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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 of Incorporation) (I.R.S. Employer
Identification Number)
7000 FANNIN, 20TH FLOOR
HOUSTON, TEXAS 77030
(713) 796-8822
(Address and telephone number of principal executive offices and zip code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.005 PER SHARE
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TITLE OF CLASS
PREFERRED STOCK PURCHASE RIGHTS
-------------------------------
TITLE OF CLASS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate iby check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The approximate aggregate market value of voting stock held by nonaffiliates
of the registrant is $169,054,000 as of June 28, 2002.
The number of shares outstanding of each of the registrant's classes of
common stock as of March 12, 2003:
TITLE OF CLASS NUMBER OF SHARES
------------------------ ----------------
Common Stock, 43,916,898
$.005 par value
Documents incorporated by reference:
DOCUMENT FORM 10-K PARTS
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Definitive Proxy Statement, III
to be filed within
120 days of December 31, 2002
(specified portions)
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in and incorporated by reference into this Form 10-K 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.
When used in this Form 10-K, 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", "Additional Risk
Factors" and elsewhere in this Form 10-K.
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. You should be aware that the occurrence of any of
the events described in the risk factors and elsewhere in this Form 10-K could
substantially harm our business, results of operations and financial condition
and that 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-K after the date of this
Form 10-K.
This Form 10-K may contain trademarks and service marks of other companies.
2
PART I
ITEM 1 -- BUSINESS
OVERVIEW
Texas Biotechnology Corporation was incorporated in Delaware in 1989 and is
sometimes referred to in this report as TBC, we or us. 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 areas where our
compounds will have the greatest likelihood of improving the lives of patients
suffering from cardiovascular diseases, thrombocytopenia, pulmonary arterial
hypertension ("PAH"), heart failure and inflammatory diseases such as asthma.
Argatroban is our first marketed product. Argatroban was approved by the U.S.
Food and Drug Administration ("FDA") in 2000 for the prophylaxis or treatment of
thrombosis in patients with heparin-induced thrombocytopenia ("HIT") and for
patients with or at risk for HIT undergoing percutaneous coronary intervention
("PCI"). Argatroban was approved in Canada in 2002 for use as anticoagulant
therapy in patients with heparin-induced thrombocytopenia syndrome ("HITS"). The
drug is being marketed in the U.S. and Canada by GlaxoSmithKline, plc ("GSK")
and has been on the market in the U.S. and Canada since November 2000 and June
2002, respectively. GSK is our development, manufacturing and marketing partner
for Argatroban.
Presently, we have four major product development programs.
- Endothelin Antagonist Program. We are developing sitaxsentan, an
endothelin(A) receptor antagonist, or ET(A), for the treatment of PAH.
During June 2000, we formed a partnership, ("ICOS-TBC"), with ICOS
Corporation ("ICOS") to develop and commercialize ET(A) receptor
antagonists. During 2002, ICOS-TBC successfully completed a Phase IIb/III
clinical trial in PAH with sitaxsentan. TBC3711, a second generation
ET(A), has previously completed Phase I clinical trials and may be
developed for cardiovascular or other diseases. In January 2003, ICOS
announced that they had reached a conclusion that joint development of the
endothelin receptor antagonist program by ICOS-TBC should not continue.
ICOS and TBC are currently negotiating the terms pursuant to which TBC
could independently continue the program. The financial terms of this
transaction are subject to ongoing negotiations between the two companies.
- Thrombosis. During 2002, we completed a Phase II human clinical trial for
Argatroban as a mono-therapy treatment for acute ischemic stroke. The
clinical trial met the primary endpoint based on safety. In light of a
lack of a positive 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. Currently, Argatroban is
being evaluated, in a clinical trial, in combination with recombinant
tissue Plasminogen Activator ("rt-PA") as a new approach to the treatment
of acute ischemic stroke by an investigator at the University of Texas
Medical School at Houston.
- Vascular Inflammation Program. Revotar Biopharmaceuticals AG ("Revotar"),
our majority owned German affiliate located in Berlin is developing a
selectin antagonist, bimosiamose, for the treatment of asthma and
psoriasis. The intravenous form of the drug demonstrated positive
anti-inflammatory effects in Phase II clinical trials. Revotar was formed
during 2000, to further the development of this program. Revotar has
completed Phase I clinical trials for asthma utilizing an inhaled form of
bimosiamose. A Phase IIa clinical trial is currently being conducted with
an inhaled form of bimosiamose and a Phase IIa clinical trial in psoriasis
is planned to commence during 2003, using a topical formulation. A Phase
IIa proof-of-concept clinical trial in psoriasis, completed during 2002
with an injectable form of bimosiamose, demonstrated signs of activity. We
are also conducting research with respect to other cell adhesion molecules
including vascular cell adhesion molecule, or VCAM, junctional adhesion
molecules, or JAM 2/3 and several integrins including very late antigen 4,
or VLA-4, (alpha)4(beta)7 and others to develop antagonists for the
treatment of asthma, rheumatoid arthritis, multiple sclerosis, restenosis
and inflammatory bowel disease. We have signed a collaboration and license
agreement for the VLA-4 program with Schering-Plough LTD and
3
Schering-Plough Corporation (collectively "Schering-Plough") and have
received a milestone from Schering-Plough for nominating a compound as a
clinical candidate. Additionally, we are conducting research on backup
VLA-4 antagonists for Schering-Plough under this agreement.
- Vascular Disease. Many disease processes involve changes in blood vessels
and heart tissue. There are numerous mediators, like endothelin, which may
contribute to the development of these diseases. Several of these act
through G-protein coupled receptors, GPCRs, to carry out their action. We
are conducting research on urotensin and other GPCRs to identify
inhibitors which could be useful in treating diseases including congestive
heart failure, ("CHF"), ischemic stroke and acute myocardial infarction.
BUSINESS STRATEGY
The key elements of our business strategy are as follows:
Maximize sales of Argatroban
Our marketing, manufacturing and distribution partner, GSK, began selling
Argatroban in the U.S. during November 2000, and in Canada during June 2002, as
an anticoagulant for prophylaxis or treatment of thrombosis in patients with
HIT. In addition:
- during 2002, we received approval from the FDA on our supplementary New
Drug Application ("sNDA") for Argatroban for use in patients, with or at
risk for HIT, undergoing PCI;
- during 2002, GSK created a hospital based sales force and initiated
programs to increase its sales efforts on Argatroban in the U.S. and
Canada that could have a positive effect on our royalties from GSK;
- Argatroban is currently being evaluated, in a clinical trial, in
combination with rt-PA as a new approach to the treatment of acute
ischemic stroke by an investigator at the University of Texas Medical
School at Houston. Argatroban is approved and sold in Japan by Mitsubishi
Pharma Corporation ("Mitsubishi"), the licensor of Argatroban as
mono-therapy for an indication of acute ischemic stroke; and
- we have completed initial studies to evaluate the use of Argatroban in
hemodialysis patients and in PCI.
Complete the clinical development of sitaxsentan and commercialize the
compound worldwide
We intend to initiate a pivotal Phase III clinical trial with sitaxsentan in
2003 with the goal of filing a new drug application with the FDA for use of
sitaxsentan in patients with PAH. We intend to commercialize the compound on a
worldwide basis by ourselves or through licensee arrangements:
- During 2002, ICOS-TBC completed a Phase IIb/III clinical trial to assess
the safety and efficacy of sitaxsentan in patients with New York Heart
Association ("NYHA") class II, III and IV PAH. Based on the results of
this clinical trial and meeting with the FDA, TBC believes that
development of sitaxsentan should be continued.
- In January 2003, ICOS announced that they had reached a conclusion that
joint development of the endothelin receptor antagonist program, through
ICOS-TBC, should not continue. ICOS has indicated that it is willing to
transfer the endothelin antagonist program in its entirety, including
sitaxsentan, to us. The financial terms of this transaction are subject to
ongoing negotiations between the two companies. This will allow us to
increase our ownership and the potential commercial benefit of the program
from 50% to 100%.
Focus on the identification and development of new drugs for the treatment
of diseases involving the vascular endothelium
Injury to the vascular endothelium is a common cause of many of the most
profound diseases affecting patients today, such as ischemic heart disease,
hypertension, congestive heart failure, and asthma. By concentrating on this
area, we can be relatively efficient in our drug discovery, development and
commercialization efforts. This efficiency extends to the following areas:
4
- Research -- Our efforts are predominantly focused toward the treatment and
prevention of interrelated diseases of the vascular endothelium,
exploiting our research group's expertise in the area of vascular biology;
- Computer aided drug design -- We utilize computers to rapidly develop drug
candidates derived from our vascular biological efforts and to identify
new targets from information discovered by the Human Genome Project; and
- Clinical investigators and consultants -- We work with key opinion leaders
and consultants experienced in vascular diseases to assist in clinical
development, product planning and the regulatory approval process.
Focus on the identification and development of small molecule drug
candidates
Synthetic, small molecule therapeutics have several advantages over protein
and peptide based large molecules. Small molecules generally are not
immunogenic, can typically be protected with composition-of-matter patents and
can be produced by conventional lower cost pharmaceutical manufacturing methods.
Participate in the sales and marketing in the United States and Canada of
the drugs we develop
In the biopharmaceutical industry, a substantial percentage of the profits
generated from successful drug development are typically retained by the entity
directly involved in the sales and marketing of the drug. Licensing our drug
candidates to a third party who will complete development and provide sales and
marketing resources in exchange for upfront payments, milestone payments and a
royalty on sales may reduce some of our risks, particularly for diseases outside
our strategic interest or in territories outside of the United States and
Canada. In the future, however, we may decide that the risk-return profile
favors developing and then marketing and selling products on a co-promotion
basis or by ourselves. Therefore, when and if we deem it appropriate, we intend
to participate in the sales and marketing of our products in the United States
and Canada.
5
THERAPEUTIC PROGRAMS AND PRODUCTS IN DEVELOPMENT
The following table summarizes the potential therapeutic indications and
development status for certain of our clinical, preclinical and research product
candidates and is qualified in its entirety by the more detailed information
appearing elsewhere in this Form 10-K.
TARGET COMPOUND/
PROGRAM DOSE FORM INDICATION STATUS(1)
- -------------------- -------------------------- ------------------------------- -----------------
THROMBOSIS ARGATROBAN
Intravenous Anticoagulant therapy for Marketed product
prophylaxis or treatment of
patients with HIT
Intravenous Anticoagulant therapy for Marketed product
patients, with or at risk for
HIT, undergoing PCI
- --------------------------------------------------------------------------------------------------------------
VASOSPASM/ ENDOTHELIN(A) RECEPTOR
HYPERTENSION ANTAGONIST
Sitaxsentan (TBC11251)
Oral Pulmonary Arterial Hypertension Phase III
TBC3711
Oral Pulmonary Arterial Hypertension Phase I completed
UROTENSIN RECEPTOR Various Research
ANTAGONIST
OTHER GPCRS Various Research
- --------------------------------------------------------------------------------------------------------------
VASCULAR SELECTIN ANTAGONIST (BEING
INFLAMMATION DEVELOPED BY REVOTAR)
Bimosiamose (TBC1269)
Inhaled Asthma Phase IIa
Topical Psoriasis and atopic dermatitis Phase IIa
VCAM/VLA-4 ANTAGONIST
TBC4746
Oral Asthma Preclinical
Multiple Sclerosis Preclinical
Rheumatoid Arthritis Preclinical
(ALPHA)4(BETA)7 ANTAGONIST
TBC3804
Oral Inflammatory Bowel Disease Research
OTHER CELL ADHESION Various Research
MOLECULES
- --------------------------------------------------------------------------------------------------------------
(1) Preclinical compounds are compounds undergoing toxicology and
pharmaceutical development in preparation for human clinical testing.
Research compounds are compounds undergoing basic evaluation and
optimization to establish a lead clinical candidate.
6
THROMBOSIS PROGRAM
ARGATROBAN
Background. Thrombosis, the lodging of a blood clot in a vessel, causes
various vascular diseases, depending on the location of the clot. An arterial
clot may lead to heart attack if lodged in a coronary artery, or stroke if
lodged in an artery that supplies oxygen to the brain. Venous clots occur
principally in the arms or legs (deep vein thrombosis), and may cause local
inflammation, chronic pain and other complications. In some cases, a venous clot
can cause lung injury (pulmonary embolism) by migrating from the veins to the
lungs.
Thrombosis can be treated surgically or through drug therapy with
anticoagulant and thrombolytic drugs. Anticoagulant drugs prevent clots from
forming. Heparin and aspirin are the most widely used antithrombotic drugs.
Heparin, first discovered over 80 years ago, is the most widely used
injectable anticoagulant. In the U.S., approximately ten million patients
annually receive therapeutic heparin to treat a variety of conditions that
require inhibition of the body's natural clotting mechanism. Each year over
300,000 of these patients develop a profound immunological reaction to heparin
that is known as heparin-induced thrombocytopenia. The condition is
characterized by a paradoxical tendency to form clots. That puts the patient at
risk of major complications such as acute myocardial infarction, ischemic
stroke, amputation or death. It is also very difficult to administer heparin
dosages.
Current Therapies. In conjunction with GSK, we obtained approval for
Argatroban as an anticoagulant for prophylaxis or treatment of thrombosis in
patients with HIT in the U.S. and Canada. GSK began marketing Argatroban in the
U.S. in November 2000. Argatroban is a synthetic direct thrombin inhibitor that
directly and selectively binds to and inactivates thrombin in the blood plasma.
Argatroban is manufactured and marketed in Japan by Mitsubishi where it is
approved as a treatment for ischemic stroke, peripheral arterial occlusion and
hemodialysis in patients with antithrombin III deficiency, a clotting disorder
that does not respond to heparin. Since the product's introduction in 1990, more
than 200,000 patients have been treated with Argatroban in Japan. Other
measures, such as inline filters, are sometimes used to remove clots, but are
highly invasive and involve patient trauma. Simply stopping heparin alone may be
insufficient, as a significant number of patients will progress to experience
severe outcomes. Clinical studies that we conducted in the U.S. have shown a
significant correlation between the administered dose of Argatroban and the
degree of anticoagulation achieved. This is potentially important as it suggests
that the relationship between dose and effect of Argatroban is generally very
predictable over the expected dose-range. As a result, we believe there is
little risk of either insufficient or excessive anticoagulation occurring from
small dose changes of Argatroban. Other product advantages for Argatroban
include a rapid onset of action, a relatively short half-life and an absence of
immunogenicity.
Clinical Trial Status. During 2002, we completed a multi-center,
placebo-controlled Phase II clinical trial (ARGIS-I) for the use of Argatroban,
as monotherapy, in patients with ischemic stroke. During February 2003, we
reported the Phase II trial results that met the primary endpoint related to
safety. 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 Texas
Biotechnology will proceed independently with a full Phase III program. However,
given the relatively positive safety outcome, and the high rate of stroke
occurrence in HIT patients, some physicians may choose to use Argatroban in
place of heparin in some patient populations. Currently, Argatroban is being
evaluated in a clinical trial, in combination with rt-PA as a new approach to
the treatment of acute ischemic stroke by an investigator at the University of
Texas Medical School at Houston. Argatroban is approved and sold in Japan by
Mitsubishi, the licensor of Argatroban, as mono-therapy for an indication of
acute ischemic stroke. With GSK, we are conducting clinical trials to evaluate
the use of Argatroban in hemodialysis patients and for use in PCI.
Competition in HIT. Primary competitors for Argatroban in its initial
indication are Refludan(R) (lepirudin), marketed by Berlex Laboratories,
Orgaran(R) (danaparoid sodium), manufactured by N.V. Organon, a unit of Akzo
Nobel, and Angiomax (R) (bivalirudin) manufactured by The Medicines Company.
Refludan(R) (lepirudin, Berlex). This product received approval in Europe in
1997 and in the U.S. in 1998 for anticoagulation in patients with HIT to prevent
further thromboembolic (clotting) complications. Refludan(R) has been associated
with the development of an adverse immune response in up to 40% of patients
receiving Refludan(R). Several cases of anaphylaxis have been reported upon
re-exposure to Refludan(R). Although the full clinical impact of development of
these antibodies is unknown, we understand that the anticoagulant effects of
Refludan(R) may
7
become unpredictable in patients developing these antibodies. Additionally
Refludan(R) is renally excreted while Argatroban is hepatically excreted. Berlex
has stated they plan to submit for a HIT prevention label claim in the future.
Orgaran(R) (danaparoid sodium, N.V. Organon). This product is a low
molecular weight heparinoid, a heparin-like compound extracted from pigs.
The product was approved in the U.S. in 2001 for prevention of deep venous
thrombosis following hip surgery. However, approximately one in ten HIT
patients receiving Orgaran(R) will develop the HIT syndrome exactly as if
the patient received heparin. Orgaran(R) is not approved in the U.S. for
HIT and is used on an off-label basis only.
Angiomax(R) (bivalirudin, The Medicines Company). This product received
approval in the U.S. in 2001 for use as an anticoagulant in patients with
unstable angina undergoing percutaneous transluminal coronary angioplasty
("PTCA"). Angiomax(R) represents the third direct thrombin inhibitor approved in
the U.S. Angiomax(R) is not approved for the treatment of HIT. The Medicines
Company has stated their intention to expand the Angiomax(R) label to include
the treatment and prevention of HIT.
Other Indications. Argatroban may be useful in other disease settings where
predictable anticoagulation is desired. Argatroban may be effective in
hemodialysis and PCI, particularly in patients who develop problems when given
heparin.
Competition for Argatroban in Other Indications. Competitors for
Argatroban in other applications include:
- Revasc(R) (desirudin, Aventis/Novartis A.G.), recombinant hirudin, is
approved in Europe for the prevention of deep vein thrombosis following
hip surgery, but has been associated with intracranial hemorrhage and
antibody production;
- Melagatran (AstraZeneca plc) is in Phase III trials and is being developed
as a treatment for deep vein thrombosis. They have stated that they intend
to file an NDA during 2003; and
- Arixtra(R) (pentasaccharide, Sanofi-Synthelabo) was approved in the U.S.
in 2002 for the prevention of deep vein thrombosis and pulmonary embolism.
8
VASOSPASM/HYPERTENSION PROGRAM
Background. Smooth muscle cells in the blood vessel are responsible directly
for mediating vessel diameter. The regulation of blood flow depends on a
delicate balance between physical and chemical stimuli that cause smooth muscle
cells to relax (vasodilatation) or contract (vasoconstriction). Chronic periods
of excessive vasoconstriction in the peripheral circulation can lead to
disturbances in blood pressure (hypertension) or heart function (congestive
heart failure), whereas acute episodes of intense vasoconstriction (vasospasm)
can restrict blood flow leading to severe tissue damage and organ failure
(myocardial infarction or kidney failure). It has been determined that the
vascular endothelium (innermost lining) plays a pivotal role in maintaining
normal blood vessel tone, including blood flow, by producing substances that
regulate the balance between vasodilatation and vasoconstriction.
Endothelin is a peptide that is believed to play a critical role in the
control of blood flow. The action of endothelin can be explained by its
interactions on cell surfaces with two distinct receptors, endothelin-A (ET(A))
and endothelin-B (ET(B)). In general, ET(A) receptors are associated with
vasoconstriction, while ET(B) receptors are primarily associated with
vasodilatation. There is substantial evidence that endothelin is involved in a
variety of diseases where blood flow is important. These include vasospasm,
congestive heart failure and certain types of hypertension.
Our research program in the vasospasm/hypertension area is aimed at
developing small molecules that inhibit the binding of endothelin to its cell
surface receptors. Our scientists believe that specific agents for each receptor
subtype may provide the best clinical utility and safety. Our initial focus has
been to develop a highly potent and selective small molecule based ET(A)
receptor antagonist. An antagonist, or inhibitor, blocks the effects of a ligand
at its receptor. A ligand is a chemical messenger, which binds to a specific
site on a target molecule or cell. Our scientists have discovered a novel class
of low molecular weight compounds that antagonize endothelin binding to the
ET(A) receptor with high potency. We identified lead compounds which mimicked
the ability of endothelin to bind to the ET(A) receptor. We then used further
optimization techniques to develop more potent compounds until the current
series of lead candidates were identified. In addition to their ability to block
endothelin, binding to its receptor, these compounds functionally inhibit
endothelin action on isolated blood vessels in vitro acting as full, competitive
antagonists. The lead compounds in this series have been shown to exhibit in
vivo efficacy using various animal models. In addition, sitaxsentan and bosentan
have demonstrated efficacy in human clinical trials, including patients with
pulmonary hypertension.
Current Therapies. Current treatments for PAH remain unsatisfactory and new
treatments are needed. At present, epoprostenol (Flolan(R)-GSK), bosentan
(Tracleer(R)-Actelion), and treprostinil (Remodulin(R)-United Therapeutics) are
approved treatments for patients with PAH.
Epoprostenol, a vasodilator requiring continuous infusion through a central
venous catheter and special infusion pump, is costly, is associated with
significant adverse events including those related to its delivery, and is
typically reserved by clinicians for patients with NYHA functional class IV
status. Bosentan, a nonselective ET-1 receptor antagonist, is the first oral
agent approved for the treatment of PAH, and is indicated in patients with World
Health Organization (WHO) functional class III and IV symptoms. Bosentan is also
associated with significant potential for hepatotoxicity, teratogenicity, and
reduction of male fertility. Treprostinil, a prostaglandin analog requiring
administration through a chronic subcutaneous pump, is associated with a high
incidence of local injection site reactions. A selective oral endothelin
antagonist, if successful, may provide a significant benefit to these patients.
Partnership. During 2000, we formed ICOS-TBC, a partnership with ICOS, to
co-develop and commercialize endothelin antagonist compounds. As part of the
agreement, ICOS made an upfront payment and a milestone payment to ICOS-TBC,
which in turn distributed these payments to TBC. In January 2003, ICOS announced
that they had reached a conclusion that joint development of the endothelin
receptor antagonist program, through ICOS-TBC should not continue. ICOS and TBC
are currently negotiating the terms pursuant to which we could independently
continue the program. The financial terms of this transaction are subject to
ongoing negotiations between the two companies. This could allow us to increase
our ownership and the potential commercial benefit of the program from 50% to
100%. The partners equally funded the cost of research and development through
the end of 2002. After 2002, we are responsible for all costs of the program.
Product Candidate -- TBC11251 - Sitaxsentan. The lead endothelin antagonist,
sitaxsentan, is being developed for the indication of PAH. PAH is a disease with
high mortality and an average survival time of approximately four
9
years from the time of diagnosis. Sitaxsentan, a highly selective endothelin-A
receptor antagonist, may provide a distinct advantage over current therapies
including the non-specific endothelin receptor antagonist Tracleer(R).
Clinical Trial Status. -- We filed an investigational new drug application,
also referred to as an IND, with the FDA for sitaxsentan in late 1996. To date,
three Phase IIa clinical trials have been completed, one in congestive heart
failure patients, one in essential hypertension patients and one in pulmonary
arterial hypertension patients. In a follow-on extension trial,
treatment-related hepatitis was observed in two patients and one of these
patients died. Following analysis of the open-label Phase IIa clinical trial and
extension studies and discussions with the FDA, ICOS-TBC initiated a Phase
IIb/III clinical trial (STRIDE) of sitaxsentan, at lower doses, for the
treatment of PAH in the second quarter of 2001. During 2002, ICOS-TBC completed
the STRIDE clinical trial to assess the safety and efficacy of sitaxsentan in
patients with NYHA class II, III and IV pulmonary arterial hypertension. The
trial enrolled 178 patients who were randomized to either sitaxsentan 100 mg,
sitaxsentan 300 mg, or placebo treatment once a day.
The primary endpoint of the Phase IIb/III 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 6-minute walk distance from baseline to week 12. The results showed
statistically significant improvement for both the sitaxsentan 100 mg and 300 mg
groups, compared with placebo treatment. The 6-minute walk test is the most
widely used efficacy test for drugs treating PAH. The clinical effectiveness of
each of the two sitaxsentan dose groups was equivalent for 6- minute walk
distance (9% relative improvement). 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.
Based on the results of this clinical trial and meeting with the FDA, TBC
believes that development of sitaxsentan should be continued. Based on concerns
the FDA has raised regarding the class, such as hepatic toxicity and
reproductive abnormalities, which may or may not be associated with our
compounds, we are pursuing indications with unmet medical needs such as PAH.
Product Candidate -- TBC3711. TBC3711 is our second endothelin antagonist
compound and has been selected as the next clinical candidate. We believe
TBC3711 is more selective and more potent than sitaxsentan and that a potential
market opportunity for TBC3711 exists for the treatment of PAH and other
diseases. ICOS-TBC has completed Phase I clinical studies with TBC3711 and is
evaluating the development plan for the compound.
Other Indications. We believe endothelin antagonist compounds may
provide therapeutic value in several other indications.
Competition. A number of companies including Abbott Laboratories, and Myogen,
Inc., have ET(A) receptor selective antagonist compounds in clinical
development. ET(A) receptor-selective compounds from Abbott are in early Phase
III development. They have reported mixed results from a Phase III trial in
severe hormone resistant prostate cancer patients. The compound reduced pain and
PSA levels, but failed to delay disease progression. They are conducting
additional studies in other cancer groups. Myogen has begun a Phase IIa trial
for their ET(A) compound in PAH. We believe our compounds are competitive with
those from the other companies in terms of bioavailability (how much reaches the
appropriate body system), half-life (how long the drugs last in the body) and
potency. Several companies have non-selective endothelin antagonists in
development. Actelion Ltd., a biotechnology company located in Switzerland, and
Genentech, Inc. received approval from the FDA to market Tracleer (R) (bosentan)
for the treatment of PAH during 2001. We believe that selective endothelin
blockers like sitaxsentan will be preferred by physicians since selective ET(A)
blockers block the negative effects of endothelin at the ET(A) receptor, and do
not block the beneficial effects of endothelin at the ET(B) receptor.
Non-selective antagonists block both the ET(A) and the ET(B) receptors.
Abbott/Knoll's development of darusentan and Actelion's development of Tracleer
for heart failure have generated negative data. It is not known if the negative
clinical data is due to a class effect, trial design or specific to the
compounds themselves.
In addition to endothelin antagonists, Pfizer is conducting a Phase II trial
in the use of Viagra (R) in PAH. If phosphodiesterase 5 inhibitors ("PDE-5
inhibitor") demonstrate a benefit in PAH patients, we believe they will be used
as additive therapy with endothelin antagonists.
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VASCULAR INFLAMMATION PROGRAM
Background. Inflammation is the body's natural defense mechanism that fends
off bacterial, viral and parasitic infections. The inflammatory response
involves a series of events by which the body attempts to limit or destroy a
foreign agent. These steps include the production of proteins that attract white
blood cells, or leukocytes, to the site of inflammation, the production of
chemicals to destroy the foreign agent and the removal of the resulting debris.
This process is normally self-limiting and not harmful to the individual.
However, in certain instances, the process may be overly active, such as during
an acute asthma attack where an immediate inflammatory reaction occurs. In
addition, in diseases such as atherosclerosis or rheumatoid arthritis, the
inflammatory reaction leads to a build up of white blood cells and debris at the
inflammation site that causes tissue damage over longer periods of time.
The initial interaction between white blood cells and the endothelial cell
layer is mediated by a group of adhesion molecules known as selectins. The
selectins are a family of three proteins, two of which are found on inflamed
endothelium, which bind to the carbohydrate sialyl Lewis x, also referred to as
sLe(X), found on the surface of white blood cells. White blood cells are able to
migrate into inflamed areas because sLe(X) present on the surface of white blood
cells binds to selectin molecules present on activated endothelium. This binding
slows the flow of white blood cells or leukocytes through the bloodstream. This
is one of the first steps in the movement of white blood cells from the blood
into the tissue. The second step in this process is vascular cell adhesion
molecule, referred to as VCAM, mediated white blood cell attachment and
migration which helps to localize white blood cells in areas of injury or
infection. The presence of VCAM at sites of endothelial injury leads to an
accumulation at these sites of the integrin very late antigen-4, or VLA-4, which
are contained in white blood cells. Such accumulation can provoke an
inflammatory response.
Current Therapies. The major anti-inflammatory compounds are corticosteroids,
leukotriene blockers and immunosuppressants such as cyclosporin. While
effective, the time to onset of action of these compounds may be significant.
Corticosteroids also have significant side effects including growth suppression
in children, cataract formation, and general intolerance. The antagonist
compounds we are developing may provide efficacy with fewer of these side
effects.
Product Candidate -- Bimosiamose is being developed by Revotar, our majority
owned affiliate. Our scientists have developed a computer model of the
selectin/sLe(X) complex and used it to produce a novel class of synthetic, small
molecule compounds that inhibit the selectin-mediated cellular adhesion that
occurs during inflammation. The lead compound in the series, bimosiamose, has
shown efficacy both in cell-based and biochemical assays, and in animal models
of inflammation. A Phase IIa clinical trial for bimosiamose's intravenous use in
asthma was completed in 1998. Results of this trial, which involved 21 patients,
demonstrated significant reductions in cellular inflammation and allowed
improved breathing. The inhaled form of bimosiamose has been tested in Phase I
clinical trials completed during 2001 for the treatment of asthma and a Phase
IIa clinical trial was completed and showed signs of activity, utilizing an
injectable form of bimosiamose as a proof-of-concept for psoriasis. During 2002,
Revotar began a Phase II clinical trial in asthma, utilizing the inhaled form
and intends to commence a Phase IIa clinical trial in psoriasis utilizing the
topical form during 2003.
German Affiliate -- Revotar Biopharmaceuticals, AG. During 2000, Revotar
Biopharmaceuticals, AG, a German affiliate, was formed and we retained a 55.2%
ownership percentage. With headquarters in Berlin, Germany, Revotar was formed
to perform research and development of novel small molecule compounds and to
develop and commercialize selectin antagonists that TBC licensed to Revotar.
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 for use in certain territories. Revotar
also received approximately $5 million in funding from three German venture
capital funds and has access to certain German government scientific grants.
During 2001, Revotar entered into a research agreement regarding macrophage
migration inhibitory factor (MIF) with the Fraunhofer Institute in Stuttgart,
Germany. We amended our license and research agreement with Revotar during 2003
to better reflect the commercial priorities of each company. Under the amended
agreement, Revotar will have exclusive worldwide rights to bimosiamose for the
treatment of asthma and other inflammatory indications as well as rights outside
of North America for topical indications. Texas Biotechnology will have
exclusive worldwide rights for the use of bimosiamose in organ transplant as
well as exclusive North American rights to all topical indications. Under the
amended agreement, each party has certain revenue sharing and royalty
obligations. In 2002, the stockholders of Revotar executed an agreement to
provide approximately $4.5 million in unsecured loans, of which our commitment
was approximately $3.4 million. Under the loan agreement, we have advanced
approximately $1.2
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million to Revotar during 2002. We believe that Revotar's existing funds, the
remaining commitments under the loan agreement and proceeds under German
government scientific grants will be sufficient to fund Revotar into the first
quarter of 2004. In order to continue to operate beyond that time, Revotar will
need to seek additional funding through collaborative arrangements and/or
through public or private financings in the future.
Clinical Trial Status. - The inhaled form of bimosiamose has been tested by
Revotar in Phase I clinical trials completed during 2001 for the treatment of
asthma and a Phase IIa clinical trial was completed in Germany utilizing an
injectable form of bimosiamose as a proof-of-concept for psoriasis. During 2002,
Revotar began a Phase IIa clinical trial in asthma, utilizing the inhaled form
and intends to initiate a Phase IIa clinical trial in psoriasis utilizing the
topical form during 2003.
Product Candidate -- VCAM/VLA-4 Antagonists. We have also identified
antagonists for the VCAM-dependent intercellular adhesion observed in asthma,
which blocks the ability of white blood cells to interact through VCAM and
VLA-4. VLA-4 antagonists represent a new class of compounds that has shown
promise in multiple preclinical animal models of asthma. These lead compounds
are being modified in an attempt to develop an orally available clinical
candidate. In preclinical animal studies, our scientists have demonstrated that
a small molecule VLA-4 antagonist can be effective in blocking acute
inflammation, suggesting that VCAM/VLA-4 plays a role in this disease process.
During 2002, TBC4746 was nominated as a clinical candidate and pursuant to our
agreement with Schering-Plough, we received a milestone payment.
Product Candidate -- (alpha)4(beta)7 Antagonists. The integrin
(alpha)4(beta)7, which is closely related to VLA-4, is present on leukocytes
which locate in the gastrointestinal system. Inhibitors of (alpha)4(beta)7 may
be useful in treating inflammatory conditions of the gut such as inflammatory
bowel disease (estimated 300,000 U.S. patients).
Research Collaboration with Schering-Plough. -- On June 30, 2000, we entered
into a worldwide research collaboration and license agreement to discover,
develop and commercialize VLA-4 antagonists with Schering-Plough. The primary
focus of the collaboration will be to discover orally available VLA-4
antagonists as treatments for asthma. Under the terms of the agreement,
Schering-Plough obtains the exclusive worldwide rights to develop, manufacture
and market all compounds from TBC's library of VLA-4 antagonists, as well as the
rights to a second integrin antagonist. TBC is responsible for optimizing a lead
compound and additional follow-on compounds. Schering-Plough 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-Plough paid an upfront license
fee and will pay development milestones and royalties on product sales resulting
from the agreement. Total payments to TBC for both the VLA-4 and an additional
program, excluding royalties, could reach $87.0 million. During 2002, TBC4746
was nominated as a clinical candidate and pursuant to our agreement with
Schering-Plough, we received a milestone payment.
Competition. Several companies have programs aimed at inhibiting cell
adhesion molecules and integrins, like (alpha)4(beta)7 and VCAM/VLA-4. We are
not aware of any competing product antagonists of these classes, which are
currently in clinical development. While no oral VCAM/VLA-4 inhibitors are in
clinical development, Biogen, Inc. and Elan Corporation plc have obtained
positive Phase II data with Antegren(R), a monoclonal antibody against VLA-4, in
multiple sclerosis and inflammatory bowel disease. They are planning to conduct
Phase III studies with this product.
VASCULAR DISEASE
Background and current status. Many disease processes involve changes in
blood vessels and heart tissue. There are numerous mediators, like endothelin,
which may contribute to the development of these diseases. Several of these act
though G-protein coupled receptors, GPCRs, to carry out their action. We are
conducting research on urotensin and other GPCRs to identify inhibitors which
could be useful in treating diseases including CHF, ischemic stroke and acute
myocardial infarction. There are numerous companies studying these and other
GPCRs. We believe our projects are competitive with these other programs.
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RESEARCH AND DEVELOPMENT COLLABORATIONS AND LICENSING AGREEMENTS
We have established, and intend to continue to establish, collaborations with
a number of corporations, research institutions and scientists to further our
research and development objectives and expedite the commercialization of our
products. Our major licensing and collaboration agreements are summarized below:
Mitsubishi Pharma Corporation ("Mitsubishi"). We entered into an agreement
with 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 agreement with
Mitsubishi, we have an exclusive license to use and sell Argatroban in the U.S.
and Canada for all cardiovascular, renal, neurological and immunological
purposes other than use for the coating of stents. We are required to pay
Mitsubishi specified royalties on net sales of Argatroban by us and our
sublicensees after its commercial introduction in the U.S. and Canada. Either
party may terminate the agreement with Mitsubishi on 60 days notice if the other
party defaults in its material obligations under the agreement, declares
bankruptcy or becomes insolvent, or if a substantial portion of its property is
subject to levy. Unless terminated sooner, the agreement with Mitsubishi expires
on the later of termination of patent rights in a particular country or 20 years
after first commercial sale of products in a particular country. Under the
Mitsubishi Agreement, we have access to an improved formulation patent granted
in the U.S. in 1993, which expires in 2010, and a use patent in the U.S., which
expires in 2009. We have agreed to pay a consultant involved in the negotiation
of this agreement a royalty based on net sales of Argatroban. During 2000, we
signed an additional agreement with Mitsubishi that provides us with royalties
on sales of Argatroban in certain European countries, up to a total of $5.0
million in milestones for the development of ischemic stroke and certain other
provisions. During 2001, we received $2.0 million of these milestones less
certain Japanese withholding taxes. Additional milestones are dependent on
further development of Argatroban in the indication of ischemic stroke. During
2002, we completed a Phase II human clinical trial for Argatroban as a
monotherapy treatment for acute ischemic stroke. The clinical trial met the
primary safety endpoint and showed positive results in the secondary safety
endpoint. 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.
GlaxoSmithKline. In connection with our development and commercialization of
Argatroban, on August 5, 1997, we entered into an agreement with GSK whereby GSK
was granted an exclusive sublicense in the U.S. and Canada for the indications
of Argatroban that we have licensed from Mitsubishi. GSK has paid $8.5 million
in upfront license fees and $12.5 million in milestone payments and has agreed
to pay up to an additional $7.5 million in additional milestone payments based
on the clinical development and FDA approval of Argatroban for the acute
myocardial infarction indication. We are evaluating the feasibility of
development of Argatroban for other indications including use in hemodialysis
and PCI.
The agreement with GSK provides for the formation of a joint development
committee to analyze the development of additional Argatroban indications (such
as PCI) covered by our license from Mitsubishi. The joint development is to be
funded 60% by GSK, except Phase IV trials are paid 100% by GSK. Except as
discussed below, 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 us and our rights to co-promote these products through our own
sales force in certain circumstances. We will retain the rights to any
indications that GSK determines it does not wish to pursue (such as ischemic
stroke), subject to the requirement that we may not grant marketing rights to
any third parties, and must use our own sales force to commercialize any such
indications. Any indications that GSK and TBC elect not to develop will be
returned to Mitsubishi, subject to the rights of GSK and TBC to commercialize
these indications at TBC's election, with GSK having the first opportunity to
commercialize. Mitsubishi may also request the joint development committee to
develop new indications inside or outside the licensed field of use, and if the
joint development committee determines that it does not want to proceed with any
such indication, all rights under the agreement with Mitsubishi regarding such
indication will revert to Mitsubishi subject to our and GSK's right to
commercialize the indication, with GSK having the first opportunity to
commercialize.
The agreement with GSK generally terminates on a country-by-country basis
upon the earlier of the termination of our rights under the agreement with
Mitsubishi, the expiration of applicable patent rights, or in the case of
certain 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 us at least three months written notice that the
commercial profile of the product in question would not justify continued
development or marketing in that country. In addition, either party may
terminate the agreement on 60 days notice if the other party defaults in its
obligations under the agreement,
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declares bankruptcy or becomes insolvent. We agreed to pay an agent involved in
the negotiation of this agreement a fee based on a percentage of all
consideration we receive, including royalties, from sales of Argatroban.
At present, Mitsubishi is the only manufacturer of Argatroban, and has
entered into an agreement with GSK to supply Argatroban in bulk to meet GSK's
needs. 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 agreement provides for the nonexclusive transfer of
the production technology to GSK. If GSK cannot commence manufacturing of
Argatroban in a timely manner or if alternate sources of supply are unavailable
or uneconomical, our results of operations would be harmed. GSK has informed us
that they will be finishing and packaging in a GSK facility in the future.
In connection with the execution of our agreement with GSK, GSK purchased
176,922 shares of common stock for $1.0 million and an additional 400,000 shares
of common stock for $2.0 million in connection with the secondary public
offering, which closed on October 1, 1997.
ICOS-TBC L.P. In June 2000, we entered into a limited partnership agreement
with ICOS to form ICOS-TBC. The partnership was formed to develop and globally
commercialize endothelin-A receptor antagonists from the TBC endothelin
antagonist program. ICOS-TBC has made an upfront license fee payment and
milestone payment for the development and commercialization of products
resulting from the collaboration and the partners equally funded the cost of
research and development through the end of 2002. In January 2003, ICOS
announced that they had reached a conclusion that joint development of the
endothelin receptor antagonist program, through ICOS-TBC should not continue.
ICOS and TBC are currently negotiating the terms pursuant to which TBC could
independently continue the program. The financial terms of this transaction are
subject to ongoing negotiations between the two companies. If TBC is successful
in obtaining 100% ownership of the program, TBC's share of the costs and
potential commercial benefit of the program will increase from 50% to 100%. See
Note 8 to the Consolidated Financial Statements for a discussion of this
transaction.
Schering-Plough. In June 2000, TBC and Schering-Plough entered into a
worldwide research collaboration and license agreement to discover, develop and
commercialize VLA-4 antagonists, with Schering-Plough having rights to a second
integrin antagonist target. In addition to funding research costs,
Schering-Plough paid TBC an upfront license fee and milestone payment, and will
pay us additional development milestones and royalties on product sales
resulting from the agreement. Total payments to us for both programs, excluding
royalties, could reach $87.0 million. See Note 8 to the Consolidated Financial
Statements for a discussion of this transaction.
Revotar Biopharmaceuticals, AG. During September 2000, Revotar was formed and
we transferred to Revotar certain development and commercialization rights to
our selectin antagonist program as well as rights to other proprietary
technology. See Note 9 to the Consolidated Financial Statements for a discussion
of this transaction. The primary focus of Revotar has been on the design and
initiation of a Phase I trial for bimosiamose using the inhaled formulation of
the drug, which was completed during 2001. During 2002, Revotar began a Phase
IIa clinical trial in asthma, utilizing the inhaled form and intends to commence
a Phase IIa clinical trial in psoriasis utilizing the topical form in 2003.
LICENSES AND PATENTS
Because of the substantial length of time and expense associated with
developing new pharmaceutical products, the biotechnology industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Our policy is to file patent applications
to protect technology, inventions and improvements that are important to the
development of our business. We have 18 pending U.S. patent applications and 34
issued U.S. patents covering compounds including selectin inhibitors, endothelin
antagonists and VCAM/VLA-4 antagonists. In addition, we have exclusive licenses
to three patents covering rational drug design technology. We have also filed
patent applications in certain foreign jurisdictions covering projects that are
the subject of U.S. applications and intend to file additional patent
applications as our research projects develop.
We in-licensed the U.S. and Canadian rights to Argatroban in 1993, which
included access to an improved formulation patent granted in 1993, which expires
in 2012, and a use 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. We have access to other patents held by Mitsubishi,
however, these are not being utilized currently.
14
Argatroban received FDA approval on June 30, 2000. 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 patent positions of biopharmaceutical firms, including us, are uncertain
and involve complex legal and factual questions. Consequently, we do not know
whether any of our applications will result in the issuance of patents or, if
any patents are issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the U.S. are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lags behind actual
discoveries, we cannot be certain that we were the first creator of inventions
covered by our pending patent applications or that we were the first to file
patent applications for such inventions. Moreover, we may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office,
commonly known as the PTO, to determine priority of invention, which could
result in substantial cost to us, even if the eventual outcome is favorable to
us. We have no interference proceedings pending which involve compounds
currently of commercial interest to us. We cannot assure you that our patents,
if issued, would be held valid by a court of competent jurisdiction. An adverse
outcome could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require us to cease using
such technology.
The development of therapeutic products for cardiovascular applications is
intensely competitive. Many pharmaceutical companies, biotechnology companies,
universities and research institutions have filed patent applications or
received patents in this field. Some of these applications or patents may be
competitive with our applications or conflict in certain respects with claims
made under our applications. Such conflict could result in a significant
reduction of the coverage of our patents, if issued. In addition, if patents are
issued to other companies that contain competitive or conflicting claims and
such claims are ultimately determined to be valid, we cannot assure you that we
would be able to obtain licenses to these patents at a reasonable cost or
develop or obtain alternative technology.
We also rely upon trade secret protection for our confidential and
proprietary information. We cannot assure you that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets or disclose such technology, or that
we can meaningfully protect our trade secrets.
We require our employees, consultants, members of our scientific advisory
board, outside scientific collaborators and sponsored researchers and certain
other advisors to enter into confidentiality agreements with us that contain
assignment of invention clauses. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of our employees,
the agreements provide that all inventions conceived by the employee are our
exclusive property. We cannot assure you, however, that these agreements will
provide meaningful protection or adequate remedies for our trade secrets in the
event of unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
The research, testing, manufacture and marketing of drug products are
extensively regulated by numerous governmental authorities in the United States
and other countries. In the United States, drugs are subject to rigorous
regulation by the FDA. The Federal Food, Drug and Cosmetic Act, and other
federal and state statutes and regulations, govern, among other things, the
research, development, testing, manufacture, storage, record keeping, labeling,
promotion and marketing and distribution of pharmaceutical products. Failure to
comply with applicable regulatory requirements may subject a company to
administrative or judicially imposed sanctions such as:
- warning letters;
- civil penalties;
15
- criminal prosecution;
- injunctions;
- product seizure;
- product recalls;
- total or partial suspension of production; and
- FDA refusal to approve pending New Drug Application ("NDA") applications
or NDA supplements to approved applications.
The steps ordinarily required before a new pharmaceutical product may be
marketed in the United States include:
- preclinical laboratory tests, animal tests and formulation studies;
- the submission to the FDA of an IND, which must become effective before
clinical testing may commence;
- adequate and well-controlled clinical trials to establish the safety and
effectiveness of the drug for each indication;
- the submission of an NDA to the FDA; and
- FDA review and approval of the NDA prior to any commercial sale or
shipment of the drug.
Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal trials to assess the potential safety and
efficacy of the product. Preclinical tests must be conducted in compliance with
Good Laboratory Practice guidelines and compounds for clinical use must be
formulated according to compliance with Good Manufacturing Practice, or cGMP,
requirements. The results of preclinical testing are submitted to the FDA as
part of the IND and NDA.
A 30-day waiting period after the filing of each IND is required prior to the
commencement of clinical testing in humans. If the FDA has not commented on or
questioned the IND within this 30-day period, clinical trials may begin. If the
FDA has comments or questions, the questions must be answered to the
satisfaction of the FDA before initial clinical testing can begin. In addition,
the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If
the FDA imposes a clinical hold, clinical trials cannot commence or recommence
without FDA authorization and then only under terms authorized by the FDA. In
some instances, the IND application process can result in substantial delay and
expenses.
Clinical trials involve the administration of the investigational new drug to
healthy volunteers or patients under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with Good Clinical
Practice guidelines, under protocols detailing the objectives of the trial, the
parameters to be used in monitoring safety and the effectiveness criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND. The
study protocol and informed consent information for patients in clinical trials
must also be approved by the institutional review board at each institution
where the trials will be conducted.
Clinical trials to support NDAs are typically conducted in three sequential
phases, which may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects or patients, the drug is tested to assess metabolism,
pharmacokinetics and pharmacological actions and safety, including side effects
associated with increasing doses. Phase II usually involves trials in a limited
patient population to:
- determine dosage tolerance and optimal dosage;
- identify possible adverse effects and safety risks; and
16
- preliminarily support the efficacy of the drug in specific, targeted
indications.
If a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluation, Phase III trials are undertaken to further
evaluate clinical efficacy and to further test for safety within an expanded
patient population at geographically dispersed clinical trial sites. There can
be no assurance that Phase I, Phase II or Phase III testing of our product
candidates will be completed successfully within any specified time period, if
at all.
After completion of the required clinical testing, generally an NDA is
prepared and submitted to the FDA. FDA approval of the NDA is required before
marketing may begin in the United States. The NDA must include the results of
extensive clinical and other testing and the compilation of data relating to the
product's chemistry, pharmacology and manufacture. The cost of an NDA is
substantial.
The FDA has 60 days from its receipt of the NDA to determine whether the
application will be accepted for filing based on the threshold determination
that the NDA is sufficiently complete to permit substantive review. Once the
submission is accepted for filing, the FDA begins an in-depth review of the NDA.
Currently, for a standard review, the FDA takes approximately twelve months in
which to review the NDA and respond to the applicant. In 1997, Congress enacted
the Food and Drug Administration Modernization Act, in part, to ensure the
availability of safe and effective drugs by expediting the FDA review process
for certain new products. This act establishes a statutory program for the
approval of fast track products (those drugs which address unmet medical needs
for serious and life-threatening conditions). Under this act, the FDA has six
months in which to review the NDA and respond to the applicant. The review
process is often significantly extended by FDA requests for additional
information or clarification regarding information already provided in the
submission. The FDA may refer the application to the appropriate advisory
committee, typically a panel of clinicians, for review, evaluation and a
recommendation as to whether the application should be approved. The FDA is not
bound by the recommendation of an advisory committee.
If FDA evaluations of the NDA and the manufacturing facilities are favorable,
the FDA may issue an approval letter, or, in some cases, an approvable letter
followed by an approval letter. The approvable letter may contain a number of
conditions that must be met in order to secure final approval of the NDA. When
and if those conditions have been met to the FDA's satisfaction, the FDA will
issue an approval letter. The approval letter authorizes commercial marketing of
the drug for specific indications. As a condition of NDA approval, the FDA may
require post-marketing testing and surveillance to monitor the drug's safety or
efficacy, or impose other conditions, commonly referred to as Phase IV trials.
If the FDA's evaluation of either the NDA submission or manufacturing
facilities is not favorable, the FDA may refuse to approve the NDA or issue a
not approvable letter. The not approvable letter outlines the deficiencies in
the submission and often requires additional testing or information.
Notwithstanding the submission of any requested additional data or information
in response to an approvable or not approvable letter, the FDA ultimately may
decide that the application does not satisfy the regulatory criteria for
approval. Once granted, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or problems occur following initial
marketing.
Manufacturing. Each domestic drug manufacturing facility must be registered
with FDA. Domestic drug manufacturing establishments are subject to periodic
inspection by the FDA and must comply with cGMP. Further, we or our third party
manufacturer must pass a preapproval inspection of its manufacturing facilities
by the FDA before obtaining marketing approval of any products. To supply
products for use in the United States, foreign manufacturing establishments must
comply with cGMP and are subject to periodic inspection by the FDA or
corresponding regulatory agencies in countries under reciprocal agreements with
the FDA. We use and will continue to use third party manufacturers to produce
our products in clinical and commercial quantities. There can be no guarantee
that future FDA inspections will proceed without any compliance issues requiring
the expenditure of money or other resources.
Foreign Regulation of Drug Compounds. Whether or not FDA approval has been
obtained, approval of a product by comparable regulatory authorities is
necessary in foreign countries prior to the commencement of marketing of the
product in those countries. The approval procedure varies among countries and
can involve additional testing. The time required may differ from that required
for FDA approval. Although there are some procedures for unified filings for
some European countries with the sponsorship of the country which first granted
marketing approval, in general each country has its own procedures and
requirements, many of which are time consuming and expensive. Thus, there can be
substantial delays in obtaining required approvals from foreign regulatory
authorities after the relevant
17
applications are filed.
In Europe, marketing authorizations may be submitted at a centralized, a
decentralized or a national level. The centralized procedure is mandatory for
the approval of biotechnology products and provides for the grant of a single
marketing authorization, which is valid in all European Union member states. As
of January 1995, a mutual recognition procedure is available at the request of
the applicant for all medicinal products, which are not subject to the
centralized procedure. We will choose the appropriate route of European
regulatory filing to accomplish the most rapid regulatory approvals. There can
be no assurance that the chosen regulatory strategy will secure regulatory
approvals on a timely basis or at all.
Hazardous Materials. 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.
COMPETITION
The development and sale of new drugs for the treatment of vascular and
inflammatory diseases is highly competitive and we will face intense competition
from major pharmaceutical companies and biotechnology companies all over the
world. Competition is likely to increase as a result of advances made in the
commercial application of technologies and greater availability of funds for
investment in these fields. Companies that complete clinical trials, obtain
required regulatory approvals and initiate commercial sales of their products
before their competitors may achieve a significant competitive advantage. In
addition, significant research in biotechnology and vascular medicine may occur
in universities and other nonprofit research institutions. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. They also compete with us in recruiting talented
scientists and business professionals.
We believe that our ability to compete successfully will depend on our
ability to create and maintain scientifically-advanced technology, develop
proprietary products, attract and retain scientific and other personnel, obtain
patent or other protection for our products, obtain required regulatory
approvals and manufacture and successfully market products through other
companies, through co-promotion agreements or alone. Many of our competitors
have substantially greater financial, marketing, and human resources than we do.
We expect to encounter significant competition.
MANUFACTURING AND MARKETING
We rely on our internal resources and third-party manufacturers to produce
compounds for preclinical development. Currently, we have no manufacturing
facilities for either the production of biochemicals or the manufacture of final
dosage forms. We believe small molecule drugs are less expensive to manufacture
than protein-based therapeutics, and that all of our existing compounds can be
produced using established manufacturing methods, including traditional
pharmaceutical synthesis.
We have established supply arrangements with third-party manufacturers for
certain clinical trials and have established and will establish supply
arrangements ultimately for commercial distribution, although there can be no
assurance that such arrangements will be established on reasonable terms. Our
long-range plan may involve establishing internal manufacturing of small
molecule therapeutics, including the ability to formulate, fill, label, package
and distribute our products. However, for the foreseeable future we plan to
outsource such manufacturing. We do not anticipate developing an internal
manufacturing capability for some time, nor are we able to determine which of
our potential products, if any, will be appropriate for internal manufacturing.
The primary factors we will consider in making this determination are the
availability and cost of third-party sources, the expertise required to
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manufacture the product and the anticipated manufacturing volume. Pursuant to
our agreement with GSK, GSK entered into an agreement with Mitsubishi regarding
the manufacture and supply of Argatroban, and we will not, therefore, have any
direct responsibility regarding the manufacture and supply of Argatroban as it
relates to the agreement with GSK.
EMPLOYEES
As of December 31, 2002, we employed 104 individuals. During January 2003, we
implemented a restructuring plan that reduced our work force to 82. Of our
restructured work force, 66 employees are engaged directly in research and
development activities and 16 in general and administrative positions. None of
our employees are represented by a labor union. We have experienced no work
stoppages and believe that relations with our employees are good. We also
maintain consulting agreements with a number of scientists at various
universities and other research institutions.
CONSULTANTS AND SCIENTIFIC ADVISORS
We have assembled a scientific advisory board composed of distinguished
professors from some of the most prestigious medical schools. The scientific
advisory board assists us in identifying research and development opportunities,
in reviewing with management the progress of our projects and in recruiting and
evaluating scientific staff. Although we expect to receive guidance from the
members of our scientific advisory board, all of its members are employed on a
full-time basis by others and, accordingly, are able to devote only a small
portion of their time to us. Management expects to meet with its scientific
advisory board members as a group approximately once each year and individually
from time to time on an informal basis. We have entered into a consulting
agreement with each member of the scientific advisory board. The Scientific
Advisory Board includes James T. Willerson, M.D., as Chairman, and the following
scientists.
Ferid Murad, M.D., Ph.D. is Professor and Chairman of the Department of
Integrative Biology and Pharmacology at the University of Texas-Houston Medical
School and the Director of the Institute of Molecular Medicine. Dr. Murad has
received many honors including the Nobel Prize in Medicine in 1998, the Ciba
Award in 1988 and the Albert and Mary Lasker Award in Basic Medical Research in
1996. He is also a member of many professional and honorary societies and is the
author or co-author of more than 300 scientific articles.
Ajit Varki, M.D. has been a Professor of Medicine since 1991 and is
currently serving in that position as well as leader of the glycobiology
program at the University of California, San Diego. Dr. Varki served as
Instructor in Medicine at Washington University School of Medicine from
1980 to 1982. He also served as Assistant Professor of Medicine from 1982
to 1987 and as Associate Professor of Medicine from 1987 to 1991 at the
University of California, San Diego. In 1975, Dr. Varki received an M.D.
from Christian Medical College and his Post-Doctorate in Biochemistry from
Washington University from 1979 to 1982. He is a member of various
professional societies and has won numerous awards since 1969. He is
currently president of the American Society for Clinical Investigation.
Dr. Varki is the author or co-author of 160 scientific publications.
Denton Cooley, M.D., Surgeon-in-Chief of the Texas Heart Institute,
acts as an advisory director to us.
We also have agreements with various outside scientific consultants who
assist us in formulating our research and development strategy. All of our
consultants and advisors are employed by other employers and may have
commitments to or consulting or advisory contracts with other entities that may
affect their ability to work with us.
INTERNET WEBSITE
Our Internet website can be found at www.tbc.com. We make available free of
charge, or through the "Investor Relations" section of our Internet website at
www.tbc.com, access to our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after such material is filed, or furnished to the Securities and
Exchange Commission.
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ADDITIONAL RISK FACTORS
Stockholders and potential investors in shares of our stock should carefully
consider the following risk factors, in addition to other information in this
Form 10-K. We are identifying these risk factors as important factors that could
cause our actual results to differ materially from those contained in any
written or oral forward-looking statements made by or on behalf of us. We are
relying upon the safe-harbor for forward-looking statements and any such
statements made by or on behalf of us are qualified by reference to the
following cautionary statements, as well as to those set forth elsewhere in this
Form 10-K.
RISKS RELATED TO OUR BUSINESS, INDUSTRY AND STRATEGY
THERE IS UNCERTAINTY IN THE DEVELOPMENT OF OUR PRODUCTS AND IF WE DO NOT
SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE WILL NOT BE PROFITABLE.
In November 2000, we began to market our first product, Argatroban, through
our agreement with GSK. However, the royalties produced to date by Argatroban
have not made us profitable. To date, the majority of our resources have been
dedicated to the research and development of Argatroban and other small molecule
drugs for certain vascular and related inflammatory diseases. The commercial
applications of our product candidates will require further investment,
research, development, preclinical and clinical testing and regulatory
approvals, both foreign and domestic. We cannot assure you that we will be able
to develop, produce at reasonable cost, or market successfully, any of our
product candidates. Further, these product candidates may require complex
delivery systems that may prevent or limit their commercial use. All of our
products will require regulatory approval before they may be commercialized.
Products, if any, resulting from our research and development programs other
than Argatroban, are not expected to be commercially available for a number of
years, and we cannot assure you that any successfully developed products will
generate substantial revenues or that we will ever be profitable.
WE FACE SUBSTANTIAL COMPETITION THAT MAY RESULT IN OTHERS DEVELOPING AND
COMMERCIALIZING PRODUCTS MORE SUCCESSFULLY THAN WE DO.
The biopharmaceutical industry is highly competitive. Our success will depend
on our ability to develop products and apply technology and to establish and
maintain a market for our products. Potential competitors in the U.S. and other
countries include major pharmaceutical and chemical companies, specialized
biotechnology firms, universities and other research institutions. Many of our
competitors have substantially greater research and development capabilities and
experience and greater manufacturing, marketing and financial resources than we
do. Accordingly, our competitors may develop products or other novel
technologies that are more effective, safer or less costly than any that have
been or are being developed by us or may obtain FDA approval for products more
rapidly than we are able.
We expect significant competition for Argatroban for the treatment of HIT.
The products that compete with Argatroban include:
- Refludan(R), which was approved by the FDA in 1997 for the treatment of
HIT;
- Orgaran(R), which is a low molecular weight heparinoid that has been
approved for the treatment of deep vein thrombosis, but is believed to be
used without an approved indication ("off-label") for the treatment of HIT
in the U.S.; and
- Angiomax(R), which is approved for use in the U.S. as an anticoagulant in
patients with unstable angina undergoing percutaneous transluminal
coronary angioplasty.
We may also face competition for Argatroban in indications other than HIT,
when and if such indications are approved by the FDA, including:
- Revasc(R), which is used in the treatment of deep vein thrombosis
following hip surgery and has received regulatory approval in Europe;
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- Angiomax(R), which is in Phase III clinical trials for acute coronary
syndromes and conducting clinical trials in HIT patients;
- Arixtra(R), which is approved for the prevention of deep vein thrombosis
and pulmonary embolism; and
- Melagatran, which is being developed as a treatment for deep vein
thrombosis and is in Phase III trials.
We cannot assure you that technological development by others will not render
our products or product candidates uncompetitive or that we will be successful
in establishing or maintaining technological competitiveness.
WE ARE DEPENDENT ON THIRD PARTIES TO FUND, MARKET AND DEVELOP OUR PRODUCTS,
INCLUDING ARGATROBAN.
We rely on strategic relationships with our corporate partners to provide the
financing, marketing and technical support and, in certain cases, the technology
necessary to develop and commercialize certain of our product candidates. We
have entered into an agreement with Mitsubishi to license rights and technology
relating to Argatroban in the U.S. and Canada for specified therapeutic
indications. 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 becomes insolvent, or if a substantial portion
of its property is subject to levy. Unless terminated sooner due to the
above-described termination provisions, the agreement with Mitsubishi expires on
the later of the termination of patent rights in a particular country or 20
years after the first commercial sale of products in a particular country.
We also entered into an agreement with GSK in 1997 whereby we granted an
exclusive sublicense to GSK relating to the continued development and
commercialization of Argatroban. This agreement provides for the payment of
royalties and certain milestone payments upon the completion of various
regulatory filings and receipt of regulatory approvals. The agreement generally
terminates on a country-by-country basis upon the earlier of the termination of
our rights under the agreement with Mitsubishi, the expiration of applicable
patent rights, or in the case of certain royalty payments, the introduction of a
substantial competitor for Argatroban by another pharmaceutical company. GSK
also has the right to terminate the agreement on a country by country basis by
giving us at least three months written notice based on a reasonable
determination by GSK that the commercial profile of the therapeutic indication
in question would not justify continued development or marketing in that
country. In addition, either we or GSK may terminate our agreement on 60 days
notice if the other party defaults in its obligations under the agreement,
declares bankruptcy or becomes insolvent.
ICOS-TBC has the responsibility for developing endothelin antagonist
compounds from our research program. Should the partners not be able to
successfully conduct the research and clinical development of the compounds, we
could be adversely affected. There is no guarantee that the partnership will
have adequate funds to pursue its research and clinical goals or that the effort
will be successful. In January 2003, ICOS announced that they had reached a
conclusion that joint development of the endothelin receptor antagonist program,
through ICOS-TBC should not continue. ICOS and we are currently negotiating the
terms pursuant to which we could independently continue the program. We are
entirely responsible for independently funding future development activities of
ICOS-TBC subsequent to 2002 which we believe will be between $19 and $21 million
in 2003. A delay in reaching an agreement with ICOS could adversely affect or
delay the development of the endothelin receptor antagonist program.
In 2002, the stockholders of Revotar executed an agreement to provide
approximately $4.5 million in unsecured loans, of which our commitment was
approximately $3.4 million. Under the loan agreement, we have advanced
approximately $1.2 million to Revotar during 2002. We believe that Revotar's
existing funds, the remaining commitments under the loan agreement and proceeds
under German government scientific grants will be sufficient to fund Revotar
into the first quarter of 2004. In order to continue to operate beyond that
time, Revotar will need to seek additional funding through collaborative
arrangements and/or through public or private financings in the future.
Our collaboration and license agreement with Schering-Plough for VLA-4
antagonists contains a provision that allows for termination of the research
program upon one hundred eighty days written notice to us.
Our success will depend on these and any future strategic alliances. There
can be no assurance that we will satisfy the conditions required to obtain
additional research or milestone payments under the existing agreements or that
we can prevent the termination of these agreements. We cannot assure you that we
will be able to enter into
21
future strategic alliances on acceptable terms. The termination of any existing
strategic alliances or the inability to establish additional collaborative
arrangements may limit our ability to develop our technology and may have a
material adverse effect on our business or financial condition.
RISKS RELATING TO CLINICAL AND REGULATORY MATTERS
THE REGULATORY APPROVAL PROCESS IS COSTLY AND LENGTHY AND WE MAY NOT BE ABLE
TO SUCCESSFULLY OBTAIN ALL REQUIRED REGULATORY APPROVALS.
The preclinical development, clinical trials, manufacturing, marketing and
labeling of pharmaceuticals are all subject to extensive regulation by numerous
governmental authorities and agencies in the U.S. and other countries. We must
obtain regulatory approval for each of our product candidates before marketing
or selling any of them. It is not possible to predict how long the approval
processes of the FDA or any other applicable federal, state or foreign
regulatory authority or agency for any of our products will take or whether any
such approvals ultimately will be granted. Positive results in preclinical
testing and/or early phases of clinical studies offer no assurance of success in
later phases of the approval process. Generally, preclinical and clinical
testing of products can take many years, and require the expenditure of
substantial resources, and the data obtained from these tests and trials can be
susceptible to varying interpretation that could delay, limit or prevent
regulatory approval. Any delay in obtaining, or failure to obtain, approvals
could adversely affect the marketing of our products and our ability to generate
product revenue.
The risks associated with the approval process include:
- delays or rejections in the regulatory approval process based on the
failure of clinical or other data to meet expectations, or the failure of
the product to meet a regulatory agency's requirements for safety,
efficacy and quality; and
- regulatory approval, if obtained, may significantly limit the indicated
uses for which a product may be marketed.
OUR CLINICAL TRIALS COULD TAKE LONGER TO COMPLETE AND COST MORE THAN WE
EXPECT, WHICH MAY RESULT IN OUR DEVELOPMENT PLANS BEING SIGNIFICANTLY
DELAYED.
We will need to conduct clinical studies of all of our product candidates.
These studies are costly, time consuming and unpredictable. Any unanticipated
costs or delays in our clinical studies could cause us to expend substantial
additional funds or to delay or modify our plans significantly, which would harm
our business, financial condition and results of operations. The factors that
could contribute to such cost, delays or modifications include:
- the cost of conducting human clinical trials for any potential product.
These costs can vary dramatically based on a number of factors, including
the order and timing of clinical indications pursued and the development
and financial support from corporate partners; and
- intense competition in the pharmaceutical market, which may make it
difficult for us to obtain sufficient patient populations or clinician
support to conduct our clinical trials as planned.
EVEN IF WE OBTAIN MARKETING APPROVAL, OUR PRODUCTS WILL BE SUBJECT TO ONGOING
REGULATORY OVERSIGHT, WHICH MAY AFFECT THE SUCCESS OF OUR PRODUCTS.
Any regulatory approvals that we receive for a product may be subject to
limitations on the indicated uses for which the product may be marketed or
contain requirements for potentially costly post-marketing follow-up Phase IV
studies. After we obtain marketing approval for any product, the manufacturer
and the manufacturing facilities for that product will be subject to continual
review and periodic inspections by the FDA and other regulatory authorities. The
subsequent discovery of previously unknown problems with the product or with the
manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecution.
22
RISKS RELATING TO FINANCING OUR BUSINESS
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, AND WE MAY
NOT BE SUCCESSFUL IN RAISING ADDITIONAL FUNDS IN THE FUTURE.
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. We have accumulated approximately $148.2
million in net losses through December 31, 2002. Estimates of our future capital
requirements will depend on many factors, including:
- market acceptance and commercial success of Argatroban;
- expenses and risks associated with clinical trials to expand the
indications for Argatroban;
- continued scientific progress in our drug discovery programs;
- the magnitude of these programs;
- progress with preclinical testing and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the costs involved in filing, prosecuting and enforcing patent claims;
- competing technological and market developments and changes in our
existing research relationships;
- our ability to maintain and establish additional collaborative
arrangements; and
- 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. Notwithstanding revenues, which may be produced through sales of
potential future products if approved, we anticipate that we will need to secure
additional funds to continue the required levels of research and development to
reach our long-term goals. We intend to seek such additional funding through
collaborative arrangements and/or through public or private financings.
We cannot assure you that additional financing will be available or, if
available, that it will be available on acceptable terms. If additional funds
are raised by issuing securities, further dilution of the equity ownership of
existing stockholders will result. If adequate funds are not available, we may
be required to delay, scale back or eliminate one or more of our drug discovery
or development programs or obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to certain of our
technologies, product candidates or products that we would not otherwise
relinquish.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR OPERATING RESULTS.
We have historically experienced, and expect to continue to experience for
the foreseeable future, significant fluctuations in our operating results. These
fluctuations are due to a number of factors, many of which are outside of our
control, and may result in volatility of our stock price. Future operating
results will depend on many factors, including:
- demand for our products;
- regulatory approvals for our products;
23
- the timing of the introduction and market acceptance of new products by us
or competing companies; and
- the timing and magnitude of certain research and development expenses.
RISKS RELATED TO ONGOING OPERATIONS
WE ARE DEPENDENT ON QUALIFIED PERSONNEL.
Our success is highly dependent on our ability to attract and retain
qualified scientific and management personnel. The loss of the services of the
principal members of our management and scientific staff including Bruce D.
Given, M.D., our President and Chief Executive Officer, and Richard A.F. Dixon,
Ph.D., our Senior Vice President, Research and Chief Scientific Officer, may
impede our ability to bring products to market. In order to commercialize
products, we must maintain and expand our personnel as needs arise in the areas
of research, clinical trial management, manufacturing, sales and marketing. We
face intense competition for such personnel from other companies, academic
institutions, government entities and other organizations. We cannot assure you
that we will be successful in hiring or retaining qualified personnel. Managing
the integration of new personnel and our growth in general could pose
significant risks to our development and progress.
We also rely on consultants and advisors to assist us in formulating our
research and development strategy. All our consultants and advisors are either
self-employed or employed by other organizations, and they may have other
commitments such as consulting or advisory contracts with other organizations
that may affect their ability to contribute to us.
THE HAZARDOUS MATERIAL WE USE IN OUR RESEARCH AND DEVELOPMENT COULD RESULT IN
SIGNIFICANT LIABILITIES, WHICH MAY EXCEED OUR INSURANCE COVERAGE.
Our research and development activities involve the use of hazardous
materials. While we believe that we are currently in substantial compliance with
federal, state and local laws and regulations governing the use of these
materials, accidental injury or contamination may occur. Any such accident or
contamination could result in substantial liabilities, which could exceed the
policy limits of our insurance coverage and financial resources. Additionally,
the cost of compliance with environmental and safety laws and regulations may
increase in the future.
WE MAY BE SUED FOR PRODUCT LIABILITY, WHICH MAY PREVENT OR INTERFERE WITH THE
DEVELOPMENT OR COMMERCIALIZATION OF OUR PRODUCTS.
Because our products and product candidates are new treatments, with limited,
if any, past use on humans, serious undesirable and unintended side effects may
arise. We may be subject to product liability claims that are inherent in the
testing, manufacturing, marketing and sale of pharmaceutical products. These
claims could expose us to significant liabilities that could prevent or
interfere with the development or commercialization of our products and
seriously impair our financial position. Product liability insurance is
generally expensive for biopharmaceutical companies such as ours. We maintain
product liability insurance coverage for claims arising from the use of our
products in clinical trials prior to FDA approval. Under the agreements with
Mitsubishi and GSK, we maintain product liability insurance to cover claims that
may arise from the sale of Argatroban. Our existing coverage will not be
adequate as we further develop products and continue to sell Argatroban. We
cannot assure you that we will be able to maintain our existing insurance
coverage or obtain additional coverage on commercially reasonable terms for
liability arising from the use of our other products in the future. Also, this
insurance coverage and our resources may not be sufficient to satisfy any
liability resulting from product liability claims and a product liability claim
may have a material adverse effect on our business, financial condition or
results of operations.
RISKS RELATING TO PRODUCT MANUFACTURING AND SALES
WE HAVE VERY LIMITED MANUFACTURING, MARKETING OR SALES EXPERIENCE.
We have very limited manufacturing, marketing or product sales experience. If
we develop any additional commercially marketable products, we cannot assure you
that contract manufacturing services will be available in sufficient capacity to
supply our product needs on a timely basis. If we decide to build or acquire
commercial scale manufacturing capabilities, we will require additional
management and technical personnel and additional capital.
24
If in the future, we decide to perform sales and marketing activities
ourselves, we would face a number of additional risks, including:
- - we may not be able to attract and build a significant marketing or
sales force;
- - the cost of establishing a marketing or sales force may not be
justifiable in light of product revenues; and
- - our direct sales and marketing efforts may not be successful.
WE CANNOT ASSURE YOU THAT THE RAW MATERIALS NECESSARY FOR THE MANUFACTURE OF
OUR PRODUCTS WILL BE AVAILABLE IN SUFFICIENT QUANTITIES OR AT A REASONABLE
COST.
Complications or delays in obtaining raw materials or in product
manufacturing could delay the submission of products for regulatory approval and
the initiation of new development programs, each of which could materially
impair our competitive position and potential profitability. We can give no
assurance that we will be able to enter into any other supply arrangements on
acceptable terms, if at all.
WE ARE DEPENDENT ON A SINGLE SUPPLIER OF ARGATROBAN.
At the present time, Mitsubishi is the only manufacturer of Argatroban in
bulk form. Mitsubishi has entered into a supply agreement with GSK to supply
Argatroban in bulk to meet GSK's and our needs. Should Mitsubishi fail during
any consecutive nine-month period to supply GSK with at least 80 percent of its
requirements, and such requirements cannot be satisfied by existing inventories,
the supply agreement with Mitsubishi provides for the nonexclusive transfer of
the production technology to GSK. However, in the event Mitsubishi terminates
manufacturing Argatroban or defaults in its supply commitment, we cannot assure
you that GSK will be able to commence manufacturing of Argatroban in a timely
manner or that alternate sources of bulk Argatroban will be available at
reasonable cost, if at all. If GSK cannot commence the manufacturing of
Argatroban or alternate sources of supply are unavailable or are not available
on commercially reasonable terms, it could harm our profitability. In addition,
finishing and packaging has only been arranged with one manufacturing facility
in the U.S. GSK has informed us that they will be finishing and packaging in a
GSK facility sometime in the future.
OUR PRODUCTS, EVEN IF APPROVED BY THE FDA OR FOREIGN REGULATORY AGENCIES, MAY
NOT BE ACCEPTED BY HEALTH CARE PROVIDERS, INSURERS OR PATIENTS.
If any of our products, including Argatroban, after receiving FDA or other
foreign regulatory approval, fail to achieve market acceptance, our ability to
become profitable in the future will be adversely affected. We believe that
market acceptance will depend on our ability to provide acceptable evidence of
safety, efficacy and cost effectiveness. In addition, market acceptance depends
on the effectiveness of our marketing strategy and the availability of
reimbursement for our products.
THE SUCCESSFUL COMMERCIALIZATION OF OUR PRODUCTS IS DEPENDENT ON
PHARMACEUTICAL PRICING AND THIRD-PARTY REIMBURSEMENT.
In recent years, there have been numerous proposals to change the health care
system in the United States. Some of these proposals have included measures that
would limit or eliminate payments for medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. In addition,
government and private third-party payors are increasingly attempting to contain
health care costs by limiting both the coverage and the level of reimbursement
of drug products. Consequently, the reimbursement status of newly approved
health care products is highly uncertain, and there can be no assurance that
third-party coverage will be available or that available third-party coverage
will enable us to maintain price levels sufficient to realize an appropriate
return on our investment in product development. Our long-term ability to market
products successfully may depend in part on the extent to which reimbursement
for the cost of such products and related treatment will be available.
Third-party payors are increasingly challenging the prices of medical products
and services. Furthermore, inadequate third-party coverage may reduce market
acceptance of our products. Significant changes in the health care system in the
United States or elsewhere could have a material adverse effect on our business
and financial performance.
25
Sitaxsentan is likely to require distribution through a limited access
program which may make patient access and reimbursement more difficult.
Tracleer(R) is distributed pursuant to such a program.
RISKS RELATING TO INTELLECTUAL PROPERTY
WE MAY NOT BE ABLE TO PROTECT PROPRIETARY INFORMATION AND OBTAIN PATENT
PROTECTION.
We actively seek patent protection for our proprietary technology, both in
the U.S. and in other areas of the world. However, the patent positions of
pharmaceutical and biotechnology companies, including us, are generally
uncertain and involve complex legal, scientific and factual issues. Intellectual
property is an uncertain and developing area of the law that is potentially
subject to significant change. Our success will depend significantly on our
ability to:
- obtain patents;
- protect trade secrets;
- operate without infringing upon the proprietary rights of others; and
- prevent others from infringing on our proprietary rights.
We cannot assure you that patents issued to or licensed by us will not be
challenged, invalidated or circumvented, or that the rights granted will provide
competitive advantages to us. We cannot assure you that our patent applications
or pending patent applications, if and when issued, will be valid and
enforceable and withstand litigation. We cannot assure you that others will not
independently develop substantially equivalent, generic equivalent or
superseding proprietary technology or that an equivalent product will not be
marketed in competition with our products, thereby substantially reducing the
value of our proprietary rights. We may experience a significant delay in
obtaining patent protection for our products as a result of a substantial
backlog of pharmaceutical and biotechnology patent applications at the PTO.
Because patent applications in the U.S. are maintained in secrecy until patents
issue, other competitors may have filed or maintained patent applications for
technology used by us or covered by pending applications without our being aware
of these applications. In addition, patent protection, even if obtained, is
affected by the limited period of time for which a patent is effective. The
Mitsubishi composition of matter patent on Argatroban has expired. Moreover,
even if we have a patent or NDA exclusivity, we cannot assure you that generic
pharmaceutical manufacturers will not ultimately enter the market and compete
with us or that competitors might develop a different formulation of Argatroban.
We could also incur substantial costs in defending any patent infringement
suits or in asserting any patent rights, including those granted by third
parties, in a suit with another party. The PTO could institute interference
proceedings involving us in connection with one or more of our patents or patent
applications, and such proceedings could result in an adverse decision as to
priority of invention. The PTO or a comparable agency in a foreign jurisdiction
could also institute re-examination or opposition proceedings against us in
connection with one or more of our patents or patent applications and such
proceedings could result in an adverse decision as to the validity or scope of
the patents.
We may be required to obtain licenses to patents or other proprietary rights
from third parties. We cannot assure you that any licenses required under any
patents or proprietary rights would be made available on acceptable terms, if at
all. If we are unable to obtain required licenses, we could encounter delays in
product introductions while we attempt to design around blocking patents, or we
could find that the development, manufacture or sale of products requiring such
licenses could be foreclosed.
IF WE ARE UNABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND
INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US.
We rely significantly on trade secrets, know-how and continuing technological
advancement to maintain our competitive position. We try to protect this
information by entering into confidentiality agreements with our employees and
consultants, which contain assignment of invention provisions. Notwithstanding
these agreements, others may gain access to these trade secrets, such agreements
may not be honored and we may not be able to protect effectively our rights to
our unpatented trade secrets. Moreover, our trade secrets may otherwise become
known or independently developed by our competitors.
26
RISKS RELATED TO OUR COMMON STOCK OUTSTANDING
OUR STOCK PRICE COULD BE VOLATILE.
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In particular, the market price of our common stock, like
that of the securities of other biopharmaceutical companies, has been and may be
highly volatile. Factors such as announcements concerning technological
innovations, new commercial products or procedures by us or our competitors,
proposed governmental regulations and developments in both the U.S. and foreign
countries, disputes relating to patents or proprietary rights, publicity
regarding actual or potential medical results relating to products under
development by us or our competitors, public concern as to the safety of
biotechnology products, and economic and other external factors, as well as
period-to-period fluctuations and financial results, may have a significant
effect on the market price of our common stock.
From time to time, there has been limited trading volume with respect to our
common stock. In addition, there can be no assurance that there will continue to
be a trading market or that any securities research analysts will continue to
provide research coverage with respect to our common stock. It is possible that
such factors will adversely affect the market for our common stock.
On March 21, 2003, Nasdaq informed us that for the last 30 consecutive
trading days, the bid price of our common stock has closed below the minimum
$1.00 per share requirement for continued inclusion in The Nasdaq National
Market. Therefore, in accordance with Nasdaq Rules, we will be provided 180
calendar days, or until September 17, 2003, to regain compliance. If, at any
time before September 17, 2003, the bid price of our common stock closes at
$1.00 per share or more for a minimum of 10 consecutive trading days, The Nasdaq
will provide written notification that we have achieved compliance with this
rule. If compliance with this rule cannot be demonstrated by September 17, 2003,
the Nasdaq will provide written notification that our securities will be
delisted. At that time, we may appeal this determination to a Listing
Qualifications Panel or may apply to transfer our securities to The Nasdaq Small
Cap Market.
THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE, INCLUDING
WARRANTS, WHICH ARE CURRENTLY EXERCISABLE, COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR STOCK.
As of December 31, 2002, we have reserved approximately 6.0 million shares of
common stock for issuance under outstanding options, warrants and other
contingent agreements. Approximately 5.8 million of these shares of common stock
are registered for sale or resale on currently effective registration
statements, and the holders of substantially all of the remaining shares of
common stock are entitled to registration rights. The issuance of a significant
number of shares of common stock upon the exercise of stock options and
warrants, or the sale of a substantial number of shares of common stock under
Rule 144 or otherwise, could adversely affect the market price of the common
stock.
CERTAIN ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND
DELAWARE LAW MAY DETER OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY, EVEN IF
THAT CHANGE WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Our Certificate of Incorporation and the provisions of Section 203 of the
Delaware General Corporation Law contain certain provisions that may delay or
prevent an attempt by a third party to acquire control of us. Additionally, we
adopted a Shareholder Rights Plan in January 2002 that may delay or prevent such
attempt by a third party to acquire control of us. In addition, the severance
provisions of employment agreements with certain members of management could
impede an attempted change of control by a third party.
ITEM 2 -- PROPERTIES
We lease 15,490 square feet of office space in Bellaire, Texas for our
administrative, marketing, clinical development and regulatory departments. The
lease expires July 31, 2005 with an option to extend the lease to December 31,
2005, provided we give ninety (90) days prior written notice.
We also lease 31,359 square feet of office and laboratory space in another
building in Houston, Texas for our research department, including a 21,621
square foot laboratory facility and a 3,909 square foot animal facility. The
27
remaining area is being used for clinical development, computer modeling,
storage space and additional offices for scientists. Our lease expires in
December 2005. Additionally, we lease 658 square feet in the building for use as
storage space on a monthly basis.
Revotar leases 8,800 square feet of office and laboratory space in Berlin,
Germany. Their lease expires in September 2006.
We may require additional space to accommodate future research and laboratory
needs as necessary to bring products into development and clinical trials.
ITEM 3 -- LEGAL PROCEEDINGS
None
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the fourth
quarter of our fiscal year ended December 31, 2002.
28
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock began trading on The Nasdaq National Market on June 19, 2001
under the symbol "TXBI" before which our common stock was traded on the American
Stock Exchange under the symbol "TXB".
On March 21, 2003, Nasdaq informed us that for the last 30 consecutive
trading days, the bid price of our common stock has closed below the minimum
$1.00 per share requirement for continued inclusion in The Nasdaq National
Market. Therefore, in accordance with Nasdaq Rules, we will be provided 180
calendar days, or until September 17, 2003, to regain compliance. If, at any
time before September 17, 2003, the bid price of our common stock closes at
$1.00 per share or more for a minimum of 10 consecutive trading days, Nasdaq
will provide written notification that we have achieved compliance with this
rule. If compliance with this rule cannot be demonstrated by September 17, 2003,
the Nasdaq will provide written notification that our securities will be
delisted. At that time, we may appeal this determination to a Listing
Qualifications Panel or may apply to transfer our securities to The Nasdaq Small
Cap Market.
The following table sets forth, for the periods indicated, the high and low
sale prices for the common stock as reported by the consolidated transaction
reporting system.
COMMON STOCK
----------------
HIGH LOW
YEAR ENDED DECEMBER 31, 2001 ----- ----
First Quarter..................... 10.90 4.62
Second Quarter.................... 9.00 4.51
Third Quarter..................... 8.60 4.90
Fourth Quarter.................... 7.47 5.02
YEAR ENDED DECEMBER 31, 2002
First Quarter..................... 7.10 5.03
Second Quarter.................... 6.10 2.94
Third Quarter..................... 3.71 1.80
Fourth Quarter.................... 3.08 1.30
As of March 15, 2003 there were approximately 476 holders of record of our
common stock and approximately 16,000 beneficial owners.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
(a) REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EQUITY
BE ISSUED UPON EXERCISE EXERCISE PRICE OF COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
- ------------- ------------------------ -------------------- ----------------------------
Equity compensation plans
approved by security holders 5,012,500 $6.72 745,913
Equity compensation plans not
approved by security holders -- -- --
--------- ----- -------
Total 5,012,500 $6.72 745,913
========= ===== =======
See Note 3 to the Consolidated Financial Statements, included herein.
29
DIVIDEND POLICY
We have never declared or paid dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We intend to
retain any future earnings to finance our growth strategy and ongoing business.
Payment of future dividends, if any, will be at the discretion of the board of
directors after reviewing various factors, including our financial condition and
operating results, current and anticipated cash needs and restrictions which may
be in effect in any future financing agreement.
RECENT SALES OF UNREGISTERED SECURITIES
None.
30
ITEM 6 -- SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected financial data set forth below for each of the years in the
five-year period ended December 31, 2002 are derived from our audited
consolidated financial statements. The selected financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our 2002, 2001 and 2000
financial statements and notes thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ............................................................ $ 10,433 $ 8,917 $ 15,692 $ 2,083 $ 2,252
Expenses:
Research and development ......................................... 20,066 17,861 13,513 13,080 14,399
Equity in loss of affiliate ...................................... 8,557 9,450 3,487 -- --
Charge for purchase of in-process research
and development ............................................... -- -- -- -- 134
General and administrative ....................................... 8,976 6,733 6,552 5,512 4,321
-------- -------- -------- -------- --------
Total expenses ............................................. 37,599 34,044 23,552 18,592 18,854
-------- -------- -------- -------- --------
Operating loss ...................................................... (27,166) (25,127) (7,860) (16,509) (16,602)
Investment income, net ........................................... 2,472 5,236 4,362 1,212 2,088
-------- -------- -------- -------- --------
Loss before minority interest and cumulative effect of
change in accounting principle.................................... (24,694) (19,891) (3,498) (15,297) (14,514)
Minority interest in loss of Revotar ................................ 1,225 749 209 -- --
-------- -------- -------- -------- --------
Loss before cumulative effect of change in
accounting principle ............................................. (23,469) (19,142) (3,289) (15,297) (14,514)
Cumulative effect of change in accounting principle ................. -- -- (2,366) -- --
-------- -------- -------- -------- --------
Net loss ............................................................ (23,469) (19,142) (5,655) (15,297) (14,514)
Preferred dividend requirement ................................... -- -- -- -- (2)
-------- -------- -------- -------- --------
Net loss applicable to common shares ............................. $(23,469) $(19,142) $ (5,655) $(15,297) $(14,516)
======== ======== ======== ======== ========
Net loss per share basic and diluted ................................ $ (0.54) $ (0.44) $ (0.14) $ (0.45) $ (0.43)
======== ======== ======== ======== ========
Weighted average common shares used to
compute basic and diluted net loss per share ..................... 43,741 43,637 39,150 34,226 33,930
======= ======= ======= ======= =======
DECEMBER 31,
------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short and
long-term investments .......................................... $ 68,005 $ 95,427 $ 92,533 $ 15,170 $ 30,376
Working capital .................................................. 44,965 52,322 85,041 14,477 27,907
Total assets ..................................................... 77,792 104,362 98,969 20,805 36,106
Shareholders' equity ............................................. 62,078 84,237 84,027 18,590 33,236
31
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 elsewhere
in this Form 10-K. This discussion contains forward-looking statements based on
current expectations that are subject to risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. When used in
this discussion, 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. Our actual results and the timing of events could
differ materially from those anticipated or implied by the forward-looking
statements discussed here as a result of various factors, including, among
others, those set forth under the "Cautionary Note Regarding Forward-Looking
Statements", herein. You should not place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
Except as required by law, we undertake no obligation to update any of the
forward-looking statements in this discussion after the date of this report.
OVERVIEW
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 areas where our compounds will have the greatest
likelihood of improving the lives of patients suffering from 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. An
important part of our strategy is the selection of corporate partners to enhance
our drug discovery and development efforts. We and our partners currently have
three products in clinical development.
For additional information about our programs and business strategy, see
"Overview" and "Business Strategy" in Item 1, "Business" included herein.
MAJOR COMPOUNDS IN RESEARCH AND DEVELOPMENT PROGRAMS
ARGATROBAN
Argatroban is our first marketed product. Argatroban was approved by the
U.S. FDA in 2000, is indicated for prophylaxis or treatment of thrombosis in
patients with HIT for patients with or at risk of HIT undergoing PCI. Argatroban
was approved in Canada in 2002 for use as anticoagulant therapy in patients with
heparin-induced thrombocytopenia syndrome. The drug is being marketed in the
U.S. and Canada by GSK and has been on the market in the U.S. and Canada since
November 2000 and June 2002, respectively. GSK is our development, manufacturing
and marketing partner for Argatroban.
During 2002, we completed a Phase II human clinical trial for Argatroban
as a mono-therapy treatment for acute ischemic stroke. The clinical trial met
the primary endpoint and showed positive results in the secondary safety
endpoint. In light of a lack of an overall efficacy trend and the high risk and
high cost associated with stroke trials, it is unlikely that we will proceed
independently with a full Phase II program. Currently, Argatroban is being
evaluated by an investigator at the University of Texas Medical School at
Houston in a clinical trial, in combination with recombinant tissue Plasminogen
Activator (rt-PA) as a new approach to the treatment of acute ischemic stroke.
Argatroban is approved and sold in Japan by Mitsubishi, the licensor of
Argatroban and by their licensee as mono-therapy for an indication of acute
ischemic stroke.
32
We, along with GSK, are continuing to evaluate the use of Argatroban for
use in hemodialysis patients and for use in PCI.
Presently, we have four major product development programs.
- - Endothelin Antagonist Program. We are developing sitaxsentan, an
endothelin(A) receptor antagonist, or ET(A), for the treatment of
pulmonary arterial hypertension. During June 2000, we formed a
partnership, ICOS-TBC, with ICOS Corporation to develop and commercialize
ET(A) receptor antagonists. During 2002, ICOS-TBC successfully completed a
Phase IIb/III clinical trial in pulmonary arterial hypertension with
sitaxsentan. TBC3711, a second generation ET(A), has previously completed
Phase I clinical trials and may be developed for cardiovascular or other
diseases. In January 2003, ICOS announced that they had reached a
conclusion that joint development of the endothelin receptor antagonist
program by ICOS-TBC should not continue. ICOS and TBC are currently
negotiating the terms pursuant to which TBC could independently continue
the program. The financial terms of this transaction are subject to
ongoing negotiations between the two companies. After 2002, we are
responsible for all costs of the program.
- - Thrombosis. During 2002, we completed a Phase II human clinical trial for
Argatroban as a mono-therapy treatment for acute ischemic stroke. The
clinical trial met the primary endpoint based on safety and showed
positive results in the secondary safety endpoint. In light of a lack of a
positive 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 II program. Currently, Argatroban is being
evaluated, in a clinical trial, in combination with recombinant tissue
Plasminogen Activator (rt-PA) as a new approach to the treatment of acute
ischemic stroke by an investigator at the University of Texas Medical
School at Houston.
- - Vascular Inflammation Program. Revotar, our majority owned German
affiliate located in Berlin is developing a selectin antagonist,
bimosiamose, for the treatment of asthma and psoriasis. The intravenous
form of the drug demonstrated positive anti-inflammatory effects in Phase
II clinical trials. Revotar was formed during 2000, to further the
development of this program. Revotar completed Phase I clinical trials for
asthma utilizing an inhaled form of bimosiamose. A Phase IIa clinical
trial is currently being conducted with an inhaled form of bimosiamose and
a Phase IIa clinical trial in psoriasis is planned to commence during the
first half of 2003, using a topical formulation. A Phase IIa
proof-of-concept clinical trial in psoriasis, completed during 2002 with
an injectable form of bimosiamose, demonstrated efficacy. We are also
conducting research with respect to other cell adhesion molecules
including vascular cell adhesion molecule, or VCAM, junctional adhesion
molecules, or JAM 2/3 and several integrins including very late antigen 4,
or VLA-4, (alpha)4(beta)7 and others to develop antagonists for the
treatment of asthma, rheumatoid arthritis, multiple sclerosis, restenosis
and inflammatory bowel disease. We have signed a collaboration and license
agreement for the VLA-4 program with Schering-Plough and have received a
milestone payment from Schering-Plough for nominating a compound as a
clinical candidate. Additionally, we are conducting research on backup
VLA-4 antagonists for Schering-Plough under this agreement.
- - Vascular Disease. Many disease processes involve changes in blood vessels
and heart tissue. There are numerous mediators, like endothelin, which may
contribute to the development of these diseases. Several of these act
though G-protein coupled receptors, GPCRs, to carry out their action. We
are conducting research on urotensin and other GPCRs to identify
inhibitors which could be useful in treating diseases including congestive
heart failure, CHF, ischemic stroke and acute myocardial infarction.
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
- We recognize revenue from service contracts 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. 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.
33
- Revenue from collaborative research and development activities is
recognized as services are performed.
- We defer the recognition of milestone payments related to
contractual agreements which are still in the development 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 the Company
continues to have obligations under the terms of the arrangement.
- License fees received under the terms of licensing agreements for
our intellectual property are deferred, and amortized into income
over the estimated development period of the licensed item or items.
- 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 reimbursed 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 progression of clinical trial and
development activities, and can be expected to vary from quarter to quarter and
year to year.
In January 2003, ICOS informed us that they had reached the conclusion
that joint development of the endothelin receptor antagonist program through
ICOS-TBC should not continue. ICOS and TBC are currently negotiating the terms
pursuant to which we could independently continue the program. The financial
terms of this transaction are subject to ongoing negotiations between the two
companies. This could allow us to increase our ownership and the potential
commercial benefit of the program from 50% to 100%. The partners were
responsible for the equal funding of the costs of research and development
incurred through the end of 2002. After 2002, we are responsible for all costs
of the program.
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 Financial Accounting Standards Board ("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
record 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.
GENERAL
Our operating results have fluctuated significantly during each quarter
and year, 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.
34
We have been unprofitable to date and expect to incur substantial
operating losses for the next several years as we invest in product research and
development, preclinical and clinical testing and regulatory compliance. We have
sustained net losses of approximately $148.2 million from the date of our
inception to December 31, 2002. We have primarily financed our operations to
date through a series of private placements 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"
herein.
Year ended December 31, 2002 Compared with Year ended December 31, 2001
Revenues in the year ended December 31, 2002 increased $1,516,000,
compared with the year ended December 31, 2001. The increase is primarily
attributable to increased royalty income earned on sales of Argatroban by GSK
and increased license fees, milestones and grants, partially offset by reduced
research and development revenues, discussed below.
Royalties earned on sales of Argatroban in 2002 were $3,514,000, an
increase of $1,928,000 over year 2001. We earn royalties based upon sales by GSK
to drug wholesalers. 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, we believe this
initiative, along with increased selling efforts, are likely to have a positive
impact on Argatroban sales.
License fees, milestones and grants increased $712,000 in 2002, compared
with 2001. Revotar has been awarded research grants from the German government
and earned approximately $303,000 in year 2002. In addition to the grants
received by Revotar, the increase in license fees, milestones and grants in 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-Plough in June 2002. See
Note 8 to the Consolidated Financial Statements.
Research agreement revenues, resulting from the Company's collaborative
efforts with unrelated parties, declined $772,000 in 2002, compared with 2001,
primarily resulting from reduced research and development effort under the
Schering-Plough agreement during 2002. Most of our efforts toward development of
an initial candidate for clinical development had been completed late in 2001.
As discussed above, we received a milestone payment under the Schering-Plough
agreement as a result of the nomination of an initial candidate for
Schering-Plough's further development in the second quarter of 2002.
Collaborative research and development revenues received from the ICOS-TBC
partnership declined $352,000 in 2002, compared with 2001. The involvement of
our research and development staff in the endothelin receptor antagonist program
has been dependent upon the activities being performed by the partnership in any
particular period, and was expected to fluctuate from quarter to quarter and
year to year. In January 2003, ICOS announced that it had reached a conclusion
that joint development of the endothelin receptor antagonist program by ICOS-TBC
should not continue. ICOS and TBC are currently negotiating the terms pursuant
to which TBC could independently continue the program. The financial terms of
this transaction are subject to ongoing negotiations between the two companies.
Research and development expenses increased $2,205,000 in 2002, compared
with 2001. The increase is primarily due to costs of clinical trials which began
to incur significant expenses early in year 2002 and were ongoing during year
2002. Trials ongoing during year 2002 included a Phase II study of Argatroban in
ischemic stroke and a Phase II study of Argatroban in patients undergoing PCI.
During 2002, Revotar completed a Phase IIa proof-of-concept clinical trial of
bimosiamose in psoriasis, and completed a Phase I clinical trial for asthma
utilizing an inhaled form of bimosiamose. See also the discussion of our ongoing
research and development programs, above.
Our equity in the loss of the ICOS-TBC partnership, primarily consisting
of research and development expenses, declined $893,000 in 2002, compared with
2001. The principle activity of the partnership, a Phase IIb/III trial of
sitaxsentan for PAH, completed enrollment in July 2002.
General and administrative expenses increased $2,243,000 in 2002, compared
with 2001. Insurance costs,
35
particularly product liability and general liability policies, increased both
due to insurance market conditions, and as a result of increased sales of
Argatroban. General and administrative expenses in 2002 included 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 arising from modifications made to stock
options previously issued to our retiring CEO.
Investment income declined $2,764,000 in 2002, compared with 2001. The
decline is due to a combination of lower prevailing interest rates during 2002,
compared with 2001, and to reduced funds available for investment during year
2002.
The interest of Revotar's minority shareholders in its losses increased
approximately $476,000 in 2002, compared with 2001. Revotar's expenses increased
in 2002, primarily due to the costs of clinical trials conducted in 2002. Under
accounting principles generally accepted in the U.S., it is likely that the
cumulative losses of Revotar will exceed the equity interest of its minority
shareholders during 2004, and we will reflect 100% of its losses in our
consolidated net income or loss thereafter.
Our net loss in 2002 increased $4,327,000 in 2002, compared with 2001. The
increase is due primarily to higher operating expenses and lower investment
income during 2002, as discussed above.
Year ended December 31, 2001 Compared with Year ended December 31, 2000
Revenues in the year ended December 31, 2001 decreased $6,775,000,
compared with the year ended December 31, 2000. License fee and milestone income
in year 2000 included a milestone payment of $7,500,000 from GSK which was
earned upon the approval of Argatroban by the FDA in June 2000, and the
recognition of $2,366,000 in remaining unrecognized license fees and milestones
related to Argatroban. After taking the $9,866,000 in revenues related to
Argatroban into consideration, revenues from other license fees and milestones
increased $967,000, as a result of the recognition of a portion of the license
fees and milestones received from Schering-Plough, Mitsubishi and ICOS-TBC in
2000 and 2001. See Notes 7 and 8 to the Consolidated Financial Statements,
included herein.
Revenues from sources other than license fees and milestones increased
$2,124,000 in 2001, compared with 2000. Royalties earned on the sale of
Argatroban, which was first shipped in the fourth quarter of 2000, increased
$1,352,000 in year 2001 compared with year 2000. Research agreement revenues in
year 2001 increased $453,000, which is comprised of payments received from
Schering-Plough, partially offset by the loss of revenues received from LG
Chemical in 2000, but not in 2001. Research payments from ICOS-TBC increased
$319,000 in year 2001. The partnership was formed in June 2000, however, and as
such, the year 2000 only included six months of operations.
Research and development expenses increased $4,348,000 in year 2001,
compared with year 2000. The increase is primarily due to costs associated with
ongoing clinical trials. During year 2001, the Company and its research partners
initiated two Phase II trials for Argatroban, for ischemic stroke and PCI, and a
Phase I study of TBC1269 for asthma.
Our equity in the losses of ICOS-TBC increased $5,963,000 in year 2001
compared with year 2000. Since the partnership was formed in June 2000, year
2000 results only included six months of operations. The increase, however, is
primarily due to clinical trials conducted in year 2001. In 2001, ICOS-TBC
initiated a Phase IIb/III clinical trial for sitaxsentan as a treatment of PAH,
and two Phase I clinical studies of TBC3711.
General and administrative expense increased $181,000 in year 2001,
compared to year 2000. The increase is primarily due to the expenses of Revotar,
which was formed in June of year 2000.
Investment income increased $874,000 in year 2001, due to higher levels of
invested funds in the current year. We received approximately $20.1 million in
proceeds from the exercise of publicly traded warrants in January 2001. The
effect on investment income of higher availability of funds was partially
offset, however, by the lower interest rates which have prevailed during year
2001.
The interest of the minority shareholders of Revotar, who collectively
hold approximately 45% of the Revotar common stock, increased $540,000 in year
2001, compared with 2000, due to higher operating expenses of Revotar in 2001.
As discussed above, Revotar was formed in June of year 2000.
36
Loss before cumulative effect of change in accounting principle increased
$15,853,000 in year 2001, compared with year 2000. The increased loss in year
2001 is primarily due to (i) the $9,866,000 in license fee and milestone
revenues related to Argatroban included in year 2000, discussed above, (ii)
increased research and development costs of $4,348,000, discussed above, (iii)
increased equity in loss of ICOS-TBC, primarily due to increased development
costs, discussed above, and (iv) increased general and administrative costs of
$181,000, primarily due to the expenses of Revotar, as discussed above.
Partially offsetting the effect of reduced revenues and increased costs,
investment income increased $874,000 in year 2001, due to higher levels of
available funds, as discussed above.
Net loss in year 2000 included a charge of $2,366,000 for the cumulative
effect, on January 1, 2000, of the change in accounting principle resulting from
our adoption of Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB101"). Such
revenue is being recognized into income over future development periods.
LIQUIDITY AND CAPITAL RESOURCES
Year 2002 and 2001
At December 31, 2002, we had cash, cash equivalents, investment securities
and accrued interest of $68,005,000, compared with $95,427,000 at December 31,
2001. We used $25,791,000 in cash on operating activities in year 2002, compared
to cash used by operating activities of $12,980,000 in 2001. The primary
operating uses of cash in 2002 and 2001 were to fund our general operating
expenses and the ongoing research and development programs conducted by TBC,
Revotar and ICOS-TBC, reduced by cash received from investment income,
milestones, and research payments from our collaborative partners.
Investing activities generated $36,351,000 in year 2002, compared with
cash used of $44,269,000 in year 2001. Our capital expenditures declined
$731,000 in 2002, compared with 2001. The cash generated by investing activities
during 2002 reflects the use of invested funds to finance ongoing operations.
Cash generated by financing activities in year 2002 was $486,000, compared
with cash generated in year 2001 of $19,043,000. Year 2001 included proceeds
from the exercise of publicly traded warrants in January 2001, for net proceeds
of $20,143,000 and proceeds from the exercise of employee stock options and
other warrants for proceeds of $502,000, partially reduced by the acquisition of
213,000 shares of treasury stock for total proceeds of $1,602,000. During 2002,
we generated $486,000 in cash from the proceeds of stock option exercises, and
the sale of common stock at market price to our new CEO.
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 Revotar 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, subject to certain loan provisions
regarding profitability or liquidity. 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. It is likely that Revotar may need to seek additional
funding through collaborative arrangements and/or through public or private
financings.
The Company had long-term obligations under our office and laboratory
leases as follows (in thousands):
Less than 1 1-3 4-5
Contractual Obligations Total year years years After 5 years
Operating Leases $4,873 $1,616 $3,126 $131 --
37
Outlook for 2003
In 2003, we expect to have the following results:
Net Sales of Argatroban by GSK.................................. $30.0 to $35.0 million
Revenues........................................................ $10.5 to $12.0 million
Expenses (net of Revotar minority interest)..................... $42.0 to $45.0 million
Investment Income............................................... $0.9 to $1.1 million
Estimated Net Loss.............................................. $30.0 to $33.0 million
Cash and Investments at Year End................................ $32.0 to $35.0 million
In January 2003, ICOS announced that it had reached a conclusion that
joint development of the endothelin receptor antagonist program by ICOS-TBC
should not continue. ICOS and TBC are currently negotiating the terms pursuant
to which TBC could independently continue the program. The financial terms of
this transaction are subject to ongoing negotiations between the two companies.
If we are successful in reaching an agreement, it is likely that we will be
responsible for 100% of development expenses incurred after January 1, 2003
related to the endothelin receptor antagonist program, which we believe will be
between $19 million and $21 million in 2003. A delay in reaching an agreement
with ICOS could adversely affect or delay the development of the endothelin
receptor antagonist program.
Our estimates of results for 2003 will be impacted by the financial terms
of the ongoing negotiations between ICOS and us.
Longer-Term Outlook
We expect to incur substantial research and development expenditures as we
design and develop biopharmaceutical products for the prevention and treatment
of cardiovascular and other diseases. We anticipate that our operating expenses
will increase in subsequent years because:
- - We expect to incur significant expenses in conjunction with
additional clinical trial costs for sitaxsentan and research and clinical
trial costs for development of bimosiamose 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.
- - There may be additional costs in future periods related to Argatroban in
complying with ongoing FDA requirements and possible clinical trial
expenditures for additional therapeutic indications.
- - Our administrative costs and costs to commercialize our products will
increase as our products are further developed and marketed.
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:
- market acceptance and commercial success of Argatroban;
- expenses and risks associated with clinical trials to expand the
indications for Argatroban;
38
- continued scientific progress in our drug discovery programs;
- the magnitude of these programs;
- progress with preclinical testing and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the costs involved in filing, prosecuting and enforcing patent
claims;
- competing technological and market developments and changes in our
existing research relationships;
- our ability to maintain and establish additional collaborative
arrangements; and
- 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 year 2004. Notwithstanding revenues, which may be produced
through sales of potential future products, if approved, we anticipate that we
will need to secure additional funds to continue the required levels of research
and development to reach our long-term goals. We intend to seek such additional
funding through collaborative arrangements and/or through public or private
financings.
In 2002, the stockholders of Revotar executed an agreement to provide
approximately $4.5 million in unsecured loans, of which our commitment was
approximately $3.4 million. Under the loan agreement, we have advanced
approximately $1.2 million to Revotar during 2002. We believe that Revotar's
existing funds, the remaining commitments under the loan agreement and proceeds
under German government scientific grants will be sufficient to fund Revotar
into the first quarter of 2004. In order to continue to operate beyond that
time, Revotar will need to seek additional funding through collaborative
arrangements and/or through public or private financings in the future.
Off-Balance Sheet Arrangements
We do not engage in off-balance sheet financing arrangements; however we
have been obligated to fund our proportionate share (50%) of any contractual
obligations of ICOS-TBC. After December 31, 2002, we are responsible for funding
100% of the expenses of ICOS-TBC. After December 31, 2002, ICOS-TBC is not
obligated for any leases, long-term debt, or other fixed obligations.
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.
ITEM 7A -- 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 affiliate in Berlin, Germany and consolidate the
results of operations into our consolidated financial results. Although not
material to date, our reported expenses and cash flows from this affiliate are
exposed to changing exchange rates. We also have contracts with entities in
other areas outside the U.S. that are denominated in a foreign currency. To
date, these currencies have not fluctuated materially. During 2003, Revotar
engaged in a program of hedging the effect of foreign currency fluctuations on
approximately $1.6 million in future loan payments from us.
39
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements we are required to include in this Item 8 are set
forth in Item 15 of this Form 10-K.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
40
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS
Incorporated herein by reference to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 16, 2003.
ITEM 11 -- EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 16, 2003.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 16, 2003.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 16, 2003.
ITEM 14 -- CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our chief executive officer and our vice president, finance and
administration, after evaluating the effectiveness of our "disclosure
controls and procedures" (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)) as of a date (the "Evaluation Date") within 90 days prior to
the filing date of this annual report on Form 10-K, have concluded that,
as of the Evaluation Date, our disclosure controls and procedures were
adequate to ensure that material information relating to the registrant
and its consolidated subsidiaries would be made known to them by others
within those entities.
(b) CHANGES IN INTERNAL CONTROLS
To our knowledge, there were no significant changes in our internal
controls or in other factors that could significantly affect internal
controls subsequent to the Evaluation Date.
41
PART IV
ITEM 15 -- EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements, the
reports thereon, and the notes thereto commencing at Page F-1 of this
Annual Report on Form 10-K. Set forth below is an index to such Financial
Statements.
PAGE
----
Independent Auditors' Report............................................... F-1
Consolidated Balance Sheets................................................ F-2
Consolidated Statements of Operations and Comprehensive Loss............... F-3
Consolidated Statements of Stockholders' Equity............................ F-4
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
2. FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report
Balance Sheets of ICOS-Texas Biotechnology L.P. (A
Development Stage Limited partnership) as of December 31, 2002
and 2001, and the related statements of operations, statements
of partners' deficit and cash flows for each of the years in
the two-year period ended December 31, 2002, the period from
June 6, 2000 (inception) through December 31, 2000 and the
period from June 6, 2000 (inception) through December 31,
2002, and notes thereto.
All other schedules have been omitted since the
information is not required or is not material to require
submission of the schedule, or because the information is
included in the financial statements or the notes thereto.
3. INDEX TO EXHIBITS
Information with respect to this Item is contained in the
attached Index to Exhibits.
The Company will furnish a copy of any one or more of these
exhibits to a shareholder who so requests upon receipt of payment
for the costs of duplication and mailing the requested item.
(b) REPORTS ON FORM 8-K
Four reports on Form 8-K were filed during the quarter ended
December 31, 2002. A report on Form 8-K dated October 2, 2002 was
filed regarding the preliminary results for the use of Argatroban as
a treatment for acute ischemic stroke. A report on Form 8-K dated
October 21, 2002 was filed regarding the phase 2b/3 trial results
for Sitaxsentan. A report on Form 8-K dated November 7, 2002 was
filed regarding the Company's third quarter 2002 financial results,
market growth for Argatroban and clinical trial status. A report on
Form 8-K dated December 19, 2002 was filed regarding an update to
shareholders on Sitaxsentan trials and sales of Argatroban.
All schedules have been omitted since the information is not
required or is not material to require submission of the schedule,
or because the information is included in the financial statements
or the notes thereto.
42
(d) FINANCIAL STATEMENTS OF 50-PERCENT-OR-LESS OWNED PERSONS
ICOS - TEXAS BIOTECHNOLOGY L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
TABLE OF CONTENTS
PAGE
----
Independent Auditors' Report ................................................... 2
Balance Sheets as of December 31, 2002 and 2001 ................................ 3
Statements of Operations for each of the years in the two-year period ended
December 31, 2002, the period from June 6, 2000 (inception) through
December 31, 2000, and the period from June 6, 2000 (inception) through
December 31, 2002 ......................................................... 4
Statements of Partners' Deficit for each of the years in the two-year period
ended December 31, 2002, and the period from June 6, 2000 (inception)
through December 31, 2000 ................................................. 5
Statements of Cash Flows for each of the years in the two-year period ended
December 31, 2002, the period from June 6, 2000 (inception) through
December 31, 2000, and the period from June 6, 2000 (inception) through
December 31, 2002 ......................................................... 6
Notes to Financial Statements .................................................. 7-9
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ICOS - Texas Biotechnology L.P.:
We have audited the accompanying balance sheets of ICOS - Texas Biotechnology
L.P. (a development stage limited partnership) as of December 31, 2002 and 2001,
and the related statements of operations, partners' deficit and cash flows for
each of the years in the two-year period ended December 31, 2002, the period
from June 6, 2000 (inception) to December 31, 2000, and the period from June 6,
2000 (inception) to December 31, 2002. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ICOS - Texas Biotechnology L.P.
as of December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2002, the
period from June 6, 2000 (inception) to December 31, 2000, and the period from
June 6, 2000 (inception) to December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that ICOS -
Texas Biotechnology L.P. will continue as a going concern. As discussed in note
6 to the financial statements, ICOS - Texas Biotechnology L.P. has experienced
recurring losses from operations and has a partners' deficit which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in note 6. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
Seattle, Washington
January 30, 2003
2
ICOS - TEXAS BIOTECHNOLOGY L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
BALANCE SHEETS
(in thousands)
--------------
December 31,
------------
2002 2001
---- ----
ASSETS
Current assets - cash ....................................... $ 1 $ 1
======= =======
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities - accrued expenses payable to partners .. $ 5,235 $ 7,059
Partners' deficit:
General partner interests:
ICOS-ET-GP LLC ....................................... (47) (30)
TBC-ET, Inc. ......................................... (47) (30)
Limited partner interests:
ICOS-ET-LP LLC ....................................... (2,570) (3,499)
Texas Biotechnology Corporation ...................... (2,570) (3,499)
------- -------
Total partners' deficit ............................ (5,234) (7,058)
------- -------
$ 1 $ 1
======= =======
3
ICOS - TEXAS BIOTECHNOLOGY L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(in thousands)
--------------
Period from Period from
Year ended Year ended June 6, 2000 (inception) June 6, 2000 (inception)
December 31, December 31, through December 31, through December 31,
2002 2001 2000 2002
---------- ---------- ---------- ----------
Revenue .................................. $ -- $ -- $ 547 $ 547
Operating expenses:
Research and development:
Contributed technology license from
Texas Biotechnology Corporation .... -- 4,000 4,000 8,000
Texas Biotechnology Corporation ...... 2,312 6,190 4,706 13,208
ICOS Corporation ..................... 14,321 12,682 2,809 29,812
General and administrative:
Texas Biotechnology Corporation ...... 153 -- -- 153
ICOS Corporation ..................... 330 26 8 364
---------- ---------- ---------- ----------
Total operating expenses ........... 17,116 22,898 11,523 51,537
---------- ---------- ---------- ----------
Net loss ................................. $ (17,116) $ (22,898) $ (10,976) $ (50,990)
========== ========== ========== ==========
4
ICOS - TEXAS BIOTECHNOLOGY L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' DEFICIT
(in thousands)
--------------
Texas Biotechnology Partners'
ICOS-ET-GP LLC TBC-ET, Inc. ICOS-ET-LP LLC Corporation Deficit
-------------- ------------ -------------- ----------- -------
BALANCES AT JUNE 6, 2000 (INCEPTION) .. $ -- $ -- $ -- $ -- $ --
Partner contributions:
Cash .............................. 4 4 4,031 2,031 6,070
Technology license ................ -- -- -- 4,000 4,000
Capital distribution .................. -- -- -- (2,000) (2,000)
Net loss .............................. (11) (11) (5,477) (5,477) (10,976)
------------ ------------ ------------ ---------- ------------
BALANCES AT DECEMBER 31, 2000 ......... (7) (7) (1,446) (1,446) (2,906)
Partner contributions:
Cash .............................. -- -- 9,373 7,373 16,746
Technology license ................ -- -- -- 4,000 4,000
Capital distribution .................. -- -- -- (2,000) (2,000)
Net loss .............................. (23) (23) (11,426) (11,426) (22,898)
------------ ------------ ------------ ---------- ------------
BALANCES AT DECEMBER 31, 2001 ......... (30) (30) (3,499) (3,499) (7,058)
Partner contributions:
Cash .............................. -- -- 9,470 9,470 18,940
Net loss .............................. (17) (17) (8,541) (8,541) (17,116)
------------ ------------ ------------ ---------- ------------
BALANCES AT DECEMBER 31, 2002 ......... $ (47) $ (47) $ (2,570) $ (2,570) $ (5,234)
============ ============ ============ ============ ============
5
ICOS - TEXAS BIOTECHNOLOGY L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(in thousands)
--------------
Period from Period from
June 6, 2000 June 6, 2000
Year ended Year ended (inception) (inception)
December 31, December 31, through December 31, through December 31,
2002 2001 2000 2002
---- ---- ---- ----
Cash flows from operating activities:
Net loss ....................................... $ (17,116) $ (22,898) $ (10,976) $ (50,990)
Adjustments to reconcile net loss to net cash
used in operating activities:
Contributed technology license ............. -- 4,000 4,000 8,000
Change in operating assets and
liabilities:
Receivable from Texas
Biotechnology Corporation .............. -- 470 (470) --
Accrued expenses payable to partners ..... (1,824) 3,662 3,397 5,235
--------- --------- -------------- --------------
Net cash used in operating activities .. (18,940) (14,766) (4,049) (37,755)
--------- --------- -------------- --------------
Cash flows from financing activities:
Partner contributions .......................... 18,940 16,746 6,070 41,756
Capital distributions .......................... -- (2,000) (2,000) (4,000)
--------- --------- -------------- --------------
Net cash provided by financing
activities ........................... 18,940 14,746 4,070 37,756
--------- --------- -------------- --------------
Net increase (decrease) in cash .................... -- (20) 21 1
Cash at beginning of period .................... 1 21 -- --
--------- --------- -------------- --------------
Cash at end of period .............................. $ 1 $ 1 $ 21 $ 1
========= ========= ============== ==============
6
ICOS - TEXAS BIOTECHNOLOGY L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
Notes to Financial Statements
December 31, 2002 and 2001
(Dollars in thousands, unless otherwise noted)
(1) ORGANIZATION AND BUSINESS OPERATIONS
ICOS-Texas Biotechnology L.P. (the "Partnership"), is a development stage
limited partnership that was formed on June 6, 2000 by Texas Biotechnology
Corporation, a Delaware corporation ("TBC"), and ICOS-ET-LP LLC, a
Washington limited liability company ("ICOS-LP"), as limited partners, and
TBC-ET, Inc., a Delaware corporation ("TBC-GP"), and ICOS-ET-GP LLC, a
Washington limited liability company ("ICOS-GP"), as general partners. The
Partnership was organized to develop and globally commercialize endothelin
receptor antagonists. The Partnership is managed jointly by TBC-GP and
ICOS-GP. Profits, losses and distributions, except for distributions for
payment of TBC's exclusive license (see Note 3), are allocated based on
respective ownership interests. ICOS Corporation ("ICOS") is the sole
member of both ICOS-LP and ICOS-GP. TBC is the sole member of TBC-GP. Both
TBC and ICOS provide the Partnership with research and development
services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(b) REVENUE RECOGNITION
Revenue represents research payments received by TBC, which were
assigned to the Partnership and recognized as the related services
were performed.
(c) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
(d) INCOME TAXES
No Federal income tax expense or benefit is included in the
financial statements since such taxes, if any, are payable or
recoverable by each partner.
(e) OPERATING SEGMENTS
The Partnership has one operating segment, the development and
commercialization of endothelin receptor antagonist products for
human therapeutic use.
7
(3) EQUITY TRANSACTIONS
TBC made an initial capital contribution to the Partnership of an
exclusive worldwide license of intellectual property associated with
endothelin receptor antagonists, including patent rights and technical
information, and ICOS-LP made an initial capital contribution to the
Partnership of $2 million in cash. In exchange for their contributions,
each party received a 49.9% limited partnership interest in the
Partnership. ICOS-GP and TBC-GP each contributed $4 in exchange for a .1%
general partnership interest in the Partnership.
The technology license contributed to the Partnership by TBC was initially
valued at $4 million, based on the cash contribution from ICOS-LP and the
concurrent capital distribution to TBC discussed below. The contributed
valuation of the technology license increased by $4 million in 2001, upon
the achievement of certain development objectives, and may increase by up
to $103 million in the future, if certain additional milestones are
achieved as provided for in the Agreement of Limited Partnership of
ICOS-Texas Biotechnology L.P. (the "Agreement").
Under the terms of the Agreement, TBC received a capital distribution of
$2 million in conjunction with formation of the Partnership and received
an additional $2 million capital distribution in October 2001 upon the
achievement of certain development objectives.
(4) LICENSE AGREEMENTS
In connection with TBC's initial capital contribution, the Partnership
entered into an Endothelin License Agreement with TBC, subject to the
rights of an agreement with LG Chemical, Ltd. discussed below. Under the
Endothelin License Agreement, the Partnership received an exclusive right
and license to certain proprietary patent rights, technical information,
technology and know-how relating to, and useful in, the manufacture,
production and worldwide commercial sale of endothelin products for human
therapeutic use. The value of the license was charged to development
expense as the underlying technology represented incomplete product
research and development.
In October 1996, TBC entered into a Strategic Alliance Agreement with LG
Chemical, Ltd. ("LG Chem"), a Korean corporation, (the "LG Chem
Agreement"), pursuant to which TBC granted LG Chem certain technology
rights and agreed to perform certain research and development activities
on behalf of LG Chem in exchange for the right to receive research and
royalty payments in the future.
In conjunction with its formation, the Partnership was assigned and
assumed certain of TBC's rights and obligations under the LG Chem
Agreement. During 2000, the Partnership recognized $547 in revenue
associated with services performed under the LG Chem Agreement. The LG
Chem Agreement was terminated during 2001. The Partnership will not
recognize any further revenue or receive any additional payments, and has
no further obligations, under the LG Chem Agreement.
(5) RESEARCH AND DEVELOPMENT SERVICE AGREEMENT
In June 2000, the Partnership entered into a Research and Development
Service Agreement (the "R&D Agreement") with TBC and ICOS, pursuant to
which TBC and ICOS agreed to provide research and development services
for, and on behalf of, the Partnership. The Partnership reimburses TBC and
ICOS, at a per-hour amount, calculated on the basis of actual hours
incurred by TBC and ICOS, plus certain development and administrative
expenses. There is no minimum commitment for research and development, and
the Partnership can contract with other parties to provide research and
development services.
(6) FINANCING
ICOS-TBC has experienced recurring losses from operations and has a
partners' deficit of $5.2 million at December 31, 2002, which raise
substantial doubt about its ability to continue as a going concern.
Pursuant to the Agreement, except as modified by a subsequent Letter
Agreement between ICOS and TBC dated February 14, 2003 (the "Letter
Agreement"), ongoing activities of the Partnership are to be funded by the
limited partners in relation
8
to their limited partnership interests. Substantially all of the partners'
deficit at December 31, 2002, was funded by capital contributions from the
limited partners during the first quarter of 2003.
Pursuant to the Letter Agreement, TBC has agreed to be responsible for
100% of all costs and expenses of the Partnership incurred after December
31, 2002, through June 30, 2003, or earlier termination of the Letter
Agreement upon mutual consent of both parties.
In January 2003, ICOS announced its conclusion that joint development of
the endothelin receptor antagonist program, through the Partnership,
should not continue. ICOS and TBC continue to negotiate the terms pursuant
to which TBC might independently continue the endothelin receptor
antagonist program.
9
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Houston
and State of Texas on the 27th day of March, 2003.
TEXAS BIOTECHNOLOGY CORPORATION
By: /s/ STEPHEN L. MUELLER
--------------------------------------------
Stephen L. Mueller
Vice President, Finance and Administration,
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons and in the capacities
indicated on the 27th day of March, 2003.
SIGNATURE TITLE
--------- -----
/s/ JOHN M. PIETRUSKI Chairman of the Board of Directors
- ----------------------------
John M. Pietruski
/s/ BRUCE D. GIVEN Director, President and Chief Executive Officer
- ---------------------------- (Principal Executive Officer)
Bruce D. Given, M.D.
/s/ RICHARD A.F. DIXON Director and Senior Vice President, Research and
- ---------------------------- Chief Scientific Officer
Richard A.F. Dixon, Ph.D.
/s/ STEPHEN L. MUELLER Vice President, Finance and Administration,
- ---------------------------- Secretary and Treasurer
Stephen L. Mueller (Principal Financial and Accounting Officer)
/s/ RON J. ANDERSON Director
- ----------------------------
Ron J. Anderson, M.D.
/s/ FRANK C. CARLUCCI Director
- ----------------------------
Frank C. Carlucci
/s/ ROBERT J. CRUIKSHANK Director
- ----------------------------
Robert J. Cruikshank
/s/ SUZANNE OPARIL Director
- ----------------------------
Suzanne Oparil, M.D.
/s/ WILLIAM R. RINGO, JR. Director
- ----------------------------
William R. Ringo, Jr.
/s/ JAMES A. THOMSON Director
- ----------------------------
James A. Thomson, Ph.D.
/s/ JAMES T. WILLERSON Director
- ----------------------------
James T. Willerson, M.D.
45
CERTIFICATIONS
I, Bruce D. Given, M.D., certify that:
1. I have reviewed this annual report on Form 10-K of Texas Biotechnology
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual report ("Evaluation Date"); and
c) presented in this annual 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 officer 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 officer and I have indicated in this
annual 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: March 27, 2003 By /s/ Bruce D. Given, M.D.
-------------------------------------
Bruce D. Given, M.D.
President and Chief Executive Officer
46
CERTIFICATIONS
I, Stephen L. Mueller, certify that:
1. I have reviewed this annual report on Form 10-K of Texas Biotechnology
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual report ("Evaluation Date"); and
c) presented in this annual 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 officer 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 officer and I have indicated in this
annual 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: March 27, 2003 By /s/ Stephen L. Mueller
------------------------------------------
Stephen L. Mueller
Vice President, Finance and Administration
Secretary and Treasurer
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Texas Biotechnology Corporation:
We have audited the accompanying consolidated balance sheets of Texas
Biotechnology Corporation and subsidiaries (the "Company") as of December 31,
2002 and 2001, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Biotechnology Corporation and subsidiaries as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Houston, Texas
March 5, 2003
F-1
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS DECEMBER 31,
------------
2002 2001
--------- ---------
Current assets:
Cash and cash equivalents ............................................. $ 21,228 $ 10,086
Short-term investments ................................................ 26,533 46,465
Accounts receivable ................................................... 1,098 655
Other current receivables ............................................. 473 618
Receivable from related party under collaborative arrangement ......... 393 1,144
Prepaids .............................................................. 1,482 1,350
--------- ---------
Total current assets ................................................ 51,207 60,318
Long-term investments ................................................... 20,244 38,876
Equipment and leasehold improvements, net ............................... 5,579 4,300
Other assets ............................................................ 762 868
--------- ---------
Total assets ........................................................ $ 77,792 $ 104,362
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 950 $ 2,187
Accrued expenses ...................................................... 3,774 3,902
Deferred revenue from related party ................................... 591 1,159
Deferred revenue from unrelated parties ............................... 927 748
--------- ---------
Total current liabilities ........................................... 6,242 7,996
Liability to related party .............................................. 2,664 3,533
Deferred revenue from related party ..................................... 1,181 1,722
Deferred revenue from unrelated parties ................................. 3,019 3,041
Minority interest in Revotar ............................................ 2,608 3,833
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.005 per share. At December 31, 2002 and
December 31, 2001, 5,000,000 shares authorized; none outstanding .... -- --
Common stock, par value $.005 per share. At December 31, 2002,
75,000,000 shares authorized; 44,015,364 shares issued
At December 31, 2001, 75,000,000 shares authorized,
43,783,638 shares issued ............................................ 220 218
Additional paid-in capital ............................................ 211,847 210,616
Deferred compensation expense ......................................... (223) --
Treasury stock, 213,000 shares at December 31, 2002 and 2001 .......... (1,602) (1,602)
Accumulated other comprehensive income (loss) ......................... 1 (299)
Accumulated deficit ................................................... (148,165) (124,696)
--------- ---------
Total stockholders' equity .......................................... 62,078 84,237
--------- ---------
Total liabilities and stockholders' equity .......................... $ 77,792 $ 104,362
========= =========
See accompanying notes to consolidated financial statements.
F-2
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
Revenues:
Research agreements .......................................... $ 3,570 $ 4,342 $ 3,889
Collaborative research and development from ICOS-TBC, L.P. ... 1,090 1,442 1,123
Royalty income ............................................... 3,514 1,586 234
License fees, milestones and grants .......................... 2,259 1,547 10,446
-------- -------- --------
Total revenues ............................................. 10,433 8,917 15,692
-------- -------- --------
Expenses:
Research and development ..................................... 20,066 17,861 13,513
Equity in loss of ICOS-TBC, L.P. ............................. 8,557 9,450 3,487
General and administrative ................................... 8,976 6,733 6,552
-------- -------- --------
Total expenses ............................................. 37,599 34,044 23,552
-------- -------- --------
Operating loss ............................................. (27,166) (25,127) (7,860)
Investment income, net ......................................... 2,472 5,236 4,362
-------- -------- --------
Loss before minority interest and cumulative effect
of change in accounting principle ........................ (24,694) (19,891) (3,498)
Minority interest in loss of Revotar ........................... 1,225 749 209
-------- -------- --------
Loss before cumulative effect of
change in accounting principle ............................. (23,469) (19,142) (3,289)
Cumulative effect of change in accounting principle .......... -- -- (2,366)
-------- -------- --------
Net loss applicable to common shares ....................... $(23,469) $(19,142) $ (5,655)
======== ======== ========
Other comprehensive income:
Unrealized income (loss) on foreign currency translation ..... 300 (284) (15)
-------- -------- --------
Comprehensive loss ......................................... $(23,169) $(19,426) $ (5,670)
======== ======== ========
Net loss per share basic and diluted ........................... $ (0.54) $ (0.44) $ (0.14)
======== ======== ========
Weighted average common shares used to compute
net loss per share basic and diluted ......................... 43,741 43,637 39,150
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
($ IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------ PAID-IN TREASURY COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK INCOME (LOSS) DEFICIT EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at January 1, 2000 ....... 34,392,909 $ 172 $ 118,317 $ -- $ -- $ (99,899) $ 18,590
Issuance of common stock in
public offering ............. 5,584,591 28 65,206 -- -- -- 65,234
Issuance of common stock for
stock option exercises ...... 618,904 3 2,319 -- -- -- 2,322
Issuance of common stock for
warrant exercises ........... 531,128 3 2,537 -- -- -- 2,540
Issuance of common stock in
payment of expenses ......... 2,236 -- 30 -- -- -- 30
Issuance of common stock in
payment for consulting
services .................... 2,000 -- 16 -- -- -- 16
Issuance of common stock in
payment for research
and development ............. 71,429 -- 965 -- -- -- 965
Net loss ......................... -- -- -- -- -- (5,655) (5,655)
Other comprehensive loss ......... -- -- -- -- (15) -- (15)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 ..... 41,203,197 $ 206 $ 189,390 $ -- $ (15) $ (105,554) $ 84,027
---------- ---------- ---------- ---------- ---------- ---------- ----------
Issuance of common stock for
stock option exercises ...... 12,268 -- 52 -- -- -- 52
Issuance of common stock for
warrant exercises ........... 2,511,558 12 20,581 -- -- -- 20,593
Issuance of common stock in
payment of expenses ......... 56,615 -- 530 -- -- -- 530
Compensation expense related to
stock options ............... -- -- 63 -- -- -- 63
Purchase of treasury shares
(213,000 shares) ............ -- -- -- (1,602) -- -- (1,602)
Net loss ......................... -- -- -- -- -- (19,142) (19,142)
Other comprehensive loss ......... -- -- -- -- (284) -- (284)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 ..... 43,783,638 $ 218 $ 210,616 $ (1,602) $ (299) $ (124,696) $ 84,237
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Continued)
F-4
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
($ IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED OTHER TOTAL
------------ PAID-IN COMPENSATION TREASURY COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EXPENSE STOCK INCOME (LOSS) DEFICIT EQUITY
------ ------ ------- ------- ----- ------------- ------- ------
Balance at December 31, 2001 ... 43,783,638 $218 $ 210,616 $ -- $(1,602) $(299) $(124,696) $ 84,237
Issuance of common stock for
stock option exercises .... 129,860 1 454 -- -- -- -- 455
Issuance of common stock for
warrant exercises ......... 500 -- -- -- -- -- -- --
Sale of unregistered
common stock .............. 5,000 -- 31 -- -- -- -- 31
Issuance of common stock in
payment of expenses ....... 51,429 1 271 -- -- -- -- 272
Compensation expense related
to stock options .......... -- -- 202 -- -- -- -- 202
Amortization of deferred
compensation expense ...... -- -- -- 85 -- -- -- 85
Deferred compensation expense
related to issuance of
stock ..................... 50,000 -- 308 (308) -- -- -- --
Cancellation of restricted
shares .................... (5,063) -- (35) -- -- -- -- (35)
Net loss ....................... -- -- -- -- -- -- (23,469) (23,469)
Other comprehensive income ..... -- -- -- -- -- 300 -- 300
----------- ---- --------- ----- ------- ----- --------- --------
Balance at December 31, 2002 ... 44,015,364 $220 $ 211,847 $(223) $(1,602) $ 1 $(148,165) $ 62,078
=========== ==== ========= ===== ======= ===== ========= ========
See accompanying notes to consolidated financial statements.
F-5
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................... $ (23,469) $ (19,142) $ (5,655)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization................................ 1,071 913 998
Equity in loss of ICOS-TBC, L.P. ............................ 8,557 9,450 3,487
Minority interest in loss of Revotar......................... (1,225) (749) (209)
Expenses paid with stock..................................... 272 530 46
Compensation expense related to stock options................ 252 63 --
Loss on disposition of fixed assets.......................... -- 12 9
Decrease (increase) in interest receivable included in
short-term and long-term investments....................... 265 131 (558)
Changes in operating assets and liabilities:
Increase in accounts receivable.............................. (443) (417) (237)
(Increase) decrease in prepaids.............................. (128) (4) 104
Decrease in other current receivables........................ 144 6 443
Decrease (increase) in receivable from related
party under collaborative arrangement...................... 751 (262) (882)
(Decrease) increase in accounts payable and
accrued expenses........................................... (1,460) 1,533 2,342
Decrease in liability to related party....................... (9,426) (7,293) (2,110)
Increase in deferred revenue from unrelated parties ......... 157 1,062 2,727
(Decrease) increase in deferred revenue from related party... (1,109) 1,187 1,693
--------- --------- ---------
Net cash (used in) provided by operating activities...... (25,791) (12,980) 2,198
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements................ (2,026) (2,757) (324)
Purchase of investments.......................................... (85,608) (154,272) (104,002)
Maturity of investments.......................................... 123,985 112,760 72,996
--------- --------- ---------
Net cash provided by (used in) investing activities...... 36,351 (44,269) (31,330)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock.................................... -- (1,602) --
Contribution from minority interest in consolidated subsidiary... -- -- 4,502
Proceeds from issuance of common stock and option
and warrant exercises, net..................................... 486 20,645 70,096
--------- --------- ---------
Net cash provided by financing activities................ 486 19,043 74,598
--------- --------- ---------
Effect of exchange rate changes on cash.............................. 96 (178) 200
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............. 11,142 (38,384) 45,666
Cash and cash equivalents at beginning of year....................... 10,086 48,470 2,804
--------- --------- ---------
Cash and cash equivalents at end of year............................. $ 21,228 $ 10,086 $ 48,470
========= ========= =========
Supplemental schedule of noncash financing activities:
Issuance of common stock for research and development,
license fee and services..................................... $ 272 $ 530 $ 1,011
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Texas Biotechnology Corporation (the "Company" or "TBC"), a Delaware
Corporation, 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. For further discussion of the ICOS-TBC
partnership, see Note 8. 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 a majority 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 or may not be successful. 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.
F-7
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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. Long-term investments consist of securities 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. Composition of cash and investments was as follows (in
thousands):
December 31, 2002 December 31, 2001
----------------- -----------------
Cash and cash equivalents:
Demand and money market accounts $ 609 $ 690
Corporate commercial paper 20,619 9,396
----------------- -----------------
Total cash and cash equivalents $ 21,228 $ 10,086
================= =================
Short-term investments:
U.S. Government agency securities $ 3,999 $ 817
Corporate commercial paper and
loan participations 22,333 44,083
Time deposits -- 1,255
Accrued interest on above 201 310
----------------- -----------------
Total short-term investments $ 26,533 $ 46,465
================= =================
Long-term investments:
U.S. Government agency securities $ 12,000 $ 30,989
Corporate commercial paper and
loan participations 7,990 7,476
Accrued interest on above 254 411
----------------- -----------------
Total long-term investments $ 20,244 $ 38,876
================= =================
(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. With respect to research and
development, salaries and benefits for the years ended December 31, 2002,
2001 and 2000, of approximately $9,283,000, $7,296,000 and $5,902,000,
respectively, were charged to research and development. Payments related
to the acquisition of in-process research and development, if any, are
expensed as incurred.
F-8
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 years
2002, 2001 and 2000, there were no potential common equivalent shares
used in the calculation of weighted average common shares outstanding.
Year Ended December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Weighted average shares used
to compute basic and diluted
net loss per common share 43,741,258 43,636,548 39,149,882
========== ========== ==========
Securities convertible into common
stock, not used because the
effect would be antidilutive:
Stock options 5,012,500 4,131,252 3,152,316
Warrants 246,586 247,858 2,772,371
---------- ---------- ----------
Total 5,259,086 4,379,110 5,924,687
========== ========== ==========
(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 development
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 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 and 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 United States of America.
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 the years ended December 31,
2002, 2001 and 2000 was $106,000, $106,000 and $53,000, respectively.
Amortization of intangible assets is included in general and
administrative expense in the consolidated statements of operations and
comprehensive loss.
F-9
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(l) Treasury Stock
Treasury stock is recorded at cost. On May 3, 2001, the Company
announced that its Board of Directors had authorized 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 repurchased 213,000 shares for
net proceeds of approximately $1,602,000 during the year ended December
31, 2001. No shares were repurchased during the year ended December 31,
2002.
(m) Stock Based Compensation
At December 31, 2002, the Company has six stock-based compensation
plans for employees and non-employee directors, which are described more
fully in Note 3. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. Net loss in
the years ended December 31, 2002 and 2001 included stock-based
compensation expense as a result of modifications made to certain options
previously issued to retiring employees. Net loss in the year ended
December 31, 2002 also includes stock-based compensation expense related
to the grant of shares of restricted stock to the Company's CEO. No other
stock-based employee compensation expense is reflected in net loss,
however, as all options granted under those plans had an exercise price
equal to the market price of the underlying common stock on the date of
grant. The following table illustrates the effect on net loss and loss
per share if the Company had applied the fair value recognition
provisions of FASB Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," (SFAS123) to stock-based
employee compensation ($ in thousands, except for per share data).
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Net loss, as reported $(23,469) $(19,142) $ (5,655)
-------- -------- --------
Add: Stock-based employee
compensation expense included
in reported net income 252 63 --
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards (4,238) (4,118) (2,950)
-------- -------- --------
Pro forma net loss $(27,455) $(23,197) $ (8,605)
======== ======== ========
Loss per share:
As reported, basic and diluted $ (0.54) $ (0.44) $ (0.14)
======== ======== ========
Pro forma, basic and diluted $ (0.63) $ (0.53) $ (0.22)
======== ======== ========
F-10
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The per-share weighted average fair value of stock options granted
during 2002, 2001 and 2000 was $3.45, $3.62 and $12.26, respectively, on
the grant date using the Black-Scholes option pricing model with the
following assumptions:
YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
------ ------ ------
Expected dividend yield 0.0% 0.0% 0.0%
Rick-free interest rate 2.8% 4.2% 5.0%
Expected volatility 74.3% 78.0% 77.0%
Expected life in years 4.54 4.83 4.61
(n) Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(o) Impairment of Long-lived Assets
As circumstances dictate, the Company evaluates the recoverability of
its long-lived tangible and intangible 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.
(p) New Accounting Pronouncements
In August 2001, the 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.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition
and Disclosure," (SFAS148). SFAS148 amends SFAS123 to provide alternative
methods
F-11
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS148
amends the disclosure requirements of SFAS123 to require prominent
disclosure in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The provisions of SFAS148 are
effective for fiscal years ending after December 15, 2002. The adoption
of SFAS148 did not have a material impact on the consolidated financial
statements.
(q) Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform with the December 31, 2002 presentation with no
effect on net loss previously reported.
(2) 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 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.
In April 2000, the Company sold 5,584,591 shares of Common Stock for
$12.50 per share in an underwritten public offering. The net proceeds to
the Company from this offering were approximately $65.2 million after
deducting selling commissions and expenses of approximately $4.6 million
related to the offering.
The Company has reserved Common Stock for issuance as of December 31,
2002 as follows:
Stock option plans................................... 5,758,413
Warrants outstanding................................. 246,586
-----------
Total shares reserved.......................... 6,004,999
===========
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 shareholder 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.
F-12
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) STOCK OPTIONS AND WARRANTS
The Company has in effect the following stock option plans:
The Amended and Restated 1990 Incentive Stock Option Plan ("1990
Plan") allows for the issuance of incentive and non-qualified options to
employees, directors, officers, non-employee independent contractors and
non-employee directors, pursuant to which 102,635 shares of Common Stock
are reserved for issuance out of authorized but unissued shares of the
Company.
The Amended and Restated 1992 Incentive Stock Option Plan ("1992
Plan") allows for the issuance of incentive and non-qualified options to
employees, directors, officers, non-employee independent contractors and
non-employee directors, pursuant to which 712,641 shares of Common Stock
are reserved for issuance out of authorized but unissued shares of the
Company.
The Amended and Restated Stock Option Plan for Non-Employee Directors
("Director Plan") allows for the issuance of non-qualified options to
non-employee directors, pursuant to which 28,527 shares of Common Stock
are reserved for issuance out of authorized but unissued shares of the
Company to be issued to non-employee members of the Board of Directors of
the Company based on a formula. No new issuances are being made under the
Director Plan.
The Amended and Restated 1995 Stock Option Plan ("1995 Plan") allows
for the issuance of incentive and non-qualified options, shares of
restricted stock and stock bonuses to employees, officers, and
non-employee independent contractors, pursuant to which 1,604,867 shares
of Common Stock are reserved for issuance out of authorized but unissued
shares of the Company.
The Amended and Restated 1995 Non-Employee Director Stock Option Plan
("1995 Director Plan") allows for the issuance of non-qualified options
to non-employee directors, pursuant to which 444,368 shares of Common
Stock are reserved for issuance out of authorized but unissued shares of
the Company to be issued to non-employee members of the Board of
Directors of the Company based on a formula. During 2003, the Board of
Directors amended the 1995 Director Plan to allow a total of 800,000
shares of Common Stock to be reserved for issuance. The amendment is
subject to approval of the stockholders at the Company's annual meeting
in 2003.
The Amended and Restated 1999 Stock Incentive Plan ("1999 Plan")
allows for the issuance of incentive and non-qualified options, shares of
restricted stock and stock bonuses to directors, employees, officers and
non-employee independent contractors, pursuant to which 2,865,375 shares
of Common Stock are reserved for issuance out of authorized but unissued
shares of the Company. During 2003, the Board of Directors amended the
1999 Plan to allow a total of 4,750,000 shares of Common Stock to be
reserved for issuance. The amendment is subject to approval of the
stockholders at the Company's annual meeting in 2003.
F-13
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock options as of December 31, 2002, follows:
EXERCISE PRICE EXERCISED/ AVAILABLE
STOCK OPTION PLANS PER SHARE AUTHORIZED OUTSTANDING OTHER EXERCISABLE FOR GRANT
------------------ -------------- ---------- ----------- ----- ----------- ---------
1990 Plan............ $ 1.38-$21.59 285,715 102,635 183,080 86,805 ---
1992 Plan............ $ 1.41-$21.59 1,700,000 712,641 987,359 688,566 ---
Director Plan........ $ 3.50-$ 4.54 71,429 28,527 42,902 28,527 ---
1995 Plan............ $ 1.31-$21.59 2,000,000 1,574,841 395,133 1,496,272 30,026
1995 Director Plan... $ 1.38-$11.31 500,000 386,596 55,632 324,096 57,772
1999 Plan............ $ 2.29-$20.13 3,000,000 2,207,260 134,625 504,085 658,115
------------ ----------- --------- --------- ---------
TOTALS........ 7,557,144 5,012,500 1,798,731 3,128,351 745,913
============ =========== ========= ========= =========
A summary of the status of the Company's stock option plans as of
December 31, 2002, 2001 and 2000 and the changes during the years then
ended is presented below:
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding at January 1, 2000...... 3,224,219 $4.53
Granted.......................... 624,160 18.66
Canceled......................... (77,159) 9.13
Exercised........................ (618,904) 3.75
-----------
Outstanding at December 31, 2000.... 3,152,316 7.36
Granted.......................... 1,042,700 5.69
Canceled......................... (51,496) 13.77
Exercised........................ (12,268) 4.15
-----------
Outstanding at December 31, 2001.... 4,131,252 6.87
Granted.......................... 1,272,225 5.74
Canceled......................... (261,117) 5.97
Exercised........................ (129,860) 3.50
-----------
Outstanding at December 31, 2002.... 5,012,500 $6.72
===========
In 2002 and 2001, the Company issued 99,734 shares at a weighted
average market price of $5.61 per share, and 51,051 shares at a weighted
average market price of $9.69 per share, of restricted Common Stock,
respectively, as compensation to certain of its employees, which will
vest over the three year period subsequent to its issuance. In 2002,
5,063 shares of previously issued restricted Common Stock were cancelled,
as a result of the termination of employment of the grantees before such
shares had vested.
F-14
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize information about the Company's stock
options outstanding as of December 31, 2002, 2001 and 2000, respectively:
WEIGHTED WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE
OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE
EXERCISE PRICE AS OF 12/31/2002 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2002 OF EXERCISABLE
-------------- ---------------- ---------------- -------------- ---------------- --------------
$ 1.31 - $ 4.53 1,261,140 3.74 $ 3.53 1,195,140 $ 3.53
$ 4.54 - $ 5.63 1,749,644 6.24 $ 5.49 647,472 $ 5.37
$ 5.64 - $ 7.19 1,400,222 5.93 $ 6.41 845,222 $ 6.56
$ 7.20 - $21.59 601,494 6.69 $ 17.68 440,517 $ 17.45
------------- -------------
$ 1.31 - $21.59 5,012,500 5.58 $ 6.72 3,128,351 $ 6.69
============= =============
WEIGHTED WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE
OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE
EXERCISE PRICE AS OF 12/31/2001 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2001 OF EXERCISABLE
-------------- ---------------- ---------------- -------------- ---------------- --------------
$ 1.31 - $ 4.19 1,050,454 3.68 $ 3.21 951,041 $ 3.11
$ 4.20 - $ 5.51 1,526,834 6.44 $ 5.17 734,486 $ 4.80
$ 5.52 - $11.31 1,035,970 6.07 $ 6.85 909,478 $ 6.79
$11.32 - $21.59 517,994 8.02 $ 19.36 194,418 $ 19.37
------------- -------------
$ 1.31 - $21.59 4,131,252 5.84 $ 6.87 2,789,423 $ 5.89
============= =============
WEIGHTED WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE
OPTION OUTSTANDING REMAINING AVERAGE EXERCISABLE EXERCISE PRICE
EXERCISE PRICE AS OF 12/31/2000 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2000 OF EXERCISABLE
-------------- ---------------- ---------------- -------------- ---------------- --------------
$ 1.31 - $ 3.50 638,719 2.86 $ 2.64 637,886 $ 2.64
$ 3.51 - $ 5.88 1,459,624 6.09 $ 4.83 1,208,453 $ 4.98
$ 5.89 - $ 8.13 451,146 7.17 $ 7.19 297,282 $ 7.19
$ 8.14 - $21.59 602,827 9.36 $ 18.63 23,752 $ 13.86
------------- -------------
$ 1.31 - $21.59 3,152,316 5.84 $ 7.36 2,167,373 $ 4.69
============= =============
F-15
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants
A summary of the status of the Company's warrants as of December 31,
2002, 2001 and 2000, and changes during the years then ended is presented
below:
WEIGHTED-AVERAGE
WARRANTS EXERCISE PRICE
------------- ----------------
Outstanding at January 1, 2000....... 4,760,972 $8.01
Canceled.......................... (1,457,473) 8.37
Exercised......................... (531,128) 4.76
------------
Outstanding at December 31, 2000..... 2,772,371 8.33
Forfeited......................... (12,955) 4.40
Exercised......................... (2,511,558) 8.20
------------
Outstanding at December 31, 2001..... 247,858 9.87
Exercised......................... (1,272) 4.25
------------
Outstanding at December 31, 2002..... 246,586 $9.90
============
On November 12, 1998, the Company announced an extension of the
exercise period of the Company's publicly traded redeemable common stock
purchase warrants 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. These publicly traded warrants comprised 2,386,645 of the 2,772,371
warrants outstanding at December 31, 2000. The exercise price of $8.44
remained unchanged. On January 3, 2001, publicly traded warrants to
purchase 2,386,645 shares were exercised and the Company received cash
proceeds of $20,143,000. In February 2001, warrants to purchase 124,913
shares at a weighted-average exercise price of $3.60, originally issued
in 1996, were exercised for total cash proceeds of $450,000.
(4) INCOME TAXES
The Company did not incur any tax expense in any year due to
operating losses and the related increase in the valuation allowance.
The reconciliation of income taxes at the statutory rate of 35%
applied to income before taxes is as follows ($ in thousands):
DECEMBER 31,
2002 2001 2000
-------- -------- --------
Computed "expected" tax expense $ (8,214) $ (6,700) $ (1,979)
Effect of:
Permanent differences 893 525 (2,020)
Increase in valuation allowance 7,321 6,175 3,999
-------- -------- --------
Tax expense $ --- $ --- $ ---
======== ======== ========
F-16
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets as of December 31, 2002
and 2001 are as follows ($ in thousands):
DECEMBER 31,
2002 2001
-------- --------
Loss carryforwards $ 41,946 $ 30,726
Start-up costs 8,001 10,748
Property, plant and equipment (71) 814
Deferred revenue 2,053 2,393
Other 1,047 974
-------- --------
Gross deferred tax assets 52,976 45,655
Valuation allowance (52,976) (45,655)
--------- ---------
Net deferred tax assets $ --- $ ---
======== ========
The Company has established a valuation allowance for the full amount
of these deferred tax assets, as management does not believe that it is
more likely than not that the Company will 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.
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following ($ in
thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
----------- -----------
Laboratory and office equipment................. $ 10,667 $ 8,407
Leasehold improvements.......................... 4,311 4,302
-------- --------
14,978 12,709
Less accumulated depreciation and amortization.. 9,399 8,409
-------- --------
$ 5,579 $ 4,300
======== ========
(6) 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 ($ in thousands):
DECEMBER 31,
2002 2001
-------- --------
Long-lived assets:
United States $ 4,884 $ 4,446
Germany 1,457 722
-------- --------
Total $ 6,341 $ 5,168
======== ========
(7) RESEARCH AGREEMENTS
On October 10, 1996, the Company signed a strategic alliance
agreement with LG Chemical, a Korean corporation, to develop and market
compounds derived from the Company's endothelin receptor antagonist and
selectin antagonist programs for certain disease indications. Upon
consummation of the transaction, LG Chemical purchased 1,250,000 shares
of Common Stock for $4.00 per share for a total of $5 million. In
addition, LG Chemical had committed to pay $10.7 million in research
payments. Of this amount, $8.1 million had been paid as of December 31,
2000. Effective June 6, 2000, the Company assigned one-half of the
research payment to ICOS-TBC which amounted to $577,000, before
commissions, during the year 2000. In August 2001, the Company and LG
Chemical mutually agreed to terminate the strategic alliance
F-17
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement. No research payments were received in 2002 or 2001 from LG
Chemical and LG Chemical's rights under the agreement have ended.
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. In January 2003, ICOS announced that it
had reached a conclusion that joint development of the endothelin
antagonist program by ICOS-TBC should not continue. ICOS and TBC are
currently negotiating the terms pursuant to which TBC could independently
continue the program. The financial terms of the transaction are subject
to ongoing negotiations between the two companies. See Note 8, below.
The Company also receives reimbursement for certain research costs
pursuant to its agreements with GlaxoSmithKline, plc ("GSK") (Note 10),
Schering-Plough LTD. and Schering-Plough Corporation (collectively
"Schering-Plough") (Note 8) and Revotar (Note 9).
(8) 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 and a use patent
which expires in 2009. The Mitsubishi composition of matter patent on
Argatroban has expired. During 2000, TBC signed an additional agreement
with Mitsubishi that provides TBC with royalties on sales of Argatroban
in certain European countries, up to a total of $5.0 million in
milestones for the development of ischemic stroke and certain other
provisions. The Company began enrolling patients 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 as revenues over the
expected development period, and accordingly, revenues in years 2002 and
2001 include approximately $382,000 and $274,000, respectively, related
to such milestone payment. In light of a lack of a positive 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. 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.
Mitsubishi further agreed to supply the Company with its requirements
of bulk Argatroban throughout the term of the Mitsubishi Agreement for
TBC's clinical testing and commercial sales of Argatroban in the U.S. and
Canada. In the event Mitsubishi should discontinue the manufacture of
Argatroban, Mitsubishi and TBC have agreed to discuss in good faith the
means by which, and the party to whom, Argatroban production technology
will be transferred. The transferee may be a person or entity other than
TBC. At present, Mitsubishi is the only manufacturer of Argatroban. See
Note 10.
In exchange for the license to the Genentech, Inc, (the "Former
Licensor") 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 United States Food and
Drug Administration (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 HIT. The value of $965,000 has been recorded as an intangible asset
and is being amortized over the estimated useful life of the asset.
Amortization expense recorded in 2002, 2001 and 2000 was $105,000,
$105,000 and $53,000, respectively and will be approximately $105,000
annually in future periods. 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.
During the third quarter of 1997, the Company sublicensed certain
rights to Argatroban to GSK. In conjunction with this agreement, the
Company agreed to make certain payments to Mitsubishi, which are included
in research and development expense, to pay an additional royalty to
Mitsubishi, beginning January 1, 2002 and to provide access to certain
F-18
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Argatroban clinical data to Mitsubishi in certain circumstances. In
certain circumstances, Mitsubishi and TBC will share equally in all
upfront payments and royalties should Mitsubishi use TBC's regulatory
documents and data for registration in certain territories. See Note 10.
ICOS Corporation Partnership
On June 6, 2000, the Company and ICOS entered into the ICOS-TBC
limited partnership agreement. The partnership was established to develop
and globally commercialize ET(A) receptor antagonists. As a result of its
contribution of technology, ICOS-TBC paid a license fee to TBC in June
2000. In July 2001, the Company earned a milestone, as a result of the
achievement of an objective defined in the partnership agreement. The
license fee is being amortized over the estimated development period of
the licensed technology and the Company recognized approximately
$464,000, $484,000 and $307,000 of it as revenue during 2002, 2001 and
2000, respectively. The milestone payment received in July 2001 is also
being amortized over the estimated development period, and the Company
recognized approximately $640,000 and $333,000 of it as revenue during
2002 and 2001, respectively. For further discussion of the Company's
revenue recognition policies, see Note 1 (h), Revenue Recognition, above.
In January 2003, ICOS announced that it had reached a conclusion that
joint development of the endothelin antagonist program by ICOS-TBC should
not continue. ICOS and TBC are currently negotiating the terms pursuant
to which TBC could independently continue the program. The financial
terms of the transaction are subject to ongoing negotiations between the
two companies. After December 31, 2002, TBC has agreed to be responsible
for 100% of the expenses of ICOS-TBC.
During the years ended December 31, 2002, 2001 and 2000, the Company
recognized losses of $8,557,000, $9,450,000 and $3,487,000, respectively,
representing the Company's proportionate share of the losses of ICOS-TBC.
The losses of ICOS-TBC includes amounts billed to the partnership by the
Company, all of which were included in the loss of the partnership, as
follows ($ in thousands):
Year Ended December 31,
------------------------------
2002 2001 2000
------ ------ ------
Charges for TBC labor costs $1,090 $1,442 $1,123
Direct research and development costs 1,375 4,748 3,583
------ ------ ------
Total billed to ICOS-TBC by
the Company $2,465 $6,190 $4,706
====== ====== ======
Summarized unaudited financial information for ICOS-TBC is as follows
($ in thousands):
FINANCIAL POSITION - DECEMBER 31: 2002 2001
--------------------------------- ---- ----
Total assets - all current............................. $ 1 $ 1
======== ========
Total liabilities - all current, payable to partners... $ 5,235 $ 7,059
Partners' deficit...................................... (5,234) (7,058)
-------- --------
$ 1 $ 1
======== ========
Period from
June 6, 2000
(inception)
Year Ended Year Ended through
December 31, December 31, December 31,
OPERATING RESULTS: 2002 2001 2000
--------------------------------------------------- ------------ ------------ -------------
Revenue................................................ $ --- $ --- $ 547
Research and development expenses, related parties..... (16,633) (18,872) (7,515)
Contribution of technology, related party.............. --- (4,000) (4,000)
Administrative expenses................................ (483) (26) (8)
-------- -------- ----------
Net loss............................................... $(17,116) $(22,898) $ (10,976)
======== ======== ==========
Schering-Plough Research Collaboration and License Agreement
On June 30, 2000, TBC and Schering-Plough entered into a worldwide
research collaboration and license agreement to discover, develop and
commercialize VLA-4 antagonists. VLA-4 antagonists represent a new class
of compounds that has shown promise in multiple preclinical animal models
of asthma. The primary focus of the collaboration will be to discover
orally available VLA-4 antagonists as treatments for asthma.
F-19
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the agreement, Schering-Plough obtains the
exclusive worldwide rights to develop, manufacture and market all
compounds from TBC's library of VLA-4 antagonists, as well as the rights
to a second integrin antagonist. TBC will be responsible for optimizing a
lead compound and additional follow-on compounds. Schering-Plough 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-Plough 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, and the Company recognized $366,000,
$456,000 and $273,000 of the license fee as revenues in years 2002, 2001
and 2000, respectively. Total payments to TBC for both programs,
excluding royalties, could reach $87.0 million.
In June 2002, the Company achieved a milestone under the
Schering-Plough agreement as a result of the nomination of an initial
candidate for Schering-Plough's further development. This milestone
payment will be recognized into revenue over the expected development
period, and approximately $104,000 was recognized as revenue during 2002.
(9) FOREIGN SUBSIDIARY
During the third quarter 2000, TBC formed Revotar to conduct research
and development of novel small molecule compounds and to develop and
commercialize selectin antagonists. Upon formation, Revotar received
certain development and commercialization rights to the Company's
selectin antagonist compounds as well as rights to certain other TBC
research technology. Revotar also received approximately $5 million in
funding from three German venture capital funds. The Company retained
ownership of approximately 55% of the outstanding common stock 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
included with the minority interest in Revotar on the consolidated
balance sheets at December 31, 2002 and 2001. The minority interest in
Revotar at December 31, 2002 and December 31, 2001, was $2,608,000 and
$3,833,000, respectively. The Company's consolidated net loss for the
years ended December 31, 2002, 2001 and 2000 was reduced $1,225,000,
$749,000 and $209,000, respectively, by the Revotar minority
shareholders' approximately 45% interest in Revotar's losses.
(10) 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. 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
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.
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.
F-20
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In connection with the execution of the GSK Agreement, GSK purchased
176,992 shares of TBC's Common Stock for $1.0 million and additional
400,000 shares of Common Stock for $2.0 million in connection with the
secondary public offering, which closed on October 1, 1997.
(11) 401(k) PLAN
The Company adopted a 401(k) plan which became effective on September
1, 1993. Under the plan, all employees with three months of service are
eligible to participate in the plan and may contribute up to 15 percent
of their compensation, with a maximum of $11,000 per employee in 2002.
The Compensation 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 effective January 1,
2001. The Compensation Committee approved matching contributions on the
catch-up contribution made by employees 50 years of age or older by the
end of the plan year and the 401(k) plan was amended effective January 1,
2002. Total cost of the employer match was $197,000 and $158,000 in 2002
and 2001, respectively.
(12) COMMITMENTS AND CONTINGENCIES
(a) Employment agreements
The Company has entered into employment agreements with certain
officers and key employees. Additionally, the Company has signed
agreements with nine of its officers to provide certain benefits in the
event of a "change of control" as defined in these agreements and the
occurrence of certain other events. The agreements provide for a lump-sum
payment in cash equal to eighteen months to three years of annual base
salary and annual bonus, if any. The base salary and annual bonus portion
of the agreements would aggregate approximately $4.9 million at the
current rate of compensation. In addition, the agreements provide for
gross-up for certain taxes on the lump-sum payment, continuation of
certain insurance and other benefits for periods of eighteen months to
three years and reimbursement of certain legal expenses in conjunction
with the agreements.
(b) Lease Agreements
In April 2002, the Company leased a facility in Bellaire, Texas, that
houses the Company's administrative, marketing, clinical development and
regulatory staff. Under the terms of the lease, which expires on July 31,
2005, the Company is obligated to pay approximately $281,000 annually for
base rent, related building services and parking. The Company has the
right to extend the term of this lease agreement under the same terms and
conditions to December 31, 2005, upon notice to the lessor. The Company
could be subject to additional charges for related building services in
years 2003 and thereafter, based upon increases in actual building costs,
not to exceed six percent annually.
The Company's lease on its laboratory facility in Houston, Texas
expires on December 31, 2005 with an annual base rent of approximately
$815,000. The Company also leases parking spaces at the facility
established rate charged, which currently approximates $43,000 per year.
The lease also includes a provision for the Company to pay certain
additional charges to obtain utilities and building services during
off-business hours. Currently, the amount of these charges is
approximately $288,000 per annum, payable in monthly installments. These
charges are subject to annual adjustments based on the local consumer
price index.
In October 2001, Revotar, the Company's majority-owned subsidiary,
leased an 8,800 square foot office and laboratory facility in Berlin,
Germany. The lease expires on September 30, 2006. Under the terms of the
lease, the Company is obligated to pay $137,000 in year 2003 for rent and
parking. Under the terms of the lease, base rent will increase at three
F-21
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
percent per year on the anniversary date of the lease. In addition to the
base rent and parking, the Company is obligated to pay $49,000 in year
2003 for related building services. The charge for related building
services is subject to annual adjustments, based upon actual increases in
costs, up to six percent per year.
For the years ended December 31, 2002, 2001 and 2000, rent and
related building services totaled approximately $1,600,000, $1,200,000
and $1,100,000, respectively.
At December 31, 2002, the Company's minimum aggregate commitments
under long-term, non-cancelable operating leases are as follows ($ in
thousands):
2003..................................... $ 1,616
2004..................................... 1,620
2005..................................... 1,506
2006..................................... 131
-------
$ 4,873
=======
(c) 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 reported expenses and
cash flows from this subsidiary are exposed to changing exchange rates.
The Company had an intercompany receivable from our German subsidiary at
December 31, 2002; however this amount was denominated in U.S. dollars
and was not exposed to exchange risk. The Company contracts with entities
in other areas outside the U.S. that are denominated in a foreign
currency. To date, the currencies of these countries have not fluctuated
materially. Through December 31, 2002, 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. During 2003, Revotar engaged in a program of
hedging the effect of foreign currency fluctuations on approximately $1.6
million in future loan payments from us.
(d) Other Contingencies
Like other biopharmaceutical companies, the Company is subject to
other contingencies, including legal proceedings and claims arising out
of its business that cover a wide range of matters, including, among
others, environmental matters, contract and employment claims, and
product liability. The Company may be involved in legal actions from time
to time. The Company has used various substances in its research and
development which have been or may be deemed to be hazardous or
dangerous, and the extent of its potential liability, if any, under
environmental, product liability and workers' compensation statutes,
rules, regulations and case law is unclear. The Company is not a party to
any legal actions.
F-22
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Total revenues $ 2,593 $ 2,626 $ 2,405 $ 2,809
Operating loss $(7,774) $(7,057) $(6,760) $(5,575)
Net loss $(6,750) $(6,221) $(5,840) $(4,658)
======= ======= ======= =======
Net loss per share data:
Basic and diluted $ (0.15) $ (0.14) $ (0.13) $ (0.11)
YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Total revenues $ 2,269 $ 2,463 $ 1,704 $ 2,481
Operating loss $(4,224) $(6,107) $(5,707) $(9,089)
Net loss $(2,510) $(4,539) $(4,289) $(7,804)
======= ======= ======= =======
Net loss per share data:
Basic and diluted $ (0.06) $ (0.10) $ (0.10) $ (0.18)
Because of the method used in calculating per share data, the
quarterly per share data will not necessarily total to the per share data
as computed for the year.
(14) SUBSEQUENT EVENTS
In January 2003, the Company implemented a restructuring plan to
reduce its annual fixed operating expenses. The Company eliminated
approximately 21 positions, primarily in its research area, and cancelled
approximately 15 open positions. The Company will incur a charge of
approximately $600,000 in 2003 related to the implementation of its
restructuring plan.
On March 21, 2003, Nasdaq informed us that for the last 30
consecutive trading days, the bid price of our common stock has closed
below the minimum $1.00 per share requirement for continued inclusion in
The Nasdaq National Market. Therefore, in accordance with Nasdaq Rules,
we will be provided 180 calendar days, or until September 17, 2003, to
regain compliance. If, at any time before September 17, 2003, the bid
price of our common stock closes at $1.00 per share or more for a minimum
of 10 consecutive trading days, Nasdaq will provide written notification
that we have achieved compliance with this rule. If compliance with this
rule cannot be demonstrated by September 17, 2003, the Nasdaq will
provide written notification that our securities will be delisted. At
that time, we may appeal this determination to a Listing Qualifications
Panel or may apply to transfer our securities to The Nasdaq Small Cap
Market.
F-23
INDEX TO EXHIBITS
EXHIBIT NO DESCRIPTION OF EXHIBIT
---------- ----------------------
3.1 -- Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1
to the Company's Form 10 (Commission File No. 0-20117) effective June 26, 1992 (as
amended))
3.2 -- Amendment to the Certificate of Incorporation dated November 30, 1993 (incorporated
by reference to Exhibit 3.4 to the Company's Form 10-Q (Commission File No. 0-20117)
filed with the Commission on November 14, 1994)
3.3 -- Amendment to the Certificate of Incorporation dated May 20, 1994 (incorporated by
reference to Exhibit 3.5 to the Company's Form 10-Q (Commission File No. 0-20117) filed
with the Commission on November 14, 1994)
3.4 -- Certificate of Amendment of Certificate of Incorporation dated May 3, 1996
(incorporated by reference to Exhibit 3.6 to the Company's Form 10-Q (Commission File No.
1-12574) for the quarter ended June 30, 1996)
3.5 -- Amended and Restated By-laws of Texas Biotechnology Corporation adopted September 6,
1996 (incorporated by reference to Exhibit 3.7 to the Company's Form 10-Q (Commission
File No. 1-12574) for the quarter ended September 30, 1996)
3.6 -- Amendment to Article II of By-laws adopted June 29, 2000 (incorporated by reference
to Exhibit 3.8 to the Company's Quarterly Report on Form 10-Q (Commission File No.
000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000)
3.7 -- Certificate of Designations, Preferences, Limitations and Relative Rights of The
Series A Junior Participating Preferred Stock of Texas Biotechnology Corporation
(incorporated by reference to Exhibit 2 to the Company's Form 8-A (Commission File No.
0-20117) with the commission on January 3, 2002)
4.1 -- Rights Agreement, dated as of January 2, 2002, between Texas Biotechnology
Corporation and The Bank of New York, as Rights Agent, including exhibits thereto.
(incorporated by reference to Exhibit 1 to the Company's Form 8-A (Commission File No.
0-20117) with the commission on January 3, 2002)
4.2 -- Form of Rights Certificate (incorporated by reference to Exhibit 3 to the Company's
Form 8-A (Commission File No. 0-20117) with the commission on January 3, 2002)
10.1 -- Consulting Agreement with John M. Pietruski dated January 1, 1992 (incorporated by
reference to Exhibit 10.6 to the Company's Form 10 (Commission File No. 0-20117)
effective June 26, 1992 (as amended))
10.2+ -- Sixth amendment dated January 1, 2003 to Consulting Agreement with John M. Pietruski
dated January 1, 1992.
10.3 -- Employment Agreement with David B. McWilliams dated July 15, 1992 (incorporated by
reference to Exhibit 19.1 to the Company's Form 10-Q (Commission File No. 0-20117) for
the quarter ended June 30, 1992)
10.4 -- Retirement Agreement between Texas Biotechnology Corporation and David B. McWilliams
dated March 21, 2002 (incorporated by reference to Exhibit 10.28 to the Company's Form
10-K (Commission File No. 1-12574) for the year ended December 31, 2001 with the
commission on March 29, 2002).
10.5+ -- Termination Agreement between Texas Biotechnology Corporation and Bruce D. Given,
M.D. dated March 21, 2003.
10.6+ -- Termination Agreement between Texas Biotechnology Corporation and Richard A. F.
Dixon dated March 17, 2003.
10.7+ -- Termination Agreement between Texas Biotechnology Corporation and Stephen L. Mueller
dated March 20, 2003.
10.8+ -- Form of Termination Agreement between Texas Biotechnology Corporation and Tom Brock,
Philip Brown, Heather Giles, Pam Mabry, Dan Thompson, and Patrick Ward.
10.9 -- Form of Indemnification Agreement between Texas Biotechnology Corporation and its
officers and directors dated March 12, 2002 (incorporated by reference to Exhibit 10.27
to the Company's Form 10-K (Commission File No. 1-12574) for the year ended December 31,
2001 with the commission on March 29, 2002).
10.10 -- Amended and Restated 1990 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.33 to the Company's Form 10-K (Commission File No. 0-20117) for the year ended
December 31, 1994)
10.11 -- Amended and Restated 1992 Incentive Stock Option Plan (as of March 3, 1995)
(incorporated by reference to Exhibit 10.34 to the Company's Form 10-K (Commission File
No. 0-20117) for the year ended December 31, 1994)
10.12 -- Amended and Restated Stock Option Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.39 to the Company's Form 10-Q (Commission File No. 0-20117) for
the quarter ended June 30, 1995)
10.13 -- 1995 Stock Option Plan (incorporated by reference to Exhibit 10.40 to the Company's
Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1995)
10.14 -- Amendment to the 1995 Stock Option Plan of Texas Biotechnology Corporation dated
March 4, 1997 (incorporated by reference to Exhibit 10.62 to the Company's Form 10-Q
(Commission File No. 1-12574) for the quarter ended June 30, 1997 with the Commission on
August 14, 1997)
10.15 -- Amended and Restated 1995 Non-Employee Director Stock Option Plan (as amended by the
Board of Directors on June 30, 1996) (incorporated by reference to Exhibit 10.55 to the
Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended June 30, 1996)
10.16 -- Amendment to the 1995 Non-Employee Director Stock Option Plan of Texas Biotechnology
Corporation dated March 4, 1997 (incorporated by reference to Exhibit 10.63 to the
Company's Form 10-Q (Commission File No. 1-12574) for the quarter ended June 30, 1997
with the Commission on August 14, 1997)
10.17 -- Amendment to Amended and Restated 1995 Non-Employee Director Stock Option Plan,
dated March 6, 2000 (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Commission File No. 333-41864) with the commission on
July 20, 2000)
10.18 -- Texas Biotechnology Corporation 1999 Stock Incentive Plan (incorporated by reference
to Exhibit 10.71 to the Company's Form 10-Q (Commission File No. 1-12574) for the Quarter
ended March 31, 1999 with the Commission on May 13, 1999)
10.19 -- Amendment to the 1999 Stock Incentive Plan adopted on March 13, 2001 (incorporated
by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8
(Commission File No. 333-72468) with the commission on October 30, 2001)
10.20 -- Lease Agreement dated, February 24, 1995 between Texas Biotechnology Corporation and
Doctors Center, Inc. (incorporated by reference to Exhibit 10.31 to the Company's Form
10-K (Commission File No. 0-20117) for the year ended December 31, 1994)
10.21+ -- Third Amendment to Lease Agreement dated January 1, 2003 between Texas Biotechnology
Corporation and the Board of Regents of The University of Texas System.
10.22+ -- Lease Agreement dated February 20, 2002 between Texas Biotechnology Corporation and
FRM West Loop Associates #6, LTD.
10.23* -- Sublicense and License Agreement dated May 27, 1993 between Company and Genentech,
Inc., together with exhibits (incorporated by reference to Exhibit 10.17 to the Company's
Form 10-Q (Commission File No. 0-20117) for the quarter ended June 30, 1993 and
incorporated by reference to Exhibit 10.17 to the Company's Form 10-Q/A-1 (Commission
File No. 0-20117) for the quarter ended June 30, 1993)
10.24* -- Stock Agreement dated May 27, 1993 between the Company and Genentech, Inc.
(incorporated by reference to Exhibit 10.18 to the Company's Form 10-Q (Commission File
No. 0-20117) for the quarter ended June 30, 1993)
10.25 -- Agreement between Mitsubishi Chemical Corporation, Texas Biotechnology Corporation
and SmithKline Beecham plc dated August 5, 1997 (incorporated by reference to Exhibit
99.1 to the Company's Form 8-K (Commission File No. 1-12574) with the Commission on
August 25, 1997)
10.26* -- Product Development License and Co-Promotion Agreement between Texas Biotechnology
Corporation and SmithKline Beecham plc dated August 5, 1997 (incorporated by reference to
Exhibit 99.2 to the Company's Form 8-K (Commission File No. 1-12574) with the Commission
on August 25, 1997)
10.27* -- Common Stock Purchase Agreement between Texas Biotechnology Corporation and
SmithKline Beecham plc dated August 5, 1997 (incorporated by reference to Exhibit 99.3 to
the Company's Form 8-K (Commission File No. 1-12574) with the Commission on August 25,
1997)
10.28*+ -- Amended and Restated License and Research Development Agreement dated January 24,
2003 between Revotar Biopharmaceuticals AG and Texas Biotechnology Corporation.
10.29* -- Agreement of Limited Partnership of ICOS-Texas Biotechnology L.P. among ICOS-ET-LP
LLC and Texas Biotechnology Corporation, as Limited Partners, and ICOS-ET-GP LLC and
TBC-ET, Inc., as General Partners dated June 6, 2000. (incorporated by reference to
Exhibit 99.4 to the Company's Quarterly Report on Form 10-Q (Commission File No.
000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000)
10.30* -- Endothelin License Agreement by and between Texas Biotechnology Corporation and
ICOS-Texas Biotechnology L.P. dated June 6, 2000. (incorporated by reference to Exhibit
99.5 to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for
the quarter ended June 30, 2000 with the commission on August 14, 2000)
10.31* -- Formation and Performance Agreement by and between ICOS Corporation and Texas
Biotechnology Corporation dated June 6, 2000. (incorporated by reference to Exhibit 99.6
to the Company's Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the
quarter ended June 30, 2000 with the commission on August 14, 2000)
10.32* -- Research and Development Service Agreement by and between ICOS Corporation, Texas
Biotechnology Corporation and ICOS-Texas Biotechnology L.P. dated June 6, 2000.
(incorporated by reference to Exhibit 99.7 to the Company's Quarterly Report on Form 10-Q
(Commission File No. 000-20117) for the quarter ended June 30, 2000 with the commission
on August 14, 2000)
10.33* -- Research Collaboration and License Agreement by and between Texas Biotechnology
Corporation and Schering-Plough LTD. dated June 30, 2000. (incorporated by reference to
Exhibit 99.8 to the Company's Quarterly Report on Form 10-Q (Commission File No.
000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000)
10.34* -- Research Collaboration and License Agreement by and between Texas Biotechnology
Corporation and Schering Corporation dated June 30, 2000. (incorporated by reference to
Exhibit 99.9 to the Company's Quarterly Report on Form 10-Q (Commission File No.
000-20117) for the quarter ended June 30, 2000 with the commission on August 14, 2000)
21.1+ -- Subsidiaries of the Registrant
23.1+ -- Independent Auditors' Consent of KPMG LLP, Seattle, Washington
23.2+ -- Independent Auditors' Consent of KPMG LLP, Houston, Texas
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.
- ----------
* The Company has omitted certain portions of these agreements in reliance on
Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.
+ Filed herewith