UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR QUARTER ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-20117
TEXAS BIOTECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3532643
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7000 Fannin, 20th Floor, Houston, Texas 77030
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
(713) 796-8822
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, exclusive of treasury shares, as of the latest practicable date.
<Table>
<Caption>
Class Outstanding at October 31, 2002
----- -------------------------------
common stock, $0.005 par value 43,807,427
</Table>
TEXAS BIOTECHNOLOGY CORPORATION
TABLE OF CONTENTS
<Table>
<Caption>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 1
Consolidated Statements of Operations and Comprehensive Loss for the
three and nine months ended September 30, 2002 and 2001 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 16
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 4: CONTROLS AND PROCEDURES 26
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 26
ITEM 2: Changes in Securities and Use of Proceeds 26
ITEM 3: Defaults Upon Senior Securities 26
ITEM 4: Submission of Matters to a Vote of Security Holders 26
ITEM 5: Other Information 26
ITEM 6: Exhibits and Reports on Form 8-K 26
SIGNATURES 27
CERTIFICATIONS 28
</Table>
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2002 2001
- ------ ------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 19,398 $ 10,086
Short-term investments 27,888 46,465
Accounts receivable 749 655
Other current receivables 507 618
Receivable from related party under collaborative arrangement 231 1,144
Prepaids 1,346 1,350
------------ ------------
Total current assets 50,119 60,318
Long-term investments 27,030 38,876
Equipment and leasehold improvements, net 5,617 4,300
Other assets 788 868
------------ ------------
Total assets $ 83,554 $ 104,362
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 861 $ 2,187
Accrued expenses 4,106 3,902
Obligation under capital leases 10 --
Deferred revenue from related party 1,150 1,159
Deferred revenue from unrelated parties 927 748
------------ ------------
Total current liabilities 7,054 7,996
Liability to related party 2,742 3,533
Deferred revenue from related party 863 1,722
Deferred revenue from unrelated parties 3,251 3,041
Obligation under capital leases 21 --
Deferred credit 2,620 2,620
Minority interest in Revotar 369 1,213
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.005 per share. At September 30, 2002,
and December 31, 2001, 5,000,000 shares authorized;
none outstanding -- --
Common stock, par value $.005 per share. At September 30, 2002
75,000,000 shares authorized; 44,013,373 shares issued
At December 31, 2001, 75,000,000 shares authorized;
43,783,638 shares issued 220 218
Additional paid-in capital 211,863 210,616
Deferred compensation expense (249) --
Treasury stock, 213,000 shares at September 30, 2002, and
December 31, 2001 (1,602) (1,602)
Accumulated other comprehensive loss (91) (299)
Accumulated deficit (143,507) (124,696)
------------ ------------
Total stockholders' equity 66,634 84,237
------------ ------------
Total liabilities and stockholders' equity $ 83,554 $ 104,362
============ ============
</Table>
See accompanying notes to consolidated financial statements
1
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues:
Research agreements $ 827 $ 499 $ 2,654 $ 3,296
Collaborative research and development
from ICOS-TBC, L.P. 286 386 772 1,166
Royalty income, net 676 333 2,481 902
License fees, milestones and grants 616 486 1,717 1,072
------------- ------------- ------------- -------------
Total revenues 2,405 1,704 7,624 6,436
------------- ------------- ------------- -------------
Expenses:
Research and development 5,286 3,776 16,107 11,835
Equity in loss of ICOS-TBC, L.P. 1,838 2,156 6,305 5,926
General and administrative 2,041 1,479 6,803 4,713
------------- ------------- ------------- -------------
Total expenses 9,165 7,411 29,215 22,474
------------- ------------- ------------- -------------
Operating loss (6,760) (5,707) (21,591) (16,038)
Investment income, net 556 1,152 1,936 4,250
------------- ------------- ------------- -------------
Loss before minority interest (6,204) (4,555) (19,655) (11,788)
Minority interest in loss of Revotar 364 266 844 451
------------- ------------- ------------- -------------
Net loss (5,840) (4,289) (18,811) (11,337)
Other comprehensive loss:
Unrealized gain (loss) on
foreign currency translation 64 224 208 (220)
------------- ------------- ------------- -------------
Comprehensive loss $ (5,776) $ (4,065) $ (18,603) $ (11,557)
============= ============= ============= =============
Net loss per common share-
basic and diluted $ (0.13) $ (0.10) $ (0.43) $ (0.26)
============= ============= ============= =============
Weighted average common shares
used to compute basic and diluted
net loss per share 43,798,840 43,607,948 43,719,884 43,658,764
============= ============= ============= =============
</Table>
See accompanying notes to consolidated financial statements
2
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (18,811) $ (11,337)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 831 595
Equity in loss of ICOS-TBC, L.P. 6,305 5,926
Minority interest in loss of Revotar (844) (451)
Expenses paid with stock 257 523
Compensation expense related to stock options 260 63
Loss on disposition of fixed assets -- 6
Change in operating assets and liabilities:
Decrease in interest receivable included in short-term
and long-term investments 284 230
Increase in accounts receivable (94) (89)
Decrease in prepaids 4 449
Decrease (increase) in other current receivables 111 (1,903)
Decrease (increase) in receivable from related party under
collaborative arrangement 913 (170)
Decrease in accounts payable and accrued expenses (1,122) (2,010)
Decrease in liability to related party (7,096) (5,147)
Increase in deferred revenue from unrelated parties 389 1,457
(Decrease) increase in deferred revenue from related party (868) 1,471
------------ ------------
Net cash used in operating activities (19,481) (10,387)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (2,034) (1,629)
Purchase of investments (73,398) (111,980)
Maturity of investments 103,537 88,077
------------ ------------
Net cash provided by (used in) investing activities 28,105 (25,532)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock -- (1,602)
Repayment of capital lease obligations (3) --
Proceeds from sale of common stock and option and
warrant exercises, net 483 20,645
------------ ------------
Net cash provided by financing activities 480 19,043
------------ ------------
Effect of exchange rate changes on cash 208 (220)
------------ ------------
Net increase (decrease) in cash and cash equivalents 9,312 (17,096)
Cash and cash equivalents at beginning of period 10,086 48,470
------------ ------------
Cash and cash equivalents at end of period $ 19,398 $ 31,374
============ ============
Supplemental schedule of noncash financing activities:
Deferred compensation expense $ 249 $ --
Issuance of common stock for expenses 257 523
Acquisition of equipment under capital leases 34 --
============ ============
</Table>
See accompanying notes to consolidated financial statements
3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Texas
Biotechnology Corporation, a Delaware Corporation, and its subsidiaries
(collectively referred to as the "Company" or "TBC") have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("USA") for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information
and notes required by accounting principles generally accepted in the USA for
complete financial statements. It is recommended that these interim condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001. Except as disclosed herein,
there has been no material change in the information disclosed in the notes to
the consolidated financial statements included in the Company's Annual Report on
Form 10-K. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for any other interim period, or for the year ending December 31, 2002.
(2) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
The Company is a biopharmaceutical company focused on the
discovery, development and commercialization of novel synthetic small
molecule compounds for the treatment of a variety of cardiovascular,
vascular and related inflammatory diseases. Since its formation in
1989, the Company has been engaged principally in research and drug
discovery programs and clinical development of certain drug compounds.
On July 25, 1994, the Company acquired all of the outstanding common
stock of ImmunoPharmaceutics, Inc. ("IPI") in exchange for common
stock, par value $.005 per share (the "Common Stock"), of the Company.
On June 6, 2000, TBC, through its wholly owned subsidiary, TBC-ET,
Inc., a Delaware Corporation, and ICOS Corporation, a Delaware
Corporation, ("ICOS") entered into an agreement and formed ICOS-Texas
Biotechnology L.P., a Delaware limited partnership ("ICOS-TBC"), to
develop and globally commercialize endothelin-A receptor antagonists.
TBC and ICOS are both 50% owners in ICOS-TBC. During the third quarter
of 2000, TBC formed Revotar Biopharmaceuticals AG ("Revotar"), a German
corporation, to conduct research and development for novel small
molecule compounds and to develop and commercialize TBC's selectin
antagonists. The Company retained an approximately 55% interest in
Revotar. The Company is presently working on a number of long-term
development projects that involve experimental and unproven technology,
which may require many years and substantial expenditures to complete,
and which may be unsuccessful. Sales of the Company's first product for
which it receives royalty income, Argatroban, began during November
2000.
(b) Basis of Consolidation
The Company's consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries, IPI and TBC-ET,
Inc., and its majority controlled subsidiary, Revotar. All material
intercompany balances and transactions have been eliminated.
(c) Cash, Cash Equivalents, Short-Term Investments and Long-Term
Investments
Cash equivalents are considered to be those securities or
instruments with original maturities, when purchased, of three months
or less. At September 30, 2002, approximately $313,000 was invested in
demand and money market accounts, and approximately $19,085,000 was
invested in
4
corporate commercial paper and loan participations with a maturity of
less than three months. Short-term investments are those investments
which have an original maturity of less than one year and greater than
three months at the purchase date. At September 30, 2002, the Company's
short-term investments consisted of approximately $25,664,000 in
corporate commercial paper and loan participations, $2,000,000 in
government securities, and accrued interest of $224,000. Long-term
investments consist of approximately $16,714,000 in government agency
bonds, $10,101,000 in corporate bonds and loan participations and
$215,000 in accrued interest thereon, all with a remaining maturity of
one year or more. Cash equivalents, short-term and long-term
investments are stated at cost plus accrued interest, which
approximates market value. Interest income is accrued as earned. The
Company classifies all short-term and long-term investments as held to
maturity.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation of furniture
and equipment is provided on the straight-line method over the
estimated useful lives of the respective assets (3 to 10 years).
Amortization of leasehold improvements is provided on the straight-line
method over the remaining minimum lease term.
(e) Investment in ICOS - TBC
The Company accounts for the investment in ICOS-TBC using the
equity method. Because the Company had no basis in the technology
transferred to ICOS-TBC as the Company's original investment, the
Company did not record an amount for its original investment. The
Company records its share of the ICOS-TBC loss as a liability to
related party until the Company funds its portion of the loss.
ICOS-TBC paid a license fee and a milestone payment to the
Company in 2000 and 2001, respectively. Because the Company has
continuing obligations to ICOS-TBC, the Company deferred these amounts
and is amortizing them into revenue over the estimated developmental
period of the underlying technology.
(f) Research and Development Costs
All research and development costs are expensed as incurred
and include salaries of research and development employees, certain
rent and related building services, research supplies and services,
clinical trial expenses and other associated costs. Salaries and
benefits charged to research and development in the three-month periods
ended September 30, 2002 and 2001 were approximately $2,421,000 and
$1,815,000, respectively, and in the nine-month periods ended September
30, 2002 and 2001 were approximately $6,979,000 and $5,177,000,
respectively. Payments related to the acquisition of in-process
research and development, if any, are expensed as incurred.
(g) Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the
net loss applicable to common shares by the weighted average number of
common and common equivalent shares outstanding during the period. For
the three-month periods ended September 30, 2002 and 2001, the weighted
average common shares used to compute basic and diluted net loss per
common share totaled 43,798,840 and 43,607,948 shares, respectively.
Securities convertible into common stock, comprised of stock options
and warrants totaling 5,367,964 and 4,326,812 shares at September 30,
2002 and 2001, respectively, were not used in the calculation of
diluted net loss per common share because the effect would have been
antidilutive.
5
(h) Revenue Recognition
Revenue from service contracts is recognized as services are
performed. Royalty revenue is recognized as products are sold by a
licensee and we have received sufficient information to record a
receivable. The Company defers the recognition of milestone payments
related to contractual agreements which are still in the developmental
stage. Such deferred revenues are amortized into income over the
estimated remaining development period. Milestone payments received
under contractual agreements which have completed the development stage
are evaluated, and either recognized into income when earned, or
amortized over a future period, depending upon whether or not the
Company continues to have obligations under the terms of the
arrangement. License fees received under the terms of licensing
agreements for the Company's intellectual property are similarly
deferred, and amortized into income over the estimated development
period of the licensed item or items. The Company periodically
evaluates its estimates of remaining development periods, and adjusts
the recognition of remaining deferred revenues over the adjusted
development period remaining. Revenue from grants is recognized as
earned under the terms of the related grant agreements, typically as
expenses are incurred. Amounts received in advance of services being
performed under contracts are recorded as deferred revenue, and
recognized as services are performed.
(i) Patent Application Costs
Costs incurred in filing for, defending and maintaining
patents are expensed as incurred.
(j) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements in conformity with
accounting principles generally accepted in the USA. Actual results
could differ from these estimates.
(k) Intangible Assets
Intangible assets, consisting of amounts paid for products
approved by the United States Food and Drug Administration ("FDA"), are
amortized on a straight-line basis over their estimated useful lives.
The Company periodically reviews the useful lives of its intangible and
long-lived assets, which may result in future adjustments to the
amortization periods. Related amortization expense for each of the
three-month periods ended September 30, 2002 and 2001 was $27,000, and
in the nine-month periods ended September 30, 2002 and 2001 was
$80,000. Amortization of intangible assets is included in general and
administrative expense in the consolidated statements of operations and
comprehensive loss.
(l) Treasury Stock
Treasury stock is recorded at cost. On May 3, 2001, the
Company announced a stock repurchase program to buy up to 3 million
shares, or approximately 7 percent, of the Company's outstanding common
stock over an 18 month period. Pursuant to the stock repurchase
program, the Company had repurchased 213,000 shares for $1,602,000
during the year ended December 31, 2001. No shares were repurchased in
the three or nine-month periods ended September 30, 2002. During the
three and nine-month periods ended September 30, 2001, the Company
repurchased 53,000 and 213,000 shares, respectively, at a cost of
approximately $334,000 and $1,602,000, respectively.
(m) Income Taxes
The Company uses the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of
6
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
(n) Impairment of Long-lived Assets
As circumstances dictate, the Company evaluates the
recoverability of its intangible and long-lived assets by comparing the
projected undiscounted net cash flows associated with such assets
against their respective carrying values. Impairment, if any, is based
on the excess of the carrying value over the fair value.
(o) New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," (SFAS143) which
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement applies to all entities that
have legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development or
normal use of the assets. SFAS143 is effective for all fiscal years
beginning after June 15, 2002. The Company does not expect the adoption
of SFAS143 to have a significant impact on its financial condition or
results of operations.
In April 2002, the FASB issued Statement of Financial
Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statements No. 13 and Technical Corrections,"
(SFAS145). SFAS145 provides guidance for income statement
classification of gains and losses on extinguishments of debt and
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. SFAS145 is effective
for the Company in January 2003. The Company does not expect the
adoption of SFAS145 to have a significant impact on its financial
condition or results of operations.
In July 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated With
Exit or Disposal Activities," (SFAS146) which addresses significant
issues regarding the recognition, measurement and reporting of costs
that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to
the guidance set forth in EITF Issue No. 94-3, "Liability Recognition
of Certain Employee Termination Benefits and Other Costs to Exit an
Activity." SFAS146 is effective for the Company in January 2003. The
Company does not expect the adoption of SFAS146 to have a significant
impact on its financial condition or results of operations.
(p) Reclassifications
Certain reclassifications have been made to prior period
financial statements to conform to the September 30, 2002 presentation
with no effect on net loss previously reported.
(3) CAPITAL STOCK
In December 1993, the Company completed an initial public offering
comprised of 4,082,500 units, each unit consisting of one share of Common Stock
(par value $.005 per share) and one warrant to purchase one share of Common
Stock. Proceeds to the Company were approximately $24.2 million, net of selling
expenses of approximately $3.3 million. The securities included in the unit
subsequently separated into its Common Stock and warrant components. The
warrants were exercisable at $8.44 per share. On December
7
13, 1998, the expiration date of the warrants was extended from December 14,
1998 to September 30, 1999 for those warrant holders electing such extension. On
September 13, 1999, the expiration date of the warrants was further extended to
December 31, 2000. There were 2,386,645 warrants outstanding as of December 31,
2000 which were exercised on January 3, 2001 for proceeds of approximately $20.1
million.
The Company has reserved Common Stock for issuance as of September 30,
2002 as follows:
<Table>
Stock option plans ......................... 5,780,451
Warrants outstanding ....................... 246,586
---------
Total shares reserved ................ 6,027,037
=========
</Table>
Our only warrants outstanding at September 30, 2002 include 142,858
warrants issued to Genentech in 1997, and 103,728 warrants granted in 1999 in
connection with consulting services.
Shareholders' Rights Plan
In January 2002, the Company adopted a shareholder rights plan
under which the Board of Directors declared a dividend of one preferred
stock purchase right ("Right") for each outstanding share of the
Company's common stock held of record as of the close of business on
January 22, 2002. Each Right initially entitles a stockholder to
purchase a one one-thousandth fraction of a share of Preferred Stock -
Junior Participating Series A (the "Preferred Stock") for $55.00. Each
such fraction of a share of Preferred Stock has terms designed to make
it essentially equivalent to one share of Common Stock. The Rights will
become exercisable only in the event a person or group acquires 15% or
more of the Company's Common Stock or commences a tender or exchange
offer which, if consummated, would result in that person or group
owning 15% of the Common Stock. Prior to such an event, the Rights will
be evidenced by and traded in tandem with the Common Stock.
If a person or group acquires a 15% or larger position in the
Company, each Right (except those held by the acquiring party) will
then entitle its holder to purchase fractional shares of Preferred
Stock having twice the value of the $55 exercise price, with each
fractional Preferred Share valued at the market price of the Common
Stock. Also, if following an acquisition of 15% or more of the
Company's Common Stock, the Company is acquired by that person or group
in a merger or other business combination transaction, each Right would
then entitle its holder to purchase Common Stock of the acquiring
company having a value of twice the $55.00 exercise price. The effect
will be to entitle the Company's shareholders to buy stock in the
acquiring company at 50% of its market price.
The Company may redeem the Rights at $.001 per Right at any
time on or prior to the tenth business day following the acquisition of
15% or more of its Common Stock by a person or group or commencement of
a tender offer for such 15% ownership. The Rights expire on January 2,
2012.
(4) STOCK OPTIONS
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its plans and applies FASB Statement No. 123, "Accounting for
Stock-Based Compensation", and related interpretations in reporting for its
plans.
8
A summary of stock options as of September 30, 2002, follows:
<Table>
<Caption>
EXERCISE PRICE EXERCISED/ AVAILABLE
STOCK OPTION PLANS PER SHARE AUTHORIZED OUTSTANDING OTHER EXERCISABLE FOR GRANT
------------------ -------------- ------------ ------------ ------------ ------------ ------------
1990 Plan .............. $ 1.38-$21.59 285,715 108,350 177,365 92,520 --
1992 Plan .............. $ 1.41-$21.59 1,700,000 728,973 971,027 676,400 --
Director Plan .......... $ 3.50-$ 4.54 71,429 28,527 42,902 28,527 --
1995 Plan .............. $ 1.31-$21.59 2,000,000 1,581,839 395,133 1,500,438 23,028
1995 Director Plan ..... $ 1.38-$11.31 500,000 386,596 50,578 284,096 62,826
1999 Plan .............. $ 2.29-$20.13 3,000,000 2,287,093 139,688 493,251 573,219
------------ ------------ ------------ ------------ ------------
Totals ........... 7,557,144 5,121,378 1,776,693 3,075,232 659,073
============ ============ ============ ============ ============
</Table>
Pursuant to provisions contained within his employment agreement, in
March 2002 the Company's new chief executive officer purchased 5,000 shares at
market price and was awarded 50,000 shares of the Company's common stock out of
the 1999 Plan. The awarded shares will vest after completion of three years'
service to the Company. The Company recorded deferred compensation expense of
$309,000, which will be recognized over the vesting period. General and
administrative expenses during the three and nine months ended September 30,
2002 included compensation expense related to such grant of approximately
$25,000 and $60,000, respectively.
In conjunction with the retirement of the Company's former chief
executive officer, the Company modified provisions regarding vesting and time to
exercise of certain stock options of the officer and recorded compensation
expense of approximately $173,000, which was included in general and
administrative expenses, during the nine months ended September 30, 2002.
(5) INCOME TAXES
The Company did not incur tax expense during the three and nine-month
periods ended September 30, 2002 and 2001, due to operating losses and the
related increase in the valuation allowance.
The reconciliation of income taxes at the statutory rate of 35% applied
to income before taxes for the three months ended September 30, 2002 and 2001 is
as follows:
<Table>
<Caption>
2002 2001
------------ ------------
Computed "expected" tax expense $ (2,044,000) $ (1,501,000)
Effect of:
Permanent differences 314,000 (409,000)
Increase in valuation allowance 1,730,000 1,910,000
------------ ------------
Tax expense $ -- $ --
============ ============
</Table>
The reconciliation of income taxes at the statutory rate of 35% applied
to income before taxes for the nine months ended September 30, 2002 and 2001 is
as follows:
<Table>
<Caption>
2002 2001
------------ ------------
Computed "expected" tax expense $ (6,583,000) $ (3,969,000)
Effect of:
Permanent differences 593,000 (760,000)
Increase in valuation allowance 5,990,000 4,729,000
------------ ------------
Tax expense $ -- $ --
============ ============
</Table>
9
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets as of September 30, 2002 and
December 31, 2001 are as follows:
<Table>
<Caption>
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Loss carryforwards $ 39,368,000 $ 30,472,000
Start-up costs 8,688,000 10,775,000
Property, plant and equipment 333,000 993,000
Deferred revenue 2,229,000 2,333,000
Other 836,000 891,000
------------ ------------
Gross deferred tax assets 51,454,000 45,464,000
Valuation allowance (51,454,000) (45,464,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</Table>
The Company has established a valuation allowance for the full amount
of these deferred tax assets, as management believes that it is more likely than
not that the Company will not recover these assets. Utilization of the Company's
net operating loss carryforwards is subject to certain limitations due to
specific stock ownership changes which have occurred or may occur. To the extent
not utilized, the carryforwards will expire during the years beginning 2005
through 2022.
(6) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Laboratory and office equipment $ 10,463,000 $ 8,407,000
Leasehold improvements 4,310,000 4,302,000
------------ ------------
14,773,000 12,709,000
Less accumulated depreciation and amortization 9,156,000 8,409,000
------------ ------------
$ 5,617,000 $ 4,300,000
============ ============
</Table>
(7) ENTITY-WIDE GEOGRAPHIC DATA
The Company operates in a single business segment that includes
research and development of pharmaceutical products. The following table
summarizes the Company's long-lived assets in different geographic locations:
<Table>
<Caption>
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Long-lived assets:
United States $ 4,997,000 $ 4,446,000
Germany 1,408,000 722,000
------------ ------------
Total $ 6,405,000 $ 5,168,000
============ ============
</Table>
(8) RESEARCH AGREEMENTS
Under the terms of the Company's agreement with ICOS-TBC, the Company
will provide, and be reimbursed for, research and development activities
conducted on behalf of ICOS-TBC. See Note 9, License Agreements, below.
The Company also receives reimbursement for certain research costs
pursuant to its agreements with Schering-Plough (Note 9), Revotar (Note 10) and
GlaxoSmithKline ("GSK") (Note 11).
10
(9) LICENSE AGREEMENTS
Mitsubishi Pharma Agreement
TBC has entered into an agreement with Mitsubishi Pharma
Corporation, formerly Mitsubishi-Tokyo Pharmaceuticals, Inc.
("Mitsubishi") to license Mitsubishi's rights and technology relating
to Argatroban and to license Mitsubishi's own proprietary technology
developed with respect to Argatroban (the "Mitsubishi Agreement").
Under the Mitsubishi Agreement, the Company has an exclusive license to
use and sell Argatroban in the U.S. and Canada for all specified
indications. The Company is required to pay Mitsubishi specified
royalties on net sales of Argatroban by the Company and its
sublicensees after its commercial introduction in the U.S. and Canada.
Either party may terminate the Mitsubishi Agreement on 60 days notice
if the other party defaults in its material obligations under the
agreement, declares bankruptcy or is insolvent, or if a substantial
portion of its property is subject to levy. Unless terminated sooner
pursuant to the above described termination provisions, the Mitsubishi
Agreement expires on the later of termination of patent rights in a
particular country or 20 years after first commercial sale of products.
Under the Mitsubishi Agreement, TBC has access to an improved
formulation patent granted in 1993 which expires in 2010, a patent on
the manufacturing process to produce Argatroban that expires in 2019,
and a patent for the use of Argatroban as a fibrinolysis-enhancing
agent which expires in 2009. The Mitsubishi composition of matter
patent on Argatroban has expired. During 2000, we signed an additional
agreement with Mitsubishi that provides TBC with royalties on sales of
Argatroban in certain European countries, and up to a total of $5.0
million in milestones for the development of ischemic stroke and
certain other provisions. In conjunction with the Mitsubishi Agreement,
a consulting firm involved in negotiations related to the agreement
will receive a percentage of net sales received as a result of the
agreement. The Company enrolled its first patient in a clinical trial
for ischemic stroke in April 2001, and received a $2.0 million
milestone payment in May 2001, which is being recognized in revenues
over the expected development period, and accordingly, revenues in the
three and nine-month periods ended September 30, 2002 include
approximately $95,000 and $286,000, respectively, related to such
milestone payment. Revenues in the three and nine-month periods ended
September 30, 2001 include approximately $107,000 and $178,000,
respectively, related to such milestone payment.
In exchange for the license from Genentech, Inc, (the "Former
Licensor") of its Argatroban technology, TBC issued the Former Licensor
285,714 shares of Common Stock during 1993 and issued an additional
214,286 shares of Common Stock on October 9, 1997, after acceptance of
the filing of the first New Drug Application ("NDA") with the FDA for
Argatroban. On June 30, 2000, the Company issued an additional 71,429
shares of Common Stock to Genentech in conjunction with the approval of
the NDA for Argatroban in patients with heparin-induced
thrombocytopenia ("HIT"). The value of $965,970 has been recorded as an
intangible asset and is being amortized over the estimated useful life
of the asset. Amortization expense recorded in the three and a
nine-month period ended September 30, 2002 was approximately $27,000
and $80,000, respectively. Additionally, on October 9, 1997, upon
acceptance of the filing of the first NDA for Argatroban with the FDA,
the Company granted the Former Licensor a warrant to purchase an
additional 142,858 shares of Common Stock at an exercise price of
$14.00 per share, subject to adjustment, which expires on October 9,
2004. TBC has also granted the Former Licensor demand and piggyback
registration rights with regard to shares of Common Stock issued to the
Former Licensor.
ICOS Corporation Partnership
On June 6, 2000, ICOS and the Company entered into the
ICOS-TBC limited partnership agreement. The partnership seeks to
develop and globally commercialize ET(A) receptor antagonists. As a
result of the Company's contribution of technology, ICOS-TBC paid a
license fee to the Company in June 2000, and has made a milestone
payment that together with additional milestone payments could be as
much as $53.5 million for the development and commercialization of
products resulting from the collaboration. The license fee is being
amortized over the estimated development period of the licensed
technology, and the Company recognized approximately
11
$121,000 and $363,000 of it as revenue during the three and nine month
periods ended September 30, 2002, and the three and nine month periods
ended September 30, 2001, respectively. See Note 2(h), Revenue
Recognition, above.
Pursuant to the terms of the limited partnership agreement,
ICOS-TBC has been initially capitalized by a cash contribution from
ICOS and the Company's contribution of intellectual property associated
with sitaxsentan sodium. The intellectual property contributed by the
Company to ICOS-TBC had no basis for financial reporting purposes and,
accordingly, the Company assigned no value to the transfer of
technology.
In July 2001, the Company earned a milestone, as a result of
the achievement of an objective defined in the partnership agreement.
The Company is recognizing the revenue associated with the milestone
over the expected development period, and revenues included
approximately $167,000 and $500,000 in the three and nine-month periods
ended September 30, 2002, respectively, and approximately $167,000 in
the three and nine-month periods ended September 30, 2001,
respectively.
During the three month periods ended September 30, 2002 and
2001, the Company recognized a loss of approximately $1,838,000 and
$2,156,000, respectively, representing the Company's proportionate
share of the losses of ICOS-TBC, including amounts billed by the
Company to ICOS-TBC as discussed in Note 8, Research Agreements, above.
During the nine-month periods ended September 30, 2002 and September
30, 2001, such losses recognized by the Company totaled $6,305,000 and
$5,926,000, respectively.
Schering-Plough Research Collaboration and License Agreement
On June 30, 2000, TBC and Schering-Plough ("Schering") entered
into a worldwide research collaboration and license agreement to
discover, develop and commercialize VLA-4 antagonists. VLA-4
antagonists represent a new class of compounds that has shown promise
in multiple preclinical animal models of asthma. The primary focus of
the collaboration will be to discover orally available VLA-4
antagonists as treatments for asthma.
Under the terms of the agreement, Schering obtains the
exclusive worldwide rights to develop, manufacture and market all
compounds from TBC's library of VLA-4 antagonists, as well as the
rights to a second integrin antagonist. TBC will be responsible for
optimizing a lead compound and additional follow-on compounds. Schering
is supporting research at TBC and will be responsible for all costs
associated with the worldwide product development program and
commercialization of the compound. In addition to reimbursing research
costs, Schering paid an upfront license fee and will pay development
milestones and royalties on product sales resulting from the agreement.
This upfront license fee is being amortized into revenue over the
expected development period. License fees, milestones and grants in the
three and nine-month periods ended September 30, 2002 included
approximately $91,000 and $274,000, respectively, related to this
upfront license fee. During the three and nine month periods ended
September 30, 2001, the Company recognized revenues of approximately
$92,000 and $364,000 related to this license fee, respectively.
In June 2002, the Company achieved a milestone under the
agreement with Schering as a result of the nomination of an initial
candidate for Schering's further development. This milestone payment
will be recognized into revenue over the expected development period.
License fees, milestones and grants for the three and nine-month
periods ended September 30, 2002 included approximately $45,000 and
$60,000 related to this milestone payment, respectively. Total payments
to TBC under the terms of the agreement, excluding royalties, could
reach $87.0 million. Additionally, in June 2002, Schering and the
Company agreed to extend Schering's support of the research
collaboration to a third year, through June 30, 2003.
12
(10) FOREIGN SUBSIDIARY
During the third quarter 2000, TBC formed Revotar to conduct research
and development of novel small molecule compounds and to develop and
commercialize selectin antagonists. Upon formation, Revotar received certain
development and commercialization rights to the Company's selectin antagonist
compounds as well as rights to certain other TBC research technology. Revotar
also received approximately $5 million in funding from three German venture
capital funds. The Company retained ownership of approximately 55% of the
outstanding common stock of Revotar and has consolidated the financial results
of Revotar into TBC's consolidated financial statements. Since the development
and commercialization rights contributed by the Company to Revotar had no basis
for financial reporting purposes, the Company assigned no value to its
contribution of intellectual property rights. The Company's equity in the
originally contributed assets by the minority shareholders is reported as a
deferred credit of $2,620,000 on its consolidated balance sheet at September 30,
2002 and December 31, 2001. The minority interest in Revotar at September 30,
2002 and December 31, 2001, was $369,000 and $1,213,000, respectively. The
Company's consolidated net loss for the three month periods ended September 30,
2002 and 2001 was reduced by $364,000 and $266,000, respectively, for the
Revotar minority shareholders' interest in Revotar's losses. The Company's
consolidated net loss for the nine-month periods ended September 30, 2002 and
2001 was reduced by $844,000 and $451,000, respectively.
Revotar has been awarded research grants from the German government,
and earned approximately $97,000 and $234,000 during the three and nine months
ended September 30, 2002, respectively, which is included in license fees,
milestones and grants.
The Company and the other stockholders of Revotar have executed an
agreement to provide approximately $4.5 million in unsecured loans, of which the
Company's commitment will be approximately $3.4 million. The terms of the loans
require quarterly interest payments and repayment of all principal on or before
April 1, 2007. The interest rate for the first two years will be seven percent,
after which the interest rate could then be reset to the U.S. prime rate plus
2.5 percent if such rate is higher than seven percent. Pursuant to such
agreement, the Company advanced approximately $700,000 to Revotar in June 2002,
and approximately $500,000 in October 2002.
As part of the agreement to form Revotar, the Company and the other
initial investors agreed to issue rights to purchase common stock of Revotar
held by them to Aqua Partners LLC ("Aqua"), which assisted in the formation of
Revotar. The shareholders have signed an agreement that provides Aqua with the
option to acquire up to 3.26% of the shares owned by each shareholder for a
total amount of approximately $540,000, payable to the shareholders.
(11) COMMERCIALIZATION AGREEMENT
In connection with TBC's development and commercialization of
Argatroban, in August 1997, TBC entered into a Product Development, License and
CoPromotion Agreement with GSK (the "GSK Agreement") whereby GSK was granted
exclusive rights to work with TBC in the development and commercialization of
Argatroban in the U.S. and Canada for specified indications. GSK paid $8.5
million in upfront license fees during August 1997, a $5 million milestone
payment in October 1997, and a $7.5 million milestone payment in June 2000.
Additional milestone payments may be earned upon the clinical development and
FDA approval for the acute myocardial infarction indication. Future milestone
payments for the acute myocardial infarction indication are subject to GSK's
agreement to market Argatroban for such indication. The parties have also formed
a joint development committee to analyze the development of additional
Argatroban indications to be funded 60% by GSK except for certain Phase IV
trials which shall be funded entirely by GSK. At this time, GSK has no plans to
conduct development work for the acute myocardial infarction and stroke
indications. TBC began a Phase II clinical trial in March 2001 to evaluate the
use of Argatroban for ischemic stroke, and announced preliminary results in
October 2002. GSK has the exclusive right to commercialize all products arising
out of the collaboration, subject to the obligation to pay royalties on net
sales to TBC and to the rights of TBC to co-promote these products through its
own sales force in certain circumstances. TBC will retain the rights to any
indications which GSK determines it does not wish to pursue (such as ischemic
stroke), subject to the requirement that TBC must use its own sales force to
commercialize any such indications. Any indications which TBC elects not to
pursue will be
13
returned to Mitsubishi. In conjunction with the GSK Agreement, a consulting firm
involved in negotiations related to the agreement will receive a percentage of
all consideration received by TBC as a result of the agreement.
We currently market Argatroban and enjoy market exclusivity pursuant to
the Waxman/Hatch Act that provides protection from competition until June 30,
2005. We can obtain an extension under Waxman/Hatch until December 31, 2005
under certain circumstances pertaining to submission of pediatric data.
Argatroban is currently marketed in a formulation that is covered under a
formulation patent that expires in 2010. We will also be submitting a process
patent, that expires in 2019, to the FDA for inclusion in the FDA Orange Book of
Approved Drug Products. Following expiration of Waxman/Hatch protection, it is
possible that generic manufacturers may be able to produce Argatroban without
violating the formulation or process patents. The composition of matter patent
on Argatroban has expired. We have access to other patents held by Mitsubishi,
however, these are not being utilized currently.
At present, Mitsubishi is the only manufacturer of Argatroban, and has
entered into the Mitsubishi Supply Agreement with GSK to supply Argatroban in
bulk in order to meet GSK and TBC's needs under the GSK Agreement. Should
Mitsubishi fail during any consecutive nine-month period to supply GSK at least
80% of its requirements, and such requirements cannot be satisfied by existing
inventories, the Mitsubishi Supply Agreement provides for the nonexclusive
transfer of the production technology to GSK. If GSK cannot commence
manufacturing of Argatroban or alternate sources of supply are unavailable or
uneconomic, the Company's results of operations would be materially and
adversely affected.
The GSK Agreement generally terminates on a country by country basis
upon the earlier of the termination of TBC's rights under the Mitsubishi
Agreement, the expiration of applicable patent rights or, in the case of royalty
payments, the commencement of substantial third-party competition. GSK also has
the right to terminate the agreement on a country by country basis by giving TBC
at least three months written notice at any time before GSK first markets
products in that country based on a reasonable determination by GSK that the
commercial profile of the product in question would not justify continued
development in that country. GSK has similar rights to terminate the GSK
Agreement on a country by country basis after marketing has commenced. In
addition, either party may terminate the GSK Agreement on 60 days notice if the
other party defaults in its obligations under the agreement, declares bankruptcy
or is insolvent.
(12) 401(k) PLAN
The Company has a 401(k) plan under which all employees with three
months of service are eligible to participate and may contribute up to 60
percent of their compensation, with a maximum contribution of $11,000 per
employee in 2002. Under the terms of the Economic Growth and Tax Relief
Reconciliation Act, employees aged 50 or older may contribute an additional
$1,000 to the 401(k) Plan in 2002, such additional contribution would be
eligible for employer matching. Effective on January 1, 2001, the Compensation
and Personnel Committee of the Board of Directors approved an employer matching
contribution of $0.50 on the dollar of employee contributions up to 6% of
salaries and the 401(k) plan was amended. Charges to operating expense for
employer match during the three-month periods ended September 30, 2002 and 2001
were approximately $52,000 and $42,000, respectively. During the nine-month
periods ended September 30, 2002 and 2001, charges to operating expense for
employer match were $155,000 and $126,000, respectively.
(13) COMMITMENTS AND CONTINGENCIES
(a) Foreign Currency Exchange Risk
The Company is exposed to market risk primarily from changes
in foreign currency exchange rates.
The Company has a majority-owned subsidiary in Germany and
consolidates the results of operations into its consolidated financial
results. Although not significant to date, the Company's
14
reported assets, liabilities, expenses and cash flows from this
subsidiary are exposed to changing exchange rates. The Company,
accordingly, included unrealized gains of $64,000 and $224,000,
respectively, in its comprehensive loss for the three-month periods
ended September 30, 2002 and 2001. In the nine-month periods ended
September 30, 2002 and 2001, the Company's comprehensive loss included
an unrealized gain of $208,000 and an unrealized loss of $220,000,
respectively. The Company had an intercompany receivable from its
German subsidiary at September 30, 2002; however, this amount is
denominated in U.S. dollars and is not exposed to exchange risk. The
Company contracts with entities in other areas outside the U.S. and
these transactions are denominated in a foreign currency. To date, the
currencies of these other countries have not fluctuated materially. At
this time, management has not deemed it cost effective to engage in a
program of hedging the effect of foreign currency fluctuations on the
Company's operating results using derivative financial instruments.
(b) Obligation under Capital Leases
In June 2002 the Company entered into a lease of certain
equipment under an agreement that is classified as a capital lease. The
cost of equipment under capital leases is included in the balance
sheets as equipment and leasehold improvements, and was $34,000 at
September 30, 2002. Accumulated amortization of the leased equipment at
September 30, 2002 was approximately $3,000. Amortization of assets
under capital leases is included in depreciation and amortization
expense.
The future minimum lease payments required under the capital
lease and the present value of the net minimum lease payments as of
September 30, 2002, are as follows:
<Table>
<Caption>
YEAR ENDING
DECEMBER 31 AMOUNT
----------- -----------
2002 $ 4,000
2003 14,000
2004 14,000
2005 4,000
-----------
Total minimum lease payments 36,000
Less: Amount representing interest (5,000)
-----------
Present value of minimum lease payments 31,000
Less: Current maturities of capital lease obligations (10,000)
-----------
Long-term capital lease obligations $ 21,000
===========
</Table>
(c) Legal Proceedings
The Company is presently involved in several legal actions,
none of which are expected to have a material adverse effect upon the
results of operations or financial condition of the Company when
considered either individually or in the aggregate.
15
ITEM 2
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
OVERVIEW
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes to the financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2001, and our
condensed consolidated financial statements and the related notes to the
financial statements included in this Quarterly Report on Form 10-Q.
Since our inception in 1989, we have primarily devoted our resources to
funding drug discovery, research and development. We are a biopharmaceutical
company focused on the discovery, development and commercialization of novel,
synthetic, small molecule compounds for the treatment of a variety of
cardiovascular, vascular and related inflammatory diseases. Our research and
development programs are focused on inhibitors (also referred to as antagonists
or blockers) that can interrupt certain disease processes. Our programs seek to
address unmet medical needs in cardiovascular diseases, thrombocytopenia,
pulmonary arterial hypertension, heart failure and inflammatory diseases such as
asthma.
Our strategy is to identify and develop novel product candidates for
underserved indications, and to commercialize those candidates through
collaborations with other pharmaceutical and biotechnology companies. On
occasion in the future, we may choose to commercialize products on our own. An
important part of our strategy is the selection of corporate partners to enhance
our drug discovery and development efforts. Our partners and we currently have
four products in clinical development.
MAJOR COMPOUNDS IN RESEARCH AND DEVELOPMENT PROGRAMS
ARGATROBAN
Argatroban was approved by the FDA in 2000, is indicated for
prophylaxis or treatment of thrombosis in patients with HIT and began shipping
in November 2000. A key element of our continuing development strategy is to
expand the uses of Argatroban. GSK is our development, manufacturing and
marketing partner for Argatroban. In April 2002, we received approval from the
FDA on our supplemental new drug application for Argatroban for use in HIT
patients undergoing percutaneous coronary intervention (PCI.) We are evaluating,
in conjunction with GSK, the use of Argatroban in hemodialysis patients. We have
recently completed patient enrollment in a Phase II clinical trial, conducted in
conjunction with GSK, for the use of Argatroban in patients undergoing PCI.
Argatroban will be evaluated in combination with t-PA as a new approach
to the treatment of acute ischemic stroke by the University of Texas Medical
School in Houston. The trial will be funded by the National Institute of
Neurological Disorders and Stroke at the National Institutes of Health (NIH).
Initial top line results for ARGIS-1, a Phase II multi-center trial
designed to assess the safety and efficacy of two doses of Argatroban, compared
to placebo, within 12 hours of the onset of a stroke, showed that Argatroban met
the primary endpoint, with no statistical difference in symptomatic intracranial
hemorrhage rates between Argatroban and placebo. Positive results were also
observed for the secondary safety endpoint, asymptomatic intracranial
hemorrhage. While the ARGIS-1 trial was powered only to determine the safety of
Argatroban, traditional neurologic assessments were also evaluated at intervals
up
16
to 90 days. Based on the preliminary analysis at 90 days, there were no
statistically significant effects or major trends observed in the measures used
to determine efficacy. A full analysis of the trial is underway to determine
whether there were any meaningful efficacy trends in specific patient sub
groups, stroke types and/or treatment windows. In light of a lack of an overall
efficacy trend, and the high risk and high costs associated with stroke trials,
it is unlikely that we will proceed independently with a full Phase III program.
If the sub group analyses demonstrate potential efficacy in a defined patient
population, we plan to pursue alternative means to fund further clinical
development.
SITAXSENTAN
In June 2000, we established ICOS-TBC, a 50/50-owned limited
partnership with ICOS, to develop and commercialize endothelin receptor
antagonists, including sitaxsentan and TBC3711. During 2001, we initiated
STRIDE, a pivotal phase IIb/III clinical trial for pulmonary arterial
hypertension ("PAH"), which completed enrollment in July 2002. The primary
endpoint of the STRIDE trial was change in percent of predicted peak VO2 from
baseline to week 12. The results showed a statistically significant improvement
for the 300 mg dose group compared with placebo treatment (7% relative
improvement). The primary endpoint was not statistically significant for the 100
mg dose group. A secondary endpoint was change in six-minute walk distance from
baseline to week 12. The results showed a significant improvement for both the
sitaxsentan 100 mg and 300 mg groups, compared with placebo treatment (9%
relative improvement). The six-minute walk test is the most widely used efficacy
test for drugs treating PAH. NYHA class improvement, another important measure
that reflects limitations in physical activity, was also statistically
significant for the sitaxsentan 100 mg and 300 mg dose groups compared with
placebo treatment. The most frequent adverse events that occurred in patients
receiving sitaxsentan, and were more common than in placebo-treated patients,
were headache, peripheral edema, nausea, nasal congestion and prolonged clotting
time.
Patients completing the above trial had been eligible to enroll in an
extension trial for the purpose of obtaining long-term safety data, for a
maximum of 55 weeks exposure to sitaxsentan in both studies combined. Liver
abnormalities have previously been recognized as complications related to the
endothelin antagonist class of drugs. Liver abnormalities in the STRIDE trial
were defined as elevated serum aminotransferase values that were more than three
times normal. Incidences of liver abnormalities, which reversed in all cases,
were approximately 2% for the placebo group, 0% for the sitaxsentan 100 mg group
and 10% for the sitaxsentan 300 mg group. When data from the STRIDE trial are
combined with data from the extension trial, the incidences of liver
abnormalities, which were all reversible, were 5% for the sitaxsentan 100 mg
dose group and 21% for the sitaxsentan 300 mg dose group. Although all liver
injury in the current trials has been reversible, the partnership decided, as a
precaution, to conclude the extension trial.
We expect to meet with the FDA over the next two to three months to
discuss the next steps for sitaxsentan.
TBC3711
TBC3711 is our second oral endothelin A receptor selective antagonist
to enter clinical development. Endothelin receptor antagonists are believed to
be potentially effective in the treatment of a variety of diseases where the
regulation of vascular constriction and tone is important. Two Phase I clinical
studies of TBC3711 were completed in year 2001 to determine the safety and
tolerability of TBC3711. At this time, there are no plans to take TBC3711 into
Phase II clinical trials.
BIMOSIAMOSE (TBC1269)
We are developing a selectin antagonist, TBC1269, for the treatment of
asthma and psoriasis. The intravenous form of the drug has been tested in Phase
II clinical trials. During 2000, we formed Revotar, a majority owned German
subsidiary located in Berlin, to further the development of this product. During
2001, Revotar completed Phase I clinical trials for asthma utilizing an inhaled
form of TBC1269 and a
17
Phase IIa clinical trial in psoriasis has been conducted with an injectable form
of TBC1269 as a proof-of-concept. Revotar is conducting a Phase IIa trial for
bimosiamose as an inhaled therapy for asthma.
Revotar also announced, in August 2002, results of Phase I studies,
using a single dose of the inhaled formulation of bimosiamose in 48 healthy
volunteers. There were no serious adverse effects and detectable plasma levels
were achieved at the higher dose levels. A maximum tolerated dose of 140 mg was
also achieved. In a double-blind, multiple dose, Phase I safety study,
bimosiamose was administered by inhalation twice a day for seven days using
several dose levels ranging from eight to 70 mg. As in the previous study, there
were no serious adverse events, and the upper dose, which resulted in systemic
exposure, was also well tolerated and well characterized.
VLA-4 ANTAGONIST PROGRAM
We are developing, in collaboration with Schering, a VLA-4 antagonist
for the treatment of asthma. In June 2002, we achieved a milestone under the
Schering agreement as a result of the nomination of an initial candidate for
Schering's further development.
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
o We recognize revenue from service contracts as services are
performed.
o Royalty revenue is recognized as products are sold by a
licensee and we have received sufficient information to record
a receivable. Our royalty revenue is based on net sales of
product, that is, sales net of discounts, returns and
allowances. We have estimated a percentage of gross sales,
based on recent experience, as an allowance for future
returns, however there can be no assurance that our estimate
will be accurate.
o Revenue from collaborative research and development activities
is recognized as services are performed.
o We defer the recognition of milestone payments related to
contractual agreements which are still in the developmental
stage. Such deferred revenues are amortized into income over
the estimated remaining developmental period. Milestone
payments received under contractual agreements which have
completed the developmental stage are evaluated, and either
recognized into income when earned, or amortized over a future
period, depending upon whether or not the Company continues to
have obligations under the terms of the arrangement.
o License fees received under the terms of licensing agreements
for our intellectual property are similarly deferred, and
amortized into income over the estimated developmental period
of the licensed item or items.
o Revenue from grants is recognized as earned under the terms of
the related grant agreements, typically as expenses are
incurred.
Amounts received in advance of services being performed under contracts
are recorded as deferred revenue, and recognized as services are performed. We
periodically evaluate our estimates of remaining development periods, and adjust
the recognition of remaining deferred revenues over the adjusted development
period remaining.
Partnership Accounting
We recognize our share of the operating results of ICOS-TBC in
proportion to our ownership interest and record it as equity in loss of
ICOS-TBC. Operating results of ICOS-TBC include expenses related to our internal
research staff that we recognize as revenue and record as collaborative research
and development revenue from ICOS-TBC. Due to the nature of the ICOS-TBC
collaborative agreement, our collaborative research and development revenue from
ICOS-TBC largely depends on the continued
18
progression of clinical trial and development activities, and can be expected to
vary from quarter to quarter and year to year.
Stock Options
We apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations ("APB 25") in accounting
for our stock option plans and apply FASB Statement No. 123, "Accounting for
Stock-Based Compensation", and related interpretations ("SFAS 123") in reporting
for our stock option plans. APB 25 utilizes the "intrinsic value" of stock
options, defined as the difference between the exercise price of an option and
the market price of the underlying share of common stock, on the "measurement
date" which is generally the date of grant. Since the exercise price of employee
stock options issued under our plans is set to match the market price of our
common stock, there is generally no compensation expense recognized upon grant
of employee stock options. Options granted to non-employees, if any, are valued
at the "fair value" of the option as defined by SFAS 123, utilizing the
Black-Scholes option pricing model. We recorded compensation expense for the
"fair value" of options granted to non-employees.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period.
Commitments and Contingencies
We are currently involved in certain legal proceedings as discussed in
"Commitments and Contingencies" in the Notes to Consolidated Financial
Statements. We do not believe these legal proceedings will have a material
adverse effect on our consolidated financial position, results of operations or
cash flows. If an unfavorable ruling were to occur in any quarterly period,
however, there exists the possibility of a material impact on that period.
GENERAL
Our operating results have fluctuated significantly during each
quarter, and we anticipate that such fluctuations, which are largely
attributable to varying research and development commitments and expenditures,
will continue for the next several years.
We have been unprofitable to date and expect to incur substantial
operating losses for the next several years as we invest in product research and
development, preclinical and clinical testing and regulatory compliance. We may
initiate certain commercial activities in the future, which could contribute to
future operating losses. We have sustained net losses of approximately $143.5
million from the date of our inception to September 30, 2002. We have primarily
financed our operations to date through a series of private placement and public
offerings of our common stock and several collaborative agreements with third
parties to jointly pursue product research and development. See discussion of
"Liquidity and Capital Resources" below. See also "Additional Risk Factors" in
Item 1 "Business" of our Annual Report on Form 10-K for the year ended December
31, 2001.
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
Revenues in the quarter ended September 30, 2002 increased
approximately $701,000, compared with the quarter ended September 30, 2001. In
the nine months ended September 30, 2002, revenues increased approximately
$1,188,000, compared with the nine months ended September 30, 2001. The increase
is attributable to increased royalty income earned on sales of Argatroban and
increased license
19
fees, milestones and grants, partially offset by reduced research and
development revenues, discussed below.
Royalties earned on sales of Argatroban were $676,000 in the third
quarter of 2002, an increase of $343,000 over the third quarter of 2001. In the
nine months ended September 30, 2002, royalties were $2,481,000, an increase of
$1,579,000 over the nine months ended September 30, 2001. We earn royalties
based upon sales by GSK to drug wholesalers. Sales to wholesalers should, over
time, reflect consumption of Argatroban in hospital procedures, however
fluctuation from quarter to quarter may occur, reflecting increases or decreases
in wholesaler inventory levels. In October 2002, GSK initiated a broad-based HIT
disease education media campaign designed to increase awareness of HIT, the
life-threatening reaction to heparin for which Argatroban is approved. As
medical education is key to growing Argatroban sales in HIT, we believe this
initiative, along with increased direct selling efforts, are likely to have a
positive impact on Argatroban sales.
Collaborative research and development revenues received from the
ICOS-TBC partnership declined approximately $100,000 in the third quarter of
2002, compared with the third quarter of 2001, and approximately $394,000 in the
nine months ended September 30, 2002 compared with the nine months ended
September 30, 2001. The involvement of the Company's research and development
staff will vary from quarter to quarter, depending upon the activities being
performed.
Research agreement revenues, resulting from the Company's collaborative
efforts with unrelated parties, increased $328,000 in the third quarter of 2002,
compared with the third quarter of 2001, and declined approximately $642,000 in
the comparable nine month periods. Research agreement revenues in the third
quarter of 2001 were negatively affected by the termination of the Company's
agreement with LG Chemical. The Company's research and development activity
conducted under the Schering agreement during the three and nine months ended
September 30, 2002, has declined, compared with the three and nine months ended
September 30, 2001. Most of the Company's efforts toward development of an
initial candidate for clinical development had been completed late in year 2001.
As discussed above, we achieved a milestone under the Schering agreement as a
result of the nomination of an initial candidate for Schering's further
development in the second quarter of 2002.
License fees, milestones and grants increased $130,000 and $645,000 in
the three and nine month periods ended September 30, 2002, respectively. Revotar
has been awarded research grants from the German government, and earned
approximately $97,000 and $234,000 during the three and nine months ended
September 30, 2002, respectively. In addition to the grant revenues received by
Revotar, the increase in license fees, milestones and grants in the nine-months
ended September 30, 2002 was primarily comprised of revenues related to the
milestone payment received from Mitsubishi in May 2001, the milestone payment
received from ICOS in July 2001, and the milestone payment received from
Schering in June 2002. See Note 9 to the Consolidated Financial Statements.
Total research and development expenses (including the Company's share
of expenses incurred by the ICOS-TBC partnership) were $7,124,000 in the third
quarter of 2002, an increase of $1,192,000 over the comparable amount in the
third quarter of 2001. In the nine months ended September 30, 2002, total
research and development expenses were $22,412,000, an increase of $4,651,000
compared with the nine months ended September 30, 2001. The increase is
primarily due to costs of clinical trials which began to incur significant
expenses early in year 2002 and were ongoing throughout the periods ended
September 30, 2002. Trials ongoing during the first nine months of 2002 include
a Phase II study of Argatroban in ischemic stroke, a Phase II study of
Argatroban in patients undergoing PCI, and a Phase IIb/III trial of sitaxsentan
for pulmonary hypertension, conducted by the ICOS-TBC partnership. All of these
trials are now complete and the results are being analyzed.
General and administrative expenses in the third quarter of 2002 were
$2,041,000, an increase of $562,000 over the third quarter of 2001. In the
comparable nine-month periods, general and administrative expenses increased
$2,090,000. The increase during the 2002 periods is primarily comprised of
additional selling and marketing support of Argatroban and increased costs at
Revotar. Revotar began operation late in year 2000, however only minimal
activity was conducted at Revotar until the second half of year 2001.
20
The nine-months ended September 30, 2002 also included the effect of costs
associated with the retirement, recruiting and hiring of key personnel,
including a non-cash charge in the first quarter of 2002 of approximately
$182,000 in compensation expense primarily related to modifications to stock
options of our retired CEO.
Investment income declined to $556,000 in the third quarter of 2002,
and to $1,936,000 in the nine months ended September 30, 2002, compared with
$1,152,000 in the third quarter of 2001 and $4,250,000 in the nine months ended
September 30, 2001. The decline is primarily due to a combination of lower
prevailing interest rates during 2002 compared with 2001 and to reduced funds
available for investment during the periods ended September 30, 2002.
In the quarter ended September 30, 2002, we reported a net loss of
$5,840,000, or $0.13 per share, basic and diluted. The comparable net loss in
the quarter ended September 30, 2001 was $4,289,000, or $0.10 per share. The
increased loss in the current quarter, compared to the quarter ended September
30, 2001, is primarily due to higher research and development costs, increased
general and administrative expenses, and lower investment income, as discussed
above.
In the nine months ended September 30, 2002, we reported a net loss of
$18,811,000, or $0.43 per share, as compared with a net loss of $11,337,000 or
$0.26 per share in the nine months ended September 30, 2001. The increased loss
during the current year period is due to higher research and development costs,
increased general and administrative expenses, and lower investment income, as
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our research and development activities and other
operations primarily through public and private offerings of our common stock
and from funds received through our collaborations, research agreements and
partnerships. We also have received royalty revenue from sales of Argatroban. We
have not conducted any offerings in 2002, and have relied on our cash balances
from prior offerings and our revenues to fund operations, with the result that
our cash balance has decreased in 2002.
Cash, cash equivalents and investments in marketable securities,
including accrued interest thereon, was $74,316,000 at September 30, 2002,
compared with $95,427,000 at December 31, 2001. We used $19,481,000 in cash in
operating activities during the nine months ended September 30, 2002, compared
to cash used in operating activities of $10,387,000 during the nine months ended
September 30, 2001. The increased use of cash in the current year period is due
to higher operating expenses and reduced investment income, compared with the
nine months ended September 30, 2001, as discussed above.
Investing activities generated $28,105,000 during the nine months ended
September 30, 2002, compared to a use of cash of $25,532,000 in the nine months
ended September 30, 2001. In the nine months ended September 30, 2002, a decline
in investments in marketable securities occurred as cash from matured
investments was consumed in or set aside for our operating activities. In the
nine months ended September 30, 2001, invested funds increased, primarily
because of the investment of the proceeds received upon the exercise of public
warrants in January 2001, discussed below.
Financing activities generated $480,000 during the nine months ended
September 30, 2002, from the exercise of stock options and the sale of stock at
market price to the Company's new CEO, pursuant to his employment agreement. In
the nine months ended September 30, 2001, we received proceeds of approximately
$20,593,000 upon the exercise of public and non-public common stock purchase
warrants, and approximately $52,000 from the exercise of stock options.
Material Commitments
Our only material contractual commitments are comprised of a loan
commitment to Revotar and office and laboratory facility leases. We and the
minority shareholders of Revotar have committed to lend
21
Revotar, on an unsecured basis, approximately $4.5 million, of which our
commitment will be approximately $3.4 million. The terms of the loans require
quarterly interest payments and repayment of all principal on or before April 1,
2007. Our portion of the loan is denominated in U.S. dollars at an interest rate
of seven percent fixed for the first two years and resets to the greater of
seven percent or U.S. prime plus two and one-half percent on April 1, 2004. In
June 2002, approximately $700,000 was advanced to Revotar pursuant to the loan
agreement, and an additional $500,000 was advanced in October 2002. Revotar will
need to seek additional funding through collaborative arrangements and/or
through public or private financings in the future. If they are not successful
in obtaining such funding, Revotar will be unable to repay our loans. A likely
result of additional financings would be to reduce our ownership percentage
in Revotar.
The Company had long-term obligations under our office and laboratory
leases as follows (in thousands):
<Table>
<Caption>
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
----------------------- ----------- ----------- ----------- ----------- -----------
Operating Leases $ 7,826 $ 1,617 $ 3,573 $ 2,636 --
Capital Leases 31 10 21 -- --
</Table>
Outlook for 2002
We expect revenues in year 2002 to be in the range of $8.5 million to
$11 million, including royalties on Argatroban sales, reimbursements from
collaborative partners of research and development expenses, research
reimbursements from ICOS-TBC for the development of endothelin antagonist
products, and amortization of earned license fees and milestones. We expect net
sales of Argatroban by GSK to be in the range of $22 million to $26 million. We
believe investment income will be in the range of $1.8 million to $2.5 million,
depending upon prevailing interest rates and invested balances.
Expenses in year 2002 are expected to be between $41 million and $44
million. The expected increase over year 2001 expenses is primarily in the area
of clinical development and reflects the Company's efforts to expand the use of
Argatroban in ischemic stroke and PCI, demonstrate the safety and efficacy of
sitaxsentan as a treatment of PAH, advance the development of TBC3711 and
continue development work of TBC1269 as a treatment for asthma and other
indications.
For a number of reasons discussed elsewhere in this Form 10-Q, we
cannot estimate, with a reasonable degree of certainty, total completion costs
or dates of completion of our ongoing research and development projects. See
"Additional Risk Factors" in Item 1, "Business" of our annual report on Form
10-K for the year ended December 31, 2001, and "Longer-Term Outlook", below.
Below is a summary of our ongoing research and development projects,
and an estimation of the distribution of our year 2002 research and development
expenditures for each of them.
<Table>
<Caption>
Research and Development Programs 2002 R&D Expenditures
--------------------------------- ---------------------
Argatroban 19%
Endothelin Antagonist 32%
(sitaxsentan and TBC3711)
Selectin Antagonist (TBC1269) 9%
VCAM/VLA-4 12%
Early Stage Research 28%
-----------
Total 100%
</Table>
22
Longer-Term Outlook
We expect to continue to incur substantial expenditures related to the
discovery, development and commercialization of small molecule drugs to treat
significant unmet medical needs. For example:
o We expect to incur significant expenses in conjunction with
the ICOS-TBC partnership for endothelin antagonists associated
with clinical trial costs for sitaxsentan and research and
clinical trial costs for development of TBC1269 compounds and
expect to begin to incur costs for clinical trials related to
additional compounds. These costs include:
- hiring personnel to direct and carry out all
operations related to clinical trials;
- hospital and procedural costs;
- services of a contract research organization; and
- purchasing and formulating large quantities of the
compound to be used in such trials.
o There will be additional costs in future periods related to
Argatroban in complying with ongoing FDA requirements and
possible clinical trial expenditures for additional
therapeutic indications.
We have been unprofitable to date and expect to incur operating losses
for the next several years as we invest in product research and development,
preclinical and clinical testing and regulatory compliance. We will require
substantial additional funding to complete the research and development of our
product candidates, to establish commercial scale manufacturing facilities, if
necessary, and to market our products. Estimates of our future capital
requirements will depend on many factors, including:
o market acceptance and commercial success of Argatroban;
o expenses and risks associated with clinical trials to expand
the use of Argatroban;
o possible emergence of generic competition;
o continued scientific progress in our drug discovery programs;
o the magnitude of these programs;
o progress with preclinical testing and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs involved in filing, prosecuting and enforcing patent
claims;
o competing technological and market developments and changes in
our existing research relationships;
o our ability to maintain and establish additional collaborative
arrangements; and
o effective commercialization activities and arrangements.
Subject to these factors, we anticipate that our existing capital
resources and other revenue sources, should be sufficient to fund our cash
requirements through 2004. We anticipate that we may need to secure additional
funds to continue the required levels of research and development to reach our
current long-term goals. We intend to seek such additional funding through
collaborative arrangements and/or through public or private financings, if
required. There can be no assurances that such funding will be available on
acceptable terms. As we review our research and development programs, we may
also consider various measures to reduce our costs in order to effectively
utilize our capital resources.
23
Off-Balance Sheet Arrangements
We do not engage in off-balance sheet financing arrangements; however
we are obligated to fund our proportionate share (50%) of any contractual
obligations of ICOS-TBC.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
Our research and development processes involve the controlled use of
hazardous materials, chemicals and radioactive materials and produce waste
products. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of hazardous
materials and waste products. Although we believe that our safety procedures for
handling and disposing of hazardous materials comply with the standards
prescribed by laws and regulations, the risk of accidental contamination or
injury from these materials cannot be eliminated completely. In the event of an
accident, we could be held liable for any damages that result. This liability
could exceed our resources or not be covered by our insurance. Although we
believe that we are in compliance in all material respects with applicable
environmental laws and regulations, there can be no assurance that we will not
be required to incur significant costs to comply with environmental laws and
regulations in the future. There can also be no assurance that our operations,
business or assets will not be materially adversely affected by current or
future environmental laws or regulations.
IMPACT OF INFLATION AND CHANGING PRICES
The pharmaceutical research industry is labor intensive, and wages and
related expenses increase in inflationary periods. The lease of space and
related building services for the Houston facility contains a clause that
escalates rent and related services each year based on the increase in building
operating costs and the increase in the Houston Consumer Price Index,
respectively. To date, inflation has not had a significant impact on our
operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than
statements of historical fact included in and incorporated by reference into
this Form 10-Q are forward-looking statements. These forward-looking statements
include, without limitation, statements regarding our estimate of the
sufficiency of our existing capital resources and our ability to raise
additional capital to fund cash requirements for future operations, and
regarding the uncertainties involved in the drug development process and the
timing of regulatory approvals required to market these drugs. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, we cannot give any assurance that such expectations reflected in
these forward-looking statements will prove to have been correct. The ability to
achieve our expectations is contingent upon a number of factors, which include,
without limitation:
o market acceptance and commercial success of Argatroban;
o expenses and risks associated with clinical trials to expand
the use of Argatroban;
o effect of any current or future competitive products;
o the possible emergence of generic competition;
o continued scientific progress in our drug discovery programs;
o the magnitude of these programs;
24
o progress with preclinical testing and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs involved in filing, prosecuting and enforcing patent
claims;
o competing technological and market developments and changes in
our existing research relationships;
o our ability to maintain and establish additional collaborative
arrangements;
o retention of key personnel;
o capital market conditions; and
o effective commercialization activities and arrangements.
When used in this Form 10-Q, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate" and similar expressions are
intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. Because these
forward-looking statements involve risks and uncertainties, actual results could
differ materially from those expressed or implied by these forward-looking
statements for a number of important reasons, including those discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. Before you invest in our common stock, you should
be aware that the occurrence of any of the contingent factors described herein
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" and described under "Additional
Risk Factors" in our Annual Report on Form 10-K for the year ended December 31,
2001 could substantially harm our business, results of operations and financial
condition. Upon the occurrence of any of these events, the trading price of our
common stock could decline, and you could lose all or part of your investment.
We cannot guarantee any future results, levels of activity, performance
or achievements. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this Form 10-Q after the date of this
Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RISK
We are exposed to market risk primarily from changes in foreign
currency exchange rates. The following describes the nature of this risk that is
not believed to be material to us.
We have a majority-owned subsidiary in Germany and consolidate the
results of operations into our consolidated financial results. Although not
significant to date, our reported assets, liabilities, expenses and cash flows
from this subsidiary are exposed to changing exchange rates. Accordingly, we
included an unrealized gain of $64,000 and $208,000 in its comprehensive loss
for the three and nine months ended September 30, 2002, respectively, and an
unrealized gain of approximately $224,000 and an unrealized loss of
approximately $220,000 for the three and nine-months ended September 30, 2001,
respectively. We had an intercompany receivable from our German subsidiary at
September 30, 2002; however, this amount is denominated in U.S. dollars and is
not exposed to exchange risk. We have contracts with entities in other areas
outside the U.S. and these transactions are denominated in a foreign currency.
To date, the currencies
25
of these other countries have not fluctuated materially. At this time, we have
not deemed it cost effective to engage in a program of hedging the effect of
foreign currency fluctuations on our operating results using derivative
financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, we carried out
an evaluation, under the supervision and with the participation of management,
including our President and Chief Executive Officer, and our Vice President of
Finance and Administration, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, our
President and Chief Executive Officer and our Vice President of Finance and
Administration concluded that our disclosure controls and procedures are
effective, providing management with material information relating to the
Company that is required to be included in our reports filed or submitted under
the Exchange Act on a timely basis. There have been no significant changes in
our internal controls or in other factors that could significantly affect
internal controls subsequent to the date we carried out our evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Two reports on Form 8-K were filed during the quarter ended September 30, 2002.
A Report on Form 8-K dated July 22, 2002 was filed providing an update on the
sitaxsentan Phase IIb/III Pulmonary Arterial Hypertension Trial. A Report on
Form 8-K dated August 9, 2002 was filed regarding the Company's results of
operations during the three and six months ended June 30, 2002, and raised
guidance on Argatroban sales.
EXHIBIT NO. DESCRIPTION
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
26
TEXAS BIOTECHNOLOGY CORPORATION
SEPTEMBER 30, 2002
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 8th day of November, 2002.
TEXAS BIOTECHNOLOGY CORPORATION
By: /s/ Bruce D. Given, M.D.
----------------------------------------
Bruce D. Given, M.D.
President and Chief Executive Officer
By: /s/ Stephen L. Mueller
----------------------------------------
Stephen L. Mueller
Vice President, Finance and Administration
Secretary and Treasurer
(Principal Financial and Accounting Officer)
27
CERTIFICATIONS
I, Bruce D. Given, M.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Texas
Biotechnology Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report ("Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors [or persons performing the
equivalent function]:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 8, 2002 By /s/ Bruce D. Given, M.D.
--------------------------------
Bruce D. Given, M.D.
President and Chief Executive
Officer
28
CERTIFICATIONS
I, Stephen L. Mueller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Texas
Biotechnology Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report ("Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors [or persons performing the
equivalent function]:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 8, 2002 By /s/ Stephen L. Mueller
--------------------------------
Stephen L. Mueller
Vice President, Finance and
Administration Secretary and
Treasurer
29
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
----------- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
</Table>