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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NO. 0-22788
AXYS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2969941
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
180 KIMBALL WAY, SOUTH SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 829-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
nonaffiliates of the Registrant as of February 28, 2001, based upon the last
trade price of the common stock reported on the Nasdaq National Market on such
date, was $157,519,573*.
The number of shares of common stock outstanding as of February 28, 2001
was 37,389,307.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement which will be filed
with the Commission pursuant to Section 14A, in connection with the 2001 annual
meeting of stockholders to be held on May 14, 2001, are incorporated herein by
reference in Part III of this report.
*Excludes approximately 325,878 shares of the Registrant's outstanding
common stock held by directors and officers of the Registrant at February 28,
2001. Exclusion of shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of the Registrant, or that such person
is controlled by or under common control with the Registrant.
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PART I.
ITEM 1. BUSINESS
INTRODUCTION
This section discusses the business of Axys Pharmaceuticals, Inc. In this
section we sometimes refer to Axys Pharmaceuticals, Inc. as "Axys", "our
company", "we", "us" or "the Company".
You should be aware that the following discussion of our company contains
both historical information and forward-looking statements. Forward-looking
statements are statements made about future events and include projections and
other statements about what may or could happen in the future. You should be
aware that forward-looking statements involve risks and uncertainties. Our
actual results could differ significantly from those you might expect based on
our forward-looking statements. There are a number of reasons why this might
occur. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed below and in the section entitled "What
Factors Could Cause Our Results to Differ Significantly from Those You Might
Expect?" You should also consider the additional risk factors described in the
section entitled "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We are a Delaware corporation. Our executive offices are located at 180
Kimball Way, South San Francisco, CA 94080 and our telephone number is (650)
829-1000.
OVERVIEW
Axys is a biopharmaceutical company focused on the discovery, design and
development of therapeutic small molecules that address significant markets with
major unmet medical needs. We collaborate with large pharmaceutical companies in
discovering therapeutics for chronic diseases for which there are large markets.
We also selectively focus our own resources on discovering and developing
therapeutics for the treatment of various types of cancer and other specialty
therapeutic opportunities. We have on-going programs in the treatment of
autoimmune diseases, inflammatory diseases, and cancer. Our drug design platform
integrates advanced biology, chemistry, biophysics and information technologies
to optimize the potency, selectivity and physical properties of new drugs,
making the drug discovery process more efficient and productive.
Currently, we have significant collaborations with Aventis Pharmaceuticals
Product, Inc. (a subsidiary of Aventis S.A.), Merck & Co. and Bayer A.G. These
collaborations provide us with financial support and collaborative resources for
these research programs. Our partners are also responsible for developing our
clinical drug candidates and commercializing our products in broad medical
markets in the event our products are approved by the United States Food & Drug
Administration ("FDA"). We believe that several of our partnered programs are
positioned to advance into human clinical testing over the next few years, which
we expect will generate increased milestone payments and eventual royalty
streams. We have additional research programs underway, both proprietary and in
collaboration with other life science companies, and we believe that novel drug
candidates will enter clinical studies within the next 12 to 18 months. We aim
to establish additional partnerships with major pharmaceutical companies in
order to obtain the funding and collaborative research support needed to expand
our discovery efforts in cancer and other areas.
We believe that advances in genomic research represent a major opportunity
for drug discovery directed at novel biological targets. We seek to exploit this
opportunity by combining medicinal chemistry and molecular biology, through
collaborations and internally, to identify possible drug candidates for a drug
target or group of drug targets. Over the next few years, we expect to continue
our research and development efforts and to bring drug candidates into clinical
development. We also seek to license and acquire technologies, resources and
products that have the potential to strengthen our drug discovery platform and
product pipeline.
During the year 2000, we reported gains of $61.2 million on the sale of two
of our three non-core affiliated companies. In April 2000, Axys sold Axys
Advanced Technologies ("AAT") to Discovery Partners International ("DPI"). DPI
completed an initial public offering of common stock in July 2000. In
consideration of the sale of AAT, we received 7,425,000 shares of DPI common
with a carry value of $40.4 million on December 31, 2000. We also sold our
interest in PPGx, Inc. ("PPGx"), our pharmacoge-
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nomics subsidiary, to DNA Sciences, Inc. ("DNAS"), as of December 31, 2000, for
1,478,550 shares of Series D Preferred Stock and 108 shares of common stock in
DNAS, valued in the aggregate at $15 million. In addition, at December 31, 2000,
we owned 23% of Akkadix Corporation ("Akkadix"), an agricultural biotechnology
company founded in 1998. In March 2001, our ownership interest increased to 44%
in connection with the exercise of contractual put options held by third party
investors in Akkadix (see Note 13 in our Financial Statements -- "Subsequent
Event").
WHAT GIVES US AN EDGE IN DRUG DISCOVERY AND DEVELOPMENT?
The entire drug discovery process runs from target identification and
validation to lead identification to preclinical development to clinical
development. The following sections describe each part of this process and the
technologies that Axys employs in drug discovery.
In recent years, the advent of new drug discovery technologies, including
genomics, bioinformatics, computational sciences, structure-based drug design,
combinatorial chemistry and high throughput screening, has offered great
potential for streamlining the lengthy and expensive process of drug discovery.
We have assembled a premier platform for drug discovery by combining and
integrating these new technologies with the traditional pharmaceutical sciences,
including medicinal chemistry and pharmacology. Our capabilities in this area,
which include assay development, compound screening, lead optimization,
pharmacology and preclinical development, are instrumental in increasing the
speed and efficiency of our drug candidate identification efforts. In addition,
we have functional genomics capabilities, which we are using to select and
validate targets for our cancer research.
As a biopharmaceutical company, our core strengths lie in the portion of
the drug discovery continuum spanning from selection of leads from hits in
primary screens, through lead optimization using structure-based drug design and
combinatorial chemistry, to preclinical development and pharmacology. In this
regard, we believe we are among the few biotechnology companies having an
in-house medicinal chemistry group of our size and scope.
TARGET IDENTIFICATION AND VALIDATION
Target identification and validation is the process of identifying and
validating those genetic-based targets that are the most promising for
therapeutic intervention by small molecules. There are numerous potential
targets, which may apply to all manner of diseases. As described below, we are
currently focusing our target identification and validation efforts on
discovering new biochemical pathways in cancer.
The human genome is the collection of all the genetic information of a
human being. Scientifically defined, the human genome consists of 23 pairs of
chromosomes that contain the 40,000 or so genes that define every human's
make-up. Genes are made up of DNA (deoxyribonucleic acid). In humans, a DNA
molecule resembles a twisted ladder and consists of two strands -- a double
helix -- whose carbohydrate-like sides are connected by pairs of
nitrogen-containing chemicals called bases, which form the rungs of the ladder.
The particular order of the bases is called the DNA sequence. In total, there
are approximately 3 billion base pairs of DNA comprising all of the chromosomes
in the human genome. Much effort has been devoted by various governments,
research institutions and companies to mapping out the exact location of each
gene on each chromosome in order to determine the complete DNA sequence of the 3
billion DNA bases. Detailed knowledge of the human genome is now available,
either through public databases or through commercially available databases.
Through 1999, Axys had applied the technology generally known as positional
cloning to disease gene identification. This technology depended on securing DNA
samples from donor populations with a known disease incidence, followed by
high-throughput genotyping and DNA sequencing to establish a linkage between the
disease and a particular chromosome or specific gene.
However, knowing the sequence of a gene is really only the beginning of the
drug discovery process. The next step is the determination of the biological
processes that the gene plays a role in. The term "functional genomics" refers
to a variety of scientific disciplines that examine gene function and identify
disease pathways resulting from a gene or genes that are not functioning
properly. The job of determining the functions of a
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gene -- and its protein products -- requires testing in systems that approximate
human systems, such as the C. elegans (nematode worm) system.
Although we were a pioneer in genomics research using positional cloning
techniques in many different disease areas, we concluded in 1999 that many of
our genomics programs were at too early a stage and too far removed from product
development to justify the sizeable investment that we were making. So, during
the last half of 1999 we wound down our genomics research programs which were
based on positional cloning technology. We continue to utilize our genomics
capabilities as part of our cancer research programs. We have integrated these
capabilities with our functional genomics capabilities to create a directed set
of target identification and validation tools, which include bioinformatics, a
sophisticated antisense knock-out technology, expression array technology and C.
elegans nematode biology, all of which we use to discover new biochemical
pathways in cancer.
Axys makes use of both proprietary and licensed bioinformatics software to
enable the discovery of new genes and the identification of known genes and
species homologs in our efforts in target identification and validation. When
new gene sequences are identified, we are able to rapidly access both public and
proprietary databases through these software tools. When the function of a gene
needs to be determined, especially in the case when it might play a pivotal role
in a biochemical process, we can use antisense knock-out technology, either in
well-characterized functional systems, such as the nematode worm, or in
mammalian systems. For most applications of antisense as applied to specific new
targets, we have licensed the technology from Atugen. We also employ
sophisticated gene expression array technology, licensed from Molecular
Dynamics-Amersham. Using this technology, very small arrays are custom built on
glass slides to study the expression levels of thousands of genes at the same
time. With the information generated from these arrays, we can compare
differences in gene expression between normal and diseased or genetically
manipulated cells. Finally, another technology we use is C. elegans, a
microscopic multicellular round worm that is the most thoroughly understood
multicellular animal in terms of cellular development, anatomy and genetic
content. C. elegans is useful as a research tool because as many as 70% of the
currently known human disease genes possess a highly significant homolog (sister
gene) in the nematode.
By combining gene expression data and our antisense results with
information about genetic relationships gained from model systems and our
bioinformatics capabilities, we are better able to identify points in biological
pathways that may be the best point of intervention for a potential therapeutic.
For a description of some of our more significant target validation and
identification activities in cancer in 2000, see the section below entitled
"What Does Axys' Non-Partnered Research and Development Franchise Look Like?"
LEAD IDENTIFICATION
Once a biological point of intervention or target is identified and
validated, we have the capability to rapidly identify chemical compounds that
regulate the protein product of the relevant gene. We have generated such lead
compounds for new biological targets at a rapid pace by making use of a broad
range of technologies in dual discovery tracks: (1) structure-based drug design
driven by X-ray crystallography and computational modeling, and (2)
high-throughput screening combined with chemical compound diversity.
We use a broad range of scientific capabilities to study the basic
structure of molecules (X-ray crystallography) and advanced chemistry that uses
the knowledge gained from crystallography and structural biology. These
technologies can speed research by enabling an understanding of the precise
three-dimensional structure of a target associated with a disease. Then, we
bring additional computational science capabilities into play. We have a rapid,
flexible molecular docking model that can be used to find a natural or synthetic
"inhibitor" that can bind to the molecule and change the way it will perform in
the body. By using structure-based design, we have the ability to rapidly create
lead compounds that are less likely to cause side effects or be toxic.
Our medicinal chemists also play an important role in our lead
identification efforts. The chemists obtain iterative structural information
from X-ray crystallography and molecular modeling, complemented by powerful
computational resources and coupled with production-level protein expression and
purification, all of which enables them to develop and refine target compound
families. Our particular strength is in the
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determination of serine and cysteine protease protein structures, and the design
of small molecules with potency and specificity among these closely related
protein family members. Proteases are enzymes, which play a critical role in
virtually every biological process. We believe the ability to develop inhibitors
of proteases may give us important advantages in our drug discovery activities.
Our combinatorial chemistry expertise compliments our structure-based
design activities. Combinatorial chemistry capabilities are particularly useful
where there is little known structural information. We have created compound
diversity libraries, originally through our former subsidiary AAT, which has
synthesized and delivered to Axys approximately 450,000 individual compounds to
date. We may develop additional compound diversity libraries or purchase
additional compounds from DPI. We project to have received an aggregate of
approximately 550,000 such compounds, encompassing over 140 distinct
sub-libraries, by year-end 2001. Our medicinal and combinatorial chemists are
able to generate a wide variety of diversity or lead optimization libraries,
depending on our needs. Assays for high-throughput screening are adapted for
automation and validated for screening against diverse chemical structures to
provide data with a low false positive hit rate. Screening hits are rapidly
confirmed or eliminated based on follow-up assays, and are qualified for further
library expansion and medicinal chemistry based on novelty, potency and
selectivity criteria.
To screen these libraries we use automated robotics systems. These robots
test the binding activity of thousands of compounds against a disease target,
usually a protein. This binding activity is a measure of the compound's ability
to inhibit or potentiate the activity of the protein. The primary role of the
technology is to detect active compounds and supply directions for their
optimization using other techniques. Given the variety and size of chemical
libraries available today, and the need to compare the results from multiple
screens, data collection and management of information are critical elements of
high throughput screening. We maintain data bases of structures, assays
performed, screening results and other similar information in relational data
bases, which can be queried from any number of research parameters.
OPTIMIZATION, PRECLINICAL DEVELOPMENT AND CLINICAL DEVELOPMENT
Once a lead candidate has been identified, the most resource-intensive
stage of our drug discovery process begins. This is the process of
identification of a preclinical candidate with the desired pharmaceutical
product profile. It requires directed medicinal chemistry efforts coupled
closely with pharmacokinetics, drug metabolism and efficacy studies in
pharmacology. Our experience in such programs partnered with major
pharmaceutical companies during the last several years has resulted in an
integration of effort by our medicinal chemists and our pharmacology group.
We believe that we are one of the few biotechnology companies having an
in-house medicinal chemistry group of our size and scope. We have approximately
55 medicinal chemists. We use our medicinal chemistry capabilities to improve
the potency, selectivity (won't bind to wrong target), oral bioavailability
(compound can be absorbed by the body when taken orally as a pill), metabolic
stability (how rapidly the body breaks down the compound), and biological
half-life (how long the effects of the drug will last) of a drug candidate.
We are building a new 43,500 square foot building dedicated to medicinal
chemistry on the Axys research campus in South San Francisco, California. The
facility will house medicinal chemistry, X-ray crystallography and computational
chemistry. This facility will be able to house approximately 80 chemists upon
completion in the latter half of 2001, allowing for future growth if we are able
to achieve additional collaborative research projects.
Before qualifying for evaluation in human trials, chemical compounds must
pass extensive safety and effectiveness tests. In such tests, we use cell-based
and animal-based models of human disease to provide important information on the
duration of action of a potential drug, as well as how it is absorbed by the
body or metabolized. On-site studies take advantage of advanced technologies,
such as mass spectrometry (a sensitive analytical method to identify a compound
and the products into which it is broken down), to evaluate hundreds of samples,
indicating not only drug concentrations but also the pharmacodynamic (what the
drug does to the body) and the pharmacokinetic (what the body does to the drug)
characteristics of compounds nearing human clinical trials.
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Finally, while some of our collaborative partners currently provide
clinical development expertise, we also have an in-house clinical development
group, with the capability to manage clinical trials, satisfy regulatory
requirements, and ensure manufacturing quality control and quality assurance.
This group is responsible for taking our products forward into human testing.
WHAT DRUG DISCOVERY PARTNERSHIPS WITH PHARMACEUTICAL COMPANIES DO WE HAVE?
PARTNERED PIPELINE
PRECLINICAL
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Aventis -- Inflammation (Cathepsin S)..................... X
Merck -- Osteoporosis (Cathepsin K)....................... X
Bayer -- Asthma (Tryptase)................................ X
Bayer (Tryptase Inhibitors/Asthma/Preclinical)
In 1994, we entered into an agreement with Bayer for the research and
development of tryptase inhibitors for the treatment of asthma. Tryptase is a
serine protease that has been shown to regulate inflammation. Tryptase is
released by mast cells as part of an immune response to allergens such as
pollen, mold or grasses and contributes to several biological events which
result in inflammation. Our tryptase inhibitors are designed to slow or halt the
inflammatory process at an early stage, in an attempt to provide safe and
effective therapies for the treatment of the underlying cause of disease, rather
than the symptoms. The most significant indication for tryptase inhibitors is
allergic asthma, as a replacement for inhaled steroid therapies.
Asthma is characterized by generalized airway inflammation and tightness in
the lungs (bronchoconstriction) which makes breathing difficult. Five percent of
the United States population, or approximately 13 million people, are estimated
to suffer from some form of asthma. The exact causes of asthma are not well
understood, and current treatments for asthma include controlling inflammation
through the use of inhaled steroids, treating airway constriction through the
use of bronchodilators and prevention of asthma attacks through the daily use of
oral leukotriene inhibitors.
In our collaboration with Bayer, we have established human proof-of-concept
for tryptase as a drug target. This was achieved in previous Phase II clinical
studies of APC 366, an inhaled peptide tryptase inhibitor, which showed that
inhibiting tryptase resulted in improved breathing (reduction in late airway
response) in asthmatics. Bayer is currently in preclinical studies with a later
generation small molecule tryptase inhibitor with high oral bioavailability and
circulating half-life, with the goal of developing a once-a-day oral therapeutic
for the prevention and chronic treatment of asthma.
Merck (Cathepsin K Inhibitors/Osteoporosis/Preclinical)
In November 1996, we entered into a research and development collaboration
with Merck to develop small molecule inhibitors of cathepsin K for the treatment
of osteoporosis. Osteoporosis is a disease of the bones that results in weakened
bones which leads to pain, difficulty in moving, deformity and fractures. This
condition mainly affects post-menopausal women.
Cathepsin K belongs to a class of enzymes called cysteine proteases. It is
known to be secreted in excessive amounts by osteoclasts. In the healthy human
body, osteoblast cells are responsible for bone-building while osteoclasts are
responsible for bone degradation. By maintaining a careful balance in each type
of cell's activity, normal bone remodeling and skeletal integrity is achieved.
However, when the rate at which bone is destroyed by the osteoclasts exceeds the
rate at which new bone is produced by osteoblasts, the result is excessive bone
degradation (bone resorption) -- a condition that results in brittle bones and
is characteristic of osteoporosis.
In February 1997, we announced the first-ever solution of the
three-dimensional crystal structure of cathepsin K which has enabled Axys to
design potent and selective inhibitors of cathepsin K. In December 1999, we
announced the successful testing of a specific, selective cathepsin K inhibitor
compound in an animal
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efficacy model, which triggered a milestone payment to us. In addition, although
the research and development relationship was originally scheduled to end after
two years and had already been extended for one additional year, we agreed with
Merck in December 1999 to extend this collaboration for another additional year
until early November 2000. In November 2000, Axys and Merck extended their
osteoporosis collaboration for a fifth year to develop additional analog
compounds to those previously provided. In February 2001, Axys received $1.5
million payment from Merck for an important milestone attained in the Cathepsin
K inhibition program. Axys expects IND-enabling studies to commence in 2001.
Aventis (Cathepsin S inhibitors/Inflammatory Diseases/Preclinical)
In December 1998 we entered into a collaborative research and development
agreement with Aventis (successor to Rhone-Poulenc Rorer). The objective of the
collaboration is the discovery and development of small molecule therapeutics
that inhibit cathepsin S, a human cysteine protease associated with certain
inflammatory diseases.
Cathepsin S is a cysteine protease found in antigen-presenting cells of the
immune system. Unlike many other proteases, it is rarely found in other types of
cells. Cathepsin S is believed to function in a pathway that regulates the
body's ability to fight off these foreign antigens, leading to an inflammatory
reaction. As a result, it may be possible to use inhibitors of cathepsin S to
block the pathway and consequently protect the body from certain inflammatory
diseases and perhaps autoimmune disorders. Our researchers were the first to
solve the three-dimensional X-ray crystal structure of cathepsin S, as reported
in June 1998 in Protein Science which allowed us to design potent and selective
inhibitor drug candidates.
Cathepsin S is associated with some inflammatory diseases, including
arthritis, asthma, atherosclerosis and a variety of autoimmune diseases. Under
the terms of the agreement, Aventis has exclusive development and marketing
rights to cathepsin S protease inhibitors for respiratory diseases,
atherosclerosis and related conditions, rheumatoid arthritis, and multiple
sclerosis ("MS"). Rheumatoid arthritis affects approximately 2.5 million
Americans. Coronary heart disease is caused by the atherosclerotic narrowing of
the coronary arteries and is the number one cause of death in United States with
approximately 500,000 deaths occurring annually. Stroke is the third leading
cause of death in the United States, with approximately 160,000 deaths occurring
annually. Approximately 350,000 people have been diagnosed with MS.
In November 1999, we announced the successful testing of a potent,
selective cathepsin S inhibitor compound in an animal efficacy model of asthma
and received a milestone payment. In addition, current in vivo proof-of-concept
studies are underway and planned for rheumatoid arthritis and atherosclerosis.
In October 2000, Axys announced that on the basis of data from an in vivo
efficacy model of asthma, Aventis qualified a collaboration compound for
pre-clinical advancement. Upon successful completion of this work, we expect
Aventis to initiate IND-enabling studies of a lead cathepsin S compound in late
2001.
No Current Partner (Factors VIIa & Xa Inhibitors/Blood Clotting
Disorders/Preclinical)
In September 1995, we signed a collaboration agreement with the predecessor
to Pharmacia Corporation to develop oral therapeutics for blood clotting
disorders, such as deep vein thrombosis, stroke, and myocardial infarction. More
specifically, we had been performing research on inhibitors of Factors Xa and
VIIa and thrombin, all of which are serine proteases involved in the blood
clotting process. These proteases have been acknowledged as targets for a host
of disorders related to abnormal clotting. Annually, more than 2 million people
are hospitalized in the United States for deep vein thrombosis, acute myocardial
infarction and unstable angina.
In July 1998 the research support for this collaboration ended and in
February 1999 we formally agreed to end this collaboration. We are currently
continuing our research efforts with a focus on Factor VIIa and are actively
seeking a new partner for the Factor VIIa program. At the present time, we are
continuing to work on potent and selective compounds, which could result in the
nomination of a clinical candidate.
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WHAT DOES AXYS' NON-PARTNERED RESEARCH AND DEVELOPMENT FRANCHISE LOOK LIKE?
PROPRIETARY PIPELINE -- ONCOLOGY & SPECIALTY THERAPEUTIC AREAS
SCREENING/ PHASE I PHASE II
PROOF OF CLINICAL CLINICAL
CONCEPT PRECLINICAL IND TRIALS TRIALS
---------- ----------- ---- -------- --------
Urokinase -- Angiogenesis/metastasis....... X
SERM-b -- Selective estrogen receptor
modulators (Beta)........................ X
Apoptosis inducers......................... X
Prostate Specific Antigen -- Prostate
cancer................................... X
Cathepsin V................................ X
APC 2059 -- Ulcerative Colitis............. X(1)
APC 2059 -- Asthma......................... X(1)
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(1) Additional trials require further preclinical testing as described below.
In early 1999 we implemented an initiative to focus our unpartnered
resources on the development of small molecule therapeutics for the treatment of
cancer. We believe that there is a significant market opportunity to meet
current and future medical needs associated with many different types of cancer.
One of the factors contributing to this growth is the aging of the world's
population. As people live longer, their chances of developing cancer increase.
Our decision to focus our resources on cancer therapeutics was also partly
based on the improving regulatory environment for approval of cancer
therapeutics. In recent years, the FDA has established a regulatory "fast track"
for some cancer therapeutics approved reviews. In addition, surrogate markers
such as tumor shrinkage have been increasingly accepted as research endpoints.
The use of surrogate markers may substantially shorten the length of the
necessary clinical research studies.
Further, we believe that protease inhibition may provide a treatment method
for many cancers, resulting in orally delivered small molecule therapeutics.
These include antiangiogenesis, hypoxia and metastasis inhibition. Angiogenesis
is the process by which blood vessels are formed. Blood vessel formation and
growth is necessary for tumor growth. Antiangiogenesis drugs are believed to be
able to cut off blood vessel growth and thereby reduce the size of tumors and
potentially interfere with their growth. Hypoxia is the deprivation of oxygen to
tumor cells, which can lead to the inhibition of tumor cell proliferation.
Metastasis is the process by which cancer spreads. Drugs which discourage
metastasis are believed to be able to stop cancer from spreading throughout the
body.
We have had research programs underway that range from a preclincial
program in antiangiogenesis to screening and proof-of-concept programs in solid
tumor metastasis and prostate cancer, to cancer target identification and
validation research programs.
Urokinase. One of our most advanced oncology programs involves the
development of inhibitors of the protease urokinase to interfere with
angiogenesis and metastasis processes. Utilizing a broad range of scientific
capabilities including crystallography and structural biology, our scientists
have extensively analyzed urokinase to identify sites on the molecule best
suited for drug interaction. Using our medicinal chemistry and structure-based
drug design capabilities, a series of drug-like compounds have been screened to
identify potential drugs and select a candidate for preclinical development.
Our lead series of urokinase inhibition drug candidates have been shown in
preclinical testing to be potent and specific which may reduce the chance of
unwanted side effects. The results to date of our tests in animal models show
that urokinase may be required for tumor metastasis, and preclinical studies
have shown activity of a urokinase inhibitor in animal models. We plan to select
an IND candidate from the urokinase inhibition program in 2001, if the results
obtained in animal studies in pancreatic cancer, in collaboration with the
Arizona Cancer Center, are successful.
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SERM-(Greek beta). Our first in-licensed program in oncology comes from
Celgene (formerly Signal Pharmaceuticals). In October 1999, Signal granted us
exclusive rights to their selective estrogen receptor-beta modulators (SERM-b)
for the treatment of cancer. SERM-(Greek beta) compounds are small molecules
that selectively modulate the activity of the newly discovered beta estrogen
receptor found in tumors and certain hormonally sensitive tissues. Preclinical
studies in animal models of prostate cancer are expected to continue throughout
2001.
Apoptosis Inducers. In early 2000, we entered into a collaborative
agreement with Cytovia, Inc. (later acquired by Maxim Pharmaceuticals, Inc.) to
discover and develop inducers of apoptosis (programmed cell death) as anticancer
drugs. During 2000, the research involved the screening of Axys diversity
libraries (approximately 400,000 compounds) through Maxim's proprietary assay
systems designed to identify potential drug candidates. Lead compounds are
expected to advance into animal studies in cancer models during 2001.
Screening/Proof-of-Concept. Particular areas of emphasis in our early-stage
research include hypoxia and angiogenesis. Biological targets identified in
these pathways can be validated as small-molecule drug targets through
additional molecular biology and eventual screening. In 2000, six oncology
targets -- histone deactylase, methionine aminopeptidase-2, MT1-MMP, HIF1-(Greek
alpha), rho kinase and CAAX protease -- were entered into high-throughput
screening by this process. Some of these targets are no longer being pursued and
other replacement targets will be entered into high-throughput screening. Two
additional protease targets, prostate-specific antigen (PSA) and Cathepsin V,
are being validated in vivo using antisense and chemical inhibitor approaches.
In addition to these programs, we are continuing to actively seek to
license potential cancer treatment compounds from other biotechnology or
pharmaceutical companies with an emphasis on early stage clinical product
opportunities, as well as advanced pre-clinical compounds.
Tryptase Inhibitors/Inflammatory Ulcerative Colitis/Clinical Phase II). In
July 1997, we modified our 1994 research and development agreement with Bayer to
re-acquire the rights to develop tryptase inhibitors for the treatment of
inflammatory bowel disease and psoriasis, which, like asthma, is another mast
cell regulated inflammatory disease. In January 2001, we amended our
collaborative agreement with Bayer to return exclusive rights to develop a
specific tryptase inhibitor, APC 2059, for non-oral applications. Axys is
investigating development of the compound as a potential inhaled therapy for
asthma and as an injectable treatment for ulcerative colitis. Our collaboration
with Bayer to develop oral tryptase inhibitors is unaffected by this amendment.
The January 2001 amended agreement provided for an up front payment to Bayer and
future royalty payments, based on net sales, upon commercialization.
In the fourth quarter of 2000, we completed a Phase II clinical trial on
our compound, APC 2059, in ulcerative colitis. Recently, we discovered that
before we can move forward to more advanced trials, extensive safety
pharmacology and dose-ranging pre-clinical research is necessary. As these
clinical trials are intended to establish safety in humans, we cannot be certain
that we will be able to initiate or complete necessary future clinical trials
successfully. Our collaboration partner Bayer is moving forward with advanced
pre-clinical studies of a compound developed in our collaboration with them for
the treatment of asthma that would be taken as a pill. We cannot be certain that
the clinical trials of this compound will be initiated or completed
successfully. Finally, we cannot be certain that any other drug candidates which
may enter clinical trials will successfully complete those trials or that we or
our collaborators will be able to show the safety and effectiveness of these
drug candidates.
We are currently evaluating further development of APC 2059. To enable
longer term dosing required for chronic disease therapies, we are currently in
the process of planning additional dose-ranging safety pharmacology studies. We
expect further human clinical testing, if any, to be delayed until these safety
pharmacology studies are completed and results evaluated.
WHY AND HOW HAVE WE LEVERAGED OUR TECHNOLOGY PLATFORM?
We will need additional capital in order to continue our research and
development efforts. One way we have attempted to raise additional capital is by
creating new stand-alone companies using our non-core
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technologies for purposes other than drug discovery, obtaining third party
funding for these companies and eventually selling our equity interest. We have
created three such businesses: Axys Advanced Technologies, Inc. in combinatorial
chemistry, PPGx, Inc. in pharmacogenomics, and Akkadix, Inc. in agricultural
biotechnology. At the same time, we retain the right to use our intellectual
property, that these businesses utilize, for our own drug discovery and
development purposes.
We have sought out third parties to invest additional capital for these
businesses, but retained equity ownership positions. In 2000, we sold our equity
position in two of these businesses: AAT, which we sold to DPI, and PPGx, which
we sold to DNAS.
While we believe that we will be successful in realizing meaningful value
from these affiliated businesses, our ability to do so will depend on the
success these companies have in executing their business strategies. We
currently own 7,425,000 shares of DPI common stock and 1,478,550 of Series D
Preferred Stock in DNAS. Our DPI shares are subject to certain contractual
restrictions that limit our ability to liquidate our position. DNAS is a
privately held company and there are limited opportunities to dispose of our
interest. There can be no assurance that the businesses in which we hold these
equity positions will be successful or that we will have the ability to sell all
or a portion of our equity ownership in these businesses. In addition, there can
be no assurance that the amount we may receive upon selling our equity ownership
interest will provide significant funding so as to postpone for a meaningful
time period the need to engage in other capital raising activities.
Competition
We face intense competition in the different market segments we are
pursuing. There are many companies that have or are developing capabilities in
drug discovery, particularly in structure-based drug design and high-throughput
screening, to identify new products. In addition, there are many companies
focused on the development of drugs for chronic disease, such as osteoperosis,
asthma, rheumatoid arthritis, ulcerative colitis, and for cancer in general.
Many biotechnology companies are expanding their capabilities, using a variety
of techniques, to determine gene function and to develop products based on gene
function. Our potential competitors in the field are numerous and include major
pharmaceutical and agricultural companies, diagnostic companies, specialized
biotechnology companies, genomics companies and academic institutions and
universities.
Many of our potential competitors have significantly more financial,
technical and other resources than we do, which may allow them to have a
competitive advantage. We are aware that there are many companies focused
specifically on other proprietary technologies directed at identifying product
targets. In addition, pharmaceutical, biotechnology and genomics companies and
academic institutions are conducting work in this field. In the future, we
expect the field to become more competitive with companies and academic
institutions seeking to develop competing technologies.
Any products that we may develop or discover through application of our
technologies will compete in highly competitive markets. Many of our potential
competitors in these markets have substantially greater financial, technical and
personnel resources than we do, and we cannot assure you that they will not
succeed in developing technologies and products that may render our technologies
and products and those of our collaborators obsolete or noncompetitive. In
addition, many of our competitors have significantly greater experience than we
do in their respective fields.
Patents and Proprietary Rights
We hold 27 issued United States patents and 26 issued foreign patents
relating to compositions of matter, methods of treating disease, combinatorial
chemistry and computational technologies. Most of our patents in combinatorial
chemistry diversity library processes and compositions of matter have been
assigned to DPI as part of the sale of AAT completed in 2000. These patents
expire at various dates starting in year 2013 up to the year 2018. In addition,
we have filed and there are now pending patent applications relating to
compositions of matter, methods of treating disease, assay techniques,
computational technologies and novel technology for the discovery of novel
protease inhibitors. We intend to file additional patent applications, when
appropriate, relating to our technology and to specific products we develop.
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We strategically file selected patent applications to protect technology,
inventions and improvements that are important to the development of our
business. That is our policy, as well as our practice. We also rely upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position. In our work, we
maintain a policy that we do not and will not knowingly violate valid claims of
patents issued by the United States Patent and Trademark Office ("PTO").
The patent positions of pharmaceutical and biotechnology firms, including
Axys, are uncertain and involve complex legal and factual questions. In
addition, the scope of the claims in a patent application can be significantly
modified before the issued patent is issued. As a result, we do not know whether
any of our applications will result in the issuance of patents, or if any of our
issued patents will provide significant protection. We also do not know whether
any of our issued patents will be invalidated. Since patent applications in the
United States are maintained in secrecy until patents issue, and since
publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, we cannot even be certain that we were the first
creator of inventions covered by our pending patent applications or that we were
the first to file patent applications for such inventions.
In addition, we may have to participate in interference proceedings
declared by the United States Patent and Trademark Office to determine priority
of invention. These proceedings determine the priority of invention and the
right to a patent for the technology in the U.S. Such proceedings could result
in substantial costs to us, even if we win.
There can be no assurance that our pending patent applications, if issued,
or our existing patents, will not be invalidated. An adverse outcome could
subject us to significant liabilities to third parties, require disputed rights
to be licensed from third parties or require us to stop or modify our use of
such technology.
The development of therapeutic products for applications in the product
fields we are pursuing is intensely competitive. A number of pharmaceutical
companies, biotechnology companies, universities and research institutions have
filed patent applications or received patents in the areas in which we are
conducting research. In addition, patent applications filed by others relating
to our potential products or technologies may currently be pending. Some of
these applications or patents may limit or hinder our freedom to practice and
could result in a significant reduction of the coverage of our patents, or
potential patents. We are aware of pending patent applications that have been
filed by other companies that may pertain to certain of our technologies. If
patents are issued to these or other companies containing incompatible or
conflicting claims, and such claims are ultimately determined to be valid, we
may be required to obtain licenses to these patents or to develop or obtain
alternative technology.
Furthermore, we have in the past been, and may again be, notified of claims
that we may be infringing patents or other intellectual property rights owned by
third parties. We have obtained licenses under several patents held by third
parties. If necessary or desirable, we may seek additional licenses under other
patents or intellectual property rights. There can be no assurance, however,
that we will be able to obtain a license we seek on reasonable terms or even at
all. As an alternative, we could decide to resort to litigation to challenge a
patent or patents. Such challenges can be extremely expensive and time
consuming. Consequently, they can have a material adverse effect on our
business, financial condition and results of operations.
Much of the unpatentable know-how important to our technology and many of
its processes depends upon the knowledge, experience and skills of key
scientific and technical personnel. To protect our rights to this know-how and
technology, all employees, consultants, advisors and collaborators are required
to enter into confidentiality agreements with the Company that prohibits the
disclosure of confidential information to any third party and requires
disclosure to the Company of ideas, developments, discoveries and inventions
made by these individuals. There can be no assurance that these agreements will
effectively prevent disclosure of our confidential information or that these
agreements will provide meaningful protection for our confidential information
if there is unauthorized use or disclosure. Our business could be adversely
affected by competitors who develop substantially equivalent technology.
In connection with certain research, we entered into sponsored research
agreements with various researchers and universities. Generally, under these
agreements we fund the research of investigators in
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exchange for the right or an option to a license to any patentable inventions
that may result in designated areas. We are obligated to make certain payments
during the terms of certain of the agreements, to pay royalties on net sales of
any licensed products and, in some cases, to negotiate in good faith the
business terms of any license executed upon exercise of licensing options. There
can be no assurance that these agreements will not be breached or that we would
have adequate remedies for any breach.
Government Regulation
The manufacturing and marketing of our proposed products and our research
and development activities are subject to regulation for safety, effectiveness
and quality by many governmental authorities in the United States and other
countries. In the United States, drugs are subject to stringent regulation by
the FDA. The Federal Food, Drug and Cosmetic Act and FDA regulations, as well as
other federal and state laws and regulations, govern, the testing, manufacture,
safety, effectiveness, package labeling, storage, record keeping, approval,
advertising and promotion of our proposed products. Product development and
approval takes a long time and involves the expenditure of a lot of money. If we
fail to comply with certain regulatory requirements, we could be subject to
sanctions, such as warning letters, penalties, criminal prosecution,
injunctions, product seizure, product recalls, total or partial suspension of
production, and FDA refusal to approve pending New Drug Applications (NDA) or
costly supplements to approved applications.
The steps required before a drug may be marketed in the United States
include (i) preclinical laboratory tests, in vivo (animal model) preclinical
studies and formulation studies, (ii) the submission to the FDA of an
application for human clinical testing, known as an Investigational New Drug
Application (IND), which must be accepted by the FDA before human clinical
trials are started, (iii) adequate and well-controlled human clinical trials to
establish the safety and effectiveness of the drug, (iv) the submission of an
NDA to the FDA, and (v) FDA approval of the NDA prior to any commercial sale or
shipment of the drug. In addition to obtaining FDA approval for each product,
each domestic drug manufacturing establishment must be registered with the FDA.
Domestic drug manufacturing establishments are subject to inspections twice a
year by the FDA and must comply with Good Manufacturing Practices. To supply
products for use in the United States, foreign manufacturers must comply with
Good Manufacturing Practices and are subject to periodic inspection by the FDA
or by corresponding regulatory agencies in their country. Drug product
manufacturers located in California also must be licensed by the State of
California.
Preclinical tests include laboratory evaluation of what is in the product
and how it was made, as well as animal studies to assess the potential safety
and effectiveness of the product. Preclinical safety tests must be conducted by
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical tests are submitted to the FDA as part
of an IND and reviewed by the FDA prior to the start of human clinical trials.
Unless the FDA objects, the IND will become effective 30 days following its
receipt by the FDA. There can be no assurance that submission of an IND will
result in FDA authorization to start clinical trials. Clinical trials involve
the giving the investigational new drug to healthy volunteers and to patients,
under the supervision of qualified investigators. Clinical trials are conducted
in agreement with Good Clinical Practices under instructions that detail the
objectives of the study, the limits to be used to monitor safety and the
effectiveness criteria to be evaluated. Instructions must be submitted to the
FDA as part of the IND. Further, each clinical study must be conducted under the
power of an independent Institutional Review Board ("IRB") at the site where the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the site.
Clinical trials are typically conducted in three phases that go in order,
but the phases may overlap. In Phase I, in which we usually give the drug to
healthy subjects, the drug is tested to determine its metabolism (how the drug
is absorbed by the body), pharmacokinetics (what the body does to the drug) and
pharmacological actions (biological effects) in humans, the side effects
associated with increasing doses and early evidence of how effective the drug
is, if possible. Phase II involves studies in a limited patient population to
(i) determine the effectiveness of the drug for specific, targeted indications,
(ii) determine what amount of the drug works best and how much of the drug can
be tolerated, and (iii) identify possible adverse effects and safety risks. If a
compound is found to be effective and to have an acceptable safety profile in
Phase II
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evaluations, Phase III trials further evaluate the effectiveness of the drug and
further test for safety in a larger group of people at many different locations.
There can be no assurance that Phase I, Phase II or Phase III testing will
be completed successfully within any specific time period, if at all, for any of
our proposed products. Furthermore, the FDA or we may suspend or cancel clinical
trials at any time if it is felt that the patients are being exposed to an
unacceptable health risk or the FDA finds errors or incorrect information in the
IND or due to the conduct of the investigation. Further, FDA regulations state
that sponsors of clinical investigations must meet numerous regulatory
requirements, including, selection of qualified investigators, proper monitoring
of the investigations, recordkeeping and record retention, and ensuring that FDA
and all investigators are promptly informed of significant new adverse effects
or risks with respect to the drug.
The results of the drug development, preclinical studies and clinical
studies are submitted to the FDA in the form of an NDA, which, if accepted,
would clear the way for marketing and commercial shipment of the drug. There can
be no assurance that any approval will be granted by the FDA at all or, if
granted, will be granted on a timely basis. The FDA may deny an NDA if certain
regulatory criteria are not satisfied, may require additional testing or
information, or may require post-marketing testing and surveillance to monitor
the safety of our products if the FDA does not view the NDA as containing enough
evidence of the safety and effectiveness of the drug. Even if the Company
submits additional data, the FDA may still decide that the application does not
satisfy its regulatory criteria for approval. In addition, even if regulatory
clearance of a drug is granted, such approval may limit the uses for which it
may be marketed. Finally, product approvals may be taken away if regulatory
standards are not maintained or if problems occur following initial marketing.
Among the typical conditions for NDA approval is the requirement that the
proposed manufacturer's quality control and manufacturing procedures conform to
Good Manufacturing Practices, which must be followed at all times. To comply
with these standards, we will have to spend a large amount of time, money and
effort in the area of production and quality control to ensure full technical
compliance.
In addition to regulations enforced by the FDA, we will also be subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. Our research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds, all of which
are regulated. Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards set by state and federal
regulations, the risk of accidental contamination or injury from these materials
is possible. In the event of an accident, the Company could be held sued for any
damages that result and any such lawsuit could exceed the insurance and
resources of the Company.
For clinical investigation and marketing outside the United States, we are
also subject to foreign regulatory requirements governing human clinical trials
and marketing approval for drugs. These requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely for
European countries both within, and outside, the European Union (EU). We plan to
comply with the European regulatory process by identifying and using clinical
investigators in the member states of the EU and other European countries to
conduct clinical studies. Further, we intend to design our studies to meet FDA,
EU and other European countries' standards.
Within the EU, while marketing authorizations must be supported by clinical
trial data of a type and to the extent set out by EU directives and guidelines,
the approval process for the commencement of clinical trials is not currently
harmonized by EU law and varies from country to country. As far as possible, we
intend to design our studies so as to develop a regulatory package sufficient
for multi-country approval in our European target markets, without the need to
duplicate studies for individual country approvals.
Outside the United States, our ability to market a product is based upon
receiving a marketing authorization from the appropriate regulatory authority.
Currently, foreign marketing authorizations are applied for at a national level,
although within the EU certain registration procedures are available to
companies wishing to market the product in more than one EU member state. If the
regulatory authority is
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satisfied that enough evidence of safety, quality and effectiveness has been
presented, a marketing authorization will be granted. The system for obtaining
marketing authorizations within the EU changed on January 1, 1995. The current
EU registration system is a dual one in which certain products, such as
biotechnology and high technology products and those containing new active
substances, will have access to a central regulatory system that provides
registration throughout the entire EU. Other products will be registered by
national authorities in individual EU member states, operating on a principle of
mutual recognition. This foreign regulatory approval process includes all of the
same risks involved in the FDA approval process described above.
Employees
As of December 31, 2000, we employed 168 individuals, of whom 57 hold Ph.D.
or M.D. degrees and 41 hold other advanced degrees. Approximately 134 of our
employees are involved in research and development activities, including a
variety of disciplines within the areas of molecular biology and other
biological sciences, medicinal chemistry, bioinformatics, computer sciences
pharmacology, safety assessment and clinical development. Approximately 34 of
our employees are employed in finance, business development and general
administrative activities. None of our employees are covered by collective
bargaining agreements, and our management considers relations with its employees
to be good. We also enter into part-time consulting arrangements with
experienced, professional scientists and managers to supplement our work force.
Recent Developments
In November 2000, the Financial Accounting Standards Board issued Emerging
Issues Task Force Issue No. 00-27, "Application of EITF Issue No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios, to Certain Convertible Instruments".
This established new accounting rules that are applicable immediately to our $26
million convertible debt instrument we issued in September 2000. The new
accounting rule required us to record a $4 million beneficial conversion during
the fourth quarter.
On March 8, 2001 we issued a press release which announced our unaudited
financial results for the fiscal year ended December 31, 2000. Our March 8, 2001
reported results did not recognize the entire $4 million non-cash charge for the
beneficial conversion feature as we were amortizing the beneficial conversion
feature over the four year term of the debt. The immediate charge resulting from
this accounting rule, which applies to transactions entered into prior to
November 16, 2000, does not impact our reported operating loss but results in a
one-time, non-cash charge to interest expense in connection with the issuance of
the convertible debt. As a result, we reported in the press release, for the
fiscal year ended December 31, 2000, basic and diluted net loss per share from
continuing operations and basic and diluted net income (loss) per share of
($1.18) and $0.39, respectively. After recognizing the entire $4 million
beneficial conversion feature, our basic and diluted net loss per share from
continuing operations and basic and diluted net income (loss) per share, for the
fiscal year ended December 31, 2000, was ($1.29) and $0.28, respectively. We do
not believe that this change will have any material impact on our operations or
financial condition.
WHAT FACTORS COULD CAUSE OUR RESULTS TO DIFFER SIGNIFICANTLY FROM THOSE YOU
MIGHT EXPECT?
IF WE FAIL TO DISCOVER OR DEVELOP OR ARE DELAYED IN THE DEVELOPMENT OF
PHARMACEUTICALS, OUR BUSINESS AND RESULTS OF OPERATIONS WILL BE ADVERSELY
AFFECTED.
All of our potential pharmaceutical products are in various stages of
research and development and will require significant additional research and
development efforts before we can sell them. These efforts include extensive
preclinical and clinical testing and lengthy regulatory review and approval by
the FDA. The development of our new pharmaceutical products is highly uncertain
and subject to a number of significant risks. To date we haven't developed a
commercial drug and we do not expect any of our pharmaceuticals to be
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commercially available for a number of years. Pharmaceuticals that appear to be
promising at early stages of development may not reach the market for a number
of reasons, including the following:
- we or our collaborators may not successfully complete any research and
development efforts;
- any pharmaceuticals we develop may be found to be ineffective or to cause
harmful side effects during preclinical testing or clinical trials;
- we may fail to obtain required regulatory approvals for any products we
develop;
- we may be unable to manufacture enough of any potential products at an
acceptable cost and with appropriate quality;
- our products may not be competitive with other existing or future
products;
- proprietary rights of third parties may prevent us from commercializing
our products.
WE MAY NOT BE SUCCESSFUL IN DEVELOPING A COMMERCIAL DRUG.
Our company is primarily engaged in the earliest stage of drug discovery;
namely, the design and systematic evaluation of therapeutic small molecule
compounds. Our drug discovery programs are unproven. Although we have expended,
and continue to expend, time and money on internal research and development
programs, we may be unsuccessful in creating drug candidates that would enable
us to form additional collaborations and receive milestone and/or royalty
payments. Even if we are able to negotiate additional collaborations, we may
never discover potential drug candidates that ultimately lead to a commercially
available drug. We have not yet created, or contributed to the creation of, a
commercial drug and there can be no assurance that we ever will discover, create
or contribute to the creation of a commercial drug. As such, we do not currently
have the internal capability to move potential products through clinical
testing, manufacturing and the approval process through the FDA.
IF WE FAIL TO OBTAIN ADDITIONAL FINANCING TO FUND OUR OPERATIONS, WE WILL BE
UNABLE TO COMPLETE OUR PRODUCT DEVELOPMENT EFFORTS.
The development of our potential drugs will require substantially more
money than we currently have. That means we will have to obtain commitments for
substantial funds in order to conduct the costly and time-consuming research and
preclinical and clinical testing activities necessary to develop our drugs. We
cannot be certain that any financing will be available when needed. If we fail
to secure additional financing, as we need it, we will have to delay or
terminate our drug development programs.
In April 2000, we successfully sold our share of AAT, now ChemRx Advanced
Technologies Inc., to DPI for 7,425,000 shares in DPI common stock.
In December 2000, we successfully sold our shares of PPGx to DNAS for
approximately $15 million in preferred stock of DNAS. Our DNAS shares are
subject to contractual restrictions that limit our ability to liquidate our
position in a timely manner. DNAS is a privately held company and there are
limited opportunities to dispose of our interest. There can be no assurance that
the businesses in which we hold these equity positions will be successful or
that we will have the ability to sell all or a portion of our equity ownership
in these businesses. In addition, there can be no assurance that the amount we
may receive upon selling our equity ownership interest will provide significant
funding so as to postpone for a meaningful time period the need to engage in
other capital raising activities.
Even if we are successful in obtaining financing from the sale of our
interests in DPI and DNAS, we believe we will still need to pursue other
financing opportunities to fund our research and development. Our future
financing needs will depend on many factors, including the following:
- scientific progress in the research and development of drug development
programs;
- the size and complexity of these programs;
- the timing, range and results of preclinical studies and clinical trials;
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- our ability to establish new and maintain existing collaborations;
- our ability to achieve any milestones under such collaborations; and
- the time and costs involved in getting regulatory approvals or in filing,
enforcing or prosecuting patents.
Our 2000 fund raising activities were as follows:
- Private placement of shares of common stock in the first quarter,
generating net cash proceeds of $29.5 million;
- Equity line of credit in the second quarter, generating net cash proceeds
of $9.6 million; and
- Senior secured convertible notes in the third quarter, generating net
cash proceeds of $24.6 million.
We believe that existing cash, short-term investments, revenues from
existing collaborations, potential proceeds from the liquidation of our
investments in DPI and DNAS, our equity line with Acqua Wellington, and
potential additional licensing revenues will enable us to continue current and
planned operations for 18-24 months. We continue to actively pursue a variety of
financing alternatives. There can be no assurances that we can liquidate our
investments in DPI and DNAS in a timely manner, or that the proceeds from these
investments will be adequate to meet our requirements to fund operations.
Additionally, we cannot state with certainty that we will be eligible to draw
funding on our equity facility with Acqua Wellington or that we will enter into
additional collaborations. Finally, the senior secured convertible notes are
collateralized by approximately 6.7 million shares of the DPI stock we own;
accordingly, at such time that the DPI shares are liquidated, a substantial
portion of the proceeds may be used to retire the debt.
We expect that we will need to continue to raise money for a number of
years until we achieve, if we ever achieve, substantial product or royalty
revenues. We expect that we will seek additional funding through new
collaborations, the extension of existing collaborations, through sale of our
interests in DPI and DNAS, or through public or private equity or debt
financings. We cannot be certain that additional funding will be available or
that the terms will be acceptable. Existing stockholders will experience
dilution of their investment if we raise additional funds by issuing equity. If
adequate funds are not available, we may delay, reduce or eliminate any of our
research or development programs. Furthermore, we may obtain funds through
arrangements with collaborative partners or others that require us to give up
rights to technologies or products that we would otherwise seek to develop or
commercialize ourselves.
OUR INCREASED LEVERAGE COULD AFFECT OUR ABILITY TO SERVICE OUR DEBT OBLIGATIONS
OR INCUR ADDITIONAL DEBT, WHICH COULD NEGATIVELY AFFECT OUR STOCK PRICE.
We are and will continue to be leveraged. At December 31, 2000, we had a
total indebtedness of approximately $28.8 million (of which $26 million consists
of the notes, and the balance consists of outstanding balances under our capital
lease obligations) and stockholders' equity of approximately $80 million.
Our ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, our indebtedness, including the notes, or to fund
planned capital expenditures and research and development expenses, will depend
on our future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. We may need to refinance all or a portion of the
principal of the notes on or prior to maturity. There can be no assurance that
our business will generate sufficient cash flow from operations or that future
borrowings will be available in an amount sufficient to enable us to service our
indebtedness, including the notes, or to fund our other liquidity needs. In
addition, there can be no assurance that we will be able to effect any such
refinancing on commercially reasonable terms or at all.
We intend to fulfill our debt obligations, both from cash generated by our
operations and from our existing cash and investments. We may add additional
long-term debt and lines of credit.
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Our indebtedness could have significant additional negative consequences,
including:
- increasing our vulnerability to general adverse economic and industry
conditions;
- limiting our ability to obtain additional financing;
- requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
- placing us at a possible competitive disadvantage to less leveraged
competitors and competitors that have better access to capital resources.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR LONGER THAN EXPECTED, WE MAY BE
UNABLE TO CONTINUE OPERATIONS AND OUR STOCK PRICE MAY DECLINE.
While we generated net income of $9.9 million for the year ended December
31, 2000, we may never sustain profitability and do not expect to remain
profitable in fiscal year 2001. We were profitable for fiscal year 2000 due to
the sale, for stock, of two of our non-core subsidiary companies: AAT, which was
sold to DPI, and PPGx, which was sold to DNAS. We have experienced significant
continuing operating losses since we started business. We have not generated any
pharmaceutical product sales revenue. For the year ended December 31, 2000, we
generated a net loss from continuing operations of approximately $45.4 million,
and as of December 31, 2000, we had an accumulated deficit of approximately
$267.4 million. We expect that we will continue to incur significant operating
losses over at least the next several years as our research and development
efforts and preclinical and clinical testing activities continue. Our future
profitability depends on our ability to complete product development and obtain
regulatory approval for our drug candidates. If we fail to become profitable or
are unable to sustain profitability on a quarterly or annual basis, we may be
unable to continue operations and our stock price may decline.
IF WE FAIL TO MAINTAIN OUR EXISTING COLLABORATIVE RELATIONSHIPS AND ENTER INTO
NEW COLLABORATIVE RELATIONSHIPS, DEVELOPMENT OF OUR PRODUCTS COULD BE DELAYED OR
WE MAY NEED TO OBTAIN OTHER SOURCES OF REVENUE.
Our strategy for the development, clinical testing, manufacturing and
commercialization of most of our pharmaceuticals has included entering into
collaborations with corporate partners. We rely to a large extent on the
activities of our collaborators with respect to the development and
commercialization of our pharmaceuticals. All of our collaboration agreements
may be canceled under certain circumstances. In addition, the amount and timing
of resources to be devoted to research, development, eventual clinical trials
and commercialization activities by our collaborators are not within our
control. We cannot guarantee that our partners will perform their obligations as
expected. If any of our collaborators terminate or elect to cancel their
agreements or otherwise fail to conduct their collaborative activities in a
timely manner, the development or commercialization of pharmaceuticals may be
delayed. If in some cases we assume responsibilities for continuing unpartnered
programs after cancellation of a collaboration, we may be required to devote
additional resources to product development and commercialization or we may
cancel certain development programs.
A large portion of our revenues to date have resulted from these
collaborations. The research funding phase of most of our collaborations will
come to an end in the next year unless continued or extended by agreement with
our collaborators. If our collaborations are not extended or we do not enter
into additional collaborative relationships, we will have to seek other sources
of revenue, including additional financing and/or sell interests in our
affiliated businesses. We cannot be certain that we will receive any additional
revenue from these arrangements beyond the minimum contractual commitments of
our partners.
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IF WE FAIL TO SATISFY FDA SAFETY AND EFFICACY REQUIREMENTS IN OUR CLINICAL
TRIALS FOR ANY PHARMACEUTICAL, WE WILL BE UNABLE TO COMPLETE THE DEVELOPMENT AND
COMMERCIALIZATION OF THAT PHARMACEUTICAL PRODUCT.
Either we or our collaborators must show through preclinical studies and
clinical trials that each of our pharmaceuticals is safe and effective in humans
for each indication before obtaining regulatory clearance from the FDA for the
commercial sale of that pharmaceutical. If we fail to adequately show the safety
and effectiveness of a pharmaceutical, regulatory approval could be delayed or
denied. The results from preclinical studies and early clinical trials are often
different than the results that are obtained in large-scale testing. We cannot
be certain that we will show sufficient safety and effectiveness in our clinical
trials that would allow us to obtain the needed regulatory approval. A number of
companies in the pharmaceutical industry, including biotechnology companies,
have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials.
Any drug is likely to produce some level of toxicity or undesirable side
effects in animals and in humans when administered at sufficiently high doses
and/or for a long period of time. Unacceptable toxicities or side effects may
occur in the course of toxicity studies or clinical trials. If we observe
unacceptable toxicities or side effects, we, our collaborators or regulatory
authorities may interrupt, limit, delay or halt the development of the drug. In
addition, these unacceptable toxicities or side effects could prevent approval
by the FDA or foreign regulatory authorities for any or all indications.
In the fourth quarter of 2000, we completed a Phase II clinical trial on
our compound, APC 2059, in ulcerative colitis. Before we can move forward to
more advanced trials, extensive safety pharmacology and dose-ranging
pre-clinical research is necessary. As these clinical trials are intended to
establish safety in humans, we cannot be certain that we will be able to
initiate or complete necessary future clinical trials successfully. Our
collaboration partner Bayer is moving forward with advanced pre-clinical studies
of a compound developed in our collaboration with them for the treatment of
asthma that would be taken as a pill. We cannot be certain that the clinical
trials of this compound will be initiated or completed successfully. Finally, we
cannot be certain that any other drug candidates which may enter clinical trials
will successfully complete those trials or that we or our collaborators will be
able to show the safety and effectiveness of these drug candidates.
IF WE FAIL TO OBTAIN REGULATORY APPROVALS TO COMMERCIALLY MANUFACTURE OR SELL
ANY OF OUR DRUGS, OR IF APPROVAL IS DELAYED, WE WILL BE UNABLE TO GENERATE
REVENUE FROM THE SALE OF OUR PRODUCTS.
We must obtain regulatory approval before marketing or selling our future
drug products. In the United States, we must obtain FDA approval for each drug
that we intend to commercialize. The FDA approval process is lengthy and
expensive, and approval is never certain. Products distributed abroad are also
subject to foreign government regulation. The process of obtaining FDA and other
required regulatory approvals can vary a great deal based upon the type,
complexity and novelty of the products involved. Delays or rejections may be
encountered based upon additional government regulation from future legislation
or administrative action or changes in FDA policy during the period of clinical
trials and FDA regulatory review. Similar delays also may be encountered in
foreign countries.
None of our drug candidates has received regulatory approval. If we fail to
obtain this approval, we will be unable to commercially manufacture and sell our
drug products. We have several drugs in various stages of preclinical
development and one drug in Phase II clinical development. These products are
not expected to be available for several more years, if at all. Because of the
risks and uncertainties involved in development of drug products, our drug
candidates could take significantly longer to gain approval than we expect or
may never gain approval. If regulatory approval is delayed, the value of our
company and our operating results could be adversely affected. Even if
regulatory approval of a product is granted, we cannot be certain that we will
be able to obtain the labeling claims necessary or desirable for the successful
promotion of those products.
Even if we obtain regulatory approval, we may be required to continue
clinical studies even after we have started selling a drug. In addition,
identification of certain side effects after a drug is on the market or the
occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the
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drug, additional preclinical testing or clinical trials and changes in labeling
of the product. This could delay or prevent us from generating revenues from the
sale of that drug or cause our revenues to decline.
If regulatory approval is obtained, we will also be subject to ongoing
existing and future FDA regulations and guidelines and continued regulatory
review. In particular, we or any third party that we use to manufacturer the
drug or our collaborators will be required to adhere to regulations setting
forth current good manufacturing practices. The regulations require that we
manufacture our products and maintain our records in a particular way with
respect to manufacturing, testing and quality control activities. Furthermore,
we or our third party manufacturers or our collaborators must pass a
pre-approval inspection of its manufacturing facilities by the FDA before
obtaining marketing approval.
Failure to comply with the FDA or other relevant regulatory requirements
may subject us to administrative or legally imposed restrictions. These include:
warning letters, civil penalties, injunctions, product seizure or detention,
product recalls, total or partial suspension of production and FDA refusal to
approve pending New Drug Applications, called NDAs, or supplements to approved
NDAs.
IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY.
Our success depends in large part on our ability to obtain patents,
maintain trade secrets and operate without infringing the rights of others, both
in the United States and in other countries.
Patents may not issue from any of our pending or future applications.
Patent applications in the United States are maintained in secrecy until the
patent issues. As a result, we cannot be certain that others have not filed
patent applications for technology covered by our pending patent applications or
that we were the first to invent the technology. In addition, an issued patent
may be challenged, invalidated or maneuvered around or it may otherwise not be
sufficient to protect our technology. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions. As a result, it is difficult to predict the broadness of
claims allowed in biotechnology and pharmaceutical patents or their
enforceability.
Our commercial success also depends, in part, on not infringing patents
issued to others and not breaching the technology licenses upon which any of our
potential products are based. Competitors may have filed applications for, or
may have received patents and may obtain additional patents and rights relating
to, genes, products or processes that block or compete with ours. A number of
third parties have filed patent applications or received patents in the areas of
our programs. Some of these applications or patents may limit or hinder our
patent applications, or conflict in certain ways with claims made under our
issued patents. Furthermore, in the past we have been, and we may from time to
time in the future be, notified of claims that we are infringing patents or
other intellectual property rights owned by third parties.
We may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office. These proceedings determine the priority of
invention and the right to a patent for the technology in the U.S. In addition,
lawsuits may be necessary to enforce any patents issued to us or to determine
the scope and validity of the rights of third parties. Lawsuits and interference
proceedings, even if they are successful, are expensive to pursue, and we could
use a substantial amount of our limited financial resources in either case. An
adverse outcome could subject us to significant liabilities to third parties and
require us to license disputed rights from third parties or to cease using such
technology.
It is also unclear whether our trade secrets will provide useful
protection. We protect our own technology and processes, in part, by
confidentiality agreements with our employees, consultants and certain
contractors. However, these agreements may be disregarded or breached, and we
may not have adequate remedies for any breach. In addition, it is possible that
our trade secrets will otherwise become known or be independently discovered by
competitors.
Disputes may arise in the future with regard to the ownership of rights to
any technology developed with collaborators. These and other possible
disagreements with collaborators could lead to delays in the achievement of
milestones or receipt of royalty payments or in research, development and
commercialization of our pharmaceuticals. In addition, these disputes could
require or result in lawsuits or arbitration. Lawsuits
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and arbitration are time-consuming and expensive. Even if we win, the cost of
these proceedings could adversely affect our business, financial condition and
results of operations. Furthermore, these proceedings could adversely affect our
stock price or our business reputation and may make the process of entering into
additional collaborative relationships more difficult.
BECAUSE WE DO NOT HAVE MANUFACTURING FACILITIES FOR OUR PROPOSED DRUG PRODUCTS
OR COMMERCIAL MANUFACTURING EXPERIENCE, WE COULD EXPERIENCE MANUFACTURING DELAYS
OR PROBLEMS THAT HURT OUR PRODUCT SALES.
We have no manufacturing facilities for our proposed drug products, and our
potential products have never been commercially manufactured. We must currently
rely on our collaborators, Merck, Aventis, and Bayer, to manufacture our
products. We must find contract manufacturers or commit capital to establish FDA
approved facilities for non-partnered drug candidates. We believe that our
collaborators or contract manufacturers or we will be able to manufacture our
compounds at a cost and in quantities necessary to make them commercially
acceptable. However, we cannot be certain that this will be the case. If we or
our collaborators or third party manufacturers are unable to manufacture or
contract with others for a sufficient supply of our compounds on acceptable
terms, we may have to delay any of the following:
- our preclinical and clinical testing schedule;
- our submission of products for regulatory approval; or
- the market introduction and subsequent sales of products.
Any of these delays would adversely affect our financial condition and
results of operations.
In addition to us, our collaborators and contract manufacturers must adhere
to current Good Manufacturing Practices regulations enforced by the FDA through
its facilities inspection program. If these facilities cannot pass a
pre-approval plant inspection, FDA approval of our products will not be granted
or will be delayed.
IF WE FAIL TO RECRUIT AND RETAIN PROFESSIONAL STAFF, OUR PRODUCT DEVELOPMENT
PROGRAMS WILL BE DELAYED.
We are highly dependent on the senior members of our scientific and
management staff. Retaining and attracting qualified personnel, consultants and
advisors is critical to our success. If we fail to recruit and retain qualified
personnel, our product development efforts will be delayed. We face intense
competition for qualified individuals from numerous pharmaceutical and
biotechnology companies, universities and other research institutions. We have
experienced high attrition rates in the last several years. We are currently
seeking to hire additional qualified scientific personnel to perform research
and development, and to replace those leaving the company. In addition, we
expect that we will need to add management personnel and develop additional
expertise by existing management personnel in order to expand product
development and clinical testing. We cannot be certain that we will be able to
attract and retain such individuals on acceptable terms or at all.
In addition, our collaborators and consultants are not our employees. As a
result, we have limited control over their activities and can expect that only
limited amounts of their time will be dedicated to our activities. These
academic collaborators may also have relationships with other commercial
entities, some of whom may be our competitors.
OUR STOCK MAY BE VOLATILE AND YOUR INVESTMENT COULD SUFFER A DECLINE IN VALUE.
Stock prices and trading volumes for biotechnology companies often
fluctuate widely for reasons which may be unrelated to their businesses. Our
stock price could decline as a result of many factors, including:
- announcements of technological innovations or new products by Axys or
other companies;
- developments or disputes concerning patents or other rights;
- publicity regarding actual or potential medical results from products
under development by Axys or other companies;
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- regulatory developments in both the United States and foreign countries;
- public concern regarding the safety of biopharmaceutical products;
- any shortfall in our revenues, net income or cash reserves from that
expected by securities analysts;
- changes in analyst's estimates of our financial performance, the
financial performance or our competitors or the financial performance of
biotechnology companies in general;
- sales of large blocks of our common stock; or
- conditions in the financial markets or economy in general or the
biotechnology industry in particular.
In the past, following large price declines in the public market price of a
company's securities, securities litigation has often been initiated against
that company. Litigation of this type could result in substantial costs and
diversion of management's attention and resources. Any adverse determination in
litigation could subject us to substantial liabilities.
IF PRODUCT LIABILITY CLAIMS ARE BROUGHT AGAINST US, WE MAY INCUR SUBSTANTIAL
LIABILITIES.
We may be exposed to liability claims resulting from the use of our
products in clinical trials, or the manufacturing, marketing and sale of any
approved products. These claims may be made directly by consumers,
pharmaceutical companies or others. We maintain product liability insurance
coverage for claims arising from the use of our products which are still in the
developmental phase. However, this insurance coverage is becoming increasingly
expensive. We and our collaborative partners may not be able to obtain and
maintain commercially reasonable product liability insurance. Furthermore, even
if we maintain insurance, the amount may not be enough to protect us against
losses due to a lawsuit. A successful product liability claim against Axys or
series of claims in excess of our insurance could adversely affect our results
of operations and our need for additional financing.
ANTI-TAKEOVER PROVISIONS UNDER DELAWARE LAW AND IN OUR CHARTER DOCUMENTS AND OUR
STOCKHOLDER RIGHTS PLAN COULD MAKE AN ACQUISITION OF AXYS MORE DIFFICULT.
In 1998, we adopted a stockholder rights plan, which may have the effect of
delaying or preventing an unsolicited takeover of the Company. Our certificate
of incorporation and bylaws state that any action taken by stockholders must be
conducted at an annual or special meeting of stockholders and may not be
conducted by written consent. Only the board of directors, the Chairman of the
Board or the President may call special meetings of the stockholders. In
addition, our board of directors has the authority to issue additional shares of
preferred stock and to determine the rights of those shares without any further
action by the stockholders. Those rights could be senior to those of the common
stockholders. The issuance of preferred stock may make it more difficult for a
third party to acquire Axys. These and other charter provisions may discourage
certain types of transactions involving an actual or potential change in control
of Axys. In fact, these provisions may discourage transactions in which the
stockholders might otherwise receive a premium for their shares over then
current prices, and may limit the stockholders' ability to approve transactions
that they think are in their best interests.
Delaware law also prohibits corporations from engaging in a business
combination with any holders of 15% or more of their capital stock until the
holder has held the stock for three years unless, among other things, the board
approves the transaction. Also, under Delaware law, our board of directors may
adopt additional anti-takeover measures in the future.
OUR SENIOR SECURED NOTES ARE CONVERTIBLE INTO SHARES OF COMMON STOCK; THERE ARE
RISKS ASSOCIATED WITH REDEEMING THESE NOTES AND THEIR CONVERSION MAY BE
DILUTIVE.
In September 2000, we issued $26 million in senior secured convertible
notes, which bear interest at 8% per annum and have a conversion price of $7.06
per share. These notes are due in November 2004; however, the holder of the
notes may choose to convert the notes at any time into shares of our common
stock. Upon maturity of these notes, the holders may choose to have the notes
repaid in cash or shares of our common
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stock. In the event that some or all of the note holders request that the notes
be repaid in cash upon maturity in November 2004, we may not have sufficient
cash to satisfy all of our obligations under the notes. The underlying
collateral pledged against those notes (approximately 6.7 million shares of DPI
stock owned by us) may not be sufficient to satisfy the debt obligation. In
addition, conversion of these notes into common stock will be dilutive to the
shareholders.
ITEM 2. PROPERTIES
We currently lease approximately 170,000 square feet and occupy
approximately 111,000 square feet of laboratory, support and administrative
space in South San Francisco, California. Leases expire on these facilities on
November 30, 2003 with respect to approximately 52,000 square feet; on July 31,
2005 on approximately 33,000 square feet; on August 4, 2006 on approximately
83,000 square feet and on a month to month arrangement on approximately 2,000
square feet. Most of these leases have additional options for extensions. In
2000, the Company converted a warehouse lease into a ground lease for 25 years
with options to extend for two additional 10-year periods. The company is
constructing a medicinal chemistry building on this lot which will include
approximately 43,500 square feet of laboratory and office space. Construction is
expected to be complete in the second half of 2001. We are subleasing
approximately 33,000 square feet to an unrelated third party, with the lease and
sublease expiring on July 31, 2005. In addition, we are subleasing approximately
25,000 square feet to DPI, with the lease and sublease expiring on November 30,
2003. We expect to sublease 52,000 square feet of adjacent space to DPI when we
occupy the new medicinal chemistry facility. DPI also has the right of first
refusal to sublease the remainder of that 52,000 square foot facility or
approximately 25,000 square feet upon the opening of the new medicinal chemistry
facility. Our existing and planned facilities are believed to be adequate to
meet our present requirements, and we currently believe that suitable additional
space will be available to us, when needed, on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are subject to legal proceedings or claims arising in
the ordinary course of its business. While the outcome of any such proceedings
or claims cannot be predicted with certainty, our management does not believe
that the outcome of any of these legal matters will have a material adverse
effect on our results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matters were submitted to a vote of
the stockholders.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below is biographical information on executive officers of Axys as
of February 28, 2001.
NAME AGE POSITION WITH AXYS
---- --- ------------------
Paul J. Hastings..................... 41 President and Chief Executive Officer, and a member of
the Board of Directors
Daniel F. Hoth, M.D. ................ 55 Senior Vice President, Chief Medical Officer
William J. Newell, J.D. ............. 43 Senior Vice President, Corporate and Business
Development and Secretary
David E. Riggs....................... 49 Senior Vice President, Chief Financial Officer
Michael C. Venuti, Ph.D. ............ 47 Senior Vice President, Research and Preclinical
Development, and Chief Technical Officer
Douglas H. Altschuler................ 44 Vice President, General Counsel and Assistant
Secretary
PAUL J. HASTINGS
Mr. Hastings joined the Company in January 2001, from Chiron Corporation of
Emeryville, CA where he was President of Chiron Bio-Pharmaceuticals from
1999-2000. Before Chiron, from 1998-1999, Mr. Hastings served as the President
and Chief Executive Officer of LXR Biotechnology, a company focused on the role
of apoptosis in cardiovascular disease and oncology. From 1994-1998, Mr.
Hastings held a series of management positions at Genzyme Corporation of
Cambridge, MA, the last of which was President of Genzyme Therapeutics
worldwide. From 1989-1994, Mr. Hastings was at Synergen, in Boulder, CO, as Vice
President of Marketing and Sales and General Manager, Synergen Europe, and from
1984-1989, was with Hoffmann-La Roche, Nutley, NJ, in marketing and sales
management positions. Mr. Hastings holds a B.S. in Pharmacy from the University
of Rhode Island.
DANIEL F. HOTH, M.D.
Dr. Hoth joined Axys in June 1999 as Senior Vice President and Chief
Medical Officer. Prior to joining Axys, Dr. Hoth was principal of an independent
consulting practice to pharmaceutical and life science firms, and the National
Institute of Health. Previously, from 1993 to 1997, Dr. Hoth served as Senior
Vice President and Chief Medical Officer at Cell Genesys, where he was
responsible for trials of gene therapy in cancer and HIV. From 1987 to 1993, he
was Director, Division of Acquired Immunodeficiency Syndrome at the National
Institute of Health (NIH), heading all activities under the NIAID's AIDS
program. Dr. Hoth's tenure at the National Cancer Institute (1980 to 1987)
included Chief of the Investigational Drug Branch, as well as the head of the
Cancer Therapy Evaluation Program. Dr. Hoth also served as an instructor and
Assistant Professor of Medicine at Georgetown University School of Medicine. He
received his medical degree at Georgetown University School of Medicine, and
completed his fellowship in medical oncology at Georgetown University Hospital.
WILLIAM J. NEWELL, J.D.
Mr. Newell joined the Company in August 1998. He has responsibility for all
of the Company's corporate development and business development activities. He
was previously responsible for the Company's legal affairs. Previously, Mr.
Newell practiced at the firm of McCutchen, Doyle, Brown & Enersen, LLP (Palo
Alto office) where he had been a partner since 1990. He received his J.D. from
the University of Michigan Law School and holds an A.B. from Dartmouth College.
DAVID E. RIGGS
Mr. Riggs joined the Company in September 2000 from Unimed Pharmaceuticals,
Inc. where he was senior vice president, business operations from September 1999
to September 2000, and Chief Financial Officer from 1992 to September 1999. At
Unimed from 1992-1999, Mr. Riggs was responsible both for building the company's
commercial platform, its integration as a specialty drug company, product
licensing and acquisition activities as well as the financial management of the
company. While at Unimed, Mr. Riggs
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concurrently held the CFO position at NeoPharm, Inc. He has a B.S. in Accounting
from the University of Illinois, and a M.B.A. in finance and quantitative
methods from DePaul University in Chicago, IL.
MICHAEL C. VENUTI, PH.D.
Dr. Venuti has been Axys' Senior Vice President, Research and Preclinical
Development since November 1998, and had previously served as Senior Vice
President, Research, South San Francisco, Vice President, Research and Chief
Technical Officer since January 1998, February 1997 and July 1996, respectively.
Dr. Venuti joined Axys in November 1994 as Director of Chemistry and was
promoted to Vice President of Chemistry in July 1995, where he served until
February 1997. From 1993 until he joined Axys, he was at Parnassus
Pharmaceuticals, a start-up biotechnology company where he was Vice President,
Chief Scientific Officer and a founder. From 1988 to 1993, Dr. Venuti was at
Genentech, Inc., a biotechnology company, where he was Director of Bioorganic
Chemistry, a program that he helped establish. From 1979 to 1988, Dr. Venuti was
employed at Syntex as a chemistry group leader. Dr. Venuti received an A.B. in
chemistry from Dartmouth College, a Ph.D. in organic chemistry from the
Massachusetts Institute of Technology and was a postdoctoral fellow at the
Syntex Institute of Organic Chemistry.
DOUGLAS H. ALTSCHULER, J.D.
Mr. Altschuler joined the Company in December 2000 from Mentor Corporation
where he was Vice President/General Counsel and Compliance Officer from 1996 to
2000. At Mentor, Mr. Altschuler was responsible for all aspects of Mentor's
legal and compliance issues. Previously, from 1994 to 1996, Mr. Altschuler was
an attorney with the law firm of Bleecher & Collins; from 1988 to 1993, he was
an attorney in the Los Angeles office of Jones, Day, Reavis & Pogue. Mr.
Altschuler received his J.D. from the University of Arizona School of Law and a
B.S. in Chemistry and Biology from the University of Arizona.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Axys' common stock began trading on the Nasdaq National Market on November
19, 1993. Prior to that date, there was no public market for the Company's
common stock. The Company's current ticker symbol is "AXPH". The following table
sets forth, for the periods indicated, the high and low sales prices of the
common stock reported on the Nasdaq National Market. These over-the-counter
quotations reflect inter-dealer prices, without retail markup, markdown or
commission, and may not necessarily represent the sales prices in actual
transactions.
HIGH LOW
------ -----
1999
First Quarter............................................. $ 8.13 $3.75
Second Quarter............................................ 4.50 3.00
Third Quarter............................................. 5.97 3.56
Fourth Quarter............................................ 4.96 2.69
2000
First Quarter............................................. 20.25 3.88
Second Quarter............................................ 9.00 3.53
Third Quarter............................................. 8.88 5.00
Fourth Quarter............................................ 7.13 3.56
On February 28, 2001, the last sale price reported on the Nasdaq National
Market for the Company's common stock was $4.25 per share.
HOLDERS
As of February 28, 2001 there were approximately 523 stockholders of record
of the Company's common stock.
DIVIDENDS
Since inception, we have not paid dividends on our common stock. We
currently intend to retain all future earnings, if any, for use in our business
and currently do not plan to pay any cash dividends in the foreseeable future.
Any future determination to pay dividends will be at the discretion of our board
of directors.
RECENT SALES OF UNREGISTERED SECURITIES
In February 2000, we sold an aggregate of 3.5 million newly issued shares
of our common stock to selected institutional and other accredited investors for
$31.5 million in gross proceeds. We are using net proceeds from this private
placement for working capital and other general corporate purposes.
The issuance and sale of such shares was intended to be exempt from
registration and prospectus delivery requirements under the Securities Act of
1933, as amended (the "Securities Act"), by virtue of Section 4(2) thereof due
to, among other things, (i) the limited number of persons to whom the shares
were issued, (ii) the distribution of disclosure documents to the investor,
(iii) the fact that such person represented and warranted to the Company, among
other things, that such person was acquiring the shares for investment only and
not with a view to the resale or distribution thereof, and (iv) the fact that
certificates representing the shares were issued with a legend to the effect
that such shares had not been registered under the Securities Act or any state
securities laws and could not be sold or transferred in the absence of such
registration or an exemption therefrom.
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RECENT SALES OF REGISTERED SECURITIES
In July 2000, we completed the sale of an aggregate 1,639,344 shares of
common stock to Acqua Wellington North American Equitus Fund, Ltd., pursuant to
a shelf registration for $10 million. We have the option to sell an additional
$40 million of common stock under our equity financing facility through
September 2001. We intend to use the net proceeds from this offering for working
capital and other general corporate purposes.
In September 2000, we issued $26 million aggregate amount of 8% senior
secured convertible notes due 2004 and related warrants, initially entitling the
purchasers of such warrants to acquire an aggregate of 1,841,360 shares of our
common stock at exercise prices ranging from $8.82 per share to $10.59 per
share. We are using the net proceeds from this offering for working capital and
other general corporate purposes.
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ITEM 6. SELECTED FINANCIAL DATA
AXYS PHARMACEUTICALS, INC.
The data should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 8. Financial Statements and Supplementary Data" which is included
elsewhere in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999(1) 1998(1)(2) 1997(1) 1996
--------- --------- ---------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS:
Revenues.................................. $ 6,990 $ 24,084 $ 35,760 $ 20,499 $21,560
Operating costs and expenses:
Research and development................ 36,575 55,174 57,502 27,062 24,319
General and administrative.............. 9,999 10,872 13,411 7,153 5,409
Restructuring charge.................... (592) 5,175 -- -- --
Acquired in-process research and
development.......................... -- -- 124,888 -- 230
--------- --------- --------- -------- -------
Total operating costs and
expenses...................... 45,982 71,221 195,801 34,215 29,958
--------- --------- --------- -------- -------
Operating loss............................ (38,992) (47,137) (160,041) (13,716) (8,398)
Interest income (expense), net............ (4,105) 341 2,317 2,422 2,470
Equity in losses of joint venture......... (3,208) (836) (2,393) -- --
Other income/expense, net................. 889 (852) -- -- --
--------- --------- --------- -------- -------
Net loss from continuing operations....... (45,416) (48,484) (160,117) (11,294) (5,928)
Discontinued operations................... (5,941) (279) 3,993 327 --
Gain on disposal of segment............... 61,213 -- -- -- --
--------- --------- --------- -------- -------
Net income (loss)......................... $ 9,856 $ (48,763) $(156,124) $(10,967) $(5,928)
========= ========= ========= ======== =======
Net loss per share, basic and diluted from
continuing operations................... $ (1.29) $ (1.59) $ (5.38) $ (0.75) $ (0.45)
Net income (loss) per share, basic and
diluted................................. $ 0.28 $ (1.60) $ (5.25) $ (0.73) $ (0.45)
Weighted average number of shares used in
computing basic and diluted net loss per
share................................... 35,281 30,385 29,758 15,025 13,177
- --------------------------------------------------------------------------------
DECEMBER 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- ---------- -------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
investments............................. $ 41,776 $ 26,657 $ 72,717 $ 53,408 $66,720
Total assets.............................. 118,696 55,734 107,262 73,584 80,832
Long-term obligations..................... 27,889 57 16,816 15,331 10,676
Accumulated deficit....................... (267,355) (277,211) (229,895) (73,771) (62,804)
Total stockholders' equity................ 79,565 14,047 60,512 43,890 52,900
- ---------------
(1) Reclassified results of operations in accordance with Accounting Principles
Board Opinion No. 30 in connection with the sale of Axys Advanced
Technologies and PPGx, Inc. during 2000.
(2) Includes the results of operations of Sequana Therapeutics, Inc. from
January 8, 1998 through December 31, 1998, including a one-time charge for
acquired in-process research and development. Excluding such one-time
charge, net loss and net loss per share would have been $31,236,000 and
$1.05 per share, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains both historical information and
forward-looking statements that involve risks and uncertainties. Forward-looking
statements include projections and other statements of events that may occur at
some point in the future. The Company's actual results could differ
significantly from those described in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in this section as well as under "Item 1. Business,"
including, "What Factors Could Cause Our Results To Differ Significantly From
Those You Might Expect?"
Overview
We are a biopharmaceutical company focused on the discovery, design and
development of therapeutic small molecules that address significant markets with
major unmet medical needs. We collaborate with large pharmaceutical companies in
discovering therapeutics for chronic diseases for which there are large markets.
We also selectively focus our own resources on discovering and developing
therapeutics for the treatment of various types of cancer and other specialty
market therapeutics. We have on-going programs in the treatment of autoimmune,
inflammatory diseases, and cancer. Our drug design platform integrates advanced
biology, chemistry, biophysics and information technologies to optimize the
potency, selectivity and physical properties of new drugs, making the drug
discovery process more efficient and productive.
During 2000, we completed a Phase II open label clinical trial using APC
2059 for the treatment of ulcerative colitis. Study results suggest that further
development of APC 2059 in ulcerative colitis is warranted. In January 2001, we
reacquired exclusive rights to develop APC 2059, for non-oral applications in
return for an up-front payment to Bayer and potential future royalty payments.
In March 2001, the Company determined that additional dose-ranging safety
pharmacology studies should be initiated before beginning additional further
human clinical trials. Further human clinical testing will be delayed until
these safety pharmacology studies are completed and results evaluated.
To date, we have not generated any product revenue in our drug discovery
programs and do not expect to generate such revenue for at least several years.
As of December 31, 2000, we had an accumulated deficit of $267 million. We
expect that losses will fluctuate from quarter to quarter, that such
fluctuations may be substantial, and that results from prior quarters may not be
indicative of future operating results. Included in our accumulated deficit at
December 31, 2000 was approximately $148 million of acquired in-process research
and development from the acquisition of Khepri Pharmaceuticals, Inc. in 1995 and
the acquisition of Sequana Therapeutics, Inc. ("Sequana") in January 1998. We
expect our sources of revenue, if any, for the next several years to consist of
payments under corporate partnerships. The process of developing our products
will require significant additional research and development, preclinical
testing and clinical trials, as well as regulatory approval. These activities,
together with our general and administrative expenses are expected to result in
significant operating losses for the foreseeable future. We will not receive
product revenues or royalties from our collaborative partners before completing
clinical trials and successfully commercializing these products.
We are subject to risks common to biopharmaceutical companies, including
risks inherent in our research and development efforts and clinical trials,
reliance on collaborative partners, enforcement of patent and proprietary
rights, the need for future capital, potential competition and uncertainty of
regulatory approvals. In order for a product to be commercialized, it will be
necessary for us, and in some cases, our collaborators, to conduct preclinical
tests and clinical trials to demonstrate the efficacy and safety of our product
candidates, obtain regulatory clearances and enter into manufacturing,
distribution and marketing arrangements as well as obtain market acceptance.
There can be no assurance that we will generate revenues or achieve and sustain
profitability in the future.
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RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
1999 Events Which Affected Comparability with 2000:
In December 1999, we closed our La Jolla operations, which primarily
represented the Sequana business acquired in 1998, and relocated our oncology
genomics research activities to our South San Francisco headquarters. As a
result of this action, a one-time restructuring charge of $5.2 million was
recorded in 1999. At the time of the Sequana acquisition, the following research
programs were in progress: Asthma, partnered with Boehringer Ingelheim GmbH;
Osteoporosis, partnered with Corange International Ltd. (currently F.
Hoffmann -- La Roche Ltd.); Non-Insulin Dependent Diabetes Mellitus, partnered
with GlaxoWellcome (currently Glaxo SmithKline, Inc.); Schizophrenia/Bipolar,
partnered with Parke-Davis (currently Pfizer, Inc.) Pharmaceutical Research
division of Warner-Lambert Company; and the unpartnered programs in Obesity,
Alzheimer's and Pharmacogenomics. As of December 31, 1999 the
Schizophrenia/Bipolar program was transferred to Parke-Davis and the
Pharmacogenomics program was spun off into the PPGx subsidiary with PPD. All
other programs have ended.
In September 1999, Akkadix completed its acquisition of Global Agro, Inc.
The acquisition resulted in our Company's equity ownership interest in Akkadix
falling below 50% and thereafter Akkadix is accounted for under the equity
method.
In February 1999, we formed a majority owned subsidiary, PPGx, which was
engaged in the business of providing pharmacogenomic (the science of how genetic
variations among individuals affects drug safety and efficacy) products and
services to the pharmaceutical industry. In connection with the formation of
PPGx, Axys contributed certain assets and technology in exchange for an 82%
ownership interest in PPGx. PPD, Inc. acquired an 18% equity interest in PPGx,
in exchange for contributing certain assets, technology, cash and loan
guarantees and the exclusive, worldwide right to market the pharmacogenomic
products and services of PPGx.
2000 Event Which Affected the Company's Operations:
During 2000, we completed the sale of two of our three non-core subsidiary
businesses created several years ago from our technology. We obtained equity
from the acquiring companies in consideration for the sale of these entities. We
plan to liquidate these equity shares over time to fund our future research and
development. The transactions involved are:
- The sale of Axys Advanced Technologies, Inc. ("AAT") to Discovery
Partners International, Inc. ("DPI"), resulting in consideration to Axys
of 7,425,000 shares of DPI common stock; and
- The sale of PPGx, Inc. ("PPGx") to DNA Sciences, Inc. ("DNAS"), resulting
in consideration to Axys of 1,478,550 shares of Series D preferred stock
and 108 shares of common stock.
Events That Happened Subsequent to 2000, Which Will Affect Us in the Future:
Akkadix (formerly known as Xyris) focuses its business on agricultural
biotechnology. In 1999, Bay City Capital ("BCC") and an affiliated fund, North
American Nutrition & Agribusiness Fund, L.P. ("NANAF"), became a primary source
of funding for Akkadix. In 2000, we and BCC each provided Akkadix with bridge
loan financing of $2.5 million, which we each subsequently increased by another
$100,000. In accordance with the equity method of accounting, we recorded a
charge of approximately $2.8 million in 2000, representing our share of
Akkadix's losses and substantially all of our investment in Akkadix.
In March 2001, BCC and NANAF each exercised its option to exchange its
shares of Akkadix preferred stock for shares of Axys common stock. These option
exercises increased our ownership interest in Akkadix from 23% at December 31,
2000 to 44% in March 2001. We do not expect to receive any future value, nor are
we planning to make future investments in Akkadix and its future viability as a
business is very uncertain. As a result of our ownership interest in Akkadix, we
expect to record a non-cash charge of up to $9 million in the first quarter of
2001.
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Collaboration and Licensing Revenues for 2000 Compared to 1999
Our collaborative research programs generally contain one or more of the
following sources of revenue to us:
- Research Support: Payments that are generally based on the number of
researchers Axys is committing to a particular program. These revenues
are recorded when earned through the performance of the required research
by Axys.
- License Fees: Payments that are generally received when the collaboration
agreement is signed. These revenues are amortized over the term of the
agreement.
- Milestone Payments: Payments that are based on our Company or our partner
achieving certain technical or regulatory milestones in the
collaboration. Milestone payments are recorded as revenues upon the
achievement of mutually agreed upon milestones.
Our collaboration and licensing revenues decreased to $7.0 million for the
year ended December 31, 2000, from $24.1 million in 1999. Collaboration and
licensing revenues (which generally consist of research support and license
fees), for the year ended December 31, 2000 were attributable to collaborative
research agreements with: (i) Aventis Pharmaceutical Products, Inc. for the
development of small molecule therapeutics that inhibit cathepsin S, associated
with certain inflammatory diseases and (ii) Merck & Co., Inc. for the
development of small molecule inhibitors of proteases involved in osteoporosis.
Revenues in 2000 decreased when compared to 1999 as the following collaborative
research programs were concluded: (i) the Boehringer Ingelheim International
GmbH gene identification program in asthma (ii) the Parke-Davis (currently known
as Pfizer, Inc.) gene identification program in schizophrenia and bipolar
disorder and (iii) the Bristol-Myers Squibb Company collaboration for the
development of protease inhibitors involved in hepatitis C infection.
Research and Development Expenses for 2000 Compared to 1999
Our research and development expenses decreased to $36.6 million for the
year ended December 31, 2000, from $55.2 million in 1999. The decrease was
primarily due to lower expenses as a result of the 1999 shutdown of our La Jolla
operation and lower headcount in 2000 from 1999 levels.
General and Administrative Expenses for 2000 Compared to 1999
Our general and administrative expenses were $10.0 million for the year
ended December 31, 2000, compared to $10.9 million in 1999. The decrease was
primarily due to lower expenses as a result of the shut down of our La Jolla
operation in 1999.
Interest Income and Interest Expense for 2000 Compared to 1999
Interest income decreased to $1.8 million for the year ended December 31,
2000, from $2.3 million in 1999. The decrease was primarily due to the decrease
in average cash and investment balances between the periods. Interest expense
increased to $5.9 million for the year ended December 31, 2000, from $2.0 in
1999. The increase was due primarily to an embedded beneficial conversion charge
of $4 million recorded in the fourth quarter of 2000.
Equity in Losses of Equity-Method Investee for 2000 Compared to 1999
Equity in losses of equity-method investee increased to $3.2 million for
the year ended December 31, 2000 as compared to $0.8 million in 1999. The
increase was primarily due to the Company expensing its $2.8 million investment
in Akkadix during the fourth quarter of 2000.
Restructuring Charge in 2000 Compared to 1999
In December 1999, we completed the closing of our La Jolla operations and
relocated the oncology genomics research activities to the South San Francisco
headquarters. At December 31, 1999, $1.9 million
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remained in an accrual relating to this restructuring charge. During 2000, we
revised our restructuring charge and reversed approximately $592,000 of this
accrual as a result of assigning the La Jolla facility lease to a third party.
Other Income/Expense in 2000 Compared to 1999
Other income and expense represents the gain on sale of a portion of the
common stock held as short-term marketable investments.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Collaboration and Licensing Revenues for 1999 Compared to 1998
Our collaboration and licensing revenues decreased to $24.1 million for the
year ended December 31, 1999, from $35.8 million in 1998. Collaboration and
licensing revenues (which generally consist of research support and license
fees), for the year ended December 31, 1999 were attributable to the
collaborative research agreements with: (i) Parke-Davis in the gene
identification program in schizophrenia and bipolar disorder; (ii) Bristol-Myers
Squibb for the development of protease inhibitors involved in hepatitis C
infection; (iii) Aventis for the development of small molecule therapeutics that
inhibit cathepsin S, associated with certain inflammatory diseases, and (iv)
Merck for the development of small molecule inhibitors of proteases involved in
osteoporosis. 1999 revenues decreased when compared to 1998 due to lower
revenues recognized under the following agreements: (i) the end of research
support in June 1999 under the Boehringer Ingelheim International GmbH agreement
for the gene identification program in asthma; (ii) the winding-down of the
Parke-Davis gene identification program for schizophrenia and bipolar disorder,
and (iii) the conclusion in mid-1998 of the Pharmacia Corporation agreement for
the development of inhibitors of Factor Xa.
Research and Development Expenses for 1999 Compared to 1998
Our research and development expenses decreased to $55.2 million for the
year ended December 31, 1999, from $57.5 million in 1998. The decrease is
primarily due to reduced headcount in 1999. Research and development expenses in
1999 reflect a partial year of Akkadix activity.
General and Administrative Expenses for 1999 Compared to 1998
Our general and administrative expenses decreased to $10.9 million for the
year ended December 31, 1999, from $13.4 million in 1998. The decrease is
primarily due to lower expenses as a result of the winding down of activities in
our La Jolla operation in 1999.
Interest Income and Interest Expense for 1999 Compared to 1998
Interest income decreased to $2.3 million for the year ended December 31,
1999, from $4.7 million in 1998. The decrease was primarily due to the decrease
in average cash and investment balances between the periods. Interest expense
decreased to $2.0 million for the year ended December 31, 1999, from $2.4
million in 1998. The decrease was primarily due to the lower debt balances from
our lines of credit and existing leasing arrangements in 1999.
Equity in Losses of Equity Method Investee for 1999 Compared to 1998
Equity in losses of equity method investee decreased to $0.8 million for
the year ended December 31, 1999 as compared to $2.4 million in 1998, and was
due to the decrease in the loss for Genos Biosciences, Inc ("Genos"), our joint
venture with Memorial Sloan Kettering Cancer Center. This amount represents
Axys' 50% portion of Genos' loss for 1999. The decrease is primarily due to the
winding down of operations of Genos in May 1999. In the third quarter of 1999,
we wrote off the balance of the investment in Genos.
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Restructuring Charge for 1999 Compared to 1998
In December 1999, we completed the closing of our La Jolla operations and
relocated our oncology genomics research activities to our South San Francisco
headquarters. As a result of this action, a one-time charge of $7.0 million was
taken during the third quarter of 1999, of which $2.2 million related to
severance and other employee-related costs, $1.7 million related to facilities
costs, $1.8 million related to the disposal of assets, and $1.3 million in other
costs associated with the restructuring. In the fourth quarter of 1999, the
restructuring charge was reduced by $1.8 million, to $5.2 million due to a
change in estimates resulting from the additional subleases of the La Jolla
facility, and from proceeds from the disposal of equipment and other assets
associated with closing down the La Jolla facility. The facilities costs include
lease payments in La Jolla net of proceeds from existing subleases. As a result
of closing the facility, we eliminated 120 positions of which 93 were included
in the severance calculation and 27 positions were eliminated through attrition
and cancellation of open requisitions. At December 31, 1999, the remaining
accrual relating to the restructuring was approximately $1.9 million.
Other Income/Expense for 1999 Compared to 1998
Other income and expense represents primarily the write-off of Axys' 50%
interest in Genos totaling $0.9 million in 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 2000. We will adopt the
new Statement effective January 1, 2001. The Statement will require us to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
Based on our derivative positions at December 31, 2000, which are limited
to warrants to purchase common shares of DPI stock (see Note 2 to our Financial
Statements) and certain key employee contracts to acquire investments held by us
(see Note 10 to our Financial Statements), we estimate that upon adoption we
will record a charge from the cumulative effect of an accounting change of
approximately $400,000 recognized in the statement of operations in the first
quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
We have financed operations since inception primarily through private and
public offerings of capital stock, through corporate collaborative research and
from a secured convertible note issuance. As of December 31, 2000, we had
realized, since inception, approximately $229 million in net proceeds from
offerings of our capital stock. In addition, we have realized approximately $180
million (adjusted for the sales of AAT and PPGx) since inception from our
collaborative research agreements. Our Company received net proceeds of $24.6
million from the issuance of senior secured convertible notes in September 2000.
Our principal sources of liquidity are our cash and investments, which
totaled $41.2 million as of December 31, 2000. We had a $30 million line of
credit under which there was no outstanding balance as of December 31, 2000. We
canceled this line of credit in February 2001, as the collateral requirements
made it difficult to utilize.
Our marketable securities at December 31, 2000 include approximately 35,450
shares of Maxim Pharmaceutical, Inc. common stock. These shares are subject to a
lock-up arrangement that restricts our ability to sell the securities, which
expires over a six-month period from December 2000, at a rate of 17,725 shares
per quarter.
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Net cash and cash equivalents used in operating activities for the year
ended December 31, 2000 was $38.8 million compared to $39.3 million in the same
period in 1999. While cash used from operating activities was comparable to the
previous year, we realized less cash from collaborations and we disposed of AAT,
a cash flow positive business, during 2000. Conversely, we reduced our cash burn
during 2000 by reducing headcount as we focused on drug discovery activities.
Cash used in operating activities is expected to fluctuate from quarter to
quarter depending, in part, upon the timing and amounts, if any, of cash
received from existing and new collaboration agreements and the liquidation of
equity held in DPI and DNAS.
We purchased approximately $4.0 million of property and equipment during
the year ended December 31, 2000. We expect to acquire or lease additional
equipment in connection with our future research and development activities. In
August 2000 the Company began construction of a new 43,500 square foot medicinal
chemistry building adjacent to our principal offices and laboratory buildings in
South San Francisco. The Company expects the building to be completed in the
second half of 2001 and to relocate personnel from our off-campus medicinal
chemistry building to the new building. We are currently self-funding
construction costs until financing can be arranged. As of February 28, 2001, we
had incurred approximately $2.7 million on the construction and have a total
commitment of $5.0 million. While we are actively seeking financing, there can
be no assurance that we will obtain financing on this facility.
We acquired our interest in DPI in connection with the April 2000 sale of
AAT, our combinatorial chemistry business, to DPI. In July 2000, DPI completed
an initial public offering of its common stock and commenced trading on the
NASDAQ under the symbol "DPI". We hold 7,425,000 shares of DPI common stock,
which, prior to the initial public offering, represented approximately 43% of
the outstanding shares of DPI. DPI sold 5 million shares of its common stock in
its initial public offering, at a price of $18 per share, raising gross proceeds
of approximately $90 million. This reduced our ownership in DPI to approximately
31%. As of February 28, 2001, our investment in DPI has a market value of
approximately $66.8 million. We plan as collateral to liquidate our investment
in DPI as soon as possible, subject to Rule 144 sales and certain contractual
restrictions. Our shares of DPI are pledged as collateral under our senior
secured convertible notes. In addition, our stock sales to any person or
affiliated group are contractually required to be less than 5% of their
outstanding shares of DPI unless pre-approved by DPI.
In July 2000, we completed a sale of $10 million of our common stock, under
a shelf registration relating to the offer and sale of up to $50 million of our
common stock. The shares of common stock were sold at a discounted weighted
average price of $6.10 per share to Acqua Wellington North American Equitus
Fund, Ltd.. Under the agreement with Acqua Wellington, we may, from time to
time, and at our discretion, issue and sell to Acqua Wellington up to an
additional $40 million of common stock, at a price per share based on the daily
volume weighted average price. In addition, we may also grant to Acqua
Wellington a right to purchase additional shares up to an amount equal to the
number of shares we elect to sell during that period.
In September 2000, we issued $26 million in senior secured convertible
notes (the "Notes"), which bear interest at 8% per annum. Interest is payable
quarterly and may be paid in cash or in shares of our common stock at our sole
discretion. The Notes are convertible into our common stock with a conversion
price of $7.06 per share. The Notes are secured by shares of DPI which are held
in trust for us. We retain the right to substitute other appropriate collateral.
In connection with these Notes, we issued warrants to purchase up to 1,841,360
of our Company's common stock. These warrants have an exercise price per share
ranging from $8.82 to $10.59, and expire October 1, 2004. The fair value of
these warrants (using the Black-Scholes option-pricing model to value the
warrants), of $5.7 million is treated as a debt issuance costs of the Notes, was
capitalized, and is being amortized to interest expense using the effective
interest method over the life of the debt. These warrants along with other debt
issuance costs have a non-cash effect on our Company.
Also in September 2000, we entered into a financing agreement with a lease
financing company under which we have the ability to finance up to $8.0 million
of future purchases of lab equipment and tenant improvements. At December 31,
2000, we had borrowed approximately $3.0 million under this financing line.
The drug development process is expensive and will require that we raise
money in the future until our Company begins to generate substantial product or
royalty revenues, if ever. We believe that existing cash, short-term
investments, revenues from existing collaborations, potential proceeds from the
liquidation of our
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investments in DPI and DNAS, our equity line with Acqua Wellington, and
potential additional licensing revenues will enable us to continue current and
planned operations for 18-24 months. We continue to actively pursue a variety of
financing alternatives. There can be no assurances that we can liquidate our
investments in DPI and DNAS in a timely manner, or that the proceeds from these
investments will be adequate to meet our requirements to fund operations.
Additionally, we cannot state with certainty that we will be eligible to draw
funding on our equity facility with Acqua Wellington or that we will enter into
additional collaborations. Finally, the senior secured convertible notes are
collateralized by approximately 6.7 million shares of the DPI stock we own;
accordingly, at such time that the DPI shares are liquidated, a substantial
portion of the proceeds may be used to retire the debt.
We expect that we will need to continue to raise money for a number of
years until we achieve, if we ever achieve, substantial product or royalty
revenues. We expect that we will seek additional funding through new
collaborations, the extension of existing collaborations, through sale of our
interests in DPI and DNAS, or through public or private equity or debt
financings. We cannot be certain that additional funding will be available or
that the terms will be acceptable. Existing stockholders will experience
dilution of their investment if we raise additional funds by issuing equity. If
adequate funds are not available, we may delay, reduce or eliminate any of our
research or development programs. Furthermore, we may obtain funds through
arrangements with collaborative partners or others that require us to give up
rights to technologies or products that we would otherwise seek to develop or
commercialize ourselves.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is principally limited to our cash equivalents
and investments that have maturities of less than one year and equity
investments in public and private companies. We maintain an investment portfolio
of investment grade, liquid securities that limit the amount of credit exposure
to any one issue, issuer or type of instrument. The securities in our investment
portfolio are not leveraged, are classified as available-for-sale and are
therefore subject to interest rate risk. We currently do not hedge interest rate
exposure. If market interest rates were to increase by 100 basis points, or 1%,
from December 31, 2000 levels, the fair value of our portfolio would decline by
approximately $50,000. The modeling technique used measures the change in fair
values arising from an immediate hypothetical shift in market interest rates and
assumes ending fair values include principal plus accrued interest.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
WITH REPORT OF INDEPENDENT AUDITORS
PAGE
----
AXYS PHARMACEUTICALS, INC.
Report of Ernst & Young LLP, Independent Auditors........... 35
Balance Sheets.............................................. 36
Statements of Operations.................................... 37
Statement of Stockholders' Equity........................... 38
Statements of Cash Flows.................................... 39
Notes to Financial Statements............................... 40
DISCOVERY PARTNERS INTERNATIONAL, INC.
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes of Financial Statements............................... F-7
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Axys Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Axys Pharmaceuticals,
Inc. as of December 31, 2000 and 1999, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Axys Pharmaceuticals, Inc.
at December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Palo Alto, California
March 2, 2001
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AXYS PHARMACEUTICALS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
----------------------
2000 1999
--------- ---------
Current assets:
Cash and cash equivalents................................. $ 41,247 $ 23,577
Marketable securities..................................... 529 3,080
Accounts receivable, trade................................ -- 4,786
Inventories............................................... -- 2,258
Prepaid expenses and other current assets................. 2,890 1,524
--------- ---------
Total current assets.............................. 44,666 35,225
Property and equipment, net................................. 10,983 18,873
Investment in equity-method investee........................ 40,367 --
Other investments........................................... 15,007 --
Notes receivable from employees............................. 365 715
Debt issuance costs, net.................................... 6,753 --
Other assets................................................ 555 921
--------- ---------
$ 118,696 $ 55,734
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,406 $ 4,563
Accrued compensation...................................... 2,154 2,980
Other accrued liabilities................................. 2,503 5,284
Deferred revenue.......................................... 229 2,083
Current portion of capital lease and debt obligations..... 950 23,646
--------- ---------
Total current liabilities......................... 11,242 38,556
Capital lease obligations, noncurrent....................... 1,889 57
Subordinated notes.......................................... 26,000 --
Minority interest........................................... -- 3,074
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, none issued or outstanding................. -- --
Common stock, $0.001 par value, 50,000,000 shares
authorized, 37,270,144 and 30,471,281 shares issued and
outstanding at December 31, 2000 and 1999,
respectively........................................... 347,444 291,328
Accumulated other comprehensive loss........................ (524) (70)
Accumulated deficit......................................... (267,355) (277,211)
--------- ---------
Total stockholders' equity........................ 79,565 14,047
--------- ---------
$ 118,696 $ 55,734
========= =========
See accompanying notes.
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AXYS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- -------- ---------
Collaboration and license revenue......................... $ 6,990 $ 24,084 $ 35,760
Operating expenses:
Research and development................................ 36,575 55,174 57,502
General and administrative.............................. 9,999 10,872 13,411
Restructuring charge.................................... (592) 5,175 --
Acquired in-process research and development............ -- -- 124,888
-------- -------- ---------
Total operating expenses........................ 45,982 71,221 195,801
-------- -------- ---------
Operating loss............................................ (38,992) (47,137) (160,041)
Interest income........................................... 1,780 2,346 4,720
Interest expense.......................................... (5,885) (2,005) (2,403)
Equity in losses of equity-method investees............... (3,208) (836) (2,393)
Other income/(expense).................................... 889 (852) --
-------- -------- ---------
Loss from continuing operations........................... (45,416) (48,484) (160,117)
Discontinued operations:
(Loss) income from operations of a discontinued
segment.............................................. (5,941) (279) 3,993
Gain on disposal of segment............................. 61,213 -- --
-------- -------- ---------
Net income (loss)......................................... $ 9,856 $(48,763) $(156,124)
======== ======== =========
Basic and diluted net loss per share from continuing
operations.............................................. $ (1.29) $ (1.59) $ (5.38)
Basic and diluted net income (loss) per share from
discontinued segments................................... $ 1.57 $ (.01) $ 0.13
-------- -------- ---------
Basic and diluted net income (loss) per share............. $ 0.28 $ (1.60) $ (5.25)
======== ======== =========
Shares used in computing basic and diluted net loss per
share................................................... 35,281 30,385 29,758
======== ======== =========
See accompanying notes.
37
39
AXYS PHARMACEUTICALS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ACCUMULATED
NOTE OTHER
COMMON STOCK RECEIVABLE COMPREHENSIVE TOTAL
--------------------- FROM INCOME ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT OFFICER (LOSS) DEFICIT EQUITY
---------- -------- ---------- ------------- ----------- -------------
Balances at January 1, 1998.................... 15,203,089 $117,786 $(125) $ -- $ (73,771) $ 43,890
Exercise of options and warrants to purchase
common stock................................. 91,649 621 -- -- -- 621
Issuance of common stock for cash.............. 132,254 1,063 -- -- -- 1,063
Issuance of common stock in connection with the
ESPP......................................... 189,145 1,091 -- -- -- 1,091
Issuance of common stock in connection with the
acquisition of Sequana Therapeutics, Inc..... 14,618,013 169,730 -- -- -- 169,730
Forgiveness of note receivable................. -- -- 125 -- -- 125
Net loss....................................... -- -- -- -- (156,124) (156,124)
Unrealized gain on securities.................. -- -- -- 116 -- 116
---------
Comprehensive loss............................. (156,008)
---------- -------- ----- ----- --------- ---------
Balance at December 31, 1998................... 30,234,150 290,291 -- 116 (229,895) 60,512
Exercise of options and warrants to purchase
common stock................................. 34,874 132 -- -- -- 132
Issuance of common stock in connection with the
ESPP......................................... 202,257 905 -- -- -- 905
Deconsolidation of Akkadix Corporation......... -- -- -- -- 1,447 1,447
Net loss....................................... -- -- -- -- (48,763) (48,763)
Unrealized loss on securities.................. -- -- -- (186) -- (186)
---------
Comprehensive loss............................. (48,949)
---------- -------- ----- ----- --------- ---------
Balance at December 31, 1999................... 30,471,281 291,328 -- (70) (277,211) 14,047
Exercise of options and warrants to purchase
common stock................................. 1,364,760 5,778 -- -- -- 5,778
Embedded beneficial conversion associated with
convertible debt issuance.................... -- 4,058 -- -- -- 4,058
Issuance of warrants in connection with
convertible debentures....................... -- 5,699 -- -- -- 5,699
Compensation expense related to options and
warrants granted to consultants.............. -- 339 -- -- -- 339
Issuance of common stock in connection with the
ESPP......................................... 176,247 613 -- -- -- 613
Issuance of common stock in connection with the
a Private Placement, net of offering costs of
$1,934....................................... 3,497,778 29,547 -- -- -- 29,547
Issuance of common stock in connection with an
equity line of credit, net of offering costs
of $385...................................... 1,639,344 9,615 -- -- -- 9,615
Issuance of common stock for interest due on
convertible debt............................. 120,734 467 -- -- -- 467
Net income..................................... -- -- -- 9,856 9,856
Unrealized loss on securities.................. -- -- -- (454) -- (454)
---------
Comprehensive income........................... 9,402
---------- -------- ----- ----- --------- ---------
Balance at December 31, 2000................... 37,270,144 $347,444 -- $(524) $(267,355) $ 79,565
========== ======== ===== ===== ========= =========
See accompanying notes.
38
40
AXYS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 9,856 $(48,763) $(156,124)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Non-cash restructure charge............................... -- 1,598 --
Forgiveness of notes receivable from officers............. 350 160 155
Beneficial Conversion and other non-cash charges.......... 4,611 -- --
Depreciation and amortization............................. 6,378 11,135 10,156
Gain on disposal of segments.............................. (61,213) -- --
(Gain) loss on disposal of fixed assets................... -- (176) 44
Equity in losses of equity method investees............... 3,208 836 2,393
Acquired in-process research and development.............. -- -- 124,888
Minority interest......................................... (3,074) 1,879 388
Changes in assets and liabilities:
Accounts receivable..................................... 4,786 (2,646) (839)
Inventories............................................. 2,258 (1,823) (435)
Prepaid expenses and other assets....................... (1,366) 3,297 (1,833)
Accounts payable........................................ 843 775 (5,818)
Accrued compensation.................................... (826) (1,252) 2,440
Other accrued liabilities............................... (2,781) 2,328 808
Deferred revenue........................................ (1,854) (6,615) (3,382)
-------- -------- ---------
Net cash and cash equivalents used in operating
activities......................................... (38,824) (39,267) (27,159)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for-sale-securities:
Purchases................................................. (11,061) (77,003) (56,065)
Maturities................................................ 13,612 110,193 92,105
Investment in subsidiaries and joint ventures............... -- (25) (2,000)
Acquisition, net of cash received........................... -- -- 13,270
Change in investment in consolidated subsidiaries and
affiliates................................................ -- 3,351 --
Proceeds from sale of PPGx stock............................ 5,900 -- --
Proceeds from sale of property and equipment................ -- 877 119
Expenditures for property and equipment..................... (3,990) (8,862) (8,263)
-------- -------- ---------
Net cash and cash equivalents provided by investing
activities................................................ 4,461 28,531 39,166
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock.................. 45,553 1,037 2,775
Proceeds from issuance of note payable and capital lease
obligations, net of issuance costs........................ 27,400 53,292 6,174
Principal payments on note payable and capital lease
obligations............................................... (20,920) (56,277) (7,633)
-------- -------- ---------
Net cash and cash equivalents provided by (used in) by
financing activities...................................... 52,033 (1,948) 1,316
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 17,670 (12,684) 13,323
Cash and cash equivalents, beginning of year................ 23,577 36,261 22,938
-------- -------- ---------
Cash and cash equivalents, end of year...................... $ 41,247 $ 23,577 $ 36,261
======== ======== =========
Supplemental disclosure of cash flows information:
Cash paid during the year for interest...................... $ 2,684 $ 2,130 $ 2,284
======== ======== =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock and value of options and warrants
issued in acquisitions.................................... $ -- $ -- $ 169,730
======== ======== =========
Value of options and warrants issued in connection with
convertible debt.......................................... $ 9,757 $ -- $ --
======== ======== =========
See accompanying notes.
39
41
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Axys Pharmaceuticals, Inc., a Delaware corporation ("Axys" or the
"Company"), is a biopharmaceutical company focused on the discovery, design and
development of therapeutic small molecules that address significant markets with
major unmet medical needs. Axys collaborates with large pharmaceutical companies
in discovering therapeutics for chronic diseases for which there are large
markets. The Company also selectively focuses its own resources on discovering
and developing therapeutics for the treatment of various types of cancer and
other specialty market therapeutics. The Company has on-going programs in the
treatment of autoimmune, inflammatory diseases, and cancers. Axys' drug design
platform integrates advanced biology, chemistry, biophysics and information
technologies to optimize the potency, selectivity and physical properties of new
drugs, making the drug discovery process more efficient and productive.
At December 31, 2000, the Company owns approximately 23% of Akkadix
Corporation ("Akkadix"), formerly known as Xyris Corporation (see notes 3 and
13) and approximately 31% of Discovery Partners International, Inc. ("DPI") (see
notes 2 and 3). These investments are accounted for under the equity method.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates, and such differences could be material.
Discontinued Operations
During 2000, the Company completed the sale of its former subsidiaries Axys
Advanced Technologies ("AAT") and PPGx, Inc. ("PPGx"). The statements of
operations are reclassified for the years ended December 31, 1999 and 1998 to
reflect the results of AAT and PPGx as discontinued operations, in accordance
with Accounting Principles Board Opinion No. 30.
Cash, Cash Equivalents and Marketable Investments
The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase to be cash equivalents. Investments
with maturities greater than three months and less than one year are classified
as marketable investments. Investments with maturities greater than one year are
classified as long-term investments.
The Company considers all its marketable investment securities as
available-for-sale. Available-for-sale securities are reported at estimated fair
market value with the related unrealized gains and losses included in
stockholders' equity. Realized gains and losses, and declines in value judged to
be other than temporary are included in interest income and expense. Realized
gains and losses have been immaterial. The cost of securities sold is based on
the specific identification method.
Equity Method Investees and Non-Marketable Investments
Investments in affiliated entities in which the Company has the ability to
exercise significant influence, but not control, of an investee, generally an
ownership interest of the voting stock of between 20% and 50%, are accounted for
under the equity method of accounting. Under the equity method of accounting,
the Company's share of the investee's earnings or losses are included in the
statements of operations. The Company records its
40
42
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
investments in equity-method investees on the balance sheets as "Investments in
equity-method investees" and its share of the investees' earnings or losses in
"Equity in losses of equity-method investee."
All other investments, which consist of investments for which the Company
does not have the ability to exercise significant influence, are accounted for
under the cost method of accounting. Dividends and other distributions of
earnings from other investees, if any, are included in income when declared. The
Company periodically evaluates the carrying value of its investments accounted
for under the cost method of accounting to determine whether a decrease in value
of the cost investment has occurred which is other than temporary.
Inventories
Inventories (relating to the Company's former AAT subsidiary) are stated at
the lower of cost (first-in, first-out) or market and consisted of the following
at December 31, 1999 (in thousands):
Raw materials............................................... $ 156
Finished goods.............................................. 2,102
------
Total....................................................... 2,258
======
Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets. Machinery and equipment has estimated useful lives ranging from 3 to 5
years and furniture and office equipment has a useful life of 5 years. Purchased
computer software is amortized over 3 years. Leasehold improvements are
amortized over the term of the lease or economic useful life, whichever is
shorter.
Revenue Recognition
The Company's collaborative research programs contain one or more of the
following sources of revenue:
- Research Support: Payments are based on the number of researchers Axys is
committing to a particular program. These revenues are recorded when
earned based on the performance requirements of the research contract.
- License Fees: Payments are generally received when the collaboration
agreement is signed. These revenues are amortized over the term of the
related agreement.
- Milestone Payments: Payments that are based on our partner achieving
certain technical or regulatory milestones in the collaboration.
Milestone payments are recorded as revenue upon the achievement of
mutually agreed upon milestones in the absence of any performance
obligations associated with the milestone.
Research and Development
Research and development expenses consist of costs incurred for independent
and collaborative research and development. These costs include direct costs and
research-related overhead expenses. Research and development expenses under the
collaborative research agreements approximate the research support revenue
recognized under the agreements of $5,443,000, $16,649,000 and $24,804,000, in
2000, 1999 and 1998 respectively.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in
41
43
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25") and related interpretations because the Company
believes the alternative fair value accounting provided for under Financial
Accounting Standards Board ("FASB") Statement No. 123, Accounting for
Stock-Based Compensation, (FAS 123) requires the use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recorded. Stock based compensation arrangements to non-employees are
accounted for in accordance with FAS 123 and EITF 96-18, using a fair value
approach, and the compensation cost of such arrangements are subject to
remeasurement over their vesting terms, as earned.
Net Loss Per Share
Basic earnings per share is computed based on the weighted average number
of shares of the Company's common stock outstanding, less shares subject to
repurchase, if any. In addition, there were other dilutive securities in the
form of options and warrants to purchase 7,311,844, 4,876,824, and 5,050,026
shares of common stock outstanding at December 31, 2000, 1999, and 1998,
respectively. These shares, which would normally be included in the computation
of dilutive earnings per share, were not included in that computation because
the effect would be antidilutive.
Major Customers
Major customers, responsible for 10% or more of revenues include drug
discovery partners and pharmaceutical companies. The percentages of
collaboration and license revenue earned from these major customers to total
revenue for the years ended December 31 were as follows:
2000 1999 1998
---- ---- ----
Customer A.................................................. 51% 16% 14%
Customer B.................................................. 39% 13% 8%
Customer C.................................................. -- 23% 26%
Customer D.................................................. -- 21% 13%
All others.................................................. 10% 27% 39%
--- --- ---
100% 100% 100%
=== === ===
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 2000. The Company
expects to adopt the new Statement effective January 1, 2001. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings.
Based on the Company's derivative positions at December 31, 2000, which are
limited to warrants to purchase common shares of DPI stock (See Note 2 to our
Financial Statements) and certain key employee contracts to acquire investments
held by the Company (see Note 10 to our Financial Statements), management
estimates that upon adoption the Company will record a charge from the
cumulative effect of an
42
44
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
accounting change of approximately $400,000 recognized in the statement of
operations in the first quarter of 2001.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
2. DISCONTINUED OPERATIONS
During 2000, the Company sold two of its affiliated businesses: PPGx, Inc.
("PPGx") and Axys Advanced Technologies, Inc. ("AAT"). As a result, the
operating results previously reported for the years ended 1999 and 1998 are
reclassified in accordance with Accounting Principles Board Opinion No. 30.
Sale of PPGx
On December 22, 2000, the Company completed the sale of PPGx to a privately
held company -- DNA Sciences, Inc. ("DNAS"). PPGx was previously a
majority-owned subsidiary (82%) of Axys and performed genetic testing and
contract research services for biotechnology and pharmaceutical companies. In
conjunction with the sale, Axys received 1,478,550 shares of DNAS Series D
Preferred Stock and 108 shares of DNAS common stock. The fair value of the
Series D Preferred Stock and Common Stock received was approximately $15
million. Immediately prior to this transaction, Pharmaceutical Product
Development, Inc. ("PPD"), the minority owner of PPGx, exercised its right to
purchase 50% of the outstanding shares of PPGx. As a result of this exercise,
Axys received $5.9 million from PPD for 32% of the outstanding PPGx shares held
by Axys. Prior to consummation of the sale of PPGx, the carrying value of Axys'
interest in the common stock of PPGx was $(5.5) million. Accordingly, a $26
million gain (representing the difference between the fair value of securities
received and the carry value, less estimated expenses) was recorded in
connection with the transaction. At December 31, 2000, Axys owned approximately
5% of DNAS outstanding stock and accounts for its investment under the cost
method.
Sale of Axys Advanced Technologies
On April 28, 2000, the Company completed the sale of its combinatorial
chemistry business, Axys Advanced Technologies, Inc. ("AAT") to Discovery
Partners International, Inc. ("DPI"). Under the terms of the agreement, AAT was
merged with a subsidiary of DPI and Axys received as consideration 7,425,000
shares of common stock in DPI, $50,000 in cash, a $550,000 note receivable, and
a warrant to purchase 200,000 additional shares of DPI at $8 per share. The
shares held by Axys represented an ownership interest in DPI of approximately
31% at December 31, 2000. Accordingly, a portion of the gain recognized on the
transaction is deferred and will be recognized as Axys' ownership in DPI is
reduced. The total gain realized from the sale of AAT through December 31, 2000
was approximately $54 million, of which $34.8 million was realized and recorded
during 2000. The Company accounts for its investment in DPI under the equity
method of accounting.
A summary of the discontinued operations described above for the year ended
2000 follows:
PPGX AAT TOTAL
------- ------- -------
(Loss) income from operations of a discontinued
segment............................................. $(7,089) $ 1,148 $(5,941)
Gain on disposal of segment........................... 26,432 34,781 61,213
------- ------- -------
$19,343 $35,929 $55,272
======= ======= =======
43
45
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The results of operations and net income (loss) of AAT and PPGx reflected
in the financial statements of Axys for the years ended 2000, 1999, and 1998 are
summarized as follows:
2000 1999 1998
--------------------- --------------------- ---------------------
NET INCOME/ NET INCOME/ NET INCOME/
REVENUE (LOSS) REVENUE (LOSS) REVENUE (LOSS)
------- ----------- ------- ----------- ------- -----------
Axys Advanced
Technologies............. $5,071 $ 1,148 $13,287 $ 4,776 $11,662 $3,993
PPGx....................... 1,719 (7,089) 886 (5,055) -- --
------ ------- ------- ------- ------- ------
$6,790 $(5,941) $14,173 $ (279) $11,662 $3,993
====== ======= ======= ======= ======= ======
3. INVESTMENTS IN UNCONSOLIDATED AFFILIATES AND NON-MARKETABLE SECURITIES
The following is a summary of the Company's investments in equity method
investees and investments in non-marketable securities.
Discovery Partners International, Inc.
At December 31, 2000, the Company's only equity-method investment with a
carry value was a 31% ownership interest in DPI. DPI is a provider of drug
discovery products, services and bio-information to pharmaceutical and
biotechnology companies. The Company received shares in DPI as a result of the
sale of AAT (see Note 2) in April 2000.
In July 2000, DPI completed its initial public offering (IPO) of its common
stock. Prior to the IPO, Axys owned 7,425,000 shares of DPI common stock, which
represented approximately 43% of the outstanding shares. DPI sold 5,000,000
shares of common stock in its IPO at a price of approximately $18 per share. The
IPO reduced Axys' original ownership percentage in DPI to its current ownership
of approximately 31%. As of December 31, 2000, DPI was the only publicly held
equity-method investee of the Company. The market value of the Company's DPI
common stock was approximately $90 million as of December 31, 2000. The DPI
shares are subject to restrictions that may limit the Company's ability to
liquidate its position in a timely manner.
Summarized balance sheet information as of December 31, 2000 of DPI is as
follows (in thousands):
Current assets............................................ $118,600
Non-current assets........................................ 61,400
Current liabilities....................................... 11,600
Non-current liabilities................................... 1,600
Summarized statement of operations information of DPI for the year ended
December 31, 2000, is as follows (in thousands):
Net revenue................................................ $36,300
Gross profit............................................... 17,900
Net loss................................................... 11,700
Akkadix Corporation
In May 1998, the Company formed a majority owned subsidiary, Akkadix
Corporation ("Akkadix", formerly known as Xyris Corporation), which was
established to leverage Axys' existing pharmaceutical technology in the
agricultural biotechnology market. In connection with the formation of Akkadix,
Axys contributed certain technology rights for use in the field of agriculture
in exchange for an 82% ownership interest at the formation date. Axys' ownership
in Akkadix was diluted as a result of various financings in 1999 (as discussed
below) and acquisitions. The Company's ownership in Akkadix was 82% at December
31, 1998,
44
46
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
38% at December 31, 1999, and 23% at December 31, 2000. Axys' carrying value in
Akkadix is zero as of December 31, 2000 and 1999 due to its pro rata share of
losses in Akkadix from inception. Axys does not guarantee any funding for
Akkadix and continues to account for this investment under the equity method of
accounting.
In 1999, Akkadix completed various financings in which it raised
approximately $10 million from third parties. Under the terms of these
financings, the Company granted certain third parties the right (the "Put
Option") to require Axys to purchase all third party interests in Akkadix in
exchange for additional shares of Axys' common stock. The Put Options granted in
connection with $9 million of that funding were extended from February 2001 to
August 2001 pursuant to an agreement reached between the Company and the holders
of such options (see Note 13).
During the fourth quarter of 2000, Axys advanced a $2.5 million bridge loan
to Akkadix. The loan to Akkadix resulted in the Company recognizing an adjusted
basis for allocation of its pro rata share of losses of Akkadix. As of December
31, 2000, the adjusted basis was charged to "Equity in losses of equity-method
investees" as the Company recorded its pro rata share of losses in the fourth
quarter and the carrying value was again reduced to zero.
DNA Sciences, Inc.
At December 31, 2000, "Other investments" includes $15 million of Series D
Preferred Stock and 108 shares of common stock of DNAS accounted for under the
cost method. The investments represent the value of the stock received from DNAS
from the sale of PPGx (See Note 2).
45
47
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash Equivalents and Marketable Securities
Securities classified as available-for-sale at December 31, 2000 and 1999
are summarized below. Estimated fair value is based on quoted market prices for
these investments (in thousands).
GROSS ESTIMATED
AMORTIZED UNREALIZED FAIR
COST LOSSES VALUE
--------- ---------- ---------
AT DECEMBER 31, 2000:
Money market account.................................. $41,247 $ -- $41,247
Equity securities..................................... 1,053 (524) 529
------- ----- -------
$42,300 $(524) $41,776
======= ===== =======
AT DECEMBER 31, 1999:
Commercial paper of U.S. corporations................. $ 8,599 $ -- $ 8,599
U.S. treasury securities.............................. 5,000 -- 5,000
Certificate of deposit................................ 28 -- 28
Securities of foreign corporations.................... 2,148 (56) 2,092
U.S. agency securities................................ 10,952 (14) 10,938
------- ----- -------
$26,727 $ (70) $26,657
======= ===== =======
Balance sheet classification:
AT DECEMBER 31, 2000:
Cash and cash equivalents............................. $41,247 $ -- $41,247
Marketable securities................................. 1,053 (524) 529
------- ----- -------
$42,300 $(524) $41,776
======= ===== =======
AT DECEMBER 31, 1999:
Cash and cash equivalents............................. $23,577 $ -- $23,577
Marketable securities................................. 3,150 (70) 3,080
------- ----- -------
$26,727 $ (70) $26,657
======= ===== =======
Estimated Fair Value of Other Financial Instruments
The carrying value of the debt obligations of $26 million approximates its
fair value at December 31, 2000. The fair value of the debt obligations was
estimated based on a discounted cash flow. The carrying values of all other
financial instruments approximate their fair values.
46
48
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY & EQUIPMENT
Property and equipment is recorded at cost and consists of the following
(in thousands):
DECEMBER 31,
--------------------
2000 1999
-------- --------
Machinery and equipment..................................... $ 17,471 $ 29,119
Purchased software.......................................... 1,833 1,946
Furniture and office equipment.............................. 8,253 2,702
Leasehold improvements...................................... 10,547 14,614
Construction in progress.................................... 1,710 227
-------- --------
39,814 48,608
Less accumulated depreciation and amortization.............. (28,831) (29,735)
-------- --------
$ 10,983 $ 18,873
======== ========
Property and equipment includes approximately $3,621,000 and $14,168,000
recorded under capital leases at December 31, 2000 and 1999, respectively.
Accumulated amortization of equipment under capital leases was approximately
$1,289,000 and $13,891,000 at December 31, 2000 and 1999, respectively.
Depreciation expenses was approximately $5,627,000, $10,310,000 and $8,883,000
for the years ended 2000, 1999, and 1998, respectively.
6. CONVERTIBLE DEBT SECURITIES
On September 22, 2000, the Company issued $26 million of 8% Senior secured
convertible notes. After placement agent fees of $1.4 million and other offering
costs, total net proceeds raised from the offering was approximately $24.6
million. The notes mature on October 1, 2004 and interest is payable quarterly.
Principal is payable in lump sum at maturity. The Company may, at its option,
pay interest in shares of its common stock in lieu of cash if certain
requirements are satisfied. The notes are convertible at any time into 3,682,720
shares of our common stock at a conversion price of $7.06. The notes are senior
obligations to the Company and rank pari passu in right of payment with all our
existing and future senior indebtedness and senior to all our existing and
future subordinated indebtedness, and are secured by 6,682,500 shares, or
approximately 90%, of our holding of DPI common stock.
The holders of notes shall have the right to require the Company to
repurchase all or a portion of the notes at a price equal to 100% of the
outstanding principal amount plus accrued and unpaid interest, upon the
occurrence of certain repurchase events. The Company cannot redeem the notes
prior to their maturity.
The notes were issued with Class A and Class B detachable warrants that
entitle the note holders to purchase a total of 1,841,360 shares of the
Company's common stock at an exercise price of $8.82 and $10.59, respectively.
All Class A and Class B warrants expire on October 1, 2004. A portion of the
proceeds from the offering were allocated to the warrants and capitalized as
debt issuance costs. The value of the warrants were determined using Black
Scholes option pricing model and estimated to be approximately $5.7 million and
will be amortized over the life of the notes. Total amortized debt issuance
costs were $498,000 for the year ended 2000.
In November 2000, the FASB issued Emerging Issues Task Force Issue No.
00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, to Certain Convertible Instruments" ("EITF 00-27") which is
effective for all such instruments. EITF 00-27 clarifies the accounting for
instruments with beneficial conversion features or contingently adjustable
conversion ratios. According to the new accounting principle, the beneficial
conversion feature should be calculated by first allocating the proceeds
received from the financing among the convertible instrument and the detachable
warrants and then, measuring the beneficial
47
49
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
conversion feature between the stated conversion price of the convertible
instrument and the effective conversion price based on the allocated proceeds.
Previously, the beneficial conversion feature calculation was based on the
difference between the stated conversion price of the convertible instrument and
the fair value of the company's stock price on the closing date of the
financing. As a result of the new accounting principle, the Company recognized a
beneficial conversion feature of approximately $4 million.
Any recorded beneficial conversion feature resulting from the allocation of
proceeds is recognized as interest expense over the minimum period from the date
of issuance to the earliest date the debt holder can exercise its conversion
option. As a result, the Company recognized the entire beneficial conversion
option of $4 million to interest expense in the fourth quarter of 2000.
7. RESTRUCTURING CHARGE
In December 1999, the Company completed the closing of its San Diego, CA
operations and relocated its oncology genomics activities to its South San
Francisco headquarters. As a result of this action, a one-time charge of $5.2
million was recorded in 1999, of which $2.2 million related to severance and
other employee-related costs, $1.1 million related to facilities costs, $500,000
related to the disposal of assets, and $1.4 in other costs associated with the
restructuring. During 2000, the Company successfully transferred the lease
facility to a third party who assumed all of the liabilities associated with the
facility, including the transfer of subleases. As a result of the lease
transfer, we did not realize all of the expected restructuring charges as
previously estimated at December 31, 1999 and, accordingly, the Company revised
its restructuring charge estimate during 2000. The net change in estimate
resulting from our successful lease transfer was approximately $592,000.
The following table summarizes the Company's 2000 restructuring charge
activity for the twelve months ended December 31, 2000 (in thousands):
CASH/ RESERVE BALANCE PAYMENTS CHANGES IN RESERVE BALANCE
DESCRIPTION NON/CASH AT 12/31/99 MADE ESTIMATE AT 12/31/00
----------- ------------- --------------- -------- ---------- ---------------
Severance and benefits......... Cash $(1,095) $1,095 $ -- $--
Facilities..................... Cash/Non-Cash (748) 156 592 --
Contractual Research
Commitments.................. Cash (81) 81 -- --
------- ------ ---- ---
$(1,924) $1,332 $592 $--
======= ====== ==== ===
8. STOCKHOLDERS EQUITY
Common Stock
At December 31, 2000 and 1999 common stock was reserved for issuance as
follows (in thousands):
2000 1999
----- -----
Stock options............................................... 5,369 5234
Warrants.................................................... 1,899 678
Employee stock purchase plan................................ 383 557
----- -----
7,651 6,471
===== =====
Equity Financing
On July 21, 2000, the Company completed the sale of $10 million of its
common stock, par value $0.001 per share. Net proceeds resulting from the sale
of 1,639,344 shares of common stock at a price of $6.10 per share were
approximately $9.6 million. Pursuant to a common stock purchase agreement, the
Company may
48
50
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
at its own discretion, issue and sell an additional $40 million of common stock
at an average price as determined over a period of 30-days prior to the
financing.
Warrants
As of December 31, 2000, the Company had issued and outstanding warrants to
purchase a total of 1,899,234 shares of the Company's common stock at prices
ranging from $4.06 to $10.59 per share. These warrants expire at various dates
from 2004 through 2005.
Stock Options
The Company has various equity incentive plans under which it issues stock
options to employees, consultants and members of the Board of Directors. The
Company's plans include the 1997 Equity Incentive Plan under which incentive
stock options or non-qualified stock options may be granted, or restricted stock
may be issued, at the discretion of the Board of Directors to employees,
directors and consultants to purchase the Company's common stock; the 1997
Non-Officer Equity Incentive Plan, under which non-officer employees and
consultants may be granted non-qualified stock options to purchase the Company's
common stock; and the 1994 Non-Employee Directors' Stock Option Plan, whereby
nonqualified stock options are automatically granted to non-employee directors
to purchase the Company's common stock.
The Company also had a 1989 Stock Option Plan, under which directors,
officers, employees, and consultants may be issued restricted stock, or granted
incentive stock options or nonqualified stock options to purchase the Company's
common stock, at the discretion of the Board of Directors. This Plan expired in
1999 eliminating approximately 700,000 shares available for grant at December
31, 1999, but continues to have options outstanding that will expire ten years
from the date of original grant.
All options granted under these Plans become exercisable pursuant to the
applicable terms of the grant. For options granted after December 31, 1997, the
exercise price is equal to the market value of the Company's common stock on the
date of grant. Generally options vest ratably over four years and expire ten
years from the date of grant.
In October 1998, the Company offered its employees the right to exchange
their then outstanding options to purchase shares of common stock with exercise
prices ranging from $4.31 to $15.59, for new options to purchase shares with
exercise prices of $4.00 per share for non-officer employees and $5.00 per share
for executive officer employees. Under this program, options to purchase
3,643,387 shares were exchanged resulting in a decrease in aggregate purchase
price from $34,254,046 to $15,560,548. All new options had an additional year of
vesting added to the original vesting term.
In May, 2000, the stockholders approved an additional 1,500,000 shares of
common stock under the Company's 1997 Equity Incentive Plan.
49
51
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Transactions under all of the above equity incentive plans are as follows:
OUTSTANDING STOCK OPTIONS
---------------------------
WEIGHTED
SHARES NUMBER OF AVERAGE
AVAILABLE SHARES EXERCISE PRICE
---------- ---------- --------------
Balances at January 1, 1998....................... 1,380,234 1,999,624 $11.06
Shares reserved................................. 2,850,000 --
Options granted................................. (7,080,180) 7,080,180 $ 5.86
Options exercised............................... -- (226,193) $ 3.23
Options canceled................................ 4,433,158 (4,433,158) $ 9.28
---------- ----------
Balances at December 31, 1998..................... 1,583,212 4,420,453 $ 4.80
---------- ----------
Shares reserved................................. -- --
Options granted................................. (1,699,539) 1,699,539 $ 4.31
Options exercised............................... -- (34,643) $ 3.38
Options canceled................................ 1,886,403 (1,886,403) $ 4.57
Options expired................................. (735,135) -- --
---------- ----------
Balances at December 31, 1999..................... 1,034,941 4,198,946 $ 4.72
---------- ----------
Shares reserved................................. 1,500,000 -- --
Options granted................................. (2,237,317) 2,237,317 $ 6.03
Options exercised............................... -- (1,145,445) $ 4.34
Options cancelled............................... 651,924 (651,924) $ 4.58
Options expired................................. (219,204) -- --
---------- ----------
Balances at December 31, 2000..................... 730,344 4,638,894 $ 5.45
========== ==========
The weighted average fair value of stock options granted under the plans
were approximately $12.2 million, $3.4 million, and $14.8 million in 2000, 1999,
and 1998, respectively.
Options outstanding and exercisable by price range at December 31, 2000:
OPTIONS OUTSTANDING
---------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ------------------------
REMAINING WEIGHTED- WEIGHTED-
OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
RANGE OF OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES (SHARES) (IN YEARS) PRICE (SHARES) PRICE
- --------------- ----------- ----------- --------- ----------- ---------
$0.07 - $ 3.94... 447,249 8.58 $ 3.40 151,157 $ 3.15
$3.97 - $ 4.00... 659,766 2.89 $ 4.00 324,252 $ 4.00
$4.06 - $ 5.00... 1,784,687 7.28 $ 4.77 582,353 $ 4.84
$5.13 - $ 8.13... 1,541,982 8.77 $ 6.65 348,880 $ 6.70
$8.38 - $17.75... 205,210 6.68 $11.61 140,238 $11.97
--------- ---------
4,638,894 7.45 $ 5.45 1,546,880 $ 5.56
========= =========
Employee Stock Purchase Plan
In October 1993, the Company adopted the 1993 Employee Stock Purchase Plan
(the "Purchase Plan") under which employees who meet certain minimum employment
criteria are eligible to participate. Eligible employees may purchase common
stock of the Company at a purchase price of 85% of the lower of the fair market
value of the stock at the offering commencement date or purchase date, within a
two-year offering period. In 1999, the Board of Directors approved an additional
500,000 common shares to be reserved under
50
52
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the Purchase Plan. Under the Purchase Plan, 176,247, 202,257, and 189,145 shares
were issued in 2000, 1999, and 1998, respectively. There are 383,158 shares
available to purchase in the plan at December 31, 2000.
Shareholders Rights Plan
On October 8, 1998, the Board of Directors adopted a Preferred Share
Purchase Rights Plan (the "Plan") designed to enable all stockholders to realize
the full value of their investment and to provide for fair and equal treatment
for all stockholders in the event an unsolicited attempt were made to acquire
the Company. In connection with the Plan, the Board declared a dividend of one
preferred share purchase right (a "Right") for each share of common stock of the
Company outstanding on October 28, 1998 and further directed the issuance of one
such right with respect to each share of the Company's common stock that is
issued after October 28, 1998. If a person, entity or group of affiliated or
associated persons acquires beneficial ownership of 15% or more of the Company's
common stock, or announces a tender offer for 15% or more of the Company's
common stock, the rights will be distributed. Each Right entitles the registered
holder to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock, at a price of $35.00 per one one-hundredth
of a Preferred Share subject to adjustment. The Rights are redeemable prior to
any person's acquisition of more than 15% of the Company's common stock and will
expire on October 7, 2008.
Stock-Based Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its stock-based compensation plans because, as discussed below,
the alternative fair value accounting provided for under SFAS 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options and employee stock-based awards. Under APB Opinion No. 25, if the
exercise price of the Company's stock options is equal to the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro Forma Disclosures
Pro forma information regarding net loss and net loss per share is required
by FAS 123, and has been determined as if the Company had accounted for its
stock-based awards under the fair value method of FAS 123. The fair value for
these stock-based awards was estimated at the date of grant using a
Black-Scholes option-pricing model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility.
The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:
OPTIONS
--------------------
2000 1999 1998
---- ---- ----
Expected life (years)....................................... 3.0 3.0 3.0
Expected volatility......................................... 1.41 0.92 0.65
Risk-free interest rate..................................... 5.73% 5.58% 5.13%
For purposes of pro forma disclosures, the estimated fair value of the
stock-based awards are amortized to pro forma net loss over the option's vesting
period and the purchase plan's six-month purchase period. The
51
53
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company's as reported and pro forma information follows (in thousands, except
for net loss per share information):
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
------ -------- ---------
Net income (loss) As reported....................... $9,856 $(48,763) $(156,124)
Pro forma......................................... $5,491 $(52,757) $(163,470)
Net income (loss) per share -- basic and diluted
As reported....................................... $ 0.28 $ (1.60) $ (5.25)
Pro forma......................................... $ 0.16 $ (1.74) $ (5.49)
For pro forma purposes in accordance with FAS 123, the repricing of
employee stock options during 1998 is treated as a modification of the
stock-based award, with the original options being repurchased and new options
granted. Any additional compensation arising from the modification is recognized
over the remaining vesting period of the new grant.
9. BUSINESS COMBINATIONS AND OTHER JOINT VENTURES
The Company completed the following business combinations and joint venture
transactions during 1999 and 1998. There were no business purchases or joint
venture transactions entered into during 2000.
Acquisition of Sequana
On January 8, 1998, the Company acquired all of the outstanding capital
stock of Sequana, a genomics company that used industrial-scale gene discovery
technology and functional genomics to discover and characterize genes that cause
certain common diseases. The Company issued shares of Axys common stock in
exchange for all the outstanding common stock of Sequana, on the basis of 1.35
shares of Axys' common stock for one share of Sequana common stock. The purchase
price of $174,070,000 consisted of (i) the issuance of 14,618,013 shares of
Company common stock valued at $168,107,000, in exchange for all outstanding
Sequana capital stock, (ii) the issuance of Company warrants valued at
$1,623,000 in exchange for all of the outstanding Sequana warrants, and (iii)
transaction costs totaling $4,340,000.
The allocation of the purchase price was determined as follows (in
thousands):
Net tangible assets acquired.............................. $ 45,882
Assembled workforce of Sequana............................ 3,300
Acquired in-process research and development.............. 124,888
--------
Total........................................... $174,070
========
The acquisition was accounted for as a purchase and accordingly, the
original purchase price was allocated to acquired assets and assumed liabilities
based upon their estimated fair values at the date of acquisition, and to the
estimated fair value of in-process research and development ("IPR&D") was
charged as an expense in the statement of operations during 1998 such acquired
IPR&D had not reached technological feasibility. The unamortized balance at
September 30, 1999 of $1.3 million for the assembled work force was written off
in connection with the Company's September 30, 1999 restructuring charge.
The value allocated to purchased IPR&D was determined by estimating the
costs to develop the purchased in-process technology into viable products,
estimating the resulting net cash flows from such projects, and discounting the
net cash flows back to their present value. The discount rate included a factor
that takes into account the Company's weighted average cost of capital and the
uncertainty surrounding the successful development of the purchased in-process
technology.
52
54
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The acquired in-process research and development projects in the Sequana
acquisition consisted of eight significant research and development projects. As
of December 31, 1999, the schizophrenia/bipolar program was transferred to
Parke-Davis (currently Pfizer, Inc.) and the pharmacogenomics program was spun
off into the PPGx subsidiary. All other programs have been terminated.
The operating results of Sequana from January 1, 1998 to December 31, 1998
have been included in the Company's consolidated results of operations. The
operating results of Sequana from January 1, 1998 to January 8, 1998 (date of
acquisition) are considered immaterial.
Investment in Joint Venture
In 1997, Sequana formed Genos with Memorial Sloan-Kettering Cancer Center
to focus on research and identification of genes and related genetic information
of values in the prognosis, diagnosis and positive treatment of certain common
cancers. Sequana invested $5.2 million and licensed certain of its technology to
Genos and has contracted with Genos to conduct research and provide certain
other services to the joint venture.
In May 1999, the Board of Directors of Genos decided to suspend its
research activities and wind up its affairs. Genos is currently a non-operating
entity holding the technology developed during its operations. As a result of
the cancellation of Genos activities, the Company recorded a one-time charge of
$1.1 million during 1999, representing the total carrying value of the
investment in Genos.
10. RELATED PARTY TRANSACTIONS
In December 2000, the Company amended the 1999 employment agreement with
the Company's former Chief Executive Officer. Under the terms of the agreement,
the former executive will receive approximately one-half of his former salary
and bonus, forgiveness of his $560,000 note receivable plus accrued interest at
December 31, 2000, in exchange for three years of continued service and an
agreement not to compete. The agreement is in effect through December 31, 2003.
The Company charged compensation expense in 2000 for the forgiveness of the note
receivable.
In August 2000, the Company advanced $300,000 in a note receivable to an
officer for housing assistance. The note earns interest at 6.37% and is due
annually. The note plus accrued interest is forgivable over five years.
In April 2000, in connection with the sale of AAT to DPI, the Company
entered into a sublease arrangement for approximately 25,000 square feet of
facility space. DPI has the right of first refusal on the remainder of the
52,000 square foot building upon the Company's move into the new facility. The
sublease provides for rental income equal to the underlying lease expense and
expires in November 2003, unless extended in accordance with its terms. Total
income recognized in 2000 from this lease was approximately $285,000.
In April 2000, in connection with the sale of AAT to DPI, the Company
entered into a Compound Purchase Agreement, by which the Company will purchase a
minimum number of compounds equal to $250,000, $500,000 and $3,350,000 by April
1, 2001, 2002 and 2003, respectively. The company purchased $2.6 million of
compounds during 2000 under this agreement.
11. EMPLOYEE BENEFIT PLANS AND OTHER COMPENSATION ARRANGEMENTS
401(K) Plan
The Company maintains a 401(K) retirement savings plan for all of its
eligible employees. Each participant in the plan may elect to contribute 1% to
20% of his or her annual salary to the plan, subject to
53
55
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
statutory limitations. The Company matches 50% of the first 6% of the salary
contributed by the employee. The Company's match is done with the
Company's stock. The expense charged to operations under this plan for fiscal
2000, 1999 and 1998 was $251,108, $458,253, and $295,180, respectively.
Key Personnel Option Plan
During 2000, the Board approved the 1999 Key Personnel Option Plan. The
plan is intended to award certain eligible key executives when the Company
realizes appreciation generated from the sale of certain affiliated business.
The plan gives certain employees rights to purchase a fixed and determinable
amount of common stock investment shares held by Axys at a set exercise price.
Shares currently subject to this arrangement include 375,000 and 121,239 shares
of DPI and DNAS, respectively. Total charges recognized during the year ended
2000 associated with this plan approximate $2.9 million. This charge is included
as a component of the gain on disposal of segment.
The Key Personnel Option Plan meets the definition of a derivative under
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities(FAS 133). As such, the contract will be marked to market as a
liability effective January 1, 2001 and changes in the market value will be
recorded in earnings.
12. COMMITMENTS
Leases
The Company leases office and laboratory facilities and equipment. Rent
expense for the years ended December 31, 2000, 1999, and 1998 was approximately
$2,179,000, $2,168,000, and $3,293,000, respectively.
Future minimum lease payments under non-cancelable leases and related
sublease income over the next five years are as follows:
CAPITAL OPERATING SUBLEASE
LEASES LEASES INCOME
------- --------- --------
(IN THOUSANDS)
2001................................................... $1,134 $ 2,206 1,072
2002................................................... 1,125 2,112 1,133
2003................................................... 940 2,265 1,240
2004................................................... 18 1,713 1,243
2005................................................... -- 1,436 549
Thereafter............................................. -- 594 --
------ ------- -----
Total minimum lease payments........................... 3,217 $10,326 5,237
======= =====
Less amount representing interest...................... (430)
------
Present value of future lease payments................. 2,787
Less current portion................................... (898)
------
Non-current portion of capital lease obligations....... $1,889
======
Lines of Credit and Note Payable
The Company has a $30 million revolving line of credit with Foothill
Capital Corporation. There were no draws on this line during December 31, 2000,
and the line of credit was terminated in February 2001 as the collateral
requirements made it difficult to utilize.
54
56
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In February 1997, the Company entered into a lending arrangement with one
of its facility lessors for tenant improvements. The loan amount was $350,000,
with interest accruing at 9% per annum. Principal and interest are due monthly
through July 1, 2001. Total outstanding principal at December 31, 2000
approximated $52,000.
In September 2000, the Company entered into a financing agreement with a
lease financing company under which Axys has the ability to finance up to $8.0
million of purchases of lab equipment. At December 31, 2000, Axys borrowed
approximately $2.8 million under this financing line, which bears interest of
9.52%.
13. INCOME TAXES
As of December 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $92,300,000 and $16,500,000, respectively.
The Company also had federal and California research and other tax credit
carryforwards of approximately $7,900,000 and $5,200,000, respectively. The
federal net operating loss and credit carryforwards will expire at various dates
beginning in the year 2001 through 2020, if not utilized. The state of
California net operating losses will expire at various dates beginning in 2001
through 2010, if not utilized.
The utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Significant components of the Company's deferred tax assets for federal and
state income taxes as of December 31 are as follows (in thousands):
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards.......................... $ 32,400 $ 39,600
Research and other credit................................. 11,700 8,600
Capitalized research expenses............................. 34,700 26,500
Fixed asset depreciation.................................. 2,800 3,200
Gain on sale of AAT....................................... 5,300 --
Other..................................................... 2,800 4,500
-------- --------
Total deferred tax assets......................... 89,700 82,400
Valuation allowance......................................... (84,000) (82,400)
Deferred tax liability:
Other..................................................... (5,700) --
-------- --------
Net Deferred Taxes................................ $ -- $ --
======== ========
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The net valuation
allowance increased by approximately $1,600,000 and $19,700,000 during the years
ended December 31, 2000 and 1999, respectively.
Approximately $4,200,000 of the valuation allowance for deferred tax assets
relates to benefits of stock options deductions which, when recognized, will be
allocated directly to contributed capital.
55
57
AXYS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENT (UNAUDITED)
On March 15, 2001, certain third party investors (see Note 8) exercised
their Put Option to acquire a total of 2,482,758 shares of Axys common stock. As
a result of the exercise of these options, Axys acquired an additional 2,702,702
shares of Series A Preferred Stock of Akkadix Corporation, increasing Axys'
ownership percentage in Akkadix voting stock to approximately 44%. The Company
expects to record a charge of approximately $9.0 million in the first quarter
resulting from the Put Option.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER(1) QUARTER(1) QUARTER(1) QUARTER(2) TOTAL YEAR
---------- ---------- ---------- ---------- ----------
2000
Revenue............................. $ 1,414 $ 1,508 $ 2,611 $ 1,457 $ 6,990
Operating loss...................... (8,713) (9,362) (7,154) (13,763) (38,992)
Loss from continuing operations..... (8,748) (8,808) (6,834) (21,026) (45,416)
Net income (loss)................... (8,492) 21,395 (6,718) 3,671 9,856
Basic and diluted net loss per
share:
Loss from continuing operations... $ (0.27) $ (0.25) $ (0.19) $ (0.57) $ (1.29)
Net income (loss)................. $ (0.26) $ 0.61 $ (0.18) $ 0.10 $ 0.28
1999
Revenue............................. $ 8,329 $ 4,734 $ 4,493 $ 6,528 $ 24,084
Operating loss...................... (8,346) (13,080) (18,690) (7,021) (47,137)
Loss from continuing operations..... (8,518) (13,049) (20,008) (6,909) (48,484)
Net income (loss)................... (7,748) (13,214) (19,940) (7,861) (48,763)
Basic and diluted net loss per
share:
Loss from continuing operations... $ (0.27) $ (0.41) $ (0.66) $ (0.23) $ (1.59)
Net income (loss)................. $ (0.26) $ (0.44) $ (0.66) $ (0.26) $ (1.60)
- ---------------
(1) Results have been reclassified in accordance with APB 30-Results of
Discontinued Operations.
(2) Significant fourth quarter events include a $4.0 million beneficial
conversion charge resulting from the issuance of convertible debt, $2.8
million charge in connection with the loan to Akkadix and approximately $2.0
million charge related to other contractual arrangements.
56
58
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Discovery Partners International, Inc.
We have audited the accompanying consolidated balance sheets of
Discovery Partners International, Inc. as of December 31, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects the consolidated financial position of
Discovery Partners International, Inc. at December 31, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
February 15, 2001
F-2
59
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 97,690,236 $ 2,884,639
Accounts receivable 9,395,097 2,785,618
Inventories 9,787,005 1,517,297
Prepaid and other current assets 1,685,914 201,284
------------- -------------
Total current assets 118,558,252 7,388,838
Property and equipment, net 9,567,871 4,655,227
Restricted cash and cash equivalents and other assets 1,996,157 2,264,200
Patent and license rights, net 3,121,074 1,137,625
Other assets, net 1,382,443 --
Goodwill, net 45,154,516 6,205,830
------------- -------------
Total assets $ 179,780,313 $ 21,651,720
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 3,574,534 $ 2,133,625
Accrued compensation 1,231,503 214,601
Deferred business acquisition payment 931,335 1,721,775
Current portion of obligations under capital leases,
equipment notes payable, line of credit and promissory notes 661,160 1,184,921
Deferred revenue 5,172,475 1,935,249
Notes payable to stockholders -- 3,861,920
------------- -------------
Total current liabilities 11,571,007 11,052,091
Obligations under capital leases, equipment notes payable,
and promissory notes less current portion 944,123 1,910,177
Deferred rent 74,583 51,906
Minority interest in Structural Proteomics 628,383 --
Commitments
Redeemable convertible preferred stock,
$.001 par value, none and 7,333,333
shares authorized at December 31, 2000
and 1999, respectively; none and
6,562,278 issued and outstanding at
December 31, 2000 and 1999, respectively -- 27,906,717
Stockholders' equity (deficit):
Common stock, $.001 par value, 99,000,000 shares
authorized, 23,931,237 and 1,611,763 issued and
outstanding at December 31, 2000 and 1999, respectively 23,931 1,612
Preferred stock, $.001 par value, 1,000,000 shares
authorized, no shares issued and outstanding at
December 31, 2000 and 1999, respectively -- --
Additional paid-in capital 200,184,929 1,399,376
Deferred compensation (2,032,378) (642,282)
Note receivable from stockholder (240,000) (240,000)
Accumulated other comprehensive income (loss) 54,903 (55,448)
Accumulated deficit (31,429,168) (19,732,429)
------------- -------------
Total stockholders' equity (deficit) 166,562,217 (19,269,171)
------------- -------------
Total liabilities and stockholders' equity $ 179,780,313 $ 21,651,720
============= =============
See accompanying notes.
F-3
60
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
Sales to third parties $ 33,898,886 $ 13,075,835 $ 6,213,736
Sales to Axys Pharmaceuticals, Inc. 2,364,764 -- --
------------ ------------ ------------
Total revenues 36,263,650 13,075,835 6,213,736
Cost of revenues (exclusive of $17,992 and
$7,238 in 2000 and 1999, respectively,
of stock-based compensation) 18,342,688 8,234,858 2,785,514
------------ ------------ ------------
Gross margin 17,920,962 4,840,977 3,428,222
Cost and expenses:
Research and development (exclusive of $575,914
and $65,828 in 2000 and 1999, respectively,
of stock-based compensation) 8,934,059 3,537,651 5,057,851
Selling, general and administrative
(exclusive of $781,933 and $238,322 in 2000
and 1999, respectively, of stock-based
compensation) 8,413,848 4,439,021 4,984,645
Amortization of stock-based compensation and
other non-cash compensation charges 1,375,839 311,388 --
Amortization of goodwill 3,379,009 -- --
Write-off of in-process research and development 9,000,000 -- --
------------ ------------ ------------
Total operating expenses 31,102,755 8,288,060 10,042,496
------------ ------------ ------------
Loss from operations (13,181,793) (3,447,083) (6,614,274)
Interest income 2,776,620 270,645 386,058
Interest expense (1,529,578) (60,003) (112,698)
Foreign currency gains (losses) 133,062 (133,923) 63,401
Minority interest in Structural Proteomics 104,950 -- --
------------ ------------ ------------
Net loss $(11,696,739) $ (3,370,364) $ (6,277,513)
============ ============ ============
Net loss per share, basic and diluted $ (0.89) $ (3.00) $ (8.20)
============ ============ ============
Shares used in calculating net loss per share,
basic and diluted 13,176,576 1,125,040 765,263
============ ============ ============
See accompanying notes.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL
------------------------- PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
---------- ------------ ------------ ------------
Balance at December 31, 1997 956,731 $ 957 $ 48,367 $ --
Exercise of options to purchase common stock 34,242 34 14,447 --
Issuance of common stock in exchange for a promissory note 430,000 430 171,570 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 1,420,973 1,421 234,384 --
Exercise of options to purchase common stock 20,790 21 5,412 --
Issuance of common stock in exchange for a promissory note 170,000 170 67,830 --
Issuance of warrants to purchase preferred stock -- -- 138,080 --
Deferred compensation related to stock options
and restricted stock -- -- 953,670 (953,670)
Amortization of deferred compensation -- -- -- 311,388
Comprehensive loss:
Foreign currency translation adjustment -- -- -- --
Net loss -- -- -- --
Comprehensive loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 1,611,763 1,612 1,399,376 (642,282)
Common stock issued and options
assumed for acquisitions 7,579,641 7,580 60,151,916 --
Common stock issued for cash 5,750,000 5,750 94,588,039 --
Exercise of options and warrants to purchase common stock 973,421 973 343,373 --
Issuance of warrants to purchase common stock -- -- 1,915,766 --
Conversion of preferred stock into common stock 8,016,412 8,016 39,020,526 --
Deferred compensation related to stock options
and restricted stock -- -- 2,724,672 (2,724,672)
Amortization of deferred compensation and other
non-cash compensation charges -- -- 41,261 1,334,576
Comprehensive loss:
Foreign currency translation adjustment -- -- -- --
Net loss -- -- -- --
Comprehensive loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2000 23,931,237 $ 23,931 $200,184,929 $ (2,032,378)
============ ============ ============ ============
NOTES ACCUMULATED
RECEIVABLE OTHER TOTAL
FROM COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCKHOLDER INCOME (LOSS) DEFICIT EQUITY (DEFICIT)
------------ ------------- ------------ ----------------
Balance at December 31, 1997 $ -- $ -- $(10,084,552) $(10,035,228)
Exercise of options to purchase common stock -- -- -- 14,481
Issuance of common stock in exchange for a promissory note (172,000) -- -- --
Net loss -- -- (6,277,513) (6,277,513)
------------ ------------ ------------ ------------
Balance at December 31, 1998 (172,000) -- (16,362,065) (16,298,260)
Exercise of options to purchase common stock -- -- -- 5,433
Issuance of common stock in exchange for a promissory note (68,000) -- -- --
Issuance of warrants to purchase preferred stock -- -- -- 138,080
Deferred compensation related to stock options
and restricted stock -- -- -- --
Amortization of deferred compensation -- -- -- 311,388
Comprehensive loss:
Foreign currency translation adjustment -- (55,448) -- (55,448)
Net loss -- -- (3,370,364) (3,370,364)
------------
Comprehensive loss -- -- -- (3,425,812)
------------ ------------ ------------ ------------
Balance at December 31, 1999 (240,000) (55,448) (19,732,429) (19,269,171)
Common stock issued and options assumed for acquisitions -- -- -- 60,159,496
Common stock issued for cash -- -- -- 94,593,789
Exercise of options and warrants to purchase common stock -- -- -- 344,346
Issuance of warrants to purchase common stock -- -- -- 1,915,766
Conversion of preferred stock into common stock -- -- -- 39,028,542
Deferred compensation related to stock options
and restricted stock -- -- -- --
Amortization of deferred compensation and other non-cash
compensation charges -- -- -- 1,375,837
Comprehensive loss:
Foreign currency translation adjustment -- 110,351 -- 110,351
Net loss -- -- (11,696,739) (11,696,739)
------------
Comprehensive loss -- -- -- (11,586,388)
------------ ------------ ------------ ------------
Balance at December 31, 2000 $ (240,000) $ 54,903 $(31,429,168) $166,562,217
============ ============ ============ ============
See accompanying notes.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998
------------- ------------- -------------
OPERATING ACTIVITIES
Net loss $ (11,696,739) $ (3,370,364) $ (6,277,513)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation 2,966,335 360,322 561,049
Amortization 5,480,244 311,388 --
Non-cash interest expense for warrants issued 1,243,847 -- --
Write-off of in-process research and development 9,000,000 -- --
Change in operating assets and liabilities:
Accounts receivable (4,804,972) (444,341) (334,487)
Inventories (1,415,559) (357,037) (423,365)
Other current assets (1,373,796) 130,727 (65,907)
Accounts payable and accrued expenses 481,058 (567,171) 1,395,725
Deferred revenue 2,309,449 (774,987) 1,871,400
Deferred rent 22,677 (23,918) 6,069
Restricted cash and cash equivalents and other assets 1,252,200 (1,000,000) --
------------- ------------- -------------
Net cash provide by (used in) operating activities 3,464,744 (5,735,381) (3,267,029)
INVESTING ACTIVITIES
Purchases of property and equipment (4,067,670) (1,112,191) (848,202)
Deposits and other assets (870,347) 181,313 (7,331)
Purchase of patents and license rights (143,673) -- (1,212,497)
Purchase of other assets (1,800,536) (4,963,444) --
Additional cash consideration for
acquisition of Discovery Technologies (1,721,775) -- --
Purchase of Axys Advanced Technologies (600,334) -- --
------------- ------------- -------------
Net cash used in investing activities (9,204,335) (5,894,322) (2,068,030)
FINANCING ACTIVITIES
Proceeds from equipment lease line 1,484,859 -- --
Principal payments on capital leases, equipment
notes payable, line of credit, and promissory notes (2,974,674) (205,980) (262,165)
Net proceeds from issuance of preferred stock 5,004,801 -- 13,568,346
Net proceeds from issuance of common stock 94,938,135 5,433 14,481
Proceeds from convertible notes payable 2,000,000 4,000,000 2,448,395
------------- ------------- -------------
Net cash provided by financing activities 100,453,121 3,799,453 15,769,057
Effect of exchange rate changes 92,067 -- --
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 94,805,597 (7,830,250) 10,433,998
Cash and cash equivalents at beginning of period 2,884,639 10,714,889 280,891
------------- ------------- -------------
Cash and cash equivalents at end of period $ 97,690,236 $ 2,884,639 $ 10,714,889
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 285,731 $ 60,004 $ 112,697
============= ============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Conversion of convertible notes
payable to preferred stock $ 6,000,000 $ -- $ 2,448,395
============= ============= =============
Issuance of common stock for promissory note $ -- $ 68,000 $ 172,000
============= ============= =============
Issuance of warrant to purchase preferred stock $ 1,105,767 $ 138,080 $ --
============= ============= =============
Non-cash consideration for purchase of AAT $ 59,769,495 $ -- $ --
============= ============= =============
Non-cash consideration for purchase of SPI $ 1,200,000 $ -- $ --
============= ============= =============
Deferred acquisition payment for DTL $ 931,335 $ 1,721,775 $ --
============= ============= =============
See accompanying notes.
F-6
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND BUSINESS
Discovery Partners International, Inc. (the "Company") was incorporated
in California on March 22, 1995, under the name IRORI. The Company develops and
offers libraries of drug-like compounds, proprietary instruments, consumables,
drug discovery services and computational tools to generate compound libraries,
and test, screen and optimize potential drugs. In 1998, the Company changed its
name to Discovery Partners International, Inc. In July 2000, the Company
reincorporated in Delaware.
CONSOLIDATION
The consolidated financial statements include all the accounts of the
Company and its wholly owned subsidiaries, IRORI Europe, Ltd., Discovery
Technologies Ltd., ChemRx Advanced Technologies, Inc. and its majority owned
subsidiary, Structural Proteomics, Inc. All intercompany accounts and
transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform to the
2000 presentation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
maturity of less than three months when purchased to be cash equivalents. At
December 31, 2000 and 1999, the cost of cash equivalents was the same as the
market value. Accordingly, there were no unrealized gains and losses. The
Company evaluates the financial strength of institutions at which significant
investments are made and believes the related credit risk is limited to an
acceptable level.
LONG-LIVED ASSETS
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, if indicators of
impairment exist, the Company assesses the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can
be recovered through undiscounted future operating cash flows. If impairment is
indicated, the Company measures the future cash flows associated with the use of
the asset and records the asset at fair value. While the Company's current and
historical operating and cash flow losses are indicators of impairment, the
Company believes the future cash flows to be received from the long-lived assets
will exceed the assets' carrying value, and accordingly, the Company has not
recognized any impairment losses through December 31, 2000.
F-7
64
INVENTORIES
Inventories are recorded at the lower of weighted average cost
(approximates first-in first-out) or market. Inventories consist of the
following:
DECEMBER 31,
-----------------------------------
2000 1999
------------ ------------
Raw materials $ 1,646,779 $ 588,048
Work-in process 1,787,383 601,432
Finished goods 13,179,138 412,006
------------ ------------
16,613,300 1,601,486
Less reserves (6,826,295) (84,189)
------------ ------------
$ 9,787,005 $ 1,517,297
============ ============
Chemical compound libraries accounted for approximately $6.1 million of
the total net inventory value at December 31, 2000.
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
-----------------------------------
2000 1999
------------ ------------
Furniture and equipment $ 12,501,966 $ 4,821,335
Software 790,389 362,108
Leasehold improvements 4,446,021 633,387
------------ ------------
17,738,376 5,816,830
Less accumulated depreciation
and amortization (8,170,505) (1,161,603)
------------ ------------
$ 9,567,871 $ 4,655,227
============ ============
Property and equipment, including equipment under capital leases and
equipment notes payable, are stated at cost and depreciated over the estimated
useful lives of the assets (three to seven years) or the term of the related
lease, using the straight-line method. Amortization of assets acquired under
capital leases is included in depreciation expense.
PATENTS AND LICENSE RIGHTS
The Company has purchased patents and license rights for the labeling of
chemical libraries and related to products for sale and in development. The
purchased patents and license rights are amortized ratably over a period of ten
years.
OTHER ASSETS
Other assets consists of chemical compounds purchased by DTL for its
screening services. The compounds are stated at cost and depreciated over the
estimated useful lives of the assets (three to five years) using the straight
line method.
REVENUE RECOGNITION
Product sales, which include the sale of combinatorial chemistry
instruments and proprietary libraries, are recorded as products are shipped.
Development contract revenues and high-throughput screening service revenues are
recognized on a percentage of completion basis. Advances received under these
development contracts and high-throughput screening service agreements are
recorded as deferred revenue and recognized as costs are incurred over the term
of the contract. Revenue from chemistry service agreements is recognized on a
monthly basis and is based upon the number of full time equivalent (FTE)
employees that actually worked on each agreement and the agreed-upon rate per
FTE per month.
The Company does not have a history of significant returns of its
products nor does it allow its customers the right to return its products.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with research and development is charged to
operations as incurred.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company accounts for common stock options granted, and restricted stock
sold, to employees, founders and directors using the intrinsic value method and,
thus, recognizes no compensation expense for options granted, or restricted
stock sold, with exercise prices equal to or greater than the fair value of the
Company's common stock on the date of the grant. The
F-8
65
Company has recorded deferred stock compensation related to certain stock
options which were granted with exercise prices below estimated fair value (see
Note 7), which is being amortized on an accelerated amortization methodology in
accordance with FIN 28.
Deferred compensation for options granted, and restricted stock sold, to
consultants has been determined in accordance with SFAS No. 123 and EITF 96-18
as the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. Deferred charges for
options granted, and restricted stock sold, to consultants are periodically
remeasured until the underlying options vest.
COMPREHENSIVE LOSS
SFAS No. 130, Reporting Comprehensive Income, requires the Company to
report in the consolidated financial statements, in addition to net income,
comprehensive income (loss) and its components including foreign currency items
and unrealized gains and losses on certain investments in debt and equity
securities. For the years ended December 31, 2000 and 1999, the Company has
disclosed comprehensive loss as a component of shareholders' equity.
Comprehensive loss was the same as net loss for the year ended December 31,
1998.
NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, Earnings per Share, and SAB 98, for all periods presented.
Under the provisions of SAB 98, common stock and redeemable convertible
preferred stock that has been issued or granted for nominal consideration prior
to the anticipated effective date of the initial public offering must be
included in the calculation of basic and diluted net loss per common share as if
these shares had been outstanding for all periods presented. To date, the
Company has not issued or granted shares for nominal consideration.
In accordance with SFAS No. 128, basic and diluted net loss per share
has been computed using the weighted average number of shares of common stock
outstanding during the period, less shares subject to repurchase. The Company
has excluded all convertible preferred stock, outstanding stock options and
warrants, and shares subject to repurchase from the calculation of diluted net
loss per common share because all such securities are anti-dilutive for all
applicable periods presented. The weighted average number of shares excluded
from the calculation of diluted net loss per share for outstanding convertible
preferred stock were 4,374,471, 6,603,780 and 5,665,232 for the years ended
December 31, 2000, 1999 and 1998, respectively. The total number of shares
excluded from the calculations of diluted net loss per share for options and
warrants were 1,292,362, 383,396, and 1,437,691 for the years ended December 31,
2000, 1999 and 1998, respectively. The effect of such securities had they been
dilutive, would have been included in the computation of diluted net loss per
share using the treasury stock method.
Pro forma basic and diluted net loss per common share of $(0.67),
$(0.44), and $(0.98) for the years ended December 31, 2000, 1999 and 1998,
respectively, gives effect to the assumed conversion of preferred stock, which
automatically converted to common stock upon the completion of the Company's
initial public offering (using the "as-if converted" method) from the original
date of issuance.
SEGMENT REPORTING
The Company has determined that it operates in only one segment.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
short-term investments. The Company limits its exposure to credit loss by
placing its cash, cash equivalents and investments with high credit quality
financial institutions.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was effective January 1, 2001. This statement establishes accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company believes the adoption of
F-9
66
SFAS No. 133 will not have an effect on the financial statements because the
Company does not engage in derivative or hedging activities.
In March 2000, the Financial Accounting Standards Board issued Financial
Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions Involving
Stock Compensation -- an interpretation of APB Opinion No. 25". FIN 44 clarifies
the definition of employees for purposes of applying Accounting Practice Board
Opinion No. 25, "Accounting for Stock Issued to Employees", the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 became effective on July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occur after either December 15,
1998 or January 12, 2000. The adoption of FIN 44 has not had a material impact
on the Company.
FOREIGN CURRENCY TRANSLATION
The financial statements of IRORI Europe, Ltd. are measured using the
U.S. dollar as the functional currency. The financial statements of Discovery
Technologies Ltd. are measured using the local currency as the functional
currency. Assets and liabilities of the Company are translated at the rates of
exchange at the balance sheet date. Income and expense items are translated at
the average rate of exchange during the reporting period. The resulting foreign
currency gains (losses) for IRORI Europe, Ltd. are included in the consolidated
statement of operations. The resulting translation adjustments for Discovery
Technologies Ltd. are unrealized and included as a separate component of other
comprehensive income (loss). Transactions denominated in currencies other than
the local currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in transaction
gains and losses which are reflected in income as unrealized (based on
period-end translations) or realized upon settlement of these transactions.
3. ACQUISITIONS
AXYS ADVANCED TECHNOLOGIES, INC.
On April 28, 2000, the Company acquired Axys Advanced Technologies, Inc.
("AAT"), a wholly owned subsidiary of Axys Pharmaceuticals, Inc. The acquisition
was accounted for as a purchase in accordance with the provisions of APB No. 16.
The Company obtained a report from Houlihan Valuation Advisors, an
independent valuation firm, and performed other procedures necessary to complete
the purchase price allocation.
A summary of the AAT acquisition costs and allocation to the assets
acquired and liabilities assumed is as follows:
Total acquisition costs:
Cash paid at acquisition $ 50,000
Issuance of promissory note 550,334
Issuance of common stock, warrant and stock options 59,769,495
Acquisition related expenses 345,099
------------
$ 60,714,928
============
Allocated to assets and liabilities as follows:
Tangible assets acquired $ 12,252,068
Assumed liabilities (2,581,167)
In-process research and development 9,000,000
Assembled workforce 1,344,067
Below market value lease 1,221,105
Goodwill 39,478,855
------------
$ 60,714,928
============
The goodwill will be amortized on a straight-line basis over a period of
ten years from the date of acquisition. The assembled workforce and below market
lease intangible assets will be amortized on a straight-line basis over periods
of three and four years, respectively, from the date of acquisition.
The valuation of the in-process research and development was determined
based on a discounted cash flow analysis of projected future earnings for each
project. The revenue stream from each research and development project was
estimated based upon its stage of completion as of the acquisition date. The
discount rates used for the
F-10
67
analysis were adjusted based on the stage of completion to give effect to
uncertainties in meeting the projected cash flows. The discount rates used
ranged from 20% to 40%.
Assuming that the acquisition of AAT had occurred on the first day of
the Company's fiscal year ended December 31, 1999, pro forma condensed
consolidated financial information would be as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999
------------ ------------
(UNAUDITED)
Revenues $ 41,334,000 $ 27,050,000
Net loss (3,543,000) (4,170,000)
Net loss per share, basic and diluted $ (0.27) $ (3.71)
This pro forma information is not necessarily indicative of the actual
results that would have been achieved had AAT been acquired the first day of the
Company's fiscal year ended December 31, 1999, nor is it necessarily indicative
of future results. The above pro forma condensed consolidated information does
not include the $9.0 million write-off of in-process research and development
that occurred in the Company's accounting for its acquisition of AAT in 2000.
STRUCTURAL PROTEOMICS, INC.
On May 5, 2000, the Company acquired 75% of the outstanding shares of
Structural Proteomics, Inc. (SPI) in exchange for $1,000,000 in cash and 150,000
shares of DPI common stock. The acquisition was accounted for as a purchase in
accordance with the provisions of APB No. 16, resulting in a total purchase
price of $2.2 million and recognition of goodwill of $1.9 million. The pro forma
results of operations for the years ended December 31, 2000 and 1999 as if the
acquisition of SPI had occurred on the first day of the Company's fiscal year
ended December 31, 1999 are not materially different than the reported net loss.
4. DEBT
EQUIPMENT NOTES PAYABLE AND CAPITAL LEASES
At December 31, 2000, obligations under equipment notes totaled
$1,794,328 payable in monthly installments through the year 2004 with a
weighted-average interest rate of 9.77% and secured by the assets of the
Company. In March 2000, the Company signed two equipment notes payable totaling
$747,150, payable in monthly installments through the year 2003 with a
weighted-average interest rate of 13.82% and secured by assets of the Company.
In November 2000, the Company signed 3 additional equipment notes payable
totaling $737,709, payable in monthly installments through the year 2004 with a
weighted-average interest rate of 7.27% and secured by assets of the Company.
NOTES PAYABLE TO SHAREHOLDERS
On December 10, 1999, the Company borrowed $4.0 million from certain of
its principal investors. The notes accrued interest at 8% per annum and were due
and payable on the earlier of the closing of a preferred stock financing round
or February 10, 2000. Subsequent to December 31, 1999, the noteholders
informally extended the maturity of the notes until the closing of the
redeemable convertible Series E preferred stock sale. The notes plus accrued
interest were converted into redeemable convertible Series E preferred stock on
April 7, 2000 (see Note 6 and 7).
On March 9, 2000, the Company borrowed $2.0 million from one of its
principal investors. The promissory note accrued interest at 8% per annum and
was due and payable upon the earlier of the closing of a preferred stock
financing round or June 9, 2000. In connection with the note, the Company issued
warrants to purchase a variable number of shares of redeemable convertible
preferred stock at a purchase price of $5.00 per share. The note plus accrued
interest was converted into redeemable convertible Series E preferred stock on
April 7, 2000 (see Note 6 and 7).
F-11
68
5. COMMITMENTS
LEASES
The Company leases a facility in San Diego under an operating lease
agreement that expires on August 31, 2006, and a second facility in South San
Francisco under an operating lease agreement that expires on November 30, 2003.
Rent expense was $908,036, $648,788 and $829,343 for the years ended December
31, 2000, 1999 and 1998, respectively. Additionally, the Company leases certain
equipment under operating leases with initial terms in excess of one year.
Annual future minimum lease obligations under the Company's operating
and capital leases as of December 31, 2000 are as follows:
EQUIPMENT NOTES
OPERATING PAYABLE AND CAPITAL
LEASES LEASES
---------- -------------------
2001 $ 971,741 $ 774,589
2002 990,966 691,136
2003 969,074 321,163
2004 674,240 19,889
2005 690,856 --
Thereafter 467,952 --
----------- -----------
Total minimum lease payments $ 4,764,832 1,806,777
=========== ===========
Less amount representing interest (201,494)
-----------
Total present value of minimum payments 1,605,283
Less current portion (661,160)
-----------
Non-current portion $ 944,123
===========
At December 31, 2000, cost and accumulated amortization of property and
equipment under capital leases was $2,472,228 and $523,050, respectively. At
December 31, 1999, cost and accumulated amortization of property and equipment
under capital leases was $624,947 and $170,183, respectively.
LETTER OF CREDIT
The Company signed a standby letter of credit for $700,000 required
under the terms of the Company's lease of its facilities. The Company pledged
$1.0 million of cash equivalents as collateral for the letter of credit. The
amount is included in restricted cash and cash equivalents as of December 31,
2000 and 1999. The letter of credit expires in fiscal 2004.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In April 2000, the Company issued 1,392,503 shares of redeemable
convertible Series E preferred stock at $8.00 per share in exchange for the
conversion of $6.0 million in notes payable to shareholders and $5.0 million in
cash. All of the shares of redeemable convertible Series A, B, C, D and E
preferred stock were converted into common stock upon the completion of the
Company's initial public offering on July 27, 2000.
7. SHAREHOLDERS' EQUITY
COMMON STOCK
On July 27, 2000, the Company sold 5 million shares of common stock at
$18.00 per share through an Initial Public Offering. On August 27, 2000, the
underwriters exercised their option to acquire an additional 750,000 shares,
also at $18.00 per share.
STOCK OPTIONS
In November 1995, the Company adopted the 1995 Stock Option/Stock
Issuance Plan, under which 2,350,000 shares of common stock were reserved for
issuance of stock and stock options granted by the Company. In July 2000, the
Company adopted the 2000 Stock Incentive Plan (the "Plan") as the successor plan
to the 1995 Stock Option/Stock Issuance Plan. 3,300,000 shares of common stock
were reserved under the Plan, including
F-12
69
shares rolled over from the 1995 Plan. The Plan provides for the grant of
incentive and nonstatutory options. The exercise price of incentive stock
options must equal at least the fair value on the date of grant, and the
exercise price of nonstatutory stock options may be no less than 85% of the fair
value on the date of grant. The options generally vest over a four-year period
and all expire ten years after the date of grant.
A summary of the Company's stock option activity and related information
is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of period 934,510 $ 0.71 980,075 $ 0.49 483,720 $ 0.31
Granted 1,602,755 7.03 191,500 1.50 1,087,700 0.51
Exercised (359,362) 0.96 (190,790) 0.38 (464,242) 0.40
Forfeited (91,061) 2.59 (46,275) 0.75 (127,103) 0.34
--------- -------- --------- -------- --------- --------
Outstanding at end of period 2,086,842 $ 5.44 934,510 $ 0.71 980,075 $ 0.49
========= ======== ========= ======== ========= ========
Exerciseable 574,933 $ 1.65 418,469 $ 0.53 204,893 $ 0.35
========= ======== ========= ======== ========= ========
Exercise prices for options outstanding as of December 31, 2000 ranged
from $0.30 to $25.00. The weighted-average remaining contractual life of those
options is approximately eight years. The weighted-average fair value of the
options granted in 2000, 1999 and 1998 is $5.62, $0.39 and $0.13 per share,
respectively.
At December 31, 2000, options for 1,108,502 shares were available for
future grant.
Pro forma information regarding net income or loss is required by SFAS
No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions in 2000, 1999 and 1998: risk- free interest rate of 6.0% ; dividend
yield of 0%; and a weighted-average life of five years. The Company used a
volatility factor of 70%, 0%, and 0% during the years ended December 31, 2000,
1999 and 1998, respectively.
For purposes of adjusted pro forma disclosures, the estimated fair value
of the options is amortized to expense over the vesting period. The Company's
adjusted pro forma information is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Adjusted pro forma net loss $ (13,301,547) $ (3,435,570) $ (6,296,500)
Adjusted pro forma net loss per share $ (1.01) $ (3.05) $ (8.23)
The pro forma effect on net loss for 2000, 1999 and 1998 is not likely
to be representative of the pro forma effects on reported net income or loss in
future years because these amounts reflect less than four years of vesting.
Following is a further breakdown of the options outstanding as of
December 31, 2000:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED EXERCISE PRICE
RANGE OF OPTIONS REMAINING LIFE AVERAGE OPTIONS OF OPTIONS
EXERCISE PRICES OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISABLE
--------------- ----------- ------------- -------------- ----------- --------------
$0.20--1.50 625,515 7.4 $ 0.80 387,328 $ 0.73
$2.50--6.56 876,982 8.9 $ 2.66 176,506 $ 2.61
$8.00--12.00 272,600 9.3 $ 8.88 1,099 $ 8.00
$14.11--25.00 311,745 9.7 $ 19.53 10,000 $ 19.88
--------- -------
2,086,842 574,933
========= =======
EMPLOYEE STOCK PURCHASE PLAN
In June 2000, the board of directors and shareholders adopted the
Employee Stock Purchase Plan (the "Purchase Plan"). A total of 250,000 shares of
the Company's common stock have been reserved for issuance under
F-13
70
the Purchase Plan. The Purchase Plan permits eligible employees to purchase
common stock at a discount, but only through payroll deductions, during defined
offering periods. The price at which stock is purchased under the Purchase Plan
is equal to 85% of the fair market value of the common stock on the first or
last day of the offering period, whichever is lower. In addition, the Purchase
Plan provides for annual increases of shares available for issuance under the
Purchase Plan beginning with fiscal 2001. Employee participation in the Purchase
Plan has not yet commenced.
DEFERRED STOCK COMPENSATION
In conjunction with the Company's initial public offering completed in
July 2000, the Company has recorded deferred stock compensation totaling
approximately $2.7 million and $1.0 million during the years ended December 31,
2000 and 1999, respectively, representing the difference at the date of grant
between the exercise or purchase price and estimated fair value of the Company's
common stock as estimated by the Company's management for financial reporting
purposes in accordance with APB No. 25. Deferred compensation is included as a
reduction of stockholders' equity and is being amortized to expense on an
accelerated basis in accordance with Financial Accounting Standards Board
Interpretation No. 28 over the vesting period of the options and restricted
stock. During the years ended December 31, 2000 and 1999, the Company recorded
amortization of stock-based compensation expense of approximately $1.4 million
and $0.3 million, respectively.
WARRANTS
In years prior to 1999, the Company has issued warrants to purchase a
total of 468,522 shares of common and preferred stock in connection with
convertible bridge notes issued to investors and obligations under capital
leases. The warrants had exercise prices ranging from $.01 to $2.00 per share.
The Company determined the relative fair value of the warrants at issuance was
not material; accordingly, no value has been assigned to the warrants.
In connection with the issuance of notes payable in December 1999 and
March 2000, the Company issued warrants to investors to purchase a total of
234,738 shares of redeemable convertible preferred stock at a purchase price of
$5.00 per share. The estimated fair value of the warrants of $1.2 million was
based on using the Black Scholes valuation model and was recorded as interest
expense in 2000.
703,260 warrants have been exercised as of December 31, 2000.
COMMON SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 2000 common shares reserved for future issuance consist
of the following:
Warrants 200,000
Stock options 3,195,344
Employee Stock purchase plan 250,000
---------
3,645,344
=========
8. INCOME TAXES
At December 31, 2000, the Company had federal and California income tax
net operating loss carryforwards of approximately $16,970,000 and $12,860,000,
respectively. The difference between the federal and California net tax
operating loss carryforwards is primarily attributable to the capitalization of
research and development expenses for California income tax purposes.
The federal and California tax loss carryforwards will begin to expire
in 2010 and 2003, respectively, unless previously utilized. The Company also has
federal and California research tax credit carryforwards of approximately
$1,255,000 and $801,000, respectively, which will begin to expire in 2010 unless
previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual
use of the Company's net operating loss and credit carryforwards may be limited
if cumulative changes in ownership of more than 50% occur during any three year
period.
F-14
71
Significant components of the Company's deferred tax assets are shown
below. A valuation allowance of $12,035,000 has been recognized to offset the
deferred tax assets as realization of such assets is uncertain.
December 31,
--------------------------------
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 6,680,000 $ 5,776,000
Research and development credits 1,775,000 935,000
Capitalized research and development expenses 2,732,000 179,000
Other, net 848,000 632,000
------------ ------------
Total deferred tax assets 12,035,000 7,522,000
Valuation allowance for deferred tax assets (12,035,000) (7,522,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
9. RETIREMENT PLAN
In 1996, the Company established a 401(k) plan covering substantially
all domestic employees. The Company pays all administrative fees of the plan.
The plan contains provisions allowing for the Company to declare a match up to
25% of funds contributed to the plan by employees. There were no matching
contributions declared by the Company for the years ended December 31, 2000,
1999 and 1998.
10. SIGNIFICANT CUSTOMERS, SUPPLIERS AND FOREIGN OPERATIONS
Most of the Company's operations and long-lived assets are based in the
United States. Discovery Technologies Ltd., located near Basel, Switzerland, had
long-lived assets totalling $3,098,373 and $2,354,836 at December 31, 2000 and
1999, respectively.
The geographic breakdown of our revenues for the years ended December
31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
---- ---- ----
United States 66% 74% 58%
Foreign countries 34% 26% 42%
---- ---- ----
100% 100% 100%
Major customers, responsible for 10% or more of revenues, include
collaborative partners and pharmaceutical and biotechnology companies. The
percentages of sales of each of these third party major customers to total
revenue derived from third parties for the years ended December 31, 2000, 1999
and 1998 were as follows:
Years Ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
Customer A 14% -- --
Customer B 12% 22% 8%
Customer C 10% -- --
Customer D 7% 20% 3%
Customer E 1% 7% 23%
The Company depends on sole source suppliers for the mesh component of
its reactors, the RF tags used in its commercial products and the two
dimensional bar code tags used in its NanoKan reactors.
F-15
72
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 2000 are as follows (in thousands, except per share data):
2000 Quarter Ended
------------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
-------- -------- -------- --------
Revenues $ 5,173 $ 9,528 $ 10,159 $ 11,403
Cost of product and services 3,053 4,724 5,034 5,531
-------- -------- -------- --------
Gross margin 2,120 4,804 5,125 5,872
-------- -------- -------- --------
Loss from operations (437) (9,435) (1,582) (1,727)
-------- -------- -------- --------
Net loss $ (1,630) $ (9,315) $ (631) $ (121)
======== ======== ======== ========
Net loss per share, basic and diluted(1) $ (1.23) $ (1.03) $ (0.03) $ (0.01)
======== ======== ======== ========
Pro forma net loss per share, basic and diluted(1), (2) $ (0.21) $ (0.55) $ (0.03) $ (0.01)
======== ======== ======== ========
- ---------------
(1) Net loss per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net loss per share will
not necessarily equal the total for the year.
(2) Pro forma basic and diluted net loss per common share gives effect to
the assumed conversion of preferred stock, which automatically converted
to common stock upon the completion of the Company's initial public
offering (using the "as-if converted" method) from the original date of
issuance.
12. SUBSEQUENT EVENTS (UNAUDITED)
On January 12, 2001, the Company acquired Systems Integration Drug
Discovery Company, Inc., a privately-held company located in Tucson, Arizona,
for approximately $12 million in cash. The acquisition was accounted for as a
purchase in accordance with the provisions of APB No. 16.
On February 27, 2001, the Company agreed to acquire Xenometrix, Inc., a
publicly-held company located in Boulder, Colorado for approximately $2.5
million in cash. The acquisition is expected to close in the second quarter of
2001, and will be accounted for as a purchase in accordance with the provisions
of APB No. 16.
F-16
73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
information under the captions "Proposals to be Voted Upon", "Nominees for
Directors" and "Compliance with the Reporting Requirements of Section 16"
contained in our definitive proxy statement to be filed no later than April 30,
1999 in connection with the solicitation of proxies for our annual meeting of
stockholders to be held May 26, 1999 (the "Proxy Statement"). In addition, the
information contained in Part I of this Form 10-K under the caption "Executive
Officers of the Registrant" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the captions "Compensation of Executive Officers,"
"Compensation of Non-Employee Directors" and "Employment Agreements and
Change-in-Control Arrangements" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Axys Stock Ownership of Beneficial Owners,
Directors and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Relationships and Transactions You Should Know
About" contained in the Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
The Financial Statements required by this item are submitted in Part II,
Item 8 of this report.
(2) Index to Financial Statements Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or in the
notes thereto.
(3) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
2.1 Agreement and Plan of Merger, dated April 11, 2000, between
Discovery Partners International, Inc., DPII Newco, LLC,
Axys Advanced Technologies, Inc., and the Registrant.
Incorporated by reference to Ex. 2.1 filed on Form 8-K on
May 15, 2000.
3.1 Amended and Restated Certificate of Incorporation.
Incorporated by reference to Ex. 3.1 filed on Form 10-K
filed on March 31, 1998.
3.2 Amended and Restated Bylaws.(1)
3.3 Registrant's Certificate of Designation of Series A Junior
Participating Preferred Stock incorporated by reference to
Exhibit 99.3 filed on Form 8-K dated October 8, 1998.
57
74
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
4.1 Rights Agreement dated as of October 8, 1998, among the
Registrant and ChaseMellon Shareholders Services, LLC,
incorporated by reference to Exhibit 99.2 filed on Form 8-K
dated October 8, 1998.
4.2 Form of Rights Certificate, incorporated by reference to
Exhibit 99.4 filed on Form 8-K dated October 8, 1998.
4.3 Indenture, dated September 22, 2000, between U.S. Bank Trust
National Association and the Registrant.(30)
4.4 Class A Common Stock Purchase Warrant, dated September 22,
2000, between Delta Opportunity Fund Limitedand the
Registrant.(30)
4.5 Class B Common Stock Purchase Warrant, dated September 22,
2000, between Delta Opportunity Fund Limited and the
Registrant.(30)
10.1 Registration Rights Agreement, among the Registrant and the
other parties therein, dated January 7, 1998.
10.2 1989 Stock Plan, as amended.(2)
10.3 Form of Employee Stock Purchase Plan and Form of Offering
Document.(2)(12)
10.4+ 1997 Equity Incentive Plan. Incorporated by reference to
Exhibit 10.4 filed on Form 10-Q filed on August 15, 1998.
10.6 Standard Industrial Lease between the Registrant and Shelton
Properties, Inc., dated October 15, 1992, with related
addenda and amendment.(1)
10.7 Third Amendment to Lease between Registrant and Shelton
Properties, Inc., dated March 29, 1994.(4)
10.11** Research and License Agreement between the Registrant and
Amgen Inc., dated May 28, 1993.(1)
10.14 Consent and Waiver between the Registrant, Amgen Inc., and
the Whitehead Institute for Biomedical Research, dated May
28, 1993.(1)
10.15** Collaboration Agreement between the Registrant and Pharmacia
AB, dated March 29, 1993.(1)
10.16** Project Agreement between the Registrant and Pharmacia AB,
dated March 29, 1993.(1)
10.17 Form of Restricted Stock Purchase Agreement.(1)(2)
10.18+ Form of Indemnity Agreement entered into between the
Registrant and its officers and directors.(1)(2)
10.19 Stock Bonus Grant Plan.(2)(3)
10.22+ 1994 Non-Employee Directors' Stock Option Plan, as amended
on January 7, 1998. Incorporated by reference to Exhibit
10.22 filed on Form 10-K filed on March 31, 1998.
10.23 Fourth Amendment to Lease dated October 15, 1992 between the
Registrant and Shelton Properties, Inc., dated October 1,
1994.(5)
10.24** Collaborative Research and License Agreement between the
Registrant and Bayer, dated November 28, 1994.(6)
10.25** Research Agreement between the Registrant and Pharmacia AB,
dated December 21, 1994.(5)
10.26 Form of Fifth Amendment to Lease dated October 15, 1992
between the Registrant and Shelton Properties, Inc. dated
August 28, 1996.(6)
10.28** Collaborative Research and License Agreement between the
Registrant and Pharmacia AB, dated August 29, 1995.(6)
10.33 Amendment to Agreement dated March 29, 1993 between the
Registrant and Kabi Pharmacia AB, dated January 31, 1996.(9)
10.34 First Amendment to Research and License Agreement, dated May
28, 1993, between Registrant and Amgen, Inc., dated February
2, 1996.(9)
10.35 Research Agreement between the Registrant and Pharmacia &
Upjohn, Inc., a Delaware corporation, dated February 29,
1996.(9)
10.36 Form of Sixth Amendment to Lease dated October 15, 1992
between the Registrant and Shelton Properties, Inc., dated
March 29, 1996.(9)
58
75
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.39 Standard Industrial Lease between the Registrant and The
Equitable Life Assurance Society of the United States, dated
August 5, 1996.(10)
10.42** Research Collaboration and License Agreement between Merck &
Co., Inc. and the Registrant, dated November 6, 1996.(7)
10.44 Collaborative Research and License Agreement between
SmithKline Beecham Corporation and the Registrant, dated
June 27, 1996.(11)
10.53** Collaborative Research Agreement dated as of June 30, 1995
by and between Sequana and Corange International, Ltd.(14)
10.54** Collaborative Research Agreement dated as of June 12, 1995
by and between Sequana and Boehringer Ingelheim
International GmbH.(14)
10.55+ Form of Indemnification Agreement between the Registrant and
its officers and directors.(14)
10.59 Merger Agreement and Plan of Reorganization Agreement
between Sequana, Sequana Merger Sub, Inc., NemaPharm, Inc.
and the Shareholders of NemaPharm, Inc., dated July 19,
1996.(17)
10.61** Joint Venture Agreement among Sequana Therapeutics, Inc.,
Memorial Sloan-Kettering Cancer Center and Genos
Biosciences, Inc., dated January 29, 1997.(19)
10.62* Amendment to Collaborative Research Agreement of June 12,
1995 between Sequana and Boehringer Ingelheim International
GmbH, dated June 19, 1997.(20)
10.64 Agreement and Plan of Merger and Reorganization dated
November 2, 1997, by and among the Registrant, Beagle
Acquisition Sub, Inc., a California corporation and wholly
owned subsidiary of the Registrant and Sequana.(21)
10.67* Collaboration Agreement dated as of October 1997 by and
between the Registrant and Bristol-Myers Squibb Company.
Incorporated by reference to Exhibit 10-67 filed on Form
10-K filed on March 31, 1998.
10.68* Collaboration Agreement dated as of October 31, 1997 by and
between Sequana and Warner-Lambert Company. Incorporated by
reference to Exhibit 10-68 filed on Form 10-K filed on March
31, 1998.
10.71 $750,000 Promissory Note, dated September 2, 1997, issued by
John P. Walker, to the Registrant. Incorporated by reference
to Exhibit 10-71 filed on Form 10-K filed on March 31, 1998.
10.72 Employment Agreement, dated August 29, 1997, by and between
John Walker and the Registrant. Incorporated by reference to
Exhibit 10-72 filed on Form 10-K filed on March 31, 1998.
10.78 1997 Equity Incentive Plan, dated January 7, 1998.(22)
10.83 Amendment to the Collaborative Research Agreement between
Sequana and Corange International Ltd., effective June 30,
1995, dated January 9, 1998.(24)
10.84* Amendment No. 2 to the Collaborative Research Agreement
between Sequana and Corange International Ltd., dated June
30, 1995, effective February 23, 1998.(24)
10.87* Termination of Collaborative Research Agreement between
Sequana and Glaxo Wellcome, Inc., effective February 1,
1998.(25)
10.88* Combinatorial Chemistry Agreement between the Registrant and
Warner-Lambert Company, dated May 15, 1998.(25)
10.89* Collaboration Agreement by and among the Registrant and its
subsidiaries, NemaPharm, Inc. and Sequana, and Roche
Bioscience, dated June 1, 1998.(25)
10.90* Amendment dated September 21, 1998 to the Collaboration
Agreement between Warner-Lambert Company and Sequana, dated
October 31, 1997.(26)
10.91 1997 Non-Officer Equity Incentive Plan.(26)
10.93* Second Amendment to the Research Collaboration and License
Agreement between Arris Pharmaceutical Corp. and Merck and
Co., Inc., dated November 5, 1998.
10.94* Collaborative Research and License Agreement between the
Registrant and Rhone-Poulenc Rorer Pharmaceuticals, Inc.,
dated December 11, 1998.
59
76
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.95* Combinatorial Chemistry Agreement between the Registrant and
Rhone-Poulenc Rorer Pharmaceuticals, Inc., dated December
22, 1998.
10.96 Agreement, dated June 11, 1998, by and between William
Newell and the Registrant.
10.97 Employment Agreement, dated February 26, 1999, between the
John Walker and the Registrant.(27)
10.98 Series A Preferred Stock Purchase Agreement, dated February
2, 1999 by and among Xyris Corporation, Bay City Capital
Fund I and the Registrant. (27)
10.101 First Amendment to the Research Agreement, dated February
28, 1999 between the Registrant and Pharmacia & Upjohn,
Inc.(27)
10.102 Seventh Amendment to Standard Industrial Lease Multi-tenant,
dated February 13, 1998, between Shelton Corporation and the
Registrant.(27)
10.103 Eighth Amendment to Standard Industrial Lease Multi-tenant,
dated November 18, 1998 between Shelton International
Holdings, Inc. and the Registrant.(27)
10.104 Ninth Amendment to Standard Industrial Lease Multi-tenant,
dated November 18, 1998 between Shelton International
Holdings, Inc. and the Registrant.(27)
10.105** Termination of Collaborative Research Agreement, dated
February 13, 1999 between Corange International, Ltd. and
the Registrant.(27)
10.106** Termination Agreement dated February 5, 1999 between
Pharmacia and Upjohn AB and the Registrant.(27)
10.107** Combinatorial Chemistry Agreement between Axys Advanced
Technologies, Inc. and Daiichi Pharmaceutical Co., Ltd.,
signed June 30, 1999.(28)
10.108** Amendment to the Collaboration Agreement between the Sequana
and Boehringer Ingelheim GmH, dated June 14, 1999.(28)
10.109 Series A Preferred Stock Purchase Agreement dated May 14,
1999, by and among Xyris Corporation, The North American
Nutrition & Agribusiness Fund and the Registrant.(28)
10.110 Series A Preferred Stock Purchase Agreement dated May 14,
1999, by and among Xyris Corporation and Missouri Soybean
Merchandise Council and the Registrant.(28)
10.112** First Amendment to Lease between ARE-JOHN HOPKINS COURT LLC
and Sequana, dated December 1, 1998.(28)
10.113** Combinatorial Chemistry Agreement between Axys Advanced
Technologies, Inc. and Allergan, Inc., dated September 27,
1999.(29)
10.114** Loan Agreement by and between Axys Pharmaceuticals, Inc. and
Foothill Capital Corporation, dated July 26, 1999.(29)
10.115 Warrant to Purchase Common Stock, issued to Reedland Capital
Partners, dated July 30, 1999.(29)
10.116 Registration Rights Agreement by and among the Registrant
and Reedland Capital Partners, dated July 30, 1999.(29)
10.117 Fifth Amendment to Expansion Lease by and between the
Registrant and Alexandria Real Estate Equities, dated
October 1999.(29)
10.118** Termination of Collaborative Research and License Agreement
between Registrant and Bristol-Myers Squibb Pharmaceutical
Research Institute dated December 31, 1999.
10.119** Research Collaboration License Agreement between the
Registrant and Merck & Co., Inc. dated November 18, 1999.
10.120** Amendment to the Collaboration Agreement between the
Registrant and Warner-Lambert Company dated October 1, 1999.
10.121 Employment Agreement, dated December 14, 1999 between
William J. Newell and the Registrant.(31)
10.122 Employment Agreement, dated December 14, 1999 between
Michael C. Venuti and the Registrant.(31)
10.123* Compound Purchase Agreement, dated April 28, 2000 between
Advanced Technologies, Inc. and the Registrant.
60
77
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.124 Bridge Financing Agreement, dated June 8, 2000, between
Akkadix Corporation and North American Nutrition &
Agribusiness Fund, L.P.
10.125 Common Stock Purchase Agreement, dated July 21, 2000,
between Acqua Wellington North American Equities Fund,
Ltd.(32)
10.126 Construction Agreement, dated August 10, 2000 between J.M.
O'Neil Inc. and the Registrant.
10.127 Construction Agreement, dated August 18, 2000 between CAS
Architects, Inc. and the Registrant.
10.128 Note Purchase Agreement, dated September 20, 2000, between
Delta Opportunity Fund, Ltd. and the Registrant.(30)
10.129 Construction Agreement, dated September 21, 2000 between
J.M. O'Neil Inc. and the Registrant.
10.130 Waiver of First Refusal, dated November 29, 2000 between
Akkadix Corporation and the Registrant.
10.131* Second Amendment to the Collaborative Research and License
Agreement dated June 2, 2000, between Aventis
Pharmaceuticals Products Inc. and the Registrant, dated
December 11, 2000.
10.132 Bridge Financing Agreement, dated December 12, 2000, between
Akkadix Corporation and the Registrant.
10.133* Fifth Amendment to the Research Collaboration and License
dated November 6, 1996, between Merck & Co., Inc. and the
Registrant, dated December 15, 2000.
10.134* Sixth Amendment to the Research Collaboration and License
dated November 6, 1996, between Merck & Co., Inc. and the
Registrant, dated December 15, 2000.
10.135 Axys Pharmaceuticals, Inc. 1999 Key Personnel Stock Option
Plan
10.136 Collaborative Research and License Agreement between Axys
Pharmaceuticals, Inc. and Cytovia, Inc., dated March 15,
2000.(33)
10.137 Fourth Amendment to the Research Collaboration and License
Agreement between Arris Pharmaceuticals Corporation and
Merck and Co., Inc., dated March 3, 2000.(33)
10.138 Form of Stock Purchase Agreement between Axys
Pharmaceuticals, Inc. and various Investors, dated February
15, 2000.(33)
10.139 Agreement and Plan of Merger by and among Discovery Partners
International, Inc., DPII Newco, LLC, Axys Advanced
Technologies, Inc. and Axys Pharmaceuticals, Inc., dated
April 11, 2000.(34)
10.140 Amendment No. 1 to the Collaborative Research and License
Agreement between the Registrant and Rhone-Poulenc Rorer
Pharmaceuticals, Inc., dated June 2, 2000.(34)
10.141 Common Stock Purchase Agreement by and between Acqua
Wellington North American Equities Fund, Ltd. and Axys
Pharmaceuticals, Inc. dated July 21, 2000.(35)
10.142 Note Purchase Agreement, Indenture; Supplemental Indenture;
Class A Common Stock Purchase Warrant; Class B Common Stock
Purchase Warrant.(35)
10.143 Credit agreement by and between PPGx, Inc. and Axys
Pharmaceuticals, Inc. dated September 22, 2000.(35)
10.144 Bridge Loan by and between Akkadix Corporation and Axys
Pharmaceuticals, Inc. dated September 11, 2000.(35)
10.145 Secured/Subordinated Promissory Note by and between
Littlefield Associates and Axys Pharmaceuticals, Inc. dated
September 28, 2000.(35)
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (incorporated in the signature page of
this Form 10-K).
- ---------------
+ Compensatory Benefit Plan or management contract.
* Confidential treatment has been requested with respect to certain portions
of this exhibit.
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78
** Confidential treatment has been granted with respect to certain portions of
this exhibit.
(1) Incorporated herein by reference to the Registration Statement on Form S-1
filed October 5, 1993, as amended thereto (file number 33-69972).
(2) Compensation plan.
(3) Incorporated herein by reference to the Registration Statement on Form S-8
filed January 31, 1994 (file number 33-69972).
(4) Incorporated herein by reference to the Registrant's Report on Form 10-Q
for the quarter ended March 31, 1994.
(5) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
(6) Incorporated herein by reference to the Registrant's Report on Form 10-Q
for the quarter ended September 30, 1995.
(7) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-K for the fiscal year ended December 31, 1996
(8) Incorporated herein by reference to the Registrant's Current Report on Form
8-K, filed November 13, 1995.
(9) Incorporated herein by reference to the Registration Report on Form 10-Q
for the quarter ended March 31, 1996.
(10) Incorporated herein by reference to the Registration Report on Form 10-Q
for the quarter ended September 30, 1996.
(11) Incorporated herein by reference to the Registration Statement filed on
Form S-3/A filed September 19, 1996 (file number 333-09307).
(12) Incorporated by reference to the Registration Statement on Form S-8 filed
July 29, 1996 (file number 333-09095).
(13) Incorporated by reference to exhibit 10.47 to the Registrant's Report on
Form 10-Q for the quarter ended October 31, 1997.
(14) Incorporated by reference to exhibits filed with Sequana's Registration
Statement on Form S-1, filed June 14, 1995 as amended (Reg. No. 33-93460).
(15) Incorporated by reference to exhibits filed with Sequana's Registration
Statement on Form S-1, filed February 12, 1996 as amended (Reg. No.
333-01226).
(16) Incorporated by reference to exhibit 10.14 to Sequana's Report on Form 10-Q
for the quarter ended June 30, 1996.
(17) Incorporated by reference to exhibit 10.15 to Sequana's Report on Form 10-Q
for the quarter ended September 30, 1996.
(18) Incorporated by reference to exhibit 10.16 filed with Sequana's Report on
Form 10-K, as amended, for the fiscal year ended December 31, 1996.
(19) Incorporated by reference to exhibit 10.17 to Sequana's Report on Form 10-Q
for the quarter ended March 31, 1997.
(20) Incorporated by reference to exhibit 10.18 to Sequana's Report on Form 10-Q
for the quarter ended June 30, 1997.
(21) Incorporated by reference to exhibit 4.1 to the Schedule 13D filed by the
Registrant on November 12, 1997.
(22) Incorporated by reference to Appendix E to the Registrants Registration
Statement on Form S-4, filed November 27, 1997.
(23) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-K for the fiscal year ended December 31, 1997.
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79
(24) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-Q for the quarter ended March 31, 1998.
(25) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-Q for the quarter ended June 30, 1998.
(26) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-Q for the quarter ended September 30, 1998.
(27) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-Q for the quarter ended March 31, 1999.
(28) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-Q for the quarter ended June 30, 1999.
(29) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-Q for the quarter ended September 30, 1999.
(30) Incorporated herein by reference to the Registrant's Registration Report on
Form 8-K filed on September 28, 2000.
(31) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-K for the year ended December 31, 1999.
(32) Incorporated herein by reference to the Registrant's Registration Report on
Form 8-K filed on August 2, 2000.
(33) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-Q for the quarter ended March 31, 2000.
(34) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-Q for the quarter ended June 30, 2000.
(35) Incorporated herein by reference to the Registrant's Registration Report on
Form 10-Q for the quarter ended September 30, 2000.
(b) Reports on Form 8-K
Axys filed a Current Report on Form 8-K on November 3, 2000, reporting
on the Company's financial results for the third quarter of fiscal year
2000.
(c) See Exhibits listed under Item 14(a)(3).
(d) All schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or in the
noted thereto.
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80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 30th day of
March, 2001.
AXYS PHARMACEUTICALS, INC.
By: /s/ PAUL J. HASTINGS
------------------------------------
Paul J. Hastings
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on
the following page constitutes and appoints Paul Hastings and David E. Riggs, or
any of them, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that the said attorney-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PAUL J. HASTINGS President, Chief Executive March 30, 2001
- ----------------------------------------------------- Officer and Director
Paul J. Hastings (Principal executive officer)
/s/ DAVID E. RIGGS Senior Vice President and March 30, 2001
- ----------------------------------------------------- Chief Financial Officer
David E. Riggs (Principal financial and
accounting officer)
/s/ JOHN P. WALKER Chairman of the Board Of March 30, 2001
- ----------------------------------------------------- Directors
John P. Walker
Director
- -----------------------------------------------------
Ann M. Arvin, M.D.
/s/ VAUGHN M. KAILIAN Director March 30, 2001
- -----------------------------------------------------
Vaughn M. Kailian
/s/ IRWIN LERNER Director March 30, 2001
- -----------------------------------------------------
Irwin Lerner
/s/ ALAN C. MENDELSON Director March 30, 2001
- -----------------------------------------------------
Alan C. Mendelson
/s/ J. LEIGHTON READ Director March 30, 2001
- -----------------------------------------------------
J. Leighton Read, M.D.
64