our agreement with
M.D. Anderson and the Regents of the University of Texas. Aroplatin(TM) patent
claims are allowed in Europe.
A patent application filed in the United States by Sumitomo
Pharmaceuticals Co. Ltd. overlapped claims included in the United States patents
licensed to us and were the subject of an interference proceeding in the United
States Patent and Trademark Office. In December 2000, we resolved this
interference by signing a license agreement with Sumitomo Pharmaceuticals that
gives us exclusive rights in the United States to a particular class of DACH
platinum compounds that were the basis for the interference. See "--
Collaborative Agreements."
INFECTIOUS DISEASES
Our infectious diseases program centers on the development of new
agents for the treatment of infectious diseases, including those that occur in
patients with weakened immune systems. The clinical program presently focuses on
two products: the development of Nyotran(R) for life-threatening systemic, or
internal, fungal infections, and ATRAGEN(R) for hepatitis.
NYOTRAN(R)for Presumed Fungal Infections (Phase III completed),
Cryptococcal Meningitis (Phase III completed), Candidemia (Phase II
completed) and Aspergillus Salvage (Phase II)
Systemic fungal infections are generally serious and may result in
death. Most systemic fungal infections are caused by Candida, or yeasts, and
Aspergillus, or molds, species. These life-threatening infections occur most
often in patients with impaired immune defense mechanisms as a result of an
underlying disease, such as HIV or diabetes, or the effects of treatments for
other medical conditions, such as chemotherapy in cancer patients or anti-
rejection therapy in patients receiving organ transplants. The population of
patients who become candidates for anti-fungal treatment is increasing because
of a number of factors, including more aggressive use of chemotherapy in cancer
patients, increases in organ and bone marrow transplants, increased use of
in-dwelling catheters for prolonged periods and the spread of HIV.
We believe that the drugs that are currently used to treat systemic
fungal infections, including fluconazole, itraconazole, amphotericin B and
liposomal formulations of amphotericin B, have limitations that present a need
for new therapies. Data from recent in vitro, or test tube, studies as well as
clinical trial data indicate that a number of fungal strains are becoming
increasingly resistant to known therapies. Fluconazole and itraconazole are
relatively safe and effective in inhibiting fungal growth in Candida, but are
not effective in inhibiting fungal growth in Aspergillus and are generally not
effective in treating fungal infections in patients who are seriously ill and
whose immune systems are compromised and not functioning properly. Amphotericin
B is very active against both Candida and Aspergillus but is highly toxic.
Several companies have developed liposomal versions of amphotericin B that are
designed to reduce the potential toxicity of amphotericin B.
Nyotran(R) is a lipid-based, intravenous formulation of the drug
nystatin, an established, widely-used topical anti-fungal agent. Although
nystatin has proven to be a potent anti-fungal against a broad spectrum of
fungi, including Candida, Cryptococcus, Histoplasma, Blastomyces and
Aspergillus, its poor solubility and toxicity have previously precluded its
systemic administration as a therapy for these fungal infections. Our
proprietary formulation, Nyotran(R), reduces the toxicity of nystatin. In
addition, we believe that the lipid-based formulation of Nyotran(R) addresses
the solubility problem of nystatin. We believe Nyotran(R) offers potential
advantages over current systemic anti-fungal therapies. Our in vitro studies
indicate that it is active against a range of fungal strains, including Candida,
Aspergillus, Cryptococcus and Fusarium species, some of which are resistant to
currently available anti-fungal therapies. We believe that our clinical trials
suggest that Nyotran(R) can be administered at doses that are effective in
treating Aspergillus, Candida and Cryptococcus infections.
-8-
12
The strategy for the development of Nyotran(R) has involved several
stages. We have conducted three Phase I clinical studies which demonstrated a
favorable safety profile. We completed a Phase II open label study in patients
with Candidemia evaluating Nyotran(R) at multiple doses. Results from this study
indicate that a dose of one- third of the maximum tolerated dose established in
Phase I appears to be efficacious. Based upon data from this study, we initiated
Phase III comparative multicenter trials in the United States, Australia and
Europe of Nyotran(R) against amphotericin B in patients with presumed fungal
infections. Most frequently, in a hospital environment, a patient with a fever
of unknown origin will be treated with an antibiotic. When this treatment proves
ineffective, the physician then presumes that the patient has a fungal
infection, and begins treatment with an anti-fungal agent. The diagnosis of a
confirmed fungal infection may occur several days after anti-fungal therapy has
begun. We completed the clinical trials for presumed fungal infections in late
1998. Data from these trials demonstrating that Nyotran(R) and amphotericin B
were equivalent in treating presumed fungal infections were presented at the
September 1999 39th Interscience Conference on Antimicrobial Agents and
Chemotherapy meeting.
To expand the potential indications for Nyotran(R), we commenced Phase
III trials for patients with cryptococcal meningitis and Phase II Aspergillus
salvage. The Aspergillus salvage trials are designed to treat patients with
Aspergillus who have failed treatment with current products. In late 1999, we
completed the Phase III trials designed to show the equivalency of Nyotran(R)
versus amphotericin B in the treatment of confirmed cryptococcal meningitis. In
February 2000, we announced our preliminary findings from this trial. The data
demonstrated that Nyotran(R) was not equivalent to amphotericin B with respect
to the primary efficacy endpoint but there was no difference with respect to
survival, a secondary endpoint. The data also indicated a favorable renal
toxicity profile when compared to amphotericin B. Having gathered data from four
clinical trials, we met with the FDA in April 2000 to discuss our strategy for
submission of our NDA in the United States. Based on these discussions, we are
now conducting an historical comparative trial in refractory invasive
Aspergillus. Following submission of our NDA in the United States, we will
review the strategy for filings in Europe and other parts of the world that will
be accomplished by Abbott Laboratories. See and "-- Additional Business Risks --
Clinical Trial Results May Result in Failure to Obtain FDA Approval and
Inability to Sell Products" and "-- Collaborative Agreements -- Collaborative
Agreement with Abbott Laboratories."
In November 1998, we entered into a license agreement with Abbott
Laboratories for Nyotran(R). The license agreement provides Abbott with
exclusive worldwide rights to market and sell Nyotran(R), subject to rights
previously granted to Grupo Ferrer Internacional, S.A. in Spain and Portugal and
certain co-promotion rights retained by us in the United States and Canada.
Abbott has paid us milestone and up-front payments of $14.7 million under the
license agreement and purchased common stock for $3.0 million under a related
stock purchase agreement. Abbott has provided funding for the clinical
development of Nyotran(R) and will make subsequent milestone payments if
specified sales targets are achieved. Abbott has agreed to pay us royalties
which increase in amount based upon the level of product sales of Nyotran(R) in
each year. See "-- Collaborative Agreements -- Collaborative Agreement with
Abbott Laboratories."
The active ingredient of Nyotran(R), nystatin, is available
commercially. We have utilized a contract manufacturer for our clinical
requirements of Nyotran(R), who we believe to be capable of satisfying the
quantities required for clinical trials and anticipated quantities for initial
commercial sales. However, we expect Abbott to manufacture the quantities of
Nyotran(R) necessary to conduct any remaining clinical trials and, following
regulatory approval, to manufacture Nyotran(R) for commercial sale.
Current treatment for systemic fungal infection is largely limited to
amphotericin B, several liposomal formulations of amphotericin B and
fluconazole. Amphotericin B has been a common choice for the treatment of
systemic fungal infections. The clinical usefulness of amphotericin B is
limited, however, because serious toxicity can occur at doses that are only
marginally effective. Liposomal formulations of amphotericin B have been
developed by several companies, including Elan Corp., Gilead Sciences and ALZA
Corporation. Each of these companies' products have regulatory approval in the
United States and other countries. Each of these liposomal formulations shows a
reduction in toxicity as compared to amphotericin B. Pfizer Inc.'s fluconazole,
the world's largest selling anti-fungal product, is an oral formulation used for
a wide range of less serious Candida indications. The FDA recently approved
Cancidas(R) for resistant and refractory invasive Aspergillus. Cancidas(R) is
marketed by Merck & Co., Inc. We are aware of other anti-fungal agents currently
in clinical development.
-9-
13
M.D. Anderson has granted us the worldwide exclusive license under an
issued patent to the use of a liposomal formulation of nystatin in the treatment
of systemic fungal infections. Another issued patent protects a process of
pharmaceutical utility in making Nyotran(R). A continuation of this process
patent is currently being prosecuted seeking additional claims in this area. See
"-- Patents and Proprietary Rights."
ATRAGEN(R) for Hepatitis (Preclinical)
We have been evaluating ATRAGEN(R), our lipid-based, intravenous
formulation of ATRA, for hematological malignancies and solid tumors. See
"Cancer-- ATRAGEN(R)."
In late 2000, some patients being treated with ATRAGEN(R) for APL were
noted to have become coincidentally infected with viral hepatitis (types B and
C) unrelated to ATRAGEN(R) . The clinicians were concerned that the addition of
cytotoxic chemotherapy to the anti-leukemia regimen would make the viral
hepatitis worse, and elected to continue treating APL with ATRAGEN(R) alone,
which was successful in inducing complete remission. The viral hepatitis also
improved while the patient was receiving ATRAGEN(R) therapy, with viral loads
dropping in a precipitous fashion. After consultation with experts in the field
of viral hepatitis and based on knowledge gathered from scientific literature of
the potential effects of high dose retinoids, we have initiated a preclinical
program to evaluate the efficacy of ATRAGEN(R) in an animal model of this
disease.
A pending United States patent application subject to assignment to
Aronex Pharmaceuticals is drawn for this indication. See "-- Patents and
Proprietary Rights."
COLLABORATIVE AGREEMENTS
Our development strategy involves entering into selected development
and licensing agreements with corporate partners to provide working capital as
well as assist in the efficient development and marketing of certain of our
products. See "-- Additional Business Risks -- Our Ability to Enter into
Collaborative Agreements Is Critical to Our Successful Development, Sales and
Licensing of Products and Potential Profitability."
Collaborative Agreement with Abbott Laboratories
In November 1998, we entered into a stock purchase agreement and a
license agreement with Abbott for Nyotran(R). The license agreement provides
Abbott with exclusive worldwide rights to market and sell Nyotran(R), subject to
rights previously granted to Grupo Ferrer Internacional, S.A. in Spain and
Portugal and co-promotion rights retained by us in the United States and Canada
for an initial two-year period. These co-promotion rights will renew annually
thereafter for successive one-year periods unless canceled by either party. To
date, Abbott has purchased $3.0 million of our common stock and paid us up-front
and milestone payments of $14.7 million under the license agreement. Abbott's
payments to us provided funding for the clinical development of Nyotran(R), and
subsequent milestones are due if specified sales targets are achieved. However,
there can be no assurance that these milestone payments will be made. Once paid,
all payments are non-refundable. Abbott will also pay us royalties that increase
in amount based upon the level of product sales of Nyotran(R) in each year.
The licenses granted under the Nyotran(R) agreement terminate on a
country-by-country basis on the expiration of the last patent relating to that
product in that country. The agreement is terminable by Abbott in the event
certain regulatory approvals are not obtained or other specified events occur,
such as adverse safety and efficacy issues, and are terminable by either party
on the occurrence of a breach that is not cured by the breaching party within a
certain time period after notice has been given to that breaching party.
-10-
14
Relationship with Grupo Ferrer Internacional, S.A.
In 1997, we entered into a supply and distribution agreement with Grupo
Ferrer Internacional, S.A. to commercialize and market Nyotran(R), under which
Grupo Ferrer received the exclusive right to distribute and sell Nyotran(R) in
Spain and Portugal. This agreement was subsequently amended to enable Abbott to
pursue an optimal registration and commercialization strategy in all
international markets.
Relationship with The University of Texas M.D. Anderson Cancer Center
We have two license agreements with M.D. Anderson which grant us
exclusive rights to manufacture, use, market and sell products based upon
certain technology developed at M.D. Anderson relating to the development of
human monocyte or murine macrophage-derived cytotoxins which inhibit or destroy
the proliferation of tumor cells, liposomal-encapsulated polyene antibiotics,
except amphotericin B, liposomal-encapsulated anthracyclines,
liposomal-encapsulated platinum derivatives and liposomal-encapsulated
retinoids. Human monocyte or murine macrophage-derived cytotoxins refers to the
source of the cytotoxins, which is either human or mouse-based. Nyotran(R),
ATRAGEN(R), Annamycin and AroplatinTM are products derived from our relationship
with M.D. Anderson.
The license agreements with M.D. Anderson require us to pay royalties
for licensed technology based on specified percentages of cumulative net sales
and royalties from sublicensees. We are also obligated to pay a milestone
payment of $200,000 upon the approval of an NDA for each licensed product.
Because we have not sold any products or processes to date, we have not paid any
royalties under the license agreements. M.D. Anderson is responsible for the
preparation, filing and prosecution of all patent applications, foreign and
domestic, relating to technology developed at M.D. Anderson, and we reimburse
M.D. Anderson for expenses incurred for these activities.
The license agreements generally remain in force until the expiration
of the last patent subject to the agreements. Either party may terminate the
license agreements after 60 days notice to the other party in the event of a
material breach of the terms of that agreement. M.D. Anderson has the right to
terminate either license agreement with 90 days notice for failure to convert
the licensed subject matter to a commercial form; however, we believe our
ongoing and active development efforts directed at commercial marketing of the
licensed products currently satisfy this obligation.
From our inception in 1986 through 1999, we contracted with M.D.
Anderson in conjunction with the license agreements through which we funded
research and development expenses incurred by the M.D. Anderson scientists that
relate to the technology licensed by us. Funding for these research and
development contracts ended with a final payment early in 2000. However, these
contracts still grant us an exclusive worldwide license to technology developed
as a result of research funded by us.
Relationship with Sumitomo Pharmaceuticals Co., Ltd.
In December 2000, we entered into a license agreement with Sumitomo
Pharmaceuticals that gives us the exclusive right in the United States to a
particular class of DACH platinum compounds. Aroplatin(TM), one of our products
in clinical development, is a liposomal formulation of a novel platinum compound
from this class of drugs. Under this agreement, Sumitomo Pharmaceuticals
received a $500,000 up-front payment from us in 2001, and will receive
subsequent milestone payments based on regulatory filings, approval and sales of
Aroplatin(TM), and royalties on the sales of Aroplatin(TM) in the United States.
Except for the treatment of hepatoma, the license agreement gives us the
exclusive right to make, use, develop, import and sell Aroplatin(TM) in the
United States.
MANUFACTURING
We do not have the facilities necessary to manufacture our products in
accordance with the good manufacturing practices guidelines established by the
FDA for companies manufacturing pharmaceutical products.
-11-
15
We do have the capability to develop formulations, analytical methods, process
controls and manufacturing technology for our products. We generally use
contract manufacturers to produce batches of our products for clinical testing,
although we expect Abbott to supply the quantities of Nyotran(R) necessary to
conduct our remaining clinical trials of that product. We and the manufacturers
of our products, other than Abbott, have not entered into any written agreements
other than periodic purchase orders for the supply of the products they
manufacture on our behalf. Contract manufacturers are closely supervised to
ensure adherence to established production methods and compliance with our
rigorous quality control and quality assurance standards. We do not expect to
establish any significant manufacturing capacity in the near future. We do not
operate, and do not currently plan to operate, manufacturing facilities for the
production of our products in commercial quantities, and intend to contract with
third parties for the manufacture and supply of our products. There can be no
assurance that we will be able to obtain supplies of products from third-party
suppliers on terms or in quantities acceptable to us. We depend on third parties
for the manufacture of our products. This may adversely affect our product
profit margins and ability to develop and deliver products on a timely basis.
Any third-party suppliers of this kind or any manufacturing facility we
establish will be required to meet FDA good manufacturing practices
requirements. FDA inspection and approval of manufacturing facilities and
quality procedures for a drug are a prerequisite to approval of an NDA for that
drug. We may encounter significant delays in obtaining supplies from third-party
manufacturers or experience interruptions in our supplies. If we are unable to
obtain adequate supplies, our business would be materially adversely affected.
The raw materials required for the majority of our products are
currently available in quantities sufficient to conduct our research,
development, preclinical safety and clinical development activities. Certain of
our products, such as Annamycin and Aroplatin(TM), are new syntheses and,
therefore, are not yet available in commercial quantities. We cannot give
assurance that the raw materials necessary for the manufacture of our products
will be available in sufficient quantities or at a reasonable cost.
Complications or delays in obtaining raw materials or in product manufacturing
could delay the submission of products for regulatory approval and the
initiation of new development programs, which could materially impair our
competitive position and potential profitability.
SALES AND MARKETING
We presently intend to market our products in North America through our
own sales and marketing infrastructure or under marketing arrangements with
other companies and will build our sales and marketing infrastructure in
accordance with regulatory submissions. We currently plan to market selected
products directly to oncologists, hematologists and infectious disease
specialists through a niche sales and marketing force in the United States.
Where large market opportunities require large sales forces, we may enter into
co-marketing arrangements with, or license marketing rights to, third parties.
Our international strategy is to negotiate marketing agreements with
pharmaceutical manufacturers and distributors which will entitle us to receive a
percentage of net product sales.
We do not have any experience in sales, marketing or distribution. To
market any of our products, we must develop a sales and marketing force with
supporting distribution capability or enter into marketing and distribution
arrangements with a company that has an established capability. Significant
additional expenditures will be required for us to develop these capabilities.
We have entered into agreements with Abbott and Grupo Ferrer with respect to the
marketing and sale of Nyotran(R). In addition, we may enter into marketing
agreements with one or more pharmaceutical companies to market other products
that we may develop. To the extent we rely upon licensing, marketing or
distribution arrangements with others, any revenues we receive will depend upon
the efforts of third parties. We cannot assure that any third party will market
our products successfully or that any third-party collaboration will be on terms
favorable to us. If any marketing partner does not market a product
successfully, our business would be materially adversely affected. We cannot
give assurance that we will be able to establish sales, marketing and
distribution capabilities or that we or our collaborators will be successful in
gaining market acceptance for any products that we may develop. Our failure to
establish marketing capabilities or to enter into marketing arrangements with
third parties would have a material adverse effect on us.
-12-
16
PATENTS AND PROPRIETARY RIGHTS
Our ability to commercialize any products will depend, in part, upon
our ability or the ability of our licensors to obtain patents, enforce those
patents, preserve trade secrets, and operate without infringing upon the
proprietary rights of third parties. The patent positions of biotechnology and
pharmaceutical companies are highly uncertain and involve complex legal and
factual questions. Some of the United States patents and patent applications
owned by or licensed to us are method-of-use patents that cover the use of
certain compounds to treat specified conditions, and composition-of-matter
patents are not available for some of our product candidates. We cannot assure
that:
o the patent applications licensed to or owned by us will result
in issued patents;
o patent protection will be secured for any particular
technology;
o any patents that have been or may be issued to us or our
licensors will be valid or enforceable;
o any patents will provide meaningful protection to us;
o others will not be able to design around the patents; or
o our patents will provide a competitive advantage or have
commercial application.
We cannot give assurance that patents owned by or licensed to us will
not be challenged by others. We could incur substantial costs in proceedings
before the United States Patent and Trademark Office and other regulatory
authorities, including interference proceedings. These proceedings could result
in adverse decisions about the patentability of our inventions and products as
well as about the enforceability, validity or scope of protection afforded by
the patents.
We cannot give assurance that the manufacture, use or sale of our
product candidates will not infringe patent rights of others. We may be unable
to avoid infringement of those patents and may be required to seek a license,
defend an infringement action, or challenge the validity of the patents in
court. We cannot give assurance that a license will be available to us, if at
all, upon terms and conditions acceptable to us or that we will prevail in any
patent litigation. Patent litigation is costly and time consuming, and we cannot
assure that we will have sufficient resources to bring the litigation to a
successful conclusion. If we do not obtain a license under such patents, are
found liable for infringement, or are not able to have infringing patents
declared invalid, we may be liable for significant money damages, may encounter
significant delays in bringing products to market, or may be precluded from
participating in the manufacture, use or sale of products or methods of
treatment requiring these licenses. While no specific study has been conducted,
we do not believe that the commercialization of our products pursuant to our
license agreements will infringe upon the patent rights of others. However, we
cannot assure that we have identified all or any United States and foreign
patents that pose a risk of infringement.
We also rely upon trade secrets and other unpatented proprietary
information in our product development activities. To the extent we rely on
trade secrets and unpatented know-how to maintain our competitive technological
position, we cannot assure that others may not independently develop the same or
similar technologies. We seek to protect trade secrets and proprietary
knowledge, in part through confidentiality agreements with our employees,
consultants, advisors and collaborators. Nevertheless, these agreements may not
effectively prevent disclosure of our confidential information and may not
provide us with an adequate remedy in the event of unauthorized disclosure of
such information. If our employees, scientific consultants or collaborators
develop inventions or processes independently that may be applicable to our
products, disputes may arise about ownership of proprietary rights to those
inventions and processes. These inventions and processes will not necessarily
become our property, but may remain the property of those persons or their
employers. Protracted and costly litigation could be necessary to enforce and
determine the scope of our proprietary rights. Failure to obtain or maintain
patent and trade secret protection, for any reason, would have a material
adverse effect on us.
We engage in collaborations, sponsored research agreements, licensing
and other arrangements with academic researchers and institutions that have
received and may receive funding from United States government agencies. As a
result of these arrangements, the United States government or certain third
parties have rights in certain inventions developed during the course of the
performance of these collaborations and agreements as required by law or the
agreements. These rights typically allow the government to use the invention for
free on an internal basis and for research and development purposes.
-13-
17
The patent laws of the United States have recently been modified.
Modifications include publication of patent applications under certain
circumstances and modified patent reexamination procedures. The effect of these
legislative changes on our intellectual property estate is uncertain.
GOVERNMENT REGULATION
Our research and development activities, preclinical studies and
clinical trials, and ultimately the manufacturing, marketing and labeling of
products, are subject to extensive regulation by the FDA and other regulatory
authorities in the United States and other countries. The United States Federal
Food, Drug and Cosmetic Act and the associated regulations and other federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of our products. Preclinical study and clinical trial
requirements and the regulatory approval process take years and require the
expenditure of substantial resources. Additional government regulation may be
established that could prevent or delay regulatory approval of our products.
Delays or rejections in obtaining regulatory approvals would adversely affect
our ability to commercialize any product we develop and our ability to receive
product revenues or royalties. If regulatory approval of a product is granted,
the approval may include significant limitations on the indicated uses for which
the product may be marketed.
The FDA and other regulatory authorities require that the safety and
efficacy of our therapeutic products must be supported through adequate and
well-controlled clinical trials. If the results of these clinical trials do not
establish the safety and efficacy of our products to the satisfaction of the FDA
and other regulatory authorities, we will not receive the approvals necessary to
market our products, which would have a material adverse effect on us.
The standard process required by the FDA before a pharmaceutical agent
may be marketed in the United States includes:
o preclinical tests;
o submission to the FDA of an IND which must become effective
before human clinical trials may commence;
o adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug in its intended
application;
o submission of an NDA to the FDA; and
o FDA approval of the NDA prior to any commercial sale or
shipment of the drug.
In addition to obtaining FDA approval for each product, each drug
manufacturing establishment must be inspected and approved by the FDA. All
manufacturing establishments are subject to inspections by the FDA and by other
federal, state and local agencies and must comply with current FDA good
manufacturing practices.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with the good laboratory practices guidelines
established by the FDA for companies conducting research and development on
proposed pharmaceutical products. The results of the preclinical tests are
submitted to the FDA as part of an IND and are reviewed by the FDA before the
commencement of human clinical trials. Unless the FDA objects to an IND, the IND
will become effective 30 days following its receipt by the FDA. There can be no
assurance that submission of an IND will result in FDA authorization to commence
clinical trials or that the lack of an objection means that the FDA will
ultimately approve an NDA.
Clinical trials involve the administration of the investigational new
drug to humans under the supervision of a qualified principal investigator.
Clinical trials must be conducted in accordance with Good Clinical Practices
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety, and efficacy criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND. Also, each clinical trial must
be approved and conducted under the auspices of an Institutional Review Board.
The Institutional Review Board will consider, among other things, ethical
factors, the safety of human subjects, and the possible liability of the
institution conducting the clinical trials.
-14-
18
Clinical trials are typically conducted in three sequential phases
which may overlap. In Phase I, the initial introduction of the drug to humans,
the drug is tested for safety, dosage tolerance, metabolism, distribution and
excretion. Phase II involves studies of a limited patient population to gather
evidence about the efficacy of the drug for specific targeted indications,
dosage tolerance and optimal dosage and to identify possible adverse effects and
safety risks. When a product has shown evidence of efficacy and has an
acceptable safety profile in a Phase II evaluation, Phase III clinical trials
are undertaken to evaluate clinical efficacy and to test for safety in an
expanded patient population at geographically dispersed clinical trial sites.
Phase III clinical trials are not always required, however, where the data
obtained in Phase II trials is determined to be "pivotal." There can be no
assurance that any of our clinical trials will be completed successfully or
within any specified time period. We or the FDA may suspend clinical trials at
any time.
We have designed the protocols for our pivotal clinical trials based on
analysis of our research, including various parts of our Phase I and Phase II
clinical trials. Although copies of our pivotal clinical trial protocols have
been submitted to the FDA, there can be no assurance that the FDA, after the
results of the pivotal clinical trials have been announced, will agree with the
design of the pivotal clinical trial protocols. In addition, the FDA inspects
and reviews clinical trial sites, informed consent forms, data from the clinical
trial sites, including case report forms and record keeping procedures, and the
performance of the protocols by clinical trial personnel to determine compliance
with good clinical practices established by the FDA. The FDA also looks to
determine that there was no bias in the conduct of clinical trials. The conduct
of clinical trials in general and the performance of the pivotal clinical trial
protocols is complex and difficult. There can be no assurance that the design or
the performance of the pivotal clinical trial protocols will be successful.
The results of preclinical studies and clinical trials, if successful,
are submitted in an NDA to seek FDA approval to market and commercialize the
drug product for a specified use. The testing and approval process will require
substantial time and effort, and there can be no assurance that any approval
will be granted for any product or that approval will be granted according to
any schedule. The FDA may deny an NDA if it believes that applicable regulatory
criteria are not satisfied. The FDA may also require additional testing for
safety and efficacy of the drug. Moreover, if regulatory approval of a drug
product is granted, the approval will be limited to specific indications. There
can be no assurance that any of our product candidates will receive regulatory
approvals for commercialization.
The FDA has implemented an accelerated review process for
pharmaceutical agents that treat serious or life-threatening diseases and
conditions, subject to payment of user fees. When appropriate, we intend to
pursue opportunities for accelerated review of our products. We cannot predict
the ultimate effect of this review process on the timing or likelihood of FDA
review of any of our products.
Even if regulatory approvals for our products are obtained, our
products and the facilities manufacturing our products are subject to continual
review and periodic inspection. The FDA will require post-marketing reporting to
monitor the safety of our products. Each drug manufacturing establishment must
be inspected and approved by the FDA. All manufacturing establishments are
subject to biennial inspections by the FDA and must comply with the FDA's good
manufacturing practices. To supply drug products for use in the United States,
foreign manufacturing establishments must comply with the FDA's good
manufacturing practices and are subject to periodic inspection by the FDA or by
regulatory authorities in those countries under reciprocal agreements with the
FDA. In complying with good manufacturing practices, manufacturers must expend
funds, time and effort in the area of production and quality control to ensure
full technical compliance. We do not have any drug manufacturing capability and
must rely on outside firms for this capability. See "-- Manufacturing." The FDA
stringently applies regulatory standards for manufacturing. Identification of
previously unknown problems with respect to a product, manufacturer or facility
may result in restrictions on the product, manufacturer or facility, including
warning letters, suspensions of regulatory approvals, operating restrictions,
delays in obtaining new product approvals, withdrawal of the product from the
market, product recalls, fines, injunctions and criminal prosecution.
Before our products can be marketed outside of the United States, they
are subject to regulatory approval similar to FDA requirements in the United
States, although the requirements governing the conduct of clinical trials,
product licensing, pricing, and reimbursement vary widely from country to
country. No action can be taken to
-15-
19
market any drug product in a country until an appropriate application has been
approved by the regulatory authorities in that country. FDA approval does not
assure approval by other regulatory authorities. The current approval process
varies from country to country and the time spent in gaining approval varies
from that required for FDA approval. In some countries, the sale price of a drug
product must also be approved. The pricing review period often begins after
market approval is granted. Even if a foreign regulatory authority approves any
of our products, no assurance can be given that it will approve satisfactory
prices for the products.
Our research and development involves the controlled use of hazardous
materials, chemicals, viruses and various radioactive compounds. Although we
believe that our procedures for handling and disposing of those materials comply
with state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be eliminated. If an accident of this type
occurs, we could be held liable for resulting damages, which could be material
to our financial condition and business. We are also subject to numerous
environmental, health and workplace safety laws and regulations, including those
governing laboratory procedures, exposure to blood-borne pathogens and the
handling of biohazardous materials. Additional federal, state and local laws and
regulations affecting us may be adopted in the future. Any violation of these
laws and regulations, and the cost of compliance, could materially and adversely
affect us.
Under the Orphan Drug Act, the FDA may grant "orphan drug" status to
therapeutic agents intended to treat a "rare disease or condition," defined as a
disease or condition that affects less than 200,000 persons in the United
States. Orphan drug status grants the sponsor tax credits for the amounts
expended on clinical trials, provided that certain conditions are met, as well
as potential marketing exclusivity for four to seven years following approval of
the pertinent NDA. We received orphan drug status for ATRAGEN(R) in 1993 for the
treatment of acute and chronic leukemia. We received orphan drug status for
AroplatinTM in 1999 for the treatment of malignant mesothelioma. We may request
this status for more of our products as part of our overall regulatory strategy.
There is no assurance, however, that any of our other products will receive
orphan drug status or that the benefits of protection currently afforded by
orphan drug status will remain in effect. In addition, any party may obtain
orphan drug status with respect to products for which patent protection has
expired or is otherwise unavailable. The first party granted marketing approval
could prevent other persons from commercializing that product during the period
for which exclusivity was granted to that party.
COMPETITION
We believe that our products, because of their unique pharmacologic
profiles, will become useful new treatments for cancers and infectious diseases,
either as alternatives to or in combination with other pharmaceuticals. We are
engaged in pharmaceutical product development characterized by rapid
technological progress. Many established biotechnology and pharmaceutical
companies, universities and other research institutions with resources
significantly greater than ours may develop products that directly compete with
our products. Those entities may succeed in developing products, including
liposomes and liposomal products, that are safer, more effective or less costly
than our products. Even if our products should prove to be more effective than
those developed by other companies, other companies may be more successful than
us because of greater financial resources, greater experience in conducting
preclinical and clinical trials and obtaining regulatory approval, stronger
sales and marketing efforts, earlier receipt of approval for competing products
and other factors. If we commence significant commercial sales of our products,
we or our collaborators will compete in areas in which we have little or no
experience such as manufacturing and marketing. There can be no assurance that
our products, if commercialized, will be accepted and prescribed by healthcare
professionals.
Some of our competitors are active in the development of proprietary
liposomes and in liposomal research and product development to treat cancer and
certain fungal infections. Those competitors include Elan Corp, Gilead Sciences
and ALZA Corporation. Each of these companies' products have regulatory approval
in the United States and other countries. Any marketing of these and other
products that treat disease indications targeted by us could adversely affect
the market acceptance of our products as a result of the established market
recognition and physician familiarity with the competing product. The presence
of directly competitive products could also result in more intense price
competition than might otherwise exist, which could have a material adverse
effect on our financial condition and results of operations. We believe that
competition will be intense for all of our product candidates.
-16-
20
EMPLOYEES
As of January 31, 2001, we had 29 full-time employees, 21 of whom were
engaged in development, clinical and regulatory affairs and 8 of whom were
engaged in business development and administration. We have not experienced any
work stoppages and consider relations with our employees to be good. We reduced
our number of full time employees in January 2001 from 77 full-time employees in
December 2000 in order to reduce the amount of our expenditures in an effort to
preserve our cash reserves. We retained those individuals necessary to maintain
our current business plan.
ADDITIONAL BUSINESS RISKS
We Are in an Early Stage of Development, Have a History of Operating Losses,
Anticipate Future Losses, May Not Generate Revenues from Product Sales and May
Never Become Profitable
Our business is at an early stage of development. We have not yet
generated any revenues from the commercial sale of our products. We cannot
assure that we will ever generate revenues from product sales.
We have incurred losses and have had negative cash flows from
operations since inception. We have funded our activities primarily from sales
of stock and, to a lesser extent, from revenues under research and development
agreements and grants. As of December 31, 2000, our accumulated deficit was
$119.5 million. To date, we have dedicated most of our financial resources to
the research and development of products, general and administrative expenses,
and the prosecution of patents and patent applications.
We expect to incur operating losses for at least the next several
years. This is primarily attributable to our plan to spend substantial amounts
on research and development of products, including preclinical studies and
clinical trials, and, if we obtain necessary regulatory approvals, on sales and
marketing efforts. We cannot assure that we will ever generate revenue from
product sales, receive royalties attributable to product sales by our licensees,
become profitable or that we will remain profitable if and when we become
profitable. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations" and "-- Liquidity and Capital
Resources."
We Will Require Future Capital and Are Uncertain of the Availability or Terms of
Additional Funding, Which May Lead to Dilution or Other Adverse Effects to the
Value of Our Shares or Our Shareholders' Rights Even if Funding Is Available
In January 2001, we received a non-approval letter from the FDA for our
NDA amendment for ATRAGEN(R). Following this event, we reduced expenditures in
our development plans and activities. Additionally, we reduced the number of
full-time employees in January 2001 from 77 to 29.
At this time, the majority of our clinical trials have reached the
stage where we have completed patient enrollment for their current phase. At the
current time, we are gathering clinical trial data for analysis. We anticipate
reporting the data at appropriate scientific meetings. Before we initiate any
new clinical trials, we will analyze each product's likelihood for approval, the
cost of the proposed clinical trial, cash available at such time and the
inherent risk profile. We anticipate these steps will assist us in maximizing
shareholder value. See "Products in Clinical Development."
We will continue to require substantial additional funds for our
operations. At December 31, 2000, we had $9.1 million in cash, cash equivalents
and investments. We believe that we can conserve our existing financial
resources to satisfy our capital and operating requirements into the fourth
quarter of 2001. Our accountants have issued a qualified opinion on our
consolidated financial statements for the year ended December 31, 2000
indicating substantial doubt about our ability to continue as a going concern.
We will, in all likelihood, need to further reduce our expenditures if we do not
obtain additional financial resources by mid 2001. Sources of financing may not
be available, or if available, will be dilutive or may have other adverse effect
to the value of our shares. We may have to close operations and/or seek legal
protection from our creditors.
-17-
21
Additional funding may be available in the public or private capital
markets and through collaboration agreements with partners. If, however, the
results of our clinical trials are not favorable, it will be much more difficult
for us to raise additional funds. We do not know if additional funding will be
available at all or on acceptable terms. If we raise funds by selling more
stock, share ownership by our current stockholders will be diluted. In addition,
we may grant future investors rights which are superior to those of current
stockholders.
Our Common Stock Could Be Delisted from NASDAQ
Although our common stock presently lists on the Nasdaq National
Market, we must maintain certain minimum financial requirements for continued
inclusion on Nasdaq. At the present time, we do not meet these criteria. If we
cannot satisfy Nasdaq's maintenance requirements, Nasdaq may delist our common
stock. In such event, trading in our common stock would thereafter be conducted
in the over-the-counter markets in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." Consequently, the liquidity of our common stock
could be impaired, not only in the number of shares which could be bought and
sold, but also through delays in the timing of the transactions, reductions in
the security analysts' and the news media's coverage of us, and lower prices for
our common stock that it might otherwise attain.
Stockholders Face the Risks of Holding "Penny Stocks"
If Nasdaq delists our common stock, it could become subject to Rule
15g-9 under the Securities and Exchange Act of 1934, as amended, (the "Exchange
Act"), which imposes additional sales practice requirements on broker-dealers
which sell such securities to persons other that established customers and
"accredited investors" (generally, individuals with net worths in excess of
$1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their
spouses). For transactions covered by this rule, a broker-dealer must make a
special suitability determination for the purchaser and receive the purchaser's
written consent to the transaction prior to the sale. Consequently, the rule may
adversely affect the ability of the holders of our common stock to sell their
shares in the secondary market.
Regulations of the Securities and Exchange Commission, the
"Commission", define "penny stock" to be any non-Nasdaq equity security that has
a market price (as therein defined) of less that $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction of penny stock, of a disclosure schedule
prepared by the Commission relating to the penny stock market. The Commission
also requires disclosure about commissions payable to both of the broker-dealer
and the registered representative and current quotations of the securities.
Finally, the Commission requires monthly statements to be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks.
These penny stock restrictions will not apply to our common stock if
Nasdaq continues to list it and has certain price and volume information
provided on a current and continuing basis and we meet certain minimum net
tangible assets or average revenue criteria. At the present time, we do not meet
these criteria. Even if our common stock were exempt from such restrictions, we
would remain subject to Section 15(b)(6) of the Exchange Act, which gives the
Commission the authority to prohibit any person engaged in unlawful conduct
while participating in a distribution of a penny stock from associating with a
broker-dealer or participating in a distribution of a penny stock, if the
Commission finds that such a restriction would be in the public interest. If our
common stock were subject to the rules on penny stocks, the market liquidity for
our common stock could be severely and adversely affected.
Clinical Trial Results May Result in Failure To Obtain FDA Approval and
Inability To Sell Products
Before approving a drug for commercial sale as a treatment for a
disease, the FDA and other regulatory authorities generally require that the
safety and efficacy of a drug be demonstrated in humans. This is provided by
showing results from adequate and well-controlled clinical trials in which the
drug is used to treat patients suffering from the disease. We cannot predict
whether our clinical trials will adequately demonstrate the drug's safety and
efficacy or whether the FDA or other regulatory authority will agree with the
sufficiency of the trial results. If our
-18-
22
clinical trials do not demonstrate the safety or efficacy of our products, or if
we otherwise fail to obtain regulatory approval for our products, we will not be
able to generate revenues from the commercial sale of our products. See "
Business -- Government Regulation."
In January 2001, the FDA denied approval for our amendment to the NDA
for ATRAGEN(R) for APL. We intend to meet with the FDA to address their concerns
and attempt to move the approval process to a conclusion. We cannot assure that
we will be able to adequately address the FDA's concerns in a timely manner, if
at all. See "Business -- Products in Clinical Development -- ATRAGEN(R)".
The FDA Can Impose Other Restrictions on Our Operations that May Increase Costs
or Delay or Prohibit Sales
The FDA and other regulatory authorities will continue to review our
products and periodically inspect the facilities used to manufacture those
products both before and after the grant of regulatory approvals. If the FDA or
other regulatory authorities identify problems with a product, manufacturer of
our products or its facility, they may impose restrictions that may include
warning letters, suspensions of regulatory approvals, operating restrictions,
delays in obtaining new product approvals, withdrawal of the product from the
market, product recalls, fines, injunctions and criminal prosecution. See
"Business -- Government Regulation."
Our Products Must Obtain Regulatory Approval in Other Countries which Delay or
Prohibit Sales
We and licensees of our products must obtain regulatory approvals in
countries other than the United States before marketing products in those
countries. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country. Some
countries require approval of the sale price of a drug before it can be
marketed. In many countries, the pricing review period begins after product
licensing approval is granted. As a result, we or our licensees may obtain
regulatory approval for a product in a particular country, but then be subject
to price regulation that prevents the sale of the product at satisfactory
prices. See " Business-- Government Regulation."
We Experience a Substantial Degree of Uncertainty Relating to Patents that, if
Determined To Be Unenforceable, Could Result in the Loss of the Patent or Claims
Against Us
Our success will depend to a large extent on our ability to:
o obtain United States and foreign patent protection for drug
candidates and processes;
o preserve trade secrets; and
o operate without infringing the proprietary rights of third
parties.
Legal standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of claims made
under these patents are still developing. As a result, our ability to obtain and
enforce patents that protect our products is uncertain and involves complex
legal and factual questions.
We also cannot be completely sure that the inventors of subject matter
covered by our patents and patent applications were the first to invent or the
first to file patent applications for such inventions. Furthermore, we cannot
guarantee that any patents will issue from any pending or future patent
applications owned by or licensed to us. Existing or future patents may be
challenged, infringed upon, invalidated, found to be unenforceable or
circumvented by others. We cannot assure that any of our rights under any issued
patents will provide sufficient protection against competitive products or
otherwise cover commercially valuable products or processes. We may not have
identified all United States and foreign patents that pose a risk of
infringement. See " Business -- Cancer", "-- Aroplatin(TM)" and "-- Patents and
Proprietary Rights."
-19-
23
We May Incur Substantial Costs and Delays as a Result of Proceedings and
Litigation Regarding Patents and Other Proprietary Rights
Proceedings involving our patents or patent applications could result
in adverse decisions about:
o the patentability of our inventions and products; and/or
o the enforceability, validity or scope of protection offered by
our patents.
The manufacture, use or sale of our products may infringe on the patent
rights of others. If we are unable to avoid infringement of the patent rights of
others, we may be required to seek a license, if we fail to successfully defend
an infringement action or challenge the validity of the patents in court. Patent
litigation is costly and time consuming. We may not have sufficient resources to
bring these actions to a successful conclusion. In addition, if we do not obtain
a license, and fail successfully to defend an infringement action or to have
infringing patents declared invalid, we may:
o incur substantial money damages;
o encounter significant delays in bringing products to market;
and/or
o be precluded from participating in the manufacture, use or
sale of products or methods of treatment requiring licenses.
In December 2000, we resolved our interference proceeding with Sumitomo
Pharmaceuticals for Aroplatin(TM) by entering into a license agreement for their
compound. See "Business -- Collaborative Agreements" for a discussion of the
terms of this agreement.
Confidentiality Agreements with Employees and Others
May Not Adequately Prevent Disclosure of Trade Secrets and Other Unpatented
Proprietary Information, which, if Disclosed, Could Materially Adversely Affect
Our Operations or Financial Condition
Because trade secrets and other unpatented proprietary information are
critical to our business, we seek protection through confidentiality agreements
with employees, consultants, advisors and collaborators. These agreements may
not effectively prevent disclosure of confidential information and may not
provide an adequate remedy in the event of unauthorized disclosure of
confidential information. In addition, others may independently discover trade
secrets and proprietary information. Costly and time-consuming litigation could
be necessary to enforce and determine the scope of our proprietary rights, and
failure to obtain or maintain trade secret protection could have a material
adverse effect on our business, results of operations and financial condition.
See "Business -- Patents and Proprietary Rights."
We Do Not Manufacture Our Own Products and May Not Be Able To Obtain Adequate
Supplies, which Could Cause Delays or Reduce Profit Margins
We do not have the facilities necessary to manufacture products in
accordance with FDA good manufacturing practices. As a result, we use contract
manufacturers to produce quantities for clinical testing. We have not entered
into any agreement with our manufacturers except for (1) periodic purchase
orders and (2) Abbott who holds an option to manufacture Nyotran(R). We do not
expect to establish any significant manufacturing capacity in the near future.
Instead, we intend to rely on corporate partners and contract manufacturers for
the manufacture and supply of our products. Therefore, we may not be able to
obtain supplies of products on acceptable terms or in sufficient quantities, if
at all. Our dependence on third parties for the manufacture of products may also
reduce our profit margins and ability to develop and deliver products with
sufficient speed. See "Business -- Manufacturing."
Our Products Require Materials that May Not Be Readily Available or Cost
Effective, which May Adversely Affect Our Competitive Position or Profitability
Some of our products, such as Annamycin and AroplatinTM, are new
syntheses and are not yet available in commercial quantities. Raw materials
necessary for the manufacture of these and other of our products may not be
-20-
24
available in sufficient quantities or at a reasonable cost in the future.
Complications or delays in obtaining raw materials or in product manufacturing
could delay the submission of products for regulatory approval and the
initiation of new development programs, which could materially impair our
competitive position and potential profitability. See "Business --
Manufacturing."
We Have No Experience in Sales, Marketing and Distribution and Rely on Third
Parties, which May Result in Lower Sales, Higher Costs or Lower Profit Margins
We anticipate relying on one or more pharmaceutical companies to market
our products to customers and, wherever possible, to retain co-marketing rights
in certain markets such as the United States and Canada. Agreements have already
been entered into with Abbott and Grupo Ferrer for distribution of Nyotran(R).
We have retained co-marketing rights under the Abbott agreement for a limited
period of time. See "Business -- Collaborative Agreements." To the extent that
we use distribution arrangements with third parties to market products, our
ability to generate revenues and profits will depend upon the efforts of these
third parties.
Our Ability to Enter into Collaborative Arrangements Is Critical to Our
Successful Development, Sales and Licensing of Products and Potential
Profitability
We are a product development company with limited resources. We do not
conduct research and we have no marketing and sales department. Therefore, our
present strategy involves entering into arrangements with corporate, government
and academic collaborators, licensors, licensees and others. As a consequence,
our success may depend in large part on the success of these other parties in
performing their responsibilities. Also, we may not be able to establish
additional collaborative arrangements or license agreements that are necessary
to develop and commercialize products. Even if established, these collaborative
or license agreements may not be successful. Some of these collaborative
agreements and license agreements provide for milestone payments to us and
others require us to pay milestone payments to others. We may not be able to
achieve the milestones that trigger payments to us. In addition, payments by us
may not result in the development of marketable products by our collaborators.
See "Business-- Collaborative Agreements."
Our Competitors May Have Greater Resources or Better Products
We believe that competition will be intense for all of our product
candidates. Our competitors include multinational pharmaceutical and chemical
companies, specialized biotechnology firms and universities and other research
institutions. Many of these competitors have greater financial and other
resources than we do. These competitors may succeed in developing products that
are safer, more effective or less costly than our products. Even if our products
prove to be more effective than those developed by our competitors, our
competitors may be more successful because of greater financial resources,
greater experience in conducting preclinical and clinical trials and obtaining
regulatory approval, stronger sales and marketing efforts, earlier receipt of
approval for competing products and other factors.
Some of our competitors are active in the development of proprietary
liposomes and in liposomal research and product development to treat cancer and
certain fungal infections. Some of these companies' products have regulatory
approval in the United States and other countries. Any marketing of these and
other products that treat diseases targeted by us could reduce the market
acceptance of our products. The presence of directly competitive products could
also result in intense price competition, which could reduce our revenues and
profits. See "Business -- Competition."
We May Not Be Able To Keep Up with the Rapid Technological Change in the
Biotechnology and Pharmaceutical Industries, which Could Make Our Products
Obsolete
Biotechnology and related pharmaceutical technologies have undergone
and continue to be subject to rapid and significant change. We expect that the
technologies associated with biotechnology research and development will
continue to develop rapidly. Our future will depend in large part on our ability
to maintain a competitive
-21-
25
position with respect to these technologies. Any compounds, products or
processes that we develop may become obsolete before we recover expenses
incurred in developing those products.
Our Success May Depend on Third-Party Reimbursement of Patients' Costs for Our
Products
Our ability to commercialize products successfully will depend in part
on the extent to which various third parties are willing to reimburse patients
for the costs of our products and related treatments. These third parties
include government authorities, private health insurers and other organizations,
such as health maintenance organizations. Third-party payors are increasingly
challenging the prices charged for medical products and services. Accordingly,
if less costly drugs are available, third-party payors may not authorize or may
limit reimbursement for our products, even if they are safer or more effective
than the alternatives. In addition, the trend toward managed healthcare and
government insurance programs could result in lower prices and reduced demand
for our products. Cost containment measures instituted by healthcare providers
and any general healthcare reform could affect our ability to sell products and
may have a material adverse effect on us.
We cannot predict what additional legislation or regulation relating to
the healthcare industry or third-party coverage and reimbursement may be enacted
in the future or what effect any legislation or regulation might have on our
business.
Our Activities Involve the Use of Hazardous Materials, which Subject Us to
Regulation, Related Costs and Delays and Potential Liabilities
Our activities involve the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds. Although we believe that
our procedures for handling and disposing of these materials comply with state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated. If an accident occurs, we could be held
liable for resulting damages, which could be substantial. We are also subject to
numerous environmental, health and workplace safety laws and regulations,
including those governing laboratory procedures, exposure to blood-borne
pathogens and the handling of biohazardous materials. Additional federal, state
and local laws and regulations affecting our operations may be adopted in the
future. We may incur substantial costs to comply with and substantial fines or
penalties if we violate any of these laws or regulations.
Our Business has a Substantial Risk that Product Liability Claims and Insurance
May Be Expensive or Unavailable
We may be subject to product liability claims if the use of our
products is alleged to injure subjects or patients. This risk exists for
products tested in human clinical trials as well as products that are approved
to be sold commercially. Product liability claims could result in a recall of
products or a change in the indications for which they may be used. We presently
have product liability insurance coverage for claims arising from the use of our
products in clinical trials; however, this insurance may not be adequate to
cover all potential claims. Furthermore, product liability insurance is becoming
increasingly expensive. As a result, we may not be able to maintain current
amounts of insurance coverage, obtain additional insurance for clinical trials
or for commercial sales or obtain insurance at a reasonable cost or in
sufficient amounts to protect against losses that could have a material adverse
effect on us.
We Depend on Key Personnel and Competition for Qualified Personnel Is Intense,
which Could Result in Delays or Additional Costs
We believe that our ability to successfully implement our business
strategy is highly dependent on our management and scientific team. The loss of
services of one or more of our executive officers might hinder the achievement
of our development objectives. We are also highly dependent on our ability to
hire and retain qualified scientific and technical personnel. The competition
for these employees is intense. We may not be able to continue to hire and
retain the qualified personnel that we need for our business. Loss of the
services of or failure to recruit key scientific and technical personnel could
substantially hurt us and our product development efforts.
-22-
26
ITEM 2. PROPERTIES
Our corporate offices and laboratories are located in a 30,000 square
foot leased building located at 8707 Technology Forest Place in The Woodlands, a
suburb of Houston, Texas. The lease for this facility expires in 2008, and we
have renewal options to extend the lease to 2018. We consider that the current
facilities will be suitable for our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-23-
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the
symbol "ARNX." The last sale price of the common stock as reported on the Nasdaq
National Market on March 23, 2001, was $0.875 per share. At December 31, 2000,
there were approximately 250 holders of record and approximately 6,100
beneficial owners of our common stock. The following table sets forth the range
of high and low sales prices per share of common stock, as reported on the
Nasdaq National Market, during the periods presented.
YEAR ENDED DECEMBER 31, 1999: HIGH LOW
--------- ----------
1st Quarter............................................................... $ 3 1/8 $ 11 15/16
2nd Quarter............................................................... 7 1/8 2 11/16
3rd Quarter............................................................... 7 1/16 3 3/8
4th Quarter............................................................... 4 2 9/16
YEAR ENDED DECEMBER 31, 2000:
1st Quarter............................................................... $ 5 1/4 $ 2 3/4
2nd Quarter............................................................... 3 5/8 2 1/2
3rd Quarter............................................................... 5 2 2/3
4th Quarter............................................................... 5 4/9 3 1/8
YEAR ENDED DECEMBER 31, 2001:
1st Quarter (Through March 23, 2001)...................................... $ 4 4/7 $ 7/8
DIVIDENDS
We have never paid cash dividends on our common stock. We currently
intend to retain earnings, if any, to support the development of our business
and do not anticipate paying dividends in the foreseeable future. Payment of
future dividends, if any, will be at the discretion of the board of directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
STOCKHOLDER RIGHTS PLAN
On October 6, 1999, we adopted a rights agreement ("Rights Plan") under
which we distributed a dividend consisting of one preferred stock purchase right
(a "Right") for each share of our common stock held of record as the close of
business on October 18, 1999. We will also distribute a Right for each share
issued thereafter until the earlier of the Distribution Date (as defined in the
Rights Plan), redemption of the Rights or expiration of the Rights. The Rights
Plan is designed to deter coercive tactics and to prevent an acquirer from
gaining control of the Company without offering fair value. The Rights will
expire on October 18, 2009, subject to earlier redemption or exchange. Each
Right entitles its holder to purchase from us one one-hundredth of a share of
Series One Junior Participating Preferred Stock at $32.00 per one one-hundredth
of a share, subject to standard anti-dilution adjustments. Generally, the Rights
become exercisable only if a Person (as defined) acquires beneficial ownership
of 20% or more of our outstanding common stock.
A complete description of the Rights, the Rights Plan between us and
American Stock Transfer and Trust Company, as rights agent, and the Series One
Junior Participating Preferred Stock is hereby incorporated by reference from
the information appearing under Item 5 of our current report on Form 8-K dated
October 6, 1999.
-24-
28
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below are derived from our
financial statements as of and for each of the years in the five-year period
ended December 31, 2000, which have been audited by Arthur Andersen LLP,
independent public accountants. In order to complete the development and other
activities to commercialize our products, additional financing will be required.
Accordingly, our independent public accountants' report on the financial
statements for the year ended December 31, 2000 includes an explanatory fourth
paragraph expressing substantial doubt about our ability to continue as a going
concern. 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 our financial statements and notes thereto
included elsewhere in this Annual Report on Form 10-K.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Research and development grants
and contracts ....................... $ 2,670 $ 841 $ 6,737 $ 11,052 $ 3,219
---------- ---------- ---------- ---------- ----------
Total revenues ...................... 2,670 841 6,737 11,052 3,219
Expenses:
Research and development ................. 10,357 13,993 22,793 21,494 16,611
Purchase of in-process research
and development ..................... 242 3,000 -- -- --
Selling, general and administrative ...... 1,620 2,641 3,354 4,652 3,241
---------- ---------- ---------- ---------- ----------
Total expenses ...................... 12,219 19,634 26,147 26,146 19,852
---------- ---------- ---------- ---------- ----------
Operating loss .............................. (9,549) (18,793) (19,410) (15,094) (16,633)
Other income (expense):
Interest income .......................... 1,692 2,059 1,265 1,330 926
Gain on sale of investments .............. -- -- -- -- 2,653
Interest expense and other ............... (173) (257) (86) (330) (448)
---------- ---------- ---------- ---------- ----------
Other income, net ........................... 1,519 1,802 1,179 1,000 3,131
Net loss before cumulative effect of
change in accounting principle ...... (8,030) (16,991) (18,231) (14,094) (13,502)
Cumulative effect of change in
accounting principle ................ -- -- -- -- (4,455)
---------- ---------- ---------- ---------- ----------
Net loss ................................... $ (8,030) $ (16,991) $ (18,231) $ (14,094) $ (17,957)
========== ========== ========== ========== ==========
Loss per share before cumulative effect
of change in accounting principle ........ $ (0.62) $ (1.14) $ (1.17) $ (0.65) $ (0.54)
Cumulative effect of change in
accounting principle ................ -- -- -- -- (0.18)
---------- ---------- ---------- ---------- ----------
Net loss per share .......................... $ (0.62) $ (1.14) $ (1.17) $ (0.65) $ (0.72)
========== ========== ========== ========== ==========
Weighted average shares used in
computing basic and diluted loss per
share .................................... 13,048 14,896 15,571 21,727 24,847
Pro forma amounts assuming the
accounting change is applied
retroactively:
Net loss ................................. $ (8,030) $ (16,991) $ (23,104) $ (13,676)
========== ========== ========== ==========
Net loss per share ....................... $ (0.62) $ (1.14) $ (1.48) $ (0.63)
========== ========== ========== ==========
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-
term and long-term investments ........... $ 41,388 $ 29,954 $ 20,390 $ 20,252 $ 9,075
Total assets ................................ 44,281 32,125 23,045 22,734 11,042
Total long-term obligations ................. 146 6 1,012 3,517 3,620
Deficit accumulated during
development stage ........................ (52,213) (69,204) (87,435) (101,529) (119,486)
Total stockholders' equity .................. 40,477 27,379 13,610 14,731 2,665
-25-
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and related Notes contained elsewhere
herein.
OVERVIEW
Since our inception in 1986, we have primarily devoted our resources to
fund research, drug discovery and development. We have been unprofitable to date
and expect to incur substantial operating losses for the next several years as
we expend our resources for product research and development, preclinical and
clinical testing and regulatory compliance. We have sustained losses of $119.5
million through December 31, 2000. Our research and development activities and
operations have been financed primarily through public and private offerings of
securities and, to a lesser extent, from revenues under research and development
agreements and grants. Our operating results have fluctuated significantly
during each quarter, and we anticipate that these fluctuations, largely
attributable to varying commitments and expenditures for clinical trials and
research and development, will continue for the next several years. In January
2001, we received a non-approval letter from the United States Food and Drug
Administration (FDA) for our New Drug Application (NDA) amendment for ATRAGEN(R)
for acute promyelocytic leukemia (APL). Following this event, we reduced
expenditures and curtailed our development plans and activities. Additionally,
we reduced the number of full-time employees in January 2001 from 77 to 29. We
plan to meet with the FDA and determine our alternatives for this NDA.
RESULTS OF OPERATIONS
Years Ended December 31, 1999 and 2000
During 2000, we adopted United States Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), which requires up-front, non-refundable license fees to
be deferred and recognized over the performance period. Payments for services
under research and development grants and contracts that are specifically tied
to a separate earnings process are recognized as revenue as the services are
performed. In situations where we receive payment in advance of the performance
of services, such amounts are deferred and recognized as revenue as the related
services are performed. Non-refundable fees, including payments for up-front
licensing fees and milestones (collectively, " Non-refundable Fees"), are
recognized as revenue based on the percentage of costs incurred to date,
estimated costs to complete, and total Non-refundable Fees received. Prior to
January 1, 2000, we had recognized revenue from Non-refundable Fees when we had
no obligations to return the fees under any circumstances, and there were no
additional contractual services to be provided or costs to be incurred by us in
connection with the Non-refundable Fees.
The cumulative effect of adopting SAB 101 at January 1, 2000 resulted
in a one-time, non-cash charge of $4.5 million, with a corresponding increase to
deferred revenue that will be recognized in future periods. The $4.5 million
represents portions of 1998 and 1999 Non-refundable Fees from Abbott
Laboratories in consideration for the exclusive worldwide rights to market and
sell Nyotran(R). For the year ended December 31, 2000, we recognized $2.8
million of research and development grants and contracts revenue that was
included in the cumulative effect adjustment as of January 1, 2000. The balance
of the deferred revenue from this adjustment, $1.7 million, will be recognized
in the future as we incur costs relating to obtaining approval for Nyotran(R)
from the FDA.
Prior period financial statements have not been restated to apply SAB
101 retroactively; however, the pro forma amounts included in the consolidated
statements of operations show the net loss and per share net loss assuming we
had retroactively applied SAB 101 to all prior periods.
Interest income decreased by 30% to $926,000 in 2000, from $1.3 million
in 1999. This decrease resulted from a decrease in the average amount of funds
available for investment in 2000.
-26-
30
Research and development expenses decreased by 23% to $16.6 million in
2000, from $21.5 million in 1999. The decrease in research and development
expenses resulted primarily from:
o a decrease of $4.7 million in clinical trial costs for
Nyotran(R) as the majority of the required clinical trial work
was completed by the end of 1999;
o a decrease of $1.2 million in salary and payroll costs;
o a decrease of $430,000 in pharmacology and toxicology studies
relating to Nyotran(R); and
o a decrease of $245,000 in drug materials and manufacturing
costs related to Aroplatin(TM).
The decreases listed above were offset by:
o an increase of $1.0 million in clinical trial costs for
ATRAGEN(R);
o an increase of $661,000 in drug materials and manufacturing
costs relating to Annamycin and ATRAGEN(R);
o an increase of $194,000 in outside pharmaceutical development
testing relating to Nyotran(R); and
o a $500,000 license fee relating to Aroplatin(TM).
Selling, general and administrative expenses decreased 30% to $3.2
million in 2000, from $4.7 million in 1999. The decrease in selling, general and
administrative expenses resulted from the following:
o a decrease of $315,000 in salary and payroll costs;
o a decrease of $240,000 in business consultant costs;
o a decrease of $471,000 in marketing expenses relating to
ATRAGEN(R); and
o a decrease of $548,000 in uncollectible receivables.
Interest expense and other increased 36% to $448,000 in 2000, from
$330,000 in 1999. The increase in interest expense was due to the increase in
the average note payable balance in 2000.
Net loss increased by 27% to $18.0 million in 2000, from $14.1 million
in 1999. The increase in net loss resulted primarily from a decrease in revenues
of $8.2 million mainly as a result of the reduction in revenues resulting from
our license agreement for Nyotran(R) and the cumulative effect of the change in
accounting principle of $4.5 million relating to the recognization of research
and development revenue. These items were partially offset by a reduction in
expenses of $6.2 million and the recording of a $2.7 million gain from the sale
of investments.
Years Ended December 31, 1998 and 1999
Revenues from research and development grants and contracts increased
66% to $11.1 million in 1999, from $6.7 million in 1998. This increase resulted
from milestone and development revenue under our license agreement for
Nyotran(R).
Interest income increased by 5% to $1,330,000 in 1999, from $1,265,000
in 1998. This increase resulted from an increase in the average amount of funds
available for investment in 1999.
Research and development expenses decreased 6% to $21.5 million in
1999, from $22.8 million in 1998. The decrease in research and development
expenses resulted primarily from decreases of $2.3 million and $729,000 in
clinical investigation costs and manufacturing relating to Nyotran(R). These
decreases were partially offset by increases of $640,000 in payroll costs and
$600,000 in regulatory consultants relating mostly to ATRAGEN(R) and Nyotran(R).
Selling, general and administrative expenses increased 39% to $4.7
million in 1999, from $3.4 million in 1998. The increase in selling, general and
administrative expenses resulted primarily from an increase of $408,000 in
business consultant expense relating mainly to evaluating the market potential
for our product candidates and an increase of $286,000 in marketing expenses
relating mainly to ATRAGEN(R).
Interest expense and other increased 284% to $330,000 in 1999, from
$86,000 in 1998. The increase in interest expense and other resulted primarily
from an increase in the average amount of capital lease obligations and
indebtedness used to fund the acquisition of laboratory equipment.
Net loss decreased 23% to $14.1 million in 1999, from $18.2 million in
1998. The decrease in net loss resulted primarily from an increase of $4.3
million in revenues relating to research and development grants and contracts.
-27-
31
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, our primary source of cash has been from financing
activities, which have consisted primarily of sales of equity securities, and to
a lesser extent, from revenues under research and development agreements and
grants. We have raised an aggregate of approximately $98.8 million from the sale
of equity securities from inception through December 31, 2000. In July 1992, we
raised net proceeds of approximately $10.7 million in the initial public
offering of our common stock. In September 1993, we entered into a collaborative
agreement with Genzyme Corp. relating to the development and commercialization
of ATRAGEN(R), in which we received net proceeds of approximately $4.5 million
from the sale of common stock to Genzyme. In November 1993, we raised net
proceeds of approximately $11.5 million and in May 1996, we raised net proceeds
of approximately $32.1 million in public offerings of common stock. From October
1995 through December 31, 1998, we received aggregate net proceeds of
approximately $6.5 million from the exercise of certain warrants issued in our
1995 merger with API Acquisition Company, Inc. (formerly Oncologix, Inc.). In
November 1998, we entered into a license agreement with Abbott relating to
Nyotran(R), in which Abbott purchased 837,989 shares of common stock for $3.0
million. Through February 29, 2000 we received an additional $14.7 million in
up-front and milestone payments from Abbott, all of which are non-refundable. In
February 1999 and April 2000, we raised net proceeds of approximately $11.7
million and $7.3 million, respectively, in offerings of our common stock. In
November 2000, we entered into an agreement with Acqua Wellington North American
Equity Fund Ltd. for an equity financing agreement covering the sale of up to
$24 million of our common stock over a 28-month period ending in March 2003. We
have not raised any funds under this agreement. In order to raise any funds
under this agreement, we must maintain a minimum stock price and maximum market
capitalization. At the present time, we do not meet these requirements and do
not expect to meet these requirements in the near future.
In December 2000, we entered into a license agreement with Sumitomo
Pharmaceuticals Co., Ltd. that gives us the exclusive right in the United States
to a particular class of DACH platinum compounds. Aroplatin(TM), one of our
products in clinical development, is a liposomal formulation of a novel platinum
compound from this class of drugs. Under this agreement, Sumitomo
Pharmaceuticals received a $500,000 up-front payment from us in 2001 (such
amount was expensed in the 2000 financial statements), and will receive
subsequent milestone payments based on regulatory filings, approval and sales of
Aroplatin(TM), and royalties on the sales of Aroplatin(TM) in the United States.
Except for the treatment of hepatoma, the license agreement gives us the
exclusive right to make, use, develop, import and sell Aroplatin(TM) in the
United States.
The majority of our development activities are committed on a
short-term, as-needed basis through contracts and purchase orders. These
arrangements can be changed based on our needs and development activities. We
have contracted with certain clinical research and other consulting
organizations to assist in conducting our clinical trials. The agreements
provide that we can terminate them at any time, should either our financial
situation, or the results of the studies, require it. Nonetheless, we intend to
continue to engage such services in the future.
Our primary use of cash to date has been in operating activities to
fund research and development, including preclinical studies and clinical trials
and general and administrative expenses. Cash of $18.3 million and $13.1 million
was used in operating activities during 2000 and 1999, respectively. We had
cash, cash-equivalents and long-term investments of $9.1 million as of December
31, 2000, consisting primarily of cash and money market accounts, and United
States government securities and investment grade commercial paper.
We have experienced negative cash flows from operations since inception
and have funded our activities to date primarily from equity financings. We have
expended, and will continue to require, substantial funds to continue our
development activities, including preclinical studies and clinical trials of our
products, and to commence sales and marketing efforts if FDA and other
regulatory approvals are obtained.
In January 2001, we received a non-approval letter from the FDA for our
NDA amendment for ATRAGEN(R) for APL. Following this event, we reduced
expenditures in our development plans and activities. Additionally, we reduced
the number of full-time employees in January 2001 from 77 to 29.
The majority of our clinical trials have reached the stage where we
have completed patient enrollment at their current phase. At the current time,
we are gathering clinical trial data for analysis. We anticipate reporting the
data at appropriate scientific meetings. Before we initiate any new clinical
trials, we will analyze each product's likelihood for approval, the cost of the
proposed clinical trial, cash available at such time and the inherent risk
profile. We anticipate these steps will assist us in maximizing shareholder
value. See "Business -- Products in Clinical Development."
-28-
32
We will continue to require substantial additional funds for our
operations. At December 31, 2000, we had $9.1 million in cash, cash equivalents
and investments. We believe that we can conserve our existing financial
resources to satisfy our capital and operating requirements into the fourth
quarter of 2001. Our accountants have issued a qualified opinion on our
consolidated financial statements for the year ended December 31, 2000
indicating substantial doubt about our ability to continue as a going concern.
We will, in all likelihood, need to further reduce our expenditures if we do not
obtain additional financial resources by mid 2001. We have retained Robertson
Stephens, a San Francisco-based investment bank, to assist us in pursuing
strategic alliances with companies in our industry. Also, we are actively
pursuing other sources of financing. Sources of financing may not be available,
or if available, will be dilutive or may have adverse affect to the value of our
shares. We may have to close operations and/or seek legal protection from our
creditors. See "Business-- Additional Business Risks."
We have experienced significant fluctuations in accounts payable and
accrued payroll, primarily as a result of our development activities. We
anticipate that the amounts expended for these items in the future will continue
to correspond with our development activities. We expect the volume of
development activities to decrease in 2001 and there will be a decrease in
outstanding payables and a decrease in our liquidity position.
We have typically obtained debt financing when necessary for equipment,
furniture and leasehold improvement requirements. In 1998, our capital
requirements increased with the move into new facilities. As a result, we
borrowed $1.4 million and $547,000 in 1998 and 1999, respectively, to finance
our requirements in this new facility. We expect that we will continue to incur
additional debt to meet our capital requirements from time to time in the
future, based on our financial resources and needs. We do not plan to make any
significant capital expenditures in 2001.
Our capital requirements will depend on many factors, including the
risk factors more completely described under "Business -- Additional Business
Risks" above. These factors include:
o problems, delays, expenses and complications frequently
encountered by development stage companies;
o the progress of our research, development and clinical trial
programs;
o the extent and terms of any future collaborative research,
manufacturing, marketing or other funding arrangements;
o the costs and timing of seeking regulatory approvals of our
products;
o our ability to obtain regulatory approvals; o the success of
our sales and marketing programs;
o the costs of filing, prosecuting and defending and enforcing
any patent claims and other intellectual property rights; and
o changes in economic, regulatory or competitive conditions of
our planned business.
Estimates about the adequacy of funding for our activities are based on
certain assumptions, including the assumption that testing and regulatory
procedures relating to our products can be conducted at projected costs. There
can be no assurance that changes in our development plans, acquisitions, or
other events will not result in accelerated or unexpected expenditures.
To satisfy our capital requirements, we may seek to raise additional
funds in the public or private capital markets. Our ability to raise additional
funds in the public or private markets will be adversely affected if the results
of our current or future clinical trials are not favorable. We may seek
additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that any funding will be available to us on
favorable terms or at all. If adequate funds are not available, we may be
required to curtail significantly one or more of our development programs, or we
may be required to obtain funds through arrangements with future collaborative
partners or other parties that may require us to relinquish rights to some or
all of our technologies or products. If we are successful in obtaining
additional financing for the company, the terms of such financing may have the
effect of diluting or adversely affecting the holdings or the rights of the
holders of our common stock. Our financial resources may reduce to a point when
we will have to close operations and/or seek legal protection from our
creditors.
-29-
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and cash flows are subject to fluctuation due to
changes in interest rates primarily from our investment of available cash
balances in investment grade corporate and U.S. government securities. We do not
believe we are materially exposed to changes in interest rates. Under our
current policies we do not use interest rate derivative instruments to manage
exposure to interest rate changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are incorporated
under Item 14 in Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-30-
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item as to our directors and executive
officers is hereby incorporated by reference from the information appearing
under the captions "Proposals-Proposal I: Election of Directors" and "Company
Information -- Executive Officers" in our definitive proxy statement which
involves the election of directors and is to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act") within 120 days of the end of our
fiscal year ended December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item as to our management is hereby
incorporated by reference from the information appearing under the captions
"Company Information -- Executive Compensation" and " -- Director Compensation"
in our definitive proxy statement which involves the election of directors and
is to be filed with the Commission pursuant to the Exchange Act within 120 days
of the end of our fiscal year ended December 31, 2000. Notwithstanding the
foregoing, in accordance with the instructions to Item 402 of Regulation S-K,
the information contained in our proxy statement under the sub-heading "Company
Information -- Report of the Compensation Committee" and " -- Performance Graph"
shall not be deemed to be filed as part of or incorporated by reference into
this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item as to the ownership by management
and others of securities of Aronex Pharmaceuticals is hereby incorporated by
reference from the information appearing under the caption "Stock Ownership of
the Company's Largest Stockholders and Management" in our definitive proxy
statement which involves the election of directors and is to be filed with the
Commission pursuant to the Exchange Act within 120 days of the end of our fiscal
year ended December 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item as to certain business
relationships and transactions with management and other related parties of
Aronex Pharmaceuticals is hereby incorporated by reference to such information
appearing under the caption "Transactions with Affiliates" in our definitive
proxy statement which involves the election of directors and is to be filed with
the Commission pursuant to the Exchange Act within 120 days of the end of our
fiscal year ended December 31, 2000.
-31-
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(a)(1) FINANCIAL STATEMENTS
See Index to Financial Statements on Page F-1 of this report.
(a)(3) EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
3.1 Amended and Restated Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to Aronex Pharmaceuticals'
Quarterly Report on Form 10-Q for the quarterly period ending June 30,
1997 (the "June 1997 Form 10-Q")).
3.1(i) Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to Exhibit 3.1
(i) to the Company's Quarterly Report on Form 10-Q for the quarterly
period ending June 30, 1999).
3.1(ii) Certificate of Designation of Series One Junior Participating Preferred
Stock dated October 6, 1999 (attached as Exhibit A to the Rights
Agreement files as Exhibit 4.1 incorporated by reference to Exhibit 4.1
on Form 8-A dated October 7, 1999).
3.2 Restated Bylaws (incorporated by reference to Exhibit 3.2 to Aronex
Pharmaceuticals' Registration Statement on Form S-1 (No. 33-47418) (the
"1992 Registration Statement"), as declared effective by the Commission
on July 10, 1992).
4.1 Specimen certificate for shares of Common Stock, par value $0.001 per
share (incorporated by reference to Exhibit 4.1 to Aronex
Pharmaceuticals' Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996).
4.1(i) Rights Agreement, dated October 6, 1999, between the Company and
American Stock Transfer & Trust Company, as Rights Agent (incorporated
by reference to Exhibit 4.1 on Form 8-A dated October 7, 1999).
4.2 Form of Rights Certificate (attached as Exhibit B to the Rights
Agreement files as Exhibit 4.1 incorporated by reference to Exhibit 4.1
on Form 8-A dated October 7, 1999).
4.3 Form of Subscription Agreement for private placement offering
(incorporated by reference to Exhibit 4.1 on the April 17, 2000 Form
8-K).
4.4 Form of Common Stock Purchase Warrant between Aronex Pharmaceuticals
and subscribers of the private placement (incorporated by reference to
Exhibit 4.2 on the April 17, 2000 Form 8-K).
4.5 Form of Warrant for the purchase of an aggregate of 150,000 shares of
common stock in connection with the Finders Agreement Exhibit 10.50
(incorporated by reference to Exhibit 4.3 on the April 17, 2000 Form
8-K).
10.1 Registration Rights Agreement dated August 2, 1989, by and among Aronex
Pharmaceuticals and certain of its stockholders (incorporated by
reference to Exhibit 10.2 to the 1992 Registration Statement).
10.2 First Amendment to Registration Rights Agreement dated April 18, 1990,
by and among Aronex Pharmaceuticals and certain of its stockholders
(incorporated by reference to Exhibit 10.3 to the 1992 Registration
Statement).
-32-
36
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.3 Second Amendment to Registration Rights Agreement dated October 31,
1991, by and among Aronex Pharmaceuticals and certain of its
stockholders (incorporated by reference to Exhibit 10.4 to the 1992
Registration Statement).
10.4 Third Amendment to Registration Rights Agreement dated September 10,
1993, among and certain of its stockholders (incorporated by reference
to Exhibit 10.24 to Aronex Pharmaceuticals' Registration Statement on
Form S-1 (No. 33-71166) (the "1993 Registration Statement"), as
declared effective by the Commission on November 15, 1993).
10.5 Fourth Amendment to Registration Rights Agreement dated January 20,
1994, among Aronex Pharmaceuticals and certain of its stockholders
(incorporated by reference to Exhibit 10.5 to the December 1999
10-K/A).
10.6+ Amended and Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the June 1997 Form 10-Q).
10.7+ Amended and Restated 1993 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the June 1997 Form 10-Q).
10.8+ 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
Aronex Pharmaceuticals' Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 (the "June 1998 Form 10-Q")).
10.9++ Exclusive License Agreement dated October 15, 1986, between Aronex
Pharmaceuticals, The University of Texas System Board of Regents and
The University of Texas M.D. Anderson Cancer Center (incorporated by
reference to Exhibit 10.8 to the 1992 Registration Statement).
10.10++ Exclusive License Agreement dated July 1, 1988, between Aronex
Pharmaceuticals, The University of Texas System Board of Regents and
The University of Texas M.D. Anderson Cancer Center, together with
amendments and extensions thereto (incorporated by reference to Exhibit
10.10 to the 1992 Registration Statement).
10.11 Amendment No. 2 to Exclusive License Agreement dated July 9, 1993,
among Aronex Pharmacueticals, The University of Texas System Board of
Regents and The University of Texas M.D. Anderson Cancer Center
(incorporated by reference to Exhibit 10.20 to the 1993 Registration
Statement).
10.12 License and Development Agreement dated September 10, 1993 between
Aronex Pharmaceuticals and Genzyme Corporation (incorporated by
reference to Exhibit 10.22 to the 1993 Registration Statement).
10.13 Amendment No. 2 to License and Development Agreement dated September
10, 1996, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 3.1 to Aronex Pharmaceuticals'
Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 1996 (the "September 1996 Form 10-Q")).
10.14 Amendment No. 2 to Stock Purchase Agreement dated September 10, 1996,
between Aronex Pharmaceuticals and Genzyme Corporation (incorporated by
reference to Exhibit 3.2 to the September 1996 Form 10-Q).
10.15 Amendment No. 3 to License and Development Agreement dated March 25,
1997, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to Aronex Pharmaceuticals'
Quarterly Report on Form 10-Q for the fiscal quarter ended March 30,
1997 (the "March 1997 Form 10-Q")).
-33-
37
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.16 Common Stock Purchase Agreement dated September 10, 1993 between Aronex
Pharmaceuticals and Genzyme Corporation (incorporated by reference to
Exhibit 10.1 to the June 4, 1999 Form 8-K).
10.17 Amendment No. 3 to Common Stock Purchase Agreement dated March 25,
1997, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.2 to the March 1997 Form
10-Q).
10.18+ Employment Agreement dated November 3, 1997 between Aronex
Pharmaceuticals' and Geoffrey F. Cox, Ph.D. (incorporated by reference
to Exhibit 10.39 to Aronex Pharmaceuticals' Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "1997 Form 10-K")).
10.19*+ First Amendment to Employment Agreement dated January 18, 2001 between
Aronex Pharmaceuticals and Geoffrey F. Cox, Ph.D.
10.20+ Consulting Agreement dated January 1, 1998, between Aronex
Pharmaceuticals and Gabriel Lopez- Berestein (incorporated by reference
to Exhibit 10.2 to the March 1998 Form 10-Q).
10.21+ Employment Agreement dated June 12, 1998, between Aronex
Pharmaceuticals and Paul A. Cossum, Ph.D. (incorporated by reference to
Exhibit 10.3 to the June 1998 Form 10-Q).
10.22*+ First amendment to employment agreement dated January 18, 2001, between
Aronex Pharmaceuticals and Paul A. Cossum, Ph.D.
10.23+ Employment Agreement dated June 12, 1998, between Aronex
Pharmaceuticals and Terance A. Murnane (incorporated by reference to
Exhibit 10.4 to the June 1998 Form 10-Q).
10.24*+ First Amendment to Employment Agreement dated January 18, 2001, between
Aronex Pharmaceuticals and Terance A. Murnane.
10.25 Lease Agreement dated April 4, 1997, between Aronex Pharmaceuticals and
Fleet National Bank successor and assignor to the Woodlands Corporation
(incorporated by reference to Exhibit 10.3 to the June 1997 Form 10-Q).
10.26* Non-Disturbance, Attornment and Subordination Agreement dated
September 22, 2000 between Aronex Pharmaceuticals, Fleet National Bank
and Woodlands VTO 2000 Commercial, L.P.
10.27++ License Agreement dated November 12, 1998, between Aronex
Pharmaceuticals and Abbott Laboratories (incorporated by reference to
Exhibit 10.1 to the December 2, 1998 Form 8-K).
10.28++ Stock Purchase Agreement dated November 12, 1998, between Aronex
Pharmaceuticals and Abbott Laboratories (incorporated by reference to
Exhibit 10.2 to the December 2, 1998 Form 8-K).
10.29 Form of Warrant issued on February 23, 1999 for the purchase of an
aggregate of 600,000 shares of common stock (included herein as Exhibit
C to Placement Agency Agreement which is filed herewith as Exhibit
10.46).
10.30+ Employment Agreement dated December 1, 1999 between Aronex
Pharmaceuticals and Anthony Williams, M.D (incorporated by reference to
Exhibit 10.38 to the December 1999 From 10-K/A).
10.31 Form of Warrant for the purchase of Common Stock, incorporated by
reference to Exhibit 1.2 of the Company's Registration Statement on
Form S-1 (Registration Statement No. 333-67599).
10.32 Amendment No. 4 to License and Development Agreement dated May 21, 1999
by and between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to the June 4, 1999 8-K).
-34-
38
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.33 10% Convertible Note dated May 21, 1999 by Aronex Pharmaceuticals made
payable to Genzyme Corporation for $2.5 million (incorporated by
reference to Exhibit 10.2 to the June 4, 1999 8-K).
10.34 Common Stock Purchase Warrant for 50,000 shares of Common Stock of
Aronex Pharmaceuticals issued in the name of Genzyme Corporation
(incorporated by reference to Exhibit 10.3 to the June 4, 1999 8-K).
10.35+ Consulting Agreement dated October 1, 1999 between Aronex
Pharmaceuticals and James R. Butler (incorporated by reference to
Exhibit 10.2 on the September 1999 Form 10-Q).
10.36+ Consulting Agreement dated October 1, 1999 between Aronex
Pharmaceuticals and David J. McLachlan (incorporated by reference to
Exhibit 10.3 on the September 1999 Form 10-Q).
10.37 License Agreement dated December 12, 2000 between Aronex
Pharmaceuticals and Sumitomo Pharmaceuticals Co., Ltd. (incorporated by
reference to Exhibit 10.1 on the December 12, 2000 Form 8-K).
10.38 Common Stock Purchase Agreement dated November 29, 2000 between Aronex
Pharmaceuticals and Acqua Wellington North American Equities Fund, Inc.
(incorporated by reference to Exhibit 10.1 on the November 29, 2000
Form 8-K).
10.39 Finders Agreement dated March 29, 2000 between Aronex Pharmaceuticals
and Paramount Capital, Inc. (incorporated by reference to Exhibit 10.1
on the April 17, 2000 Form 8-K).
10.40*+ Employment Agreement dated June 30, 2000 between Aronex Pharmaceuticals
and Seenu V. Srinivasan, Ph.D.
10.41*+ Employment Agreement dated August 16, 2000 between Aronex
Pharmaceuticals and Michael T. Redman.
11.1 Statement regarding computation of loss per share.
23.1* Consent of Arthur Andersen LLP.
24.1 Power of attorney (included on the signature page of this Registration
Statement).
- ----------
* Filed herewith.
+ Management Contract or Compensatory Plan.
++ Portions of this exhibit have been omitted based upon a request for
confidential treatment pursuant to Rule 24b-2g of the Exchange Act.
Such omitted portions have been filed separately with the Commission.
-35-
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARONEX PHARMACEUTICALS, INC.
Dated: March 22, 2001 By: /s/ GEOFFREY F. COX
--------------------
Geoffrey F. Cox
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ GEOFFREY F. COX Chairman of the Board of Directors March 22, 2001
- ---------------------------------
Geoffrey F. Cox Chief Executive Officer
(Principal executive officer)
/s/ TERANCE A. MURNANE Controller March 22, 2001
- --------------------------------- (Principal financial and accounting officer)
Terance A. Murnane
/s/ JAMES R. BUTLER Director March 22, 2001
- ---------------------------------
James R. Butler
/s/ GABRIEL LOPEZ-BERESTEIN, M.D. Director March 22, 2001
- ---------------------------------
Gabriel Lopez-Berestein, M.D.
/s/ PHYLLIS I. GARDNER, M.D. Director March 22, 2001
- ---------------------------------
Phyllis I. Gardner, M.D.
/s/ MARTIN P. SUTTER Director March 22, 2001
- ---------------------------------
Martin P. Sutter
/s/ GREGORY F. ZAIC Director March 22, 2001
- ---------------------------------
Gregory F. Zaic
/s/ DAVID J. MCLACHLAN Director March 22, 2001
- ---------------------------------
David J. McLachlan
/s/ PAUL W. HOBBY Director March 24, 2001
- ---------------------------------
Paul W. Hobby
-36-
40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants............................................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000........................................ F-3
Consolidated Statements of Operations for the Years ended December 31, 1998, 1999 and 2000,
and the Period from Inception (June 13, 1986) through December 31, 2000................... F-4
Consolidated Statements of Comprehensive Income for the Years ended December 31, 1998,
1999 and 2000............................................................................. F-4
Consolidated Statements of Stockholders' Equity for the Period from Inception (June 13, 1986)
through December 31, 2000................................................................. F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1999 and 2000,
and the Period from Inception (June 13, 1986) through December 31, 2000................... F-12
Notes to Consolidated Financial Statements.......................................................... F-13
F-1
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aronex Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Aronex
Pharmaceuticals, Inc. and subsidiaries (a Delaware corporation in the
development stage), as of December 31, 1999 and 2000, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
and cash flows for each of the three years in the period ended December 31, 2000
and for the period from inception (June 13, 1986) through December 31, 2000.
These consolidated financial statements are the responsibility of Aronex
Pharmaceuticals' management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Aronex Pharmaceuticals, Inc. as of December 31, 1999 and 2000, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2000 and for the period from inception (June 13,
1986) through December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
As explained in Note 2 to the consolidated financial statements,
effective January 1, 2000, the Company changed its method of accounting for
revenue recognition.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has operated as a development stage enterprise
since its inception by devoting substantially all of its efforts to raising
capital and performing research and development. In January 2001, the Company
received a non-approval letter from the United States Food and Drug
Administration (FDA) for its New Drug Application (NDA) amendment for
ATRAGEN(R). In order to complete the research and development and other
activities necessary to commercialize its products, additional financing will be
required. The Company has not secured any commitments for any such additional
financing. These events raise substantial doubt as to the Company's ability to
continue as a going concern. Management's plans with regard to these matters are
also described in Note 1. The accompanying financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Houston, Texas
February 9, 2001
F-2
42
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
1999 2000
------------ ------------
Current assets:
Cash and cash equivalents .................................................. $ 11,528 $ 8,254
Short-term investments ..................................................... 7,804 --
Prepaid expenses and other assets .......................................... 453 116
------------ ------------
Total current assets .................................................. 19,785 8,370
Long-term investments .......................................................... 920 821
Furniture, equipment and leasehold improvements, net of accumulated
depreciation of $3,450 and $3,914, respectively ............................ 2,029 1,851
------------ ------------
Total assets .......................................................... $ 22,734 $ 11,042
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ...................................... $ 3,502 $ 2,789
Accrued payroll ............................................................ 644 313
Current portion of notes payable ........................................... 340 459
Current portion of deferred revenue ........................................ -- 1,196
------------ ------------
Total current liabilities ............................................. 4,486 4,757
Long-term liabilities:
Notes payable, net of current portion ...................................... 3,517 3,154
Deferred revenue, net of current portion ................................... -- 466
------------ ------------
Total long-term liabilities ........................................... 3,517 3,620
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized,
none issued and outstanding ........................................... -- --
Common stock $.001 par value, 40,000,000 shares authorized, 22,853,782
and 25,973,674 shares issued and outstanding, respectively ............ 23 26
Additional paid-in capital ................................................. 113,262 118,697
Common stock warrants ...................................................... 908 3,439
Treasury stock ............................................................. (11) (11)
Deferred compensation ...................................................... (69) --
Unrealized gain on securities available-for-sale ........................... 2,147 --
Deficit accumulated during development stage ............................... (101,529) (119,486)
------------ ------------
Total stockholders' equity ............................................ 14,731 2,665
------------ ------------
Total liabilities and stockholders' equity ................................. $ 22,734 $ 11,042
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
43
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
PERIOD FROM
INCEPTION (JUNE 13,
YEARS ENDED DECEMBER 31, 1986) THROUGH
1998 1999 2000 DECEMBER 31, 2000
----------- ----------- ----------- -------------------
Revenues:
Research and development grants
and contracts ........................ $ 6,737 $ 11,052 $ 3,219 $ 26,058
----------- ----------- ----------- -----------
Total revenues ................... 6,737 11,052 3,219 26,058
----------- ----------- ----------- -----------
Expenses:
Research and development .................. 22,793 21,494 16,611 114,033
Purchase of in-process research
and development ...................... -- -- -- 11,625
General and administrative ................ 3,354 4,652 3,241 25,051
----------- ----------- ----------- -----------
Total expenses ................... 26,147 26,146 19,852 150,709
----------- ----------- ----------- -----------
Operating loss ................................ (19,410) (15,094) (16,633) (124,651)
Other income (expense):
Interest income ........................... 1,265 1,330 926 9,102
Gain on sale of investments ............... -- -- 2,653 2,653
Interest expense and other ................ (86) (330) (448) (2,135)
----------- ----------- ----------- -----------
Other income, net ............................. 1,179 1,000 3,131 9,620
Net loss before cumulative effect of
change in accounting principle ............ (18,231) (14,094) (13,502) (115,031)
Cumulative effect of change in
accounting principle .................. -- -- (4,455) (4,455)
----------- ----------- ----------- -----------
Net loss ...................................... $ (18,231) $ (14,094) $ (17,957) $ (119,486)
=========== =========== =========== ===========
Net loss per share before cumulative effect
of change in accounting principle.......... $ (1.17) $ (0.65) $ (0.54)
Cumulative effect of change in
accounting principle .................. -- -- (0.18)
----------- ----------- -----------
Basic and diluted net loss per share .......... $ (1.17) $ (0.65) $ (0.72)
=========== =========== ===========
Weighted average shares used in
computing basic and diluted loss
per share ................................. 15,571 21,727 24,847
=========== =========== ===========
Pro forma amounts assuming the accounting
change is applied retroactively:
Net loss ................................... $ (23,104) $ (13,676)
=========== ===========
Net loss per share ......................... $ (1.48) $ (0.63)
=========== ===========
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
Comprehensive loss:
Net loss ..................................... $ (18,231) $ (14,094) $ (17,957) $ (119,486)
Unrealized gain (loss) on securities
available for sale:
Unrealized gain .............................. 803 1,431 506 2,653
Realized gain ................................ -- -- (2,653) (2,653)
---------- ---------- ---------- ----------
Net unrealized gain (loss) on
securities available for sale ....... 803 1,431 (2,147) --
---------- ---------- ---------- ----------
Comprehensive loss ............................... $ (17,428) $ (12,663) $ (20,104) $ (119,486)
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
44
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY FOR THE PERIOD FROM
INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 2000
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
-------- ------- ---------- -------- ---------
Sale of common stock for cash, August
through December 1986
($1.6396 per share) ........................... 183,334 -- $ 301 $ -- $ --
Issuance of common stock for license
agreement rights, October 1986 ($.006
per share) .................................... 60,606 -- 1 -- --
Net loss ......................................... -- -- -- -- --
-------- ------- --------- ------- ---------
Balance at December 31, 1986 ..................... 243,940 -- 302 -- --
Issuance of common stock in exchange for
8% convertible notes, May 1987 ($3.30
per share) .................................... 90,909 1 299 -- --
Net loss ......................................... -- -- -- -- --
------- ------- --------- ------- ---------
Balance at December 31, 1987 ..................... 334,849 1 601 -- --
Issuance of common stock for cash, September
and December 1988 ($.066 per share) ........... 130,303 -- 8 -- --
Net loss ......................................... -- -- -- -- --
------- ------- --------- ------- ---------
Balance at December 31, 1988 ..................... 465,152 1 609 -- --
Issuance of common stock for cash, July
and August 1989 ($.066 per share) ............. 158,182 -- 10 -- --
Issuance of common stock for cash, August
1989 ($3.63 per share) ........................ 1,220,386 1 4,429 -- --
Issuance of common stock for key man life
insurance policies, December 1989 ($3.63) .... 3,862 -- 14 -- --
Net loss ......................................... -- -- -- -- --
------- ------- --------- ------- ---------
Balance at December 31, 1989 ..................... 1,847,582 $ 2 $ 5,062 $ -- $ --
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------- ----------- -------------
Sale of common stock for cash, August
through December 1986
($1.6396 per share) ........................... $ -- $ -- $ -- $ 301
Issuance of common stock for license
agreement rights, October 1986 ($.006
per share) .................................... -- -- -- 1
Net loss ......................................... -- -- (40) (40)
-------- ------- ------- --------
Balance at December 31, 1986 ..................... -- -- (40) 262
Issuance of common stock in exchange for
8% convertible notes, May 1987 ($3.30
per share) .................................... -- -- -- 300
Net loss ......................................... -- -- (216) (216)
-------- ------- ------- --------
Balance at December 31, 1987 ..................... -- -- (256) 346
Issuance of common stock for cash, September
and December 1988 ($.066 per share) ........... -- -- -- 8
Net loss ......................................... -- -- (832) (832)
-------- ------- ------- --------
Balance at December 31, 1988 ..................... -- -- (1,088) (478)
Issuance of common stock for cash, July
and August 1989 ($.066 per share) ............. -- -- -- 10
Issuance of common stock for cash, August
1989 ($3.63 per share) ........................ -- -- -- 4,430
Issuance of common stock for key man life
insurance policies, December 1989 ($3.63) .... -- -- -- 14
Net loss ......................................... -- -- (942) (942)
-------- ------- ------- --------
Balance at December 31, 1989 ..................... $ -- $ -- $(2,030) $ 3,034
(continued on next page)
F-5
45
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY FOR THE PERIOD FROM
INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 2000
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
--------- --------- ---------- -------- -----------
Balance at December 31, 1989 .................... 1,847,582 $ 2 $ 5,062 $ -- $ --
Stock options exercised January 1990 ($.66
per share) .................................. 30 -- -- -- --
Warrants issued to purchase 9,914 shares
of common stock .............................. -- -- -- -- --
Net loss ........................................ -- -- -- -- --
--------- --------- --------- ------------ ----------
Balance at December 31, 1990 .................... 1,847,612 2 5,062 -- --
Stock options exercised, May 1991 ($.66
per share) ................................... 75 -- -- -- --
Issuance of common stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share) ...... 596,095 -- 4,328 -- --
Deferred compensation relating to certain
stock options ................................ -- -- 326 -- --
Compensation expense related to stock options ... -- -- -- -- --
Net loss ........................................ -- -- -- -- --
--------- --------- --------- ------------ ----------
Balance at December 31, 1991 .................... 2,443,782 2 9,716 -- --
Stock options exercised, January, April, May,
October and December 1992 ($.66 per
share) ....................................... 37,198 -- 24 -- --
Stock warrants exercised April, May and
August 1992 ($3.63 per share) ................ 11,364 -- 41 -- --
Issuance of common stock for cash in initial
public offering, July 1992 ($14.00 per
share) ....................................... 850,000 1 10,659 -- --
Deferred compensation relating to certain
stock options ................................ -- -- 1,644 -- --
Compensation expense related to stock options ... -- -- -- -- --
Net loss ........................................ -- -- -- -- --
--------- --------- --------- ------------ ----------
Balance at December 31, 1992 .................... 3,342,344 $ 3 $ 22,084 $ -- $ --
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------- ----------- -------------
Balance at December 31, 1989 .................... $ -- $ -- $ (2,030) $ 3,034
Stock options exercised January 1990 ($.66
per share) .................................. -- -- -- --
Warrants issued to purchase 9,914 shares
of common stock .............................. -- -- -- --
Net loss ........................................ -- -- (1,825) (1,825)
--------- --------- --------- ---------
Balance at December 31, 1990 .................... -- -- (3,855) 1,209
Stock options exercised, May 1991 ($.66
per share) ................................... -- -- -- --
Issuance of common stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share) ...... -- -- -- 4,328
Deferred compensation relating to certain
stock options ................................ (326) -- -- --
Compensation expense related to stock options ... 138 -- -- 138
Net loss ........................................ -- -- (2,914) (2,914)
--------- --------- --------- ---------
Balance at December 31, 1991 .................... (188) -- (6,769) 2,761
Stock options exercised, January, April, May,
October and December 1992 ($.66 per
share) ....................................... -- -- -- 24
Stock warrants exercised April, May and
August 1992 ($3.63 per share) ................ -- -- -- 41
Issuance of common stock for cash in initial
public offering, July 1992 ($14.00 per
share) ....................................... -- -- -- 10,660
Deferred compensation relating to certain
stock options ................................ (1,644) -- -- --
Compensation expense related to stock options ... 460 -- -- 460
Net loss ........................................ -- -- (4,708) (4,708)
--------- --------- --------- ---------
Balance at December 31, 1992 .................... $ (1,372) $ -- $ (11,477) $ 9,238
(continued on next page)
F-6
46
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY FOR THE PERIOD FROM
INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 2000
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
--------- ----------- ----------- ----------- ------------
Balance at December 31, 1992 ..................... 3,342,344 $ 3 $ 22,084 $ -- $ --
Issuance of common stock for compensation ........ 5,000 -- 51 -- --
Warrants issued to purchase 50,172 shares
of common stock .............................. -- -- -- -- --
Stock options exercised, February and
November 1993 ($.66) per share ................ 14,465 -- 9 -- --
Issuance of common stock for cash,
September 1993 ($14.00 per share) ............. 357,143 -- 4,538 -- --
Issuance of common stock for cash in
secondary public offering November &
December 1993 ($9.00 per share) ............... 1,402,250 2 11,462 -- --
Compensation expense related to stock options .... -- -- -- -- --
Net loss ......................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1993 ..................... 5,121,202 5 38,144 -- --
Deferred compensation relating to certain
stock options ................................. -- -- 66 -- --
Stock options exercised, January through
October
1994 ($.66 per share) ......................... 15,111 -- 10 -- --
Warrants issued to purchase 537 shares of
common stock .................................. -- -- -- -- --
Issuance of additional shares of common
stock pursuant to collaborative
agreement ..................................... 66,163 -- -- -- --
Compensation expense related to stock options .... -- -- -- -- --
Unrealized loss on available-for-sale
securities ...................................... -- -- -- -- --
Net loss ......................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1994 ..................... 5,202,476 $ 5 $ 38,220 $ -- $ --
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------- ----------- -------------
Balance at December 31, 1992 ..................... $ (1,372) $ -- $ (11,477) $ 9,238
Issuance of common stock for compensation ........ -- -- -- 51
Warrants issued to purchase 50,172 shares
of common stock .............................. -- -- -- --
Stock options exercised, February and
November 1993 ($.66) per share ................ -- -- -- 9
Issuance of common stock for cash,
September 1993 ($14.00 per share) ............. -- -- -- 4,538
Issuance of common stock for cash in
secondary public offering November &
December 1993 ($9.00 per share) ............... -- -- -- 11,464
Compensation expense related to stock options .... 396 -- -- 396
Net loss ......................................... -- -- (6,225) (6,225)
----------- ----------- ----------- -----------
Balance at December 31, 1993 ..................... (976) -- (17,702) 19,471
Deferred compensation relating to certain
stock options ................................. (66) -- -- --
Stock options exercised, January through
October
1994 ($.66 per share) ......................... -- -- -- 10
Warrants issued to purchase 537 shares of
common stock .................................. -- -- -- --
Issuance of additional shares of common
stock pursuant to collaborative
agreement ..................................... -- -- -- --
Compensation expense related to stock options .... 546 -- -- 546
Unrealized loss on available-for-sale
securities ...................................... -- (315) -- (315)
Net loss ......................................... -- -- (9,052) (9,052)
----------- ----------- ----------- -----------
Balance at December 31, 1994 ..................... $ (496) $ (315) $ (26,754) $ 10,660
(continued on next page)
F-7
47
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY FOR THE PERIOD FROM
INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 2000
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
---------- ------- ----------- ---------- ---------
Balance at December 31, 1994 .................... 5,202,476 $ 5 $ 38,220 $ -- $ --
Deferred compensation relating to certain
stock options .............................. -- -- 1,380 -- --
Stock options exercised, January through
December 1995 ($.66 per share) ............. 36,958 -- 24 -- --
Issuance of common stock and warrants
pursuant to merger agreements ) ............ 3,868,436 4 11,111 2,844 --
Warrants exercised ($4.50 per share) ............ 705,614 1 3,402 (226) --
Issuance of common stock pursuant to
settlement agreement ....................... 531,552 -- 2,046 (1,130) --
Issuance of common stock for services
rendered ................................... 37,500 -- 159 -- --
Treasury stock purchased ($4.42 per share) ...... (2,480) -- -- -- (11)
Compensation expense related to stock
options .................................... -- -- -- -- --
Unrealized gain on available-for-sale
securities ..................................... -- -- -- -- --
Net loss ........................................ -- -- -- -- --
---------- ------- ----------- ---------- ---------
Balance at December 31, 1995 .................... 10,380,056 $ 10 $ 56,342 $ 1,488 $ (11)
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------- ----------- -------------
Balance at December 31, 1994 .................. $ (496) $ (315) $ (26,754) $ 10,660
Deferred compensation relating to certain
stock options ............................ (1,380) -- -- --
Stock options exercised, January through
December 1995 ($.66 per share) ........... -- -- -- 24
Issuance of common stock and warrants
pursuant to merger agreements ) .......... -- -- -- 13,959
Warrants exercised ($4.50 per share) .......... -- -- -- 3,177
Issuance of common stock pursuant to
settlement agreement ..................... -- -- -- 916
Issuance of common stock for services
rendered ................................. -- -- -- 159
Treasury stock purchased ($4.42 per share) .... -- -- -- (11)
Compensation expense related to stock
options .................................. 340 -- -- 340
Unrealized gain on available-for-sale
securities ................................... -- 199 -- 199
Net loss ...................................... -- -- (17,429) (17,429)
----------- ----------- ----------- -----------
Balance at December 31, 1995 .................. $ (1,536) $ (116) $ (44,183) $ 11,994
(continued on next page)
F-8
48
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY FOR THE PERIOD FROM
INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 2000
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 ................... 10,380,056 $ 10 $ 56,342 $ 1,488 $ (11)
Warrants redeemed January 1996 ................. -- -- 269 (269) --
Deferred compensation relating to certain
stock options ............................. -- -- 966 -- --
Issuance of common stock for cash in
secondary public offering, March &
April 1996 ($10.00 per share) ............. 3,450,000 4 32,073 -- --
Stock options exercised, January through
December 1996 ($0.04-$9.50 per share) ..... 106,041 -- 343 -- --
Warrants exercised January through December
1996 ($4.50-$12.00 per share) ............. 622,428 1 3,528 (194) --
Issuance of common stock pursuant to
settlement agreements ..................... 38,722 -- 221 (57) --
Compensation expense related to stock options .. -- -- -- -- --
Unrealized gain on available-for-sale securities -- -- -- -- --
Net loss ....................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 ................... 14,597,247 15 93,742 968 (11)
Warrants exercised February and March 1997
($8.00 per share) ......................... 3,499 -- 28 (1) --
Reversal of deferred compensation relating to
forfeited stock options ................... -- -- (578) -- --
Issuance of common stock for services .......... 22,278 -- 130 -- --
Stock options exercised, January through
December 1997 ($0.04-$5.50 per share) ..... 128,278 -- 215 -- --
Stock purchased-employee stock purchase
plan, June and December 1997 ($3.31
and $3.19 per share) ...................... 21,392 -- 69 -- --
Issuance of common stock pursuant to
contingent stock agreement ................ 686,472 -- 3,000 -- --
Compensation expense related to stock options .. -- -- -- -- --
Unrealized loss on securities available-for-sale -- -- -- -- --
Net loss ....................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 ................... 15,459,166 $ 15 $ 96,606 $ 967 $ (11)
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------- ----------- --------------
Balance at December 31, 1995 ................... $ (1,536) $ (116) $ (44,183) $ 11,994
---------- ---------- ---------- ----------
Warrants redeemed January 1996 ................. -- -- --
Deferred compensation relating to certain
stock options ............................. (966) -- -- --
Issuance of common stock for cash in
secondary public offering, March &
April 1996 ($10.00 per share) ............. -- -- -- 32,077
Stock options exercised, January through
December 1996 ($0.04-$9.50 per share) ..... -- -- -- 343
Warrants exercised January through December
1996 ($4.50-$12.00 per share) ............. -- -- -- 3,335
Issuance of common stock pursuant to
settlement agreements ..................... -- -- -- 164
Compensation expense related to stock options .. 553 -- -- 553
Unrealized gain on available-for-sale securities -- 41 -- 41
Net loss ....................................... -- -- (8,030) (8,030)
---------- ---------- ---------- ----------
Balance at December 31, 1996 ................... (1,949) (75) (52,213) 40,477
Warrants exercised February and March 1997
($8.00 per share) ......................... -- -- -- 27
Reversal of deferred compensation relating to
forfeited stock options ................... 578 -- -- --
Issuance of common stock for services .......... -- -- -- 130
Stock options exercised, January through
December 1997 ($0.04-$5.50 per share) ..... -- -- -- 215
Stock purchased-employee stock purchase
plan, June and December 1997 ($3.31
and $3.19 per share) ...................... -- -- -- 69
Issuance of common stock pursuant to
contingent stock agreement ................ -- -- -- 3,000
Compensation expense related to stock options .. 464 -- -- 464
Unrealized loss on securities available-for-sale -- (12) -- (12)
Net loss ....................................... -- -- (16,991) (16,991)
---------- ---------- ---------- ----------
Balance at December 31, 1997 ................... $ (907) $ (87) $ (69,204) $ 27,379
(continued on next page)
F-9
49
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY FOR THE PERIOD FROM
INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 2000
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
------------- --------- ---------- ---------- ---------
Balance at December 31, 1997 .......................... 15,459,166 $ 15 $ 96,606 $ 967 $ (11)
Reversal of deferred compensation relating to
forfeited stock options .......................... -- -- (28) -- --
Issuance of common stock for services ................. 23,494 -- 76 -- --
Warrants expired June 1998 ............................ -- -- 917 (917) --
Stock options exercised, January through
December 1998 ($0.04 - $0.68 per share) ......... 19,144 -- 7 -- --
Issuance of shares through the employee stock
purchase plan, June and December 1998
($3.35 and $1.70 per share) ...................... 39,516 -- 99 -- --
Issuance of shares for cash November 1998
($3.58 per share) ................................ 837,989 1 2,977 -- --
Compensation expense related to stock options ......... -- -- -- -- --
Unrealized gain on securities available-for-sale ...... -- -- -- -- --
Net loss .............................................. -- -- -- -- --
------------- --------- ---------- ---------- ---------
Balance at December 31, 1998 .......................... 16,379,309 $ 16 $ 100,654 $ 50 $ (11)
Reversal of deferred compensation relating to
forfeited stock options .......................... -- -- (30) -- --
Issuance of common stock for cash in
secondary public offering February 1999
($2.1875 per share) .............................. 6,000,000 6 11,683 -- --
Issuance of common stock for services ................. 162,116 -- 475 -- --
Issuance of warrants to purchase 600,000 share
of common stock .................................. -- -- (758) 758 --
Issuance of warrants to purchase 50,000 shares
of common stock .................................. -- -- -- 150 --
Warrants expired December 1999 ........................ -- -- 50 (50) --
Stock options exercised, January through
December 1999 ($0.22 - $4.75 per share) ......... 241,339 1 869 -- --
Issuance of shares through the employee stock
purchase plan, June and December 1999
($1.65 and $2.66 per share) ...................... 71,023 -- 141 -- --
Compensation expense related to stock options ......... -- -- 178 -- --
Unrealized gain on securities available-for-sale ...... -- -- -- -- --
Net loss .............................................. -- -- -- -- --
------------- --------- ---------- ---------- ---------
Balance at December 31, 1999 .......................... 22,853,782 $ 23 $ 113,262 $ 908 $ (11)
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------- ------------- ------------- -------------
Balance at December 31, 1997 .......................... $ (907) $ (87) $ (69,204) $ 27,379
Reversal of deferred compensation relating to
forfeited stock options .......................... 28 -- -- --
Issuance of common stock for services ................. -- -- -- 76
Warrants expired June 1998 ............................ -- -- -- --
Stock options exercised, January through
December 1998 ($0.04 - $0.68 per share) ......... -- -- -- 7
Issuance of shares through the employee stock
purchase plan, June and December 1998
($3.35 and $1.70 per share) ...................... -- -- -- 99
Issuance of shares for cash November 1998
($3.58 per share) ................................ -- -- -- 2,978
Compensation expense related to stock options ......... 499 -- -- 499
Unrealized gain on securities available-for-sale ...... -- 803 -- 803
Net loss .............................................. -- -- (18,231) (18,231)
------------- ------------- ------------- -------------
Balance at December 31, 1998 .......................... $ (380) $ 716 $ (87,435) $ 13,610
Reversal of deferred compensation relating to
forfeited stock options .......................... 30 -- -- --
Issuance of common stock for cash in
secondary public offering February 1999
($2.1875 per share) .............................. -- -- -- 11,689
Issuance of common stock for services ................. -- -- -- 475
Issuance of warrants to purchase 600,000 share
of common stock .................................. -- -- -- --
Issuance of warrants to purchase 50,000 shares
of common stock .................................. -- -- -- 150
Warrants expired December 1999 ........................ -- -- -- --
Stock options exercised, January through
December 1999 ($0.22 - $4.75 per share) ......... -- -- -- 870
Issuance of shares through the employee stock
purchase plan, June and December 1999
($1.65 and $2.66 per share) ...................... -- -- -- 141
Compensation expense related to stock options ......... 281 -- -- 459
Unrealized gain on securities available-for-sale ...... -- 1,431 -- 1,431
Net loss .............................................. -- -- (14,094) (14,094)
------------- ------------- ------------- -------------
Balance at December 31, 1999 .......................... $ (69) $ 2,147 $ (101,529) $ 14,731
(continued on next page)
F-10
50
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY FOR THE PERIOD FROM
INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 2000
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
------------ ------------ ---------- ---------- ---------
Balance at December 31, 1999 .......................... 22,853,782 $ 23 $ 113,262 $ 908 $ (11)
------------ ------------ ------------ ------------ ------------
Issuance of common stock for cash in
secondary offering ($2.75 per share) ............. 2,932,547 3 7,303 -- --
Issuance of common stock for services ................. 60,107 -- 233 -- --
Issuance of warrants to purchase 1,127,524
shares of common stock ........................... -- -- (2,561) 2,561 --
Stock options exercised, January through
December 2000 ($2.00 - $5.06 per share) ......... 71,620 -- 280 -- --
Stock warrants exercised .............................. 14,422 -- 73 (30) --
Issuance of shares through the employee stock
purchase plan, June and December 2000
($2.60 per share) ................................ 41,169 -- 107 -- --
Compensation expense related to stock options ......... -- -- -- -- --
Unrealized gain on securities available-for-sale ...... -- -- -- -- --
Realized gain on securities available-for-sale ........ -- -- -- -- --
Net loss .............................................. -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 .......................... 25,973,647 $ 26 $ 118,697 $ 3,439 $ (11)
============ ============ ============ ============ ============
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------- ------------- ------------- -------------
Balance at December 31, 1999 .......................... $ (69) $ 2,147 $ (101,529) $ 14,731
------------ ------------ ------------ ------------
Issuance of common stock for cash in
secondary offering ($2.75 per share) ............. -- -- -- 7,306
Issuance of common stock for services ................. -- -- -- 233
Issuance of warrants to purchase 1,127,524
shares of common stock ........................... -- -- -- --
Stock options exercised, January through
December 2000 ($2.00 - $5.06 per share) ......... -- -- -- 280
Stock warrants exercised .............................. -- -- -- 43
Issuance of shares through the employee stock
purchase plan, June and December 2000
($2.60 per share) ................................ -- -- -- 107
Compensation expense related to stock options ......... 69 -- -- 69
Unrealized gain on securities available-for-sale ...... -- 506 -- 506
Realized gain on securities available-for-sale ........ -- (2,653) -- (2,653)
Net loss .............................................. -- -- (17,957) (17,957)
------------ ------------ ------------ ------------
Balance at December 31, 2000 .......................... $ -- $ -- $ (119,486) $ 2,665
============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-11
51
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
PERIOD FROM
INCEPTION
(JUNE 13,
YEARS ENDED DECEMBER 31, 1986) THROUGH
---------------------------------------------- DECEMBER 31,
1998 1999 2000 2000
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss .................................................... $ (18,231) $ (14,094) $ (17,957) $ (119,486)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization .......................... 821 611 570 6,028
Loss on disposal of assets ............................. -- -- -- 200
Compensation expense related to stock
and stock options ...................................... 547 1,084 312 5,179
Charge for purchase of in-process research
and development ........................................ -- -- -- 11,547
Unrealized gain on investment ............................... 803 1,431 506 2,653
Realized gain on investment ................................. -- -- (2,653) (2,653)
Acquisition costs, net of cash received ..................... -- -- -- (270)
Loss in affiliate ........................................... -- -- -- 500
Accrued interest payable converted to stock ................. -- -- -- 97
Changes in assets and liabilities:
Increase (decrease) in prepaid expenses and other
assets ................................................. 214 (193) 337 69
Decrease (increase) in accounts receivable .................. (32) 132 -- --
Increase (decrease) in accounts payable and accrued
expenses ............................................... 3,673 (2,058) (1,044) 3,029
Increase in deferred revenue ................................ -- -- 1,662 1,309
------------ ------------ ------------ ------------
Net cash used in operating activities ....................... (12,205) (13,087) (18,267) (91,798)
Cash flows from investing activities:
Purchases of investments .................................... (42,809) (11,111) (1,567) (262,928)
Sales of investments ........................................ 61,682 11,439 9,470 267,842
Purchase of furniture, equipment and leasehold
improvements ........................................... (1,958) (377) (401) (6,857)
Proceeds from sale of assets ................................ 9 -- 9 72
Decrease in deposits ........................................ 490 -- -- --
Investment in affiliate ..................................... -- -- -- (500)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities ......... 17,414 (49) 7,511 (2,371)
Cash flows from financing activities:
Proceeds from notes payable ................................. 1,369 927 182 7,150
Repayment of notes payable and principal payments
under capital lease obligations ........................ (353) (301) (426) (3,538)
Purchase of treasury stock .................................. -- -- -- (11)
Proceeds from issuance of stock ............................. 3,084 12,700 7,726 98,822
------------ ------------ ------------ ------------
Net cash provided by financing activities ................... 4,100 13,326 7,482 102,423
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ........ 9,309 190 (3,274) 8,254
Cash and cash equivalents at beginning of period ............ 2,029 11,338 11,528 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ..................... $ 11,338 $ 11,528 $ 8,254 $ 8,254
============ ============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest .................... $ 81 $ 273 $ 391 $ 1,530
Supplemental schedule of noncash financing activities:
Conversion of notes payable and accrued interest
to Common Stock ........................................ $ -- $ -- $ -- $ 3,043
The accompanying notes are an integral part
of these consolidated financial statements.
F-12
52
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Aronex Pharmaceuticals, Inc. ("the Company", "Aronex Pharmaceuticals",
"we", "us" or "our") was incorporated in Delaware on June 13, 1986 and merged
with Triplex Pharmaceutical Corporation ("Triplex") and API Acquisition Company,
Inc. ("API"), formerly Oncologix, Inc. effective September 11, 1995. In 1998, we
formed a subsidiary, Aronex Europe Limited.
Aronex Pharmaceuticals is a development-stage company that has devoted
substantially all of its efforts to research and product development and has not
yet generated any significant revenues, nor is there any assurance of future
revenues. In addition, we expect to continue to incur losses for the foreseeable
future, and there can be no assurance that we will successfully complete the
transition from a development-stage company to successful operations. The
development activities we engage in involve a high degree of risk and
uncertainty. Our ability to successfully develop, manufacture and market our
proprietary products is dependent upon many factors. These factors include, but
are not limited to, the need for additional financing, attracting and retaining
key personnel and consultants, and successfully developing manufacturing, sales
and marketing operations. Our ability to develop these operations may be
immensely impacted by uncertainties related to patents and proprietary
technologies, technological change and obsolescence, product development,
competition, government regulations and approvals, health care reform,
third-party reimbursement and product liability exposure. Further, during the
period required to develop these products, we will require additional funds
which may not be available to us.
We have operated as a development stage enterprise since our inception
by devoting substantially all of our efforts to raising capital and performing
research and development. In order to complete the development and other
activities necessary to commercialize our products, additional financing will be
required. We have not secured any commitments for any such additional financing.
The majority of our clinical trials have reached the stage where we
have completed patient enrollment in their current phase. At the current time,
we are gathering clinical trial data for analysis. We anticipate reporting the
data at appropriate scientific meetings. Before we initiate any new clinical
trials, we will analyze each product's likelihood for approval, the cost of the
proposed clinical trial, cash available at such time and the inherent risk
profile. We anticipate these steps will assist us in maximizing shareholder
value.
In January 2001, we received a non-approval letter from the United
States Food and Drug Administration (FDA) for our New Drug Application (NDA)
amendment for ATRAGEN(R) for acute promyelocytic leukemia (APL). Following this
event, we reduced expenditures in our research and development plans and
activities. Additionally, we reduced the number of full-time employees in
January 2001 from 77 to 29.
We will continue to require substantial additional funds for our
operations. At December 31, 2000, we had $9.1 million in cash, cash equivalents
and investments. We believe that we can conserve our existing financial
resources to satisfy our capital and operating requirements into the fourth
quarter of 2001.
The factors discussed above raise substantial doubt about our ability
to continue as a going concern. We will, in all likelihood, need to further
reduce our expenditures if we do not obtain additional financial resources by
mid 2001. We retained Robertson Stephens, a San Francisco-based investment bank,
to assist us in pursuing strategic alliances with companies in our industry.
Also, we are actively pursuing other sources of financing. Sources of financing
may not be available, or if available, will be diliutive or may have other
adverse effect to the value of our shares. We may have to close operations
and/or seek legal protection from our creditors. Accordingly, there can be no
assurance of our future success. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern. See
"Business -- General" and "Business -- Additional Business Risks" in the
Company's Form 10-K for the year ended December 31, 2000.
F-13
53
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Aronex
Pharmaceuticals, Triplex, API and Aronex Europe Limited. All material
intercompany transactions have been eliminated in consolidation.
Cash, Cash Equivalents and Short- and Long-Term Investments
Debt and equity securities that we have the intent and ability to hold
to maturity are classified as "held to maturity" and reported at amortized cost.
Debt and equity securities that are held for current resale are classified as
"trading securities" and reported at fair value with unrealized gains and losses
included in earnings. Debt and equity securities not classified as either
"securities-held-to-maturity" or "trading securities" are classified as
"securities-available-for-sale" and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity.
Cash and cash equivalents include money market accounts and investments
with an original maturity of less than three months. Long-term investments at
December 31, 2000 are available for sale securities which are United States
mortgage backed securities with maturity dates over the next 22 years that have
an amortized cost of $821,000 which approximates fair market value and cost. We
currently have no trading securities.
Furniture, Equipment and Leasehold Improvements
Furniture and equipment are carried at cost and depreciation is
calculated on the straight-line method using a five-year estimated useful life.
Leasehold improvements are amortized on the straight-line method over the
shorter of the life of the lease or a five-year estimated useful life.
Maintenance and repairs that do not improve or extend the life of assets are
expensed as incurred. Expenditures which improve or extend the life of assets
are capitalized.
A summary of furniture, equipment and leasehold improvements is as
follows (in thousands):
DECEMBER 31,
-----------------------------
1999 2000
------------ ------------
Office furniture and equipment ....................... $ 1,136 $ 1,390
Laboratory equipment ................................. 3,460 3,499
Leasehold improvements ............................... 883 876
------------ ------------
5,479 5,765
Less accumulated depreciation and amortization ........ (3,450) (3,914)
------------ ------------
Furniture, equipment and leasehold improvements, net .. $ 2,029 $ 1,851
============ ============
At December 31, 2000, the cost of all furniture, equipment and
leasehold improvements pledged as collateral on notes payable totaled
$1,916,000.
Revenue Recognition
During 2000, we adopted United States Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), which requires up-front, non-refundable license fees to
be deferred and recognized over the performance period. Payments for services
under research and development grants and contracts that are specifically tied
to a separate earnings process are recognized as revenue as the services are
performed. In situations where we receive payment in advance of the performance
of services, such amounts are
F-14
54
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
deferred and recognized as revenue as the related services are performed.
Non-refundable fees, including payments for up-front licensing fees and
milestones (collectively, " Non-refundable Fees"), are recognized
as revenue based on the percentage of costs incurred to date, estimated costs to
complete, and total Non-refundable Fees received. Prior to January 1, 2000, we
had recognized revenue from Non-refundable Fees when we had no obligations to
return the fees under any circumstances, and there were no additional
contractual services to be provided or costs to be incurred by us in connection
with the Non-refundable Fees.
The cumulative effect of adopting SAB 101 at January 1, 2000 resulted
in a one-time, non-cash charge of $4.5 million, with a corresponding increase to
deferred revenue that will be recognized in future periods. The $4.5 million
represents portions of 1998 and 1999 Non-refundable Fees from Abbott
Laboratories in consideration for the exclusive worldwide rights to market and
sell Nyotran(R). For the year ended December 31, 2000, we recognized $2.8
million of research and development grants and contracts revenue that was
included in the cumulative effect adjustment as of January 1, 2000. The balance
of the deferred revenue from this adjustment, $1.7 million, will be recognized
in the future as we incur costs relating to obtaining approval for Nyotran(R)
from the FDA.
Prior period financial statements have not been restated to apply SAB
101 retroactively; however, the pro forma amounts included in the consolidated
statements of operations show the net loss and per share net loss assuming we
had retroactively applied SAB 101 to all prior periods.
Research and Development
Costs incurred in connection with research and development activities
are expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on our behalf.
Comprehensive Loss
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for reporting and displaying comprehensive loss and its components in an
entity's financial statements, and is effective for fiscal years beginning after
December 15, 1997. Comprehensive loss is the total of net loss and all other
non-owner changes in equity, which for the Company includes unrealized gains and
losses on securities available for sale. A reconciliation of reported net loss
to comprehensive loss is included in the consolidated statements of
comprehensive loss.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain reclassifications have been made to the prior year's financial
statements to be consistent with the presentation in the current year.
3. INVESTMENT IN AFFILIATE
In April 1994, we invested in and entered into a drug development
agreement with RGene Therapeutics, Inc. ("RGene"). We purchased $500,000 of
RGene's preferred stock, which was recorded in the financial statements as
investment in affiliate. The original investment was written off as RGene
incurred losses. This resulted in a zero basis when RGene was acquired by
Targeted Genetics Corporation, a publicly traded company, in June 1996.
We received 440,520 shares of Targeted Genetics common stock from the
acquisition of RGene in June 1996 and an additional 104,496 shares upon the
achievement of certain milestones in October 1998. The Company recorded the
shares at zero value in the financial statements until 1998 when they were
recorded at their fair market value of $716,000. As a result, an unrealized gain
of $2,147,000 is reflected on the Company's balance sheet at
F-15
55
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999. In January 2000, we sold all of our shares of Targeted
Genetics and realized a gain of $2,653,000.
4. NOTES PAYABLE
In May 1998, we entered into a master loan agreement for the financing
of furniture, office equipment and laboratory equipment acquisitions. Each loan
is collateralized by the furniture and equipment and is payable in 60 monthly
installments. In June 1998 and February 1999, we borrowed $1,369,000 and
$547,000, respectively, through this agreement bearing interest at 12%. In May
1999, a $2.0 million advance from Genzyme Corporation ("Genzyme") and $500,000
in minimum royalties relating to ATRAGEN(R) due to Genzyme were converted into a
$2.5 million convertible note payable to Genzyme. This note bears interest at
10% per annum with interest payable semi-annually, and the principal is due May
21, 2002. This note can be converted into common stock of the Company at $4.35
per share at Genzyme's option (See note 8). Future principal payments under
these loan agreements at December 31, 2000 are as follows:
YEAR ENDING
DECEMBER 31, NOTE PAYABLE
------------ -------------
2001 $ 459,000
2002 2,867,000
2003 275,000
2004 12,000
-------------
Total $ 3,613,000
=============
5. STOCKHOLDERS' EQUITY
Common Stock Warrants
At December 31, 2000, we had warrants outstanding, relating to a
certain financing transaction to purchase 2,944 shares of common stock at an
exercise price of $12.00 per share. The warrants expired in March 2001.
At December 31, 2000, we had warrants outstanding, relating to our
February 1999 common stock offering to purchase 596,772 shares of common stock
at a price of $3.28 per share. These warrants expire in February 2004.
At December 31, 2000, we had warrants outstanding relating to our 1999
financing with Genzyme to purchase 50,000 shares of common stock at an exercise
price of $4.00 per share. These warrants expire in May 2004.
In connection with our April 2000 common stock offering, we issued
warrants to purchase 977,524 shares of common stock at a price of $3.00 per
share. At December 31, 2000, 965,403 of these warrants are outstanding, and they
expire in April 2005. In addition, we issued to a placement agent warrants to
purchase 150,000 shares of common stock at an exercise price of $3.25 per share.
At December 31, 2000, all of these warrants are outstanding, and they expire in
April 2007. The fair value of the warrants issued, $2,561,000, has been recorded
in the accompanying financial statements. This amount has been estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: a risk free interest rate of 5.6% with no expected
dividends, expected lives of five and seven years and expected volatility of
92%.
Financing Agreement
In November 2000, we entered into an agreement with Acqua Wellington
North American Equity Fund Ltd. for an equity financing agreement covering the
sale of up to $24 million of our common stock over a 28-month period ending in
March 2003. We have not raised any funds under this agreement. In order to raise
any funds under this
F-16
56
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
agreement, we must maintain a minimum stock price and maximum market
capitalization. At the present time, we do not meet these requirements and do
not expect to meet these requirements in the near future.
6. STOCK OPTION PLANS
In 1989, our stockholders approved the 1989 Stock Option Plan (the
"Plan"). The Plan, as amended in 1992 and in May 1997, authorized the issuance
of options through December 31, 1999. The term of each option ranges from five
to seven years from the date of grant. The Plan expired at December 31, 1999 and
has not been extended. Options granted under the Plan continue to be outstanding
and expire at various dates through 2006.
A summary of stock option activity for the Plan follows:
OPTIONS PRICE
OUTSTANDING PER SHARE
------------ ---------------------
Balance at December 31, 1997............................ 1,960,717 $ 0.04 to $14.88
Granted........................................... 336,114 $ 2.06 to $ 4.63
Exercised......................................... (42,638) $ 0.04 to $ 0.68
Forfeited......................................... (228,946) $ 3.88 to $14.88
------------ ---------------------
Balance at December 31, 1998............................ 2,025,247 $ 0.04 to $14.88
Granted........................................... 404,605 $ 1.94 to $ 5.81
Exercised......................................... (317,433) $ 0.22 to $ 4.75
Forfeited......................................... (396,944) $ 0.04 to $14.88
------------ ---------------------
Balance at December 31, 1999............................ 1,715,475 $ 0.16 to $11.50
Exercised......................................... (64,120) $ 2.38 to $ 5.06
Forfeited......................................... (361,948) $ 2.38 to $11.50
------------ ---------------------
Balance at December 31, 2000............................ 1,289,407 $ 0.16 to $11.50
============ =====================
Exercisable at December 31, 2000........................ 1,024,783 $ 0.16 to $11.50
============ =====================
In June 1998, our stockholders approved the 1998 Stock Option Plan (the
"1998 Plan"). This plan authorizes the issuance of options to purchase up to
750,000 shares of common stock. Shares issued under the 1998 Plan expire 10
years from the date of issuance. In 1998, options to purchase 370,000 shares of
common stock were issued to employees, and 320,000 of these shares will vest at
the earlier of various dates based on the achievement of corporate and personal
goals as determined by the Board of Directors' compensation committee and the
achievement of specific common stock price targets or nine years and ten months
from the date of grant. At December 31, 2000, 28,243 shares were available for
future grant under the Plan. In January 2001, the Board of Directors amended and
restated 1998 Plan authorizing the issuance of options covering the greater of
(i) 2,600,000 shares of common stock or (ii) 10% of the shares of common stock
outstanding on the last day of the preceding fiscal quarter, among other
changes.
F-17
57
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity for the 1998 Plan follows:
OPTIONS PRICE
OUTSTANDING PER SHARE
------------ ---------------------
Balance at December 31, 1997............................ -- $ --
Granted........................................... 370,000 $ 2.44 to $ 3.88
------------ ---------------------
Balance at December 31, 1998............................ 370,000 $ 2.44 to $ 3.88
Granted........................................... 230,000 $ 3.63
Exercised......................................... (58,800) $ 2.44 to $ 3.88
Forfeited......................................... (143,200) $ 3.88
------------ ---------------------
Balance at December 31, 1999............................ 398,000 $ 3.63 to $ 3.88
Granted........................................... 281,807 $ 2.63 to $ 5.31
Exercised......................................... (60,107)(i) $ --
Forfeited......................................... (16,850) $ 3.00 to $ 3.38
------------ ---------------------
Balance at December 31, 2000............................ 602,850 $ 2.63 to $ 4.06
============ =====================
Exercisable at December 31, 2000........................ 130,450 $ 3.63 to $ 3.88
============ =====================
(i) Represents stock issued at fair market value for services under
consulting agreements.
During 1993, we adopted the 1993 Non-Employee Director Stock Option
Plan (the "Director Plan"). The Director Plan, as amended effective in May 1997,
authorizes the issuance of options to purchase up to 600,000 shares of common
stock. In January 2001, the Board of Directors amended the Director Plan to
increase the number of shares of our common stock underlying options that may be
granted under the Director Plan to 1,200,000 from 600,000. Shares issued under
the Director Plan expire ten years from the date of issuance. The Director Plan
allows for the issuance of two types of grants: Formula Grants and Discretionary
Grants. Formula Grants are fully-vested when issued and are issued at a price
equal to the fair market value of our stock at the date of issuance. The
following Formula Grants are issued under the Director Plan: (1) options to
purchase 25,000 shares of common stock to each Non-Employee Director upon first
being elected to the Board of Directors and (2) options to purchase 7,500 shares
of common stock annually to each Non-Employee Director who has served as a
director for at least six months. The annual Formula Grants for 2000 were not
granted until January 2001 because insufficient shares were available on
December 31, 2000. The expense associated with these annual Formula Grants for
2000 has been recorded in the December 31, 2000 financial statements.
Discretionary Grants may be issued by the compensation committee of the Board of
Directors and may be issued at less than the fair market value of our stock. In
2000, Discretionary Grants to purchase a total of 80,000 shares of common stock
were issued to two Non-Employee Directors. These options vest over four years
and were issued at the fair market value of our common stock at the date of
grant. At December 31, 2000, 7,500 shares were available for future grant under
the Plan.
F-18
58
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity for the Director Plan follows:
OPTIONS PRICE
OUTSTANDING PER SHARE
-------------- -----------------
Balance at December 31, 1997........................... 367,500 $ 4.25 to $ 11.00
Granted................................................ 62,500 $ 2.00 to $ 2.53
-------------- -----------------
Balance at December 31, 1998........................... 430,000 $ 2.00 to $ 11.00
Granted................................................ 102,500 $ 2.97 to $ 3.13
Forfeited.............................................. (32,500) $ 5.50 to $ 9.38
-------------- -----------------
Balance at December 31, 1999........................... 500,000 $ 2.00 to $ 11.00
Granted................................................ 80,000 $ 2.81 to $ 4.75
Exercised.............................................. (7,500) $ 2.00
-------------- -----------------
Balance at December 31, 2000........................... 572,500 $ 2.00 to $ 11.00
============== =================
Exercisable at December 31, 2000....................... 513,167 $ 2.00 to $ 11.00
============== =================
We recorded deferred compensation for the difference between the grant
price and the fair market value of the stock for financial statement
presentation purposes related to options. At December 31, 2000, all of this
compensation had been amortized to expense over the vesting periods of the
options. In 1998, 1999 and 2000, $499,000, $281,000 and $69,000, respectively,
in related expense was recorded.
We account for these plans under APB Opinion No. 25, under which
compensation expense is recorded. Had compensation cost for these plans been
determined consistent with FASB Statement No. 123 ("SFAS 123"), our net loss per
share would have been increased to the following pro forma amounts:
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
Net Loss:
As reported ............... $ (18,231,000) $ (14,094,000) $ (17,957,000)
================ ================ ================
Pro forma ................. $ (19,598,000) $ (15,567,000) $ (18,812,000)
================ ================ ================
Loss Per Share (basic and diluted):
As reported ............... $ (1.17) $ (0.65) $ (0.72)
================ ================ ================
Pro forma ................. $ (1.26) $ (0.72) $ (0.75)
================ ================ ================
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
may not be representative of that to be expected in future years. The fair value
of each option grant is estimated on the date of grant using the Black Scholes
options pricing model with the following weighted-average assumptions used for
grants in 1998, 1999 and 2000, respectively: risk-free interest rates of 5.2%,
5.6% and 6.2%, with no expected dividends, expected lives of five years, 3.5
years and four years and expected volatility of 113%, 92% and 97%.
F-19
59
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of our three stock option plans as of December
31, 1998, 1999 and 2000 and charges during the years ending on those dates is
presented below:
1998 1999 2000
---------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
-------------------- --------- ---------- --------- ---------- --------- ----------
Balance at beginning of year ....... 2,328,217 $ 5.37 2,825,247 $ 4.96 2,613,475 $ 4.69
Granted ............................ 768,614 $ 3.52 737,105 $ 3.30 361,807 $ 3.35
Exercised .......................... (42,638) $ 0.39 (376,233) $ 3.27 (131,727) $ 3.85
Forfeited .......................... (228,946) $ 5.27 (572,644) $ 5.15 (378,798) $ 5.95
---------- ---------- ----------
Balance at end of year ............. 2,825,247 $ 4.96 2,613,475 $ 4.69 2,464,757 $ 4.35
========== ========== ==========
Options exercisable at year end .... 1,917,151 $ 5.40 1,654,649 $ 5.08 1,668,400 $ 4.70
========== ========== ==========
Weighted-average fair value of
options granted during the year .... $ 2.68 $ 2.24 $ 2.36
The following table summarizes information about stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- -----------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE
- ------------------ ----------------- ------------------- ---------------- ----------------- ----------------
$0.16 - $ 3.00 395,253 5.5 $ 2.62 158,870 $ 2.39
$3.01 - $ 7.00 1,878,710 4.4 $ 4.31 1,318,845 $ 4.46
$7.01 - $ 11.50 190,794 3.8 $ 8.30 190,685 $ 8.30
-------------- -----------
2,464,757 1,668,400
============== ===========
In addition to the stock option plans in 1997, we issued 100,000 stock
options to a former consultant. These options are vested, have an exercise price
of $7.00 per share and expire in May 2002.
7. FEDERAL INCOME TAXES
We recognize deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently in the
financial statements and tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Deferred tax assets are evaluated for realization based
on a more-likely-than-not criteria in determining if a valuation allowance
should be provided.
F-20
60
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the statutory federal income tax rate to our
effective income tax rate for the periods ended December 31, 1998, 1999 and 2000
is as follows:
1998 1999 2000
-------- -------- --------
Statutory rate ........................................ (34.0)% (34.0)% (34.0)%
Cumulative effect of accounting change not
deductible ......................................... 0.0% 0.0% 3.1%
Equity in loss of foreign subsidiary not deductible ... 0.0% 2.2% 0.8%
Deductible stock option compensation .................. 0.0% (0.4)% 0.0%
Other ................................................. 0.9% 0.1% 0.2%
Adjustment due to deferred tax valuation allowance .... 33.1% 32.1% 29.9%
-------- ======== ========
0.0% 0.0% 0.0%
======== ======== ========
Significant components of our net deferred tax asset at December 31,
1999 and 2000 are as follows:
1999 2000
------------ ------------
Deferred tax assets relating to:
Federal net operating loss carryforwards ........... $ 39,023,000 $ 44,386,000
Financial statement depreciation and amortization in
excess of amount deductible for income
tax purposes .................................. 240,400 241,300
Accrued liabilities not currently deductible
for income tax purposes ....................... 748,000 748,000
Equity in loss of affiliate not currently
deductible for income tax purposes ............ 170,000 170,000
Other items, net ................................... (34,300) (37,600)
------------ ------------
Total deferred items, net ............................. 40,147,100 45,507,700
Deferred tax valuation allowance ...................... (40,147,100) (45,507,700)
------------ ------------
Net deferred tax asset ................................ $ -- $ --
============ ============
At December 31, 2000, we had net operating loss ("NOL") carryforwards
for federal income tax purposes of approximately $130.6 million. The Tax Reform
Act of 1986 provided a limitation on the use of NOL and tax credit carryforwards
following certain ownership changes that could limit our ability to utilize
these NOLs and tax credits. Accordingly, our ability to utilize the above NOL
and tax credit carryforwards to reduce future taxable income and tax liabilities
may be limited. As a result of the merger with Triplex and API in 1995, a change
in control as defined by federal income tax law occurred, causing the use of
these carryforwards to be limited and possibly eliminated. Additionally, because
United States tax laws limit the time during which NOLs and the tax credit
carryforwards may be applied against future taxable income and tax liabilities,
we may not be able to take full advantage of our NOLs and tax credit
carryforwards for federal income tax purposes. The carryforwards will begin to
expire in 2001 if not otherwise used. Due to the possibility of not reaching a
level of profitability that will allow for the utilization of our deferred tax
assets, a valuation allowance has been established to offset these tax assets.
The valuation allowance increased $8,108,400, $3,401,700 and $5,360,600 for the
years ended December 31, 1998, 1999 and 2000, respectively. These increases were
primarily due to our losses from operations for such periods and the valuation
allowance for the net operating loss carryforwards acquired in the 1995 mergers
with Triplex and API. We have not made any federal income tax payments since
inception.
8. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
We have two exclusive license agreements with The University of Texas
M.D. Anderson Cancer Center ("M.D. Anderson") that may be terminated in the
event of a material breach of the terms of the agreement or for failure to
convert the licensed subject matter to a commercial form. However, management
believes our ongoing development efforts currently satisfy this obligation to
commercialize.
F-21
61
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The license agreements require us to pay royalties for licensed patent
products or processes based on net sales percentages. We must also pay M.D.
Anderson $200,000 for each FDA-approved product resulting from certain licensed
research tasks. No royalties have been paid to date since we have had no sales.
For the years ended December 31, 1998, 1999 and 2000, we paid M.D.
Anderson $23,000, $157,000 and $23,000, respectively, for research performed on
our behalf.
In 1993, we entered into a non-exclusive license agreement with a
pharmaceutical company to use a patented process in the manufacture, use and
sale of certain of our products with an initial fee of $30,000. Annual royalty
payments by us are to be computed as a percentage of sales, as defined in the
agreement. The royalty payments shall not exceed $1 million in a calendar year
and expire upon expiration of the licensed patents.
In 1993, we entered into a license and development agreement with
Genzyme to develop and commercialize ATRAGEN(R). In September 1996, Genzyme
advanced us $2.0 million. Early in 1997, the Company amended the agreement
through which (1) we released Genzyme from any further obligation to perform
development work for ATRAGEN(R) and (2) the license granted to Genzyme under the
agreement was converted to an option to acquire the right to market and sell
ATRAGEN(R) worldwide.
In March 1999, Genzyme notified us that they did not intend to
exercise their option to acquire the right to market and sell ATRAGEN(R)
worldwide. As a result of the election, we have regained full marketing rights
to ATRAGEN(R) on a worldwide basis and we were obligated to repay Genzyme the
$2.0 million advance by May 21, 1999 and pay product royalties, including
$500,000 in minimum royalties by April 24, 2000. In May 1999, the $2.0 million
advance from Genzyme and the $500,000 in minimum royalties were converted into a
$2.5 million convertible note payable to Genzyme, which has a maturity date in
May 2002. This note can be converted into our common stock at $4.35 per share at
Genzyme's option. In connection with this financing, we issued Genzyme warrants
to purchase 50,000 shares of common stock at an exercise price of $4.00 per
share. These warrants are exercisable until May 21, 2004. The fair value of the
warrants, $150,000, has been recorded in the accompanying financial statements.
This amount has been estimated on the date of grant using the Black Scholes
option pricing model with the following weighted-average assumptions: a risk
free interest rate of 5.2% with an expected life of five years and expected
volatility of 114%.
In 1996, we entered into a license agreement with Boehringer Mannheim
GmbH (subsequently acquired by F. Hoffman-LaRoche Ltd. ("Roche")) to develop and
commercialize one of our products, AR209. Under the agreement, Roche was
responsible for funding the costs of all remaining preclinical and clinical
development of AR209 and for manufacturing the product. Roche paid us $150,000
in license fees in connection with this agreement in 1997 and agreed to pay
minimum annual license fees of $100,000 during the term of the agreement. The
agreement was terminated without cause by Roche in September 1998, as a result
of which all rights to AR209 have reverted to us.
On November 12, 1998, we entered into a license agreement with Abbott
for Nyotran(R). The license agreement provides Abbott with exclusive worldwide
rights to market and sell Nyotran(R), subject to rights previously granted to
Grupo Ferrer Internacional, S.A. in Spain and Portugal and certain co-promotion
rights retained by us in the United States and Canada. Under the license
agreement, Abbott has paid us up-front payments, development milestones and
development payments. Abbott purchased 837,989 shares of our common stock for
$3.0 million under a related stock purchase agreement on November 30, 1998.
Abbott has provided funding for the clinical development of Nyotran(R) and will
make subsequent milestone payments if specified sales targets are achieved.
Abbott will also pay to us escalating royalties on all product sales of
Nyotran(R).
In December 2000, we entered into a license agreement with Sumitomo
Pharmaceuticals Co., Ltd. that gives us the exclusive right in the United States
to a particular class of DACH platinum compounds. Aroplatin(TM), one of our
products in clinical development, is a liposomal formulation of a novel platinum
compound from this class of drugs. Under this agreement, Sumitomo
Pharmaceuticals received a $500,000 up-front payment from us in 2001,
F-22
62
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(such amount was expensed in the 2000 financial statements) and will receive
subsequent milestone payments based on regulatory filings, approval and sales of
Aroplatin(TM), and royalties on the sales of Aroplatin(TM) in the United States.
Except for the treatment of hepatoma, the license agreement gives us the
exclusive right to make, use, develop, import and sell Aroplatin(TM) in the
United States.
9. COMMITMENTS AND CONTINGENCIES
We lease laboratory and office space under operating leases and
certain office equipment on a short-term basis. Under a current building lease,
we have committed to lease 30,000 square feet for ten years beginning in January
1998. Rental expense relating to these leases was approximately $667,000,
$756,000, and $713,000 for the years ended December 31, 1998, 1999 and 2000,
respectively.
Future minimum noncancellable payments under operating leases at
December 31, 2000 are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ -------------
2001 $ 713,000
2002 710,000
2003 707,000
2004 692,000
2005 676,000
Thereafter 1,379,000
-------------
Total $ 4,877,000
=============
We are subject to numerous risks and uncertainties because of the
nature of and status of our operations. We maintain insurance coverage for
events and in amounts that we deem appropriate. Management believes that
uninsured losses, if any, will not be materially adverse to our financial
position or results of operations.
Litigation
In the normal course of doing business, we occasionally become a party
to litigation. It the opinion of management, pending or threatened litigation
involving the Company will not have a material adverse material effect on our
financial condition.
10. RELATED PARTY TRANSACTIONS AND EMPLOYMENT AGREEMENTS
We entered into employment agreements with our chief executive officer
and key employees that have initial termination dates ranging from 2001 to 2002.
These agreements are thereafter automatically renewed for successive periods of
12 to 18 months unless terminated by either party. Such agreements provide that
in the case of termination by the Company without cause or termination by the
employee for good reason, the officers are entitled to payments ranging from 100
to 250% of their annual salaries. Additionally, one officer has an outstanding
loan with Aronex Pharmaceuticals with a balance of approximately $10,000 at
December 31, 2000. This loan will be repaid over the next two years. Current
annual salaries relating to these agreements total $1.2 million at December 31,
2000.
In February 1998, we amended a consulting agreement with our chief
scientific advisor for a three-year period ending December 31, 2000, whereby we
were committed to pay consulting fees of $156,000 per year through December 31,
2000. One-half of the amount was paid in cash and one-half was paid in our
common stock. We paid cash of $78,000 for the years ended December 31, 1998,
1999 and 2000, respectively, and issued 18,352, 40,248 and 21,584 shares of our
common stock in 1998, 1999 and 2000, respectively, pursuant to this agreement.
In December 2000, this agreement was renewed for an additional 12-month period.
F-23
63
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 401(k) PLAN
We maintain a retirement savings plan, effective as amended on January
1, 1991, in which any of our employees who has completed one month of employment
may elect to participate. The plan is an individual account plan providing for
deferred compensation as described in Section 401(k) of the United States
Internal Revenue Service Code and is subject to, and intended to comply with,
the Employee Retirement Income Security Act of 1974, as amended. Each eligible
employee is permitted to contribute up to 20% of his/her annual salary up to the
applicable statutory maximum prescribed in the Code. We may, in our discretion,
contribute an amount equal to the employee's contribution, but our contribution
may not exceed an amount equal to 6% of the employee's compensation. A
participant is 50% vested in the accrued benefits derived from our contributions
after completion of one year of employment following his/her election to
participate in the plan, and 100% vested in such contributions after completion
of two years of employment following such election. Participants may receive
hardship loans under the terms of the plan. The plan provides for distributions
in the event a participant dies, reaches the age of 65, becomes disabled or
terminates his/her employment prior to the age of 65. Aronex Pharmaceuticals
made contributions of approximately $56,500, $65,200 and $64,300 under the
401(k) plan for the years ended December 31, 1998, 1999 and 2000, respectively.
12. EMPLOYEE STOCK PURCHASE PLAN
In December 1996, the Board of Directors adopted the 1997 Employee
Stock Purchase Plan and reserved 250,000 shares of common stock for issuance
thereunder. The plan permits employees to purchase common stock through payroll
deductions of up to 15% of their compensation subject to limitations as defined
by the Internal Revenue Service. Purchases of common stock are made at the lower
of 85% of fair market value at the beginning or end of each six-month offering
period. In 1998, 39,516 shares were purchased by employees at $3.35 and $1.70
per share. In 1999, 71,023 shares were purchases by employees at $1.65 and $2.66
per share. In 2000, 41,169 shares were purchased by employees at $2.60 per
share.
13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Effective January 1, 2000, we changed our method of accounting for
revenue recognition to conform with the guidance provided by SAB 101 (See Note
2). The cumulative effect of adopting SAB 101 at January 1, 2000 resulted in a
one-time, non-cash charge of $4.5 million, with a corresponding increase to
deferred revenue that will be recognized in future periods. The $4.5 million
represents portions of 1998 and 1999 payments received from Abbott Laboratories
in consideration for the exclusive worldwide rights to market and sell
Nyotran(R). For the year ended December 31, 2000, we recognized $2.8 million of
research and development grants and contracts revenue that was included in the
cumulative effect adjustment as of January 1, 2000.
F-24
64
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized quarterly financial data for the years ended December 31, 2000
and 1999 are displayed in the following tables:
FIRST QUARTER ENDED
MARCH 31, 2000
(UNAUDITED)
--------------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- ------------
Total revenues .......................................... $ 300 $ 1,451
============ ============
Operating loss .......................................... $ (6,199) $ (5,048)
------------ ------------
Other income, net ....................................... 2,747 2,747
------------ ------------
Net loss before cumulative effect of change in accounting
principle ........................................ $ (3,452) $ (2,301)
Cumulative effect of change in accounting principle ..... -- (4,455)
------------ ------------
Net loss ................................................ $ (3,452) $ (6,756)
============ ============
Net loss per share, basic and diluted:
Net loss before cumulative effect of change in
accounting principle ............................. $ (0.15) $ (0.10)
Cumulative effect of change in accounting principle ..... -- (0.19)
------------ ------------
Net loss per share ...................................... $ (0.15) $ (0.29)
============ ============
SECOND QUARTER ENDED THIRD QUARTER ENDED
JUNE 30, 2000 SEPTEMBER 30, 2000
(UNAUDITED) (UNAUDITED)
------------------------------- ------------------------------- FOURTH QUARTER
AS AS ENDED
PREVIOUSLY AS PREVIOUSLY AS DECEMBER 31, 2000
REPORTED RESTATED REPORTED RESTATED (UNAUDITED)
------------ ------------ ------------ ------------ -------------------
Total revenues ........ $ 0 $ 587 $ 26 $ 711 $ 470
Operating loss ........ $ (4,636) $ (4,049) $ (4,270) $ (3,585) $ (3,951)
Other income, net...... 170 170 139 139 75
Net loss............... (4,466) (3,879) (4,131) (3,446) (3,876)
Net loss per share,
basic and diluted.... $ (0.18) $ (0.16) $ (0.16) $ (0.13) $ (0.15)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, 1999 JUNE 30, 1999 SEPTEMBER 30, 1999 DECEMBER 31, 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------- --------------- ------------------ ----------------
Total Revenues .................. $ 3,282 $ 6,591 $ 854 $ 325
Operating income (loss).......... (3,437) 954 (5,595) (7,016)
Other income, net................ 262 315 196 227
Net income (loss) ............... $ (3,175) $ 1,269 $ (5,399) $ (6,789)
Net income (loss) per share,
basic and diluted.............. $ (0.17) $ 0.06 $ (0.24) $ (0.30)
Pro forma amounts assuming
the accounting charge is
applied retroactively:
Net loss....................... $ (4,353) $ (1,205) $ (3,757) $ (4,361)
Net loss per share............. $ (0.23) $ (0.05) $ (0.17) $ (0.19)
F-25
65
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to Aronex Pharmaceuticals'
Quarterly Report on Form 10-Q for the quarterly period ending June 30,
1997 (the "June 1997 Form 10-Q")).
3.1(i) Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to Exhibit 3.1
(i) to the Company's Quarterly Report on Form 10-Q for the quarterly
period ending June 30, 1999).
3.1(ii) Certificate of Designation of Series One Junior Participating Preferred
Stock dated October 6, 1999 (attached as Exhibit A to the Rights
Agreement files as Exhibit 4.1 incorporated by reference to Exhibit 4.1
on Form 8-A dated October 7, 1999).
3.2 Restated Bylaws (incorporated by reference to Exhibit 3.2 to Aronex
Pharmaceuticals' Registration Statement on Form S-1 (No. 33-47418) (the
"1992 Registration Statement"), as declared effective by the Commission
on July 10, 1992).
4.1 Specimen certificate for shares of Common Stock, par value $0.001 per
share (incorporated by reference to Exhibit 4.1 to Aronex
Pharmaceuticals' Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996).
4.1 (i) Rights Agreement, dated October 6, 1999, between the Company and
American Stock Transfer & Trust Company, as Rights Agent (incorporated
by reference to Exhibit 4.1 on Form 8-A dated October 7, 1999).
4.2 Form of Rights Certificate (attached as Exhibit B to the Rights
Agreement files as Exhibit 4.1 incorporated by reference to Exhibit 4.1
on Form 8-A dated October 7, 1999).
4.3 Form of Subscription Agreement for private placement offering
(incorporated by reference to Exhibit 4.1 on the April 17, 2000 Form
8-K).
4.4 Form of Common Stock Purchase Warrant between Aronex Pharmaceuticals
and subscribers of the private placement (incorporated by reference to
Exhibit 4.2 on the April 17, 2000 Form 8-K).
4.5 Form of Warrant for the purchase of an aggregate of 150,000 shares of
common stock in connection with the Finders Agreement Exhibit 10.50
(incorporated by reference to Exhibit 4.3 on the April 17, 2000 Form
8-K).
10.1 Registration Rights Agreement dated August 2, 1989, by and among Aronex
Pharmaceuticals and certain of its stockholders (incorporated by
reference to Exhibit 10.2 to the 1992 Registration Statement).
10.2 First Amendment to Registration Rights Agreement dated April 18, 1990,
by and among Aronex Pharmaceuticals and certain of its stockholders
(incorporated by reference to Exhibit 10.3 to the 1992 Registration
Statement).
66
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.3 Second Amendment to Registration Rights Agreement dated October 31,
1991, by and among Aronex Pharmaceuticals and certain of its
stockholders (incorporated by reference to Exhibit 10.4 to the 1992
Registration Statement).
10.4 Third Amendment to Registration Rights Agreement dated September 10,
1993, among and certain of its stockholders (incorporated by reference
to Exhibit 10.24 to Aronex Pharmaceuticals' Registration Statement on
Form S-1 (No. 33-71166) (the "1993 Registration Statement"), as
declared effective by the Commission on November 15, 1993).
10.5 Fourth Amendment to Registration Rights Agreement dated January 20,
1994, among Aronex Pharmaceuticals and certain of its stockholders
(incorporated by reference to Exhibit 10.5 to the December 1999
10-K/A).
10.6+ Amended and Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the June 1997 Form 10-Q).
10.7+ Amended and Restated 1993 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the June 1997 Form 10-Q).
10.8+ 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
Aronex Pharmaceuticals' Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 (the "June 1998 Form 10-Q")).
10.9++ Exclusive License Agreement dated October 15, 1986, between Aronex
Pharmaceuticals, The University of Texas System Board of Regents and
The University of Texas M.D. Anderson Cancer Center (incorporated by
reference to Exhibit 10.8 to the 1992 Registration Statement).
10.10++ Exclusive License Agreement dated July 1, 1988, between Aronex
Pharmaceuticals, The University of Texas System Board of Regents and
The University of Texas M.D. Anderson Cancer Center, together with
amendments and extensions thereto (incorporated by reference to Exhibit
10.10 to the 1992 Registration Statement).
10.11 Amendment No. 2 to Exclusive License Agreement dated July 9, 1993,
among Aronex Pharmaceuticals, The University of Texas System Board of
Regents and The University of Texas M.D. Anderson Cancer Center
(incorporated by reference to Exhibit 10.20 to the 1993 Registration
Statement).
10.12 License and Development Agreement dated September 10, 1993 between
Aronex Pharmaceuticals and Genzyme Corporation (incorporated by
reference to Exhibit 10.22 to the 1993 Registration Statement).
10.13 Amendment No. 2 to License and Development Agreement dated September
10, 1996, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 3.1 to Aronex Pharmaceuticals'
Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 1996 (the "September 1996 Form 10-Q")).
10.14 Amendment No. 2 to Stock Purchase Agreement dated September 10, 1996,
between Aronex Pharmaceuticals and Genzyme Corporation (incorporated by
reference to Exhibit 3.2 to the September 1996 Form 10-Q).
10.15 Amendment No. 3 to License and Development Agreement dated March 25,
1997, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to Aronex Pharmaceuticals'
Quarterly Report on Form 10-Q for the fiscal quarter ended March 30,
1997 (the "March 1997 Form 10-Q")).
67
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.16 Common Stock Purchase Agreement dated September 10, 1993 between Aronex
Pharmaceuticals and Genzyme Corporation (incorporated by reference to
Exhibit 10.1 to the June 4, 1999 Form 8-K).
10.17 Amendment No. 3 to Common Stock Purchase Agreement dated March 25,
1997, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.2 to the March 1997 Form
10-Q).
10.18+ Employment Agreement dated November 3, 1997 between Aronex
Pharmaceuticals' and Geoffrey F. Cox, Ph.D. (incorporated by reference
to Exhibit 10.39 to Aronex Pharmaceuticals' Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "1997 Form 10-K")).
10.19*+ First Amendment to Employment Agreement dated January 18, 2001 between
Aronex Pharmaceuticals and Geoffrey F. Cox, Ph.D.
10.20+ Consulting Agreement dated January 1, 1998, between Aronex
Pharmaceuticals and Gabriel Lopez-Berestein (incorporated by reference
to Exhibit 10.2 to the March 1998 Form 10-Q).
10.21+ Employment Agreement dated June 12, 1998, between Aronex
Pharmaceuticals and Paul A. Cossum, Ph.D. (incorporated by reference to
Exhibit 10.3 to the June 1998 Form 10-Q).
10.22*+ First amendment to employment agreement dated January 18, 2001, between
Aronex Pharmaceuticals and Paul A. Cossum, Ph.D.
10.23+ Employment Agreement dated June 12, 1998, between Aronex
Pharmaceuticals and Terance A. Murnane (incorporated by reference to
Exhibit 10.4 to the June 1998 Form 10-Q).
10.24*+ First Amendment to Employment Agreement dated January 18, 2001, between
Aronex Pharmaceuticals and Terance A. Murnane.
10.25 Lease Agreement dated April 4, 1997, between Aronex Pharmaceuticals and
Fleet National Bank successor and assignor to the Woodlands Corporation
(incorporated by reference to Exhibit 10.3 to the June 1997 Form 10-Q).
10.26* Non-Disturbance, Attornment and Subordination Agreement dated
September 22, 2000 between Aronex Pharmaceuticals, Fleet National Bank
and Woodlands VTO 2000 Commercial, L.P.
10.27++ License Agreement dated November 12, 1998, between Aronex
Pharmaceuticals and Abbott Laboratories (incorporated by reference to
Exhibit 10.1 to the December 2, 1998 Form 8-K).
10.28++ Stock Purchase Agreement dated November 12, 1998, between Aronex
Pharmaceuticals and Abbott Laboratories (incorporated by reference to
Exhibit 10.2 to the December 2, 1998 Form 8-K).
10.29 Form of Warrant issued on February 23, 1999 for the purchase of an
aggregate of 600,000 shares of common stock (included herein as Exhibit
C to Placement Agency Agreement which is filed herewith as Exhibit
10.46).
10.30+ Employment Agreement dated December 1, 1999 between Aronex
Pharmaceuticals and Anthony Williams, M.D. (incorporated by reference to
Exhibit 10.38 to the December 1999 From 10-K/A).
10.31 Form of Warrant for the purchase of Common Stock, incorporated by
reference to Exhibit 1.2 of the Company's Registration Statement on
Form S-1 (Registration Statement No. 333-67599).
10.32 Amendment No. 4 to License and Development Agreement dated May 21, 1999
by and between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to the June 4, 1999 8-K).
68
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.33 10% Convertible Note dated May 21, 1999 by Aronex Pharmaceuticals made
payable to Genzyme Corporation for $2.5 million (incorporated by
reference to Exhibit 10.2 to the June 4, 1999 8-K).
10.34 Common Stock Purchase Warrant for 50,000 shares of Common Stock of
Aronex Pharmaceuticals issued in the name of Genzyme Corporation
(incorporated by reference to Exhibit 10.3 to the June 4, 1999 8-K).
10.35+ Consulting Agreement dated October 1, 1999 between Aronex
Pharmaceuticals and James R. Butler (incorporated by reference to
Exhibit 10.2 on the September 1999 Form 10-Q).
10.36+ Consulting Agreement dated October 1, 1999 between Aronex
Pharmaceuticals and David J. McLachlan (incorporated by reference to
Exhibit 10.3 on the September 1999 Form 10-Q).
10.37 License Agreement dated December 12, 2000 between Aronex
Pharmaceuticals and Sumitomo Pharmaceuticals Co., Ltd. (incorporated by
reference to Exhibit 10.1 on the December 12, 2000 Form 8-K).
10.38 Common Stock Purchase Agreement dated November 29, 2000 between Aronex
Pharmaceuticals and Acqua Wellington North American Equities Fund, Inc.
(incorporated by reference to Exhibit 10.1 on the November 29, 2000
Form 8-K).
10.39 Finders Agreement dated March 29, 2000 between Aronex Pharmaceuticals
and Paramount Capital, Inc. (incorporated by reference to Exhibit 10.1
on the April 17, 2000 Form 8-K).
10.40*+ Employment Agreement dated June 30, 2000 between Aronex Pharmaceuticals
and Seenu V. Srinivasan, Ph.D.
10.41*+ Employment Agreement dated August 16, 2000 between Aronex
Pharmaceuticals and Michael T. Redman.
11.1 Statement regarding computation of loss per share.
23.1* Consent of Arthur Andersen LLP.
24.1 Power of attorney (included on the signature page of this Registration
Statement).
- ----------
* Filed herewith.
+ Management Contract or Compensatory Plan.
++ Portions of this exhibit have been omitted based upon a request for
confidential treatment pursuant to Rule 24b-2g of the Exchange Act.
Such omitted portions have been filed separately with the Commission.