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 SEPTEMBER
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
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(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 October 31, 1998
----- -------------------------------
Common Stock, $0.005 par value 34,088,017
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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 September 30, 1998 and December 31, 1997 1
Consolidated Statements of Operations for the three months ended
September 30, 1998 and 1997 and the nine months ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows the nine months ended
September 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 16
INDEX TO EXHIBITS 17
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 5,310,547 $ 14,323,573
Short term investments 28,660,489 29,383,791
Long term investments 1,011,385 --
Other current receivables 1,035,067 1,175,280
Prepaids 759,552 553,585
Other current assets 11,100 10,400
------------- -------------
Total current assets 36,788,140 45,446,629
Equipment and leasehold improvements, at cost less
accumulated depreciation and amortization (note 4) 3,140,818 3,292,062
Other assets 59,591 59,591
------------- -------------
Total assets $ 39,988,549 $ 48,798,282
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 986,087 $ 1,006,145
Accrued expenses 1,870,989 1,625,071
------------- -------------
Total current liabilities 2,857,076 2,631,216
Commitments and contingencies (notes 6 and 7) -- --
Stockholders' equity (note 2):
Preferred stock, par value $.005 per share. At September 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 September 30, 1998,
75,000,000 shares authorized; 34,086,498 shares issued and
outstanding. At December 31, 1997, 75,000,000 shares
authorized; 33,585,919 shares issued and outstanding. 170,435 167,929
Additional paid-in capital 117,528,208 116,085,172
Accumulated deficit. (80,567,170) (70,086,037)
------------- -------------
Total stockholders' equity 37,131,473 46,167,066
------------- -------------
Total liabilities and stockholders' equity $ 39,988,549 $ 48,798,282
============= =============
See accompanying notes to consolidate financial statements
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Research agreements $ 616,402 1,187,500 1,859,790 2,672,502
License fee income -- 8,500,000 -- 8,500,000
Other income -- 2,502 -- 7,500
------------ ------------ ------------ ------------
Total revenues 616,402 9,690,002 1,859,790 11,180,002
------------ ------------ ------------ ------------
Expenses:
Research and development 3,482,683 4,287,056 10,691,830 13,117,421
General and administrative 953,506 1,177,642 3,282,252 4,248,950
------------ ------------ ------------ ------------
Total expenses 4,436,189 5,464,698 13,974,082 17,366,371
------------ ------------ ------------ ------------
Operating income (loss) (3,819,787) 4,225,304 (12,114,292) (6,186,369)
------------ ------------ ------------ ------------
Other income:
Interest income 519,132 183,494 1,634,849 506,970
Other -- 8,093 -- 2,253
------------ ------------ ------------ ------------
Total other income (expense) 519,132 191,587 1,634,849 509,223
Net income (loss) (3,300,655) 4,416,891 (10,479,443) (5,677,146)
Preferred dividend requirement -- 297,229 1,690 1,144,623
Net income (loss) applicable to common shares $ (3,300,655) 4,119,662 (10,481,133) (6,821,769)
Net income (loss) per common share:
Basic $ (0.10) 0.15 (0.31) (0.26)
Diluted $ -- 0.15 -- --
Weighted average common shares used to
compute net income (loss) per common share:
Basic 34,086,498 27,305,955 33,872,875 25,853,961
Diluted -- 28,762,873 -- --
See accompanying notes to consolidate financial statements
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,479,443) (5,677,146)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 599,718 561,095
Expenses paid with stock (note 2) 16,297 9,967
Compensation expense related to stock options -- 1,303,094
Loss on disposition of fixed assets 7,895 --
(Increase) decrease in preferred dividend payable not included in net loss 11,912 (98,965)
Change in operating assets and liabilities, net of
effect of acquisition:
(Increase) decrease in prepaids (205,967) 255,088
(Increase) decrease in receivables 140,213 (671,880)
(Increase) in other current assets (700) (343,168)
Increase (decrease) in current liabilities 225,860 (1,146,951)
(Decrease) in deferred revenue -- (562,500)
------------- -------------
Net cash used in operating activities (9,684,215) (6,371,366)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (459,367) (369,003)
Proceeds from disposition of fixed assets 3,000 --
Purchase of long-term investments (1,011,385) --
Purchase of short-term investments (43,707,919) (18,987,527)
Maturity of short-term investments 44,400,161 16,757,893
Decrease in interest receivable included in short term investments 31,061 --
------------- -------------
Net cash used by investing activities (744,449) (2,598,637)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and options and
warrant exercises, net 1,415,639 1,733,350
Proceeds from sale of preferred stock, net -- 5,925,269
------------- -------------
Net cash provided by financing activities 1,415,639 7,658,619
------------- -------------
Net (decrease) in cash and cash equivalents (9,013,025) (1,311,384)
Cash and cash equivalents at beginning of period 14,323,573 2,127,999
------------- -------------
Cash and cash equivalents at end of period $ 5,310,548 816,615
============= =============
Supplemental schedule of noncash financing activities (note 2) $ 16,297 34,853
============= =============
See accompanying notes to consolidate financial statements
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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, Short-Term and Long-Term Investments
Cash equivalents are considered to be those securities or
instruments with original maturities, when purchased, of three
months or less. At September 30, 1998, approximately $5,311,000
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 September
30, 1998, the Company's short term investments consisted of
approximately $6,499,000 in Government Agency Notes and Bonds and
$22,161,000 in Corporate Commercial Paper. Long-term investments
consist of one Government Agency Bond with an original maturity of
two years. Cash equivalents, short-term investments and long-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 and long-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
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lives of the respective assets (3 to 10 years). Amortization of
leasehold improvements is provided on the straight-line method
over the remaining minimum lease term.
(e) 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 September 30, 1998 and 1997, totaled
approximately $1,541,000 and $1,445,000, respectively, of which
approximately $1,167,000 and $1,136,000, respectively, was charged
to research and development. For the nine month period ended
September 30, 1998 and 1997, salaries and benefits totaled
approximately $4,715,000 and $4,257,000, respectively, of which
approximately $3,526,000 and $3,335,000, respectively, was charged
to research and development. Payments related to the acquisition
of in-process research and development are expensed as incurred.
(g) Net Loss Per Common Share
Basic net loss per common share is 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 nine month
period ended September 30, 1998 included $1,690 of accrued
dividends. For the three months ended September 30, 1998 and 1997,
the weighted average common shares used to compute basic net loss
per common share totaled 34,086,498 and 27,305,955, respectively.
For the nine months ended September 30, 1998 and 1997, the
weighted average common shares used to compute net loss per common
share totaled 33,872,875 and 25,853,961, 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.
Diluted net income per common share is based upon the net
income applicable to common shares before the preferred dividend
requirement. For the three months ended September 30, 1997, the
weighted average shares used to compute diluted net income
per share totaled 28,762,873 and included the conversion of
securities convertible into Common Stock and the exercise of
dilutive stock options and warrants. Shares held in escrow through
September 30, 1995, pending satisfaction of certain future
conditions, and shares related to contingent stock issue rights
related to the IPI acquisition have been excluded from the
diluted net income per share calculation until such shares were
released or issued.
(h) Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform with the September 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.
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(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.
(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 $16,297 and
$9,967, respectively, for the nine month periods ended September 30, 1998
and 1997.
A summary of stock options as of September 30, 1998, follows:
Exercise Price Exercised/ Available
Stock Option Plans Per Share Authorized Outstanding Other Exercisable for Grant
------------------ -------------- ---------- ----------- ---------- ----------- ---------
1990 Plan $1.38 - $5.59 285,715 177,882 66,318 165,070 41,515
1992 Plan $1.41 - $5.36 1,700,000 1,188,011 272,493 1,158,188 239,496
1995 Plan $1.31 - $8.13 2,000,000 1,773,800 21,851 657,828 204,349
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 3,362,940 408,758 2,119,513 585,446
========== ========== ======== ========== =========
(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
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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 September 30, 1998, the net deferred tax asset totaled approximately
$30,348,153, and was fully reserved. The Company did not incur any tax
expense in any period due to operating losses.
(4) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
September 30,1998 December 31, 1997
----------------- -----------------
Laboratory and office equipment $ 5,105,317 $ 4,665,174
Leasehold improvements 3,701,772 3,701,772
---------------- ----------------
8,807,089 8,366,946
Less accumulated depreciation and amortization (5,666,271) (5,074,884)
---------------- ----------------
$ 3,140,818 $ 3,292,062
================ ================
(5) COMMON STOCK RESERVED
The Company has reserved Common Stock for issuance as of September 30,
1998 as follows:
Stock option plans 3,948,386
Common Stock issuable under licensing agreement 71,429
Publicly Traded Warrants Outstanding 4,082,500
Other Warrants Outstanding 645,918
Underwriters purchase options and related warrants 710,000
---------
Total shares reserved 9,458,233
=========
(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 by the end of 1998.
(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
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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 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.
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ITEM 2.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 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 $80.6 million from
inception to September 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 September
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 $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 clinical development and FDA
approval of NOVASTAN(R) for the indications of HIT, HITTS and Acute
Myocardial
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Infarction ("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 SEPTEMBER 30, 1998 AND 1997
Revenues decreased from $9,690,002 in the three month period ended
September 30, 1997 to $616,402 in the same period of 1998, a decrease of
94%. Revenues were primarily composed of earned revenues under research
and development agreements and the license agreement. Revenues decreased
primarily due to a one-time license fee of $8,500,000 received from
SmithKline during the third quarter of 1997.
Total operating expenses decreased 19% from $5,464,698 in the three month
period ended September 30, 1997 to $4,436,189 in the same period of 1998
due primarily to the decrease in research and development expenses.
Research and development expenses decreased 19% from $4,287,056 in the
three month period ended September 30, 1997 to $3,482,683 in the same
period of 1998. This decrease was primarily attributable to continued
decreases in research and development activity related to the completion
in certain clinical trials for the compound NOVASTAN(R). General and
administrative expenses decreased 19% from $1,177,642 in the three month
period ended September 30, 1997 to $953,506 in the same period of 1998
due primarily to cost associated with the SmithKline Agreement in 1997,
which were not incurred in 1998, offset by the addition of an investor
relations department in 1998. The Company had 81 employees at September
30, 1998 and 78 employees at September 30, 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 183% increase in investment income from $183,494 in the three
month period ended September 30, 1997 to $519,132 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.
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues decreased from $11,180,002 in the nine month period ended
September 30, 1997 to $1,859,790 in the same period of 1998, a decrease
of 83%. Revenues were primarily composed of earned revenues under
research and development agreements and the license agreement. Revenues
decreased primarily due to a one-time license fee of $8,500,000 received
from SmithKline during the third quarter of 1997.
Total operating expenses decreased 20% from $17,366,371 in the nine month
period ended September 30, 1997 to $13,974,082 in the same period of 1998
due primarily to the decrease in research and development expenses.
Research and development expenses decreased 18% from $13,117,421 in the
nine month period ended September 30, 1997 to $10,691,830 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 23% from $4,248,850 in the
nine month period ended September 30, 1997 to $3,282,252 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 222% increase in investment income from $506,970
in the nine month period ended September 30, 1997 to $1,634,849 in the
same period of 1998, attributed primarily to
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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 nine
months of 1998, the Company utilized net cash in operating activities of
$9,684,216. The use of cash in operations was caused primarily by the
Company's net loss before preferred dividend requirements of $10,479,443.
Investing and financing activities primarily reflect the net effect of
purchases and redemptions of short term investments during the first nine
months of 1998. At September 30, 1998, the Company had cash, cash
equivalents and short-term and long-term investments of $34,982,421.
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
fluctuate 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 by
the end of 1998. In order to resubmit the NDA, the Company may incur
significant, unanticipated costs, all of which are presently not known.
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. During 1999, 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 second 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 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.
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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 September 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 Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year.
Computer equipment, software and other devices with imbedded technology
that are time-sensitive, such as computer systems, related software,
research equipment, alarm systems and telephone systems may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, temporary inability to process
data, and may materially impact its financial condition.
The Company has undertaken various initiatives intended to ensure that it
is prepared for the Y2K issue. The Company is in the process of accessing
its state of readiness. Presently, the Company is reviewing its
scientific equipment, computer systems and related software to identify
systems which may exhibit Y2K issues. This review is being performed by
internal teams from various disciplines within the Company. These teams
are currently evaluating the Company's Y2K issues, and , if necessary,
developing remediation plans. As a part of this review the Company will
determine the known risks related to the consequences of a failure to
correct any Y2K deficiencies. The Company has initiated formal
communications with material third parties to determine the extent to
which the Company may be vulnerable to those third parties' failure to
remediate their Y2K problems. The Company and its licensee, SmithKline
are dependent upon Mitsubishi Chemical Corporation ("Mitsubishi") for
supply of bulk NOVASTAN(R) for clinical trial material and for its
inventory needs should the FDA approve the compound for
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marketing. The Company will contact Mitsubishi to ascertain their state
of Y2K readiness and any potential effect upon the Company. Any Y2K
issues which would result in significant interruptions of delivery
schedules by our suppliers or service providers could have a material
effect on the Company's operations. However, the Company is presently not
aware of any Y2K issues that have been encountered by any third party,
which could materially affect the Company's operations.
If necessary, during 1999, the Company will develop a contingency plan to
address potential Y2K issues. This contingency plan will likely address
problems that the Company identifies during the course of its remediation
efforts and reasonably foreseeable problems that may arise as a result of
Y2K, including, but not limited to computer hardware and software and
research equipment. The contingency plan will be continually refined as
additional information becomes available. However, it is unlikely that
any contingency plan can fully address all events that may arise.
The Company estimates that the costs associated with the Y2K issue will
not be material, and as such will not have a significant impact on the
Company's financial position or operating results. There can be no
assurance that the Company will not experience difficulties as a result
of Y2K issues either arising out of internal operations or caused by
third parties. The failure to discover or correct a material Y2K problem
could result in an interruption in the Company's normal business
activities or operations. Such failure could materially and adversely
affect the Company's results of operation, liquidity and financial
condition.
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
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
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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 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
In July and August of 1998, the Company issued an aggregate of 58,576
shares of its Common Stock to certain institutions and individuals,
pursuant to the exercise of outstanding warrants for an aggregate
purchase price of $205,016. 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.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Dr. Rita R. Colwell resigned as a Director of the Company's Board on
September 1, 1998, to pursue other interests following her appointment to
the National Science Foundation.
The Board of Directors of the Company extended the expiration date of the
Company's publicly traded warrant from 5:00 p.m., New York time on
December 14, 1998, to 5:00 p.m., New York Time on September 30, 1999. All
other terms of the warrants remain in effect.
Dr. Philip Jochelson resigned his position as Vice President, Clinical
Development and Regulatory Affairs to pursue other interests effective
November 30, 1998. The Company has appointed Dr. John McMurdo to replace
Dr. Jochelson.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule
- ----------------
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TEXAS BIOTECHNOLOGY CORPORATION
SEPTEMBER 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 12th day of November, 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)
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INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
27.1 Financial Data Schedule