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 JUNE 30, 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
- --------------------------------------------------------------------------------
(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 July 31, 1998
----- ----------------------------
Common Stock, $0.005 par value 34,053,998
2
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 June 30, 1998 and December 31, 1997 1
Consolidated Statements of Operations for the three months ended
June 30, 1998 and 1997 and the six months ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows the six months ended
June 30, 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
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 13
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 14
ITEM 2: Changes in Securities 14
ITEM 3: Defaults Upon Senior Securities 15
ITEM 4: Submission of Matters to a Vote of Security Holders 15
ITEM 5: Other Information 15
ITEM 6: Exhibits and Reports on Form 8-K 15
SIGNATURES 17
INDEX TO EXHIBITS 18
3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
--------------- ---------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 13,836,229 14,323,573
Short term investments 23,921,328 29,383,791
Other current receivables 1,418,665 1,175,280
Prepaids 867,343 553,585
Other current assets 12,900 10,400
--------------- ---------------
Total current assets 40,056,465 45,446,629
Equipment and leasehold improvements, at cost less
accumulated depreciation and amortization (note 4) 3,275,909 3,292,062
Other assets 59,591 59,591
--------------- ---------------
Total assets $ 43,391,965 48,798,282
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 895,129 1,006,145
Accrued expenses 2,374,064 1,625,071
--------------- ---------------
Total current liabilities 3,269,193 2,631,216
Commitments and contingencies (notes 6 and 7) -- --
Stockholders' equity (note 2):
Preferred stock, par value $.005 per share. At June 30, 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 June 30, 1998,
75,000,000 shares authorized; 33,980,577 shares issued and
outstanding. At December 31, 1997, 75,000,000 shares
authorized; 33,585,919 shares issued and outstanding 169,905 167,929
Additional paid-in capital 117,219,382 116,085,172
Accumulated deficit (77,266,515) (70,086,037)
--------------- ---------------
Total stockholders' equity 40,122,772 46,167,066
--------------- ---------------
Total liabilities and stockholders' equity $ 43,391,965 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 ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Research agreements $ 621,788 687,501 1,243,388 1,485,002
Other income -- 2,499 -- 4,998
--------------- --------------- --------------- ---------------
Total revenues 621,788 690,000 1,243,388 1,490,000
--------------- --------------- --------------- ---------------
Expenses:
Research and development 3,798,763 4,545,311 7,209,147 8,830,365
General and administrative 1,114,437 1,987,010 2,328,746 3,071,308
--------------- --------------- --------------- ---------------
Total expenses 4,913,200 6,532,321 9,537,893 11,901,673
--------------- --------------- --------------- ---------------
Operating loss 4,291,412 5,842,321 8,294,505 10,411,673
--------------- --------------- --------------- ---------------
Other income (expense):
Interest income 535,168 166,088 1,115,717 323,476
Other -- (15,458) -- (5,840)
--------------- --------------- --------------- ---------------
Total other income (expense) 535,168 150,630 1,115,717 317,636
Net loss 3,756,244 5,691,691 7,178,788 10,094,037
Preferred dividend requirement -- 450,442 1,690 847,394
Net loss applicable to common shares $ 3,756,244 6,142,133 7,180,478 10,941,431
Net loss per common share, basic and diluted: $ 0.11 0.24 0.21 0.43
=============== =============== =============== ===============
Weighted average common shares used to
compute net loss per common share, basic
and diluted: 33,909,344 25,775,955 33,782,048 25,647,058
=============== =============== =============== ===============
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
SIX MONTHS ENDED
JUNE 30,
1998 1997
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,178,788) (10,094,037)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 399,942 373,107
Expenses paid with stock (note 2) 9,682 5,472
Compensation expense related to stock options (note 2) -- 1,303,094
Loss on disposition of fixed assets 7,895 --
(Increase) decrease in preferred dividend payable not included in net loss 11,912 (68,497)
Change in operating assets and liabilities, net of
effect of acquisition:
(Increase) decrease in prepaids (313,758) 159,682
(Increase) in receivables (243,385) --
(Increase) in other current assets (2,500) (659,704)
(Increase) in inventories -- (167,560)
Increase (decrease) in current liabilities 637,977 (834,412)
(Decrease) in deferred revenue -- (375,000)
--------------- ---------------
Net cash used in operating activities (6,671,023) (10,357,855)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (394,684) (293,901)
Proceeds from disposition of fixed assets 3,000 --
Purchase of short term investments (27,653,176) (7,919,487)
Maturity of short term investments 33,087,858 11,262,292
Decrease in interest receivable included in short term investments 27,781 --
--------------- ---------------
Net cash provided by investing activities 5,070,779 3,048,904
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and options and
warrant exercises, net 1,112,900 630,527
Proceeds from sale of preferred stock, net -- 5,925,269
--------------- ---------------
Net cash provided by financing activities 1,112,900 6,555,796
--------------- ---------------
Net (decrease) in cash and cash equivalents (487,344) (753,155)
Cash and cash equivalents at beginning of period 14,323,573 2,127,999
--------------- ---------------
Cash and cash equivalents at end of period $ 13,836,229 1,374,844
=============== ===============
Supplemental schedule of noncash financing activities (note 2) $ 9,682 5,472
=============== ===============
See accompanying notes to consolidated financial statements
FORM 10-Q Page 3
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1998, approximately $234,000 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 June 30,
1998, the Company's short term investments consisted of
approximately $1,500,000 in Government Agency Notes and
$22,421,000 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 June 30, 1998 and 1997, totaled
approximately $1,501,000 and $2,613,000, respectively, of which
approximately $1,122,000 and $1,462,000, respectively, was charged
to research and development. For the six month period ended June
30, 1998 and 1997, salaries and benefits totaled approximately
$3,174,000 and $4,200,000, respectively, of which approximately
$2,359,000 and $2,600,000, 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 shares outstanding during
the period. Preferred dividend requirements for the six month
period ended June 30, 1998 included $1,690 of accrued dividends.
For the three months ended June 30, 1998 and 1997, the weighted
average common shares used to compute basic net loss per common
share totaled 33,909,344 and 25,775,955, respectively. For the six
months ended June 30, 1998 and 1997, the weighted average common
shares used to compute net loss per common share totaled
33,782,048 and 25,647,058, respectively. The conversion of
securities convertible into Common Stock and the exercise of stock
options and warrants were not assumed in the calculation of
diluted 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 June 30, 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.
(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 certain prior periods, the Company reported as a development
stage enterprise. With the signing of a commercialization
agreement for NOVASTAN(R)(argatroban), 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. No current issuances are being made
under the Director Plan. This plan allows for directors to request stock
in lieu of cash payment of director fees, which amounted to $9,682 and
$5,472, respectively, for the six month periods ended June 30, 1998 and
1997.
A summary of stock options as of June 30, 1998, follows:
Exercise Price Exercised/ Available
Stock Option Plans Per Share Authorized Outstanding Other Exercisable for Grant
------------------ -------------- ----------- ----------- ---------- ----------- ---------
1990 Plan $1.38 - $5.59 285,715 184,001 66,318 167,856 35,396
1992 Plan $1.41 - $5.36 1,700,000 1,233,511 236,660 1,194,522 229,829
1995 Plan $1.31 - $8.13 2,000,000 1,706,800 11,851 670,329 281,349
Director Plan $3.50 - $4.54 71,429 34,242 37,187 34,242 --
1995 Director Plan $1.38 - $5.69 300,000 189,005 10,909 104,185 100,086
--------- --------- ------- --------- -------
TOTALS 4,357,144 3,347,559 362,925 2,171,134 646,660
========= ========= ======= ========= =======
(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 June 30, 1998, the net deferred tax asset totaled approximately
$25,027,000, and was fully reserved. The Company did not incur any tax
expense in any period 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:
June 30,1998 December 31, 1997
------------ -----------------
Laboratory and office equipment $ 5,040,633 $ 4,665,174
Leasehold improvements 3,701,772 3,701,772
--------------- ---------------
8,742,405 8,366,946
Less accumulated depreciation and amortization (5,466,496) (5,074,884)
--------------- ---------------
$ 3,275,909 $ 3,292,062
=============== ===============
(5) COMMON STOCK RESERVED
The Company has reserved Common Stock for issuance as of June 30, 1998 as
follows:
Stock option plans 3,994,219
Common Stock issuable under licensing agreement 71,429
Publicly Traded Warrants Outstanding 4,082,500
Other Warrants Outstanding 732,583
Underwriters purchase options and related warrants 710,000
-----------
Total shares reserved 9,590,731
===========
(6) 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) for use as an anticoagulant in patients
with heparin-induced thrombocytopenia ("HIT") and heparin-induced
thrombocytopenia with thrombosis syndrome ("HITTS"). During September
1997, the FDA granted priority review status to the new drug application
for NOVASTAN(R). 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 met with the FDA to confirm the
exact requirements for the resubmission of the NOVASTAN(R) new drug
application. Based on the meeting, the resubmission will include an
expanded historical control group that reflects the FDA's requirement for
one that more closely resembles the medical conditions and outcomes seen
in the literature and other patient registries. The Company remains
committed to satisfying the FDA's requirements and is moving forward with
the plan to resubmit the NDA as quickly as possible.
(7) 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 February 7, 1995, the plaintiffs
filed a motion for class certification. The Court denied the
motion by the Company and by John Pietruski.
FORM 10-Q Page 7
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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 first 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
JUNE 30, 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 $77.3 million from
inception to June 30, 1998. The Company has primarily financed its
operations to date through certain private placements of Common Stock and
shareholder loans (none of which are outstanding), 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 in October 1997 which 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 million. In addition, Synthelabo
has paid $6,750,000 in research payments over a three year period. 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 June 30,
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, $3.1 million has been paid (of which $1.0 million was a
receivable at June 30, 1998), $1.0 million will be paid on December 31,
1998 and on each of June 30 and December 31 of 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
FORM 10-Q Page 9
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clinical development and FDA approval of NOVASTAN(R) for the indications
of HIT, HITTS and AMI. In 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 in 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 JUNE 30, 1998 AND 1997
Revenues decreased from $690,000 in the three month period ended June 30,
1997 to $621,788 in the same period of 1998, a decrease of 10%. Revenues
were primarily composed of earned revenues under research and development
agreements. Revenue from research agreements decreased primarily due to
the completion of the payment schedule included in the Synthelabo
Agreement.
Total operating expenses decreased 25% from $6,532,321 in the three month
period ended June 30, 1997 to $4,913,200 in the same period of 1998 due
primarily to the decrease in research and development expenses and a
noncash charge during 1997 to general and administrative expenses.
Research and development expenses decreased 16% from $4,545,311 in the
three month period ended June 30, 1997 to $3,798,763 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).
General and administrative expenses decreased 44% from $1,987,010 in the
three month period ended June 30, 1997 to $1,114,437 in the same period
of 1998 due primarily to a noncash charge of $828,716 incurred during
1997 related to the extension of the exercise period for certain stock
options. The Company had 76 employees at June 30, 1998 and 80 employees
at June 30, 1997.
Other income and expense is composed of investment income on invested
funds, interest expense and foreign currency exchange losses. The
increase is due to a 222% increase in investment income from $166,088 in
the three month period ended June 30, 1997 to $535,168 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 the last six months of 1997.
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
Revenues decreased from $1,490,000 in the six month period ended June 30,
1997 to $1,243,388 in the same period of 1998, a decrease of 17%.
Revenues were primarily composed of earned revenues under research and
development agreements. Such revenue decreased primarily due to the
completion of the payment schedule included in the Synthelabo Agreement.
In addition, no data payments from Synthelabo were received in 1998.
Total operating expenses decreased 20% from $11,901,673 in the six month
period ended June 30, 1997 to $9,537,893 in the same period of 1998 due
primarily to the decrease in research and development expenses. Research
and development expenses decreased 18% from $8,830,365 in the six month
period ended June 30, 1997 to $7,209,147 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). General and
administrative expenses decreased 24% from $3,071,308 in the six month
period ended June 30, 1997 to $2,328,746 in the same period of 1998
primarily because of a $952,919 noncash charge related to the extension
of the exercise period for certain stock options.
Other income and expense is composed of investment income on invested
funds, interest expense and foreign currency exchange losses. The
increase is caused by a 245% increase in investment income from $323,476
in the
FORM 10-Q Page 10
13
six month period ended June 30, 1997 to $1,115,717 in the same period of
1998, attributed primarily to higher investment balances resulting from
funds received in connection with the SmithKline Agreement and a public
offering of Common Stock completed in the last six months of 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 six
months of 1998, the Company utilized net cash in operating activities of
$6,671,023. The use of cash in operations was caused primarily by the
Company's net loss before preferred dividend requirements of $7,178,788.
Investing and financing activities primarily reflect the net effect of
purchases and redemptions of short term investments during the first six
months of 1998. At June 30, 1998, the Company had cash, cash equivalents
and short-term investments of $37,757,557.
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 met
with the FDA to confirm the exact requirements for the resubmission of
the NOVASTAN(R) new drug application. Based on the meeting, the
resubmission will include an expanded historical control group that
reflects the FDA's requirement for one that more closely resembles the
medical conditions and outcomes seen in the literature and other patient
registries. The Company remains committed to satisfying the FDA's
requirements and is moving forward with the plan to resubmit the NDA as
quickly as possible.
In order to resubmit the NDA, the Company may incur significant,
unanticipated costs, all of which are presently not known. In addition,
at this time the Company cannot predict when a resubmission of the NDA
might be filed or the timing of the FDA's review and decision regarding
the use and marketing of NOVASTAN(R). Based upon 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 and these costs are continuing during
1998. 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 first quarter of 2000. This date is contingent upon various
factors, including the rates of patient enrollment and spending
associated with the clinical trials of NOVASTAN(R) and the compounds TBC
11251 and TBC 1269, the costs necessary to meet requirements for further
consideration of NOVASTAN(R) by the FDA 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
FORM 10-Q Page 11
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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 June 30, 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.
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 regarding Texas Biotechnology
FORM 10-Q Page 12
15
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 13
16
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 ocertification. 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 first 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
Common Stock Transactions
On April 9, April 22, April 24, April 29, May 7, May 14 and May 22, 1998,
the Company issued an aggregate of 214,488 shares of its Common Stock to
certain institutions and individuals, pursuant to the exercise of
outstanding warrants for an aggregate purchase price of $776,592. 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
FORM 10-Q Page 14
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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
On June 9, 1998, an annual meeting of the stockholders of the Company was
held. The holders of 26,899,577 shares of Common Stock were present in
person or represented by proxy at the meeting. At the meeting, the
stockholders took the following actions:
(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 ABSTAINING
---- --------- ----------------
Ron J. Anderson 26,666,703 232,874
Frank C. Carlucci 26,653,453 246,124
Rita R. Colwell 26,673,853 225,724
Robert J. Cruikshank 26,671,238 228,339
Richard A.F. Dixon 26,675,742 223,835
David B. McWilliams 26,674,753 224,824
John M. Pietruski 26,664,603 234,974
James A. Thomson 26,673,678 225,899
James T. Willerson 26,638,773 260,804
ITEM 5. OTHER INFORMATION
During July 1998, Texas Biotechnology Corporation announced positive
preliminary data for the second half of a double-blind,
placebo-controlled Phase IIA congestive heart failure ("CHF") trial
evaluating the Company's endothelin A (ETA) receptor antagonist, TBC
11251. The first half of the trial, reported in February 1998, was
terminated early due to statistically significant interim results. The
protocol was subsequently amended to allow further evaluation of TBC11251
at a higher dose. In both segments of the Phase IIA trial, the patients
treated with TBC11251 demonstrated a statistically significant
improvement versus placebo in the primary endpoint of improving central
hemodynamics, particularly pulmonary vascular resistance. Positive trends
were also observed in several other important cardiovascular measures.
Both segments of the study were conducted in patients with moderate to
severe congestive heart failure (New York Heart Association class III/IV
heart failure patients). The study involved a total of 48 patients. In
the study, patients received either a single intravenous bolus dose of
TBC11251 or placebo. No significant adverse events were observed in any
of the patient groups.
On July 17, 1998, Philip Jochelson, M.D. was appointed to the position of
Vice President, Clinical Development and Regulatory Affairs.
FORM 10-Q Page 15
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION
----------- -----------
4.9 Amended Certificate of Designation of 5% Cumulative Convertible Preferred Stock of Texas
Biotechnology Corporation
10.64 Agreement between Texas Biotechnology Corporation and Dr. Philip Jochelson dated June 23,
1998
27.1 Financial Data Schedule
- ----------------
FORM 10-Q Page 16
19
TEXAS BIOTECHNOLOGY CORPORATION
JUNE 30, 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 August, 1998.
TEXAS BIOTECHNOLOGY CORPORATION
By:
---------------------------------------
David B. McWilliams
President and Chief Executive Officer
By:
---------------------------------------
Stephen L. Mueller
Vice President, Finance and
Administration Secretary and Treasurer
(Principal Financial and
Accounting Officer)
FORM 10-Q Page 17
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INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
4.9 Amended Certificate of Designation of 5% Cumulative Convertible Preferred Stock of Texas
Biotechnology Corporation
10.64 Agreement between Texas Biotechnology Corporation and Dr. Philip Jochelson dated June 23,
1998
27.1 Financial Data Schedule
- ----------------
FORM 10-Q Page 18