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 JUNE 30, 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 August 4, 2003
----- -----------------------------
common stock, $0.005 par value 44,430,169
ENCYSIVE PHARMACEUTICALS INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 1
Consolidated Statements of Operations and Comprehensive Loss for the
three and six months ended June 30, 2003 and 2002 2
Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 26
ITEM 4: CONTROLS AND PROCEDURES 27
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 27
ITEM 2: Changes in Securities and Use of Proceeds 27
ITEM 3: Defaults Upon Senior Securities 27
ITEM 4: Submission of Matters to a Vote of Security Holders 27
ITEM 5: Other Information 29
ITEM 6: Exhibits and Reports on Form 8-K 29
SIGNATURES
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 25,698 $ 21,228
Short-term investments 14,633 26,533
Accounts receivable 1,154 1,098
Other current receivables 250 473
Receivable from related party under collaborative arrangement - 393
Prepaids 1,646 1,482
--------- ---------
Total current assets 43,381 51,207
Long-term investments 11,112 20,244
Equipment and leasehold improvements, net 5,170 5,579
Other assets 709 762
--------- ---------
Total assets $ 60,372 $ 77,792
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,561 $ 950
Accrued expenses 3,520 3,774
Deferred revenue from related party - 591
Deferred revenue from unrelated parties 927 927
Payable to related party - 2,664
Current maturity on long-term debt 4,000 -
--------- ---------
Total current liabilities 10,008 8,906
Long-term debt, less current maturity 2,000 -
Deferred revenue from related party - 1,181
Deferred revenue from unrelated parties 2,556 3,019
Minority interest in Revotar 2,105 2,608
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.005 per share
5,000,000 shares authorized; none issued or outstanding - -
Common stock, par value $.005 per share. At June 30, 2003
75,000,000 shares authorized; 44,533,125 shares issued.
At December 31, 2002, 75,000,000 shares authorized;
44,015,364 shares issued. 223 220
Additional paid-in capital 212,468 211,847
Deferred compensation expense (289) (223)
Treasury stock, 213,000 shares (1,602) (1,602)
Accumulated other comprehensive income 168 1
Accumulated deficit (167,265) (148,165)
--------- ---------
Total stockholders' equity 43,703 62,078
--------- ---------
Total liabilities and stockholders' equity $ 60,372 $ 77,792
========= =========
See accompanying notes to consolidated financial statements
1
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Research agreements $ 742 $ 914 1,484 $ 1,827
Collaborative research and development from
Encysive, L.P. - 246 664 486
Royalty income, net 1,113 840 2,260 1,805
License fees, milestones and grants 373 626 1,036 1,101
------------ ------------ ------------ ------------
Total revenues 2,228 2,626 5,444 5,219
------------ ------------ ------------ ------------
Expenses:
Research and development 6,304 5,472 10,523 10,821
Purchase of in-process research and development 8,363 - 8,363 --
Equity in loss of Encysive, L.P. - 1,957 2,386 4,467
General and administrative 2,258 2,254 4,412 4,762
------------ ------------ ------------ ------------
Total expenses 16,925 9,683 25,684 20,050
------------ ------------ ------------ ------------
Operating loss (14,697) (7,057) (20,240) (14,831)
Investment income, net 264 613 637 1,380
------------ ------------ ------------ ------------
Loss before minority interest (14,433) (6,444) (19,603) (13,451)
Minority interest in loss of Revotar 313 223 503 480
------------ ------------ ------------ ------------
Net loss (14,120) (6,221) (19,100) (12,971)
Other comprehensive gain
Unrealized gain on foreign currency translation 106 205 167 144
------------ ------------ ------------ ------------
Comprehensive loss $ (14,014) $ (6,016) (18,933) $ (12,827)
============ ============ ============ ============
Net loss per common share-
basic and diluted $ (0.32) $ (0.14) (0.44) $ (0.30)
============ ============ ============ ============
Weighted average common shares used to compute
basic and diluted net loss per share 43,763,903 43,745,625 43,744,573 43,679,752
============ ============ ============ ============
See accompanying notes to consolidated financial statements
2
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
2003 2002
----------- ------------
Cash flows from operating activities:
Net loss $(19,100) $(12,971)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 522 553
Equity in loss of Encysive, L.P. 2,386 4,467
Purchase of in-process research and development 8,363
Minority interest in loss of Revotar (503) (480)
Expenses paid with stock 341 242
Stock based compensation expense 91 212
Amortization of premium/discount on investments - 78
Change in operating assets and liabilities:
Decrease in interest receivable included in short-term
and long-term investments 211 330
Increase in accounts receivable (56) (225)
Increase in prepaids (163) (404)
Decrease in other current receivables 271 249
Decrease in receivable from related party under
collaborative arrangement 393 815
Increase (decrease) in current liabilities 302 (1,747)
Decrease in liability to related party (5,051) (5,025)
Decrease (increase) in deferred revenue from unrelated parties (463) 620
Decrease in deferred revenue from related party (135) (585)
-------- --------
Net cash used in operating activities (12,591) (13,871)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (114) (2,136)
Grants received for purchases of equipment 185 167
Purchase of in-process research and development (4,000)
Purchases of investments 30,578 (55,141)
Maturity of investments (9,756) 90,466
-------- --------
Net cash provided by investing activities 16,893 33,356
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and option and
warrant exercises, net 126 307
-------- --------
Net cash provided by financing activities 126 307
Effect of exchange rate changes on cash 42 34
-------- --------
Net increase in cash and cash equivalents 4,470 19,826
Cash and cash equivalents at beginning of period 21,228 10,086
-------- --------
Cash and cash equivalents at end of period $ 25,698 $ 29,912
======== ========
Supplemental schedule of noncash financing activities:
Deferred compensation expense $ 137 $ 274
Issuance of Common Stock for expenses 341 242
Acquisition of equipment under capital leases - 34
Interest 2 1
======== ========
See accompanying notes to consolidated financial statements
3
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Encysive
Pharmaceuticals Inc., a Delaware corporation, and its subsidiaries (collectively
referred to as the "Company" or "Encysive") 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 and six-month periods ended June
30, 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,
Encysive, through its wholly owned subsidiary, EP-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. Encysive 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.
("ELP"). The acquisition of ICOS's ownership interest in ICOS-TBC is
referred to herein as the "Acquisition." See Note 13. During the third
quarter of 2000, Encysive formed Revotar Biopharmaceuticals AG, a German
corporation ("Revotar"), to conduct research and development for novel
small molecule compounds and to develop and commercialize the Company'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, ELP and EP-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. The Company
has classified as restricted, cash deposited with a bank as security for
certain foreign exchange futures contracts. See Note 12. Of those
securities classified as long-term investments, the Company has pledged
U.S. Government agency securities having a purchase price of $3,000,000 and
corporate securities having a purchase price of $4,011,000 as collateral
for a letter of credit securing a note payable to ICOS. See Note 13.
Composition of cash and investments was as follows (in thousands):
June 30, 2003 December 31, 2002
------------- -----------------
Cash and cash equivalents:
Demand and money market accounts $ 378 $ 609
Restricted cash 121 ---
Corporate commercial paper 25,199 20,619
------- -------
Total cash and cash equivalents $25,698 $21,228
======= =======
Short-term investments:
U.S. Government agency securities $ 5,000 $ 3,999
Corporate commercial paper and
loan participations 9,508 22,333
Accrued interest on above 125 201
------- -------
Total short-term investments $14,633 $26,533
======= =======
Long-term investments:
U.S. Government agency securities $ 3,000 $12,000
Corporate commercial paper and
loan participations 7,994 7,990
Accrued interest on above 118 254
------- -------
Total long-term investments $11,112 $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 Encysive, L.P.
Prior to the Acquisition, the Company accounted for the investment in
ELP using the equity method. Because the Company had no basis in the
technology transferred to ELP as the Company's original investment, the
Company did not record an amount for its original investment. The
5
Company recorded its share of the ELP loss as a liability to related party
until it funded its portion of the loss. Subsequent to the Acquisition, the
Company's consolidated financial statements include the accounts of ELP.
See Note 13.
(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 June 30, 2003 and
2002 were approximately $1,998,000 and $2,307,000, respectively, and the
six-month periods ended June 30, 2003 and 2002 were approximately
$4,584,000 and $4,598,000, respectively. Net purchase price related to the
acquisition of in-process research and development 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 June30, 2003 and 2002, the weighted average common shares
used to compute basic and diluted net loss per common share totaled
43,763,903 and 43,745,625 shares, respectively. Weighted average common
shares used to compute basic and diluted net loss per common share for the
six-month periods ended June 30, 2003 and 2002 were 43,744,573 and
43,679,752 shares, respectively. Securities convertible into Common Stock,
comprised of stock options, warrants and unvested shares of restricted
common stock totaling 5,844,884 and 5,499,880 shares at June 30, 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 that 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 that have completed the development stage are evaluated, and
either recognized into income when earned, or amortized over a future
period, depending upon whether or not the Company continues to have
obligations under the terms of the arrangement. License fees received under
the terms of licensing agreements for the Company's intellectual property
are similarly deferred, and amortized into income over the estimated
development period of the licensed item or items. The Company periodically
evaluates its estimates of remaining development periods, and adjusts the
recognition of remaining deferred revenues over the adjusted development
period remaining. Revenue from grants is recognized as earned under the
terms of the related grant agreements, typically as expenses are incurred.
Amounts received in advance of services being performed under contracts are
recorded as deferred revenue, and recognized as services are performed.
(i) Patent Application Costs
Costs incurred in filing for, defending and maintaining patents are
expensed as incurred.
(j) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with accounting
principles generally accepted in the USA. Actual results could differ from
these estimates.
6
(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 June 30, 2003 and June 30, 2002 was
$27,000, and in the six-month periods ended June 30, 2003 and 2002 was
$53,000. 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. Pursuant to a stock repurchase
program, the Company repurchased 213,000 shares during the year ended
December 31, 2001.
(m) Stock Based Compensation
At June 30, 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 and six-months ended June 30, 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 expense is reflected in net loss,
however, as all options granted under those plans had an exercise price
equal to the market price of the underlying Common Stock on the date of
grant. The following table illustrates the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions of
FASB Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" to stock-based employee compensation (amounts in
thousands, except for per share data).
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------------ ------------- ----------- ------------
Net loss, as reported $(14,120) $ (6,221) $(19,100) $(12,971)
Add: Stock-based employee
compensation expense
included in reported
net loss 28 6 28 178
Deduct: Total stock-based
employee compensation
expense determined
under fair value method
for all awards (713) (1,187) (1,811) (2,048)
-------- -------- -------- --------
Pro forma net loss $(14,805) $ (7,402) $(20,883) $(14,841)
======== ======== ======== ========
Loss per share:
As reported, basic and
diluted $ (0.32) $ (0.14) $ (0.44) $ (0.30)
Pro forma, basic and diluted $ (0.34) $ (0.17) $ (0.48) $ (0.34)
The per-share weighted average fair value of stock options granted
during the three-month periods ended June 30, 2003 and 2002 was $1.71 and
$2.79, respectively, and in the six-month periods ended June 30, 2003 and
2002 was $0.76 and $ 3.48, respectively, on the grant date using the
Black-Scholes option pricing model with the following assumptions:
7
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
----------- ---------- ---------- ----------
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 2.6% 3.0% 2.5% 2.8%
Expected volatility 79.8% 75.6% 73.4% 74.4%
Expected life in years 5.50 4.80 4.49 4.55
(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.
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. The
8
Company does not expect any impact upon its financial condition or results
of operations as a result of the adoption of FIN No. 46.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities," ("SFAS149"). SFAS149 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.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This statement becomes effective for the Company in the third quarter of
2003, and the Company does not expect any impact on its financial condition
or results of operations upon its adoption.
(q) Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform to the June 30, 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 June 30, 2003 as
follows:
Stock option plans................................... 7,214,863
Warrants outstanding................................. 246,586
---------
Total shares reserved.......................... 7,461,449
=========
The Company's only warrants outstanding at June 30, 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 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 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 Common Stock, the Company is acquired by
that person or group in a merger or other business combination transaction,
each Right would then entitle its holder to purchase Common Stock of the
acquiring company having a value of twice the $55.00 exercise price. The
effect will be to entitle the Company's shareholders to buy stock in the
acquiring company at 50% of its market price.
9
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 June 30, 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 61,919 223,796 61,919 ---
1992 Plan................. $ 1.41-$21.59 1,700,000 586,308 1,113,692 583,475 ---
Director Plan............. $ 3.50-$ 4.54 71,429 19,954 51,475 19,954 ---
1995 Plan................. $ 0.93-$21.59 2,000,000 1,391,279 417,133 1,314,531 191,588
1995 Director Plan........ $ 1.38-$11.31 800,000 446,596 77,433 354,096 275,971
1999 Plan................. $ 0.93-$20.13 4,750,000 2,568,908 508,752 1,064,121 1,672,340
---------- --------- -------- --------- ----------
TOTALS............. 9,607,144 5,074,964 2,392,281 3,398,096 2,139,899
========== =========== ========= ========= ==========
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 restricted Common Stock out of the 1999
Plan. The awarded shares will vest after completion of three years of service to
the Company. The Company recorded deferred compensation expense of $309,000,
which is being recognized over the vesting period.
In January 2003, the Company issued 105,250 shares of restricted Common
Stock to non-officer employees remaining after a restructuring of the Company.
The shares will vest after completion of one year of service to the Company. The
Company recorded deferred compensation expense of $162,000, which is being
recognized over the vesting period. In March 2003, the Company issued options to
certain employees, subject to the approval of stockholders of a motion to
increase the authorized shares in the Amended and Restated 1999 Stock Incentive
Plan. The Company will record stock compensation expense for such options of
$186,000 over the vesting period.
In June 2003, the Company issued 15,000 shares of restricted Common Stock
to the new vice president of marketing. The shares will vest in 1/3 increments
over three years based upon the hire date. The Company recorded deferred
compensation expense of $41,000, which is being recognized over the vesting
period.
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 six months ended June 30, 2002.
(5) INCOME TAXES
The Company did not incur tax expense during the three and six-month
periods ended June 30, 2003, due to operating losses and the related increase in
the valuation allowance.
10
(6) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following (amounts in
thousands):
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Laboratory and office equipment $10,736 $10,667
Leasehold improvements 4,311 4,311
------- -------
15,047 14,978
Less accumulated depreciation and amortization 9,877 9,399
------- -------
$ 5,170 $ 5,579
======= =======
(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 (amounts in
thousands):
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Long-lived assets:
United States $4,595 $4,884
Germany 1,284 1,457
------ ------
Total $5,879 $6,341
====== ======
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
Revenues:
United States $2,086 $2,489 $5,019 $5,082
Germany 142 137 425 137
------ ------ ------ ------
Total $2,228 $2,626 $5,444 $5,219
====== ====== ====== ======
(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 13, Acquisition.
The Company also receives reimbursement for certain research costs
pursuant to its agreements with Schering-Plough, GlaxoSmithKline ("GSK")
(Note 9) and Revotar (Note 10).
(9) LICENSE AGREEMENTS
Mitsubishi Pharma Agreement
Encysive 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
11
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.
ICOS Corporation Partnership
On June 6, 2000, ICOS and the Company entered into the ELP 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, ELP paid a license fee to the Company in June
2000. Prior to the Acquisition, the license fee was being amortized over
the estimated development period of the licensed technology. In July 2001,
the Company earned a milestone as a result of the achievement of an
objective defined in the partnership agreement. Prior to the Acquisition,
the Company was recognizing the revenue associated with the milestone over
the expected development period.
Deferred revenue of $1,637,000, arising from previous payments
received by the Company from ELP for a license fee and milestones, was
recognized as an offset to the purchase price, resulting in a charge for
the purchase of in-process research and development of $8,363,000. See Note
13.
Schering-Plough Research Collaboration and License Agreement
On June 30, 2000, TBC and Schering-Plough ("Schering") entered into a
worldwide research collaboration and license agreement to discover, develop
and commercialize VLA-4 antagonists. VLA-4 antagonists represent a new
class of compounds that has shown promise in multiple preclinical animal
models of asthma. The primary focus of the collaboration will be to
discover orally available VLA-4 antagonists as treatments for asthma.
Schering and the Company agreed to extend Schering's support of the
research collaboration to a fourth year, through June 30, 2004.
GSK Product Development, License and CoPromotion Agreement
In connection with the Company's development and commercialization of
Argatroban, in August 1997, Encysive entered into a Product Development,
License and CoPromotion Agreement with GSK (the "GSK Agreement") whereby
GSK was granted exclusive rights to work with the Company in the
development and commercialization of Argatroban in the U.S. and Canada for
specified indications
(10) FOREIGN SUBSIDIARY
During the third quarter of 2000, Encysive 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 Encyisve 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 its 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 June 30, 2003 and December 31, 2002, was $2,105,000 and $2,608,000,
respectively. The Company's consolidated net loss for the three-month periods
ended June 30, 2003 and 2002 was reduced by $313,000 and $223,000, respectively,
for the Revotar minority shareholders' interest in Revotar's losses.
Consolidated net loss for the six-month periods ended June 30, 2003 and 2002 was
reduced by $503,000 and $480,000, respectively, for the Revotar minority
shareholders' interest.
Revotar has been awarded research grants from the German government, and
earned approximately $142,000 and $137,000 during the three-month periods ended
June 30, 2003 and 2002, respectively, which is included in license fees,
milestones and grants. German government grants of $425,000 and $137,000 were
earned by Revotar in the six-month periods ended June 30, 2003 and 2002,
respectively.
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
12
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 June 30, 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, and recorded a gain of $58,000 in the three
months ended June 30, 2003 on forward contracts.
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) 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 $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 June 30, 2003 and 2002 were
approximately $40,000 and $53,000, respectively. During the six-month periods
ended June 30, 2003 and 2002 charges to operating expense for employer match
were $86,000 and $103,000, respectively.
(12) 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 $106,000 and $205,000, respectively, in its comprehensive loss for
the three-month periods ended June 30, 2003 and 2002, and unrealized gains
of $167,000 and $144,000 in the six-month periods ended June 30, 2003 and
2002, respectively. The Company had an intercompany receivable from its
German subsidiary at June 30, 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, on which it
recorded a gain of $58,000 in the three months ended June 30, 2003, 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
13
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.
(13) ACQUISITION
On April 22, 2003, the Company and ICOS executed a purchase and sale
agreement (the "Acquisition Agreement") pursuant to which the Company purchased
the partnership interest of ICOS and its subsidiaries in ELP. The partnership
had no assets other than its rights to the in-process research and development
of the endothelin receptor antagonist program. 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
then was adjusted on the first business day of July to approximately 2.78%. The
next LIBOR adjustment days are the first business days of October and January.
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 $7,011,000.
Since the only asset acquired was in-process research and development, the
Company recorded a charge for in-process research and development of $10,000,000
less unamortized deferred revenues of $1,637,000. The unamortized deferred
revenues of $1,637,000 relates to the previous payments received from ELP that
were being amortized into income over the estimated remaining development
period. Due to the short-term nature of the Note and the associated interest
rate, the Note was not discounted when calculating the in-process research and
development charge.
Following the Acquisition, the Company changed the name of ICOS-TBC to
Encysive, L.P. The Company's consolidated financial statements include the
accounts of ELP.
14
The following pro forma summary of operations for the three and six-month
periods ended June 30, 2003 and 2002 are based upon the historical financial
statements of the Company and ELP after giving effect to the Acquisition, as if
the combination had occurred on January 1, 2002.
Pro Forma Summary of Operations
Amounts in thousands (except per share data)
Three Months Ended June 30, 2003 Three Months Ended June 30, 2002
--------------------------------------- ------------------------------------------
Pro Forma Pro Forma
Historical Adjustment Pro Forma Historical Adjustment Pro Forma
---------- ---------- --------- ---------- ---------- ---------
Total Revenues $ 2,228 --- $ 2,228 $ 2,626 $ (543) $ 2,083
Net Loss (14,120) 8,363 (5,757) (6,221) (2,254) (8,475)
========= ========== ============ ===========
Net loss per common share-
basic and diluted (0.32) (0.13) (0.14) (0.19)
Six Months Ended June 30, 2003 Six Months Ended June 30, 2002
--------------------------------------- ------------------------------------------
Pro Forma Pro Forma
Historical Adjustment Pro Forma Historical Adjustment Pro Forma
---------- ---------- --------- ---------- ---------- ---------
Total Revenues $ 5,444 $ (800) $ 4,644 $ 5,219 $ (1,071) $ 4,148
Net Loss (19,100) 8,227 (10,873) (12,971) (5,052) (18,023)
========== ========== ============ ===========
Net loss per common share-
basic and diluted (0.44) (0.25) (0.30) (0.41)
Pro forma adjustments include eliminating the $8,363,000 charge for
purchase of in-process research and development upon the Acquisition,
elimination of intercompany revenues between the Company and ELP, elimination of
recognition of license fee and milestones received by the Company from ELP, and
recognition of ICOS's share of partnership expenses in the three and six-month
periods ended June 30, 2003 and 2002.
15
ITEM 2.
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 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 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,
and changed the name of the partnership to Encysive, L.P.. 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 and 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 GSK and has been on the market in the U.S. and Canada
16
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. 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 ("PAH"). 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 STRIDE 1, 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. We have initiated a pivotal
Phase III trial in PAH, "STRIDE 2." STRIDE 2 will be of 18 weeks duration and
will test two doses of sitaxsentan (100 mg and 50 mg), verses placebo, dosed
once daily in a double blind fashion. In addition, a randomized bosentan
(Tracleer) arm will be included. Bosentan is currently the only approved
endothelin antagonist available. In June 2003, we received a Special Protocol
Assessment from the FDA confirming that STRIDE 2, together with the results of
STRIDE 1 and planned supportive trials will be sufficient for filing a new drug
application ("NDA"). We anticipate enrollment will complete in the spring of
2004 with results available in the fall. We anticipate that the NDA submission
may occur between the end of year 2004 and first quarter of 2005.
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 with an inhaled form of bimosiamose was
completed in the second quarter of 2003 and positive preliminary results were
released in August 2003. A Phase IIa clinical trial in psoriasis is planned to
commence during 2003, using a topical formulation. A Phase IIa proof-of-concept
clinical trial in psoriasis, completed during 2002 with an injectable form of
bimosiamose, demonstrated 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
17
candidate. Additionally, we are conducting research on backup VLA-4 antagonists
for Schering-Plough under this agreement. Schering-Plough and Encysive have
recently agreed to extend the research agreement for another year, through June
2004.
Vascular Disease. Many disease processes involve changes in blood vessels and
heart tissue. There are numerous mediators, like endothelin, which may
contribute to the development of these diseases. Several of these act though
G-protein coupled receptors, GPCRs, to carry out their action. We are conducting
research on urotensin and other GPCRs to identify inhibitors which could be
useful in treating diseases including congestive heart failure, CHF, ischemic
stroke and acute myocardial infarction.
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
- We recognize revenue from service contracts as services are performed.
- Royalty revenue is recognized as products are sold by a licensee and
we have received sufficient information to record a receivable. Our
royalty revenue is based on net sales of product, that is, sales net
of discounts, returns and allowances. We have estimated a percentage
of gross sales, based on recent experience, as an allowance for future
returns, however there can be no assurance that our estimate will be
accurate. We believe, however, that differences between estimated and
actual future returns will not have a material effect upon our results
of operations or financial condition.
- Revenue from collaborative research and development activities is
recognized as services are performed.
- We defer the recognition of milestone payments related to contractual
agreements that 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 that 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. At June 30, 2003, remaining deferred revenue was approximately
$3.4 million, of which we expect to recognize approximately $0.9 million over
the next 12 months. A future change in our estimate of development periods could
accelerate or decelerate the timing of future recognition of deferred revenue.
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
18
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 record compensation expense for the fair value of
options granted to non-employees.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period.
GENERAL
Our operating results have fluctuated significantly during each quarter,
and 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 $167.3
million from the date of our inception to June 30, 2003. We have primarily
financed our operations to date through a series of private placements and
public offerings of our Common Stock and several collaborative agreements with
third parties to jointly pursue product research and development. See discussion
of "Liquidity and Capital Resources" below. See also "Additional Risk Factors"
in Item 1 "Business" of our Annual Report on Form 10-K for the year ended
December 31, 2002.
THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
In April 2003, we acquired the interest of ICOS in ELP. Of the $10 million
purchase price, $4 million was paid at closing, and the remaining $6 million is
subject to the terms of a note to ICOS requiring a $4 million payment in April
2004 and a $2 million payment in October 2004. Deferred revenue of $1.6 million,
arising from previous payments received by us from ELP for a license fee and
milestones, was recognized as an offset to the purchase price, resulting in a
charge for the purchase of in-process research and development of $8.4 million
in the second quarter of 2003.
From its inception in June 2000 through December 31, 2002, we and ICOS
shared equally in the costs of ELP. In January 2003, however, ICOS informed us
that they had reached the conclusion that joint development of the endothelin
receptor antagonist program through ELP should not continue. As a result, from
January 2003 until the Acquisition, we agreed to be responsible for 100% of the
costs of ELP under the terms of a letter agreement, which expired upon the
Acquisition.
From its inception in June 2000 through March 31, 2003, we accounted for
our investment in ELP under the equity method. As a result of the Acquisition,
we now include the accounts of ELP in our consolidated financial statements. A
result of the consolidation of ELP into 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." are eliminated and the
operating expenses of ELP are included in our operating expenses.
We have included, in Note 13 to the condensed consolidated financial
statements, a pro forma statement of operations which adjusts our historical
results for the three and six months ended June 30, 2003 and 2002 to reflect
such results as if the Acquisition had occurred at the beginning of 2002.
Although the pro forma results do not necessarily indicate what actual results
would have occurred had the Acquisition happened earlier, they do give an
indication of the impact of the Acquisition on the reported historical results,
and the trends in our business unrelated to the effects of the Acquisition.
19
REVENUES
Revenues in the three months ended June 30, 2003 decreased to $2,228,000
from $2,626,000 in the three months ended June 30, 2002. Pro forma revenues,
however, increased to $2,228,000 from $2,083,000 in the comparable three-month
periods. The difference between historical revenues and pro forma revenues in
the second quarter of 2002 is the elimination of $246,000 in "Collaborative
research and development from Encysive, L.P." and $297,000 in license fee and
milestone revenues arising from the amortization of a license fee and milestones
previously received from ELP. The increase in pro forma revenues in the second
quarter of 2003, compared with the second quarter of 2002 is comprised of
increased royalties on sales of Argatroban partially offset by reduced research
agreement revenues in the current year period. Royalties increased $273,000 or
approximately 32.5% due to higher sales of Argatroban by GSK in the current year
period. In 2002, GSK created a hospital based sales force and initiated programs
to increase sales efforts on Argatroban in the U.S. and Canada that we believe
could have a positive effect on our royalties from GSK. Research agreement
revenues declined $172,000, or approximately 18.8% in the current year period.
Research agreement revenues are primarily comprised of payments received from
Schering-Plough for research on VLA-4 antagonists. Following the naming of a
clinical candidate, and receipt of a milestone payment from Schering-Plough in
June 2002, we are continuing research on backup VLA-4 antagonists for
Schering-Plough, however fewer internal resources are devoted to the program
than in the periods prior to June 2002. Schering-Plough agreed to extend its
support for continued research on backup VLA-4 antagonists for another year,
through June 2004. License fees, milestones and grants declined $253,000 or
approximately 40.4% in the second quarter of 2003, compared to the second
quarter of 2002. In the second quarter of 2002, license fees, milestones and
grants included $297,000 in amortization of a license fee and milestones
previously received from ELP. As discussed above, the remaining deferred revenue
from ELP was recognized upon the Acquisition.
Revenues in the six months ended June 30, 2003 increased $225,000 to
$5,444,000 from $5,219,000 in the six months ended June 30, 2002. Pro forma
revenues increased $496,000 to $4,644,000 from $4,148,000 in the prior year
period. The difference between historical revenues and pro forma revenues is the
elimination of $664,000 and $486,000 in "Collaborative research and development
from Encysive, L.P." in the 2003 and 2002 periods, respectively, and the
elimination of license fee and milestone revenues of $136,000 and $585,000 in
the 2003 and 2002 periods, respectively. Royalties increased $455,000, or
approximately 25.2% in the six months ended June 30, 2003 due to higher sales of
Argatroban by GSK in the current year period, as discussed above. Research
agreement revenues, for the same reasons discussed above, decreased $343,000 or
approximately 18.8%. Pro forma license fees, milestones and grants increased
$384,000, or approximately 74.4%, due to the receipt of a milestone payment from
Schering-Plough in June 2002.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense in the second quarter of 2003 was
$6,304,000, compared with $5,472,000 in the second quarter of 2002. In the
second quarter of 2003, however, the development expenses of the endothelin
receptor antagonist program totaling $2,918,000 are included in research and
development expense, as a result of the Acquisition and consolidation of ELP. In
the second quarter of 2002, our share of the expenses of the endothelin receptor
antagonist program of $1,957,000 was reported as equity in loss of ELP. After
considering the different accounting for the endothelin receptor antagonist
program, other research and development expenses of $3,386,000 in the second
quarter of 2003 declined $2,086,000, or approximately 38.1% in the second
quarter of 2003, compared with the second quarter of 2002. In January 2003, we
announced a reduction of headcount, primarily in the areas of basic exploratory
biology, early stage target identification and support functions. Clinical
trials expenses (other than for the endothelin receptor antagonist program)
declined $1.3 million in the second quarter of 2003, compared with the second
quarter of 2002. In the second quarter of 2002, we were conducting several
trials, primarily ARGIS-I for Argatroban in stroke. The STRIDE-2 clinical trial
was initiated late in the second quarter of 2003.
20
Research and development expense in the six months ended June 30, 2003 was
$10,523,000, compared with $10,821,000 in the six months ended June 30, 2002.
Research and development expense in the six months ended June 30, 2003 included
$2,918,000 in development expenses of the endothelin receptor antagonist
program, as a result of the Acquisition and consolidation of ELP. Our share of
endothelin receptor antagonist program expenses incurred prior to the
Acquisition were $2,386,000 and $4,467,000 in the six months ended June 30, 2003
and 2002, respectively, and were reported as equity in loss of ELP. After
considering the different accounting for the endothelin receptor antagonist
program, other research and development expenses in the six months ended June
30, 2003 of $7,605,000 declined $3,216,000 or approximately 29.7% compared with
the six months ended June 30, 2002. Clinical trials costs (other than for the
endothelin receptor antagonist program) declined $2.3 million in the 2003
period, compared with the 2002 period, as we were conducting several trials,
primarily ARGIS-I for Argatroban in stroke during the 2002 period. As a result
of the January restructuring, we incurred a restructuring charge of
approximately $0.5 million, primarily comprised of severance benefits paid to
terminated employees, which is included in research and development expense in
the six months ended June 30, 2003. We believe that research and development
expenses in the remaining period of 2003 will be higher than in the comparable
2002 periods, as costs associated with the STRIDE-2 trial of sitaxsentan in PAH
are incurred.
The endothelin receptor antagonist program has been conducted within the
ELP, formerly ICOS-TBC, from its inception in June 2000. Prior to December 31,
2002, we included our proportionate share of ELP's losses, 50%, in our financial
results under the caption equity in loss of ELP. As discussed above, in January
2003, ICOS informed us that they had reached the conclusion that joint
development of the endothelin receptor antagonist program through ELP should not
continue. As a result, from January 2003 until the Acquisition, we agreed to be
responsible for 100% of the costs of ELP under the terms of a letter agreement,
which expired upon the Acquisition. Total research and development costs of the
endothelin receptor antagonist program in the three months ended June 30, 2003
of $2,918,000 were included in our research and development expenses, as
discussed above. In the six months ended June 30, 2003, total research and
development costs of the endothelin receptor antagonist program were $5,304,000,
of which $2,918,000 was included in our research and development expense and
$2,386,000 was reported as equity in loss of ELP. Comparable total expenses of
the endothelin receptor antagonist program in the three and six-month periods
ended June 30, 2002, of which we reported our 50% share as equity in loss of ELP
were $3,914,000 and $8,934,000, respectively. In the 2002 periods, ELP's
research and development expenses were primarily comprised of the costs of the
ongoing STRIDE trial of sitaxsentan in pulmonary arterial hypertension ("PAH"),
which was completed in 2002. During the three months ended June 30, 2003, ELP
initiated STRIDE-2, a final pivotal study in PAH.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses in the three-months ended June 30, 2003
and 2002 were comparable, at $2.3 million. In the six months ended June 30,
2003, general and administrative expenses declined $350,000, or approximately
7.3% compared with the six months ended June 30, 2002. The prior year period
included stock compensation expenses of $182,000, primarily resulting from
modifications to stock options issued to our retiring chief executive officer.
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 to apply strict cost control
measures to minimize cash spent on administrative activities.
Total operating expenses in the three months ended June 30, 2003 increased
$7,242,000 compared to the three months ended June 30, 2002. The 2003 period
included a one-time charge of $8,363,000 for the purchase of in-process research
and development as a result of the Acquisition, however, and after taking this
charge into consideration other expenses declined $1,121,000 or approximately
11.6% compared with the three months ended June 30, 2002. Total operating
expenses in the six months ended June 30, 2003 increased $5,634,000 compared
with the six months ended June 30, 2002, however after taking the $8,363,000
one-time charge into consideration other total expenses declined $2,729,000 or
approximately 13.6%. As discussed above, we believe that research and
development expenses in the remaining periods of 2003 will be higher than in the
comparable periods of 2002, primarily due to costs associated with the STRIDE-2
trial of sitaxsentan in PAH.
21
Operating loss in the three months ended June 30, 2003 increased $7,640,000
compared with the three months ended June 30, 2002, due to the $8,363,000 charge
for purchase of in-process research and development upon the Acquisition, as
discussed above. In the comparable six month periods, operating loss increased
$5,409,000, again due to the $8,363,000 charge discussed above.
Investment income declined $349,000 or approximately 56.9% and $743,000 or
approximately 53.8% in the comparable three and six month periods. The decline
is due to lower levels of funds available for investment in the current year
periods.
The minority interest in the loss of Revotar in the three and six-month
periods increased $90,000 and $23,000, respectively, as a result of higher
expenses at Revotar during the 2003 periods.
Net loss in the three months ended June 30, 2003 increased $7,899,000
compared with the three months ended June 30, 2002, primarily due to the
$8,363,000 charge for in-process research and development upon the Acquisition.
Pro forma net loss, however, decreased $2,718,000 due to higher pro forma
revenues and lower pro forma expenses in the 2003 period. Net loss in the six
months ended June 30, 2003 increased $6,129,000 due to the $8,363,000 charge for
in-process research and development upon the Acquisition. Pro forma net loss,
however, decreased $7,150,000 due to higher revenues and reduced operating
expenses in the pro forma results. See Note 13 to the condensed consolidated
financial statements.
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 $51,443,000 at June 30, 2003, compared
with $68,005,000 at December 31, 2002. We used $12,591,000 in cash in operating
activities, during the six months ended June 30, 2003, compared to cash used in
operating activities of $13,871,000 during the six months ended June 30, 2002.
The decreased use of cash for operating activities in the current year period is
primarily due to lower operating expenses, other than the charge for purchase of
in-process research and development.
Investing activities generated $16,893,000 during the six months ended
June 30, 2003, compared to $33,356,000 in the six months ended June 30, 2002.
Purchases of equipment and leasehold improvements declined $2,022,000 in the
current year, 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 a $4,000,000 payment to ICOS upon
the Acquisition and purchases of and maturities of investments. Revotar has
received grants from the German government for purchases of certain capital
equipment items, totaling $185,000 and $167,000 in the six months ended June 30,
2003 and 2002, respectively, which are recognized into income over the estimated
useful lives of the assets.
Cash flows from financing activities in the six months ended June 30,
2003 included $126,000 in proceeds from option exercises. In the six months
ended June 30, 2002 cash flows from financing activities of $307,000 reflected
proceeds from the sale of Common Stock and option exercises
Material Commitments
As a result of the Acquisition, as discussed in Note 13 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 $7,011,000.
Pledged securities will be released to us
22
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 June 30, 2003, we have
advanced $2,237,000 to Revotar under our loan commitment, and we expect to lend
our remaining commitment of $1.1 million in the fourth quarter of 2003. Revotar
will need to seek additional funding through collaborative arrangements and/or
through public or private financings in the future. If it is not successful,
Revotar will be unable to repay our loans. A likely result of additional
financings would be to reduce our ownership percentage in Revotar.
We had long-term obligations under our office and laboratory leases and
note payable as follows ($ 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 ---
Long-term Debt 6,000 4,000 2,000 --- ---
Outlook for 2003
In connection with the Acquisition, we announced 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 taken into consideration the renewal of our research agreement with
Schering-Plough for an additional year, through June 30, 2004.
23
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.
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 and the approval of sitaxsentan;
24
- 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;
- 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 complete the development and submit an NDA for sitaxsentan and to
reach our other current long-term goals. We anticipate that the NDA submission
may occur between the end of year 2004 and first quarter of 2005. 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.
25
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.
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 $106,000 and $205,000, respectively, in our comprehensive
loss for the three-month periods ended June 30, 2003 and 2002, and an unrealized
gain of $167,000 and $144,000 in the six-month periods ended June 30, 2003 and
2002, respectively. We had an intercompany receivable from our German
26
subsidiary at June 30, 2003 and December 31, 2002; however, this amount is
denominated in U.S. dollars and is not exposed to exchange risk. We contract
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 our operating results using derivative financial
instruments.
Encysive and the other stockholders of Revotar have executed an agreement
to provide approximately $4.5 million in unsecured loans, of which our
commitment will be approximately $3.4 million. The terms of the loans require
quarterly interest payments and repayment of all principal on or before April 1,
2007. 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, we advanced
approximately $2,237,000 to Revotar as of June 30, 2003. Revotar's management
has informed us that they anticipate that Revotar will borrow the remaining
commitment of approximately $1.1 million from us 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, and recorded a gain on such forward contracts of $58,000 in the
three and six months ended June 30, 2003.
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 AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 2003, an annual meeting of our stockholders was held. The
holders of 40,986,142 shares of common stock were present in person or
represented by proxy at the meeting. At the meeting, the stockholders took
the following actions:
27
(a) Election of Directors
The stockholders elected the following persons to serve as directors
of the Company until the next annual meeting of stockholders, or until
their successors are duly elected and qualified:
NUMBER OF NUMBER OF
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
Ron J. Anderson 39,821,531 1,164,611
Frank C. Carlucci 39,808,441 1,177,701
Robert J. Cruikshank 39,828,045 1,158,097
Richard A. F. Dixon 39,851,704 1,134,438
Bruce D. Given 39,845,733 1,140,409
Suzanne Oparil 39,832,779 1,153,363
John M. Pietruski 39,800,122 1,186,020
William R. Ringo, Jr. 39,827,795 1,158,347
James A. Thomson 39,824,931 1,161,211
James T. Willerson 39,830,995 1,155,147
(b) Adoption of the Amendment to the Amended and Restated 1999 Stock
Incentive Plan
The stockholders approved the proposal to adopt the Amendment to the
Amended and Restated 1999 Stock Incentive Plan. Votes were cast as
follows:
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES
--------- ------------- ---------------- ----------------
37,227,649 3,672,657 85,836 -0-
(c) Adoption of the Amendment to the Amended and Restated 1995
Non-Employee Director Stock Option Plan
The stockholders approved the proposal to adopt the Amendment to the
Amended and Restated 1995 Non-Employee Director Stock Option Plan.
Votes were cast as follows:
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES
--------- ------------- ---------------- ----------------
38,921,503 1,832,720 131,919 -0-
(d) Adoption of the Proposal to Amend the Company's Certificate of
Incorporation
The stockholders approved the proposal to adopt the amendment to the
Company's Certificate of Incorporation, which would change the
Company's corporate name from "Texas Biotechnology Corporation" to
"Encysive Pharmaceuticals Inc." Votes were cast as follows:
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES
--------- ------------- ---------------- ----------------
40,741,628 185,422 59,092 -0-
28
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Seven reports on Form 8-K were filed during the quarter ended June 30,
2003. A report on Form 8-K dated April 11, 2003 was filed regarding the
Company's retaining compliance with The Nasdaq National Market System. A
report on Form 8-K dated April 23, 2003 was filed regarding updated
guidance and operating plans following the sitaxsentan re-acquisition. A
report on Form 8-K dated April 23, 2003 and amended on July 3, 2003 was
filed regarding the purchase and sale agreement of ICOS-Texas Biotechnology
L.P. A report on Form 8-K dated May 8, 2003 was filed regarding first
quarter 2003 results. A report on Form 8-K dated May 16, 2003 was filed
regarding the name change of "Texas Biotechnology Corporation" to "Encysive
Pharmaceuticals Inc." A report on Form 8-K dated June 3, 2003 was filed
regarding the naming of the new vice president of marketing and sales and
corporate officer. A report on Form 8-K dated June 20, 2003 was filed
announcing special protocol assessment from the FDA creating a binding
agreement for the basis of sitaxsentan regulatory review.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amendment to Certificate of Incorporation dated May 16, 2003
(incorporated by reference to Exhibit 3.1 to the Company's 10-Q
(Commission File No. 000-20117) for the quarter ended June 30, 2003
filed with the Commission on August 13, 2003).
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.
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
- ----------- -----------
3.1 Amendment to Certificate of Incorporation dated May 16, 2003
(incorporated by reference to Exhibit 3.1 to the Company's 10-Q
(Commission File No. 000-20117) for the quarter ended June 30, 2003
filed with the Commission on August 13, 2003).
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.