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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
COMMISSION FILE NUMBER: 000-31979
ARRAY BIOPHARMA INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 84-1460811
(State of Incorporation) (I.R.S. Employer Identification No.)
</Table>
3200 WALNUT STREET, BOULDER, COLORADO 80301
(Address of principal executive offices)
(303) 381-6600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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 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 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 aggregate market value of voting stock held by non-affiliates of the
registrant as of August 31, 2001 was approximately $168,547,319. (For this
computation, the registrant has excluded the market value of all shares of its
common stock reported as beneficially owned by executive officers and directors
of the registrant; such exclusion shall not be deemed to constitute an admission
that any such person is an "affiliate" of the registrant.)
As of August 31, 2001, the registrant had 23,389,297 shares of common
stock, par value $.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant's definitive Proxy Statement, which will be filed on or before
October 1, 2001 with the Securities and Exchange Commission in connection with
Registrant's annual meeting of stockholders to be held on November 1, 2001 is
incorporated by reference into Part III of this Report.
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This annual report filed on form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve significant risks and uncertainties. Because these statements reflect
our current expectations concerning future events, our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including those discussed below under the heading
"Risk Factors" and elsewhere in this annual report. We are providing this
information as of September 27, 2001. We undertake no duty to update any
forward-looking statements to reflect the occurrence of events or circumstances
after the date of such statements or of anticipated or unanticipated events that
alter any assumptions underlying such statements.
RISK FACTORS
WE MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY.
We are at an early stage of executing our business plan, and we have a
limited history of offering our drug discovery capabilities. We have incurred
operating and net losses and negative cash flows from operations since our
inception. As of June 30, 2001, we had an accumulated deficit of $20.1 million.
We had net losses of $10.6 million and $5.1 million for the fiscal years ended
June 30, 2001 and 2000, respectively. We may continue to incur operating and net
losses and negative cash flows from operations, due in part to anticipated
increases in expenses for research and development, acquisitions of
complementary businesses and technologies and expansion of our personnel and our
business development capabilities. We may not be able to achieve or maintain
profitability. Moreover, if we do achieve profitability, the level of any
profitability cannot be predicted and may vary significantly from quarter to
quarter.
OUR BUSINESS IS DEPENDENT UPON THE EXTENT TO WHICH THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES USE THIRD-PARTY ASSISTANCE WITH ONE OR MORE ASPECTS OF
THEIR DRUG DISCOVERY PROCESS.
We are highly dependent on the outsourcing of drug discovery activities by
the pharmaceutical and biotechnology industries and on their willingness to
spend significant funds on research and development. Our capabilities include
aspects of the drug discovery process that pharmaceutical and biotechnology
companies have traditionally performed internally. The willingness of these
companies to expand or continue their outsourcing of drug discovery activities
and their research and development expenditures is based on several factors,
such as their ability to hire and retain qualified chemists, the resources
available for entering into drug discovery collaborations, the spending
priorities among various types of research activities and their policies
regarding expenditures during recessionary periods. Any decrease in the trend to
outsource drug discovery or in drug research and development expenditures by
pharmaceutical and biotechnology companies could cause our revenue to decline.
In addition, our ability to convince these companies to use our drug discovery
capabilities, rather than develop them internally, will depend on many factors,
including our ability to:
- develop drug discovery technologies that will result in the
identification of higher quality drug candidates;
- achieve intended results in a timely fashion, with acceptable quality and
at an acceptable cost; and
- design, create and manufacture sufficient quantities of our chemical
compounds for our collaborators.
The importance of these factors varies from company to company and,
although we believe we are currently meeting them for our collaborators, we may
be unable to meet all or any of them for some of our collaborators, and even if
we are able to meet them, these companies may still decide to perform these
activities internally.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE EXPERIENCED SCIENTISTS AND
MANAGEMENT WE NEED TO COMPETE IN THE DRUG RESEARCH AND DEVELOPMENT INDUSTRY.
We are a small company with 202 full-time employees as of September 2001,
and our future success depends on our ability to attract, retain and motivate
highly skilled scientists and management, including business development
personnel. Our ability to maintain, expand or renew existing engagements with
our
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collaborators, enter into new engagements, and provide additional expertise to
our existing collaborators depends on our ability to hire and retain scientists
with the skills necessary to keep pace with continuing changes in drug discovery
technologies. Competition for experienced scientists is intense. We compete with
pharmaceutical and biotechnology companies, including our collaborators,
medicinal chemistry outsourcing companies, contract research companies, and
academic and research institutions to recruit scientists. Our inability to hire
additional qualified personnel may also require an increase in the workload for
both existing and new personnel. We may not be successful in attracting new
scientists or management or in retaining or motivating our existing personnel.
The shortage of experienced scientists, and other factors, may lead to increased
recruiting, relocation and compensation costs for such scientists, which may
exceed our expectations. These increased costs may reduce our profit margins or
make hiring new scientists impracticable.
Our future success also depends on the personal efforts and abilities of
the principal members of our senior management and scientific staff to provide
strategic direction, manage our operations and maintain a cohesive and stable
environment. In particular, we rely on the services of Robert E. Conway, our
Chief Executive Officer; Dr. Kevin Koch, our President and Chief Scientific
Officer; Dr. David L. Snitman, our Chief Operating Officer and Vice President,
Business Development; Dr. Anthony D. Piscopio, our Vice President, Chemistry and
Director of Process Chemistry; Michael Carruthers, our Chief Financial Officer;
Dr. John A. Josey, our Senior Director of High-Speed Synthesis; Dr. Laurence E.
Burgess, our Senior Director of Medicinal Chemistry and Lead Optimization; Dr.
Steven A. Boyd, our Director of Medicinal Chemistry and Dr. James P. Rizzi, our
Director of Computational Technology. Although we have employment agreements
with the majority of the above personnel, we do not have employment agreements
with all of our key personnel, and the employment agreements we do have allow
the employees to terminate them upon 30 days' prior notice. If we cannot attract
and retain scientists and management, we will not be able to continue to provide
or expand our drug discovery offerings.
BECAUSE WE RELY ON A SMALL NUMBER OF COLLABORATORS FOR A SIGNIFICANT PORTION OF
OUR REVENUE, IF WE LOSE ONE OR MORE OF OUR MAJOR COLLABORATORS, OUR REVENUE MAY
SIGNIFICANTLY DECREASE AND OUR RESULTS OF OPERATIONS MAY BE HARMED.
A relatively small number of collaborators account for a significant
portion of our revenue. During the year ended June 30, 2001, revenue from ICOS
Corporation and Eli Lilly and Company each represented approximately 24% of our
total revenue. One of our agreements with ICOS Corporation terminates as early
as July 2002, and our agreement with Eli Lilly and Company terminates in March
2005, or earlier upon payment of a termination fee. We expect that revenue from
a limited number of collaborators will account for a large portion of our
revenue in future quarters. In general, our collaborators may terminate their
contracts with us upon 30 to 90 days' notice for a number of reasons or, in some
cases, for no reason. In addition, some of our major collaborators can determine
the amount of products delivered and research or development performed under
these agreements. As a result, if any one of our major collaborators cancels,
declines to renew or reduces the scope of its contract with us, our revenue may
decrease.
WE MAY NOT SUCCESSFULLY ENTER INTO ADDITIONAL COLLABORATIONS THAT ALLOW US TO
PARTICIPATE IN THE FUTURE SUCCESS OF OUR PROPRIETARY DRUG CANDIDATES THROUGH
MILESTONE, ROYALTY AND/OR LICENSE PAYMENTS, AND WE MAY NEVER RECEIVE ANY
MILESTONE, ROYALTY, AND/OR LICENSE PAYMENTS UNDER OUR CURRENT OR ANY FUTURE
COLLABORATIONS.
One of our business strategies is to create our own proprietary drug
candidates and to then enter into collaborations for the development of these
drug candidates that will allow us to earn milestone, royalty and/or license
payments. Our proprietary drug discovery program is in its early stage
development and is unproven. Although we have expended, and continue to expend,
time and money on internal research and development programs, we may be
unsuccessful in creating valuable proprietary drug candidates that would enable
us to form additional collaborations and receive milestone, royalty and/or
license payments.
Our collaborations and internal programs may not result in the discovery of
potential drug candidates that will be safe or effective. Although we have
received license fees to date, we may never receive any milestone or royalty
payments, or additional license fees, under our current or any future
collaborations. Our receipt of any
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future milestone, royalty or license payments depends on many factors, including
whether our collaborators want to continue to pursue a potential drug candidate
and the ultimate commercial success of the drug. Development and
commercialization of potential drug candidates depend not only on the
achievement of research objectives by us and our collaborators, but also on each
collaborator's financial, competitive, marketing and strategic considerations
and regulation in the United States and other countries. Pharmaceutical products
our collaborators develop will require lengthy and costly testing in animals and
humans and regulatory approval by governmental agencies prior to
commercialization. These agencies may not approve the products for
commercialization despite the substantial time and resources required to obtain
approvals and comply with appropriate statutes and regulations. If unforeseen
complications arise in the development or commercialization of the potential
drug candidates by our collaborators, we may not realize milestone, royalty, or
license payments as expected. We have not received any milestone or royalty
payments since our inception.
WE MAY FAIL TO EXPAND COLLABORATOR RELATIONSHIPS.
One of our business strategies is to expand our existing customer
relationships across the full spectrum of our drug discovery capabilities. The
number of large pharmaceutical and biotechnology companies that could
potentially use our capabilities is limited. As a result, we must expand our
existing collaborator relationships in order to maximize our potential revenue.
However, we may not be able to expand these existing relationships. We currently
provide our drug discovery capabilities to 130 companies, and only 14 of them
have chosen to expand the relationship with us to additional types of
collaborations.
WE MAY NOT BE ABLE TO ACCELERATE THE DRUG DISCOVERY PROCESS.
One of our business strategies is to accelerate the drug discovery process
by identifying potential drug candidates. We have never identified a drug
candidate that has been developed into a commercial drug. It is uncertain
whether we will be able to make the drug discovery process more efficient or
make higher quality drug candidates. Our ability to accelerate the drug
discovery process depends on many factors, including the performance and
decision-making capabilities of our scientists. Our information-driven
technology platform, which we believe enables our scientists to make better
decisions, may not enable our scientists to make correct decisions or develop
viable drug candidates.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO GROW AND TO MANAGE OUR GROWTH.
We began operations in 1998 and are at an early stage of our development.
We have experienced and expect to continue to experience growth in the number of
our employees and the scope of our operating and financial systems. For example,
we have sold our drug discovery offerings primarily through the efforts of our
senior management and scientists and through collaborator referrals. One of our
business strategies is to attract and retain additional business development
personnel and to expand our business development activities. Growth in our
operations has placed and is expected to place a significant strain on our
operational, human and financial resources. Our ability to compete effectively
will depend, in large part, on our ability to hire, train and assimilate
additional management and professional, scientific and technical personnel, and
our ability to expand, improve and effectively use our operating, management,
business development and financial systems to accommodate our expanded
operations. The physical expansion of our facilities to accommodate future
growth may lead to significant costs and may divert management and business
development resources. If we fail to effectively anticipate, implement or manage
the changes required to sustain our growth, we may not be able to compete
successfully.
WE MAY NOT BE ABLE TO MEET THE DELIVERY AND PERFORMANCE REQUIREMENTS SET FORTH
IN OUR COLLABORATION AGREEMENTS AND CONTRACTS.
In order to maintain our current customer relationships and to meet the
performance and delivery requirements in our customer contracts, we must be able
to provide drug discovery capabilities at appropriate levels and with acceptable
quality and at an acceptable cost. Our ability to deliver the drug discovery
capabilities we offer to our collaborators is limited by many factors, including
the difficulty of the chemistry, the lack of predictability in the scientific
process and the shortage of qualified scientific personnel. In
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particular, a large portion of our revenue depends on producing collections of
chemical compounds, and our current commitments to provide these compounds to
our collaborators exceeds the current rate at which we are producing them. Some
of our collaborators can influence when we provide our drug discovery
capabilities under their contracts, which could increase our current contractual
commitments to provide chemical compounds even further. Unless we are able to
increase our current rate of compound synthesis, we will fail to meet our
existing contractual commitments, which may result in delayed or lost revenue,
loss of collaborators or failure to expand our existing relationships.
OUR QUARTERLY OPERATING RESULTS COULD FLUCTUATE SIGNIFICANTLY.
Sales of our drug research and development capabilities, including our Lead
Generation Library, can typically involve significant technical evaluation
and/or commitment of capital by our collaborators. Accordingly, the sales cycles
are lengthy and subject to a number of significant risks, including
collaborators' budgetary constraints and internal acceptance reviews. In
addition, some of our collaborators can influence when we deliver products and
perform services under their contracts with us. Due to these lengthy and
unpredictable sales cycles and the ability of our collaborators to influence our
delivery of products and performance of services, our operating results could
fluctuate significantly from quarter to quarter. In addition, we expect to
continue to experience significant fluctuations in quarterly operating results
due to factors such as general and industry specific economic conditions that
may affect the research and development expenditures of pharmaceutical and
biotechnology companies.
Due to the possibility of fluctuations in our revenue and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price could decline.
OUR DEVELOPMENT, TESTING AND MANUFACTURE OF POTENTIAL DRUG CANDIDATES MAY EXPOSE
US TO POTENTIAL LIABILITY AND LOSSES FROM PRODUCT LIABILITY LAWSUITS.
We develop, test and manufacture the precursors to pharmaceutical products
intended generally for use in humans. Our drug discovery activities that result
in the future manufacture and sale of drugs by our collaborators expose us to
the risk of liability for personal injury or death to persons using these drugs.
We may be required to pay substantial damages or incur defense costs in
connection with any of these product liability claims, or we may lose revenue
from expected royalty or milestone payments if the commercialization of a drug
is limited or ceases as a result of such claims. We have product liability
insurance that contains customary exclusions and provides coverage up to $2.0
million per occurrence and in the aggregate, which we believe is customary in
our industry. However, our product liability insurance does not cover every type
of product liability claim that we may face or loss we may incur, and may not
adequately compensate us for the entire amount of covered claims or losses or
for the harm to our business reputation. We may be unable to acquire or maintain
additional or maintain our current insurance at acceptable costs or at all.
IF OUR USE OF CHEMICAL AND HAZARDOUS MATERIALS VIOLATES APPLICABLE LAWS OR
REGULATIONS OR CAUSES PERSONAL INJURY, WE MAY BE LIABLE FOR DAMAGES.
Our drug discovery activities, including the analysis and synthesis of
chemical compounds, involve the controlled use of chemicals, including
flammable, combustible, toxic and radioactive materials that are potentially
hazardous if misused. Our use, storage, handling and disposal of these materials
is subject to federal, state and local laws and regulations, including the
Resource Conservation and Recovery Act, the Occupational Safety and Health Act
and local fire codes, and regulations promulgated by the Department of
Transportation, the Drug Enforcement Agency, the Department of Energy, the
Colorado Department of Public Health and Environment and the Colorado Department
of Human Services, Alcohol and Drug Abuse Division. We may incur significant
costs to comply with these laws and regulations in the future. In addition, we
cannot completely eliminate the risk of accidental contamination or injury from
these materials. In the event of such an accident, we could be liable for any
damages that result, and any such liability could exceed our resources and
disrupt our business.
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OUR OPERATIONS COULD BE INTERRUPTED BY DAMAGE TO OUR SPECIALIZED LABORATORY
FACILITIES.
Our operations are dependent upon the continued use of our highly
specialized laboratories and equipment in Boulder, Colorado and Longmont,
Colorado. Catastrophic events, such as fires or explosions, caused by our
chemical synthesis and other drug discovery activities could damage our
laboratories, equipment or inventories of chemical compounds and may materially
interrupt our business. We employ safety precautions in our laboratory
activities in order to reduce the likelihood of the occurrence of these
catastrophic events, however, we cannot eliminate the chance that such an event
will occur altogether. The availability of laboratory space in these areas is
extremely limited, and rebuilding our facilities could be time consuming and
result in substantial delays in fulfilling our agreements with our
collaborators. We maintain business interruption insurance to cover lost revenue
caused by such occurrences. However, this insurance would not compensate us for
the loss of opportunity and potential harm to customer relations that our
inability to meet our collaborators' needs in a timely manner could create.
OUR COLLABORATORS MAY RESTRICT OUR USE OF SCIENTIFIC INFORMATION.
Our ability to improve the efficiency of drug discovery by, among other
things, developing an effective database designed to predict chemical compound
interactions with targeted disease-related proteins, depends in part on our
generation and use of information that we derive from performing these services
and is not proprietary to our collaborators. However, our collaborators may not
allow us to use this information with others, such as the general interaction
between types of chemistries and types of drug targets that we generate when
performing drug discovery services for them. Without the ability to use this
information, we may not be able to develop a database, which may limit our
ability to improve the efficiency of the drug discovery services we provide.
THE DRUG RESEARCH AND DEVELOPMENT INDUSTRY IS HIGHLY COMPETITIVE, AND WE COMPETE
WITH SOME COMPANIES THAT OFFER A BROADER RANGE OF CAPABILITIES AND HAVE BETTER
ACCESS TO RESOURCES THAN WE DO.
The pharmaceutical and biotechnology industries are characterized by rapid
and continuous technological innovation. We compete with companies in the United
States and abroad that are engaged in the development and production of
chemistry discovery capabilities. Our major competitors are medicinal chemistry
outsourcing companies, including Albany Molecular Research Inc., ArQule, Inc.,
Discovery Partners Inc., MediChem Life Sciences, Inc. and Evotec BioSystems AG
(Evotec OAI), and drug discovery companies, including 3-Dimensional
Pharmaceuticals, Inc., BioCryst Pharmaceuticals, Inc., Gilead Sciences, Inc.,
Texas Biotechnology Corporation and Vertex Pharmaceuticals Incorporated. Some of
our competitors offer a broader range of capabilities and have greater access to
financial, technical, scientific, business development, recruiting and other
resources than we do. Their access to greater resources may allow them to
develop processes or technologies, such as databases and molecular modeling
tools that predict how effectively compounds will treat a targeted disease, that
render our technologies obsolete or uneconomical. We anticipate that we will
face increased competition in the future as new companies enter the market and
advanced technologies become available.
THE CONCENTRATION OF THE PHARMACEUTICAL INDUSTRY AND ANY FURTHER CONSOLIDATION
COULD REDUCE THE NUMBER OF OUR POTENTIAL COLLABORATORS.
We believe there are a limited number of large pharmaceutical companies and
these companies represent a significant portion of the market for our
capabilities. The number of our potential collaborators could decline even
further through consolidation among or growth of these companies. If the number
of our potential collaborators declines even further, they may be able to
negotiate price discounts or other terms for our capabilities that are
unfavorable to us.
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THE INTELLECTUAL PROPERTY RIGHTS WE RELY ON TO PROTECT THE TECHNOLOGY UNDERLYING
OUR PRODUCTS AND TECHNIQUES MAY BE INADEQUATE TO PREVENT THIRD PARTIES FROM
USING OUR TECHNOLOGY OR DEVELOPING COMPETING CAPABILITIES OR TO PROTECT OUR
INTERESTS IN OUR PROPRIETARY DRUG CANDIDATES.
Our success will depend in part on our ability to protect patents or
maintain the secrecy of proprietary processes and other technologies we develop
for the testing and synthesis of chemical compounds in the drug discovery
process. In addition, one of our business strategies is to develop our own
proprietary drug candidates and enter into collaborations with pharmaceutical
and biotechnology companies for the development of these drug candidates. In
order to protect our rights to our proprietary drug candidates, we must obtain
and maintain the intellectual property rights to such drug candidates. We
currently have one United States patent and seven patent applications on file in
the United States, including one provisional application, and we are pursuing
limited patent coverage in foreign countries. Any patents that we may own or
license now or in the future may not afford meaningful protection for our
technology and products. Our efforts to enforce and maintain our intellectual
property rights may not be successful and may result in substantial costs and
diversion of management time. In addition, others may challenge patents we may
obtain in the future and, as a result, these patents could be narrowed,
invalidated or rendered unenforceable or we may be forced to stop using the
technology covered by these patents or to license the technology from third
parties. In addition, current and future patent applications on which we depend
may not result in the issuance of patents in the United States or foreign
countries. Even if our rights are valid, enforceable and broad in scope,
competitors may develop products based on similar technology that is not covered
by our patents.
In addition to patent protection, we also rely on copyright and trademark
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities. In an effort to maintain the confidentiality and
ownership of our trade secrets and proprietary information, we require our
employees, consultants and advisors to execute confidentiality and proprietary
information agreements. However, these agreements may not provide us with
adequate protection against improper use or disclosure of confidential
information and there may not be adequate remedies in the event of unauthorized
use or disclosure. Furthermore, like many companies in our industry, we may from
time to time hire scientific personnel formerly employed by other companies
involved in one or more areas similar to the activities we conduct. In some
situations, our confidentiality and proprietary information agreements may
conflict with, or be subject to, the rights of third parties with whom our
employees, consultants or advisors have prior employment or consulting
relationships. Although we require our employees and consultants to maintain the
confidentiality of all confidential information of previous employers, we or
these individuals may be subject to allegations of trade secret misappropriation
or other similar claims as a result of their prior affiliations. Finally, others
may independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to our trade secrets. Our failure to
protect our proprietary information and techniques may inhibit or limit our
ability to exclude certain competitors from the market and execute our business
strategies.
THE DRUG RESEARCH AND DEVELOPMENT INDUSTRY HAS A HISTORY OF PATENT AND
OTHER INTELLECTUAL PROPERTY LITIGATION, AND WE MAY BE INVOLVED IN COSTLY
INTELLECTUAL PROPERTY LAWSUITS.
The drug research and development industry has a history of patent and
other intellectual property litigation, and these lawsuits will likely continue.
Because we produce and provide many different capabilities in this industry, we
face potential patent infringement suits by companies that control patents for
similar capabilities or other suits alleging infringement of their intellectual
property rights. In order to protect or enforce our intellectual property
rights, we may have to initiate legal proceedings against third parties. Legal
proceedings relating to intellectual property would be expensive, take
significant time and divert management's attention from other business concerns,
whether we win or lose. The cost of such litigation could affect our
profitability. Further, if we do not prevail in an infringement lawsuit brought
against us, we might have to pay substantial damages, including treble damages,
and we could be required to stop the infringing activity or obtain a license to
use the patented technology.
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HEALTH CARE REFORM COULD REDUCE THE PRICES PHARMACEUTICAL AND BIOTECHNOLOGY
COMPANIES CAN CHARGE FOR DRUGS THEY SELL WHICH, IN TURN, COULD REDUCE THE
AMOUNTS THAT THEY HAVE AVAILABLE TO RETAIN OUR SERVICES.
We depend on contracts with pharmaceutical and biotechnology companies for
a majority of our revenues. We therefore depend upon the ability of
pharmaceutical and biotechnology companies to earn enough profit on the drugs
they market to devote substantial resources to the research and development of
new drugs. Future legislation may limit the prices pharmaceutical and
biotechnology companies can charge for the drugs they market. Such laws may have
the effect of reducing the resources that pharmaceutical and biotechnology
companies can devote to the research and development of new drugs, which could
reduce the amount of services that we perform, and therefore our revenues.
THE ABILITY OF OUR STOCKHOLDERS TO CONTROL OUR POLICIES AND EFFECT A CHANGE OF
CONTROL OF OUR COMPANY IS LIMITED, WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR
STOCKHOLDERS.
There are provisions in our certificate of incorporation and bylaws that
may discourage a third party from making a proposal to acquire us, even if some
of our stockholders might consider the proposal to be in their best interests.
These provisions include the following:
- our certificate of incorporation provides for three classes of directors
with the term of office of one class expiring each year, commonly
referred to as a "staggered board." By preventing stockholders from
voting on the election of more than one class of directors at any annual
meeting of stockholders, this provision may have the effect of keeping
the current members of our board of directors in control for a longer
period of time than stockholders may desire.
- our certificate of incorporation authorizes our board of directors to
issue shares of preferred stock without stockholder approval and to
establish the preferences and rights of any preferred stock issued, which
would allow the board to issue one or more classes or series of preferred
stock that could discourage or delay a tender offer or change in control.
In addition, our board of directors approved on August 2, 2001 a Rights
Agreement, which could deter a potential unsolicited takeover of us by causing
substantial dilution of an acquirer of 15% or more of our outstanding common
stock. We are also subject to Section 203 of the Delaware General Corporation
Law, which, in general, imposes restrictions upon acquirers of 15% or more of
our stock.
OUR OFFICERS AND DIRECTORS WILL HAVE SIGNIFICANT CONTROL OVER US AND THEIR
INTERESTS MAY DIFFER FROM THOSE OF OUR STOCKHOLDERS.
At June 30, 2001, our directors and officers beneficially owned or
controlled approximately 31% of our common stock. Individually and in the
aggregate, these stockholders significantly influence our management, affairs
and all matters requiring shareholder approval. In particular, this
concentration of ownership may have the effect of delaying, deferring or
preventing an acquisition of us and may adversely affect the market price of our
common stock.
BECAUSE OUR STOCK PRICE MAY BE VOLATILE, OUR STOCK PRICE COULD EXPERIENCE
SUBSTANTIAL DECLINES.
The market price of our common stock has historically experienced and may
continue to experience volatility. Our quarterly operating results, changes in
general conditions in the economy or the financial markets and other
developments affecting our competitors or us could cause the market price of our
common stock to fluctuate substantially. In addition, in recent years, the stock
market has experienced significant price and volume fluctuations. In addition,
during the past twelve months, the stock market, and in particular technology
companies, have experienced significant decreases in market value. This
volatility and the recent market decline has affected the market prices of
securities issued by many companies, often for reasons unrelated to their
operating performance and may adversely affect the price of our common stock.
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BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS, STOCKHOLDERS WILL BENEFIT FROM AN
INVESTMENT IN OUR COMMON STOCK ONLY IF IT APPRECIATES IN VALUE.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any cash dividends in the foreseeable
future. As a result, the success of an investment in our common stock will
depend entirely upon any future appreciation. There is no guarantee that our
common stock will appreciate in value or even maintain the price at which
stockholders have purchased their shares.
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PART I
ITEM 1. BUSINESS
OVERVIEW OF ARRAY'S BUSINESS
Array BioPharma is a drug discovery company creating new drugs through the
integration of chemistry, structural biology and chemoinformatics. We
collaborate with leading pharmaceutical and biotechnology companies to identify
novel small molecule drugs and are leveraging the Array Discovery Platform to
develop our own pipeline of proprietary drug candidates. The Array scientific
team has a proven track record of success in identifying promising drug
candidates.
The genomics revolution has provided an unparalleled opportunity to
understand human disease by identifying gene targets, the proteins that cause
disease. Now, chemistry is needed to actually create the drugs that treat those
diseases. We believe the drug research and development bottleneck is shifting
from the discovery of gene targets to the creation of safe and effective new
drugs for those targets. We use the integrated Array Discovery Platform to
bridge the gap between the identification of targets and the testing of drug
candidates in animals and humans.
OUR OBJECTIVE IS TO BUILD THE INDUSTRY'S PREMIER DRUG DISCOVERY COMPANY BY
ACHIEVING THE FOLLOWING:
- We continually strive to enhance the Array Discovery Platform by
developing novel tools and implementing new technologies and processes to
accelerate the drug discovery process for our partners and our
proprietary drug candidates.
- We will continue to collaborate with pharmaceutical and biotechnology
companies to identify novel drug candidates and receive a fee for each
scientist dedicated to the program and potentially, residuals in the form
of milestones and royalties.
- Our scientists use the Array Discovery Platform to create our own
proprietary drug candidates, which we intend to continue to license and
co-develop with partners.
OUR ACHIEVEMENTS AS OF THE END OF OUR JUNE 30, 2001 FISCAL YEAR INCLUDE:
- Creating our own potential drug candidates and entering into a research
and license agreement with Amgen Inc. providing for the development and
possible commercialization of one of these potential drug candidates;
- Entering into collaboration agreements with pharmaceutical companies such
as Eli Lilly and Company, and Merck & Co., Inc.;
- Entering into collaboration agreements with biotechnology companies such
as Chiron, ICOS Corporation, Immunex Corporation and Tularik Inc.;
- Discovering a drug candidate potentially suitable for human testing with
our first collaboration partner, ICOS;
- Creating the Array Discovery Platform to identify new drug candidates
from genomic information;
- Entering into a long-term lease that will increase laboratory space to
190,000 square feet over the next three years, accommodating up to 350
scientists; and
- Raising $50.8 million in our initial public offering in November 2000.
OUR ACHIEVEMENTS SINCE OUR FISCAL YEAR END INCLUDE:
- Growing our staff since our inception in 1998 to 202 full-time employees
as of September 2001, including 140 scientists, of whom 91 have Ph.D.'s.
- Entering into collaboration agreements with ICOS Corporation, Takeda
Chemical Industries, Inc. and Vertex Pharmaceutical Incorporated, which
include fees for each scientist dedicated to these projects and/or
upfront fees, potential milestone and royalty payments.
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DRUG DISCOVERY AND DEVELOPMENT
Drug discovery and development is the process of creating drugs for the
treatment of human disease. The drug discovery process aims to generate safe and
effective drug candidates, while the drug development process involves the
testing of these drug candidates for safety and efficacy in animals and humans.
The role of biology in drug discovery is primarily focused on the early stages
of research, including understanding the mechanism of diseases, identifying
potential drug targets for therapeutic intervention and evaluating potential
drug candidates. The role of chemistry in drug discovery is the actual invention
of safe and effective drug candidates to address these targets.
DRUG CHARACTERISTICS
Drug characteristics are the criteria that measure the effectiveness of a
drug in treating a particular disease. These characteristics include:
- Potency, which is the amount of a drug required to effectively treat the
disease; the greater the potency, the smaller the required dose and
therefore the smaller the likelihood of harmful side effects;
- Selectivity, which is the extent to which a drug interacts only with the
disease-causing target; the greater the selectivity, the lower the
probability of harmful side effects;
- Toxicity, which is the presence and significance of any harmful side
effects;
- Metabolism, which is how rapidly the drug works and how long it stays
effective; and
- Formulation, which is how the drug is administered to patients, for
example, orally or by injection.
Drugs created by chemists are generally small in molecular weight relative
to targets and are known as small molecule drugs. Small molecule drugs are
generally administered orally and remain the preferred treatment for most
diseases. They are particularly appropriate for the treatment of chronic
diseases requiring the daily administration of medications over many years.
Worldwide retail pharmaceutical sales in 2000 were $354 billion. We estimate
that more than 90% of the revenue derived from retail drug sales is attributable
to small molecule drugs created through the application of chemistry.
DRUG DISCOVERY AND DEVELOPMENT PROCESS
Currently, the process of researching and developing a safe and effective
drug is slow, expensive and has a high failure rate. This process is estimated
to take an average of 12 years and to have a risk adjusted cost of $500 million
per drug. This long and costly process is due largely to the inability of
science to predict which, if any, of a virtually infinite number of possible
small molecule drugs will prove to be safe and effective. We believe that
improved decision making by chemists early in drug discovery can improve the
success rate of, and lower the cost and time required for, the development of
safe and effective drugs.
The following is a more detailed description of the drug research and
development process, which includes:
- Target discovery, including target identification and validation;
- Drug discovery, including lead generation, lead optimization, and process
research and development;
- Preclinical development, which involves testing a potential drug
candidate for safety and efficacy in animals; and
- Clinical development, which involves testing a drug candidate for safety
and efficacy in humans.
TARGET DISCOVERY
The mapping and sequencing of the human genome, which is the set of all
human genes, has identified large numbers of genes that encode the chemical
information for cells to produce proteins. These proteins determine human
physiology, and some cause disease. These disease-related proteins are potential
targets for
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therapeutic intervention with a drug. Biologists identify the targets against
which chemists create drugs. Organizations that develop new drugs, principally
pharmaceutical and biotechnology companies are advancing many of these newly
identified potential drug targets into drug discovery. Many of these potential
drug targets have yet to be validated, meaning that their roles in causing
disease are not completely understood.
DRUG DISCOVERY
Lead Generation
Lead generation is the process of identifying hits, which are chemical
compounds that interact with a potential drug target with sufficient potency and
selectivity to warrant further testing and refinement as possible drug
candidates. These potential drug candidates are called leads.
Assay development and compound screening. Once biologists identify a
potential drug target, biochemists must develop tests, called assays, to
evaluate, or screen, potential drug compounds against these targets for their
therapeutic value. Depending on the target and what is understood about its
biology, biologists develop many types of primary assays conducted in test
tubes, called in vitro assays, to measure the relative potency and specificity
of interaction of a potential drug compound with a target. Biochemists further
evaluate the drug characteristics of compounds by creating more complex
secondary assays that are both in vitro and conducted in animals, known as in
vivo. A typical screening campaign for a given target entails screening small
amounts of thousands of chemical compounds from collections of chemical
compounds known as libraries.
Compound libraries. Chemists design compound libraries to provide a
starting point to identify leads in the drug discovery process and to better
understand the biochemistry and therapeutic relevance of targets. A
well-designed, highly pure library increases the likelihood of finding a hit
that is suitable for optimization of its drug characteristics. The screening of
low quality libraries often produces either numerous false hits or hits that are
not suitable for optimization, creating a bottleneck in secondary screening and
downstream drug discovery. Therefore, we believe high quality libraries should
produce better candidates at a lower cost.
Libraries can consist of newly synthesized compounds or of historical
collections of synthetic compounds or natural products. It is estimated that
over 10(60), or virtually an infinite number, of possible chemical compound
structures are of an appropriate size and contain the right elements to be
potential drugs. Since it would be impossible to create or screen even a small
fraction of this universe of possible compounds, the choice of which compounds
to synthesize is critical and is based on several factors, including ease of
synthesis, desired drug characteristics and chemical properties. A high quality
library for drug discovery will contain compounds of high purity and have
valuable drug characteristics, from which chemists can rapidly optimize hits to
generate leads. At the same time, the design of a high quality library should
maximize the differences between compounds, also known as diversity, so that
each compound provides important information about its potential as a drug
candidate against a specific target. Furthermore, high quality libraries should
not contain compounds with metabolic or toxic liabilities or compounds that may
interact nonspecifically with many different targets.
Compound synthesis. Compound synthesis is the process by which chemists
use a small set of commercially available starting materials called building
blocks to create new compounds. Compound synthesis is accomplished by adding
building blocks to a core chemical structure, called a scaffold, through a
chemical reaction, either one reaction at a time or in a parallel fashion using
technology known as automated high-speed synthesis. Chemists determine which
compounds to prepare and try to choose a method that will minimize the number of
steps and the time required for synthesis. Compound synthesis often involves
multiple separate chemical steps. While new technologies have increased
productivity, the synthesis of compounds with desirable drug characteristics
remains a rate-limiting step in the drug discovery process.
Lead Optimization
Lead optimization is the complex, multi-step process of refining the
chemical structure of a hit to improve its drug characteristics, with the goal
of producing a preclinical drug candidate. The process of lead optimization
typically falls between two extremes known as empirical lead optimization and
rational drug
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design. Empirical lead optimization emphasizes screening large numbers of
compounds, often generated through combinatorial chemistry, to optimize leads.
Combinatorial chemistry relates to the mechanics of mixing and matching
different building blocks, in combination with a scaffold, to create a library
that may or may not be designed to have optimal drug characteristics and maximum
diversity. Combinatorial chemistry typically creates libraries using automated
high-speed synthesis. Rational drug design, in contrast, optimizes leads through
the detailed analysis of the three-dimensional structure of the target and of
the chemical structure required for a potential drug compound to interact with
that target. We believe a combination of these two approaches, one that
optimizes leads through a continuous, multi-step process based on knowledge
gained at each stage, generally results in higher quality potential drug
candidates at lower cost than either approach by itself.
Hits to quality leads. By definition, a quality lead can be readily
optimized into a potential drug candidate. At the initiation of a drug discovery
project, goals defining the desired drug characteristics, or candidate criteria,
are established. Medicinal chemistry involves the design, selection and
synthesis of compounds to achieve these specified drug characteristics. Any hits
obtained from screening against targets are evaluated relative to these
candidate criteria. Typically, one or more hits are evaluated in secondary
assays and a set of structurally related compounds, called analogs, are
synthesized and screened as well. Chemists select which hits or analogs to make
based on a combination of their potential drug characteristics, ease of
synthesis and structure-activity relationship, or SAR. SAR is quantitative
information that correlates changes in chemical structure to biological data
generated from screening assays. The ability of chemists to make informed
decisions as to which changes in structure will optimize a hit's valuable drug
characteristics is based mostly on experience and is a key parameter for
productivity in drug discovery.
This optimization process can be accomplished by an empirical, linear
approach where each analog is evaluated to determine its drug characteristics
and based upon this analysis an additional analog is synthesized. Alternatively,
a rational, parallel approach can be used to simultaneously create multiple
analogs, called focused libraries. These focused libraries can be screened
against targets to generate a matrix of SAR information, resulting in
accelerated optimization.
Leads to candidates. A preclinical candidate is a lead that has been
optimized to meet particular drug candidate criteria and that is ready for Food
and Drug Administration, or FDA, regulated toxicity testing. Chemists use SAR
information, derived from focused libraries, complex secondary assays, and other
technologies, including x-ray crystallography and molecular modeling, to
engineer hits with desired drug characteristics into leads. Complex secondary
assays, such as those using human tissues and animal models, can help define the
potential of drugs to be safe and effective in humans. Technologies that help
improve the prediction of clinical success include x-ray crystallography, which
can determine the three-dimensional structure of potential drug compounds bound
to targets, and molecular modeling, a computational method that helps chemists
to design more potent and selective compounds. In addition, chemists can use
databases correlating chemical structure to biology, generally referred to as
chemoinformatics, to help predict SAR to optimize desired drug characteristics.
Databases to predict a chemical compound's drug characteristics are particularly
important. While historically performed in a linear process, chemists now refine
drug characteristics in parallel at every point in the lead optimization
process, even in library creation. Ultimately, the experience, intuition and
synthetic skills of medicinal chemists are the defining factors in creating a
successful drug candidate.
Process Research and Development
The compounds chemists create for screening in lead generation and lead
optimization are typically synthesized in relatively small, milligram
quantities. The synthetic process to make compounds for screening typically uses
a parallel synthesis approach to explore drug characteristics, rather than to
optimize ease of synthesis. Before a drug candidate can be taken into clinical
trials, kilogram quantities must be synthesized. The goal of process research is
to streamline the synthesis of larger quantities of the compound, typically by
minimizing the number of synthetic steps and reducing the time and cost of
production. Process development refers to the production scale-up and further
refinement required for clinical trials and commercial manufacturing.
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PRECLINICAL DEVELOPMENT
For regulatory purposes, a potential drug candidate must undergo extensive
in vitro and in vivo studies to predict human drug safety, including toxicity
over a wide range of doses and how the drug is metabolized. The objective of
preclinical testing is to obtain results that will allow the preclinical drug
candidate to be approved for human testing by the FDA, through an
Investigational New Drug, or IND, application.
CLINICAL DEVELOPMENT
Clinical trials, or human tests of a potential drug candidate to determine
safety and efficacy, are typically conducted in three sequential phases,
although the phases may overlap. A successful clinical trial will result in the
filing of a New Drug Application, or NDA, with the FDA to grant permission to
market the drug in the United States. Similarly, clinical trials must be
conducted and regulatory approvals secured before a drug can be marketed in
other countries.
THE OPPORTUNITY
The drug industry. In 2000, worldwide drug sales increased 10% to an
estimated $354 billion. Pharmaceutical companies in particular are under
increasing pressure to introduce novel drugs to grow revenue. It is estimated
that research and development spending over the last 10 years has increased
approximately three fold, growing from 16% of pharmaceutical company revenue in
1990 to an estimated 20% in 2000. Despite this increase in research spending,
the FDA approved only 27 new drugs in 2000, compared with 23 new drugs in 1990.
Problems with current drug discovery and development. Despite all of the
recent technological advances in genomics, biology and chemistry, drug discovery
and development remains slow, expensive and risky. Currently, less than 1% of
all drug discovery programs yield marketable drugs. The drug industry faces
multiple challenges in reducing the cost and time of drug discovery and
development. These include the early identification and elimination of
unsuccessful drug candidates and increasing the success rate at each stage of
the drug development process.
Capitalizing on the genomics revolution. The drug research and development
process is experiencing a fundamental change fueled by the revolution in
genomics and the tremendous progress in the biological understanding of disease.
The success of publicly and privately funded genomics initiatives, including the
Human Genome Project, in sequencing the entire human genome heralds a new era in
drug research and development. Heavy investment in the technologies to work out
the biological understanding of gene function is widely expected to result in a
dramatic increase in the number of potential drug targets. All of the human
therapeutic drugs on the market today are directed at approximately 500 targets.
The genomics revolution is projected to expand the number of potential
therapeutic targets to between 5,000 and 10,000.
The importance of chemistry. We believe the bottleneck in drug research
and development is shifting from the identification and validation of new
targets to the creation of safe and effective drugs for these targets. Although
tremendous knowledge has become available about the human genome, now the
challenge is to create drugs from this biological information. During the next
decade, we believe the knowledge gained from genomics and biology will lead to a
dramatic increase in the investment in small molecule drug discovery. The
chemical make-up or structure, of a drug is the key determinant of its safety
and efficacy. Minor modifications in chemical structure can differentiate drugs
and determine their success or failure in the marketplace. While targets are
generally used as tools for screening potential drug candidates, chemistry is
necessary to create the actual drug provided to a patient. Therefore, while the
ultimate value of intellectual property associated with newly identified targets
is currently unknown, the value of intellectual property associated with drugs
has proven to be significant.
Pharmaceutical industry challenges. The demands for new and improved drugs
coupled with the emerging potential of new targets have created a shortage of
qualified chemists. Some pharmaceutical companies have revealed plans to
significantly increase their internal discovery chemistry capacity over the next
five years. However, we believe there will be a continuing shortage of qualified
chemists to fill these
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positions. To the extent that they cannot hire qualified chemists, these
companies must substantially increase their drug discovery productivity, enter
into collaborations, or acquire additional discovery capabilities.
Biotechnology industry challenges. Many biotechnology companies are
increasing their focus on creating drugs against their proprietary targets.
Historically, they have partnered with pharmaceutical companies to create small
molecule drugs. These arrangements have often resulted in biotechnology
companies relinquishing much of the economic value of their biological
discoveries. Accordingly, several biotechnology companies have announced their
intention to build small molecule drug discovery capabilities internally.
However, they face significant barriers in creating a competitive drug discovery
platform, including hiring multidisciplinary teams of scientists with drug
discovery experience, the significant investment necessary to build and equip
specialized laboratories, and most importantly, the opportunity cost in time
required to build an effective drug discovery capability.
THE ARRAY DISCOVERY PLATFORM
The Array Discovery Platform creates a new model for drug discovery,
bridging the gap between target identification and clinical testing. We
continually strive to enhance our platform by developing novel tools and
implementing new technologies and processes to accelerate drug discovery.
The Array Discovery Platform includes:
- Structural Biology: Array's experienced biology team is creating a
better understanding of how small molecule drugs interact with disease
targets. This team clones, expresses and purifies related families of
disease proteins across multiple therapeutic areas to gain insights into
their function. X-ray crystallography and computational modeling are used
to define the three-dimensional structures of these proteins. This
process provides valuable information about the interaction between lead
candidates and protein targets.
- High Throughput Screening: Our screening capability can analyze up to
100,000 chemical compounds per week against target assays to identify
novel leads for further optimization. Our scientists use compound
libraries to screen compounds against targets to obtain quantitative
measures of drug quality in our proprietary drug discovery programs and
collaborations.
- Predictive Chemoinformatics: Predicting drug characteristics, such as
potency, dosing frequency and potential side effects, requires powerful
information mining and management tools. Array's chemoinformatics team,
composed of experts in computational chemistry, scientific computing and
medicinal chemistry, works together to increase the probability of
success. Our proprietary software searches databases of existing drugs
and generates novel predictive databases and modeling programs designed
to better forecast the characteristics of valuable new drugs. In
addition, we use an electronic notebook to allow information to be
collected and accessed -- at the bench-top -- throughout the
organization. We believe the integration of these technologies improves
the decision-making ability of our scientists in the generation of
successful drug candidates.
- Parallel Synthesis: Our high-speed parallel synthesis team builds
quality small molecule compound libraries, called Lead Generation
Libraries, as a starting point for drug discovery. Array's predictive
chemoinformatics technologies, along with our medicinal chemistry
experience, are used to design these biologically relevant libraries.
This group develops efficient, versatile processes to synthesize, analyze
and purify compounds for screening. The team creates highly pure and
diverse libraries of compounds directed against families of disease
targets. Most importantly, any screening hit from these libraries are
designed to readily advance to lead optimization.
- Analytical Chemistry: Our analytical chemistry team uses
state-of-the-art automated instrumentation to evaluate the quality of
chemical compounds, understand the chemical processes used to synthesize
these compounds and measure important drug properties. This capability
allows for the high throughput analysis and purification of thousands of
compounds per week.
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- Medicinal Chemistry: Chemical leads that interact with disease-causing
protein targets can come from several sources including hits from our
libraries, de novo structure-based design strategies, the scientific
literature, or from our collaborators. Regardless of the source, we apply
the same defined processes to optimize these leads to clinical drug
candidates. We first utilize information regarding the three-dimensional
structure of the protein-lead interaction to design novel sets of
compounds for synthesis. Next, we use our chemoinformatics capability to
eliminate certain compounds from our design set that are predicted to
have poor drug characteristics. We then synthesize, analyze and purify
this refined set in a parallel format and screen these compounds against
many assays to quantify drug characteristics. An iterative process of
making small changes in chemical structure, evaluating the results and
engineering improvements into the drug candidate is repeated many times
to optimize drug characteristics and achieve the candidate criteria.
- Drug Metabolism: When optimizing desirable drug characteristics, it is
critical at an early stage in the discovery process to determine drug
metabolism, which is how rapidly the drug works and how long it stays
effective. We have established a series of assays to identify these
metabolic characteristics. These assays include human liver enzyme
assays, cellular assays and assays based on fluids obtained from the
dosing of compounds in animals. We measure both the rate in which
compounds are metabolized and the position of metabolism using state of
the art mass spectrometry techniques. We also screen our Lead Generation
Libraries against these assays to build valuable drug metabolism
databases to help predict clinical success of our future compounds.
- Process Research and Development: Our process chemists improve complex
synthetic procedures, which allow for more efficient scale-up and
production of drug candidates. We design our proprietary processes to
lower the cost and increase the rate in which drug candidates can be
synthesized. We believe the experience of our process chemists in
resolving complex synthetic problems allows us to rapidly develop new
synthetic procedures and accelerates the development of valuable drug
candidates for human testing.
We provide the Array Discovery Platform to biotechnology and pharmaceutical
companies for lead generation and lead optimization, as well as for process
research and development. We also leverage the Array Discovery Platform to
create our own potential drug candidates. We plan to optimize, develop and
commercialize our proprietary compounds in collaboration with pharmaceutical and
biotechnology companies.
We believe our information-driven technology platform enables our
scientists to make better decisions at each step of the drug discovery process.
Our organizational structure emphasizes multi-disciplinary teams to improve
problem solving, which we believe streamlines the drug discovery process. We
believe that our integrated approach to drug discovery will enable both our
collaborators and our internal discovery teams to create higher quality drugs
more quickly and less expensively.
We have assembled a scientific team with experience in both the
pharmaceutical and biotechnology industries. We had the distinct advantage of
recruiting 20 former Amgen scientists at our inception. This nucleus afforded us
a critical mass of experienced chemists, which we believe has proven to be a
competitive advantage in recruiting additional scientists. As of September 2001,
after only three years in operation, we have 202 full-time employees, including
140 scientists, of whom 91 have Ph.D.'s and 66 have large pharmaceutical company
experience.
STRATEGY
Our objective is to become the leading inventor of high quality drug
candidates by creating the industry's premier drug discovery platform. Our
strategies to achieve this objective are as follows:
Provide an integrated solution to drug discovery. Our drug discovery
capabilities bridge the gap between target identification and preclinical
testing. We provide collaborators with a fully integrated drug discovery
capability. While collaborators can access components of this capability, we
seek to expand all collaborations across the entire Array Discovery Platform.
Because of the breadth and quality of our discovery platform, we expect to
become the drug discovery partner of choice for pharmaceutical and biotechnology
companies.
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Combine state-of-the-art technology with innovative chemistry and
structural biology to accelerate drug discovery. We provide a premium drug
discovery capability that we believe creates drugs more efficiently. Our
integrated approach leverages parallel processing across the Array Discovery
Platform to speed the creation of high quality drug candidates. We rely on our
highly qualified and experienced scientists and our drug discovery platform to
create drug candidates by understanding the complex relationships between
chemical structure and desirable drug characteristics. We are committed to
continuous process improvement, implementation of new technologies, shared
learning among our scientists and innovative organizational design.
Create our own drug candidates. We intend to maximize the value of the
Array Discovery Platform by creating our own drug candidates. We intend to
commercialize these drug candidates by entering into collaborations to
co-develop these drug candidates with pharmaceutical and biotechnology partners.
Attract world-class scientists. We expect to grow our business by
continuing to aggressively recruit world-class scientific talent. Our success in
recruiting and retaining these scientists depends on our continued focus on
quality science and the maintenance of our culture, which emphasizes innovation
and empowerment of our scientists, and our ability to provide industry
competitive salaries and equity participation in our company.
Expand our capabilities through internal development and acquisitions. We
plan to increase our current capacity by expanding our state-of-the art
facilities. In addition, we intend to acquire additional laboratory sites to
meet our collaborators' needs and improve access to regional scientific talent.
We further intend to acquire or develop new technologies and capabilities to
expand our existing drug discovery platform.
ARRAY'S DRUG DISCOVERY CAPABILITIES
We provide a broad range of premium drug discovery capabilities, including:
- Structural biology
- Lead generation;
- Lead optimization; and
- Process research and development.
We offer these capabilities to collaborators across the drug discovery
process and also use them internally for our own drug discovery programs. The
Array Discovery Platform supports the entire drug discovery process.
STRUCTURAL BIOLOGY
Our structural biology team is creating a better understanding of how small
molecule drugs interact with disease targets across multiple therapeutic areas.
We utilize our biotechnology expertise to produce proteins for structural
determination and high throughput screening. X-ray crystallography and
computational modeling are used to define the three-dimensional structures of
these proteins. We develop our own assays or format assays supplied by a
collaborator for high throughput screens and can screen up to 100,000 compounds
per week. Tens of thousands of small molecule compounds are then screened
against the targets to obtain quantitative measures of drug quality. We also
screen our Lead Generation Libraries against metabolism and toxicology assays
both to establish quality and to populate our predictive databases. Our
computational and medicinal chemists then mine this information to design
focused libraries of small molecule drug candidates. This approach takes
advantage of the similarities within disease target families, which are designed
to accelerate the discovery process.
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LEAD GENERATION
Optimer building blocks
Chemists are able to create high value compounds more rapidly by using
quality building blocks and automated chemical synthesis techniques. We
recognize that a bottleneck in drug discovery is the availability of
high-quality building blocks for initiating chemical synthesis. Our chemists
have designed a series of building blocks with desirable drug-relevant
properties, using our proprietary software, Radical, and based on their
experience in assessing drug-relevant chemical structures. These building blocks
are added to a scaffold during compound synthesis and have become an important
component of our overall drug discovery strategy. We produce primary building
block sets for construction of lead generation libraries. We then utilize sets
of complementary secondary building blocks for creating focused libraries to
determine SAR in lead optimization programs. In addition, we sell approximately
335 of these building blocks under the trade name Optimer.
Lead Generation Libraries
We provide chemical compounds from our Lead Generation Libraries to our
collaborators with a non-exclusive license to use them for internal research. We
retain all other rights to these compounds, including the right to use these
compounds for our internal and collaborative programs, as well as the rights to
the synthetic processes used to create these compounds. We create sub-libraries
that interact with specific target families, including G-protein coupled
receptors, nuclear receptors, enzymes and protein-protein interactions. The
majority of all drugs on the market today are aimed at targets within these
families.
A critical rate-limiting step in the drug discovery process is the
availability of high-quality compound libraries that have been designed with
structures relevant for screening specifically against important target classes
and that are designed for rapid lead optimization. We believe that the
production of large compound libraries, by itself, has limited value for
creating high quality leads. Instead, we design our libraries so that any leads
generated require less optimization and will result in clinical candidates with
a greater likelihood of clinical success.
We design our libraries according to the following criteria:
- Biologically-relevant diversity. We have established specific
computational parameters to define the diversity of our compound
libraries. Our proprietary chemoinformatics tools categorize how
changes in chemical structure correlate with the biological activity
of known drugs and use this information to define our diversity
parameters. Libraries can be constructed to optimize diversity and
therefore maximize the information provided by each library
compound.
- Capture full patent potential. Our scientists maximize the number
of distinct drug-like three-dimensional shapes, or pharmacophores
during library design. This approach is designed to optimize the
number of discrete, patentable compound sets within a library, with
the goal of identifying the key structural features of drug-target
interactions.
- Target-directed chemical scaffolds. Our chemists create scaffolds
designed for disease-related families of targets. This "privileged"
scaffold strategy allows us to synthesize compounds with a higher
probability of finding a high-quality lead for a given target. We
attach novel and commercial building blocks to these scaffolds to
create our library compounds.
- Drug-relevant building blocks. We use drug-relevant building blocks
to synthesize libraries. We design the library to identify the least
complex, or minimal structure that will interact with a target by
using minimally complex, or primary building block sets. Any hit
generated from our Lead Generation Library can be readily optimized
due to the availability of more complex, or secondary building block
sets. These focused libraries study the SAR around any compound hit.
- Optimized chemical synthetic processes for high purity. We invest
significant effort in the process design and synthesis of each
library to ensure that the compounds generated are of high purity
and can be readily optimized. The library undergoes analysis during
each stage of its development to ensure the identity of each
compound and maintain quality.
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Custom libraries. We develop novel processes for and design libraries
focused towards specific target families or our collaborators' proprietary
scaffolds. We sell chemical compounds from the custom libraries we design and
synthesize for our collaborators, with either an exclusive or non-exclusive
license to use these compounds. These libraries are typically synthesized in
multi-milligram quantities and are generally of very high purity.
LEAD OPTIMIZATION
Our chemists optimize leads generated from multiple starting points,
including leads provided by our collaborators, identified through screening our
Lead Generation Library, or generated through our structure-based drug design
programs. Regardless of a lead's source, we take an iterative, structure-based
approach to lead optimization. This approach typically begins with the design
and synthesis of focused libraries to identify the SAR of a lead. From this, we
can use x-ray crystallography and our chemoinformatics capabilities to
continuously design and synthesize additional focused libraries until we achieve
the drug candidate criteria. We utilize knowledge of gene families, the proteins
they encode and the compounds that interact with them to design clinical
candidates. We then screen these compounds against secondary assays to minimize
the potential for toxicity or metabolic deficiencies.
Because no single technology exists to accurately predict clinical outcomes
for potential drug candidates, experienced chemists with success in generating
clinical candidates are vital to an effective lead optimization program. Our
approach is to work closely with our collaborators, providing multi-disciplinary
teams of experienced scientists on projects to identify drug candidates. We have
successfully utilized this approach to lead optimization with a lead provided to
us by ICOS. Within 12 months from the initiation of the program, Array and ICOS
scientists identified a potential drug candidate.
PROCESS RESEARCH AND DEVELOPMENT
The processes to synthesize many preclinical candidates can be long,
complex and costly to scale-up. Our process chemists have solved significant
synthetic challenges in their careers, including the development of patentable
processes for synthesizing drugs that have entered clinical trials, and have
contributed to the synthesis of several complex drugs derived from natural
products. Our goal is to apply these skills and experience to create novel yet
efficient processes to synthesize complex molecules.
Process design. Once a potential drug candidate has been identified, it is
critical to reach a rapid decision to advance the candidate into the clinic. In
many cases, lack of an adequate quantity of a specific compound for preclinical
testing delays that decision. Our efforts are designed to take complex medicinal
chemistry processes and reduce the number of steps and improve yields to allow
for the rapid synthesis and scale-up of preclinical and clinical drug
candidates.
Custom synthesis. Our chemists can undertake challenging syntheses to
produce building blocks, complex intermediates and final products on a custom
basis or from small-scale through bulk quantities. We synthesize compounds both
on a proprietary and non-proprietary basis. A number of collaborators have asked
us to synthesize larger quantities of compounds we previously produced for them.
We intend to create proprietary processes that can be licensed to collaborators
as they advance potential drug candidates into clinical trials.
Process scale-up. Often a synthetic process can face unknown challenges
upon scale-up. Our chemists have demonstrated their ability to rapidly scale-up
compound production to meet customer deadlines. We have the capacity to produce
lots of up to 10 kilograms.
PROPRIETARY DRUG DISCOVERY
We leverage all of our capabilities internally to create our own drug
candidates for partnering with pharmaceutical and biotechnology companies. Our
chemical-proteomics approach takes advantage of the similarities in drug design
strategies for related families of disease relevant protein targets. We are
working on a number of target families, including those important for the
treatment of arthritis, diabetes and cancer.
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Through database analysis of human genomics information, we categorize targets
into biologically related protein families. These protein families will
typically have similar three-dimensional structures, and related biologic
function and enzymatic activity. The expertise required to produce and screen
these proteins in biologic assays are often similar. In parallel, we create
focused libraries of compounds, which are designed to interact with these
families of protein targets. By screening target-focused libraries against
related families of targets, we then generate our own early-stage leads against
therapeutically important targets. Once we have qualified a valuable lead
through secondary screening, we will seek to initiate a collaboration with a
partner for subsequent lead optimization, development and commercialization. In
the future, we plan to continue research on certain promising lead series and
move select compounds into early clinical development. To date, we have entered
into one such collaboration agreement that provides an up-front fee, license
fees, and payments for each full-time equivalent employee working in the
collaboration and milestone payments. We expect to enter into future
collaborations that may provide similar fees and that also allow us to
participate in the success of these potential drug candidates through royalty
payments.
COMMERCIALIZATION
We intend to grow revenue and achieve profitability while sharing in the
success we create for our collaborators. We intend to maximize the value we
capture by focusing our scientific resources on our proprietary drug programs
and collaborations that use our full breadth of capabilities and enable us to
participate in the success of the potential drug candidates that we create.
Our intent is to increase revenue by continuing to expand our
collaborations across the Array Discovery Platform. Generally, a collaboration
begins through accessing a single capability within our platform. We sell our
Optimer building blocks and license our Lead Generation Libraries, once
synthesized, to multiple collaborators, creating a recurring revenue stream. We
enter into collaborations with pharmaceutical and biotechnology companies and
receive fees for each scientist dedicated to these programs. In addition, in a
number of our current collaboration agreements, we are entitled to up-front
fees, milestone payments upon achievement of certain drug discovery objectives
and/or royalties based on sales of products commercialized by our collaborators
as a result of these agreements.
We create proprietary drug candidates with the intent of furthering their
development and increasing their potential commercial value through
collaborating with biotechnology or pharmaceutical partners. In the future, we
may choose to progress certain drug candidates as far as early clinical
development in order to maximize the value retained by Array. As we progress
candidates, we will seek collaborations that provide us with an initial
licensing fee for exclusive rights to our intellectual property, payments for
continued research and down stream payments that may include milestone and
royalty payments.
A key element of our strategy is to increase the value we provide
collaborators by expanding our relationships with them across complementary
development efforts. Below we describe several collaborators that chose to
expand their initial relationship with us.
ICOS. ICOS was one of our first collaborators. Our first agreement with
ICOS addressed lead optimization of up to four ICOS targets. This agreement,
initiated in December 1998, called for our scientists, in collaboration with
ICOS' scientists, to develop clinical candidates from ICOS' preliminary leads.
Based upon the success of this program, ICOS expanded this relationship in the
spring of 1999, by both initiating a second lead optimization program on a
separate set of targets, and subscribing to our Lead Generation Library. In less
than one year, our initial collaboration led to the development of a potential
clinical candidate for a target called phosphodiesterase 4, or PDE 4. To speed
the development of this clinical candidate, ICOS chose to access our chemistry
process research to refine the production process to produce sufficient
quantities for preclinical and early phase clinical testing. In July 2000 and
again in March 2001, ICOS expanded the scope of their collaboration with us and
consolidated these earlier lead optimization and library agreements, providing
additional milestones and extending the term. These new agreements include lead
optimization of hits identified during ICOS' screening of our Lead Generation
Library.
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ICOS has now taken advantage or our lead generation, lead optimization and
process chemistry capabilities. ICOS has announced that clinical trials for the
PDE 4 inhibitor will be initiated in late-2001. We are entitled to milestone
payments upon the achievement of specific clinical objectives.
Tularik. Tularik first became interested in Array because of our approach
to creating our Lead Generation Libraries. To evaluate the quality of our
libraries, Tularik acquired a small subset of our Lead Generation Libraries in
April 1999. Within three months they initiated a one-year subscription to all of
our Lead Generation Libraries. Six months later, Tularik exercised an option to
subscribe to our second-year Lead Generation Libraries. We have also expanded
our relationship with Tularik by creating focused libraries to an important
class of targets called orphan nuclear receptors.
Merck. Merck began working with us in May 1999 by purchasing building
blocks from our Optimer collection on a non-exclusive basis. This initial
introduction led to an agreement between the parties for the exclusive
development and supply of custom synthesized compounds for Merck. Building on
this relationship, we announced in September 2000 an agreement with Merck for
process research, synthesis and supply of custom libraries for Merck's drug
discovery programs.
Eli Lilly. In March 2000, Eli Lilly initiated a multi-year medicinal
chemistry collaboration for up to 30 of our scientists. To date, this
collaboration is moving forward successfully. Our scientists are fully
integrated into some of Eli Lilly's drug discovery project teams. Initially this
collaboration focused on certain aspects of our lead optimization chemistry;
however, Eli Lilly has expanded these joint efforts to other aspects of our
Array Discovery Platform.
BUSINESS DEVELOPMENT
To date, our business development activities have been conducted primarily
through direct customer contact by our senior management and scientists and
through customer referrals. Because our collaborators are primarily skilled
scientists, we use our scientific expertise to initiate and to build upon strong
customer relationships. In Japan, we have relied upon the services of a
consulting company, Transpect, Inc., to help introduce and promote our company.
We market our Optimer building blocks through multiple channels, including
targeted mailing of a hardcopy catalog and through an Internet catalog. We plan
to continue to grow our business development resources.
RESEARCH AND DEVELOPMENT
Our research and development expenses were approximately $3.3 million in
fiscal year 1999, $4.0 million in fiscal year 2000 and $8.3 million in fiscal
year 2001. We conduct research and development in the following areas:
Assay development and high throughput screening automation. We are
investing in the development of new assay and high speed screening technologies
to more effectively evaluate potential drug compounds for their therapeutic
value, including specificity and metabolism, and to increase the speed of our
screening capability.
Chemoinformatics. We are continuing our development of database
technology, to more effectively capture, organize and link the data generated by
our scientists, and to make this information more seamlessly accessible to any
of our drug discovery efforts. In addition, we continue the development of
internal software technologies designed to increase the speed and efficacy of
our lead generation and lead optimization chemistry.
Libraries. We have ongoing projects to develop and refine technologies
necessary to create high quality compound libraries composed of drug-relevant
compounds that can be rapidly optimized. Our research is focused in the areas of
designing drug-relevant building blocks and scaffolds, maximizing drug-like
characteristics of our library compounds, optimizing library synthesis processes
and maximizing biologically-relevant compound diversity.
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Internal Drug Discovery Projects. We will continue to invest in internal
drug discovery programs intended to create our own potential drug candidates. We
intend to commercialize any potential drug candidates that we are successful in
developing in these programs through partnerships with pharmaceutical and
biotechnology companies.
COMPETITORS
Competition across the range of our drug discovery focus is currently
fragmented. We compete, however, with a number of companies in each of the
functional areas of drug discovery that we serve. Our major competitors among
drug discovery outsourcing companies include: Albany Molecular Research Inc.,
ArQule, Inc., Discovery Partners Inc., MediChem Life Sciences, Inc. and Evotec
BioSystems AG (Evotec OAI), and among drug discovery companies include:
3-Dimensional Pharmaceuticals, Inc., Gilead Sciences, Inc., Texas Biotechnology
Corporation and Vertex Pharmaceuticals Incorporated. In addition, we compete
with the internal research departments of biotechnology and pharmaceutical
companies. Many of these companies, which also represent a significant market
for our capabilities and some of which are our collaborators, are developing or
already possess internally the technologies we offer. Academic institutions and
other research organizations are also conducting research in areas in which we
provide our capabilities, either on their own or through collaborative efforts.
Many of our competitors are larger than we are and have greater financial
and other resources. We expect that we will face increased competition in the
future as new companies enter the market and advanced technologies become
available. Any of our competitors could broaden the scope of their drug
discovery offerings through acquisition, collaboration or internal development
to integrate their offerings or compete with us comprehensively across the drug
discovery process. Our competitors may also develop new, more effective or
affordable approaches or technologies that compete with our capabilities or
render them obsolete or uneconomical.
In addition, we compete with pharmaceutical and biotechnology companies,
including our collaborators, academic and research institutions and other firms
to hire qualified scientists. Some of our competitors may have stronger
financial resources, offer more attractive equity compensation or have a proven
operating history, any of which may make our competitors more attractive
employers than us to potential employees.
GOVERNMENT REGULATION
In the course of our business, we handle, store and dispose of chemicals.
We are subject to various federal, state and local laws and regulations relating
to the use, manufacture, storage, handling and disposal of hazardous materials
and waste products. These environmental laws generally impose liability
regardless of the negligence or fault of a party and may expose us to liability
for the conduct of, or conditions caused by, others. We have not incurred, and
do not expect to incur, material costs to comply with these laws and
regulations. Because the requirements imposed by these laws and regulations
change frequently, however, we may be unable to accurately predict the cost of
complying with these laws and regulations. In addition, although we believe that
we currently comply with the standards prescribed by these laws and regulations,
the risk of accidental contamination or injury from these materials cannot be
eliminated. In that event, we could be liable for any resulting damages, which
could exceed our resources and harm our results of operations.
Our customers and collaborators are subject to substantial regulation by
governmental agencies in the United States and other countries. Virtually all
pharmaceutical products are subject to rigorous preclinical and clinical testing
and other approval procedures by the FDA and by foreign regulatory agencies.
Various federal and state laws and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of these
pharmaceutical products. This approval process is time-consuming and expensive
and there are no assurances that approval will be granted on a timely basis, or
at all. Even if regulatory approvals are granted, a marketed product is subject
to continual review. Later discovery of previously unknown problems or a failure
to comply with applicable regulatory requirements may result in restrictions on
the marketing of a product or the withdrawal of the product, as well as possible
civil or criminal sanctions. To the extent our customers or collaborators are
unable to obtain the necessary regulatory approvals
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to market their products, or fail to continue to comply with regulatory
requirements, we may be unable to realize revenue from license, milestone and/or
royalty payments.
We are subject to other regulations, including regulations under the
Occupational Safety and Health Act, regulations promulgated by the United States
Department of Agriculture, and other federal, state and local laws.
INTELLECTUAL PROPERTY
Our success will depend in part on our ability to protect our proprietary
software, potential drug candidates and other intellectual property rights. To
establish and protect our proprietary technologies and products, we rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality provisions in our contracts with our collaborators, employees,
consultants and other third parties.
We attempt to protect our trade secrets in part by entering into
confidentiality agreements with third parties, employees and consultants. Our
employees also sign agreements requiring that they assign to us their interests
in inventions and original expressions and any corresponding patents and
copyrights arising from their work for us. However, it is possible that these
agreements may be breached, invalidated or rendered unenforceable, and if so,
there may not be an adequate corrective remedy available. Despite the measures
we have taken to protect our intellectual property, parties to our agreements
may breach the confidentiality provisions in our contracts or infringe or
misappropriate our patents, copyrights, trademarks, trade secrets and other
proprietary rights. In addition, third parties may independently discover or
invent competing technologies or reverse engineer our trade secrets or other
technology.
We also have implemented a patent strategy designed to protect technology,
inventions and improvements to inventions that are commercially important to our
business. We currently have one United States patent and seven patent
applications on file in the United States, including one provisional
application, and we are pursuing limited patent coverage in foreign countries.
Four of our patent applications filed in the United States relate to proprietary
compounds that are pharmaceutical candidates, two relate to inventions based on
and used in our research efforts, and one relates to compounds that are
pharmaceutical candidates and the compound synthesis process. Two of our United
States patent applications relating to proprietary pharmaceutical candidates,
along with related foreign patent rights, were assigned to us by Amgen Inc. in
November 1998.
United States patents issued from applications filed on or after June 8,
1995 have a term of 20 years from the application filing date or earlier claimed
priority. All of our patent applications were filed after June 8, 1995. Patents
in most other countries have a term of 20 years from the date of filing of the
patent application. Because the time from filing patent applications to issuance
of patents is often several years, this process may result in a period of patent
protection significantly shorter than 20 years, which may adversely affect our
ability to exclude competitors from our markets. Our success will depend in part
upon our ability to develop proprietary products and technologies and to obtain
patent coverage for these products and technologies. We intend to continue to
file patent applications covering newly developed products and technologies. We
may not, however, commercialize the technology underlying any or all of our
existing or future patent applications.
Patents provide some degree of protection for our proprietary technology.
However, the pursuit and assertion of patent rights, particularly in areas like
pharmaceuticals and biotechnology, involve complex legal and factual
determinations and, therefore, are characterized by some uncertainty. In
addition, the laws governing patentability and the scope of patent coverage
continue to evolve, particularly in biotechnology. As a result, patents may not
issue from any of our patent applications or from applications licensed to us.
The scope of any of our patents, if issued, may not be sufficiently broad to
offer meaningful protection. In addition, our patents or patents licensed to us,
if they are issued, may be successfully challenged, invalidated, circumvented or
rendered unenforceable so that our patent rights might not create an effective
competitive barrier. Moreover, the laws of some foreign countries may not
protect our proprietary rights to the same extent as do the laws of the United
States. Any patents issued to us or our strategic partners may not provide a
legal basis for establishing an exclusive market for our products or provide us
with any competitive advantages. Moreover,
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the patents held by others may adversely affect our ability to do business or to
continue to use our technologies freely. In view of these factors, our
intellectual property positions bear some degree of uncertainty.
The source code for our proprietary software programs is protected both as
a trade secret and as a copyrighted work.
We have registrations pending in the United States for the following
trademarks: "ARRAY BIOPHARMA," "ARRAY BIOPHARMA THE DISCOVERY RESEARCH COMPANY,"
"THE ARRAY BIOPHARMA LOGO," "TURNING GENOMICS INTO BREAKTHROUGH DRUGS," "ARRAY
DISCOVERY PLATFORM," and "OPTIMER." We may not be able to obtain registrations
for these marks in the United States or other jurisdictions in which we may
submit applications, or to protect the use of these marks effectively.
Although we are not a party to any legal proceedings, in the future, third
parties may file claims asserting that our technologies or products infringe on
their intellectual property. We cannot predict whether third parties will assert
such claims against our licensees or us or against the licensors of technology
licensed to us, or whether those claims will harm our business. If we are forced
to defend against such claims, whether they are with or without merit, and
whether they are resolved in favor of or against us, our licensees or our
licensors, we may incur significant expenses and diversion of management's
attention and resources. As a result of such disputes, we may have to develop at
a substantial cost non-infringing technology or enter into licensing agreements.
EMPLOYEES
As of September 2001, we have 202 full-time employees, including 140
scientists, of whom 91 have Ph.D.'s and 66 have large pharmaceutical company
experience. None of our employees are covered by collective bargaining
agreements and we consider our employee relations to be good.
ITEM 2. PROPERTIES
We are headquartered in Boulder, Colorado, where we lease approximately
59,000 square feet of space under a lease that expires April 1, 2008. Prior to
May 1, 2004, we have also agreed under this lease to occupy an additional 85,000
square feet in our Boulder campus. We have options to extend the Boulder lease
for one eight-year term and two additional five-year terms. In addition, we
lease approximately 43,000 square feet in Longmont, Colorado under a lease that
expires on May 31, 2005, and has an option to renew for two additional five-year
terms. We also have an option to lease an additional 28,800 square feet in a
building adjacent to our Longmont facility when it becomes available for lease.
We believe that these facilities, including our option to expand our Longmont
facility, will be sufficient for our anticipated growth for the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders for a vote during the fourth
quarter of 2001.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock began trading on The Nasdaq National Market on
November 17, 2000 under the symbol "ARRY". Prior to this date, there was no
public market for the common stock or any other securities of the Company.
The following table sets forth, for the periods indicated, the range of the
high and low closing sale prices for Array's common stock:
<Table>
<Caption>
YEAR ENDED JUNE 30, 2001: HIGH LOW
------------------------- ------ -----
Second Quarter (from November 17, 2000)..................... $11.50 $7.75
Third Quarter............................................... $ 9.00 $4.81
Fourth Quarter.............................................. $ 9.10 $4.94
</Table>
As of August 27, 2001, there were approximately 154 holders of record of
the Company's common stock. This does not include the number of persons whose
stock is in nominee or "street name" accounts through brokers.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
we do not intend to pay any cash dividends in the foreseeable future. We
currently intend to retain all available funds and any future earnings for use
in the operations of our business and to fund future growth.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from our audited
financial statements. These historical results do not necessarily indicate
future results. When you read this data, it is important that you also read our
financial statements and related notes, as well as the section "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Annual Report on Form 10-K.
<Table>
<Caption>
PERIOD FROM
FEBRUARY 6,
1998
YEARS ENDED JUNE 30, (INCEPTION) TO
---------------------------- JUNE 30,
2001 2000 1999 1998
-------- ------- ------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenue:
Collaboration revenue.................................... $ 12,084 $ 4,629 $ 992 $ --
Product revenue.......................................... 4,280 2,145 512 --
License revenue.......................................... 642 -- -- --
-------- ------- ------- ------
Total revenue.......................................... 17,006 6,774 1,504 --
Cost of revenue*........................................... 12,965 4,445 1,033 --
-------- ------- ------- ------
Gross profit............................................... 4,041 2,329 471 --
Research and development expenses*......................... 8,265 3,963 3,301 --
Selling, general and administrative expenses*.............. 7,668 3,470 1,522 62
-------- ------- ------- ------
Total operating expenses............................... 15,933 7,433 4,823 62
-------- ------- ------- ------
Loss from operations................................... (11,892) (5,104) (4,352) (62)
Interest expense........................................... (587) (384) (136) --
Interest income............................................ 2,092 356 181 13
-------- ------- ------- ------
Net loss before extraordinary item......................... (10,387) (5,132) (4,307) (49)
Extraordinary loss from early extinguishment of debt....... (225) -- -- --
-------- ------- ------- ------
Net loss................................................... (10,612) (5,132) (4,307) (49)
Deemed dividend related to beneficial conversion feature of
preferred stock.......................................... (5,000) -- -- --
-------- ------- ------- ------
Net loss applicable to common stockholders................. $(15,612) $(5,132) $(4,307) $ (49)
======== ======= ======= ======
Basic and diluted net loss per share:
Net loss applicable to common stockholders before
extraordinary item....................................... $ (0.98) $ (1.68) $ (1.48) $(0.06)
Extraordinary loss from early extinguishment of debt....... (0.01) -- -- --
-------- ------- ------- ------
Net loss applicable to common stockholders................. $ (0.99) $ (1.68) $ (1.48) $(0.06)
======== ======= ======= ======
Number of shares used to compute per share data............ 15,693 3,063 2,918 864
======== ======= ======= ======
* INCLUDES COMPENSATION RELATED TO OPTION GRANTS:
Cost of revenue.......................................... $ 998 $ 43 $ -- $ --
Research and development expenses........................ 644 35 -- --
Selling, general and administrative expenses............. 3,012 1,040 -- --
-------- ------- ------- ------
Total............................................. $ 4,654 $ 1,118 $ -- $ --
======== ======= ======= ======
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities........... $ 47,712 $ 5,784 $ 2,186 $2,608
Property, plant and equipment, net......................... 17,421 6,911 2,872 6
Working capital............................................ 44,917 2,210 1,260 2,743
Total assets............................................... 70,950 15,823 7,125 2,810
Long-term debt, less current portion....................... -- 2,833 1,824 --
Total stockholders' equity................................. 62,468 6,652 2,557 2,753
</Table>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 which involve significant risks
and uncertainties, including those discussed below and those described more
fully in other reports filed by Array BioPharma with the Securities and Exchange
Commission. Because these statements reflect our current expectations concerning
future events, our actual results could differ materially from those anticipated
in these forward-looking statements. The factors that could cause actual results
to differ from our expectations include, but are not limited to, our ability to
achieve and maintain profitability, the willingness of the pharmaceutical and
biotechnology industries to collaborate with third parties, particularly Array,
on their drug discovery activities, and our ability to attract and retain
experienced scientists and management. We are providing the information in this
annual report filed on Form 10-K as of the date of this report. We undertake no
duty to update any forward-looking statements to reflect the effect on those
statements of subsequent events or changes in our expectations or assumptions.
OVERVIEW
Array BioPharma is a drug discovery company creating new drugs through the
integration of chemistry, structural biology and chemoinformatics. We
collaborate with leading pharmaceutical and biotechnology companies to identify
novel small molecule drugs and are leveraging our discovery platform to develop
our own pipeline of proprietary drug candidates. Array's scientific team has a
proven track record of success in identifying promising drug candidates.
We have incurred net losses since inception and expect to incur losses in
the near future as we expand our scientific staff and continue to scale-up our
operations. To date, we have funded our operations primarily through the
issuance of equity securities and revenue from our collaborators and borrowings.
As of June 30, 2001, we had an accumulated deficit of $20.1 million.
We generate revenue by researching, designing, synthesizing and screening
medicinally relevant chemical compounds. We report product and collaboration
revenue separately, although the distinction between the two is minor and
periodically difficult to determine because many of our agreements co-mingle
product and service revenue. We report cost of goods sold and cost of revenue
from collaborations as one line item titled cost of revenue in our statement of
operations. Although our current cost accounting system has the functional
capacity to segregate these costs, we have not yet implemented such
functionality, primarily because these costs are derived from similar processes,
including research, design and synthesis activities.
Our products include our Lead Generation Library and our Optimer building
blocks. Our Lead Generation Library is a collection of structurally related
chemical compounds that may have the potential to become drug candidates. We
sell compounds from our Lead Generation Library to our customers with a
nonexclusive license restricting use of these compounds to internal research,
and we retain all other rights to them, which permits us to sell the same
compounds to other customers. We sell our Optimer building blocks, which are the
starting materials used to create more complex chemical compounds in the drug
discovery process, without any restrictions on use.
Our collaborations include lead generation, lead optimization, custom
synthesis and process research and development. We collaborate with our
customers in lead optimization to refine and optimize potential drug candidates.
We also design, synthesize and provide libraries of chemical compounds or single
compounds to our customers on a custom basis, with either an exclusive or
nonexclusive license to use the compounds. In addition, we provide lead
generation collaborations, including screening compound libraries to discover
potential drug candidates for our collaborators. Finally, we assist customers in
process research and development, which involves developing the processes, and
synthesizing for delivery, larger quantities of chemical compounds required for
clinical testing.
In general, we sell our Optimer building blocks and license our Lead
Generation Library on a per-compound basis. Some of our contracts allow our
customers to obtain exclusive rights to particular compounds upon the payment of
additional fees. We are typically paid under our collaboration agreements based
on the
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number of full-time equivalent employees contractually assigned to a project, at
an annual full-time equivalent price, plus certain expenses. Custom collections
of chemical compounds we create and custom chemical synthesis we perform under
our collaboration agreements are typically charged on a per-delivered compound
basis, plus a charge for research and development. In addition, the majority of
our collaboration agreements provide for additional payments upon the
achievement of certain drug development milestones and several agreements
provide for royalty payments based on sales of products created as a result of
these collaborations. One of our collaboration agreements provides for an
up-front license fee. We have not yet generated any milestone or royalty
payments. In general, our collaborators may terminate their collaboration
agreement with us on 30 to 90 days' prior notice. During fiscal year 2001, ICOS
Corporation, Eli Lilly and Company and Merck & Co., Inc. accounted for 24%, 24%
and 12%, respectively, of our total revenue. During fiscal year 2000, ICOS
Corporation, Celltech Chiroscience Discovery and Merck & Co., Inc. accounted for
48%, 11% and 10%, respectively, of our total revenue. We will seek to generate
revenue from new collaboration agreements that, if obtained, will reduce our
concentration of revenue.
We recognize revenue upon shipment of our products or upon performance
under our collaboration agreements. Revenue from our full-time equivalent
collaboration agreements is recognized on a monthly or per diem basis as work is
performed. Revenue from our development, fixed-fee and fee-per-compound
collaboration agreements is recognized either on a percentage-of-completion
basis or as compounds are shipped. Revenue from license fees and up-front fees
is recognized over the term of the particular license, or over the expected term
of the particular collaboration agreement.
Cost of revenue consists mainly of compensation, associated fringe benefits
and other product or collaboration-related costs, including recruiting and
relocation, fine chemicals, supplies, small tools, facilities, depreciation and
other direct and indirect chemical handling and laboratory support costs,
excluding any costs related to research and development.
Research and development expenses consist of the same type of scientific
expenditures that comprise cost of revenue, except that the expenses are related
to the development of our early-stage intellectual property and products where
we have not yet proven technological feasibility. Costs of routine or
production-related activities are charged to cost of revenue.
Selling, general and administrative expenses consist mainly of compensation
and associated fringe benefits and other management, business development,
accounting, information technology and administration costs, including
recruiting and relocation, consulting and professional services, travel and
meals, advertising, sales commissions, facilities, depreciation and other office
expenses.
We currently license or sell our products and collaborations directly to
pharmaceutical and biotechnology companies through our senior management,
scientists and customer referrals. In addition, we license or sell our products
and collaborations in Japan through an agent. International revenue represented
9%, 9% and 8% of our total revenue during fiscal years 2001, 2000 and 1999,
respectively. The majority of our international revenue was attributed to
European sales in the prior fiscal year periods and to Japanese sales in fiscal
year 2001. All of our collaboration agreements and purchase orders are
denominated in United States dollars.
We intend to grow our revenue with existing customers and to realize new
revenue streams through collaborations with a diversified group of
pharmaceutical and biotechnology companies. In addition, we expect to enter into
additional agreements that allow us to participate in the success of potential
drug candidates with our collaborators through milestone and/or royalty payments
and to enter into agreements to participate in the success of our proprietary
potential drug candidates through a combination of licensing fees, milestone
and/or royalty payments. We expect our growth to require significant ongoing
investment in facilities, scientific personnel and business development
resources.
STOCK COMPENSATION
During fiscal years 2000 and 2001, we recorded deferred stock compensation
totaling $13.1 million. We recorded compensation expense related to stock option
grants of approximately $4.7 million for fiscal year 2001 and approximately $1.1
million for fiscal year 2000. As of June 30, 2001, we had a total of $7.3
million of
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remaining deferred stock compensation to be amortized. We expect to amortize
deferred stock compensation recorded through June 30, 2001, as follows: $2.5
million in fiscal year 2002; $2.4 million in fiscal year 2003; $2.3 million in
fiscal year 2004; and $183,000 in fiscal year 2005. To date, we have granted our
employees stock options as annual incentive bonus awards. Any future annual
incentive bonus awards may include a partial cash component in addition to
stock-based compensation.
DEEMED DIVIDEND UPON ISSUANCE OF CONVERTIBLE PREFERRED STOCK
On August 31, 2000, we issued 1,666,667 shares of our Series C convertible
preferred stock, which converted on a one-to-one basis into shares of common
stock upon the effectiveness of our initial public offering (the "IPO"), at
$6.00 per share to investors, resulting in gross proceeds of $10.0 million.
Subsequent to the commencement of the IPO process, we reevaluated the fair value
of our Series C preferred as of August 31, 2000, and determined it to be $9.00
per share. Accordingly, the incremental fair value of $5.0 million, or $3.00 per
share, is deemed to be the equivalent of a dividend on the Series C preferred.
We recorded the deemed dividend at the date of issuance by offsetting charges
and credits to preferred stock, without any effect on total stockholders'
equity. The preferred stock dividend increases the loss applicable to common
stockholders in the calculation of basic net loss per share for fiscal year 2001
and all related interim periods.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 2001 AND 2000
Revenue. Total revenue increased to $17.0 million in fiscal year 2001 from
$6.8 million in fiscal year 2000. This is the result of increased sales in all
business areas, and most significantly in collaborations involving lead
optimization and custom libraries and product sales from our Lead Generation
Library. Collaboration revenue increased approximately $7.5 million in fiscal
year 2001 over fiscal year 2000. This increase was primarily a result of our new
collaboration agreements in fiscal year 2001 as well as expanded collaborations
with existing customers.
Cost of revenue. Cost of revenue increased to $13.0 million in fiscal year
2001 from $4.4 million in fiscal year 2000, reflecting the increased cost to
support our revenue growth in the same period. The cost increases in fiscal year
2001 were primarily attributed to recruiting and relocating additional
scientific staff and associated salaries and benefits, and the expenditures
associated with equipping and commencing operations in our new and expanded
facilities. Cost of revenue was 76% of revenue in fiscal year 2001, compared to
66% in fiscal year 2000. The increased cost of revenue as a percentage of
revenue in 2001 as compared to 2000 was due primarily to compensation related to
stock option grants and recruiting and relocation to support our growth.
Research and development expenses. Research and development expenses
increased to $8.3 million in fiscal year 2001 from $4.0 million in fiscal year
2000. The increase in research and development expenses in fiscal year 2001 was
primarily attributed to expanded research efforts for our Lead Generation
Library, custom library collaborations and our own proprietary drug discovery.
These expanded research efforts required the recruitment and relocation of
additional scientific staff and associated salaries and benefits, and the
expenditures associated with equipping and commencing operations in our new and
expanded facilities.
Selling, general and administrative expenses. Selling, general and
administrative expenses totaled $7.7 million in fiscal year 2001, compared to
$3.5 million in fiscal year 2000. The increase in selling, general and
administrative expenses in fiscal year 2001 was primarily attributed to
compensation related to stock option grants, our increased staffing levels and
expanded management and other costs associated with being a publicly traded
company.
Compensation related to stock option grants. Compensation expense related
to stock option grants was approximately $4.7 million in fiscal year 2001,
compared to $1.1 million in fiscal year 2000. The expense for fiscal year 2001
relates most significantly to the selling, general and administrative functional
area.
Interest income or expense. We had net interest income of approximately
$1.5 million in fiscal year 2001, compared to net interest expense of
approximately $28,000 in fiscal year 2000. The net interest income
29
30
in fiscal year 2001 compared with net interest expense in fiscal year 2000 was
primarily due to larger balances of cash, cash equivalents and marketable
securities in fiscal year 2001 resulting from the IPO in November 2000.
Extraordinary item. During fiscal 2001, we fully repaid all obligations
related to equipment loan facilities and lines of credit. In connection with the
early extinguishment of these debts, we incurred $225,176 of extraordinary
charges related to prepayment penalties charged by the respective financial
institutions, including a noncash charge of approximately $90,000 related to the
remaining accreted interest expense associated with warrants issued to the
lenders. No such extraordinary charges existed in any other prior periods.
Income taxes. There is no current or deferred tax expense for the years
ended June 30, 2001 and 2000. At June 30, 2001, we had federal and Colorado
income tax net operating loss carryforwards for income tax purposes of
approximately $15.3 million, which will expire beginning in 2018 and continuing
through 2021. We have provided a 100% valuation allowance against the related
deferred tax assets, as realization of such tax benefits is not assured.
YEARS ENDED JUNE 30, 2000 AND 1999
Revenue. Total revenue increased to $6.8 million in fiscal year 2000 from
$1.5 million in fiscal year 1999. The revenue increase from fiscal year 1999 to
fiscal year 2000 was primarily a result of a full year of operations in fiscal
year 2000 versus a partial year of operations in fiscal year 1999. Sales
increased in all business areas, most significantly in lead optimization,
process chemistry and sales of our Lead Generation Library.
Cost of revenue. Cost of revenue increased to $4.4 million in fiscal year
2000 from $1.0 million in fiscal year 1999, reflecting the increased cost to
support our revenue growth in the same period. The cost increases in fiscal year
2000 were primarily attributed to recruiting and relocating additional
scientific staff and associated salaries and benefits, and the expenditures
associated with equipping and commencing operations in our new and expanded
facilities. Cost of revenue was 66% of revenue in fiscal year 2000, compared to
69% in fiscal year 1999. The reduction in cost of revenue as a percentage of
revenue in 2000 as compared to 1999 was due primarily to a larger revenue base
against which to apply certain fixed costs.
Research and development expenses. Research and development expenses
increased to $4.0 million in fiscal year 2000 from $3.3 million in fiscal year
1999. The increase in research and development expenses in fiscal year 2000 was
primarily attributed to expanded research efforts for our Lead Generation
Library and custom synthesis collaborations. These expanded research efforts
required the recruitment and relocation of additional scientific staff and
associated salaries and benefits, and the expenditures associated with equipping
and commencing operations in our new and expanded facilities.
Selling, general and administrative expenses. Selling, general and
administrative expenses totaled $3.5 million in fiscal year 2000, compared to
$1.5 million in fiscal year 1999. The increase in selling, general and
administrative expenses in fiscal year 2000 was primarily attributed to our
increased staffing levels and expanded management. The recruitment and
relocation of senior management was a significant component of our selling,
general and administrative expenses in fiscal year 2000.
Compensation related to stock option grants. Compensation expense related
to stock option grants was approximately $1.1 million in fiscal year 2000. There
was no compensation expense related to stock option grants in fiscal year 1999.
The expense for fiscal year 2000 relates primarily to the selling, general and
administrative functional area. During fiscal year 2000, we recorded deferred
stock compensation totaling $5.8 million. After recording compensation expense
related to stock option grants of approximately $1.1 million for fiscal year
2000, we had a total of approximately $4.7 million of remaining deferred stock
compensation to be amortized.
Interest income or expense. We had net interest expense of approximately
$28,000 in fiscal year 2000, compared to net interest income of approximately
$45,000 in fiscal year 1999. The net interest expense in fiscal year 2000
compared with net interest income in fiscal year 1999 was primarily due to
increased
30
31
borrowing to finance equipment purchases, offset partially by larger interest
income from our larger balances of cash, cash equivalents and marketable
securities in fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
On November 17, 2000, we closed our IPO of 7,475,000 shares of common stock
at $7.50 per share. We received net proceeds of $50.8 million in cash, net of
$5.3 million in expenses and underwriters' discount relating to the issuance and
distribution of the securities. Prior to this offering, we financed our
operations principally with $25.3 million of private equity financing and $7.9
million in short-term and long-term debt and equipment financing arrangements.
Equity investments came from a common stock offering and a series of three
preferred stock offerings between May 1998 and August 2000.
As of June 30, 2001, cash, cash equivalents and marketable securities
totaled $47.7 million compared to $5.8 million at June 30, 2000. Net cash used
in operating activities was $2.4 million for fiscal year 2001. Our net loss of
$10.6 million was offset by noncash charges of $7.3 million and a reduction in
working capital of $945,000. Working capital declined due to increased accounts
payable and advance payments from customers, which exceeded the increases in
inventories and other assets.
In fiscal year 2001, we invested in capital equipment and leasehold
improvements totaling $13.1 million. Equity financing activities provided $61.7
million consisting of $50.8 million from the IPO, $10.0 million from the sale of
our Series C preferred stock and $906,000 from the exercise of stock options and
shares issued under the employee stock purchase plan. With these proceeds, we
completely repaid loans from equipment financing in the net amount of $4.7
million.
Our future capital requirements will depend on a number of factors,
including our success in increasing sales of both existing and new products and
collaborations, expenses associated with unforeseen litigation, regulatory
changes, competition, technological developments and potential future merger and
acquisition activity. We believe that our existing cash, cash equivalents and
marketable securities and anticipated cash flow from existing collaboration
agreements will be sufficient to support our current operating plan for at least
the next 12 months. This estimate of our future capital requirements is a
forward-looking statement that is based on assumptions that may prove to be
wrong and that involve substantial risks and uncertainties. Our actual future
capital requirements could vary as a result of a number of factors, including:
- the progress of our research activities;
- the number and scope of our research programs;
- the progress of our preclinical and clinical development activities;
- the progress of the development efforts of our collaborators;
- our ability to establish and maintain current and new collaboration
agreements;
- the costs involved in enforcing patent claims and other intellectual
property rights;
- the costs and timing of regulatory approvals; and
- the costs of establishing business development and distribution
capabilities.
Future capital requirements will also depend on the extent to which we
acquire or invest in other businesses, products and technologies. Until we can
generate sufficient levels of cash from our operations, which we do not expect
to achieve in the foreseeable future, we expect to continue to utilize our
existing cash and marketable securities resources that were primarily generated
from the proceeds of our IPO. In addition, we may finance future cash needs
through the sale of equity securities, strategic collaboration agreements and
debt financing. We cannot assure that we will be successful in obtaining
collaboration agreements, or in receiving milestone and/or royalty payments
under those agreements, that our existing cash and marketable securities
resources will be adequate or that additional financing will be available when
needed or that, if available, this financing will be obtained on terms favorable
to us or our stockholders. Insufficient funds may require us to delay, scale
back or eliminate some or all of our research or development programs or to
31
32
relinquish greater or all rights to product candidates at an earlier stage of
development or on less favorable terms than we would otherwise choose or may
adversely affect our ability to operate as a going concern. If additional funds
are raised by issuing equity securities, substantial dilution to existing
stockholders may result.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Short-term investments. Our interest income is sensitive to changes in the
general level of United States interest rates, particularly since a significant
portion of our investments are and will be in short-term marketable securities.
Due to the nature and maturity of our short-term investments, we have concluded
that there is no material market risk exposure.
Foreign currency rate fluctuations. We have not taken any action to reduce
our exposure to changes in foreign currency exchange rates, such as options or
futures contracts, with respect to transactions with our worldwide customers.
All of our collaboration agreements and purchase orders are denominated in
United States dollars.
Inflation. We do not believe that inflation has had a material impact on
our business or operating results during the periods presented.
32
33
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Report of Independent Auditors.............................. 34
Balance Sheets at June 30, 2001 and 2000.................... 35
Statements of Operations for each of the three years in the
period ended June 30, 2001................................ 36
Statements of Stockholders' Equity for each of the three
years in the period ended June 30, 2001................... 37
Statements of Cash Flows for each of the three years in the
period ended June 30, 2001................................ 38
Notes to Financial Statements............................... 39
</Table>
33
34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Array BioPharma Inc.
We have audited the accompanying balance sheets of Array BioPharma Inc. as
of June 30, 2001 and 2000, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 2001. 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 Array BioPharma Inc. at June
30, 2001 and 2000, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 2001 in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Denver, Colorado
July 27, 2001,
except for Footnote 9,
as to which the date is
August 7, 2001
34
35
ARRAY BIOPHARMA INC.
BALANCE SHEETS
<Table>
<Caption>
AS OF JUNE 30,
--------------------------
2001 2000
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,961,699 $ 3,846,407
Marketable securities..................................... 29,750,156 1,937,099
Accounts receivable, net of allowances of $15,000 and $0
at June 30, 2001 and 2000, respectively................ 979,874 885,522
Deposits.................................................. 84,858 120,129
Inventories............................................... 4,137,107 1,557,376
Prepaid expenses and advances............................. 486,556 201,560
------------ -----------
Total current assets.............................. 53,400,250 8,548,093
Property, plant and equipment, net.......................... 17,420,883 6,910,757
Other assets................................................ 129,291 364,342
------------ -----------
Total assets...................................... $ 70,950,424 $15,823,192
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade................................. $ 2,873,468 $ 1,708,750
Advance payments from customers........................... 4,496,591 1,940,433
Accrued compensation and benefits......................... 819,711 359,871
Current portion of long-term debt......................... -- 1,723,837
Other current liabilities................................. 293,153 605,309
------------ -----------
Total current liabilities......................... 8,482,923 6,338,200
Long-term debt, less current portion........................ -- 2,832,423
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized;
Series A convertible preferred stock; no shares and
6,635,000 shares outstanding at June 30, 2001 and
2000, respectively.................................... -- 6,635
Series B convertible preferred stock; no shares and
3,199,999 shares outstanding at June 30, 2001 and
2000, respectively.................................... -- 3,200
Series C convertible preferred stock; no shares
outstanding at June 30, 2001 and 2000, respectively... -- --
Common stock, $0.001 par value; 60,000,000 shares
authorized; 23,262,878 and 3,370,207 shares issued and
outstanding at June 30, 2001 and 2000, respectively.... 23,262 3,370
Additional paid-in capital................................ 90,023,407 21,168,078
Accumulated deficit....................................... (20,101,258) (9,489,113)
Notes receivable for common stock -- related party........ (266,625) (393,750)
Accumulated other comprehensive income.................... 116,801 --
Deferred compensation..................................... (7,328,086) (4,645,851)
------------ -----------
Total stockholders' equity........................ 62,467,501 6,652,569
------------ -----------
Total liabilities and stockholders' equity........ $ 70,950,424 $15,823,192
============ ===========
</Table>
See accompanying notes.
35
36
ARRAY BIOPHARMA INC.
STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEARS ENDED JUNE 30,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
REVENUE:
Collaboration revenue.............................. $ 12,083,650 $ 4,629,000 $ 992,000
Product revenue.................................... 4,279,888 2,144,634 511,859
License revenue.................................... 642,222 -- --
------------ ----------- -----------
Total revenue.............................. 17,005,760 6,773,634 1,503,859
Cost of revenue*..................................... 12,965,378 4,444,958 1,032,910
------------ ----------- -----------
Gross profit......................................... 4,040,382 2,328,676 470,949
EXPENSES:
Research and development expenses*................. 8,264,406 3,962,969 3,300,941
Selling, general and administrative expenses*...... 7,668,302 3,469,969 1,522,067
------------ ----------- -----------
Total operating expenses................... 15,932,708 7,432,938 4,823,008
------------ ----------- -----------
Loss from operations....................... (11,892,326) (5,104,262) (4,352,059)
Interest expense..................................... (586,554) (384,378) (135,904)
Interest income...................................... 2,091,911 356,237 180,557
------------ ----------- -----------
Net loss before extraordinary item................... (10,386,969) (5,132,403) (4,307,406)
Extraordinary loss from early extinguishment of
debt............................................... (225,176) -- --
------------ ----------- -----------
Net loss............................................. (10,612,145) (5,132,403) (4,307,406)
Deemed dividend related to beneficial conversion
feature of preferred stock......................... (5,000,001) -- --
------------ ----------- -----------
Net loss applicable to common stockholders........... $(15,612,146) $(5,132,403) $(4,307,406)
============ =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE:
Net loss applicable to common stockholders before
extraordinary item................................. $ (0.98) $ (1.68) $ (1.48)
Extraordinary loss from early extinguishment of
debt............................................... (0.01) -- --
------------ ----------- -----------
Net loss applicable to common stockholders........... $ (0.99) $ (1.68) $ (1.48)
============ =========== ===========
Number of shares used to compute per share data...... 15,692,985 3,063,439 2,918,367
============ =========== ===========
* INCLUDES COMPENSATION RELATED TO OPTION GRANTS:
Cost of revenue.................................... $ 998,039 $ 42,689 $ --
Research and development expenses.................. 643,715 34,928 --
Selling, general and administrative expenses....... 3,011,798 1,040,179 --
------------ ----------- -----------
Total...................................... $ 4,653,552 $ 1,117,796 $ --
============ =========== ===========
</Table>
See accompanying notes.
36
37
ARRAY BIOPHARMA INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
NOTES
RECEIVABLE
FOR
COMMON
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK-
---------------------- -------------------- PAID-IN ACCUMULATED RELATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT PARTY
----------- -------- ---------- ------- ----------- ------------ -----------
BALANCE AT JUNE 30, 1998............. 2,500,000 $ 2,500 2,913,367 $ 2,913 $ 3,148,877 $ (49,304) $(351,750)
Issuance of Series A convertible
preferred stock, net of issuance
costs of $60,381.................... 4,135,000 4,135 -- -- 4,070,484 -- --
Exercise of stock options............ -- -- 10,000 10 2,340 -- --
Interest accrued on notes
receivable.......................... -- -- -- -- -- -- (21,000)
Warrants issued in connection with
equipment financing................. -- -- -- -- 55,075 -- --
Net loss............................. -- -- -- -- -- (4,307,406) --
----------- -------- ---------- ------- ----------- ------------ ---------
BALANCE AT JUNE 30, 1999............. 6,635,000 6,635 2,923,367 2,923 7,276,776 (4,356,710) (372,750)
Issuance of Series B convertible
preferred stock, net of issuance
costs of $63,204.................... 3,199,999 3,200 -- -- 7,933,594 -- --
Exercise of stock options............ -- -- 446,840 447 104,561 -- --
Interest accrued on notes
receivable.......................... -- -- -- -- -- -- (21,000)
Compensation related to stock option
grants.............................. -- -- -- -- 5,763,647 -- --
Warrants issued in connection with
equipment financing................. -- -- -- -- 89,500 -- --
Net loss............................. -- -- -- -- -- (5,132,403) --
----------- -------- ---------- ------- ----------- ------------ ---------
BALANCE AT JUNE 30, 2000............. 9,834,999 9,835 3,370,207 3,370 21,168,078 (9,489,113) (393,750)
Issuance of Series C convertible
preferred stock, net of issuance
costs of $28,180.................... 1,666,667 1,667 -- -- 9,970,155 -- --
Conversion of preferred stock to
common stock........................ (11,501,666) (11,502) 11,501,666 11,502 -- -- --
Issuance of common stock for
cash-public offering, net of
offering costs of $5,265,840........ -- -- 7,475,000 7,475 50,789,185 -- --
Issuance of common stock under stock
option and employee stock purchase
plans............................... -- -- 876,673 876 760,241 -- --
Issuance of common stock upon the
exercise of warrants................ -- -- 39,332 39 (39) -- --
Interest accrued on notes
receivable.......................... -- -- -- -- -- -- (17,875)
Repayment of notes receivable........ -- -- -- -- -- -- 145,000
Compensation related to stock option
grants.............................. -- -- -- -- 7,335,787 -- --
Net loss............................. -- -- -- -- -- (10,612,145) --
Change in unrealized gain on
marketable securities............... -- -- -- -- -- -- --
Comprehensive loss...................
----------- -------- ---------- ------- ----------- ------------ ---------
BALANCE AT JUNE 30, 2001............. -- $ -- 23,262,878 $23,262 $90,023,407 $(20,101,258) $(266,625)
=========== ======== ========== ======= =========== ============ =========
<Caption>
ACCUMULATED
OTHER
COMPREHENSIVE DEFERRED
INCOME COMPENSATION TOTAL
------------- ------------ ------------
BALANCE AT JUNE 30, 1998............. $ -- $ -- $ 2,753,236
Issuance of Series A convertible
preferred stock, net of issuance
costs of $60,381.................... -- -- 4,074,619
Exercise of stock options............ -- -- 2,350
Interest accrued on notes
receivable.......................... -- -- (21,000)
Warrants issued in connection with
equipment financing................. -- -- 55,075
Net loss............................. -- -- (4,307,406)
-------- ----------- ------------
BALANCE AT JUNE 30, 1999............. -- -- 2,556,874
Issuance of Series B convertible
preferred stock, net of issuance
costs of $63,204.................... -- -- 7,936,794
Exercise of stock options............ -- -- 105,008
Interest accrued on notes
receivable.......................... -- -- (21,000)
Compensation related to stock option
grants.............................. -- (4,645,851) 1,117,796
Warrants issued in connection with
equipment financing................. -- -- 89,500
Net loss............................. -- -- (5,132,403)
-------- ----------- ------------
BALANCE AT JUNE 30, 2000............. -- (4,645,851) 6,652,569
Issuance of Series C convertible
preferred stock, net of issuance
costs of $28,180.................... -- -- 9,971,822
Conversion of preferred stock to
common stock........................ -- -- --
Issuance of common stock for
cash-public offering, net of
offering costs of $5,265,840........ -- -- 50,796,660
Issuance of common stock under stock
option and employee stock purchase
plans............................... -- -- 761,117
Issuance of common stock upon the
exercise of warrants................ -- -- --
Interest accrued on notes
receivable.......................... -- -- (17,875)
Repayment of notes receivable........ -- -- 145,000
Compensation related to stock option
grants.............................. -- (2,682,235) 4,653,552
Net loss............................. -- -- (10,612,145)
Change in unrealized gain on
marketable securities............... 116,801 -- 116,801
------------
Comprehensive loss................... (10,495,344)
-------- ----------- ------------
BALANCE AT JUNE 30, 2001............. $116,801 $(7,328,086) $ 62,467,501
======== =========== ============
</Table>
See accompanying notes.
37
38
ARRAY BIOPHARMA INC.
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED JUNE 30,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
OPERATING ACTIVITIES:
Net loss............................................. $(10,612,145) $(5,132,403) $(4,307,406)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation....................................... 2,553,642 989,127 530,932
Accrued interest on notes receivable for common
stock........................................... (17,875) (21,000) (21,000)
Compensation related to stock option grants........ 4,653,552 1,117,796 --
Accreted interest related to warrants.............. 122,839 15,053 6,683
Changes in operating assets and liabilities:
Accounts receivable............................. (94,352) (378,280) (507,242)
Deposits........................................ 35,271 132,759 (62,388)
Inventories..................................... (2,579,731) (578,218) (979,158)
Prepaid expenses and advances................... (284,996) (122,237) (77,655)
Accounts payable -- trade....................... 1,164,718 995,371 713,379
Advance payments from customers................. 2,556,158 876,679 1,063,754
Accrued compensation and benefits............... 459,840 294,744 27,205
Other current liabilities....................... (312,156) 467,515 118,925
------------ ----------- -----------
Net cash used in operating activities...... (2,355,235) (1,343,094) (3,493,971)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment........... (13,063,768) (5,028,030) (3,396,992)
Net purchases of marketable securities............... (27,696,256) (1,937,099) --
(Additions) reductions to other long-term assets..... 235,051 (116,098) (244,100)
------------ ----------- -----------
Net cash used in investing activities...... (40,524,973) (7,081,227) (3,641,092)
FINANCING ACTIVITIES:
Proceeds from sale of preferred and common stock, net
of issuance costs.................................. 60,768,482 7,936,794 4,074,619
Proceeds from exercise of stock options, warrants and
shares issued under the employee stock purchase
plan............................................... 906,117 105,008 2,350
Proceeds from the issuance of long-term debt......... 2,000,000 2,913,792 2,837,917
Payment on long-term debt............................ (6,679,099) (870,781) (201,829)
------------ ----------- -----------
Net cash provided by financing
activities............................... 56,995,500 10,084,813 6,713,057
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 14,115,292 1,660,492 (422,006)
Cash and cash equivalents, beginning of period....... 3,846,407 2,185,915 2,607,921
------------ ----------- -----------
Cash and cash equivalents, end of period*............ $ 17,961,699 $ 3,846,407 $ 2,185,915
============ =========== ===========
</Table>
---------------
* Excludes marketable securities totaling $29,750,156, $1,937,099 and $0 as of
June 30, 2001, 2000 and 1999, respectively. See Note 1 to the financial
statements for further details.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest was $711,404, $301,111 and $90,516 in the fiscal
years ended June 30, 2001, 2000 and 1999, respectively.
See accompanying notes.
38
39
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
Array BioPharma Inc. (the "Company") is a drug discovery company creating
new drugs through the integration of chemistry, structural biology and
chemoinformatics. The Company collaborates with leading pharmaceutical and
biotechnology companies to identify novel small molecule drugs and also
leverages its discovery platform to develop a pipeline of its own proprietary
drug candidates. The Company's scientific team has a proven track record of
success in identifying promising drug candidates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist of short-term, highly liquid financial instruments
with insignificant interest rate risk that are readily convertible to cash and
have maturities of three months or less from the date of purchase. Cash
equivalents and marketable securities consist of money market funds, taxable
commercial paper, U.S. government agency obligations, corporate notes and bonds
with high credit quality and auction rate securities. The fair market value,
based on quoted market prices, of cash equivalents and marketable securities is
substantially equal to their carrying value at June 30, 2001 and 2000.
At June 30, 2001 and 2000, management determined that cash equivalents and
marketable securities held by the Company were classified as available-for-sale
securities for purposes of SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Securities available-for-sale are carried at fair
value, with unrealized gains and losses reported as a component of stockholders'
equity until their disposition. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Realized gains and
losses and declines in value judged to be other-than-temporary on securities
available-for-sale are included in investment income. Interest and dividends on
securities available-for-sale are included in investment income. The cost of
securities sold is based on the specific identification method.
All cash equivalents and marketable securities as of June 30, 2001 and 2000
are classified as available-for-sale securities and consist of the following:
<Table>
<Caption>
AS OF JUNE 30,
------------------------
2001 2000
----------- ----------
Cash equivalents:
Money market fund......................................... $13,289,827 $ 435,851
Commercial paper.......................................... -- 1,980,443
Corporate notes/bonds..................................... -- 940,000
Auction rate securities................................... 4,158,830 --
----------- ----------
Total............................................. $17,448,657 $3,356,294
=========== ==========
Marketable securities:
U.S. government agency obligations........................ $19,466,243 $ --
Corporate notes/bonds..................................... 5,288,868 1,937,099
Commercial paper.......................................... 4,995,045 --
----------- ----------
Total............................................. $29,750,156 $1,937,099
=========== ==========
</Table>
Unrealized gains on available-for-sale securities at June 30, 2001, were
$116,801. There were no unrealized gains or losses on available-for-sale
securities as of June 30, 2000. Gross realized gains and losses on sales of
available-for-sale securities during the years ended June 30, 2001 and 2000 were
immaterial.
39
40
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Debt securities at June 30, 2001 and 2000, by contractual maturity, are
shown below. Actual maturities may differ from contractual maturities because
issuers of the securities may have the right to prepay obligations.
<Table>
<Caption>
AS OF JUNE 30,
------------------------
2001 2000
----------- ----------
Marketable securities:
Due in one year or less................................... $24,496,523 $ --
Due after one year through four years..................... 5,253,633 1,937,099
----------- ----------
Total............................................. $29,750,156 $1,937,099
=========== ==========
</Table>
INVENTORIES
Inventories primarily consisting of individual chemical compounds in the
form of Optimer building blocks, Lead Generation Libraries, custom libraries and
commercially available fine chemicals are stated at the lower of cost (first-in,
first-out basis) or market. The Company designs and produces the chemical
compounds comprising its Lead Generation Libraries, custom libraries and Optimer
building blocks and begins capitalizing costs into inventory only after
technological feasibility has been established. Inventories are reviewed
periodically, and items considered to be slow moving or obsolete are reduced to
estimated net realizable value through an appropriate reserve.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Repairs and maintenance
are charged to operations as incurred, and significant expenditures for
additions and improvements are capitalized. Depreciation and amortization of
equipment are computed using the straight-line method based on the following
estimated useful lives:
<Table>
<Caption>
ESTIMATED
TYPE OF PROPERTY AND EQUIPMENT USEFUL LIFE
------------------------------ -----------
Computer hardware and software.............................. 3 years
Laboratory and analytical equipment......................... 5 years
Furniture and fixtures...................................... 7 years
Leasehold improvements...................................... 7 years
</Table>
PATENTS AND PATENT APPLICATION COSTS
The Company capitalizes legal costs directly incurred in pursuing patent
applications as patent costs. When such applications result in an issued patent,
the related costs are amortized on a straight-line method over the estimated
remaining lives of the issued patents, generally 17 years. On a quarterly basis,
the Company reviews its issued patents and pending patent applications, and if
it determines to abandon a patent application or that an issued patent no longer
has economic value, the unamortized balance in deferred patent costs relating to
that patent is immediately expensed.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate the carrying amount of the assets may not be recoverable.
Recoverability is measured by comparison of the assets' carrying amount to
future net undiscounted cash flows the assets are expected to generate. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
projected discounted future net cash flows arising from the assets.
40
41
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Net revenue from product sales is recognized as products are shipped, while
revenues from the Company's full-time equivalent contracts are recognized on a
per diem basis as work is performed. Development and fixed-fee-type contract
revenues are recognized on a percentage-of-completion basis. In general,
contract provisions include predetermined payment schedules or the submission of
appropriate billing detail. Any payments received in advance from these
agreements are recorded as deferred revenue until earned. The Company separately
reports product, collaboration and license revenue. The Company reports cost of
goods sold and cost of revenue from collaborations as one line item titled cost
of revenue in its statement of operations. Although the Company's current cost
accounting system has the functional capacity to segregate these costs, it has
not yet implemented such functionality, primarily because these costs are
derived from similar processes including research, design and synthesis
activities. To date, the Company has not received any milestone or royalty
payments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents, accounts
receivable and investments in marketable securities. The Company maintains its
cash balances in the form of bank demand deposits. Cash equivalents and
marketable securities consist of money market funds, taxable commercial paper,
U.S. government agency obligations, corporate notes and bonds with high credit
quality and auction rate securities. All cash, cash equivalents and marketable
securities are maintained with financial institutions that management believes
are creditworthy. Accounts receivable are typically unsecured and are
concentrated in the pharmaceutical and biotechnology industries. Accordingly,
the Company may be exposed to credit risk generally associated with
pharmaceutical and biotechnology companies. The Company has had no bad debt
since inception, and management believes that there are no losses inherent in
the Company's accounts receivable as of June 30, 2001 or June 30, 2000. The
Company has no financial instruments with off-balance sheet risk of accounting
loss, such as foreign exchange contracts, option contracts or other foreign
currency hedging arrangements.
During fiscal year 2001, revenue from three of the Company's customers
represented approximately 24%, 24% and 12% of total revenue. During fiscal year
2000, revenue from three of the Company's customers represented approximately
48%, 11% and 10% of total revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion costs are expensed when incurred. The amount
charged against operations for the years ended June 30, 2001, 2000 and 1999 was
approximately $293,000, $70,000 and $18,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, and long-term debt. The carrying values of cash,
accounts receivable and accounts payable approximate fair value due to their
short-term nature. The carrying amount of the Company's long-term debt as of
June 30, 2000, approximates fair value, as these borrowings are at an interest
rate comparable to the current market rate.
41
42
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"), and related pronouncements. Under the provisions
of APB 25, no compensation expense is recognized when stock options are granted
with exercise prices equal to or greater than market value on the date of grant.
SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, Disclosure About
Segments of an Enterprise and Related Information, establishes standards for the
reporting of information about operating segments. Since its inception, the
Company has conducted its operations in one operating segment.
The Company enters into agreements directly with pharmaceutical and
biotechnology companies throughout the United States, Europe and Japan.
International revenue represented 9%, 9% and 8% of the Company's total revenue
during fiscal years 2001, 2000 and 1999, respectively.
INTERNALLY DEVELOPED SOFTWARE
The Company accounts for its software and information technology in
compliance with Statement of Position 98-1 ("SOP 98-1"), Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1
defines the types of computer software project costs that may be capitalized.
All other costs are expensed in the period incurred. In order for costs to be
capitalized, the computer software project must be intended to create a new
system or add identifiable functionality to an existing system. Total
capitalized costs were $682,939 and $134,090 for fiscal year 2001 and 2000,
respectively, and are being amortized over a period of three years.
EMPLOYEE SAVINGS PLAN
The Company has a 401(k) plan which allows participants to contribute 1% to
15% of their salary, subject to eligibility requirements and annual limits. All
eligible employees can participate in the plan on January 1, April 1, July 1 or
October 1. The Company matches employee contributions on a discretionary basis
as determined by the Company's Board of Directors. During fiscal year 2001, the
Company paid matching contributions of approximately $84,000. The Company did
not contribute to the 401(k) plan in any other previous fiscal years.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss for the period by
the weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing the net loss for the period
by the weighted average number of common and potential common shares outstanding
during the period, if their effect is dilutive. Potential common shares include
incremental shares of common stock issuable upon the exercise of stock options
and warrants and upon the conversion of convertible preferred stock. The
potential shares of common stock have not been included in the diluted net loss
per share calculation because to do so would be anti- dilutive. For fiscal year
2001, the weighted average number of shares of common stock outstanding included
11,501,666 shares of preferred stock that converted to common stock on the date
of the Company's initial public offering (the "IPO") as of November 17, 2000.
The number
42
43
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of common share equivalents excluded from the diluted loss per share
calculations for the years ended June 30, 2001, 2000 and 1999 were 1,212,112,
1,115,702 and 0, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's amounts to conform
to current year's presentation. These reclassifications had no impact on the
reported results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, Business Combinations ("SFAS 141") and Statement No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). SFAS 141 requires companies to reflect
intangible assets apart from goodwill and supersedes previous guidance related
to business combinations. SFAS 142 eliminates amortization of goodwill and
amortization of indefinite lived intangible assets. However, SFAS 142 also
requires the Company to perform impairment tests at least annually on all
goodwill and other intangible assets. These statements are required to be
adopted by the Company on January 1, 2001 and for any acquisitions entered into
after July 1, 2001. The adoption of SFAS 141 and SFAS 142 does not currently
impact the Company's financial statements.
2. BALANCE SHEET COMPONENTS
<Table>
<Caption>
AS OF JUNE 30,
------------------------
2001 2000
----------- ----------
Property, plant and equipment:
Laboratory and analytical equipment....................... $12,295,172 $5,875,863
Computer hardware and software............................ 3,460,493 1,369,293
Leasehold improvements.................................... 4,367,329 751,132
Furniture and fixtures.................................... 1,334,588 409,866
----------- ----------
21,457,582 8,406,154
Less accumulated depreciation............................. (4,036,699) (1,495,397)
----------- ----------
Total property, plant and equipment, net.......... $17,420,883 $6,910,757
=========== ==========
Inventories:
Fine chemicals............................................ $ 1,110,015 $ 372,562
Lead Generation Library, custom library and Optimer
building blocks........................................ 3,027,092 1,184,814
----------- ----------
Total inventories................................. $ 4,137,107 $1,557,376
=========== ==========
</Table>
3. LONG-TERM DEBT AND EXTRAORDINARY LOSS
Long-term debt as of June 30, 2000, related to equipment loan facilities
negotiated with financial institutions.
In May and June 2001, the Company fully repaid all obligations related to
equipment loan facilities and lines of credit. In connection with the early
extinguishment of these debts, the Company incurred $225,176 of extraordinary
charges related to prepayment penalties charged by these financial institutions,
including a noncash charge of approximately $90,000 related to the remaining
accreted interest expense associated with warrants issued to the lenders as
discussed below. No such extraordinary charges existed in any other prior
periods.
43
44
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the negotiated equipment loan facilities during 2000 and
1999, the Company issued warrants to purchase 110,750 shares of its preferred
stock at exercise prices ranging from $1.00 to $5.00 per share. The warrants
expire during, or prior to fiscal year 2009. In accordance with EITF 86-35,
Debenture with Detachable Stock Purchase Warrants, the Company is required to
assess the value of these warrants, and allocate the debt proceeds between the
debt liability and the related warrant. The Company assessed the value of these
warrants using the Black-Scholes methodology, which ascribed a cumulative value
of $144,575 to these warrants. As a result, an allocation between the warrant
and the related loan has been made for these warrant grants. Total accreted
interest expense was $32,839, $15,053 and $6,683, respectively, during fiscal
years 2001, 2000 and 1999.
4. LEASES
The Company leases office space and equipment under various noncancelable
operating lease agreements. Rental expense was $1,129,049, $682,551 and $540,242
for the years ended June 30, 2001, 2000 and 1999, respectively. As of June 30,
2001, future minimum rental commitments, by fiscal year and in the aggregate,
for the Company's operating leases are as follows:
<Table>
<Caption>
AMOUNT
-----------
2002........................................................ $ 2,025,432
2003........................................................ 2,025,432
2004........................................................ 2,362,994
2005........................................................ 4,084,673
2006........................................................ 3,613,378
Thereafter.................................................. 6,595,424
-----------
Total minimum lease payments...................... $20,707,333
===========
</Table>
One of the Company's facilities leases that expires on May 31, 2005, offers
the option to renew the lease for two additional terms of five years each at the
then-prevailing market rental rates.
5. STOCK OPTION PLAN, EMPLOYEE STOCK PURCHASE PLAN AND STOCK WARRANTS
STOCK OPTIONS
In September 2000, the Company's Board of Directors approved the Amended
and Restated Stock Option and Incentive Plan (the "Plan"), which is the
successor equity incentive plan to the Company's 1998 Stock Option Plan (the
"1998 Plan"), initially adopted by the Board of Directors in July 1998. Upon the
closing of the Company's IPO, the Plan became effective and no additional grants
were made under the 1998 Plan. A total of 7,000,000 shares of common stock have
been reserved for issuance under the Plan to eligible employees, consultants and
directors of the Company. Additional authorized shares may be reserved on any
given day in an amount equal to the difference between: (i) 25% of the Company's
issued and outstanding shares of common stock, on a fully diluted and
as-converted basis and (ii) the number of outstanding shares relating to awards
under the Plan plus the number of shares available for future grants of awards
under the Plan on that date. The number of shares available for issuance under
the Plan as incentive stock options may not exceed 7,000,000 shares, provided
that this number will be increased each January 1 beginning in 2001 by 250,000
shares. In no event, however, will this number exceed the number of shares
reserved for issuance under the Plan.
The Plan provides for awards of both nonstatutory stock options and
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and other incentive awards and rights to
purchase shares of the Company's common stock.
44
45
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Plan is administered by the Compensation Committee of the Board of
Directors, which has the authority to select the individuals to whom awards will
be granted and to determine whether and to what extent stock options and other
stock incentive awards are to be granted, the number of shares of common stock
to be covered by each award, the vesting schedule of stock options, generally
straight-line over a period of four years, and all other terms and conditions of
each award. A summary of activity in the Plan is as follows:
<Table>
<Caption>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Balance, July 1, 1998....................................... 1,532,500 $0.235
Exercised................................................. 10,000 0.235
Terminated or expired..................................... 26,000 0.235
--------- ------
Balance, June 30, 1999...................................... 1,496,500 0.235
Granted................................................... 1,815,740 0.469
Exercised................................................. 446,840 0.235
Terminated or expired..................................... 10,556 0.235
--------- ------
Balance, June 30, 2000...................................... 2,854,844 0.384
Granted................................................... 1,951,788 2.594
Exercised................................................. 786,914 0.445
Terminated or expired..................................... 528,069 0.584
--------- ------
Balance, June 30, 2001...................................... 3,491,649 $1.575
========= ======
</Table>
A summary of options outstanding as of June 30, 2001, is as follows:
<Table>
<Caption>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE SHARES AVERAGE
EXERCISE SHARES UNDER REMAINING EXERCISE CURRENTLY EXERCISE
PRICE OPTION CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
-------- ------------ ---------------- --------- ----------- ---------
$0.235 1,160,912 7.3 $0.235 418,974 $0.235
0.60 1,582,285 8.7 0.600 627,161 0.600
3.00 242,852 9.3 3.000 21,250 3.000
5.00-8.94 505,600 9.7 7.020 20,000 7.500
--------- --- ------ --------- ------
3,491,649 8.4 $1.575 1,087,385 $0.633
========= === ====== ========= ======
</Table>
FAIR VALUE DISCLOSURE
As described in Note 1, the Company accounts for its stock compensation
arrangements under the provisions of APB 25, Accounting for Stock Issued to
Employees, and intends to continue to do so.
Pro forma information regarding net loss is required by SFAS 123,
Accounting and Disclosure of Stock-Based Compensation, 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 for these options for fiscal year
2000 and 1999 was estimated at the date of grant using the minimum value method
available to nonpublic companies under SFAS 123. Under this method, option value
is determined as the excess of the fair value of the stock at the date of grant
over the present value of both the exercise price (lump sum) and the expected
dividend payments (annuity), each discounted at the risk-free rate, over the
expected exercise life of the option. A risk-free interest rate of 6.25% for
2000 and 5.0% for 1999, a dividend yield of 0% for 2000 and 1999, and an
45
46
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expected life of five years were applied for 2000 and 1999 grants. Upon the
completion of the Company's IPO in fiscal year 2001, the Company began using the
Black-Scholes option pricing model under SFAS 123 and used the following
weighted average assumptions: risk-free interest rate of 4.63%; a dividend yield
of 0%; volatility factor of the expected market price of the Company's common
stock of 98.9%; and a weighted-average expected life of the option of five
years. The weighted average fair value of stock options granted during 2001,
2000 and 1999 was $7.31, $1.81 and $0.05 per share, respectively. As discussed
further below, the Company recorded approximately $4.7 million and $1.1 million
of stock-based compensation under APB 25 during fiscal year 2001 and 2000,
respectively.
Option valuation models such as the minimum value and Black-Scholes methods
described above require the input of highly subjective assumptions. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The following summarized pro forma results of operations assume the
estimated fair value of the options granted is amortized to expense over the
option-vesting period.
<Table>
<Caption>
YEARS ENDED JUNE 30,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
Pro forma net loss........................... $(11,444,128) $(5,132,403) $(4,384,031)
Pro forma net loss applicable to common
stock...................................... $(16,444,129) $(5,132,403) $(4,384,031)
Pro forma loss per share (basic and
diluted)................................... $ (1.05) $ (1.68) $ (1.50)
</Table>
DEFERRED STOCK-BASED COMPENSATION
As of June 30, 2001 and June 30, 2000, the Company has recorded $7,328,086
and $4,645,851 of deferred stock compensation, respectively, in accordance with
APB 25, SFAS 123 and FIN 44, related to certain stock options granted to
employees. Stock compensation expense is being recognized on a straight-line
basis over the vesting periods of the related options, which is generally four
years, except for options with performance-based vesting provisions. During
fiscal 2001, 75% of the performance-based options vested upon the completion of
the Company's IPO in November 2000. The remaining performance-based options will
vest in November 2001. The Company recognized stock compensation expense of
$4,653,552 and $1,117,796 for the years ended June 30, 2001 and June 30, 2000,
respectively.
EMPLOYEE STOCK PURCHASE PLAN
During fiscal year 2001, the Company adopted an Employee Stock Purchase
Plan (the "Purchase Plan"), authorizing the issuance of 800,000 shares of its
common stock pursuant to purchase rights granted to eligible employees of the
Company. The Purchase Plan provides a means by which employees purchase common
stock of the Company through payroll deductions of up to 15% of their base
compensation. At the end of each of four offering periods during a calendar
year, the Company uses accumulated payroll deductions to purchase, on behalf of
participating employees, shares of common stock at a price equal to the lower of
85% of the fair market value of a share of common stock (i) at the beginning of
the offering period or (ii) at the end of the offering period. The offering
periods under the Purchase Plan end on March 31, June 30, September 30 and
December 31 of each year. Generally all employees, including executive officers,
who work at least 20 hours per week and five months per year may participate in
the Purchase Plan. Employees who are deemed to own greater than 5% of the
combined voting power of all classes of stock of the Company are not eligible
for participation in the Purchase Plan. As of June 30, 2001, 89,759 shares have
been issued under the Purchase Plan.
46
47
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK WARRANTS
The Company has issued warrants to purchase shares of the Company's
preferred stock, generally in connection with the Company's equipment financing.
Upon the closing of the Company's IPO, in conjunction with the automatic
conversion of the preferred stock, these warrants became exercisable for the
same number of shares of common stock. The warrants expire on various dates
through fiscal 2009. During May 2001, warrants to acquire 47,000 shares of
common stock were exercised on a "net" basis, resulting in the issuance of
39,332 shares of common stock.
The following table summarizes warrant data as of June 30, 2001:
<Table>
Issued and outstanding...................................... 63,750
Exercise price.............................................. $2.90 - $5.00
Weighted-average exercise price............................. $4.55
</Table>
6. PREFERRED AND COMMON STOCK
PREFERRED STOCK
During May 1998, the Company sold 2,500,000 shares of Series A convertible
preferred stock ("Series A preferred"), in a first closing, to a group of
private investors at a purchase price of $1.00 per share. The net proceeds to
the Company from the sale were $2,469,884. During August 1998, the Company
completed issuance of 4,135,000 shares of Series A preferred, in a second
closing, to another group of private investors in which the net proceeds to the
Company were $4,074,619. In November 1999, the Company issued 3,199,999 shares
of Series B convertible preferred stock ("Series B preferred") to substantially
the same owners as Series A preferred, at a purchase price of $2.50 per share.
The net proceeds to the Company were $7,936,794. All of the preferred shares had
preferences before common stock in liquidation equal to the initial preferred
purchase price, plus any accrued but unpaid non-cumulative dividends.
On August 31, 2000, the Company issued 1,666,667 shares of its Series C
convertible preferred stock ("Series C preferred") at $6.00 per share to
investors, resulting in net proceeds of $9,971,822. Subsequent to the
commencement of the IPO process, the Company reevaluated the fair value of its
Series C preferred as of August 31, 2000 and determined it to be $9.00 per
share. Accordingly, the incremental fair value of $5.0 million, or $3.00 per
share, is deemed to be the equivalent of a dividend on the Series C preferred.
The Company recorded the deemed dividend at the date of issuance by offsetting
charges and credits to preferred stock, without any effect on total
stockholders' equity. The preferred stock dividend increases the loss applicable
to common stockholders in the calculation of basic net loss per share for fiscal
year 2001 and the related interim periods.
On November 17, 2000, concurrent with the Company's IPO, all of the
convertible preferred stock outstanding, amounting to 11,501,666 shares,
automatically converted into common stock at a one-to-one ratio.
COMMON STOCK
Concurrent with the May 1998 sale of Series A preferred, the Company
completed a private sale of 2,913,367 shares of its common stock to a group of
private investors and the Company's founders at a purchase price of $0.235 per
share. The net proceeds to the Company from the sale were $334,406, plus notes
receivable from three of the Company's founders having an aggregate principal
balance of $350,000. The notes, including accrued interest at 6.0% per year,
totaled $266,625 and $393,750 as of June 30, 2001 and 2000, respectively, and
are payable in full in September 2002 or, if earlier, the date on which two of
the founders' services with the Company terminates. During fiscal year 2001,
$145,000 was received from one of the founders as full
47
48
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
repayment of the outstanding notes receivable balance, including accrued
interest. The notes are secured and have been included with related accrued
interest as a component of stockholders' equity.
On November 17, 2000, the Company completed its IPO of 7,475,000 shares of
it common stock, including 975,000 shares for the exercise of the underwriters'
over-allotment option. The Company received net proceeds of $50.8 million from
its IPO, net of $5.3 million in expenses and underwriters' discount relating to
the issuance and distribution of the securities.
7. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109,
Accounting for Income Taxes. Under the provisions of Statement No. 109, a
deferred tax liability or asset (net of a valuation allowance) is provided in
the financial statements by applying the provisions of applicable tax laws to
measure the deferred tax consequences of temporary differences that will result
in net taxable or deductible amounts in future years as a result of events
recognized in the financial statements in the current or preceding years.
The Company's effective tax rate differs from the federal income tax rate
for the following reasons:
<Table>
<Caption>
YEARS ENDED JUNE 30,
-----------------------------
2001 2000 1999
------- ------ ------
Expected federal income tax expense at statutory rate
of 34%.............................................. 34.0% 34.0% 34.0%
Effect of permanent differences....................... 42.0 22.1 0.2
State income tax expense, net of federal benefit...... -- -- --
Valuation allowance................................... (76.0) (56.1) (34.2)
------- ------ ------
--% --% --%
======= ====== ======
</Table>
The components of the Company's deferred tax assets and liabilities are as
follows:
<Table>
<Caption>
AS OF JUNE 30,
-------------------------
2001 2000
----------- -----------
Deferred tax assets:
Net operating loss carryforwards......................... $ 5,665,504 $ 2,856,869
Research and development credit carryforwards............ 615,268 281,866
Deferred revenue......................................... 443,846 --
Other.................................................... 79,351 2,680
----------- -----------
6,803,969 3,141,415
Valuation allowance........................................ (5,959,306) (3,062,245)
----------- -----------
844,663 79,170
Deferred tax liabilities:
Depreciation............................................. (844,663) (79,170)
----------- -----------
Net deferred tax assets and liabilities.................... $ -- $ --
=========== ===========
</Table>
The Company has recorded a valuation allowance equal to the excess of
deferred tax assets over deferred tax liabilities as the Company was unable to
determine that it is more likely than not that the deferred tax asset will be
realized.
48
49
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 2001, the Company has the following net operating loss and tax
credit carryforwards for income tax purposes:
<Table>
<Caption>
RESEARCH AND
NET OPERATING DEVELOPMENT
LOSS CREDITS
------------- ------------
Expiration date:
2018........................................................ $ 49,000 $ --
2019........................................................ 4,468,000 --
2020........................................................ 4,494,000 282,000
2021........................................................ 6,278,000 333,000
----------- --------
$15,289,000 $615,000
=========== ========
</Table>
The Tax Reform Act of 1986 contains provisions that limit the utilization
of net operating loss and tax credit carryforwards if there has been a "change
of ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit the Company's utilization of its net operating
loss and tax credit carryforwards, and could be triggered by subsequent sales of
securities by the Company or its stockholders.
8. COLLABORATIVE AGREEMENTS
Eli Lilly and Company. In March 2000, the Company entered into a research
agreement with Eli Lilly to form a chemistry-based research collaboration. Under
the terms of the agreement, up to 30 of the Company's scientists will provide
drug research in collaboration with Eli Lilly scientists on identified Eli Lilly
drug discovery projects. The Company is compensated based on an annual rate for
each full-time equivalent employee working on an Eli Lilly project. The
Company's agreement with Eli Lilly terminates in March 2005, but Eli Lilly may
terminate the agreement at any time upon payment of an early termination
payment.
ICOS Corporation. In July 2000, the Company consolidated and expanded its
lead optimization agreements with ICOS into a drug discovery collaboration
agreement for lead optimization on undisclosed targets. Under the agreement,
ICOS has the exclusive worldwide right to develop and market any products
resulting from the collaboration. The Company is compensated based on an annual
rate for each full-time equivalent employee working on an ICOS project and is
entitled milestone payments upon achievement of identified development and
commercialization goals for products resulting from the collaboration. The
agreement expires in July 2002, and may be terminated upon 90 days' notice by
ICOS following the first anniversary of the agreement. In March 2001, the
Company expanded this lead optimization agreement and entered into a compound
library agreement with ICOS.
Merck & Co. In September 2000, the Company expanded an existing
collaboration with Merck & Co., Inc., to design and synthesize lead generation
libraries for drug discovery at Merck. Under the terms of the new agreement,
Merck and Array will collaborate to design small molecule libraries exclusively
for Merck's drug discovery activities. Array will develop processes for the
synthesis of each library in collaboration with Merck scientists and utilize its
proprietary high-speed synthesis and parallel purification platforms to create
these high-quality libraries. Under the terms of the agreement, Merck will
provide the Company with research funding as well as payment upon delivery of
compounds.
Amgen. In October 2000, the Company entered into a research and license
agreement with Amgen. Under the terms of this agreement, the Company granted
Amgen an exclusive license to its existing program to address a target for
diabetes, called PTP1B and the Company initiated a joint research program in
November 2000 to identify, characterize and optimize potential drug candidates
targeting PTP1B. Amgen has the exclusive worldwide right to develop and
commercialize any drugs that target PTP1B developed under this
49
50
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
collaboration. The agreement provides for an initial, nonrefundable up-front fee
of $1.8 million, which was received in November 2000, license fees, quarterly
payments for each full-time equivalent employee working on the PTP1B project,
and milestone payments upon achievement of identified research, development and
commercialization goals for products resulting from the collaboration. The
initial term of the research program is two years, and Amgen may terminate the
research program with six months written notice during this term. The Company is
recognizing the up-front fee over the expected three-year term of this
agreement. To date, the Company has not received any milestone payments under
this agreement.
Compound Library Agreements. The Company has entered into agreements with
customers, including Tularik in June 1999, which Tularik extended in January
2000, and which expires in January 2002; DuPont in August 2000, which expires in
December 2005; and F. Hoffmann-La Roche Ltd in June 2001, which expires in June
2006, providing nonexclusive access on a per-compound fee basis to compounds in
the Company's Lead Generation Library for their internal lead generation
efforts. These customers have the option to gain exclusive rights to compounds
they intend to commercialize upon payments of either a one-time activation fee
or annual fees. The Company retains all ownership of the intellectual property
rights to the compounds and to the Company's Lead Generation Library, and to any
inventions made by its scientists working under these agreements. These
agreements are terminable only upon breach or insolvency of a party.
9. SUBSEQUENT EVENTS
Takeda Chemical Industries, Ltd. In July 2001, the Company entered into a
new collaboration to create a series of small molecule drug leads against a
proprietary Takeda target. Takeda will pay fees to the Company based on the
number of Company scientists working on the research phase of the agreement. The
Company will be entitled to receive success payments based on reaching certain
development milestones and royalties based upon sales of products resulting from
the collaboration.
Vertex Pharmaceutical Incorporated. In August 2001, the Company entered
into a new collaboration to discover and develop small molecule drugs directed
at two specific targets in the phosphatase protein family. Under the terms of
this agreement, Vertex will provide the Company with an up-front fee and
research funding over three years. The Company will be responsible for the
initial drug discovery, including lead generation and lead optimization. Vertex
will be responsible for all aspects of clinical development and
commercialization, and the Company will be entitled to receive clinical
milestone payments. If products are commercialized as a result of this
collaboration, the Company will also be entitled to additional milestone
payments. These milestones would be paid on an annual basis for a defined term
and are tied to predetermined sales levels.
ICOS Corporation. In August 2001, the Company entered into a new drug
discovery collaboration agreement to discover and develop small molecule drugs
directed at two specific disease targets containing the I-domain allosteric site
(IDAS) structural motif. IDAS-targeted drugs regulate function of the target
proteins through a novel allosteric mechanism. ICOS has identified key
structural features of proteins containing the IDAS motif that will be exploited
by the Company's scientists to systematically produce drugs against targets of
this class. Under the terms of the agreement, ICOS will provide the Company with
research funding over two years. The Company and ICOS scientists will
collaborate in all aspects of lead generation and lead optimization. ICOS will
be responsible for clinical development and commercialization. The Company is
entitled to receive success payments upon reaching certain development
milestones and royalties based upon sales of products resulting from this
collaboration.
Stockholder Rights Plan. In August 2001, the Company adopted a Stockholder
Rights Plan (the "Rights Plan") designed to ensure that the Company's
stockholders receive fair and equal treatment in the event of an unsolicited
attempt to take control of the Company and to deter coercive or unfair tactics
by potential acquirers. The Rights Plan imposes a significant penalty upon any
person or group that acquires 15% or more of the Company's outstanding common
stock without the approval of the Company's Board of
50
51
ARRAY BIOPHARMA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Directors. Under the Rights Plan, a dividend of one Preferred Stock Purchase
Right was declared for each common share held of record as of the close of
business on August 27, 2001. Each right would initially entitle the holder to
purchase 1/100th of a share of Series A Junior Participating Preferred Stock.
The rights generally will not become exercisable unless an acquiring entity
accumulates or initiates a tender offer to purchase 15% or more of the Company's
common stock. In that event, each right will entitle the holder, other than the
unapproved acquirer and its affiliates, to purchase upon the payment of the
exercise price a number of shares of the Company's common stock having a value
of two times the exercise price. If the Company is acquired in a merger, or 50%
or more of the Company's assets are sold in one or more related transactions,
each right would entitle the holder thereof to purchase for the exercise price a
number of shares of common stock of the acquiring company having a value of two
times the exercise price. The rights expire on August 2, 2011.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables below summarize the Company's unaudited quarterly operating
results for the 2001 and 2000 fiscal year periods.
<Table>
<Caption>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
FISCAL YEAR 2001
Total revenue.................... $ 2,761,204 $ 3,832,886 $ 4,741,212 $ 5,670,458
Gross profit..................... 353,212 541,511 1,325,719 1,819,940
Net loss before extraordinary
item........................... (3,085,843) (4,231,288) (1,689,156) (1,380,682)
Extraordinary loss from early
extinguishment of debt......... -- -- -- (225,176)
Deemed dividend related to
beneficial conversion feature
of preferred stock............. (5,000,001) -- -- --
Net loss to common
stockholders................... (8,085,844) (4,231,288) (1,689,156) (1,605,858)
Basic and diluted net loss per
share:
Net loss applicable to common
stockholders before
extraordinary item............. $ (2.17) $ (0.33) $ (0.07) $ (0.06)
Extraordinary loss from early
extinguishment of debt......... -- -- -- (0.01)
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders................... $ (2.17) $ (0.33) $ (0.07) $ (0.07)
=========== =========== =========== ===========
FISCAL YEAR 2000
Total revenue.................... $ 1,349,812 $ 1,350,852 $ 1,825,376 $ 2,247,594
Gross profit..................... 532,775 549,691 651,867 594,343
Net loss......................... (660,465) (1,465,135) (1,216,572) (1,790,231)
Basic and diluted net loss per
share.......................... $ (0.22) $ (0.49) $ (0.40) $ (0.55)
</Table>
See Note 3 for a discussion of the extraordinary loss from early
extinguishment of debt and Note 6 for a discussion of the preferred stock deemed
dividend.
51
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information under the captions "Proposal 1-Election of Directors" and "Executive
Officers and Other Key Employees" contained in the Proxy Statement of Array
BioPharma Inc. relating to the annual meeting of stockholders to be held on
November 1, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the Proxy
Statement of Array BioPharma Inc. relating to the annual meeting of stockholders
to be held on November 1, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Principal Stockholders" contained in the Proxy
Statement of Array BioPharma Inc. relating to the annual meeting of stockholders
to be held on November 1, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Transactions" contained
in the Proxy Statement of Array BioPharma Inc. relating to the annual meeting of
stockholders to be held on November 1, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements are listed under Part II, Item 8 of this report.
Index to Financial Statements
(a) Balance Sheets at June 30, 2001 and 2000
(b) Statements of Operations for each of the three years in the period
ended June 30, 2001
(c) Statements of Stockholders' Equity for each of the three years in
the period ended June 30, 2001
(d) Statements of Cash Flows for each of the three years in the period
ended June 30, 2001
(e) Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
All other schedules are omitted because they are not required, are not
applicable or the information is included in the financial statements or notes
thereto.
(b) REPORTS ON FORM 8-K DURING THE FOURTH QUARTER OF 2001
None.
52
53
(c) EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(1) -- Amended and Restated Certificate of Incorporation of Array
BioPharma Inc.
3.2(1) -- Amended and Restated Bylaws of Array BioPharma Inc.
4.1(1) -- Specimen certificate representing the common stock
10.1(1) -- 1998 Stock Option Plan effective July 1, 1998, as amended
10.2(1) -- Amended and Restated Stock Option and Incentive Plan
10.3(1) -- Employee Stock Purchase Plan
10.4(1) -- Preferred and Common Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated May 18, 1998
10.5(1) -- Amendment to Preferred and Common Stock Purchase Agreement
dated August 7, 1998
10.6(1) -- Series B Preferred Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.7(1) -- Series C Preferred Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated August 31, 2000
10.8(1) -- Lease Agreement by and between Registrant, as Tenant, and
Amgen Inc., as Landlord, dated July 1998
10.9(1) -- First Amendment to Lease Agreement by and between
Registrant, as Tenant, and Amgen Inc., as Landlord, dated
April 1, 1999
10.10(1) -- Lease Agreement by and between Registrant, as Tenant, and
Pratt Land Limited Liability Company, as Landlord, dated
February 28, 2000
10.11(1) -- Revised Employment Agreement by and between Registrant and
Robert E. Conway dated November 16, 1999
10.12(1) -- Form of Employment Agreement dated September 1, 2000 by and
between Registrant and each of Laurence Burgess, Jonathan
Josey, Anthony D. Piscopio, David L. Snitman, Kevin Koch,
and Michael Carruthers
10.13(1) -- Promissory Note and Pledge Agreement of Kevin Koch to
Registrant dated May 18, 1998, as amended
10.14(1) -- Promissory Note and Pledge Agreement of Anthony D. Piscopio
to Registrant dated May 18, 1998, as amended
10.15(1) -- Amended and Restated Investors Rights Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.16(1) -- Amendment No. 1 to Amended and Restated Investors Rights
Agreement between Registrant and the parties listed on the
signature pages thereto dated August 31, 2000
10.17(1) -- Amended and Restated Stockholders Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.18(1) -- Amendment No. 2 to Amended and Restated Stockholders
Agreement between Registrant and the parties listed on the
signature pages thereto dated August 31, 2000
10.19(1) -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated October 9, 1998
10.20(1) -- Warrant issued to Silicon Valley Bank, issue date October 9,
1998
10.21(1) -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated March 26, 1999
10.22(1) -- Warrant issued to Silicon Valley Bank, issue date March 31,
1999
10.23(1) -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated May 17, 2000
10.24(1) -- Warrant issued to Silicon Valley Bank, issue date May 17,
2000
</Table>
53
54
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.25(1) -- Master Note and Security Agreement by and between Registrant
and Leasing Technologies International, Inc. dated February
26, 1999
10.26(1) -- Warrant issued to Leasing Technologies International, Inc.,
issue date March 30, 1999
10.27(1) -- Custom Synthesis Fee-For-Service Agreement between
Registrant and Merck & Co., Inc. dated May 14, 1999
10.28(1) -- Array Library Screening Agreement between Registrant and
E.I. du Pont de Nemours and Company dated August 1, 2000
10.29(1) -- Drug Discovery Collaboration Agreement between Registrant
and ICOS Corporation dated July 31, 2000
10.30(1) -- Compound Library Agreement between Registrant and Darwin
Discovery Limited dated April 22, 1999
10.31(1) -- Diversity Library Screening Agreement between Registrant and
Tularik Inc. dated June 10, 1999, as amended
10.32(1) -- Research Services Agreement between Registrant and Eli Lilly
and Company dated March 22, 2000, as amended
10.33(1) -- Custom Synthesis Development and Supply Agreement between
Registrant and Merck & Co., Inc. dated September 6, 2000
10.34(1) -- Research and License Agreement between Registrant and Amgen
Inc. dated October 26, 2000
10.35(2) -- Second Amendment to Lease Agreement by and between
Registrant, as Subtenant, and Amgen Inc., as Sublandlord,
dated April 1, 2001
10.36(2) -- Option Agreement by and between Registrant, as Subtenant,
and Boulder Headquarters LLC, as Landlord, dated April 1,
2001
10.37(2) -- Letter Agreement dated March 17, 2001 by and between
Registrant and ICOS Corporation amending the Drug Discovery
Collaboration Agreement dated July 31, 2000
23.1 -- Consent of Ernst & Young LLP
</Table>
---------------
(1) Incorporated herein by reference to the Registrant's registration statement
on Form S-1 (File No. 333-45922).
(2) Incorporated herein by reference to the Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2001 (File No. 000-31979).
54
55
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, in the city of
Boulder, State of Colorado, on September 27, 2001.
ARRAY BIOPHARMA INC.
By /s/ ROBERT E. CONWAY
------------------------------------
Robert E. Conway
Chief Executive Officer
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT E. CONWAY Chief Executive Officer and September 27, 2001
------------------------------------------------ Director (Principal Executive
Robert E. Conway Officer)
/s/ KYLE LEFKOFF Chairman of the Board of September 27, 2001
------------------------------------------------ Directors
Kyle Lefkoff
/s/ MICHAEL CARRUTHERS Chief Financial Officer September 27, 2001
------------------------------------------------ (Principal Financial and
Michael Carruthers Accounting Officer)
/s/ FRANCIS J. BULLOCK Director September 27, 2001
------------------------------------------------
Francis J. Bullock, Ph.D.
/s/ MARVIN H. CARUTHERS Director September 27, 2001
------------------------------------------------
Marvin H. Caruthers, Ph.D.
/s/ KIRBY L. CRAMER Director September 27, 2001
------------------------------------------------
Kirby L. Cramer
/s/ KEVIN KOCH Director September 27, 2001
------------------------------------------------
Kevin Koch, Ph.D.
/s/ ROBERT W. OVERALL Director September 27, 2001
------------------------------------------------
Robert W. Overell, Ph.D.
/s/ DAVID L. SNITMAN Director September 27, 2001
------------------------------------------------
David L. Snitman, Ph.D.
/s/ JOHN L. ZABRISKIE Director September 27, 2001
------------------------------------------------
John L. Zabriskie, Ph.D.
</Table>
55
56
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(1) -- Amended and Restated Certificate of Incorporation of Array
BioPharma Inc.
3.2(1) -- Amended and Restated Bylaws of Array BioPharma Inc.
4.1(1) -- Specimen certificate representing the common stock
10.1(1) -- 1998 Stock Option Plan effective July 1, 1998, as amended
10.2(1) -- Amended and Restated Stock Option and Incentive Plan
10.3(1) -- Employee Stock Purchase Plan
10.4(1) -- Preferred and Common Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated May 18, 1998
10.5(1) -- Amendment to Preferred and Common Stock Purchase Agreement
dated August 7, 1998
10.6(1) -- Series B Preferred Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.7(1) -- Series C Preferred Stock Purchase Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated August 31, 2000
10.8(1) -- Lease Agreement by and between Registrant, as Tenant, and
Amgen Inc., as Landlord, dated July 1998
10.9(1) -- First Amendment to Lease Agreement by and between
Registrant, as Tenant, and Amgen Inc., as Landlord, dated
April 1, 1999
10.10(1) -- Lease Agreement by and between Registrant, as Tenant, and
Pratt Land Limited Liability Company, as Landlord, dated
February 28, 2000
10.11(1) -- Revised Employment Agreement by and between Registrant and
Robert E. Conway dated November 16, 1999
10.12(1) -- Form of Employment Agreement dated September 1, 2000 by and
between Registrant and each of Laurence Burgess, Jonathan
Josey, Anthony D. Piscopio, David L. Snitman, Kevin Koch,
and Michael Carruthers
10.13(1) -- Promissory Note and Pledge Agreement of Kevin Koch to
Registrant dated May 18, 1998, as amended
10.14(1) -- Promissory Note and Pledge Agreement of Anthony D. Piscopio
to Registrant dated May 18, 1998, as amended
10.15(1) -- Amended and Restated Investors Rights Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.16(1) -- Amendment No. 1 to Amended and Restated Investors Rights
Agreement between Registrant and the parties listed on the
signature pages thereto dated August 31, 2000
10.17(1) -- Amended and Restated Stockholders Agreement between
Registrant and the parties whose signatures appear on the
signature pages thereto dated November 16, 1999
10.18(1) -- Amendment No. 2 to Amended and Restated Stockholders
Agreement between Registrant and the parties listed on the
signature pages thereto dated August 31, 2000
10.19(1) -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated October 9, 1998
10.20(1) -- Warrant issued to Silicon Valley Bank, issue date October 9,
1998
10.21(1) -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated March 26, 1999
10.22(1) -- Warrant issued to Silicon Valley Bank, issue date March 31,
1999
10.23(1) -- Loan and Security Agreement by and between Registrant and
Silicon Valley Bank dated May 17, 2000
10.24(1) -- Warrant issued to Silicon Valley Bank, issue date May 17,
2000
</Table>
56
57
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.25(1) -- Master Note and Security Agreement by and between Registrant
and Leasing Technologies International, Inc. dated February
26, 1999
10.26(1) -- Warrant issued to Leasing Technologies International, Inc.,
issue date March 30, 1999
10.27(1) -- Custom Synthesis Fee-For-Service Agreement between
Registrant and Merck & Co., Inc. dated May 14, 1999
10.28(1) -- Array Library Screening Agreement between Registrant and
E.I. du Pont de Nemours and Company dated August 1, 2000
10.29(1) -- Drug Discovery Collaboration Agreement between Registrant
and ICOS Corporation dated July 31, 2000
10.30(1) -- Compound Library Agreement between Registrant and Darwin
Discovery Limited dated April 22, 1999
10.31(1) -- Diversity Library Screening Agreement between Registrant and
Tularik Inc. dated June 10, 1999, as amended
10.32(1) -- Research Services Agreement between Registrant and Eli Lilly
and Company dated March 22, 2000, as amended
10.33(1) -- Custom Synthesis Development and Supply Agreement between
Registrant and Merck & Co., Inc. dated September 6, 2000
10.34(1) -- Research and License Agreement between Registrant and Amgen
Inc. dated October 26, 2000
10.35(2) -- Second Amendment to Lease Agreement by and between
Registrant, as Subtenant, and Amgen Inc., as Sublandlord,
dated April 1, 2001
10.36(2) -- Option Agreement by and between Registrant, as Subtenant,
and Boulder Headquarters LLC, as Landlord, dated April 1,
2001
10.37(2) -- Letter Agreement dated March 17, 2001 by and between
Registrant and ICOS Corporation amending the Drug Discovery
Collaboration Agreement dated July 31, 2000
23.1 -- Consent of Ernst & Young LLP
</Table>
---------------
(1) Incorporated herein by reference to the Registrant's registration statement
on Form S-1 (File No. 333-45922).
(2) Incorporated herein by reference to the Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2001 (File No. 000-31979).
57