UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-20117
ENCYSIVE PHARMACEUTICALS INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3532643
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6700 West Loop South, 4th Floor, Bellaire, Texas 77401
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(Address of principal executive office) (Zip code)
(713) 796-8822
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, exclusive of treasury shares, as of the latest practicable date.
Class Outstanding at May 6, 2003
----- --------------------------
common stock, $0.005 par value 44,280,125
TEXAS BIOTECHNOLOGY CORPORATION
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 1
Consolidated Statements of Operations and Comprehensive Loss for the
three months ended March 31, 2003 and 2002 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 18
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 27
ITEM 4: CONTROLS AND PROCEDURES 28
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 28
ITEM 2: Changes in Securities and Use of Proceeds 28
ITEM 3: Defaults Upon Senior Securities 28
ITEM 4: Submission of Matters to a Vote of Security Holders 28
ITEM 5: Other Information 28
ITEM 6: Exhibits and Reports on Form 8-K 28
SIGNATURES 30
CERTIFICATIONS
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 27,030 $ 21,228
Short-term investments 19,713 26,533
Accounts receivable 1,139 1,098
Other current receivables 131 473
Receivable from related party under collaborative arrangement 1,248 393
Prepaids 2,235 1,482
--------- ---------
Total current assets 51,496 51,207
Long-term investments 13,105 20,244
Equipment and leasehold improvements, net 5,454 5,579
Other assets 736 762
--------- ---------
Total assets $ 70,791 $ 77,792
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 812 $ 950
Accrued expenses 2,335 3,774
Deferred revenue from related party 591 591
Deferred revenue from unrelated parties 927 927
Payable to related party 2,375 2,664
--------- ---------
Total current liabilities 7,040 8,906
Deferred revenue from related party 1,046 1,181
Deferred revenue from unrelated parties 2,787 3,019
Minority interest in Revotar 2,418 2,608
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.005 per share. At March 31, 2003,
and December 31, 2002, 5,000,000 shares authorized;
none outstanding -- --
Common stock, par value $.005 per share. At March 31, 2003
75,000,000 shares authorized; 44,458,644 shares issued
At December 31, 2002, 75,000,000 shares authorized;
44,015,364 shares issued 222 220
Additional paid-in capital 212,282 211,847
Deferred compensation expense (319) (223)
Treasury stock, 213,000 shares at March 31, 2003, and
December 31, 2002 (1,602) (1,602)
Accumulated other comprehensive income 62 1
Accumulated deficit (153,145) (148,165)
--------- ---------
Total stockholders' equity 57,500 62,078
--------- ---------
Total liabilities and stockholders' equity $ 70,791 $ 77,792
========= =========
See accompanying notes to consolidated financial statements
1
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2003 2002
------------ ------------
Revenues:
Research agreements $ 742 $ 913
Collaborative research and development from
ICOS-TBC, L.P. 664 240
Royalty income, net 1,148 965
License fees, milestones and grants 662 475
------------ ------------
Total revenues 3,216 2,593
------------ ------------
Expenses:
Research and development 4,219 5,190
Equity in loss of ICOS-TBC, L.P. 2,386 2,510
General and administrative 2,154 2,667
------------ ------------
Total expenses 8,759 10,367
------------ ------------
Operating loss (5,543) (7,774)
Investment income, net 373 767
------------ ------------
Loss before minority interest (5,170) (7,007)
Minority interest in loss of Revotar 190 257
------------ ------------
Net loss (4,980) (6,750)
Other comprehensive gain (loss):
Unrealized gain (loss) on foreign currency translation 61 (61)
------------ ------------
Comprehensive loss $ (4,919) $ (6,811)
============ ============
Net loss per common share-
basic and diluted $ (0.11) $ (0.15)
============ ============
Weighted average common shares used to compute
basic and diluted net loss per share 43,945,274 43,613,146
============ ============
See accompanying notes to consolidated financial statements
2
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,980) $ (6,750)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 263 270
Equity in loss of ICOS-TBC, L.P. 2,386 2,510
Minority interest in loss of Revotar (190) (257)
Expenses paid with stock 325 230
Compensation expense related to stock options 16 182
Amortization of premium/discount on investments 32 66
Change in operating assets and liabilities:
Decrease in interest receivable included in short-term
and long-term investments 186 278
Increase in accounts receivable (40) (288)
Increase in prepaids (753) (872)
Decrease in other current receivables 384 284
(Increase) decrease in receivable from related party under
collaborative arrangement (861) 479
Decrease in current liabilities (1,601) (1,011)
Decrease in liability to related party (2,675) (2,172)
Decrease in deferred revenue from unrelated parties (232) (187)
Decrease in deferred revenue from related party (136) (288)
-------- --------
Net cash used in operating activities (7,876) (7,526)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (56) (1,245)
Purchases of investments (8,307) (32,888)
Maturity of investments 22,048 57,769
-------- --------
Net cash provided by investing activities 13,685 23,636
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and option and
warrant exercises, net -- 157
-------- --------
Net cash provided by financing activities -- 157
Effect of exchange rate changes on cash (7) (45)
-------- --------
Net increase in cash and cash equivalents 5,802 16,222
Cash and cash equivalents at beginning of period 21,228 10,086
-------- --------
Cash and cash equivalents at end of period $ 27,030 $ 26,308
======== ========
Supplemental schedule of noncash financing activities:
deferred compensation expense $ 162 $ 300
======== ========
issuance of Common Stock for expenses $ 325 $ 230
======== ========
See accompanying notes to consolidated financial statements
3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Texas
Biotechnology Corporation, a Delaware corporation, and its subsidiaries
(collectively referred to as the "Company" or "TBC") have been prepared in
accordance with accounting principles generally accepted in the United States
of America ("USA") for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all
information and notes required by accounting principles generally accepted in
the USA for complete financial statements. It is recommended that these interim
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. Except as
disclosed herein, there has been no material change in the information
disclosed in the notes to the consolidated financial statements included in the
Company's Annual Report on Form 10-K. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
three-month period ended March 31, 2003 are not necessarily indicative of the
results that may be expected for any other interim period, or for the year
ending December 31, 2003.
(2) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
The Company is a biopharmaceutical company focused on the
discovery, development and commercialization of novel synthetic small
molecule compounds for the treatment of a variety of cardiovascular,
vascular and related inflammatory diseases. Since its formation in
1989, the Company has been engaged principally in research and drug
discovery programs and clinical development of certain drug compounds.
On July 25, 1994, the Company acquired all of the outstanding common
stock of ImmunoPharmaceutics, Inc. ("IPI") in exchange for common
stock, par value $.005 per share (the "Common Stock"), of the Company.
On June 6, 2000, TBC, through its wholly owned subsidiary, TBC-ET,
Inc., a Delaware Corporation, and ICOS Corporation, a Delaware
Corporation, ("ICOS") entered into an agreement and formed ICOS-Texas
Biotechnology L.P., a Delaware limited partnership ("ICOS-TBC"), to
develop and globally commercialize endothelin-A receptor antagonists.
TBC and ICOS were both 50% owners in ICOS-TBC until April 22, 2003, at
which time the Company purchased ICOS's share of ICOS-TBC and changed
the name of ICOS-TBC to Encysive, L.P. ("Encysive"). The acquisition
of ICOS's ownership interest in ICOS-TBC is referred to herein as the
"Acquisition". See Note 14. During the third quarter of 2000, TBC
formed Revotar Biopharmaceuticals AG ("Revotar"), a German
corporation, to conduct research and development for novel small
molecule compounds and to develop and commercialize TBC's selectin
antagonists. The Company retained an approximately 55% interest in
Revotar. The Company is presently working on a number of long-term
development projects that involve experimental and unproven
technology, which may require many years and substantial expenditures
to complete, and which may be unsuccessful. Sales of the Company's
first product for which it receives royalty income, Argatroban, began
during November 2000.
(b) Basis of Consolidation
The Company's consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries, IPI and
TBC-ET, Inc., and its majority controlled subsidiary, Revotar. All
material intercompany balances and transactions have been eliminated.
4
(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 and are recorded at cost. Short-term investments consist of
debt securities with original maturities of less than one year and
greater than three months at the purchase date. Long-term investments
consist of debt securities with a remaining maturity of one to four
years. The Company classifies all short-term and long-term investments
as held-to-maturity. Held-to-maturity securities are those securities
in which the Company has the ability and intent to hold the security
until maturity. Short-term and long-term investments are stated at
amortized cost plus accrued interest. Interest income is accrued as
earned. The Company evaluates the carrying value of its securities by
comparing the carrying values of the securities to their market
values. In the event that the fair value of a security were to decline
below its carrying cost, and in the opinion of management such decline
were other than temporary, the Company would record a loss and reduce
the carrying value of such instrument to its fair value. Composition
of cash and investments was as follows (in thousands):
March 31, 2003 December 31, 2002
-------------- -----------------
Cash and cash equivalents:
Demand and money market accounts $ 5,145 $ 609
Corporate commercial paper 21,885 20,619
------- -------
Total cash and cash equivalents $27,030 $21,228
======= =======
Short-term investments:
U.S. Government agency securities $ 5,000 $ 3,999
Corporate commercial paper and
loan participations 14,569 22,333
Accrued interest on above 144 201
------- -------
Total short-term investments $19,713 $26,533
======= =======
Long-term investments:
U.S. Government agency securities $ 5,000 $12,000
Corporate commercial paper and
loan participations 8,013 7,990
Accrued interest on above 92 254
------- -------
Total long-term investments $13,105 $20,244
======= =======
(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 (Encysive)
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
5
deferred these amounts and is amortizing them into revenue over the
estimated developmental period of the underlying technology.
Approximately $1,637,000 in remaining deferred license fee and
milestone income received from ICOS-TBC at the date of the Acquisition
will be recognized as an offset to the purchase price paid to ICOS.
Subsequent to the Acquisition, the Company's consolidated financial
statements will include the accounts of ICOS-TBC. See Note 14.
(f) Research and Development Costs
All research and development costs are expensed as incurred
and include salaries of research and development employees, certain
rent and related building services, research supplies and services,
clinical trial expenses and other associated costs. Salaries and
benefits charged to research and development in the three-month
periods ended March 31, 2003 and 2002 were approximately $2,586,000
and $2,373,000, respectively. Payments related to the acquisition of
in-process research and development, if any, are expensed as incurred.
(g) Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the
net loss applicable to common shares by the weighted average number of
common and common equivalent shares outstanding during the period. For
the three-month periods ended March 31, 2003 and 2002, the weighted
average common shares used to compute basic and diluted net loss per
common share totaled 43,945,274 and 43,613,146 shares, respectively.
Securities convertible into Common Stock, comprised of stock options
and warrants totaling 5,637,230 and 5,485,252 shares at March 31, 2003
and 2002, respectively, were not used in the calculation of diluted
net loss per common share because the effect would have been
antidilutive.
(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 the Company has 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 and for which the Company continues to have obligations under
the agreement. Such deferred revenues are amortized into income over
the estimated remaining development period. Milestone payments
received under contractual agreements which have completed the
development stage are evaluated, and either recognized into income
when earned, or amortized over a future period, depending upon whether
or not the Company continues to have obligations under the terms of
the arrangement. License fees received under the terms of licensing
agreements for the Company's intellectual property are similarly
deferred, and amortized into income over the estimated development
period of the licensed item or items. The Company periodically
evaluates its estimates of remaining development periods, and adjusts
the recognition of remaining deferred revenues over the adjusted
development period remaining. Revenue from grants is recognized as
earned under the terms of the related grant agreements, typically as
expenses are incurred. Amounts received in advance of services being
performed under contracts are recorded as deferred revenue, and
recognized as services are performed.
(i) Patent Application Costs
Costs incurred in filing for, defending and maintaining
patents are expensed as incurred.
(j) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities
to prepare these consolidated financial statements in conformity with
accounting principles
6
generally accepted in the USA. Actual results could differ from these
estimates.
(k) Intangible Assets
Intangible assets, included in other assets, consisting of
amounts paid for products approved by the United States Food and Drug
Administration ("FDA"), are amortized on a straight-line basis over
their estimated useful lives. The Company periodically reviews the
useful lives of its intangible and long-lived assets, which may result
in future adjustments to the amortization periods. Related
amortization expense for each of the three-month periods ended March
31, 2003 and 2002 was $27,000. Amortization of intangible assets is
included in general and administrative expense in the consolidated
statements of operations and comprehensive loss.
(l) Treasury Stock
Treasury stock is recorded at cost. On May 3, 2001, the
Company announced a stock repurchase program to buy up to 3 million
shares, or approximately seven percent, of the Company's outstanding
Common Stock over an 18 month period. Pursuant to the stock repurchase
program, the Company had repurchased 213,000 shares for $1,602,000
during the year ended December 31, 2001. No shares were repurchased in
the three-month periods ended March 31, 2003 and 2002.
(m) Stock Based Compensation
At March 31, 2003, the Company has six stock-based
compensation plans for employees and non-employee directors, which are
described more fully in Note 4. The Company accounts for those plans
under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Net loss in the three-months
ended March 31, 2003 and 2002 included stock-based compensation
expense as a result of modifications made to certain options
previously issued to retiring employees, and resulting from the grant
of shares of restricted stock to certain employees. No other
stock-based employee compensation expenses is reflected in net loss,
however, as all options granted under those plans had an exercise
price equal to the market price of the underlying Common Stock on the
date of grant. The following table illustrates the effect on net loss
and loss per share if the Company had applied the fair value
recognition provisions of FASB Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" to
stock-based employee compensation ($ in thousands, except for per
share data).
Three Months Ended March 31,
----------------------------
2003 2002
------- --------
Net loss, as reported $(4,980) $(6,750)
Add: Stock-based employee compensation
expense included in reported
net loss 66 181
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards (1,162) (866)
------- -------
Pro forma net loss $(6,076) $(7,435)
======= =======
Loss per share:
As reported: basic and diluted $ (0.11) $ (0.15)
Pro forma: basic and diluted $ (0.14) $ (0.17)
7
The per-share weighted average fair value of stock options
granted during the three-month periods ended March 31, 2003 and 2002
was $0.52 and $3.53, respectively, on the grant date using the
Black-Scholes option pricing model with the following assumptions:
Three Months
Ended March 31,
----------------------
2003 2002
---- ----
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 2.5% 2.8%
Expected volatility 71.9% 74.3%
Expected life in years 4.24 4.53
(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 intangible and long-lived assets by comparing
the projected undiscounted net cash flows associated with such assets
against their respective carrying values. Impairment, if any, is based
on the excess of the carrying value over the fair value.
(p) New Accounting Pronouncements
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 was
effective for the Company in January 2003. The Company's adoption of
SFAS145 did not 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 was effective for the Company in January 2003. The
Company's adoption of SFAS146 did not have a significant impact on its
financial condition or results of operations.
8
In January 2003, the FASB issued FASB Interpretation (FIN)
No. 46, "Consolidation of Variable Interest Entities." FIN No. 46
requires a company to consolidate a variable interest entity if it is
designated as the primary beneficiary of that entity even if the
company does not have a majority of voting interests. A variable
interest entity is generally defined as an entity where its equity is
unable to finance its activities or where the owners of the entity
lack the risk and rewards of ownership. The provisions of this
statement apply at inception for any entity created after January 31,
2003. For an entity created before February 1, 2003, the provisions of
this Interpretation must be applied at the beginning of the first
interim or annual period beginning after June 15, 2003. When the
Company adopts the provisions of FIN No. 46 in the third quarter of
2003 for existing entities its investment in Encysive, L.P. will be
consolidated.
In April 2003, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative
instruments. This statement is effective for contracts entered into or
modified after June 30, 2003. The Company will adopt this statement in
the third quarter of 2003 and is currently evaluating the provisions
of this statement to determine its impact on the financial statements.
(q) Reclassifications
Certain reclassifications have been made to prior period
financial statements to conform to the March 31, 2003 presentation
with no effect on net loss or stockholders' equity previously
reported.
(3) CAPITAL STOCK
The Company has reserved Common Stock for issuance as of March 31,
2003 as follows:
Stock option plans ............... 7,321,346
Warrants outstanding ............. 246,586
---------
Total shares reserved ...... 7,567,932
=========
The Company's only warrants outstanding at March 31, 2003 include
142,858 warrants issued to Genentech in 1997, and 103,728 warrants granted in
1999 in connection with non-employee services.
Shareholders' Rights Plan
In January 2002, the Company adopted a shareholder rights
plan under which the Board of Directors declared a dividend of one
preferred stock purchase right ("Right") for each outstanding share of
the Company's Common Stock held of record as of the close of business
on January 22, 2002. Each Right initially entitles a stockholder to
purchase a one one-thousandth fraction of a share of Preferred Stock -
Junior Participating Series A (the "Preferred Stock") for $55.00. Each
such fraction of a share of Preferred Stock has terms designed to make
it essentially equivalent to one share of Common Stock. The Rights
will become exercisable only in the event a person or group acquires
15% or more of the Company's Common Stock or commences a tender or
exchange offer which, if consummated, would result in that person or
group owning 15% of the Common Stock. Prior to such an event, the
Rights will be evidenced by and traded in tandem with the Common
Stock.
If a person or group acquires a 15% or larger position in the
Company, each Right (except those held by the acquiring party) will
then entitle its holder to purchase fractional shares of Preferred
Stock having twice the value of the $55.00 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
9
Common Stock of the acquiring company having a value of twice the
$55.00 exercise price. The effect will be to entitle the Company's
shareholders to buy stock in the acquiring company at 50% of its
market price.
The Company may redeem the Rights at $.001 per Right at any
time on or prior to the tenth business day following the acquisition
of 15% or more of its Common Stock by a person or group or
commencement of a tender offer for such 15% ownership. The Rights
expire on January 2, 2012.
(4) STOCK OPTIONS
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans and applies FASB Statement No. 123, Accounting for
Stock-Based Compensation, and related interpretations in reporting for its
plans.
A summary of stock options as of March 31, 2003, follows:
EXERCISE PRICE EXERCISED/ AVAILABLE
STOCK OPTION PLANS PER SHARE AUTHORIZED OUTSTANDING OTHER EXERCISABLE FOR GRANT
- ------------------ -------------- ---------- ----------- ---------- ----------- ---------
1990 Plan .................. $ 1.38-$21.59 285,715 88,348 197,367 88,348 --
1992 Plan .................. $ 1.41-$21.59 1,700,000 683,140 1,016,860 680,307 --
Director Plan .............. $ 3.50-$ 4.54 71,429 28,527 42,902 28,527 --
1995 Plan .................. $ 0.93-$21.59 2,000,000 1,595,461 395,133 1,485,265 9,406
1995 Director Plan (1) ..... $ 1.38-$11.31 800,000 386,596 65,033 324,096 348,371
1999 Plan (2) ............. $ 0.93-$20.13 4,750,000 2,608,572 568,504 1,137,013 1,572,924
--------- --------- --------- --------- ---------
TOTALS .............. 9,607,144 5,390,644 2,285,799 3,743,556 1,930,701
========= ========= ========= ========= =========
(1) Includes 300,000 authorized shares which are subject to approval of
stockholders at the 2003 Annual Meeting, to be held May 16, 2003.
(2) Includes 1,750,000 authorized shares and 132,752 outstanding but not
exercisable options which were issued subject to approval of
stockholders at the 2003 Annual Meeting, to be held May 16, 2003.
Pursuant to provisions contained within his employment agreement, in
March 2002 the Company's new chief executive officer purchased 5,000 shares at
market price and was awarded 50,000 shares of the Company's Common Stock out of
the 1999 Plan. The awarded shares will vest after completion of three years'
service to the Company. The Company recorded deferred compensation expense of
$309,000, which is being recognized over the vesting period. General and
administrative expenses in the three-month periods ended March 31, 2003 and
2002 included $26,000 and $9,000, respectively, related to this grant.
In January 2003, the Company issued 105,250 shares of restricted
Common Stock to non-officer employees remaining after the restructuring. The
shares will vest after completion of one year of service to the Company. The
Company recorded deferred compensation expense of $162,000, which will be
recognized over the vesting period. Research and Development expenses and
General and Administrative expenses during the three months ended March 31,
2003 included $35,000 and $5,000, respectively related to these grants.
In conjunction with the retirement of the Company's former chief
executive officer, the Company modified provisions regarding vesting and time
to exercise of certain stock options of the officer and recorded compensation
expense of approximately $173,000, which was included in general and
administrative expenses, during the three months ended March 31, 2002.
10
(5) INCOME TAXES
The Company did not incur tax expense during the three-month period
ended March 31, 2003, due to operating losses and the related increase in the
valuation allowance.
The reconciliation of income taxes at the statutory rate of 35%
applied to loss before taxes for the three months ended March 31, 2003 and 2002
is as follows ($ in thousands):
2003 2002
------- -------
Computed "expected" tax benefit $(1,743) $(2,362)
Effect of:
Permanent differences 34 178
Increase in valuation allowance 1,709 2,184
------- -------
Tax benefit $ -- $ --
======= =======
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets as of March 31, 2003 and
December 31, 2002 are as follows ($ in thousands):
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Loss carryforwards $ 44,475 $ 41,946
Start-up costs 7,315 8,001
Property, plant and equipment (87) (71)
Deferred revenue 1,920 2,053
Other 1,062 1,047
-------- --------
Gross deferred tax assets 54,685 52,976
Valuation allowance (54,685) (52,976)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
The Company has established a valuation allowance for the full amount
of these deferred tax assets, as management believes that it is more likely
than not that the Company will not recover these assets. Utilization of the
Company's net operating loss carryforwards is subject to certain limitations
due to specific stock ownership changes which have occurred or may occur. To
the extent not utilized, the carryforwards will expire during the years
beginning 2005 through 2023.
(6) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following ($ in
thousands):
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Laboratory and office equipment $10,803 $10,667
Leasehold improvements 4,311 4,311
------- -------
15,114 14,978
Less accumulated depreciation and amortization 9,660 9,399
------- -------
$ 5,454 $ 5,579
======= =======
11
(7) ENTITY-WIDE GEOGRAPHIC DATA
The Company operates in a single business segment that includes
research and development of pharmaceutical products. The following table
summarizes the Company's long-lived assets in different geographic locations ($
in thousands):
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Long-lived assets:
United States $4,749 $4,884
Germany 1,441 1,457
------ ------
Total $6,190 $6,341
====== ======
THREE MONTHS ENDED
-------------------------------
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Revenues:
United States $2,933 $2,593
Germany 283 --
------ ------
Total $3,216 $2,593
====== ======
(8) RESEARCH AGREEMENTS
Under the terms of the Company's agreement with ICOS-TBC, prior to the
Acquisition, the Company provided, and was reimbursed for, research and
development activities conducted on behalf of ICOS-TBC. See Note 9, License
Agreements, and Note 14, Subsequent Event.
The Company also receives reimbursement for certain research costs
pursuant to its agreements with Schering-Plough (Note 9), Revotar (Note 10) and
GlaxoSmithKline ("GSK") (Note 11).
(9) LICENSE AGREEMENTS
Mitsubishi Pharma Agreement
TBC has entered into an agreement with Mitsubishi Pharma
Corporation, formerly Mitsubishi-Tokyo Pharmaceuticals, Inc.
("Mitsubishi") to license Mitsubishi's rights and technology relating
to Argatroban and to license Mitsubishi's own proprietary technology
developed with respect to Argatroban (the "Mitsubishi Agreement").
Under the Mitsubishi Agreement, the Company has an exclusive license
to use and sell Argatroban in the U.S. and Canada for all specified
indications. The Company is required to pay Mitsubishi specified
royalties on net sales of Argatroban by the Company and its
sublicensees after its commercial introduction in the U.S. and Canada.
Either party may terminate the Mitsubishi Agreement on 60 days notice
if the other party defaults in its material obligations under the
agreement, declares bankruptcy or is insolvent, or if a substantial
portion of its property is subject to levy. Unless terminated sooner
pursuant to the above described termination provisions, the Mitsubishi
Agreement expires on the later of termination of patent rights in a
particular country or 20 years after first commercial sale of
products. Under the Mitsubishi Agreement, TBC has access to an
improved formulation patent granted in 1993 which expires in 2010, a
patent on the manufacturing process to produce Argatroban that expires
in 2012, and a patent for the use of Argatroban as a
fibrinolysis-enhancing agent which expires in 2009. The Mitsubishi
composition of matter patent on Argatroban has expired. During 2000,
the Company signed an additional agreement with Mitsubishi that
provides TBC with royalties on sales of Argatroban in certain European
countries, and up to a total of $5.0 million in milestones for the
development of ischemic stroke and certain other provisions. In
conjunction with the Mitsubishi Agreement, a
12
consulting firm involved in negotiations related to the agreement will
receive a percentage of net sales received as a result of the
agreement. The Company enrolled its first patient in a clinical trial
for ischemic stroke in April 2001, and received a $2.0 million
milestone payment in May 2001, which is being recognized in revenues
over the expected development period, and accordingly, revenues in the
three-month periods ended March 31, 2003 and 2002 include
approximately $95,000 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 exchange for the license from Genentech, Inc, (the "Former
Licensor") of its Argatroban technology, TBC issued the Former
Licensor 285,714 shares of Common Stock during 1993 and issued an
additional 214,286 shares of Common Stock on October 9, 1997, after
acceptance of the filing of the first New Drug Application ("NDA")
with the FDA for Argatroban. On June 30, 2000, the Company issued an
additional 71,429 shares of Common Stock to Genentech in conjunction
with the approval of the NDA for Argatroban in patients with
heparin-induced thrombocytopenia ("HIT"). The value of $965,970 was
recorded as an intangible asset and is being amortized over the
estimated useful life of the asset. Amortization expense recorded in
the three-month periods ended March 31, 2003 and 2002 was
approximately $26,000. Additionally, on October 9, 1997, upon
acceptance of the filing of the first NDA for Argatroban with the FDA,
the Company granted the Former Licensor a warrant to purchase an
additional 142,858 shares of Common Stock at an exercise price of
$14.00 per share, subject to adjustment, which expires on October 9,
2004. TBC has also granted the Former Licensor demand and piggyback
registration rights with regard to shares of Common Stock issued to
the Former Licensor.
ICOS Corporation Partnership
On June 6, 2000, ICOS and the Company entered into the
ICOS-TBC limited partnership agreement. The partnership seeks to
develop and globally commercialize ET(A) receptor antagonists. As a
result of the Company's contribution of technology, ICOS-TBC paid a
license fee to the Company in June 2000. The license fee is being
amortized over the estimated development period of the licensed
technology, and the Company recognized approximately $62,000 and
$121,000 of it as revenue during the three-month periods ended March
31, 2003 and 2002, respectively.
Pursuant to the terms of the limited partnership agreement,
ICOS-TBC was initially capitalized by a cash contribution from ICOS
and the Company's contribution of intellectual property associated
with sitaxsentan sodium. The intellectual property contributed by the
Company to ICOS-TBC had no basis for financial reporting purposes and,
accordingly, the Company assigned no value to the transfer of
technology.
In July 2001, the Company earned a milestone as a result of
the achievement of an objective defined in the partnership agreement.
The Company is recognizing the revenue associated with the milestone
over the expected development period, and revenues included
approximately $86,000 and $167,000 in the three-month periods ended
March 31, 2003 and 2002, respectively.
During the three-month periods ended March 31, 2003 and 2002,
the Company recognized a loss of approximately $2,386,000 and
$2,510,000, respectively, representing the Company's proportionate
share of the losses of ICOS-TBC.
Approximately $1,637,000 in remaining deferred license fee
and milestone income received from ICOS at the date of the Acquisition
will be recognized as an offset to the purchase price paid to ICOS.
See Note 14. Subsequent to the Acquisition, the Company's consolidated
financial statements will include the accounts of ICOS-TBC.
Schering-Plough Research Collaboration and License Agreement
13
On June 30, 2000, TBC and Schering-Plough ("Schering")
entered into a worldwide research collaboration and license agreement
to discover, develop and commercialize VLA-4 antagonists. VLA-4
antagonists represent a new class of compounds that has shown promise
in multiple preclinical animal models of asthma. The primary focus of
the collaboration will be to discover orally available VLA-4
antagonists as treatments for asthma.
Under the terms of the agreement, Schering obtains the
exclusive worldwide rights to develop, manufacture and market all
compounds from TBC's library of VLA-4 antagonists, as well as the
rights to a second integrin antagonist. TBC will be responsible for
optimizing a lead compound and additional follow-on compounds.
Schering is supporting research at TBC and will be responsible for all
costs associated with the worldwide product development program and
commercialization of the compound. In addition to reimbursing research
costs, Schering paid an upfront license fee and will pay development
milestones and royalties on product sales resulting from the
agreement. This upfront license fee is being amortized into revenue
over the expected development period. License fees, milestones and
grants in the three-month periods ended March 31, 2003 and 2002
included approximately $92,000, related to this upfront license fee.
In June 2002, the Company achieved a milestone under the
agreement with Schering as a result of the nomination of an initial
candidate for Schering's further development. This milestone payment
will be recognized into revenue over the expected development period.
License fees, milestones and grants for the three-month period ended
March 31, 2003 included approximately $45,000 related to this
milestone payment. Total payments to TBC under the terms of the
agreement, excluding royalties, could reach $87.0 million.
Additionally, in June 2002, Schering and the Company agreed to extend
Schering's support of the research collaboration to a third year,
through June 30, 2003.
(10) FOREIGN SUBSIDIARY
During the third quarter 2000, TBC formed Revotar to conduct research
and development of novel small molecule compounds and to develop and
commercialize selectin antagonists. Upon formation, Revotar received certain
development and commercialization rights to the Company's selectin antagonist
compounds as well as rights to certain other TBC research technology. Revotar
also received approximately $5 million in funding from three German venture
capital funds. The Company retained ownership of approximately 55% of the
outstanding common stock of Revotar and has consolidated the financial results
of Revotar into TBC's consolidated financial statements. Since the development
and commercialization rights contributed by the Company to Revotar had no basis
for financial reporting purposes, the Company assigned no value to its
contribution of intellectual property rights. The minority interest in Revotar
at March 31, 2003 and December 31, 2002, was $2,418,000 and $2,608,000,
respectively. The Company's consolidated net loss for the three-month periods
ended March 31, 2003 and 2002 was reduced by $190,000 and $257,000,
respectively, for the Revotar minority shareholders' interest in Revotar's
losses.
Revotar has been awarded research grants from the German government,
and earned approximately $283,000 during the three-months ended March 31, 2003,
which is included in license fees, milestones and grants.
The Company and the other stockholders of Revotar have executed an
agreement to provide approximately $4.5 million in unsecured loans, of which
the Company's commitment will be approximately $3.4 million. The terms of the
loans require quarterly interest payments and repayment of all principal on or
before April 1, 2007. The interest rate for the first two years will be seven
percent, after which the interest rate will be reset to the U.S. prime rate
plus 2.5 % if such rate is higher than seven percent. Pursuant to such
agreement, the Company has advanced approximately $2,237,000 to Revotar as of
March 31, 2003. Revotar's management has informed the Company that they
anticipate that Revotar will borrow the remaining commitment of approximately
$1.1 million from the Company in the fourth quarter of 2003. The loan is
denominated in U.S. dollars. To mitigate the risk of fluctuations in foreign
14
currency exchange rates, Revotar entered into a forward contract with a bank to
fix the exchange rate at which it will borrow the remaining loan commitment.
As part of the agreement to form Revotar, the Company and the other
initial investors agreed to issue rights to purchase common stock of Revotar
held by them to Aqua Partners LLC ("Aqua"), which assisted in the formation of
Revotar. The shareholders have signed an agreement that provides Aqua with the
option to acquire up to 3.26% of the shares owned by each shareholder for a
total amount of approximately $540,000, payable to the shareholders.
(11) COMMERCIALIZATION AGREEMENT
In connection with TBC's development and commercialization of
Argatroban, in August 1997, TBC entered into a Product Development, License and
CoPromotion Agreement with GSK (the "GSK Agreement") whereby GSK was granted
exclusive rights to work with TBC in the development and commercialization of
Argatroban in the U.S. and Canada for specified indications. GSK paid $8.5
million in upfront license fees during August 1997, a $5 million milestone
payment in October 1997, and a $7.5 million milestone payment in June 2000.
Additional milestone payments may be earned upon the clinical development and
FDA approval for the acute myocardial infarction indication. Future milestone
payments for the acute myocardial infarction indication are subject to GSK's
agreement to market Argatroban for such indication. The parties have also
formed a joint development committee to analyze the development of additional
Argatroban indications to be funded 60% by GSK except for certain Phase IV
trials which shall be funded entirely by GSK. At this time, GSK has no plans to
conduct development work for the acute myocardial infarction and stroke
indications. TBC began a Phase II clinical trial in March 2001 to evaluate the
use of Argatroban for ischemic stroke, and announced preliminary results in
October 2002. GSK has the exclusive right to commercialize all products arising
out of the collaboration, subject to the obligation to pay royalties on net
sales to TBC and to the rights of TBC to co-promote these products through its
own sales force in certain circumstances. TBC will retain the rights to any
indications which GSK determines it does not wish to pursue (such as ischemic
stroke), subject to the requirement that TBC must use its own sales force to
commercialize any such indications. Any indications which TBC elects not to
pursue will be 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.
The GSK Agreement generally terminates on a country by country basis
upon the earlier of the termination of TBC's rights under the Mitsubishi
Agreement, the expiration of applicable patent rights or, in the case of
royalty payments, the commencement of substantial third-party competition. GSK
also has the right to terminate the agreement on a country by country basis by
giving TBC at least three months written notice at any time before GSK first
markets products in that country based on a reasonable determination by GSK
that the commercial profile of the product in question would not justify
continued development in that country. GSK has similar rights to terminate the
GSK Agreement on a country by country basis after marketing has commenced. In
addition, either party may terminate the GSK Agreement on 60 days notice if the
other party defaults in its obligations under the agreement, declares
bankruptcy or is insolvent.
(12) 401(K) PLAN
The Company has a 401(k) plan under which all employees with three
months of service are eligible to participate and may contribute up to 60 % of
their compensation, with a maximum contribution of
15
$12,000 per employee in 2003. Under the terms of the Economic Growth and Tax
Relief Reconciliation Act, employees aged 50 or older may contribute an
additional $2,000 to the 401(k) Plan in 2003, such additional contribution
would be eligible for employer matching. The Company provides a matching
contribution of $0.50 on the dollar of employee contributions up to 6% of
salaries. Charges to operating expense for employer match during the
three-month periods ended March 31, 2003 and 2002 were approximately $46,000
and $50,000, respectively.
(13) COMMITMENTS AND CONTINGENCIES
(a) Foreign Currency Exchange Risk
The Company is exposed to market risk primarily from changes
in foreign currency exchange rates.
The Company has a majority-owned subsidiary in Germany and
consolidates the results of operations into its consolidated financial
results. Although not significant to date, the Company's reported
assets, liabilities, expenses and cash flows from this subsidiary are
exposed to changing exchange rates. The Company, accordingly, included
an unrealized gain of $60,000 and unrealized loss of $61,000,
respectively, in its comprehensive loss for the three-month periods
ended March 31, 2003 and 2002. The Company had an intercompany
receivable from its German subsidiary at March 31, 2003 and December
31, 2002; however, this amount is denominated in U.S. dollars and is
not exposed to exchange risk. Revotar's management has informed the
Company that they anticipate that Revotar will borrow the remaining
commitment of approximately $1.1 million from the Company in the
fourth quarter of 2003. The loan is denominated in U.S. dollars. To
mitigate the risk of fluctuations in foreign currency exchange rates,
Revotar entered into a forward contract with a bank to fix the
exchange rate at which it will borrow the remaining loan commitment.
The Company contracts with entities in other areas outside the U.S.
and these transactions are denominated in a foreign currency. To date,
the currencies of these other countries have not fluctuated
materially.
(b) 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 presently involved in several legal actions, none of which
are expected to have a material adverse effect upon the results of
operations or financial condition of the Company when considered
either individually or in the aggregate.
(14) SUBSEQUENT EVENT
On April 22, 2003, the Company and ICOS executed a purchase and sale
agreement (the "Agreement") pursuant to which the Company purchased the
partnership interest of ICOS and its subsidiaries in ICOS-TBC. Under the
Agreement, the Company agreed to pay to ICOS a purchase price of $10,000,000,
of which $4,000,000 was paid on April 22, 2003. The remaining $6,000,000 is
subject to a secured promissory note (the "Note") which requires a payment of
$4,000,000 on April 22, 2004, and a payment of $2,000,000 on October 22, 2004.
The outstanding principal balance of the Note shall accrue interest at a rate
which approximates the three-month London interbank offering rate for U.S.
Dollars (LIBOR) plus 1.5%. The interest rate was established on April 22, 2003
at approximately 2.82% and will be adjusted on the first business day of each
April, July, October and January thereafter (the LIBOR Adjustment Dates).
Interest is payable on or before the tenth day after each LIBOR Adjustment
Date. The Company's obligations under the Note are secured with an irrevocable
standby letter of credit, for which the Company has pledged marketable
securities with a value of approximately $7,000,000.
16
Approximately $1,637,000 in remaining deferred license fee and
milestone income received from ICOS at the date of the Acquisition will be
recorded as a reduction in the acquisition cost recorded by the Company,
resulting in a charge to operating expenses of approximately $8,363,000 in the
second quarter of 2003.
Following the Acquisition, the Company has changed the name of
ICOS-TBC to Encysive, L.P. The Company's consolidated financial statements will
include the accounts of Encysive, L.P..
17
ITEM 2.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
OVERVIEW
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes to the financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2002, and our
condensed consolidated financial statements and the related notes to the
financial statements included in this Quarterly Report on Form 10-Q.
Since our inception in 1989, we have primarily devoted our resources
to funding drug discovery, research and development. We are a biopharmaceutical
company focused on the discovery, development and commercialization of novel,
synthetic, small molecule compounds for the treatment of a variety of
cardiovascular, vascular and related inflammatory diseases. We believe that
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. Our
research and development programs are focused on inhibitors (also referred to
as antagonists or blockers) that can interrupt certain disease processes. Our
programs seek to address unmet medical needs in cardiovascular diseases,
thrombocytopenia, pulmonary arterial hypertension, heart failure and
inflammatory diseases such as asthma.
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 June 2000, we established ICOS-TBC, a 50/50-owned limited
partnership with ICOS Corporation ("ICOS"), to develop and commercialize
endothelin receptor antagonists, including sitaxsentan and TBC3711. In January
2003, ICOS announced that they had reached a conclusion that joint development
of the endothelin receptor antagonist program should not continue, and in April
2003, we purchased the partnership interest of ICOS in ICOS-TBC for a purchase
price of $10 million. Following the Acquisition, as discussed below, we intend
to continue the development of the endothelin receptor antagonist program. Our
strategy for managing our capital requirements includes seeking to license
rights to sitaxsentan for select markets, while preferably retaining North
American rights.
APPROVED DRUGS IN COMMERCIAL MARKET
ARGATROBAN
Argatroban was approved by the FDA in 2000, is indicated for
prophylaxis or treatment of thrombosis in patients with heparin-induced
thrombocytopenia ("HIT") and for use in HIT patients undergoing percutaneous
coronary intervention ("PCI".) Argatroban was approved in Canada in 2002 for
use as anticoagulant therapy in patients with heparin-induced thrombocytopenia
syndrome. During 2002, we completed initial studies to evaluate the use of
Argatroban in hemodialysis patients and in PCI. The drug is being marketed in
the U.S. and Canada by GlaxoSmithKline, plc ("GSK") and has been on the
18
market in the U.S. and Canada since November 2000 and June 2002, respectively.
GSK is our development, manufacturing and marketing partner for Argatroban.
GSK currently markets Argatroban and enjoys market exclusivity
pursuant to the Waxman/Hatch Act that provides protection from competition
until June 30, 2005. We recently received a formal Written Request from FDA to
conduct a study with Argatroban in pediatric patients. Upon completion of this
study, we will be eligible for an additional six months of market exclusivity.
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 would expire in 2019, to the FDA for inclusion in the FDA Orange
Book of Approved Drug Products. Following expiration of Waxman/Hatch
protection, it is possible that generic manufacturers may be able to produce
Argatroban without violating the formulation or process patents. The
composition of matter patent on Argatroban has expired. The Company has access
to other patents held by Mitsubishi, however, these are not being utilized
currently.
RESEARCH AND DEVELOPMENT PROGRAMS
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 pivotal 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. Following the Acquisition, discussed
above, we intend to initiate a final pivotal study in PAH during the second
quarter of 2003, to include 50 and 100 mg oral doses of sitaxsentan, placebo
and bosentan.
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.
19
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.
- 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 or not 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 similarly deferred, and
amortized into income over the estimated developmental 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
From its inception in June 2000 through December 31, 2002, we and ICOS
shared equally in the costs of ICOS-TBC. In January 2003, however, ICOS
informed us that they had reached the conclusion that joint development of the
endothelin receptor antagonist program through ICOS-TBC should not continue. As
a result, since January 2003 we have agreed to be responsible for 100% of the
costs of ICOS-TBC. Following the Acquisition, we have increased our ownership
and potential commercial benefit of the endothelin receptor antagonist program
from 50% to 100%.
Operating results of ICOS-TBC include expenses related to our internal
research staff that we recognize as revenue and record as collaborative
research and development revenue from ICOS-TBC. Due to the nature of the
ICOS-TBC collaborative agreement, our collaborative research and development
revenue from ICOS-TBC largely depends on the continued progression of clinical
trial and development activities, and can be expected to vary from quarter to
quarter and year to year.
From its inception in June 2000 through March 31, 2003, we have
accounted for our investment in ICOS-TBC under the equity method. As a result
of the Acquisition, in the future we will include the accounts of Encysive,
L.P. in our consolidated financial statements. A result of the consolidation of
Encysive, L.P. with our financial statements is that the revenue item,
"Collaborative research and development from ICOS-TBC, L.P." and the expense
item, "Equity in loss of ICOS-TBC, L.P." will be eliminated. The operating
expenses of Encysive will be included in our operating expenses.
20
Remaining deferred revenue, comprised of the portion of the license
fee and milestone payment received from ICOS that has not been recognized as
revenue totaled $1,637,000 at March 31, 2003. The recognition of this amount
upon the Acquisition will offset the effect of the $10,000,000 purchase price
paid to ICOS and result in a net charge of approximately $8,363,000 in the
second quarter of 2003.
Stock Options
We apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations ("APB 25") in
accounting for our stock option plans and apply FASB Statement No. 123,
"Accounting for Stock-Based Compensation", and related interpretations ("FAS
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 FAS 123, utilizing the Black-Scholes option pricing model. We recorded
compensation expense for the "fair value" of options granted to non-employees.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
GENERAL
Our operating results have fluctuated significantly during each
quarter, and we anticipate that such fluctuations, which are largely
attributable to varying research and development commitments and expenditures,
will continue for the next several years.
We have been unprofitable to date and expect to incur substantial
operating losses for the next several years as we invest in product research
and development, preclinical and clinical testing and regulatory compliance. We
may initiate certain commercial activities in the future, which could
contribute to future operating losses. We have sustained net losses of
approximately $153.1 million from the date of our inception to March 31, 2003.
We have primarily financed our operations to date through a series of private
placement and public offerings of our Common Stock and several collaborative
agreements with third parties to jointly pursue product research and
development. See discussion of "Liquidity and Capital Resources" below. See
also "Additional Risk Factors" in Item 1 "Business" of our Annual Report on
Form 10-K for the year ended December 31, 2002.
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
Revenues increased $623,000, or approximately 24.0% in the three
months ended March 31, 2003, compared with the three months ended March 31,
2002. The increase was comprised of increased collaborative research and
development revenues from ICOS-TBC, increased royalty income and increased
license fees, milestones and grants. Research agreement revenues, however,
declined $177,000 or approximately 19%. During the prior year quarter, we,
along with GSK, were conducting clinical trials for additional uses of
Argatroban and those trials completed during 2002.
Collaborative research and development from ICOS-TBC, L.P. in the
quarter ended March 31, 2003 increased $424,000, or approximately 177% compared
with the quarter ended March 31, 2002. Beginning January 1, 2003, a
significantly higher percentage of the development activity was performed by
our employees than in previous periods.
21
Royalty income from the sales of Argatroban increased $183,000, or
approximately 19% as a result of increased sales by GSK. 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 we believe could have a
positive effect on our royalties from GSK.
License fees, milestones and grants increased $187,000, or
approximately 39%, primarily due to the receipt of German government grants by
Revotar during the quarter ended March 31, 2003.
Research and development expense decreased $971,000, or approximately
19% in the three months ended March 31, 2003, compared with the three months
ended March 31, 2002. The decrease is primarily due to a reduction in clinical
trials expenses of $1,092,000 as we were conducting several trials, primarily
ARGIS-I for Argatroban in stroke, during the prior year quarter. During the
quarter ended March 31, 2003, research and development expense includes a
restructuring charge, primarily comprised of severance benefits paid to
terminated employees, of $503,000. In January 2003, we announced a reduction of
headcount, primarily in the areas of basic exploratory biology, early stage
target identification and support functions. As a result of the headcount
reduction, our ongoing employee costs for research and development declined
$392,000 in the three months ended March 31, 2003, compared with the three
months ended March 31, 2002.
Equity in loss of ICOS-TBC, L.P. declined $124,000, or approximately
5%, in the three months ended March 31, 2003, compared with the three months
ended March 31, 2002. Our equity in loss for the three months ended March 31,
2002 is comprised of 50% of the loss of ICOS-TBC, which totaled $5,020,000. Our
equity in loss for the three months ended March 31, 2003 is comprised of 100%
of the loss of ICOS-TBC. The expenses of ICOS-TBC declined in the current year
primarily in clinical trial costs, as the STRIDE trial was in progress during
the prior year period.
General and administrative expenses declined $513,000, or
approximately 19% in the three months ended March 31, 2003, compared with the
three months ended March 31, 2002. The prior year period included stock
compensation expenses of $182,000, primarily resulting from modifications to
stock options issued to our retiring CEO. General and administrative expenses
in 2003 include $53,000 in costs related to the January 2003 restructuring. The
remaining decrease in general and administrative expenses is primarily due to
reduced travel and other employee related costs. In 2003 we intend to continue
with strict cost control measures to minimize cash spent on administrative
activities.
Total operating expenses declined $1,608,000, or approximately 16% in
the three months ended March 31, 2003, compared with the three months ended
March 31, 2002. Operating expenses in the three months ended March 31, 2003
include a charge of $556,000 resulting from the restructuring of our research
activities in January 2003. Operating expenses in the three months ended March
31, 2002 include stock compensation expenses of $182,000, primarily resulting
from modifications to stock options issued to our retiring CEO. After taking
these charges into consideration, other operating expenses declined $1,958,000,
or approximately 19% in the current quarter, compared to the comparable prior
year quarter. As discussed above, the decline is primarily due to reduced
clinical trials costs and reduced headcount during the current year quarter.
Operating loss declined $2,231,000, or approximately 29%, in the three
months ended March 31, 2003, compared with the three months ended March 31,
2002, due to higher revenues and reduced operating expenses in the current year
period.
Investment income declined $394,000, or approximately 51% in the three
months ended March 31, 2003, compared with the three months ended March 31,
2002 due to lower levels of funds available for investment in the current
quarter.
The minority interest in the loss of Revotar in the three months ended
March 31, 2003 declined $67,000, or approximately 26% compared to the three
months ended March 31, 2002, reflecting reduced expenses, primarily clinical
trials costs, at Revotar in the current year quarter.
22
Net loss in the three months ended March 31, 2003 declined $1,770,000,
or approximately 26% compared with the three months ended March 31, 2002. The
decreased net loss in the current quarter is due to higher revenues and lower
operating expenses in the current quarter, partially offset by reduced
investment income in the current quarter, all as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our research and development activities and other
operations primarily through public and private offerings of our Common Stock
and from funds received through our collaborations, research agreements and
partnerships. We also have received royalty revenue from sales of Argatroban.
We have not conducted any offerings in 2003, and have relied on our cash
balances from prior offerings and our revenues to fund operations, with the
result that our cash balance has decreased in 2003.
Cash, cash equivalents and investments in marketable securities,
including accrued interest thereon, was $59,848,000 at March 31, 2003, compared
with $68,005,000 at December 31, 2002. We used $7,876,000 in cash in operating
activities during the three months ended March 31, 2003, compared to cash used
in operating activities of $7,526,000 during the three months ended March 31,
2002. The increased use of cash in the current year period is primarily due to
the effect of changing our relationship with ICOS in January 2003, after which
we became responsible for 100% of the costs of Encysive, L.P. As a result of
the Acquisition, as discussed in Note 14 to the Financial Statements included
herein, we have made a payment to ICOS of $4 million on April 22, 2003 and
agreed to pay $4 million in April 2004 and $2 million in October 2004. The Note
is secured with an irrevocable standby letter of credit for which we have
pledged marketable securities with a value of approximately $7,000,000. Pledged
securities will be returned to us by the bank as payments are made on the Note.
Investing activities generated $13,685,000 during the three months
ended March 31, 2003, compared to $23,636,000 in the three months ended March
31, 2002. Purchases of equipment and leasehold improvements declined $1,189,000
in the current quarter, as a result of programs implemented by management to
conserve cash. Other than expenditures for purchases of equipment and leasehold
improvements, investing activities consist of purchases of, and maturities of
investments. During the quarter ended March 31, 2002, the net cash provided
from investing activities was primarily used to fund an increase of cash and
cash equivalents in that quarter of $16,222,000. In the current quarter, cash
and cash equivalents increased $5,802,000, which was primarily funded from
investing activities.
Cash flows from financing activities in the quarter ended March 31,
2002 of $157,000 reflected proceeds from the sale of Common Stock and option
exercises. There was no financing activity in the quarter ended March 31, 2003.
Material Commitments
As a result of the Acquisition, as discussed in Note 14 to the
Financial Statements included herein, we have made a payment to ICOS of $4
million on April 22, 2003 and agreed to pay $4 million in April 2004 and $2
million in October 2004. The Note is secured with an irrevocable standby letter
of credit for which we have pledged marketable securities with a value of
approximately $7,000,000. Pledged securities will be returned to us by the bank
as payments are made on the Note.
Our only other 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, on an
unsecured basis, approximately $4.5 million, of which our commitment is
approximately $3.4 million. The terms of the loans require quarterly interest
payments and repayment of all principal on or before April 1, 2007. Our portion
of the loan is denominated in U.S. dollars at an interest rate of seven percent
fixed for the first two years and resets to the greater of seven percent or
U.S. prime plus two and one-half percent on April 1, 2004. As of March 31,
2003, we have advanced $2,237,000 to Revotar under our loan commitment. Revotar
will need to seek additional funding through collaborative arrangements and/or
through public or private financings in the future. If they are not
23
successful, Revotar will be unable to repay our loans. A likely result of
additional financings would be to reduce our ownership percentage in Revotar.
The Company had long-term obligations under our office and laboratory
leases as follows (in thousands):
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
----------------------- ----- --------- ------ ----- -------
Operating Leases $4,873 $1,616 $3,126 $131 --
Outlook for 2003
In connection with the Acquisition, we have announced new guidance for
2003 as follows:
Net sales of Argatroban by GSK.................. $30.0 to $35.0 million
Revenues........................................ $10.0 to $11.5 million
Expenses (1).................................... $50.0 to $53.0 million
Investment income............................... $0.8 to $1.0 million
Estimated net loss.............................. $39.0 to $42.0 million
Cash and Investments at Year-End 2003........... $30.0 to $32 million
(1) Expenses net of minority interest in Revotar and include a
charge of $8.4 million related to the Acquisition.
These expectations are based upon various assumptions, which are
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected. Among these risks, trends
and uncertainties are timing and cost of our clinical trials, attainment of
research and clinical goals and milestones of product candidates, and sales
levels of Argatroban. We have assumed that sales trends of Argatroban over the
previous year will continue. While we do not sell Argatroban, our revenues
include a royalty from GSK which is based on sales and will, accordingly, vary
with sales. Our actual royalty revenues could vary from our assumptions to the
extent that GSK's actual sales of Argatroban differ from assumed levels.
As a result of the Acquisition, our projected revenues do not include
any revenues associated with ICOS-TBC beyond the amount recognized through
March 31, 2003. Projected revenues contain continued amortization of deferred
license fees and milestones previously received from Schering-Plough,
Mitsubishi and ICOS-TBC, which are being deferred over the estimated
development period of the respective compound or program. We periodically
review our estimates of development periods, and actual recognized revenues
could increase or decrease to the extent that we decrease or increase our
estimated development periods. We have assumed that research agreement revenues
from Schering-Plough will end upon the expiration of the agreement, at June 30,
2003.
Projected operating expenses are based upon our approved operating
budget for the year, adjusted to take into consideration the effect of the
Acquisition. After the Acquisition, we became responsible for all development
costs of the endothelin receptor antagonist program. We have not assumed
significant changes in numbers of employees during year 2003, and other
budgeted items remained unchanged from previously projected amounts.. Our
budgeted expenses also include basic research efforts on our other programs,
and levels of administrative support we believe to be necessary.
Projected investment income assumes that the rate of return on
invested funds of approximately 2% on an average of approximately $50 million
in funds available for investment throughout the year.
Cash and investments at year-end is projected based upon our projected
sources and uses of cash during the year. In projecting our end of year cash
and investment balances, we have not assumed additional financing, or
collaborative arrangements other than those in place at this time.
24
The range of estimated net loss is based upon our projected revenues
and expenses, as discussed above.
For a number of reasons discussed elsewhere in this Form 10-Q, we
cannot estimate, with a reasonable degree of certainty, total completion costs
or dates of completion of our ongoing research and development projects. See
"Additional Risk Factors" in Item 1, "Business" of our annual report on Form
10-K for the year ended December 31, 2002, and "Longer-Term Outlook", below.
Longer-Term Outlook
We expect to continue 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 cost 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 contract research organizations; and
- purchasing and formulating large quantities of the
compound to be used in such trials.
- There will be additional costs in future periods related to
Argatroban in complying with ongoing FDA requirements and
possible clinical trial expenditures for additional
therapeutic indications.
We have been unprofitable to date and expect to incur operating losses
for the next several years as we invest in product research and development,
preclinical and clinical testing and regulatory compliance. We will require
substantial additional funding to complete the research and development of our
product candidates, to establish commercial scale manufacturing facilities, if
necessary, to fund the $6 million required future payments to ICOS 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 use of Argatroban;
- possible emergence of generic competition;
- 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;
25
- 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 the end of the third quarter of 2004. We anticipate that
we may need to secure additional funds to continue the required levels of
research and development to reach our current long-term goals. We intend to
seek such additional funding through collaborative arrangements and/or through
public or private financings, if required. Our strategy for managing our
capital requirements includes seeking to license rights to sitaxsentan for
select markets, while preferably retaining North American rights. There can be
no assurances that such funding or licensing arrangements will be available on
acceptable terms. As we review our research and development programs, we may
also consider various measures to reduce our costs in order to effectively
utilize our capital resources.
Off-Balance Sheet Arrangements
We do not engage in off-balance sheet financing arrangements.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
Our research and development processes involve the controlled use of
hazardous materials, chemicals and radioactive materials and produce waste
products. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of hazardous
materials and waste products. Although we believe that our safety procedures
for handling and disposing of hazardous materials comply with the standards
prescribed by laws and regulations, the risk of accidental contamination or
injury from these materials cannot be eliminated completely. In the event of an
accident, we could be held liable for any damages that result. This liability
could exceed our resources or not be covered by our insurance. Although we
believe that we are in compliance in all material respects with applicable
environmental laws and regulations, there can be no assurance that we will not
be required to incur significant costs to comply with environmental laws and
regulations in the future. There can also be no assurance that our operations,
business or assets will not be materially adversely affected by current or
future environmental laws or regulations.
IMPACT OF INFLATION AND CHANGING PRICES
The pharmaceutical research industry is labor intensive, and wages and
related expenses increase in inflationary periods. The lease of space and
related building services for the Houston facility contains a clause that
escalates rent and related services each year based on the increase in building
operating costs and the increase in the Houston Consumer Price Index,
respectively. To date, inflation has not had a significant impact on our
operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). All statements other
than statements of historical fact included in and incorporated by reference
into this Form 10-Q are forward-looking statements. These forward-looking
statements include, without limitation, statements regarding our estimate of
the sufficiency of our existing capital resources and our ability to raise
additional capital to fund cash requirements for future operations, and
regarding the uncertainties involved in the drug development process and the
timing of regulatory approvals required to market these drugs. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, we cannot give any assurance that such expectations reflected in
these forward-looking statements will prove to have been correct.
26
When used in this Form 10-Q, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate" and similar expressions are
intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. Because these
forward-looking statements involve risks and uncertainties, actual results
could differ materially from those expressed or implied by these
forward-looking statements for a number of important reasons, including those
discussed under "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. Before you invest in our Common Stock, you
should be aware that the occurrence of any of the contingent factors described
herein under "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and described under
"Additional Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2002 could substantially harm our business, results of operations
and financial condition. Upon the occurrence of any of these events, the
trading price of our Common Stock could decline, and you could lose all or part
of your investment.
We cannot guarantee any future results, levels of activity,
performance or achievements. Except as required by law, we undertake no
obligation to update any of the forward-looking statements in this Form 10-Q
after the date of this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RISK
We are exposed to market risk primarily from changes in foreign
currency exchange rates. The following describes the nature of this risk that
is not believed to be material to us.
We have a majority-owned subsidiary in Germany and consolidate the
results of operations into our consolidated financial results. Although not
significant to date, our reported assets, liabilities, expenses and cash flows
from this subsidiary are exposed to changing exchange rates. We, accordingly,
included an unrealized gain of $61,000 and an unrealized loss of $61,000,
respectively, in our comprehensive loss for the three-month periods ended March
31, 2003 and 2002. We had an intercompany receivable from its German subsidiary
at March 31, 2003 and December 31, 2002; however, this amount is denominated in
U.S. dollars and is not exposed to exchange risk. The Company contracts with
entities in other areas outside the U.S. and these transactions are denominated
in a foreign currency. To date, the currencies of these other countries have
not fluctuated materially. At this time, management has not deemed it cost
effective to engage in a program of hedging the effect of foreign currency
fluctuations on the Company's operating results using derivative financial
instruments.
The Company and the other stockholders of Revotar have executed an
agreement to provide approximately $4.5 million in unsecured loans, of which
the Company's commitment will be approximately $3.4 million. The terms of the
loans require quarterly interest payments and repayment of all principal on or
before April 1, 2007. The interest rate for the first two years will be seven
percent, after which the interest rate could then be reset to the U.S. prime
rate plus 2.5 % if such rate is higher than seven percent. Pursuant to such
agreement, the Company has advanced approximately $2,237,000 to Revotar as of
March 31, 2003. Revotar's management has informed the Company that they
anticipate that Revotar will borrow the remaining commitment of approximately
$1.1 million from the Company in the fourth quarter of 2003. The loan is
denominated in U.S. dollars. To mitigate the risk of fluctuations in foreign
currency exchange rates, Revotar entered into a forward contract with a bank to
fix the exchange rate at which it will borrow the remaining loan commitment
27
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, we carried out
an evaluation, under the supervision and with the participation of management,
including our President and Chief Executive Officer, and our Vice President of
Finance and Administration, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, our
President and Chief Executive Officer and our Vice President of Finance and
Administration concluded that our disclosure controls and procedures are
effective, providing management with material information relating to the
Company that is required to be included in our reports filed or submitted under
the Exchange Act on a timely basis. There have been no significant changes in
our internal controls or in other factors that could significantly affect
internal controls subsequent to the date we carried out our evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Five reports on Form 8-K were filed during the quarter ended
March 31, 2003. A report on Form 8-K dated January 7, 2003 was filed
regarding the Company's restructuring plan. A report on Form 8-K dated
January 30, 2003 was filed announcing the Company's negotiations
regarding the reacquisition of full development and marketing rights
to Sitaxsentan. A report on Form 8-K dated February 6, 2003 was filed
regarding the amending of the license and research and development
agreement the Company has with Revotar Biopharmaceuticals AG. A report
on Form 8-K dated February 26, 2003 was filed regarding updated
guidance for 2002 and initial estimates for 2003. A report on Form 8-K
dated March 6, 2003 and amended on April 2, 2003 was filed regarding
the Company's full year 2002 results.
EXHIBIT NO. DESCRIPTION
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under
the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under
the Securities Exchange Act of 1934, as amended.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
28
EXHIBIT NO. DESCRIPTION
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
29
ENCYSIVE PHARMACEUTICALS INC.
NOVEMBER 14, 2003
SIGNATURES
Pursuant to the requirements 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, on the 14th day of November, 2003.
ENCYSIVE PHARMACEUTICALS INC.
By: /s/ Stephen L. Mueller
--------------------------------------------
Stephen L. Mueller
Vice President, Finance and Administration
Secretary and Treasurer
(Principal Financial and Accounting Officer)
30
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under
the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under
the Securities Exchange Act of 1934, as amended.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
31