1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-12574
TEXAS BIOTECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
(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)
7000 Fannin, Suite 1920, Houston, Texas 77030
- --------------------------------------------------------------------------------
(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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at March 31, 1998
----- -----------------------------
Common Stock, $0.005 par value 33,746,536
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TEXAS BIOTECHNOLOGY CORPORATION
TABLE OF CONTENTS
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 1
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows the three months ended
March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 13
ITEM 2: Changes in Securities 13
ITEM 3: Defaults Upon Senior Securities 14
ITEM 4: Submission of Matters to a Vote of Security Holders 14
ITEM 5: Other Information 14
ITEM 6: Exhibits and Reports on Form 8-K 14
SIGNATURES 15
INDEX TO EXHIBITS 16
3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ ------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 14,540,196 14,323,573
Short term investments 25,944,393 29,383,791
Other current receivables 796,877 1,175,280
Prepaids 856,634 553,585
Other current assets 12,900 10,400
------------- -------------
Total current assets 42,151,000 45,446,629
Equipment and leasehold improvements, at cost less
accumulated depreciation and amortization (note 4) 3,449,600 3,292,062
Other assets 59,591 59,591
------------- -------------
Total assets $ 45,660,191 48,798,282
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,148,982 1,006,145
Accrued expenses 1,462,958 1,625,071
------------- -------------
Total current liabilities 2,611,940 2,631,216
Commitments and contingencies (notes 5, 6 and 8) -- --
Stockholders' equity (notes 2 and 5):
Preferred stock, par value $.005 per share. At March 31, 1998, 5,000,000
shares authorized; none outstanding. At December 31, 1997, 5,000,000
shares authorized, 300 shares issued and
outstanding -- 2
Common stock, par value $.005 per share. At March 31, 1998,
75,000,000 shares authorized; 33,746,536 shares issued and
outstanding. At December 31, 1997, 75,000,000 shares
authorized; 33,585,919 shares issued and outstanding 168,735 167,929
Additional paid-in capital 116,389,787 116,085,172
Accumulated deficit (73,510,271) (70,086,037)
------------- -------------
Total stockholders' equity 43,048,251 46,167,066
------------- -------------
Total liabilities and stockholders' equity $ 45,660,191 48,798,282
============= =============
See accompanying notes to consolidated financial statements
FORM 10-Q
Page 1
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1998 1997
----------- -----------
(unaudited) (unaudited)
Revenues:
Research agreements $ 621,600 797,501
Other income -- 2,499
----------- -----------
Total revenues 621,600 800,000
----------- -----------
Expenses:
Research and development 3,410,384 4,285,054
General and administrative 1,214,309 1,084,298
----------- -----------
Total expenses 4,624,693 5,369,352
----------- -----------
Operating loss 4,003,093 4,569,352
----------- -----------
Other income:
Interest income 580,549 157,388
Other -- 9,618
----------- -----------
Total other income 580,549 167,006
Net loss 3,422,544 4,402,346
Preferred dividend requirement 1,690 396,952
Net loss applicable to common shares $ 3,424,234 4,799,298
Net loss per common share, basic and diluted: $ 0.10 0.19
=========== ===========
Weighted average common shares used to
compute net loss per common share, basic
and diluted: 33,653,337 25,516,729
=========== ===========
See accompanying notes to consolidated financial statements
FORM 10-Q
Page 2
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,422,544) (4,402,346)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 200,470 186,365
Expenses paid with stock (note 2) 3,592 --
Compensation expense related to stock options (note 2) -- 153,265
Loss on disposition of fixed assets 7,895 --
Decrease in preferred dividend payable not included in net loss 11,913 --
Change in operating assets and liabilities, net of effect of acquisition:
(Increase) decrease in prepaids (303,049) 76,034
(Increase) decrease in receivables 378,403 --
(Increase) in other current assets (2,500) (207,940)
(Increase) in inventories -- (167,560)
(Decrease) in current liabilities (19,276) (924,174)
(Decrease) in deferred revenue -- (187,500)
------------ ------------
Net cash used in operating activities (3,145,096) (5,473,856)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (368,903) (214,921)
Proceeds from disposition of fixed assets 3,000
Purchase of short term investments (15,840,434) (5,483,103)
Maturity of short term investments 19,272,605 6,094,650
Decrease in interest receivable included in short term investments 7,227 --
------------ ------------
Net cash provided by investing activities 3,073,495 396,626
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and exercises of
options and warrants, net 288,224 586,092
Proceeds from sale of preferred stock, net -- 5,955,575
------------ ------------
Net cash provided by financing activities 288,224 6,541,667
------------ ------------
Net increase in cash and cash equivalents 216,623 1,464,437
Cash and cash equivalents at beginning of period 14,323,573 2,127,999
------------ ------------
Cash and cash equivalents at end of period $ 14,540,196 3,592,436
============ ============
See accompanying notes to financial statements
FORM 10-Q
Page 3
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Texas Biotechnology Corporation (the "Company" or "TBC"), a
biopharmaceutical company, applies innovative drug discovery
techniques and its specialized knowledge of the role of vascular
cell biology in vascular diseases to the design and development of
novel pharmaceutical compounds. 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") (now
discontinued), a San Diego, California based company, in exchange
for Common Stock of the Company. TBC consolidated the IPI
operation into TBC in the first half of 1996.
The Company is presently working on a number of long-term
development projects which involve experimental and unproven
technology, which may require many years and substantial
expenditures to complete, and which may be unsuccessful. To date,
other than small amounts of monoclonal antibody compounds and
services produced and sold by IPI (now discontinued), the Company
has not developed or sold any products, and no assurance can be
given that the Company will be able to develop, manufacture or
market any products in the future. In addition, no assurance
exists that future revenues will be significant, that any sales
will be profitable, or that the Company will have sufficient funds
available to complete its research and development programs or
market any products which it may develop.
(b) Basis of Consolidation
The Company's consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, IPI. All
material intercompany transactions have been eliminated. The
Company's consolidated financial statements include the activity
related to IPI since August 1, 1994.
(c) Cash, Cash Equivalents and Short Term Investments
Cash equivalents are considered to be those securities or
instruments with original maturities, when purchased, of three
months or less. At March 31, 1998, approximately $13,089,000 was
invested in demand and money market accounts. Short term
investments are those investments which have an original maturity
of less than one year and greater than three months. At March 31,
1998, the Company's short term investments consisted of
approximately $2,461,000 in Government Agency Notes and
$23,484,000 in Corporate Commercial Paper. Cash equivalents and
short term investments are stated at cost plus accrued interest,
which approximates market value. Interest income is accrued as
earned. In connection with the adoption of Financial Accounting
Standards Statement 115, the Company classified all short term
investments as held to maturity.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation of
furniture and equipment is provided on the straight-line method
over the estimated useful lives of the respective assets (3 to 10
years). Amortization of leasehold improvements is provided on the
straight-line method over the remaining minimum lease term.
FORM 10-Q Page 4
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(e) Intangible Assets
Intangible assets are amortized on a straight line basis over ten
years.
(f) Research and Development Costs
All research and development costs are expensed as incurred and
include salaries of research and development employees, certain
rent and related building services, research supplies and
services, clinical trial expenses and other associated costs. With
respect to research and development, salaries and benefits for the
three month period ended March 31, 1998 and 1997, totaled
approximately $1,673,000 and $1,587,000, respectively, of which
approximately $1,237,000 and $1,137,000, respectively, was charged
to research and development. Payments related to the acquisition
of in-process research and development are expensed.
(g) Net Loss Per Common Share
Basic net loss per common share is based upon the net loss
applicable to common shares after preferred dividend requirements
and upon the weighted average of common and common equivalent
shares outstanding during the period. For the three months ended
March 31, 1998 and 1997, the weighted average common shares used
to compute basic net loss per common share totaled 33,653,337 and
25,516,729, respectively. The conversion of securities convertible
into Common Stock and the exercise of stock options and warrants
were not assumed in the calculation of net loss per common share
because the effect would have been antidilutive.
(h) Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform with the March 31, 1998 presentation with no
effect on net loss reported.
(i) Revenue Recognition
Revenue from service contracts is recognized as the services are
performed and/or as milestones are achieved. Milestone payments
related to contractual agreements are recognized as the milestones
are achieved. Revenue from products and services is recognized
when the products are shipped or the services are performed.
Revenue from licensing fees is recorded when the license is
granted. Revenue from grants is recognized as earned under the
terms of the related grant agreements. Amounts received in advance
of services to be performed under contracts are recorded as
deferred revenue.
(j) Patent Application Costs
Costs incurred in filing for patents are expensed as incurred.
(k) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from these estimates.
FORM 10-Q Page 5
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(l) Development Stage Enterprise
In prior periods, the Company reported as a development stage
enterprise. With the signing of a commercialization agreement for
NOVASTAN(R), the Company began reporting as an operating company
during the third quarter of 1997.
(2) STOCK OPTIONS AND WARRANTS
The Company has in effect three stock option plans allowing for the
issuance of incentive and non-qualified options to employees, directors,
officers, non-employee independent contractors and non-employee
directors, and two stock option plans allowing for the issuance of
non-qualified options to non-employee members of the Board of Directors
of the Company based on a formula of which one is effective. This plan
allows for directors to request stock in lieu of cash payment of director
fees.
A summary of stock options as of March 31, 1998, follows:
Exercise Price Exercised/ Available
Stock Option Plans Per Share Authorized Outstanding Other Exercisable for Grant
------------------ -------------- ---------- ----------- ---------- ----------- ---------
1990 Plan $1.38 - $5.59 285,715 184,834 66,318 165,020 34,563
1992 Plan $1.41 - $5.36 1,700,000 1,248,344 224,827 1,199,525 226,829
Director Plan $2.40 - $4.54 71,429 34,242 37,187 34,242 ---
1995 Plan $1.31 - $7.19 2,000,000 1,787,175 5,001 577,997 207,824
1995 Director Plan $1.38 - $5.69 300,000 136,505 10,909 86,685 152,586
--------- --------- ------- --------- --------
TOTALS 4,357,144 3,391,100 344,242 2,063,469 621,802
========= ========= ======= ========= ========
(3) 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 carry forwards. 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.
At March 31, 1998, the net deferred tax asset totaled approximately
$25,194,000, and was fully reserved. The Company did not incur any tax
expense in any year due to operating losses.
FORM 10-Q Page 6
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(4) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
March 31,1998 March 31, 1997
------------- --------------
Laboratory and office equipment $ 5,014,851 $ 4,665,174
Leasehold improvements 3,701,772 3,701,772
----------- -----------
8,716,623 8,366,946
Less accumulated depreciation and amortization (5,267,023) (5,074,884)
----------- -----------
$ 3,449,600 $ 3,292,062
=========== ===========
(5) COMMON STOCK RESERVED
The Company has reserved Common Stock for issuance as of March 31, 1998
as follows:
Stock option plans 4,012,902
Common Stock issuable under licensing agreement 71,429
Publicly Traded Warrants Outstanding 4,082,500
Other Warrants Outstanding 970,018
Underwriters purchase options and related warrants 710,000
----------
Total shares reserved 9,846,849
==========
(6) CLINICAL RESEARCH AGREEMENTS
In November, 1997, the Company entered into an agreement with Coromed,
Inc. to coordinate the clinical evaluation of TBC 11251 (TBC's lead
compound for vasospasm/hypertension) to determine acute hemodynamic
efficacy and safety in congestive heart failure. The term of the
agreement ends May 30, 1998, subject to extension upon mutual written
agreement of both parties. The parties have agreed to a total budget of
$993,415.
(7) REGULATORY FILING
During August 1997, the Company filed a new drug application ("NDA")
with the United States Food and Drug Administration (the "FDA") for its'
lead product candidate, NOVASTAN(R) (argatroban) for use as an
anticoagulant in patients with Heparin-induced thrombocytopenia ("HIT").
During September 1997, the FDA granted priority review status to the new
drug application for NOVASTAN(R) (argatroban). During October, 1997, the
Company was notified by the FDA that the filed NDA for NOVASTAN(R) was
accepted. The FDA extended the priority review period by 90 days during
January 1998. On May 11, 1998, the Company announced that it had received
a non-approvable letter from the FDA for Novastan(R). The Company will
request a meeting with the FDA to confirm the exact requirements for
further consideration of the drug by the FDA.
(8) COMMITMENTS AND CONTINGENCIES
a) Legal Proceedings
On November 21, 1994, a class action shareholders' suit was filed
in the United States District Court for the Southern District of
Texas, Houston Division seeking damages in the amount of $16
million. Plaintiffs are two individuals who purchased shares of
the Company on December 16, 1993 following the Company's initial
public offering ("IPO"). In their complaint, plaintiffs have sued
the Company, certain members of the board of directors and certain
officers alleging violations of Sections 11, 12 and 15 of the
Securities Act of 1933, as amended (the "Act"). Plaintiffs have
also named David Blech, D. Blech & Co. and Isaac Blech as
defendants. On January 23, 1995, the Company and the members of
the board of directors filed a motion to dismiss the plaintiffs'
complaint pursuant to Rule 9(b) and Rule 12b(6) of the Federal
Rules of Civil Procedure. In addition, defendant John Pietruski,
Chairman of the Board of Directors, filed a motion to dismiss the
plaintiffs' complaint pursuant to Rule 12(b)(2) of the Federal
Rules of Civil Procedure. On
FORM 10-Q Page 7
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February 7, 1995, the plaintiffs filed a motion for class
certification. The Court denied the motion by the Company and by
John Pietruski.
On March 28, 1995, a second class action shareholders' suit was
filed in the United States District Court for the Southern
District of New York seeking unspecified damages. Plaintiffs are
eight individuals who purchased shares in various companies for
which D. Blech & Co. acted as an underwriter (or co-underwriter)
or marketmaker. In their complaint, the plaintiffs have sued the
Company alleging violations of Section 10(b) of the Securities
Exchange Act of 1934, as Amended (the "Exchange Act") and Rule
10b-5 promulgated thereunder by the Securities and Exchange
Commission (the "Commission"). Plaintiffs have named a number of
defendants, including David Blech and D. Blech & Co., four
individuals, two brokerage firms, one investment management
company and ten other companies for which D. Blech & Co. acted as
underwriter or marketmaker.
On August 14, 1995, the Judicial Panel on The Multi-District
Litigation ordered that the action filed in the United States
District Court for the Southern District of Texas, Houston
Division be transferred to the United States District Court for
the Southern District of New York for coordinated or consolidated
pretrial proceedings with the action pending there. In light of
the transfer and consolidation of the Texas case with similar
cases against other companies for which D. Blech & Co. acted as
underwriter, the Company requested that the Court in New York
reconsider the Texas Court's denial of its motion to dismiss as a
part of the Court's consideration of similar motions to dismiss
filed by those companies. All of these motions were presented to
the Court on February 6, 1996. On June 6, 1996, the New York
District Court entered two memorandum opinions in the consolidated
cases. In one of its opinions, the Court dismissed all of the
Exchange Act and common law fraud claims filed against the Company
and its officers and directors, but afforded those plaintiffs the
right to attempt to preserve those claims by repleading them. The
Court ordered that those claims be repleaded no later than July
26, 1996. Plaintiffs did not replead those claims by the deadline,
resulting in the dismissal of all claims against the Company in
that litigation. In its opinion in the second case, i.e., the case
filed on November 21, 1994, the Court granted the Company's and
its officers' and directors' motion for reconsideration, but
together with all other similar pending motions, denied the
requested relief. Pursuant to the court's order, the Company
therefore filed an answer in that case. The Company also filed a
Motion seeking leave of court to prosecute an immediate appeal of
the Court's denial of the Company's Motion to Dismiss. The Court
heard argument on that Motion on October 10, 1996. The motion was
denied on January 16, 1997. Limited discovery has taken place in
the case, however, given its early stage, the Company is unable to
evaluate its potential outcome at this time. The Company disputes
these claims and intends to contest them vigorously. There can be
no assurance, however that the final disposition of this case will
be favorable to the Company. This is the only remaining litigation
against the Company.
FORM 10-Q Page 8
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ITEM 2.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
OVERVIEW
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that
involve risks and uncertainties.
Since its inception in 1989, the Company has primarily devoted its
resources to fund research, drug discovery and development. The Company
has been unprofitable to date and expects to incur substantial losses for
the next several years as the Company invests in product research and
development, preclinical and clinical testing and regulatory compliance.
The Company has sustained net losses of approximately $73.5 million from
inception to March 31, 1998. The Company has primarily financed its
operations to date through certain private placements of Common Stock and
shareholder loans, which have raised an aggregate of $21.3 million in net
proceeds, the Initial Public Offering which raised an aggregate of $24.2
million in net proceeds including the over-allotment sold in January
1994, a private placement of Common Stock on February 13, 1996, which
raised $13.0 million in net proceeds, a private placement of the 5%
Preferred on March 14, 1997, which raised approximately $6.0 million in
net proceeds, and a secondary public offering which closed during October
1997 and raised approximately $26.7 million in net proceeds.
On July 25, 1994, the Company acquired all of the outstanding stock of
ImmunoPharmaceutics, Inc. ("IPI") in exchange for 1,599,958 shares of
Common Stock, 999,956 shares of escrowed Common Stock which were released
upon satisfaction of certain research milestones, and contingent stock
issue rights to acquire 1,400,000 shares of which 399,961 shares were
issued upon satisfaction of certain research milestones. IPI's financial
results have been included in the Company's financial statements
beginning August 1, 1994. In March 1996, IPI's remaining operations in
California were consolidated with the Company's Houston operations.
The Company signed a collaborative agreement with Synthelabo S.A., the
pharmaceutical division of L'Oreal S.A. ("Synthelabo") on October 11,
1994 (the "Synthelabo Agreement"). Upon consummation of the transaction,
Synthelabo purchased 1,428,571 shares of Common Stock for a total of $5.0
million and paid a licensing fee of $3.0 million. In addition, Synthelabo
has paid $3.0 million annually in research payments (payable in quarterly
installments) for two years and paid $750,000 for the third year. During
1996, TBC signed agreements with Synthelabo to provide copies of certain
clinical data. Over the life of the agreements TBC may receive as much as
$2.92 million, of which $2.88 million has been received as of March 31,
1998. During October 1996, the Company executed a research and Common
Stock purchase agreement with LG Chem. LG Chem purchased 1,250,000 shares
of Common Stock for $5.0 million and committed to pay up to $10.7 million
over a five year period to develop two compounds in clinical development.
Of this amount, $2.1 million has been paid and $1.0 million will be paid
and on each of June 30 and December 31, of 1998, 1999 and 2000, and $1.3
million will be paid on June 30 and December 31, 2001.
In August 1997, the Company entered into an agreement with SmithKline
Beecham plc., ("SmithKline") whereby SmithKline was granted exclusive
rights to work with TBC in the development and commercialization of
NOVASTAN(R) in the U.S. and Canada for specified indications (the
"SmithKline Agreement"). Upon execution of the agreement, SmithKline paid
an $8.5 million license fee and during October 1997, paid a $5 million
milestone payment to TBC and has committed to pay up to $15.0 million in
additional milestone payments based on the clinical development and FDA
approval of NOVASTAN(R) for the indications of HIT, HITTS and AMI. In
FORM 10-Q Page 9
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connection with the SmithKline Agreement, SmithKline purchased 176,922
shares of Common Stock for $1.0 million and an additional 400,000 shares
of Common Stock for $2.0 million in conjunction with the Company's public
offering which closed during October 1997.
The Company's operating results have fluctuated significantly during each
quarter, and the Company anticipates that such fluctuations, largely
attributable to varying research and development commitments and
expenditures, will continue for the next several years.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
Revenues decreased from $800,000 in the three month period ended March
31, 1997 to $621,600 in the same period of 1998, a decrease of 22%.
Revenues were composed of earned revenues under research and development
agreements and sales of products and services. Revenue from research
agreements decreased primarily due to the completion of the payment
schedule included in the Synthelabo Agreement.
Total operating expenses decreased 14% from $5,369,352 in the three month
period ended March 31, 1997 to $4,624,694 in the same period of 1998 due
primarily to the decrease in research and development expenses. Research
and development expenses decreased 20% from $4,285,054 in the three month
period ended March 31, 1997 to $3,410,385 in the same period of 1998.
This decrease was primarily attributable to continued decreases in
research and development activity related to the completion of enrollment
in certain clinical trials for the compound NOVASTAN(R) (argatroban).
General and administrative expenses increased 12% from $1,084,298 in the
three month period ended March 31, 1997 to $1,214,309 in the same period
of 1998 due primarily to increased compensation and personnel recruiting
costs and market research expenses. The Company had 81 employees at March
31, 1998 and 74 employees at March 31, 1997.
Other income and expense is composed of investment income on invested
funds, interest expense and foreign currency exchange gains. The increase
is due to a 269% increase in investment income from $157,388 in the three
month period ended March 31, 1997 to $580,549 in the same period of 1998,
attributed primarily to higher investment balances resulting from funds
received in conjunction with the SmithKline Agreement and a public
offering of Common Stock completed in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its research and development activities to date
principally through (i) public offerings and private placements of its
equity securities, (ii) issuances of Common Stock in conjunction with
acquisitions and research and collaboration agreements and exercises of
stock options and warrants, (iii) milestone and research payments
received in conjunction with research and collaborative agreements, and
(iv) investment income, net of interest expense. During the first quarter
of 1998, the Company utilized net cash of $3,145,096 in operating
activities. The use of cash in operations was caused primarily by the
Company's net loss before preferred dividend requirements of $3,422,544.
Investing and financing activities primarily reflect the net effect of
purchases and redemptions of short term investments during the first
quarter of 1998. At March 31, 1998, the Company had cash, cash
equivalents and short-term investments of $40,484,589.
The Company expects to incur substantial research and development
expenditures as it designs and develops small molecule drugs for vascular
diseases. The Company anticipates that operating expenses may continue to
increase during 1998 and subsequent years. The Company began to incur
costs to develop NOVASTAN(R) during the third quarter of 1993. These
costs will continue during 1998 because of ongoing NOVASTAN(R) trials and
will continue to be significant through the FDA approval process and for
clinical trial work should additional clinical indications be pursued.
The Company has received a non-approvable letter from the FDA regarding
its NDA for NOVASTAN(R) as a treatment for HIT/HITTS. The Company will
request a meeting with the FDA to confirm the exact requirements for
further consideration of the drug by the FDA. In order to resubmit the
NDA the Company may
FORM 10-Q Page 10
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incur significant, unanticipated costs, which are presently not known. In
addition, at this time the Company cannot predict when a resubmission of
the NDA might be filed as the timing of the FDA's review and decision
regarding the use and marketing of NOVASTAN(R). Based on its meetings
with the FDA and with SmithKline, the Company's partner in the
commercialization of NOVASTAN(R), the Company expects to be able to
develop an estimated budget and time line regarding the NDA resubmission.
The failure to receive NDA approval from the FDA will have a material
adverse effect on the commercialization of NOVASTAN(R) for HIT/HITTS, as
well as potentially adversely impacting commercialization of other
indications. The Company also began incurring clinical trial costs in
1997 for the compounds TBC 11251 and TBC 1269. In 1998, the Company
expects to begin to incur costs for clinical trials related to additional
compounds. These costs include, among other things, hiring personnel to
direct and carry out all operations related to the clinical trials,
hospital and procedural costs, services of a contract research
organization and purchasing and formulating large quantities of the
compound to be used in such trials. In addition, the Company anticipates
that the administrative costs associated with this effort will be
significant. The amounts and timing of expenditures will depend on the
progress of the Company's ongoing research, clinical development and
commercialization efforts.
The Company anticipates that its existing capital resources and its other
revenue sources should be sufficient to fund its cash requirements
through the end of 1999. This date is contingent upon various factors,
including the rates of patient enrollment and spending associated with
the clinical trials of NOVASTAN(R), the costs necessary to meet
requirements for further consideration of NOVASTAN(R) by the FDA and the
compounds TBC 11251 and TBC 1269, and the level of research and
development expenditures for other compounds. The Company's existing
capital resources may not be sufficient to fund the Company's operations
through commercialization of its first product, NOVASTAN(R). Moreover,
TBC's agreement with Synthelabo requires the Company to maintain a "net
worth", as defined in the agreement, of at least $5.0 million during the
term of the agreement. If the Company fails to maintain at least $5.0
million of "net worth", Synthelabo may require that the technology be
transferred to, and the development program be conducted by, a joint
venture owned by TBC and Synthelabo. The outcome of certain lawsuits that
have been filed against the Company could also have an impact on
liquidity. See Part II, Item 1. Legal Proceedings.
The Company anticipates that it may need to raise substantial funds for
future operations, which may be raised through collaborative
arrangements, public or private issuance of debt and equity, or other
arrangements. The Company expects that additional expenditures will be
required if additional product candidates enter clinical trials which may
require additional expenditures for laboratory space, scientific and
administrative personnel, and services of contract research
organizations. There can be no assurance that the Company will be able to
obtain such additional financings on acceptable terms or in time to fund
any necessary or desirable expenditures. In the event such financing is
not obtained, the Company's drug discovery or development programs may be
delayed, scaled back or eliminated. The Company may also be required in
this event to obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to
certain of its technologies, product candidates or products that it would
not otherwise relinquish.
PENDING LITIGATION
As of March 31, 1998, one class action shareholder lawsuit remains
pending against the Company and includes certain directors and officers
as defendants. The Company disputes all claims set forth in this lawsuit
and intends to contest it vigorously. However, the Company is unable to
evaluate the potential outcome at this time.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
The Company's research and development activities involve the controlled
use of hazardous and radioactive materials. The Company is subject to
federal, state, and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain
waste products. Management believes that the Company is in compliance
with such laws, regulations and standards currently in effect and that
the cost of compliance with such laws, regulation, and standards will not
have a material adverse effect on the Company. The Company does not
expect to incur any material capital expenditures for environmental
control in the foreseeable future.
FORM 10-Q Page 11
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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 the operations of the Company.
YEAR 2000 ISSUE
The Company is in the process of conducting a review of its scientific
equipment, computer systems and related software to identify systems that
could be affected by the "Year 2000" issue. In this respect, teams from
various disciplines within the Company have been formed to evaluate the
appropriate courses of corrective action should such issues arise. The
total cost is not expected to have a material effect on the Company's
financial position or results of operations.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this Report are forward
looking statements. Such forward looking statements include, without
limitation, statements under (a) Statements in "Business" regarding Texas
Biotechnology Corporation's expectations for future drug discovery and
development and related expenditures and (b) "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" - regarding TBC's estimate of sufficiency of existing
capital resources and its ability to raise additional capital to fund
cash requirements for future operations. Although TBC believes that the
expectations reflected in such forward looking statements are reasonable,
it can give no assurance that such expectations reflected in such forward
looking statements will prove to have been correct. The ability to
achieve TBC's expectations is contingent upon a number of factors which
include (i) ongoing cost of research and development activities, (ii)
cost of clinical development of product candidates, (iii) attainment of
research and clinical goals of product candidates, (iv) timely approval
of TBC's product candidates by appropriate governmental and regulatory
agencies, (v) effect of any current or future competitive products, (vi)
ability to manufacture and market products commercially, (vii) retention
of key personnel and (viii) capital market conditions. This Form 10-Q may
contain trademarks and service marks of other companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
FORM 10-Q Page 12
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 21, 1994, a class action shareholders' suit was filed in the
United States District Court for the Southern District of Texas, Houston
Division seeking damages in the amount of $16 million. Plaintiffs are two
individuals who purchased shares of the Company on December 16, 1993
following the Company's initial public offering("IPO"). In their
complaint, plaintiffs have sued the Company, certain members of the board
of directors and certain officers alleging violations of Sections 11, 12
and 15 of the Securities Act of 1933, as amended (the "Act"). Plaintiffs
have also named David Blech, D. Blech & Co. and Isaac Blech as
defendants. On January 23, 1995, the Company and the members of the board
of directors filed a motion to dismiss the plaintiffs' complaint pursuant
to Rule 9(b) and Rule 12b(6) of the Federal Rules of Civil Procedure. In
addition, defendant John Pietruski, Chairman of the Board of Directors,
filed a motion to dismiss the plaintiffs' complaint pursuant to Rule
12(b)(2) of the Federal Rules of Civil Procedure. On February 7, 1995,
the plaintiffs filed a motion for class certification. The Court denied
the motion by the Company and by John Pietruski.
On March 28, 1995, a second class action shareholders' suit was filed in
the United States District Court for the Southern District of New York
seeking unspecified damages. Plaintiffs are eight individuals who
purchased shares in various companies for which D. Blech & Co. acted as
an underwriter (or co-underwriter) or marketmaker. In their complaint,
the plaintiffs have sued the Company alleging violations of Section 10(b)
of the Securities Exchange Act of 1934, as Amended (the "Exchange Act")
and Rule 10b-5 promulgated thereunder by the Securities and Exchange
Commission (the "Commission"). Plaintiffs have named a number of
defendants, including David Blech and D. Blech & Co., four individuals,
two brokerage firms, one investment management company and ten other
companies for which D. Blech & Co. acted as underwriter or marketmaker.
On August 14, 1995, the Judicial Panel on The Multi-District Litigation
ordered that the action filed in the United States District Court for the
Southern District of Texas, Houston Division be transferred to the United
States District Court for the Southern District of New York for
coordinated or consolidated pretrial proceedings with the action pending
there. In light of the transfer and consolidation of the Texas case with
similar cases against other companies for which D. Blech & Co. acted as
underwriter, the Company requested that the Court in New York reconsider
the Texas Court's denial of its motion to dismiss as a part of the
Court's consideration of similar motions to dismiss filed by those
companies. All of these motions were presented to the Court on February
6, 1996. On June 6, 1996, the New York District Court entered two
memorandum opinions in the consolidated cases. In one of its opinions,
the Court dismissed all of the Exchange Act and common law fraud claims
filed against the Company and its officers and directors, but afforded
those plaintiffs the right to attempt to preserve those claims by
repleading them. The Court ordered that those claims be repleaded no
later than July 26, 1996. Plaintiffs did not replead those claims by the
deadline, resulting in the dismissal of all claims against the Company in
that litigation. In its opinion in the second case, i.e., the case filed
on November 21, 1994, the Court granted the Company's and its officers'
and directors' motion for reconsideration, but together with all other
similar pending motions, denied the requested relief. Pursuant to the
court's order, the Company therefore filed an answer in that case. The
Company also filed a Motion seeking leave of court to prosecute an
immediate appeal of the Court's denial of the Company's Motion to
Dismiss. The Court heard argument on that Motion on October 10, 1996. The
motion was denied on January 16, 1997. Limited discovery has taken place
in the case, however, given its early stage, the Company is unable to
evaluate its potential outcome at this time. The Company disputes these
claims and intends to contest them vigorously. There can be no assurance,
however that the final disposition of this case will be favorable to the
Company. This is the only remaining litigation against the Company.
ITEM 2. CHANGES IN SECURITIES
Preferred Stock Conversions
On February 11, 1998, the Company issued an aggregate of 64,795 shares of
Common Stock to certain institutions pursuant to the conversion of the
remainder of its 5% Cumulative Convertible Preferred Stock. The issuance
of the Common Stock was exempt from registration under Section 4 (2) of
the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder.
FORM 10-Q Page 13
16
Common Stock Transactions
On February 20, 1998, March 12, 1998 and March 23, 1998, the Company
issued an aggregate of 31,786 shares of its Common Stock to certain
institutions and individuals, pursuant to the exercise of outstanding
warrants for an aggregate purchase price of $111,251. The issuance of the
Common Stock was exempt from registration under Section 4 (2) of the
Securities Act of 1933, as amended. The warrants and the Common Stock
underlying the warrants may not be sold in the United States absent
registration or an applicable exemption from registration requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION
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27.1 Financial Data Schedule
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FORM 10-Q Page 14
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TEXAS BIOTECHNOLOGY CORPORATION
MARCH 31, 1998
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 13th day of May, 1998.
TEXAS BIOTECHNOLOGY CORPORATION
By: /S/ DAVID B. MCWILLIAMS
--------------------------------------------
David B. McWilliams
President and Chief Executive Officer
By: /S/ STEPHEN L. MUELLER
--------------------------------------------
Stephen L. Mueller
Vice President, Finance and Administration
Secretary and Treasurer
(Principal Financial and Accounting Officer)
FORM 10-Q Page 15
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INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
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27.1 Financial Data Schedule
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FORM 10-Q Page 16