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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2000
REGISTRATION NO. 333-30730
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SIGNAL PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 8731 94-3174286
(PRIOR TO REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
DELAWARE
(AFTER REINCORPORATION)
(STATE OR JURISDICTION
OF INCORPORATION OR
ORGANIZATION)
5555 OBERLIN DRIVE
SAN DIEGO, CALIFORNIA 92121
(858) 558-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ALAN J. LEWIS, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5555 OBERLIN DRIVE
SAN DIEGO, CALIFORNIA 92121
(858) 558-7500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
FREDERICK T. MUTO, ESQ. FAYE H. RUSSELL, ESQ
JANE K. ADAMS, ESQ. RYAN S. HONG, ESQ.
DENISE L. WOOLARD, ESQ. KANDACE W. RICHARDSON, ESQ.
COOLEY GODWARD LLP BROBECK, PHLEGER & HARRISON LLP
4365 EXECUTIVE DRIVE, SUITE 1100 12390 EL CAMINO REAL
SAN DIEGO, CA 92121 SAN DIEGO, CA 92130
(858) 550-6000 (858) 720-2500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE PRICE(2) REGISTRATION FEE
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Common Stock, $.001 par value per
share............................ 5,750,000 $15.00 $86,250,000 $22,770(3)
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(1) Includes 750,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated for the purpose of calculating the amount of the registration fee
in accordance with Rule 457 under the Securities Act of 1933.
(3) $21,252 of such fee has been paid previously.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 22, 2000
[SIGNAL LOGO]
5,000,000 SHARES
COMMON STOCK
Signal Pharmaceuticals, Inc. is offering 5,000,000 shares of its common
stock. This is our initial public offering and no public market currently exists
for our shares. We have applied to have our common stock approved for quotation
on the Nasdaq National Market under the symbol "SGNL." We anticipate that the
initial public offering price will be between $13.00 and $15.00 per share.
As part of our collaboration agreement with DuPont Pharmaceuticals Company,
DuPont Pharmaceuticals has agreed to purchase $2.0 million of our common stock
in a private transaction concurrent with the closing of this offering at the
initial public offering price.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------------
PER SHARE TOTAL
---------- ----------
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Signal Pharmaceuticals, Inc. ................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Signal Pharmaceuticals, Inc. has granted the underwriters a 30-day option
to purchase up to an additional 750,000 shares of common stock to cover
over-allotments.
------------------------------
ROBERTSON STEPHENS
CHASE H&Q
CIBC WORLD MARKETS
THE DATE OF THIS PROSPECTUS IS , 2000.
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[INSIDE FRONT COVER ARTWORK]
DEVELOPING DRUGS
TO REALIZE THE THERAPEUTIC POTENTIAL OF GENOMICS
[Graphic depicting the gene regulating target and drug discovery programs of
Signal. The graphic is divided into columns indicating the stage of research or
development for each of Signal's current drug targets and drug candidates. The
right side of the graphic lists the disease areas targeted by Signal: cancer,
inflammation, bone metabolism, cardiovascular disease, neurological disease and
viral infections.]
Genomics is the large-scale identification and sequencing of the genes that
comprise the human genome. The ability to convert the thousands of gene targets
coming from genomics into drugs requires knowledge of which genes cause diseases
and how to design drugs that selectively regulate these disease genes. Our drug
discovery engine is an integrated set of advanced target and drug discovery
technologies which accelerate the application of genomics to the generation of
gene regulating drugs. Using our drug discovery engine, we have generated a
pipeline of novel gene regulating targets and drugs at various stages of
development for treating major diseases.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF COMMON STOCK. IN THIS PROSPECTUS,
"SIGNAL," "SIGNAL PHARMACEUTICALS," "WE," "US" AND "OUR" REFER TO SIGNAL
PHARMACEUTICALS, INC.
------------------------------
TABLE OF CONTENTS
PAGE
----
Summary..................................................... 1
Risk Factors................................................ 5
Special Note Regarding Forward-Looking Statements........... 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 26
Management.................................................. 53
Certain Transactions........................................ 62
Principal Stockholders...................................... 63
Description of Capital Stock................................ 65
Shares Eligible for Future Sale............................. 68
Underwriting................................................ 70
Where You Can Find More Information......................... 72
Legal Matters............................................... 72
Experts..................................................... 72
Index to Financial Statements............................... F-1
------------------------------
Signal Pharmaceuticals(TM), PhaRMA(TM) and the Signal Pharmaceuticals
stylized logo are trademarks of Signal Pharmaceuticals. This prospectus also
includes trademarks owned by other parties. All other trademarks mentioned are
the property of their respective owners.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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SUMMARY
This summary highlights information contained elsewhere in this prospectus.
We have included this information in the summary because we believe this
information is highly important in making a decision to invest in our common
stock. You should read this summary together with the more detailed information
regarding our company and the common stock being sold in this offering appearing
elsewhere in this prospectus, including our financial statements and related
notes, for a more complete understanding of our business and the offering.
OUR BUSINESS
OVERVIEW
Signal Pharmaceuticals is a biopharmaceutical company focused on
discovering, developing and commercializing new classes of drugs that regulate
genes associated with disease. Current initiatives in the field of genomics,
which is the large-scale identification and sequencing of the genes that
comprise the human genome, are generating a large flow of information regarding
the role of genes in health and disease. We believe our approach can convert
this enormous amount of valuable information into new classes of superior drugs.
We have advanced the application of genomics beyond identifying genes to
understanding the role of genes in disease and how these genes are regulated.
This allows us to design novel classes of drugs that selectively regulate genes
that cause disease. Our technologies enable us to identify and pursue numerous
gene regulating drug targets across multiple diseases and to rapidly identify
drugs for development. We believe our approach will yield drugs that treat the
underlying causes of a disease, unlike many current drugs which only relieve the
symptoms of a disease. Our efforts are focused in several major disease areas in
which abnormal gene regulation plays an important role in the onset and
progression of disease. These disease areas represent large commercial markets,
including cancer, inflammatory disease, osteoporosis, cardiovascular disease,
neurological disease and viral infections.
OUR DRUG DISCOVERY ENGINE
We have developed and integrated a large set of advanced target and drug
discovery technologies, which we refer to as our "drug discovery engine," to
accelerate the application of genomics to the discovery of important new classes
of gene regulating drugs. We first map gene regulating pathways, which are
networks of proteins inside cells that relay information to activate or suppress
genes. We next select specific gene regulating proteins, or gene switches,
within these pathways that control one or more genes that result in disease. We
then generate novel drugs that regulate these gene switches. We believe our
discovery and development capabilities provide us and our collaborators with a
highly advanced and competitive technology platform for target and drug
discovery.
To protect our discoveries, we pursue patent exclusivity for our drug
targets, drug leads and related drug candidates. We own or have exclusive
licenses to 38 issued United States and foreign patents and 87 pending United
States and foreign patents.
OUR ACCOMPLISHMENTS
Our drug discovery engine has enabled us to build a large and diverse
portfolio of gene regulating drug targets, drug leads and drug candidates. To
date, together with our collaborators, we have:
- advanced drug discovery programs in six major disease areas;
- explored and mapped 10 gene regulating pathways to identify the crucial
gene switches that control disease;
- identified 27 gene switches that we believe to be important targets for
treating disease;
- assembled a large and diverse screening library of more than 300,000
distinct compounds and natural products and a proprietary library
designed to be potentially effective inhibitors of gene switches;
- developed 29 drug discovery tests, or "screens," which allow us to search
rapidly through our compound library for new drugs;
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- identified 24 novel series of potent and selective drug leads that
regulate our disease targets;
- commenced evaluation of drug leads in 15 animal models that mimic human
diseases; and
- developed two drug candidates for which we expect to file Investigational
New Drug applications, or INDs, in 2000, assuming preclinical studies
required to begin human testing are favorably completed without delays.
Our first drug candidate, SP8490, is for treating breast cancer and other
cancers. In preclinical animal studies, SP8490, when orally administered, was
effective in treating breast cancer and demonstrated equal or superior efficacy
to tamoxifen, the current leading hormonal therapy for breast cancer. In
addition, SP8490 displayed a superior safety profile in animal models that
assess harmful side effects. The second drug candidate, NSP6783, is for
preventing or treating nerve damage caused by cancer chemotherapy. In animal
studies, this orally administered drug candidate provided significant protection
of peripheral nerves and their function in an animal model of nerve damage
caused by the chemotherapy drug taxol. In addition, we have discovered other
gene regulating drug leads that are effective in several animal models,
including models of rheumatoid arthritis, asthma, osteoporosis and epilepsy.
We are conducting our drug discovery and development programs both
independently and with our corporate collaborators: Nippon Kayaku, Ares-Serono,
Axys Pharmaceuticals and DuPont Pharmaceuticals. Currently, our corporate
collaborators fund significant portions of our research and development
expenditures. We have retained United States co-commercialization or
profit-sharing rights for the areas of cancer and inflammatory disease in three
of our four collaborative programs.
OUR STRATEGY
There are five important elements of our business and scientific strategy:
- We plan to advance our leadership position in the field of gene
regulating targets and drugs by continuing to enhance the capabilities
and scale of our discovery technologies.
- We plan to continue expanding our product portfolio by mapping multiple
gene regulating pathways, identifying multiple drug targets within each
of these gene regulating pathways and selecting those targets for drug
discovery that can be validated in multiple diseases.
- We will develop orally administered drugs for large disease markets where
current drugs do not adequately address these diseases.
- We intend to establish a United States franchise for drugs that treat
cancer and inflammatory disease.
- We will continue to seek to establish strategic collaborations with
leading pharmaceutical and biotechnology companies and will seek to
retain substantial United States commercial rights in those
collaborations in our franchise areas.
OUR HISTORY
We were incorporated in California in July 1992, and we intend to
reincorporate in Delaware prior to the completion of this offering. As of
December 31, 1999, we had 87 full-time employees with experienced scientists and
managers skilled in each phase of target and drug discovery. We had an
accumulated deficit as of December 31, 1999 of approximately $37.8 million and
expect to continue to incur losses for at least the next several years. Our
research laboratories and executive offices are located at 5555 Oberlin Drive,
San Diego, California 92121, and our telephone number at that address is (858)
558-7500. Our website is located at www.signalpharm.com. Information contained
on our website is not part of this prospectus.
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THE OFFERING
Common stock offered by Signal
Pharmaceuticals........................... 5,000,000 shares
Common stock to be outstanding after this
offering.................................. 19,236,756 shares
Use of proceeds........................... We intend to use the net
proceeds of this offering for
research and development, the
acquisition of research and
development technologies,
compound libraries and product
rights, capital investments,
repayment of debt and working
capital and general corporate
purposes.
Proposed Nasdaq National Market symbol.... SGNL
------------------------------
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999 and assumes
the completion of the sale of $2.0 million of our common stock to DuPont
Pharmaceuticals in a private transaction concurrent with the closing of this
offering at an assumed initial public offering price of $14.00 per share.
The number of shares of common stock to be outstanding after the offering
excludes:
- 1,493,607 shares subject to options outstanding as of December 31, 1999,
at a weighted average exercise price of $0.72 per share. Subsequent to
December 31, 1999, we granted options to purchase 589,375 shares of
common stock at a weighted average exercise price of $2.50 per share;
- 125,000 shares subject to warrants outstanding as of December 31, 1999,
at an exercise price of $4.20 per share;
- 1,417,018 additional shares that we could issue under our 2000 Equity
Incentive Plan;
- 250,000 shares that we could issue under our Non-Employee Directors'
Stock Option Plan; and
- 500,000 shares that we could issue under our Employee Stock Purchase
Plan.
------------------------------
Unless otherwise stated, information in this prospectus is based on the
following assumptions:
- the conversion of all our outstanding shares of preferred stock into
shares of common stock upon the closing of this offering;
- no exercise of the underwriters' over-allotment option;
- our reincorporation in Delaware and the filing of our amended and
restated certificate of incorporation prior to the closing of this
offering; and
- a 1-for-2 stock split to be effected prior to the completion of this
offering.
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Revenue....................................... $ 299 $ 3,933 $ 7,579 $15,414 $11,748
Expenses:
Research and development.................... 5,173 7,724 10,337 15,573 16,748
General and administrative.................. 1,937 2,471 2,791 4,798 3,011
------- ------- ------- ------- -------
Total expenses........................... 7,110 10,195 13,128 20,371 19,759
------- ------- ------- ------- -------
Loss from operations.......................... (6,811) (6,262) (5,549) (4,957) (8,011)
Interest income (expense), net................ 329 53 (191) 600 155
------- ------- ------- ------- -------
Net loss...................................... (6,482) (6,209) (5,740) (4,357) (7,856)
Imputed dividend on preferred stock........... -- -- -- -- (818)
------- ------- ------- ------- -------
Net loss applicable to common shareholders.... $(6,482) $(6,209) $(5,740) $(4,357) $(8,674)
======= ======= ======= ======= =======
Historical net loss per share applicable to
common shareholders, basic and diluted...... $ (9.12) $ (7.29) $ (5.65) $ (3.31) $ (5.29)
======= ======= ======= ======= =======
Weighted average shares....................... 711 852 1,016 1,318 1,641
======= ======= ======= ======= =======
Pro forma net loss per share applicable to
common shareholders, basic and diluted...... $ (0.63)
=======
Shares used in computing pro forma net loss
per share, basic and diluted................ 13,752
=======
DECEMBER 31, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 9,420 $ 75,670
Working capital............................................. 3,960 70,210
Total assets................................................ 14,539 80,789
Long-term obligations under capital leases and equipment
notes payable............................................. 1,805 1,805
Accumulated deficit......................................... (37,776) (37,776)
Total stockholders' equity.................................. 5,983 72,233
Please see note 1 of notes to our financial statements for an explanation
of the determination of the number of shares used in computing per share data.
The pro forma as adjusted balance sheet data reflect the net proceeds from
the sale by us of shares of common stock in this offering at an assumed initial
public offering price of $14.00 per share, after deducting underwriting
discounts and commissions and our estimated offering expenses, and our receipt
of $2.0 million from DuPont Pharmaceuticals in exchange for the 142,857 shares
of common stock to be issued in a private transaction concurrent with the
closing of this offering.
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RISK FACTORS
Any investment in shares of our common stock involves a high degree of
risk. You should consider carefully the following information about these risks,
together with the other information contained in this prospectus before you
decide to buy our common stock. If any of the following risks occurs, our
business, financial condition, results of operations and future growth prospects
would likely be materially adversely affected. In these circumstances, the
market price of our common stock could decline, and you may lose all or part of
the money you paid to buy our common stock.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR LONGER THAN WE ANTICIPATE, WE MAY
BE UNABLE TO CONTINUE OUR OPERATIONS.
We have generated operating losses since our inception in 1992 and as of
December 31, 1999 had an accumulated deficit of approximately $37.8 million. We
expect to continue to incur significant operating losses for the foreseeable
future as we continue to incur increasing costs related to research and
development, expansion of our operations and initiation of clinical trials.
Payments, if any, from corporate collaborators, interest income and governmental
grants are expected to be our only sources of revenue for the foreseeable
future. To date, we have not received any significant milestone revenue and have
received license fees and research and development payments of $41.2 million.
Revenue from commercial sales of products based upon any drug target or drug
lead that we may identify are not expected for a number of years, if at all. Any
such revenue will depend on our ability, alone or with others, to successfully
research, develop, obtain regulatory clearance for, manufacture and market our
products under development. The extent of our future losses may exceed our
expectations and jeopardize our ability to continue our operations.
BECAUSE OUR DRUG CANDIDATES ARE AT AN EARLY STAGE OF DEVELOPMENT, THERE IS A
HIGH RISK OF FAILURE.
We have no products that have received regulatory clearance for commercial
sale. In addition, we have no compounds in human testing, referred to as
clinical trials. All of our compounds are in the research or preclinical
development stage, and we face the risks of failure inherent in researching and
developing drugs based on new technologies. We may be unable to file INDs for
our two drug candidates, SP8490 and NSP6783, by the end of 2000 as we expect.
None of our compounds, including SP8490 and NSP6783, may ever enter clinical
trials, be commercialized or generate revenue in the future.
THE DRUG DISCOVERY AND DEVELOPMENT PROCESS IS HIGHLY SPECULATIVE AND WE, OR OUR
COLLABORATORS WORKING WITH US, MAY NEVER CREATE A COMMERCIAL DRUG.
The discovery and development of new drugs is highly uncertain and subject
to a number of significant risks which could prevent us or our collaborators
from ever creating a commercial drug. Drug leads and drug candidates that appear
to be promising at early stages of development may not enter clinical
development or reach the market for a number of reasons, including the
possibilities that the drug leads and drug candidates will:
- be found ineffective or cause harmful side effects during preclinical
testing or clinical trials;
- fail to receive necessary regulatory clearance;
- be difficult or expensive to manufacture on a commercial scale; or
- fail to generate market demand.
To our knowledge, no drugs based on genomics discoveries have been
commercialized. In addition, we are not aware of any marketed drugs that were
designed specifically to target gene regulating pathways in
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order to treat the underlying molecular causes of a disease. Our current and
potential discoveries of the gene regulating pathways associated with specific
diseases may not lead to the development or commercialization of drugs.
To date, none of the compounds generated by us or through our
collaborations has been approved for clinical testing. None may ever be
submitted for clinical testing. If we identify any potential products, either
independently or through our collaborations, they will face the following risks:
- our discovery and development programs may not be successfully initiated
or completed;
- any IND we file, including any INDs that we may file relating to SP8490
and NSP6783, may not be accepted by the FDA or other applicable
regulatory authorities;
- clinical trials may not commence or be completed as planned;
- required regulatory clearance may not be obtained on a timely basis, if
at all; or
- any products for which clearance is obtained may not be commercially
successful.
In addition, success in preclinical testing and early stage clinical trials
does not ensure that later clinical trials will be successful.
IF WE CANNOT MAINTAIN OUR CURRENT CORPORATE COLLABORATIONS OR ENTER INTO NEW
CORPORATE COLLABORATIONS, WE MAY NEVER DEVELOP OR COMMERCIALIZE PRODUCTS OR
ACHIEVE PROFITABILITY.
We rely, to a significant extent, on our corporate collaborators to provide
funding that supports our research and to conduct some research, preclinical and
clinical development, manufacturing and marketing. To date, approximately 90% of
the revenue that we have received has been from our collaborations. We expect
that a similar percentage of our revenue for the foreseeable future will be
generated by collaborations. If any of our corporate collaborators were to
breach or terminate their agreement with us or otherwise fail to conduct their
collaborative activities successfully and in a timely manner, the preclinical or
clinical development or commercialization of the affected drug candidates or
research programs could be delayed or terminated. In addition, we expect to rely
on our corporate collaborators for commercialization of some of our products.
Our ability to continue to fund our research and development programs,
maintain adequate capital reserves and, ultimately, achieve profitability will
be dependent upon our and our collaborators' ability to achieve specified
milestones under existing collaborations with Nippon Kayaku, Ares-Serono, Axys
and DuPont Pharmaceuticals or our ability to enter into additional
collaborations. We have not yet entered into collaborations for a number of our
existing or prospective programs. Even if a potential collaborator believes that
our technologies and research discoveries justify entering into an agreement
with us, its budgeting cycle, resources or other priorities may not permit a
timely collaboration. We also must compete with other companies for the limited
number of existing opportunities to enter into collaborative arrangements.
We may not be able to negotiate additional collaborative agreements in the
future on acceptable terms, if at all. In particular, potential collaborators
may be unwilling to enter into an agreement that allows us to retain rights in
our focus areas of cancer and inflammatory disease. In addition, current or
future collaborative agreements may not be successful. Finally, current or
future collaborators may pursue or develop alternative technologies either on
their own or in collaboration with others, including our competitors. In the
absence of such collaborative agreements, we may be required to delay or curtail
our research and development activities to a significant extent.
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To date, we have not received any significant milestone revenue and have
received license fees and research and development payments of $41.2 million.
These payments have not covered all of the expenses incurred in conducting our
business. Our future revenue will depend in part on our ability to receive
milestone payments and royalties triggered by the continued development and
commercialization of drugs by our collaborators, over which we have little or no
control.
We currently have arrangements with four corporate collaborators: Nippon
Kayaku, Ares-Serono, Axys Pharmaceuticals and DuPont Pharmaceuticals. If one of
these collaborators were to terminate its arrangement with us, it could cause a
substantial decrease in our revenue as well as potential delay or curtailment of
ongoing research and development activities. Our collaborations may generally be
terminated upon a breach by either party. Moreover, some of our collaborations
may be terminated by our collaborators if we fail to achieve specified research
and development milestones. We have in the past encountered, and may in the
future encounter, difficulty in satisfying some stated milestones under our
collaboration agreements.
There has been a significant number of recent business combinations among
our current and potential collaborators that have resulted in a reduced number
of potential collaborators. If business combinations involving our corporate
collaborators were to occur, the effect could be to cause delays in, reduce the
scope of, or terminate one or more of our corporate collaborations.
Some of our corporate or academic collaborators are conducting multiple
drug discovery and development efforts within each disease area that is the
subject of the collaboration with us. Generally, in each of our collaborations,
we have agreed not to conduct independently, or with any third party, any
research that is in conflict with the rights granted under the collaboration
agreement. Our collaborations may have the effect of limiting the areas of
research and development that we may pursue.
BECAUSE WE EXPECT TO GENERATE A SIGNIFICANT PERCENTAGE OF OUR FUTURE REVENUES
FROM CO-COMMERCIALIZATION AND PROFIT-SHARING ARRANGEMENTS, THE SUCCESS OR
FAILURE OF THESE ARRANGEMENTS WILL SIGNIFICANTLY IMPACT OUR FUTURE FINANCIAL
RESULTS.
Under three of our current collaborations, we have co-commercialization or
profit-sharing rights, and we plan to enter into additional collaborations that
provide us with similar rights. Because these types of arrangements are expected
to generate a larger percentage of our future revenues as compared with
collaborations under which we receive only royalties, these collaborations may
disproportionately affect our financial success. If these collaborations are not
successful, or if we decide to abandon or license some or all of these
co-commercialization or profit-sharing rights to third parties, we may not
achieve all of our financial objectives.
OUR COMPETITORS MAY BE ABLE TO DEVELOP AND MARKET PRODUCTS MORE QUICKLY OR THAT
ARE MORE EFFECTIVE THAN OURS, WHICH WOULD REDUCE OR ELIMINATE OUR COMMERCIAL
OPPORTUNITY.
The competition among pharmaceutical and biotechnology companies to
identify drug targets and drug candidates for development is intense and is
expected to increase. Our commercial opportunity will be reduced or eliminated
if our competitors develop and market products more quickly or that are more
effective, have fewer side effects, are easier to administer or are less
expensive than our product candidates. Other companies have product candidates
in clinical trials to treat most of the diseases for which we are seeking to
discover and develop product candidates. Even if we or our collaborators are
successful in developing effective drugs, our products may not compete
effectively with these products or other successful products.
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In addition, our competitors include fully integrated pharmaceutical
companies, biotechnology companies, universities and public and private research
institutions that have substantially greater capital resources, larger research
and development staffs and facilities, greater experience in drug development
and in obtaining regulatory clearance and greater manufacturing and marketing
capabilities than we do. These organizations also compete with us to:
- attract qualified personnel;
- attract parties for acquisitions, joint ventures or other collaborations;
and
- license the proprietary technology of institutions that is competitive
with the technology we are developing and applying.
BECAUSE WE MUST OBTAIN REGULATORY CLEARANCE TO TEST AND MARKET OUR PRODUCTS IN
THE UNITED STATES AND FOREIGN JURISDICTIONS, WE CANNOT PREDICT WHETHER OR WHEN
WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS.
The pharmaceutical industry is subject to stringent regulation by a wide
range of authorities in the geographic areas where we intend to develop and
commercialize products. A pharmaceutical product cannot be marketed in the
United States until it has completed rigorous preclinical testing and clinical
trials and an extensive regulatory clearance process implemented by the FDA.
Satisfaction of regulatory requirements typically takes many years, is dependent
upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources.
Before commencing clinical trials in humans, we must submit and receive
clearance from the FDA by means of an IND application. Clinical trials are
subject to oversight by institutional review boards and the FDA and:
- must be conducted in conformance with the FDA's good laboratory practice
regulations;
- must meet requirements for institutional review board oversight;
- must meet requirements for informed consent;
- must meet requirements for good clinical and manufacturing practices;
- are subject to continuing FDA oversight;
- may require large numbers of test subjects; and
- may be suspended by us or the FDA at any time if it is believed that the
subjects participating in these trials are being exposed to unacceptable
health risks or if the FDA finds deficiencies in the IND application or
the conduct of these trials.
Before receiving FDA clearance to market a product, we must demonstrate
that the product is safe and effective on the patient population that will be
treated. Data obtained from preclinical and clinical activities are susceptible
to varying interpretations that could delay, limit or prevent regulatory
clearances.Additionally, we have limited experience in conducting and managing
the clinical trials and manufacturing processes necessary to obtain regulatory
clearance.
If regulatory clearance of a product is granted, this clearance will be
limited to those disease states and conditions for which the product is
demonstrated through clinical trials to be safe and efficacious. We cannot
ensure that any compound developed by us, alone or with others, will prove to be
safe and efficacious in clinical trials and will meet all of the applicable
regulatory requirements needed to receive marketing clearance.
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Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. This foreign regulatory approval process includes all of the risks
associated with FDA clearance described above.
For additional information concerning regulatory clearance of our potential
products, see "Business -- Government Regulation."
IF WE REQUIRE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, WE MAY NEED TO RAISE
THESE FUNDS ON UNFAVORABLE TERMS, OR MAY NOT BE ABLE TO RAISE THESE FUNDS AT
ALL.
We will need substantial funds to continue the research, development and
testing of our potential products. If adequate funds are not available, or are
available on unfavorable terms, we may be required to delay, reduce in scope or
eliminate one or more of our programs. Our future capital requirements will
depend on, and could increase substantially as a result of, many factors,
including the following:
- progress in, and the costs of, our research and development programs;
- the scope, prioritization and number of programs;
- our acquisition and development of technologies;
- our acquisition of potential products;
- the progress of preclinical and clinical testing;
- our ability to enter into additional collaborations;
- our receipt of license, milestone, royalty and other payments from our
collaborations;
- the modification or termination of any of our current or future
collaborations;
- the time and costs involved in obtaining regulatory clearances;
- the costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent and other intellectual property claims;
- competing technological and market developments;
- the costs of securing manufacturing arrangements for clinical or
commercial production; and
- financial market conditions for debt and equity offerings.
We currently depend on our corporate collaborators for substantially all of
our research and development funding. As of December 31, 1999, we had received
approximately $54.3 million in license fees, research and development funding,
milestone payments and equity investments from our past and current
collaborators. We may not continue to receive funding under our existing
collaborative agreements and our existing or potential future collaborative
arrangements may not be adequate to fund our operations. We also may seek
alternative sources of financing or financing structures in the future.
Alternative financing arrangements may not be available, and even if available,
may not be adequate for the successful development of products.
We intend to raise additional funds through private or public financings,
research and development financings, collaborative relationships or other joint
venture relationships and may seek to fund some of our programs through other
financing sources. Because of our long-term capital requirements, we may seek to
raise money through equity whenever we deem market conditions to be favorable,
even if we do not need additional capital at that time. We do not know whether
any such additional funding will be available when needed or that available
financing will be on favorable terms. If we raise additional funds by issuing
equity or convertible debt securities, you may experience substantial dilution,
and debt financing, if available, may involve restrictive covenants.
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WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, WHICH MAY
MAKE IT DIFFICULT TO PREDICT OUR FUTURE PERFORMANCE.
Our quarterly operating results have fluctuated in the past and are likely
to do so in the future. If revenue declines or does not grow as anticipated, we
may not be able to correspondingly reduce our operating expenses. A large
portion of our expenses, including expenses for facilities, equipment,
contracted research and personnel, is relatively fixed. In addition, we plan to
significantly increase operating expenses in 2000. Failure to achieve
anticipated levels of revenue could therefore significantly harm our operating
results for a particular fiscal period. 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. Some
of the factors that could cause our operating results to fluctuate include:
- termination or reduction in the scope of our corporate collaborations;
- the success rate of our discovery and development efforts associated with
milestones and royalties;
- our ability to enter into new agreements with corporate collaborators or
to extend the terms of our existing corporate collaboration agreements;
- our ability to satisfy all applicable regulatory requirements; and
- general and industry-specific economic conditions that may affect our
corporate collaborators' research and development expenditures.
IF OUR TECHNOLOGIES OR THOSE OF OUR COLLABORATORS ARE ALLEGED OR FOUND TO
INFRINGE THE PATENTS OR PROPRIETARY RIGHTS OF OTHERS, WE MAY BE SUED OR HAVE TO
LICENSE THOSE RIGHTS FROM OTHERS ON UNFAVORABLE TERMS.
Our commercial success will depend significantly on our ability to operate
without infringing the patents and proprietary rights of third parties. Our
technologies along with our licensors' and our collaborators' technologies may
infringe the patents or proprietary rights of others. An adverse outcome in
litigation or an interference to determine priority or other proceeding in a
court or patent office could subject us to significant liabilities, require
disputed rights to be licensed from or to other parties or require us, our
licensors or our collaborators to cease using a technology necessary to carry
out research, development and commercialization.
Litigation to establish the validity of patents, to defend against patent
infringement claims of others and to assert infringement claims against others
can be expensive and time consuming, even if the outcome is favorable. An
outcome of any patent prosecution or litigation that is unfavorable to us or one
of our licensors or collaborators may have a material adverse effect on us. We
could incur substantial costs if we are required to defend ourselves in patent
suits brought by third parties, if we participate in patent suits brought
against or initiated by our licensors or collaborators or if we initiate such
suits. We may not have sufficient funds or resources in the event of litigation.
Additionally, we may not prevail in any such action.
A number of pharmaceutical companies, biotechnology companies, independent
researchers, universities and research institutions may have filed patent
applications or may have been granted patents that cover technologies similar to
the technologies owned, optioned by or licensed to us or our collaborators. For
instance, a number of patents may have been issued or may be issued in the
future on targets or their use in screens for evaluating the activity of
compounds on a specific drug target, called screening assays, that could prevent
us and our collaborators from developing screens using such targets, compounds
relating to such targets or relating to other aspects of technology that we
utilize or expect to utilize. In addition, we are unable to determine all of the
patents or patent applications that may materially affect our or our
collaborators' ability to make, use or sell any potential products.
We are aware of one issued United States patent relating to specific
methods for regulating gene expression. We may in the future have to prove we
are not infringing the patent or be required to obtain a
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license to the patent, and we do not know whether such a license will be
available on commercially reasonable terms, or at all. We are also aware of a
United States patent which has been issued to a third party claiming subject
matter relating to the NF-kB pathway which appears to overlap with technology
claimed in some of our pending NF-kB patent applications. We believe that one or
more interference proceedings will be initiated by the U.S. Patent and Trademark
Office to determine priority of invention for this subject matter. We cannot be
certain of the outcome of any such proceedings.
Any conflicts resulting from third-party patent applications and patents
could significantly reduce the coverage of the patents owned, optioned by or
licensed to us or our collaborators and limit our ability or that of our
collaborators to obtain meaningful patent protection. If patents are issued to
third parties that contain competitive or conflicting claims, we, our licensors
or our collaborators may be legally prohibited from pursuing research,
development or commercialization of potential products or be required to obtain
licenses to these patents or to develop or obtain alternative technology. We,
our licensors and or our collaborators may be legally prohibited from using
patented technology, may not be able to obtain any license to the patents and
technologies of third parties on acceptable terms, if at all, or may not be able
to obtain or develop alternative technologies.
In addition, like many biopharmaceutical companies, we may from time to
time hire scientific personnel formerly employed by other companies involved in
one or more areas similar to the activities conducted by us. We or these
individuals may be subject to allegations of trade secret misappropriation or
other similar claims as a result of their prior affiliations.
OUR ABILITY TO COMPETE MAY DECREASE IF WE DO NOT ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS.
Our commercial success will depend in part on our and our collaborators'
ability to obtain and maintain patent protection for our proprietary
technologies, drug targets and potential products and to effectively preserve
our trade secrets. Because of the substantial length of time and expense
associated with bringing potential products through the development and
regulatory clearance processes to reach the marketplace, the pharmaceutical
industry places considerable importance on obtaining patent and trade secret
protection. We seek patent protection for our proprietary technology, drug
targets and potential products. However, the patent positions of pharmaceutical
and biotechnology companies can be highly uncertain and involve complex legal
and factual questions. No consistent policy regarding the breadth of claims
allowed in biotechnology patents has emerged to date. Accordingly, we cannot
predict the type and breadth of claims allowed in these patents.
The degree of future protection for our proprietary rights is uncertain.
Many factors may affect our patent position, including whether:
- we were the first to make the inventions covered by each of our pending
patent applications;
- we were the first to file patent applications for these inventions;
- others will independently develop similar or alternative technologies or
duplicate any of our technologies;
- any of our pending patent applications will result in issued patents;
- any patents issued to us or our collaborators will provide a basis for
commercially viable products, will provide us with any competitive
advantages or will not be challenged by third parties;
- we will develop additional proprietary technologies that are patentable;
or
- the patents of others will have an adverse effect on our ability to do
business.
In addition to patent protection, we also rely on copyright protection,
trade secrets, know-how, continuing technological innovation and licensing
opportunities. In an effort to maintain the confidentiality and ownership of
trade secrets and proprietary information, we require our employees, consultants
and some
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collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with us. These agreements may not provide
meaningful protection for our trade secrets, confidential information or
inventions in the event of unauthorized use or disclosure of such information,
and adequate remedies may not exist in the event of such unauthorized use or
disclosure.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL AS NECESSARY, IT COULD DELAY OR IMPAIR THE QUALITY OF OUR PRODUCT
DEVELOPMENT PROGRAMS AND RESULT IN REDUCED RESEARCH AND DEVELOPMENT EFFORTS.
Our success is highly dependent on the principal members of our scientific
and management staff, as well as our scientific advisors and consultants. If we
lose the services of one or more of these individuals, it could prevent us from
advancing our technology, developing potential products or achieving
profitability. We may not be able to attract or retain qualified employees in
the future due to the intense competition for qualified personnel among
biotechnology and other technology-based businesses, particularly in the San
Diego area. If we are not able to attract and retain the necessary personnel to
accomplish our business objectives, we may experience constraints that will
adversely affect our ability to meet the demands of our collaborators in a
timely fashion or to support our internal research and development programs. In
particular, our product development programs depend on our ability to attract
and retain highly skilled scientists, including molecular biologists,
biochemists and engineers, and clinical and regulatory experts. Our employees
are "at-will" which means they may quit at any time and we may fire them at any
time.
Our planned activities will require additional expertise in specific
industries and areas applicable to the products developed through our
technologies. These activities will require the addition of new personnel,
including management, and the development of additional expertise by existing
management personnel.
WE DEPEND ON THIRD PARTIES TO PERFORM MANY PRECLINICAL AND CLINICAL DEVELOPMENT
ACTIVITIES, AND OUR DEVELOPMENT PROGRAMS MAY BE DELAYED OR TERMINATED IF THEY
FAIL TO PERFORM THEIR RESPONSIBILITIES COMPLETELY AND ON TIME.
We rely and will continue to rely in part on third parties to perform
preclinical and clinical development activities. Specifically, we expect to
contract with third parties for the manufacture of drug product, the conduct of
preclinical animal studies, including studies regarding biological activity,
safety, absorption, metabolism and elimination of drug candidates, and the
performance of clinical trials for safety and efficacy in humans. Our agreements
for contract preclinical and clinical development services place substantial
responsibilities on third parties for development of our drug candidates which
could result in delays in or termination of development if these third parties
fail to perform as expected. We may not be able to maintain any of these
existing relationships, or establish new ones on favorable terms, if at all. We
may not be able to enter into these arrangements without undue delays or
excessive expenditures. Furthermore, these third parties may not perform as
expected.
WE HAVE NO MANUFACTURING EXPERIENCE AND MUST RELY ON THIRD-PARTY MANUFACTURING.
To date, we have not manufactured any products for preclinical, clinical or
commercial purposes and do not have any manufacturing facilities. We currently
use third-party contract manufacturers, and may in the future use our corporate
collaborators, for the production of materials for preclinical and clinical
trials and for the manufacture of future products for commercialization. If we
are unable to secure such outside manufacturing capabilities, we will not be
able to conduct preclinical product development, clinical trials or
commercialize our potential products as planned.
WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR GROWTH.
We will need to expand and effectively manage our operations and facilities
in order to successfully complete our existing corporate collaborative
agreements, facilitate additional collaborations and pursue future
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internal research, development and commercialization efforts. We expect to
significantly increase our rate of growth to meet our strategic objectives. If
our growth accelerates, it will place a strain on us. In addition, we will be
required to expand our management capabilities, enhance our operating and
financial systems and expand our facilities to manage our growth effectively. If
we continue to grow, it is possible that the number and skills of management and
scientific personnel, systems and facilities currently in place may not be
adequate.
OUR BUSINESS INVOLVES THE USE OF HAZARDOUS MATERIALS WHICH COULD CAUSE US TO
INCUR SUBSTANTIAL COSTS IN THE EVENT SUCH MATERIALS ARE NOT STORED, HANDLED OR
DISPOSED OF CORRECTLY.
Our research and development processes involve the controlled use of
hazardous materials, including infectious biological materials, chemicals and
various radioactive compounds. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of hazardous materials and waste products. The risk of accidental contamination
or injury from these materials cannot be completely eliminated. In the event of
an accident, we could be held liable for any damages that result and any such
liability could exceed our resources and result in lengthy interruption of
business operations. If an accident occurred, we would likely incur significant
costs to comply with environmental laws and regulations in the future.
OUR STOCK PRICE WILL LIKELY BE VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN.
The market prices of technology companies, particularly life science
companies, have been highly volatile. Our stock may be affected by this type of
market volatility, as well as by our own performance. The following factors,
among other risk factors, may have a significant effect on the market price of
our common stock:
- developments in our relationships with current or future corporate
collaborators;
- announcements of technological innovations or new products by us or our
competitors;
- developments in patent or other proprietary rights;
- fluctuations in our operating results;
- litigation initiated by or against us;
- future royalties and profit-sharing from product sales, if any, by our
collaborators;
- developments in domestic and international governmental policy or
regulation; and
- economic and other external factors or other disaster or crisis.
WE MAY BE SUED FOR PRODUCT LIABILITY AND OUR INSURANCE COVERAGE MAY NOT BE
SUFFICIENT.
We may be held liable if any product we or our collaborators develop, or
any product which is made with the use of any of our technologies, causes injury
or is found otherwise unsuitable during product testing, manufacturing,
marketing or sale. We currently have no product liability insurance. When we
attempt to obtain product liability insurance, this insurance may be expensive,
or may not fully cover our potential liabilities. Inability to obtain sufficient
insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could prevent or inhibit the
commercialization of products developed by us or our collaborators. If we are
sued for any injury caused by our products, our liability could exceed our total
assets.
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THE CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS MAY PREVENT OTHER STOCKHOLDERS FROM INFLUENCING
SIGNIFICANT CORPORATE DECISIONS AND DEPRESS OUR STOCK PRICE.
After this offering, our executive officers, directors and stockholders
with at least 5% of our stock will control approximately 54.1% of our
outstanding common stock. If these officers, directors and principal
stockholders act together, they will be able to influence significantly and
possibly control matters requiring approval by our stockholders, including
approvals of amendments to our certificate of incorporation, mergers, a sale of
all or substantially all of our assets, going private transactions and other
fundamental transactions. They may also be able to control the election of our
board of directors members. This concentration of ownership could depress our
stock price.
THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND YOU MAY NOT BE ABLE TO
RESELL YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE.
Prior to this offering, there has been no public market for shares of our
common stock. An active, liquid trading market may not develop following
completion of this offering, or if developed, may not be maintained. We will
determine the initial public offering price for the shares through negotiations
between us and representatives of the underwriters. This price may not be
indicative of prices that will prevail later in the trading market. The market
price of our common stock may decline below the initial public offering price,
and you may not be able to resell your shares at or above the initial public
offering price.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO YOU.
Our certificate of incorporation, our bylaws and Delaware law could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to you. These provisions could discourage potential takeover attempts
and could adversely affect the market price of our common stock. Because of
these provisions, you might not be able to receive a premium on your investment.
These provisions:
- authorize our board of directors, without stockholder approval, to issue
up to 5,000,000 shares of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and prevent a takeover attempt;
- limit who has the authority to call a special meeting of our
stockholders;
- prohibit stockholder action by written consent, requiring stockholder
actions to be taken at stockholder meetings;
- establish advance notice requirements for nominations for election to the
board of directors and for proposals to be acted upon at stockholder
meetings; and
- establish staggered terms for the members of the board of directors.
Any of the provisions described above could delay or make more difficult
transactions involving a change in control of us or our management.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in the
public market after the closing of this offering, or the perception that these
sales could occur. These sales could make it more difficult for us to sell
equity securities in the future at a time and price that we deem appropriate. In
addition, the market price of our common stock could decline if we sell
additional equity securities in connection with financings or collaborative
arrangements.
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YOUR INVESTMENT WILL BE IMMEDIATELY DILUTED.
We expect that initial public offering price to be substantially higher
than the net tangible book value per share of the common stock. Therefore, if
you purchase shares of our common stock in this offering, you will incur
immediate and substantial dilution in pro forma net tangible book value of
$10.28 per share. You may incur additional dilution if the holders of
outstanding options or warrants exercise those options or warrants. Additional
information regarding the dilution to investors in this offering is included in
this prospectus under the headings "Dilution" and "Shares Eligible for Future
Sale."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These include statements about our expectations, plans,
objectives, assumptions or future events. In some cases, you can identify
forward-looking statements by terminology such as "anticipate," "estimate,"
"plans," "projects," "continuing," "ongoing," "expects," "management believes,"
"we believe," "we intend" and similar expressions. These statements involve
estimates, assumptions and uncertainties that could cause actual results to
differ materially from those expressed for the reasons described in this
prospectus. You should not place undue reliance on these forward-looking
statements.
The forward-looking statements speak only as of the date on which they are
made, and we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the statement is made or
to reflect the occurrence of unanticipated events. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
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USE OF PROCEEDS
Our proceeds from the sale of the 5,000,000 shares of common stock we are
offering are estimated to be $66.3 million ($76.0 million if the underwriters'
over-allotment option is exercised in full), after deducting the underwriting
discount and our estimated offering expenses.
We intend to use approximately $8.7 million of the net proceeds from this
offering to fund drug discovery and development to be conducted during 2000,
including internal discovery programs and joint research and development with
corporate and academic collaborators. We also intend to use the net proceeds
from this offering for future research and development, the acquisition of
research and development technologies and compound libraries, manufacture of
drug candidates, capital investments, repayment of debt, working capital and
general corporate purposes. We also may use a portion of the net proceeds to
fund acquisitions of product or target rights or businesses, although we have no
current agreements or commitments for any such acquisition. The amounts and
timing of these expenditures will vary depending on a number of factors,
primarily the amount and timing of revenues from our current or future
collaborators, including amendments of the terms of such collaborative
arrangements. Pending the uses described above, we will invest the net proceeds
of this offering in short- and intermediate-term, interest-bearing,
investment-grade securities.
We believe the net proceeds of this offering, together with our existing
capital resources, interest income and committed revenue from our existing
collaborations, should be sufficient to fund our anticipated operating expenses
and capital requirements until at least the end of 2001. We will continue to
expend substantial resources for the expansion of drug discovery and
development, including costs associated with preclinical testing and clinical
trials. We will be required to expend substantial funds in the course of
completing required additional development, preclinical testing and clinical
trials of and regulatory clearance for product candidates, if any. Our future
liquidity and capital requirements will depend on many factors, including:
- continued scientific progress in our research and development programs;
- the size and complexity of these programs;
- the retention of existing and establishment of future collaborative
arrangements, if any;
- the scope and results of preclinical testing and clinical trials;
- the time and expense involved in obtaining regulatory clearances, if any;
- competing technological and marketing developments;
- the time and expense of filing and prosecuting patent applications and
enforcing patent claims; and
- other factors beyond our control.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain our future earnings, if any, for the development of
our business and do not anticipate paying any cash dividends in the foreseeable
future. In addition, the terms of our secured loan from MMC/GATX Partnership No.
1 prohibit us from paying any dividends and making any distributions and limit
our ability to repurchase stock.
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CAPITALIZATION
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes to those statements included elsewhere in this
prospectus.
DECEMBER 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
Long-term obligations, less current portion................. $ 1,805 $ 1,805 $ 1,805
Stockholders' equity:
Convertible preferred stock, $.001 par value; 12,371,319
shares authorized and 12,246,296 shares issued and
outstanding, actual; 5,000,000 shares authorized and no
shares issued and outstanding, pro forma; 5,000,000
shares authorized and no shares issued or outstanding,
pro forma as adjusted.................................. 12 -- --
Common stock, $.001 par value; 17,644,354 shares
authorized and 1,847,603 shares issued and outstanding,
actual; 50,000,000 shares authorized and 14,093,899
shares issued and outstanding, pro forma; 50,000,000
shares authorized and 19,236,756 shares issued and
outstanding, pro forma as adjusted..................... 2 14 19
Additional paid-in capital................................ 45,112 45,112 111,357
Deferred compensation..................................... (1,272) (1,272) (1,272)
Notes receivable from stockholders........................ (95) (95) (95)
Accumulated deficit....................................... (37,776) (37,776) (37,776)
-------- -------- --------
Total stockholders' equity........................... 5,983 5,983 72,233
-------- -------- --------
Total capitalization................................. $ 7,788 $ 7,788 $ 74,038
======== ======== ========
This table sets forth as of December 31, 1999:
- our actual capitalization;
- our pro forma capitalization, assuming the conversion of all of our
outstanding preferred stock into common stock in conjunction with the
closing of this offering;
- our pro forma as adjusted capitalization which also gives effect to the
sale of 5,000,000 shares of our common stock in this offering and the
sale of 142,857 shares of common stock to DuPont Pharmaceuticals in a
private transaction concurrent with the closing of this offering at an
assumed initial public offering price of $14.00 per share after deducting
estimated underwriting discounts and commissions and estimated expenses
of this offering.
The number of shares of common stock to be outstanding after this offering
assumes no exercise of the underwriters' over-allotment option. The number of
shares to be outstanding after this offering is based on the number of shares
outstanding as of December 31, 1999, and excludes:
- 1,493,607 shares subject to options outstanding as of December 31, 1999,
at a weighted average exercise price of $0.72 per share. Subsequent to
December 31, 1999, we granted options to purchase 589,375 shares of
common stock at a weighted average exercise price of $2.50 per share;
- 125,000 shares subject to warrants outstanding as of December 31, 1999,
at an exercise price of $4.20 per share;
- 1,417,018 additional shares that we could issue under our 2000 Equity
Incentive Plan;
- 250,000 shares that we could issue under our Non-Employee Directors'
Stock Option Plan; and
- 500,000 shares that we could issue under our Employee Stock Purchase
Plan.
Of the total shares outstanding, 128,911 shares are subject to our right of
repurchase as of December 31, 1999.
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DILUTION
Our pro forma net tangible book value as of December 31, 1999 was $5.4
million, or $.38 per share, after giving effect to the automatic conversion of
all outstanding shares of preferred stock into an aggregate of 12,246,296 shares
of common stock, which will occur upon the closing of the offering. After giving
effect to the sale of the common stock in this offering and the sale of 142,857
shares to DuPont Pharmaceuticals in a private transaction concurrent with the
closing of this offering at an assumed initial public offering price of $14.00
per share, after deducting the estimated underwriting discount and offering
expenses, the adjusted pro forma net tangible book value at December 31, 1999,
would have been $71.6 million, or $3.72 per share.
Pro forma net tangible book value per share before the offering has been
determined by dividing pro forma net tangible book value (total tangible assets
less total liabilities) by the pro forma number of shares of common stock
outstanding at December 31, 1999. The offering will result in an increase in pro
forma net tangible book value per share of $3.34 to existing stockholders and
dilution in pro forma net tangible book value per share of $10.28 to new
investors who purchase shares in the public offering. Dilution is determined by
subtracting pro forma net tangible book value per share after the public
offering and the sale of shares to DuPont Pharmaceuticals from the assumed
initial public offering price of $14.00 per share. The following table
illustrates this dilution:
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $0.38
Increase per share attributable to new investors.......... 3.34
-----
Pro forma net tangible book value per share after the public
offering and the sale of shares to DuPont
Pharmaceuticals........................................... 3.72
------
Net tangible book value dilution per share to new
investors............................................. $10.28
======
If the underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share after this offering would be $4.07 per
share, the increase in net tangible book value per share to existing
stockholders would be $3.69 per share and the dilution in net tangible book
value to new investors would be $9.93 per share.
The following table summarizes, on a pro forma basis as of December 31,
1999, the differences between the total consideration paid and the average price
per share paid by the existing stockholders and the new investors with respect
to the number of shares of common stock purchased from us based on an assumed
public offering price of $14.00 per share:
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
Existing stockholders........... 14,093,899 73% $ 41,648,504 37% $ 2.96
New investors................... 5,142,857 27 71,999,998 63 $14.00
---------- --- ------------ ---
Total......................... 19,236,756 100% $113,648,502 100%
========== === ============ ===
These tables assume no exercise of stock options and warrants outstanding
at December 31, 1999 and include 128,911 shares subject to repurchase by us at
$0.46 per share.
At December 31, 1999, there were 1,493,607 shares of common stock issuable
upon exercise of outstanding stock options at a weighted average exercise price
of $0.72 per share. Subsequent to December 31, 1999, we granted options to
purchase 589,375 shares of common stock at a weighted average exercise price of
$2.50 per share. In addition, 125,000 shares of Series C-1 preferred stock are
issuable upon exercise of outstanding warrants at an exercise price of $4.20 per
share.
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SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to our statements
of operations for the years ended December 31, 1997, 1998 and 1999 and with
respect to our balance sheet at December 31, 1998 and 1999, are derived from the
financial statements that have been audited by Ernst & Young LLP, independent
auditors, which are included elsewhere herein and are qualified by reference to
such financial statements. Our statement of operations data for the years ended
December 31, 1995 and 1996 and the balance sheet data at December 31, 1995, 1996
and 1997 have been derived from the financial statements audited by Ernst &
Young LLP, our independent auditors, which are not included herein. The selected
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and notes thereto appearing elsewhere in this
prospectus.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Collaborative agreements:
Related party................................. $ -- $ -- $ 250 $ 3,000 $ 4,525
Unrelated parties............................. -- 3,586 7,065 12,027 6,696
Grants........................................... 299 347 264 387 527
------- ------- ------- ------- -------
Total Revenue............................ 299 3,933 7,579 15,414 11,748
------- ------- ------- ------- -------
Expenses:
Research and development......................... 5,173 7,724 10,337 15,573 16,748
General and administrative....................... 1,937 2,471 2,791 4,798 3,011
------- ------- ------- ------- -------
Total Expenses.............................. 7,110 10,195 13,128 20,371 19,759
------- ------- ------- ------- -------
Loss from operations............................... (6,811) (6,262) (5,549) (4,957) (8,011)
Interest income.................................... 453 187 326 1,052 607
Interest expense................................... (124) (134) (517) (452) (452)
------- ------- ------- ------- -------
Net loss........................................... (6,482) (6,209) (5,740) (4,357) (7,856)
Imputed dividend on preferred stock................ -- -- -- -- (818)
------- ------- ------- ------- -------
Net loss applicable to common shareholders......... $(6,482) $(6,209) $(5,740) $(4,357) $(8,674)
======= ======= ======= ======= =======
Historical net loss per share applicable to common
shareholders, basic and diluted.................. $ (9.12) $ (7.29) $ (5.65) $ (3.31) $ (5.29)
======= ======= ======= ======= =======
Weighted average shares............................ 711 852 1,016 1,318 1,641
======= ======= ======= ======= =======
Pro forma net loss per share applicable to common
shareholders, basic and diluted.................. $ (0.63)
=======
Number of shares used in computing pro forma net
loss per share, basic and diluted................ 13,752
=======
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DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $ 4,211 $ 5,460 $ 20,866 $ 12,952 $ 9,420
Working capital............................... 3,616 2,606 15,379 9,123 3,960
Total assets.................................. 6,866 9,047 23,838 19,558 14,539
Long-term obligations under capital leases and
equipment notes payable..................... 513 2,746 1,548 2,460 1,805
Accumulated deficit........................... (12,796) (19,005) (24,745) (29,102) (37,776)
Total stockholders' equity.................... 5,574 1,512 15,164 12,125 5,983
Please see note 1 of notes to our financial statements for an explanation
of the determination of the number of shares used in computing per share data.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were incorporated in July 1992 and have devoted substantially all of our
resources since that time to research and development in order to identify
proprietary drug targets and discover novel small molecule drugs that regulate
genes associated with disease. Through both internally funded programs and in
conjunction with our corporate collaborators, we are working to identify gene
regulating drug targets and potential products for treating cancer, inflammatory
disease, bone metabolic disease, cardiovascular disease, neurological disease
and viral infections. We have incurred significant losses since inception, with
an accumulated deficit of $37.8 million as of December 31, 1999, due primarily
to ongoing expenditures related to our research and development programs. We
expect to continue to incur substantial increases in expenditures and operating
losses for at least the next several years as we expand our target and drug
discovery and development efforts. Such expansion will result in increases in
research and development expenses, general and administrative expenses and
related capital expenditures. In addition, we have granted stock options at
exercise prices below the assumed initial public offering price, which we expect
will result in substantial and recurring non-cash compensation expense over the
next several years. In February 2000, we granted options to purchase 589,375
shares which will result in additional deferred compensation of approximately
$6.0 million. Our results of operations have fluctuated from period to period
and likely will continue to fluctuate substantially in the future based upon the
timing and composition of funding under various collaborative agreements, the
initiation, expansion and termination of research and development programs, the
acquisition of technologies, compound libraries and product rights, as well as
the progress of our research and development programs. Results of operations for
any period may be unrelated to results of operations for any other period. In
addition, historical results should not be viewed as indicative of future
operating results.
A key element of our strategy is to enter into collaborations with
pharmaceutical and biotechnology companies in order to enhance our target and
drug discovery programs and to fund our capital requirements. Our principal
sources of revenue for the next several years are expected to consist of license
fees and upfront payments, research and development funding and milestone
payments under such collaborations, government grants, if any, and interest
income. To date, our revenue has been due primarily to arrangements with the
following collaborators: Tanabe, which was entered into in March 1996 and
concluded in March 1998; Organon, which was entered into in July 1996 and
concluded in August 1999; Roche Bioscience, which was entered into in August
1996 and concluded in August 1999; Ares-Serono, which was entered into in
November 1997; DuPont Pharmaceuticals, which was entered into in December 1997;
Nippon Kayaku, which was entered into in February 1998; and Axys
Pharmaceuticals, which was entered into in October 1999.
Under our collaborative arrangements, we have received payments of $54.3
million to date in license fees, research and development payments and equity
investments, of which $37.1 million has been recognized as revenue. To date, we
have received an equity milestone of $1.0 million and license fees, upfront
payments and research and development payments of $41.2 million. In 1997, we
recognized aggregate revenue of $725,000 in license fees and upfront payments,
$6.6 million in research and development payments from our collaborators and
$264,000 in government grants. In 1998, we recognized aggregate revenue of $3.1
million in license fees and upfront payments, $11.9 million in research
development payments from our collaborators and $387,000 in government grants.
In 1999, we recognized aggregate revenue of $1.9 million in license fees and
upfront payments, $9.4 million in research and development payments from our
collaborators and $528,000 in government grants.
Under the terms of our collaborations described above, as of December 31,
1999, our corporate collaborators had agreed to provide future research funding
of up to approximately $10.4 million over a two-year period, including $1.5
million subject to possible cancellation, as well as additional payments upon
the achievement of specific research and development milestones and royalties or
profit-sharing upon the commercialization of any products.
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RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenue. Revenue for the year ended December 31, 1999 decreased to $11.7
million from $15.4 million for the year ended December 31, 1998. The decrease
was due primarily to the termination of the Tanabe agreement in 1998 which
resulted in decreased revenues of $4.1 million. Revenue for the year ended
December 31, 1998 increased to $15.4 million from $7.6 million for the year
ended December 31, 1997. The increase was due primarily to additional
collaborative agreements that were in place during 1998 and an amendment to the
collaborative agreement with Tanabe which resulted in recognition of additional
research and development revenue of $6.4 million and $840,000, respectively.
Research and Development Expenses. Our research and development expenses
for the year ended December 31, 1999 increased to $16.7 million from $15.6
million for the year ended December 31, 1998. The increase in 1999 was due
primarily to increased salary and relocation expense of $857,000, resulting from
the hiring of additional research and development personnel and increased
product development expense of $576,000. Research and development expenses for
the year ended December 31, 1998 increased to $15.6 million from $10.3 million
for the year ended December 31, 1997. The increase was due primarily to
increased expenses for salaries and relocation of $1.7 million resulting from
the hiring of additional research and development personnel, the purchase of
materials of $1.2 million for expansion of our research programs, facilities
expansion of $506,000, depreciation expense of $500,000, amortization of
deferred compensation of $376,000, increased travel expenses of $198,000 and the
initiation of additional academic research collaborations of $184,000.
General and Administrative Expenses. Our general and administrative
expenses for the year ended December 31, 1999 decreased to $3.0 million from
$4.8 million in 1998. The decrease was due primarily to reductions in fees for
professional services of $1.0 million, equipment rentals of $245,000 and salary
expense of $185,000 due to lower general and administrative headcount. Our
general and administrative expenses for the year ended December 31, 1998
increased to $4.8 million from $2.8 million for the year ended December 31,
1997. The increase was due primarily to increased fees for professional services
of $827,000, and increased salary expense of $591,000 resulting from the hiring
of additional personnel, amortization of deferred compensation of $231,000 and
facilities expansion of $160,000.
Interest Income (Expense), Net. Net interest income (expense) for the years
ended December 31, 1999, 1998 and 1997 was $155,000, $600,000 and ($191,000),
respectively. The decrease in net interest income in 1999 from 1998 was due
primarily to lower average cash balances. The increase in net interest income in
1998 from 1997 was due primarily to higher average cash balances.
Imputed Dividend. Due to our achievement of a certain milestone in 1999,
DuPont Pharmaceuticals purchased 144,354 shares of our Series F-1 Preferred
Stock for total cash proceeds of $1.0 million. We recognized an imputed dividend
of $818,487 to reflect a beneficial conversion feature on these preferred
shares.
Income Taxes. At December 31, 1999, we had federal and state net operating
loss carryforwards of approximately $30.6 million and $11.7 million,
respectively. The federal tax loss carryforwards will begin expiring in 2007,
unless previously used, and the state tax loss carryforwards began expiring in
1998. We have provided a 100% valuation allowance against the related deferred
tax assets as realization of such tax benefits is not assured. Future
utilization of these carryforwards may be limited in any one fiscal year under
the Internal Revenue Code and similar state provisions; however, the annual
limitation will not prevent the entire amount of the carryforwards from being
used during the carryforward period. Therefore, we do not believe any such
limitation will have a material effect upon the utilization of these
carryforwards.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through private
placements of preferred stock, funds provided under the Tanabe, Organon, Roche
Bioscience, Ares-Serono, DuPont Pharmaceuticals, Nippon Kayaku and Axys
Pharmaceuticals collaborative agreements, and, to a lesser extent, through debt
and equipment financing, interest income and government research grant revenue.
As of December 31, 1999, we have received $40.8 million in net proceeds from the
sales of equity securities, $41.2 million under our collaborative agreements,
$7.0 million in debt and equipment financing, $2.9 million in interest income
and $1.8 million in research grants from the NIH. As of December 31, 1999, we
had approximately $9.4 million in cash, cash equivalents and short-term
investments.
Net cash used in operations was $2.9 million, $4.8 million and $2.3 million
in 1999, 1998 and 1997, respectively. Net cash used in operations decreased in
1999 from 1998 due primarily to initial license fees and upfront payments and
research and development payments under our collaborative agreements. Net cash
used in operations increased in 1998 from 1997 due primarily to prepayment by
our corporate collaborators of a portion of research and development funding for
1998 in 1997.
As of December 31, 1999, we have purchased with cash $5.1 million in
property and equipment, primarily for facility improvements and laboratory and
office equipment. We have financed approximately $4.9 million of our equipment
through capital leases and equipment note obligations.
At December 31, 1999, we had outstanding debt of $416,000 under a secured
promissory note that we issued on December 2, 1996. The principal amount of this
secured promissory note is payable in monthly installments of $88,334, with the
final monthly payment scheduled for May 31, 2000. The promissory note is secured
by substantially all of our assets except for our intellectual property. The
terms of the loan limit our ability to incur additional debt, repurchase our
stock and pay dividends. We were in compliance with all covenants under the
arrangement as of December 31, 1999.
We believe the net proceeds of this offering and the sale of $2.0 million
of shares of common stock at a price per share equal to the initial public
offering price to DuPont Pharmaceuticals in a private transaction concurrent
with the closing of this offering, together with our existing capital resources,
committed revenue from our existing collaborations and interest income should be
sufficient to fund our anticipated operating expenses and capital requirements
at least through the end of the year 2001. These funding requirements include
continued and increased expenditures for research and development activities, as
well as expenditures related to facility improvements, the purchase of
additional laboratory and office equipment, the purchase of technology, compound
libraries and product rights, the repayment of debt, working capital and general
corporate purposes. We have not entered into any formal commitments to use the
proceeds from the offering for increased personnel, capital expenditures or any
other purpose. We cannot assure you that changes in our research and development
plans and collaborations, the acquisition of additional technology, compound
libraries and product rights or other changes affecting our operating expenses
or use of capital will not result in the expenditure of available resources
before such time. The costs associated with the clinical development of new
drugs are substantial and generally increase over time. If we are successful in
advancing one or more drug candidates into clinical development, our need for
additional capital will increase substantially.
In any event, we will need to raise substantial additional capital to fund
our operations in future periods. We intend to seek additional funding through
collaborative arrangements, public or private equity or debt financing, property
and equipment financing or other financing sources that may be available. If
additional funds are raised through the sale of equity securities, substantial
dilution to you may result. Debt financing, if available, may involve
restrictive covenants. Further, we cannot assure you that additional financing
will be available on acceptable terms, if at all. If adequate funds are not
available, we may be required to delay, or reduce the scope of, or eliminate one
or more of our research or development programs or to obtain funds through
strategic collaborations that are on unfavorable terms or that may require us to
relinquish rights to some of our technologies, product candidates, products or
marketing territories that we would otherwise seek to retain. Our failure to
raise capital when needed could have a material adverse effect on our business,
financial condition and results of operations.
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New Accounting Pronouncements. We expect to adopt SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, effective January 1, 2001.
SFAS No. 133 will require us to recognize all derivatives on the balance sheet
at fair value. We do not anticipate that the adoption of the SFAS No. 133 will
have a significant effect on our results of operations or financial position.
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BUSINESS
OVERVIEW
Signal Pharmaceuticals is a biopharmaceutical company focused on
discovering, developing and commercializing new classes of "small molecule"
drugs, which are drugs that can be taken in pill form, that regulate
disease-associated genes. We believe our approach can convert the enormous
amount of valuable information coming from genomics initiatives into new classes
of superior drugs. Our powerful drug discovery engine enables us to identify and
pursue numerous potential gene-regulating drug targets across multiple diseases
and to rapidly identify drugs for development. Our efforts are focused in
several major disease areas in which abnormal gene regulation plays an important
role in the development of disease. These disease areas represent large
commercial markets, including cancer, inflammatory disease, osteoporosis,
cardiovascular disease, neurological disease and viral infections.
We have developed and integrated a large set of advanced target and drug
discovery technologies to accelerate the application of genomics to the
discovery of important new classes of gene regulating drugs. This drug discovery
engine consists of:
- advanced cellular, molecular and genomic technologies that we use to
discover clinically important drug targets;
- proprietary automated biochemical and cell-based drug discovery systems,
known as high throughput screening assays, and diverse libraries of
compounds that we use to rapidly identify small molecule compounds that
are active against multiple drug targets;
- our proprietary library of compounds having attractive drug-like
properties and designed to selectively inhibit novel classes of gene
switches; and
- proprietary three-dimensional models of drug targets, combined with
advanced chemistry technologies, to efficiently generate potent and
selective small molecule compounds, or drug leads, and to move these
forward as drug candidates into preclinical evaluation and clinical
development.
Our drug discovery engine has enabled us to build a large and diverse
portfolio of drug targets, drug leads and drug candidates. To date, together
with our collaborators, we have:
- identified 27 drug targets in 10 major gene regulating pathways;
- developed 29 drug discovery screens;
- identified 24 novel series of drug leads and commenced evaluation of a
number of these drug leads in 15 animal models that mimic human diseases;
and
- developed two drug candidates which currently are in late-stage
preclinical development.
We are conducting our drug discovery and development programs both
independently and with our corporate collaborators: Nippon Kayaku, Ares-Serono,
Axys Pharmaceuticals and DuPont Pharmaceuticals. Currently, our corporate
collaborators fund significant portions of our research and development
expenditures. In three of our four collaborative programs, we have retained
United States co-commercialization or profit-sharing rights for the areas of
cancer and inflammatory disease.
BACKGROUND
GENES AND DISEASE
The human body contains an estimated 140,000 genes. Genes control all
cellular functions responsible for maintaining human health by serving as
blueprints for the production of proteins in cells, a process known as gene
expression. Proteins, which control a cell's biological function, include
hormones, enzymes and cytokines, which are proteins secreted by cells that
mediate the inflammatory response. Critical cell functions regulated by proteins
include growth, differentiation and survival.
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Recent advances in cellular and molecular biology have shown that
malfunctions in gene regulation either cause or predispose humans to most
diseases. These malfunctions cause cells to produce inappropriate amounts or
types of proteins. For example, the uncontrolled proliferation of cells
characteristic of cancer and inflammatory diseases is the result of
over-activation of multiple genes and the proteins they produce, such as
cytokines and enzymes. Conversely, under-activation of critical genes and their
protein products, such as tumor suppressors and growth factors, also may give
rise to disease, including cancer and neurological disorders. Many complex
diseases are caused by the abnormal activity of not just one but multiple genes.
Such complex diseases include cancer, obesity, diabetes and inflammatory,
cardiovascular and neurological diseases.
REGULATION OF GENES BY GENE SWITCHES
Gene regulation is a highly controlled process in which specific sets of
genes are switched on and off in select tissues to maintain the body's essential
functions. Genes are controlled by networks of proteins inside cells which relay
information through pathways from a cell's surface to its nucleus where genes
are expressed. These pathways consist of several large and distinct classes of
gene regulating proteins, or gene switches, which include transcription factors,
kinases and ligases. Transcription factors are molecular switches that bind to
the regions of genes that control the level and duration of gene expression and
protein production. Kinases are enzymes that transmit information within cells
and ultimately lead to gene expression. Ligases control the proper levels of
gene regulating proteins in cells. Each of these three classes of gene switches
can control not just one but multiple genes that contribute to disease.
Therefore, drugs designed to target these gene switches at pivotal points in a
gene regulating pathway can have a major impact on the subsequent expression of
entire sets of genes that contribute to disease.
[GRAPHIC]
Genomics is the large-scale identification and sequencing of the genes that
comprise the human genome. Currently this information is being compiled in
databases, and the sequencing of the entire human genome is nearing completion.
This genomic database provides a starting point for understanding the underlying
role of genes in disease, but by itself is inadequate to identify key
disease-related gene switches. To realize the
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substantial potential of genomics initiatives, key gene switches involved in
disease need to be identified in order to permit the rapid development of
superior drug therapies.
CURRENT LIMITATIONS OF DRUG DISCOVERY AND GENOMICS
Conventional drug discovery efforts principally are focused on identifying
compounds that affect targets outside the cell, such as cell surface receptors
and secreted proteins, and provide only symptomatic relief without treating the
underlying molecular causes of disease. For example, in rheumatoid arthritis,
aspirin and related compounds only relieve the symptoms of pain and
inflammation. These drugs do not address the destruction of arthritic joints
caused by the disease. Drugs directed toward targets outside the cell also have
a number of potential limitations in treating complex diseases where the
underlying molecular mechanisms are located within cells. These drugs often do
not control the specific sets of genes that are responsible for the onset and
progression of disease and may also result in side effects due to their
non-specific action. Further, by focusing principally on receptors and other
proteins located outside the cell, these drugs are directed toward only a
limited number of the total potential disease targets. An additional limitation
is that many current drugs or drugs in development, especially proteins, must be
injected and are not available in pill form.
Recent advances in genomics have the potential to significantly improve
drug discovery. Most genomics efforts have been directed principally toward the
identification and sequencing of the large number of genes that comprise the
human genome. These developments have not enabled the rapid identification of
drug targets, because the gene sequence data by itself provides limited
information, if any, about a gene's relationship to a specific disease. To fully
capitalize on the therapeutic potential of genomics, there is a need to map
critical gene regulating pathways and identify key gene switches as drug targets
for disease therapy.
SIGNAL'S GENE REGULATING DRUGS
We have developed and integrated a large set of proprietary target and drug
discovery technologies to accelerate the application of genomics to the
discovery of important new classes of gene regulating drugs. We first map the
gene regulating pathways to identify drug targets, or gene switches, that
control specific genes and result in disease. This information is then used to
discover novel gene regulating drugs by applying our drug discovery engine. We
believe our discovery and development capabilities provide us and our
collaborators with a highly advanced and competitive technology platform for
target and drug discovery. This engine consists of:
- Advanced cellular, molecular and genomic technologies. We use information
produced from human genomics initiatives to map gene regulating pathways
and identify clinically important drug targets for specific diseases. We
have generated proprietary human cell lines, from multiple tissues of the
body, to create in vitro, or test tube, models of disease and to evaluate
the activity and selectivity of drug candidates. We also use functional
genomics and proteomics, which is the large-scale linking of genes and
their protein products to their biological functions, for mapping gene
regulating pathways and identifying disease targets for use in drug
discovery;
- Proprietary high throughput screening systems and diverse compound
libraries. We have assembled a library of more than 300,000 distinct
small molecule compounds and natural products which we screen using our
proprietary biochemical and cell-based screening technologies. Our
screening systems include a proprietary screening technology that
simultaneously screens multiple kinases to provide drug activity and
specificity data across multiple drug targets;
- A proprietary, specially designed kinase inhibitor library. We identified
the active sites, or molecular locks, on a number of gene regulating
kinase targets using our extensive knowledge of the three dimensional
structures of these targets. We believe gene regulating targets
identified in the future will contain similar locks. Our kinase inhibitor
library is designed to contain compounds expected to fit like molecular
keys into these locks, enhancing our ability to identify effective
inhibitors of current as well as yet-undiscovered gene regulating
targets. In addition, we design these compounds to have attractive
pharmaceutical properties, such as solubility, chemical stability,
non-reactivity and the ability to be taken in pill form, which
accelerates the development of viable drug candidates; and
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- Structure-based drug design. We use our proprietary three-dimensional
models of drug targets, combined with advanced chemistry technologies, to
efficiently generate drug leads and advance drug candidates into
preclinical and clinical development.
We believe that, together, these integrated target and drug discovery
capabilities enable us to proceed rapidly from target identification to
screening and optimization of drug candidates. To date, we alone or with our
collaborators have identified 27 drug targets in 10 gene regulating pathways
with potential applications in at least six major disease areas. We also have
developed 29 drug discovery screens, identified 24 drug leads and commenced
evaluation of drug leads in 15 animal models of disease. We and our
collaborators have developed two drug candidates in our cancer program for which
we intend to submit INDs by the end of 2000, assuming preclinical development is
favorably completed without delay.
We believe that our proprietary drug discovery engine enables us to
overcome many of the current limitations of conventional drug discovery and
genomics for the following reasons:
We Identify Multiple Drug Targets for Each Therapeutic Program. It is
estimated that there are more than 2,000 gene switches within cells which
activate or suppress genes in a broad range of diseases. We are identifying
those gene switches that are critical drug targets for disease therapy. Many of
these targets are highly amenable to inhibition with small molecule drugs which
can be administered in pill form. We believe that identifying multiple targets
in each of our therapeutic programs increases the likelihood of generating a
large and sustainable pipeline of superior drug candidates. For example, in our
cancer program, we and our collaborators have identified 15 key gene switches
within four gene regulating pathways.
We Select Drug Targets That Simultaneously Regulate Multiple
Disease-Causing Genes. We are discovering drugs that may be effective in
treating diseases where a single drug target regulates multiple genes involved
in disease. For instance, we have identified potent and selective inhibitors of
the cJun N-terminal kinase or JNK, drug target which modulate the expression of
a broad set of disease-associated genes such as interleukin-2, or IL-2, gamma
interferon and tumor necrosis factor a, or TNFa. These JNK inhibitors have
disease-modifying activity in animal models of arthritis and asthma.
Our Drug Leads and Drug Candidates Are Highly Selective for Specific Gene
Targets. Many of our drug targets regulate genes functioning in an over- or
under-activated state, and do not affect normal levels of gene expression
required to maintain essential cellular functions. Therefore, we expect the
safety profile of our drugs to be superior to less specific drugs. For example,
our inflammation program focuses on gene regulating pathways that are not turned
on in normal tissues but are primarily turned on by inflammatory proteins during
a disease process, causing tissue damage.
OUR STRATEGY
Our goal is to build a leading pharmaceutical company focused on the
discovery, development and commercialization of new classes of drugs regulating
gene function. There are five important elements of our business strategy:
Advance Our Leadership Position in Discovering and Developing Novel Gene
Regulating Drugs. We have developed and integrated a large set of proprietary
target and drug discovery technologies into a drug discovery engine for
generating new classes of gene regulating drugs. We plan to expand our
leadership in this area by continuing to develop and integrate advances in
functional genomics, proteomics, drug screening systems, structure-based drug
design, medicinal chemistry, pharmacology and preclinical drug development. We
plan to continue to add management and technical expertise to accelerate the
development and commercialization of gene regulating drugs. We will license from
others or acquire leading technologies that complement our core capabilities.
Build a Large and Diversified Product Portfolio. To date we have developed
a portfolio of two preclinical drug candidates, four drug leads and 27 targets
that address major diseases. We plan to identify multiple targets within each
gene regulating pathway we explore and select those targets for drug discovery
that can be useful in treating multiple diseases. We believe this strategy will
allow us to enhance the clinical
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34
potential of each pathway while simultaneously limiting our scientific and
financial risk in any single gene regulation pathway or drug target.
Pursue Treatment of Serious Medical Conditions that Represent Large
Potential Markets. We intend to continue to focus our drug discovery and
development efforts on serious diseases that represent large potential markets
for our drug products. Our current program areas include cancer, inflammatory
diseases, osteoporosis, cardiovascular disease, neurological disease and viral
infections. In addition, the nature of our gene regulation targets makes them
well suited for small molecule drugs which can be widely distributed and easily
administered in pill form.
Develop a Cancer and Inflammatory Disease Franchise. We have retained
significant United States co-commercial or profit sharing rights in three of our
current corporate collaborations. We intend to establish a United States
franchise in products addressing cancer and inflammatory disease and will
continue to seek to retain substantial United States co-commercial or profit
sharing rights in future collaborations within these areas.
Establish Corporate Collaborations. We will continue to aggressively pursue
collaborations with leading pharmaceutical and biotechnology companies to fully
develop and exploit our pipeline of drug targets and drug candidates. These
collaborations provide us with multiple potential sources of revenue. Currently,
our corporate collaborators fund significant portions of four of our six disease
programs. The establishment of these collaborations allow us to diversify
scientific and financial risk and benefit from our collaborators' substantial
development, manufacturing and marketing resources. Typically, we intend to
establish royalty-based collaborations outside of our franchise areas.
OUR DRUG DEVELOPMENT PROGRAMS
Our drug discovery and development programs are focused in several disease
areas in which gene dysregulation plays a major role in the onset and
progression of disease. These diseases include cancer, inflammatory disease,
osteoporosis, cardiovascular disease, neurological disease and viral infections.
CANCER PROGRAMS
Cancer is a group of diseases characterized by uncontrolled growth and
spread of abnormal cells in the body. Cancer results from abnormalities in the
expression of genes that regulate cell proliferation, cell migration and cell
death. According to the American Cancer Society, cancer is the second leading
cause of death in the United States and accounted for 560,000 deaths and an
estimated 1.2 million new cancer cases in 1999. The worldwide cancer drug market
totaled approximately $7.8 billion in 1998. Most current anti-cancer drugs kill
both cancerous and normal cells, giving rise to serious toxic side effects. We
are developing new classes of drugs designed to selectively control abnormal
gene regulating pathways which cause the start or spread of cancer, with the
goal of creating safer and more effective cancer therapies.
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We have six drug discovery and development programs focused on regulating
abnormal gene expression involved in the onset and progression of cancer. We
currently have two drug candidates. The first, SP8490, is for preventing and
treating breast cancer and other cancers. The second, NSP6783, is for preventing
or treating nerve damage caused by cancer chemotherapies. We plan to initiate
preclinical studies for both candidates by mid-2000 and, assuming favorable
outcomes of those studies and no delays in preclinical development, to file INDs
by the end of 2000. We also have three additional cancer drug leads.
CANCER PROGRAMS
- --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL
- ------------------
ER-a MODULATOR - Signal Preclinical development Breast, endometrial and renal
SP8490 cancer, multiple myeloma
- ------------------
ER-b MODULATOR Axys/Signal Lead optimization Breast, prostate, ovarian and
colon cancer
- ------------------
NEUROPROTECTANT - Nippon Kayaku / Preclinical development Chemotherapy-induced neuropathies
NSP6783 Signal
- ------------------
JNK:
JNK1,2 Signal Lead optimization Lung and breast cancer, leukemia,
JNKK1,2 Signal Lead optimization melanoma
JIP1,2 Signal Target validation
- ------------------
NF-kB:
IKK1,2,3 Ares-Serono / Signal Lead optimization Glioma, lymphoma, pancreatic
NIK Ares-Serono / Signal Assay development cancer, melanoma, sarcoma
IKKAPI Ares-Serono / Signal Assay development
IkB ligase Ares-Serono / Signal Assay development
- ------------------
OTHER LIGASES:
E3 ligases Signal Target validation Breast, prostate and pancreatic
cancer
- ------------------
TGF-b Signal Target validation Breast, prostate and pancreatic
cancer
- ------------------
* In the table above and the other tables in this section, the terms we use
under the column entitled "Status" have the following meanings:
- TARGET DISCOVERY AND TARGET VALIDATION is the identification of new
disease-related genes and the gene switches that regulate them followed by
a determination of which of these gene switches are the optimal drug
targets for treating disease.
- ASSAY DEVELOPMENT is creation of biochemical or cell-based test systems,
known as "assays" or "screens," for determining specific properties of
compounds which incorporate a specific drug target and are used to
identify compounds which selectively and potently regulate the drug
target.
- SCREENING is testing libraries of organic small molecules and natural
products in biochemical or cell-based assays to identify compounds which
selectively and potently inhibit or induce activation of a drug target.
- LEAD OPTIMIZATION indicates the application of combinatorial and
computational chemistry, as well as structure-based drug design, to
enhance the potency, selectivity, bioavailability, safety and other
pharmaceutical properties of drug leads.
- PRECLINICAL DEVELOPMENT is the evaluation of a drug lead in pharmacology,
safety and other relevant tests in preparation for clinical trials.
- --------------------------------------------------------------------------------
Estrogen Gene Regulation in Cancer
Estrogen is a hormone that has a broad spectrum of effects on tissues in
both women and men. Many of these biological effects are beneficial, including
maintenance of bone density, cardiovascular and neurological protection, and the
protection of organ systems from the effects of aging. In addition to estrogen's
positive effects, however, the hormone also is a potent growth factor in the
breast and uterus that has been demonstrated to increase significantly the risk
of cancer in women. In addition, estrogen contributes to prostate cancer and in
certain conditions can cause feminization in men.
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Two distinct estrogen receptors exist in the body, the estrogen
receptor-alpha, or ER-a, and estrogen receptor-beta, or ER-b, each of which has
a distinct tissue distribution in the body. ER-a is found predominantly in bone
and in cardiovascular, breast and reproductive tissue, while ER-b is the
predominantly expressed estrogen receptor in the prostate and hippocampus region
of the brain. Given the tissue-selective expression of ER-a and ER-b, estrogen
receptor modulators can be designed to mimic the positive effects and block the
negative effects of estrogen in different tissues. Drugs that modulate these
receptors are termed selective estrogen receptor modulators, or SERMs.
Unlike chemotherapeutic agents which often cause significant side effects,
including loss of white blood cells, nerve damage, nausea and other debilitating
side effects, SERMs act through different, primarily non-toxic mechanisms.
Currently two SERMs are marketed for treatment of breast cancer. One of these
SERMs, tamoxifen, is the most widely prescribed anti-hormonal therapy for cancer
today. However, tamoxifen is associated with a number of adverse side effects,
including an increased risk for uterine cancer, blood clotting and hot flashes.
In addition, virtually all patients receiving tamoxifen become resistant to the
drug. Despite these shortcomings, worldwide tamoxifen sales for breast cancer
totaled approximately $560 million in 1999.
We are using our gene regulation expertise to design new classes of ER-a
and ER-b-selective SERMs with efficacy and safety profiles that we believe will
be superior to those of current chemotherapies and tamoxifen. We believe these
SERMs have significant potential for preventing and treating breast,
endometrial, prostate, colon and other cancers whose growth is dependent on
estrogen.
SP8490 -- An ER-a Modulator
Using our drug discovery engine and expertise in estrogen gene regulating
pathways, we have discovered and are developing a series of SERMs with improved
efficacy and safety in animal models when compared with tamoxifen. In animal
studies, these drug leads were orally effective in preventing breast cancer and
demonstrated equal or superior efficacy to tamoxifen. Additionally, these
compounds displayed a superior safety profile on uterine tissue compared to
tamoxifen. A potential drug candidate, SP8490, is in preclinical studies and,
assuming favorable outcomes of those studies and no delays in preclinical
development, we plan to file an IND by the end of 2000.
ER-b Modulators
We have discovered and are developing a novel series of ER-b-selective
SERMs which currently are in lead optimization. These drug leads demonstrate
significant in vitro anti-cancer activity in tamoxifen-resistant breast cancers
and ER-b-expressing cancers such as prostate cancer. Our SERM-b drug leads
represent a novel series of SERMs that, if successfully commercialized, may be
useful in treating the large number of cancer patients that develop tamoxifen
resistance, as well as other ER-b-positive cancers such as prostate, colon and
ovarian cancer. Currently, we know of no other ER-b-selective drugs that are
being marketed or that are in clinical development.
In October 1999, we entered into a collaboration with Axys Pharmaceuticals
to discover and develop ER-b-selective SERMs for cancer therapy. We describe
this collaboration and our other collaborative arrangements below under the
heading "Corporate Collaborators."
NSP6783 -- A Neuroprotectant for Neuropathies Caused by Cancer Chemotherapy
An estimated 350,000 cancer patients receive chemotherapy using taxol,
cisplatin, carboplatin and other drugs each year in the United States to treat
solid tumors of the lung, breast, ovaries and other organs. We estimate that
150,000 of these cancer patients develop nerve damage as a result of
chemotherapy, known as chemotherapy-induced neuropathies. These neuropathies
result in pain and/or loss of feeling in the hands and feet, reduced motor
coordination and muscle strength. The present standard of care for
chemotherapy-induced neuropathy provides only symptomatic relief and does not
prevent or treat the underlying cause of the neuropathy.
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Applying our drug discovery engine, in collaboration with Nippon Kayaku, we
identified a compound we call NSP6783. In multiple animal studies, this orally
active drug candidate has been shown to provide significant protection of
peripheral nerves and their function in an animal model of taxol-induced
neuropathy. In preclinical studies, NSP6783 has a favorable safety profile and
does not diminish the anti-cancer effects of taxol or cisplatin.
We are developing NSP6783 for the prevention and possible treatment of
chemotherapy-induced neuropathies. NSP6783 is in preclinical studies to evaluate
the safety and to profile other drug properties. Assuming favorable outcomes of
those studies and no delays in preclinical development, we plan to file an IND
by the end of 2000. This drug candidate is the first in a novel class of
neuroprotectants to be used in conjunction with chemotherapy to prevent
peripheral neuropathy. NSP6783 has the potential to prevent nerve damage and
therefore may be effective in preventing or treating the underlying cause of
this disorder. There presently are no approved treatments for this condition,
and we know of no such drugs currently under development.
We are investigating other potential clinical applications for this novel
class of neuroprotectants. These include the possible treatment of diabetic
neuropathy and nerve crush injury in the peripheral nervous system and the
potential treatment of Parkinson's and Alzheimer's diseases in the central
nervous system.
In February 2000, we extended our collaboration with Nippon Kayaku to share
equally, with the exception of Japan, in the development and commercialization
of NSP6783 and other potential neuroprotectant agents worldwide.
JNK Inhibitors for Cancer
The JNK pathway controls the expression of specific sets of genes involved
in cancer, including:
- cytokines and growth factors that promote the growth of cancer cells;
- molecules on the surface of cells that are responsible for cell-to-cell
attachment and tissue-destructive enzymes that enable tumors to spread to
distant sites in the body and invade normal tissues and organs, referred
to as metastasis; and
- factors that lead to the growth of new blood vessels and aid in
establishing new tumors, referred to as angiogenic factors.
We are applying our expertise in the JNK gene regulating pathway to
identify novel cancer targets which play a fundamental role in tumor growth and
metastasis. We are designing new classes of drugs that target abnormalities in
gene regulating pathways to inhibit the transformation, growth and spread of
cancer without affecting other essential gene regulating pathways. Using our
drug discovery engine, we have identified potent and selective small molecule
inhibitors of the JNK pathway which have demonstrated anti-proliferative
activity in tumor cell lines in vitro. Additional cancer models will be used to
evaluate the effects of JNK inhibitors on tumor growth and metastases. We
believe drugs that selectively inhibit select targets in the JNK pathway may be
highly effective in treating several cancers including lung, breast and ovarian
carcinomas, myelomas and leukemias without the safety concerns of current cancer
treatments.
NF-kB Inhibitors for Cancer
The nuclear factor kappa B, or NF-kB, pathway controls the expression of
specific sets of genes involved in different stages of cancer development and
progression. These include molecules on the surface of cells that allow cancer
cells to migrate and attach to distant tissues, as well as specific cell
survival factors that make cancer cells resistant to radiation and chemotherapy.
Using our gene regulating target discovery expertise, we and our collaborators
have mapped the NF-kB pathway extensively and have identified multiple drug
targets in the NF-kB gene regulating pathway. We and our collaborators also have
demonstrated in vitro that inhibiting key NF-kB kinase targets significantly
increases the sensitivity of cancer cells to cancer chemotherapeutics. We have
identified small molecule inhibitors of kinase targets in the NF-kB gene
regulating pathway and plan to study these further in animal models of cancer.
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In November 1997, we entered into a collaboration with Ares-Serono to
discover and develop drugs that target the NF-kB pathway for the potential
treatment of certain cancers.
Ligase Inhibitors for Cancer
We pioneered the discovery of ligase drug targets in the NF-kB and other
important gene regulating pathways. Ligases represent an important new family of
gene regulating targets because of their ability to precisely maintain normal
levels of proteins in cells. In cancer, certain proteins, such as those that
suppress the growth of tumors, are lost or diminished which causes the
progression of cancer. We have developed novel drug screens to identify
selective ligase inhibitors which we believe may restore normal levels of
proteins the body uses to prevent the emergence of cancer and resistance to
chemotherapy.
TGF-b Modulators for Cancer
Transforming growth factor-b, or TGF-b, controls several well-known
tumor-regulating gene products, such as tumor suppressor genes, cyclins and
cyclin-dependent kinases. Normal regulation of the TGF-b pathway has been shown
to suppress tumor progression. In a number of cancers, the loss of normal
TGF-b-regulated gene expression promotes the cancers' progression and the risk
of death.
The gene regulating pathway for TGF-b recently has been identified. Our
scientists are applying genomic and proteomic approaches to discover novel
targets which suppress TGF-b pathways. Inhibitors of these novel targets are
expected to restore normal TGF-b-regulated gene expression and inhibit tumor
growth. We are developing drug discovery assays for specific targets in this
pathway and intend to screen our kinase inhibitor and diversity compound
libraries against these targets.
INFLAMMATORY DISEASE PROGRAMS
The human immune system is comprised of cells and biochemical substances
that protect the body from infectious organisms, physical injury and abnormal
cellular events such as cancer. Key components of the immune system, such as
white blood cells, are responsible for protective or inflammatory responses at
sites of injury and disease. Inflammatory diseases arise from the
over-activation of the immune system resulting in the over-production of immune
cells, inflammatory proteins and tissue-destructive enzymes. These cells and
proteins attack and destroy healthy tissue, giving rise to a number of diseases
such as rheumatoid arthritis, osteoarthritis, allergies, asthma, inflammatory
bowel disease and psoriasis, as well as transplant rejection. In 1998, worldwide
sales of anti-arthritic and immunosuppressive drugs alone totaled approximately
$4.4 billion. Many current drugs have dose-limiting side effects and only target
a single disease mechanism. More importantly, although these current drugs
alleviate many symptoms of disease, they generally do not target the underlying
mechanisms and therefore do not effectively modify disease processes or treat
the underlying disease.
We are identifying drug targets in key pathways and screening for new
classes of small molecule drugs that regulate inflammatory diseases at the level
of gene function. For example, inflammatory proteins such as interleukin-1, or
IL-1, and TNFa activate gene regulating pathways that cause an inflammatory
response. The anti-TNFa protein drug Enbrel(R) has validated this cytokine
pathway for treating rheumatoid arthritis; however, this drug must be
administered by injection. A drug of comparable or superior efficacy that can be
taken in pill form would represent formidable competition for injectable drugs
such as Enbrel. Our strategy is to discover small molecule drugs that can be
taken in pill form and that effectively modulate other important inflammatory
pathways such as IL-1 and IL-2 in addition to TNFa. We currently are optimizing
inhibitors of gene regulating targets in three distinct pathways, JNK, NF-kB and
p38, and have demonstrated the efficacy of two series of drug leads in animal
models of asthma and arthritis.
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We have three drug discovery and development programs focused on regulating
abnormal gene expression involved in the onset and progression of inflammation.
These programs are directed toward 17 gene regulating targets. We currently have
drug leads in each of our JNK, NF-kB and p38 programs outlined in the table
below.
INFLAMMATORY DISEASE PROGRAMS
- --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL
- ------------------
JNK:
JNK1,2 Signal Lead optimization Rheumatoid arthritis, asthma,
JNKK1,2 Signal Assay development allergy, multiple sclerosis,
JIP1,2 Signal Target validation transplant rejection
- ------------------
NF-kB:
IKK1,2,3 Ares-Serono / Signal Lead optimization Assay Osteoarthritis, rheumatoid
NIK Ares-Serono / Signal development arthritis, multiple sclerosis,
IKKAP1 Ares-Serono / Signal Assay development inflammatory bowel disease, ARDS
IkB Ligase Ares-Serono / Signal Assay development
- ------------------
P38:
p38-2 Signal Screening Psoriasis, rheumatoid arthritis,
MKK3 Signal Assay development asthma, inflammatory bowel
MKK6 Signal Lead optimization disease, ischemic disorders
Tao1,2 Signal Target validation
- --------------------------------------------------------------------------------
- ------------
* Please refer to the legend located beneath the table entitled "Cancer
Programs" on page 30 for an explanation of the terms used to describe the
status of our programs.
JNK Inhibitors for Inflammatory Diseases
Activation of the JNK gene regulating pathway increases the expression of a
set of inflammatory genes, including TNFa, IL-2 and gamma interferon. There are
multiple types of the JNK regulatory enzyme, each of which controls the
expression of genes in specific cells and in response to specific stimuli. Our
researchers and collaborators have identified what we believe is the largest
number of known kinase targets in the JNK pathway to date. We believe we have a
dominant patent position in the JNK pathway with eight issued United States
patents, four issued foreign patents and related patent applications covering
JNK, its use in drug discovery and JNK inhibitors. Over-activation of JNK causes
or exacerbates several inflammatory diseases, including rheumatoid arthritis,
asthma and multiple sclerosis. Drugs that inhibit JNK activation are expected to
selectively block the over-activation of disease-associated genes, and not
affect normal cellular functions, since JNKs principally do not regulate normal
gene expression.
We have developed and initiated high throughput screening for JNK1, JNK2
and JNK3 inhibitors using proprietary biochemical and cell-based screens. Using
our kinase-focused inhibitor library, we have identified several compounds which
inhibit JNK1 and JNK2 activity with a high level of potency and specificity. In
addition to significantly reducing inflammation, one of these drug leads
prevents the destruction of joints in an animal model of arthritis. This drug
lead also demonstrates potent disease-modifying activity in an animal model of
asthma. We are currently optimizing drug leads to improve the potency,
selectivity and other pharmaceutical properties of our JNK inhibitors. We are
also developing additional high throughput drug screens for several other drug
targets in the JNK pathway, including JNKK1 and JNKK2.
NF-kB Inhibitors for Inflammatory Diseases
NF-kB plays a pivotal role in inflammatory disease processes by regulating
cytokine genes, such as TNFa, IL-1, IL-2, IL-6, IL-8, along with genes that code
for molecules on the surface of cells and the cyclooxygenase-2 or, COX-2,
inflammatory enzyme. Our researchers and collaborators have identified six drug
targets that regulate NF-kB activation. Our discovery of three of these targets
was reported in the journals Science, Nature and Cell. We believe drugs which
inhibit NF-kB and the activation of select disease-associated genes will have
potential disease modifying effects. We have been issued four United States
patents and we and our collaborators have filed related patent applications for
targets in this pathway.
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We have developed and initiated high throughput screening for NF-kB
inhibitors using proprietary biochemical and cell-based screens. We also have
developed technology for profiling the effects of active compounds on a number
of immune-inflammatory genes and proteins in cells and animals. Using our kinase
inhibitor library, we have identified several small molecule drug leads which
selectively inhibit a Kinase target on the NF-kB pathway. One of these drug
leads inhibits expression of inflammatory response genes, such as TNF-a, in an
animal model. We are optimizing these drug leads to enhance potency, specificity
and bioavailability in order to develop an important new class of
anti-inflammatory drugs. We are developing additional high throughput drug
screens for other targets in the NF-kB pathway.
In November 1997, we initiated a collaborative development and license
agreement with Ares-Serono to discover novel NF-kB inhibitors for inflammatory
and other diseases.
p38 Inhibitors for Inflammatory Diseases
Activation of the p38 gene regulating pathway causes the expression of
multiple cytokine genes, including IL-1, IL-6, IL-8 and TNFa, which regulate the
development and proliferation of cells in response to disease and tissue injury.
When inappropriately activated, the p38 pathway is believed to play an important
role in diseases arising from abnormal production of cytokines, including heart
disease caused by harmful inflammatory events. To date, we and our academic
collaborators have identified five proprietary drug targets in the p38 pathway.
One of these targets is p38-2, a subtype of p38, which is highly expressed in
heart and skeletal muscle and not most other tissues. We and our collaborators
have been issued three United States patents for three drug targets in the p38
pathway, MKK3, MKK6 and p38-2, and we and our collaborators have filed related
patent applications with regard to other potential drug targets in this pathway.
In the p38 pathway, we have screened two targets using our kinase inhibitor
compound library and have identified novel inhibitors which we plan to optimize
as drug leads later in 2000. We also plan to initiate high throughput screening
on an additional p38 pathway target during the first half of 2000.
OSTEOPOROSIS AND BONE FORMATION PROGRAMS
The incidence of osteoporosis and bone fractures in women is significantly
increased during and following menopause. According to the National Osteoporosis
Foundation, in 1999 more than 28 million people in the United States and over 75
million people in the U.S., Europe and Japan are affected by osteoporosis.
Estrogen has been used for hormone replacement therapy, or HRT, for many years
to prevent osteoporosis and alleviate some of the other effects of menopause.
However, HRT has several negative side effects, including the increased risk of
breast and uterine cancer, which make it a poor treatment option for many women.
OSTEOPOROSIS AND BONE FORMATION PROGRAMS
- --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL
- ------------------
ER-a MODULATOR Signal Preclinical development Osteoporosis, Paget's disease
- ------------------
BONE FORMATION Signal Target validation Osteoporosis, Paget's disease
TARGETS
- ------------------
- ---------------
* Please refer to the legend located beneath the table entitled "Cancer
Programs" on page 30 for an explanation of the terms used to describe the
status of our programs.
ER-a Modulators for Osteoporosis
SERMs are designed to mimic the beneficial effects of estrogen by
inhibiting bone loss in postmenopausal women, while avoiding some of estrogen's
negative effects. In 1998 Eli Lilly's raloxifene became the first and only
FDA-approved SERM for osteoporosis and in 1999 achieved estimated worldwide
sales of $326 million.
We have developed a novel series of ER-a-selective SERMs with superior
efficacy and safety when compared with raloxifene in preclinical animal studies.
We discovered these drug leads by applying our expertise in gene regulation to
map new estrogen-regulated gene pathways. We then developed and applied
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genetically modified bone cell lines, proprietary drug screens, genomic and
proteomic technologies and structure-based drug design to discover and develop
safer and more effective drugs in this class.
In three separate animal studies, four of our drug leads were tested in
comparison with estrogen and raloxifene for the ability to inhibit bone loss. In
those studies, our orally administered drug leads were demonstrated to be
significantly superior to raloxifene in preventing bone loss and preserving bone
strength. Importantly, our drug leads also demonstrated a superior safety
profile in uterine tissues following microscopic evaluation, when compared with
raloxifene. An additional safety feature of our drug leads is that they do not
stimulate cell proliferation in breast tissue. Our ER-a-selective SERMs also
demonstrated a favorable cholesterol-lowering profile in animal models. The drug
leads are well tolerated in animals and have not shown any negative effects in
genetic safety tests required by the FDA. Final selection of a drug candidate
for preclinical development is expected to occur this year. These drugs, if
successfully developed, would provide clinicians with an alternative,
non-estrogen treatment for osteoporosis that also would minimize some of the
adverse effects associated with HRT, including an increased risk of breast and
uterine cancer.
Activators of Bone Formation
Current treatments for osteoporosis limit bone loss but do not induce new
bone formation. Drugs stimulating new bone formation would represent an
important addition to current therapies for osteoporosis and other bone
disorders. To date, no orally active drugs that induce bone formation are
available for the treatment of bone diseases. Growth factor proteins known as
bone morphogenetic proteins, or BMPs, stimulate bone formation through
activation of bone forming cells. OP-1, also referred to as BMP7, stimulates new
bone formation and is used clinically as a bone graft substitute in orthopedic
and dental indications. However, because these proteins require injection, they
are not good drug candidates for the osteoporosis market. By mapping the BMP
gene regulating pathway, we have identified molecular targets that may be
inhibited with orally administered small molecule drugs to promote new bone
formation. We plan to screen our compound library against these targets later in
2000 to identify potential drug leads.
CARDIOVASCULAR DISEASE PROGRAMS
Cardiovascular disease, including heart attack and congestive heart
failure, largely results from restricted blood flow caused by atherosclerosis
and hypertension. Cardiovascular disease is the leading cause of death worldwide
and results in an estimated 16.7 million annual deaths worldwide according to
the World Health Organization. In the United States, approximately 58.8 million
people were afflicted with cardiovascular disease, leading to an estimated one
million deaths in 1996 according to the American Heart Association. In 1998,
pharmaceutical sales of cardiovascular drugs exceeded $22 billion in the United
States.
Several classes of cardiovascular drugs have been developed to prevent and
treat chronic cardiovascular disease. These drugs work by lowering the LDL, or
bad cholesterol, levels in the blood stream which helps to reduce the buildup of
fatty plaque deposits in blood vessels. However, many of these drugs can cause a
number of serious adverse side effects and do not address the underlying cause
of the disease. There is a need for new classes of cardiovascular drugs that
work on the molecular mechanisms of cardiovascular disease and have improved
efficacy and safety.
Many cardiovascular diseases occur because of abnormal expression of genes
in blood vessels and in the heart. Heart attacks can occur when the cells that
line blood vessels are activated by injury or trauma. These damaged cells
overproduce inflammatory proteins such as molecules on the surface of cells that
are responsible for cell-to-cell attachment, growth factors and cytokines that
lead to a buildup of inflammatory cells and platelets in blood vessel walls.
This buildup may block normal blood flow and lead to atherosclerosis and heart
attack. Many of these proteins are controlled by the NF-kB, JNK and p38 gene
regulating pathways. In addition, the gradual increase of cholesterol in blood
vessels may also cause atherosclerosis and heart attacks. Estrogen enhances the
clearance of bad cholesterol from the blood by regulating gene expression in the
liver.
We have identified several selective inhibitors of gene regulating targets
in the JNK, NF-kB, p38 and estrogen pathways. We have developed additional
screens which use proprietary human vascular cell lines to
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evaluate the potential cardioprotective effects of our drug leads. We plan to
test these inhibitors in animal models of heart attack, restenosis,
atherosclerosis and heart failure.
CARDIOVASCULAR DISEASE PROGRAMS
- --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL
- ------------------
JNK:
JNK1,2 Signal Lead optimization Congestive heart failure,
JNKK1,2 Signal Assay development myocardial ischemia
JIP1,2 Signal Target validation
- ------------------
NF-kB:
IKK1,2,3 Ares-Serono / Signal Lead optimization Atherosclerosis, restenosis,
NIK Ares-Serono / Signal Assay development myocardial ischemia, vasculitis
IKKAP1 Ares-Serono / Signal Assay development
IkB ligase Ares-Serono / Signal Assay development
- ------------------
P38:
p38-2 Signal Screening Myocardial ischemia, restenosis
MKK3 Signal Assay development
MKK6 Signal Lead optimization
Tao1,2 Signal Target validation
- ------------------
ER-a MODULATOR Signal Preclinical development Atherosclerosis,
hypercholesterolemia, restenosis
- ------------------
ER-b MODULATOR Signal Lead optimization
- ------------------
- ------------
* Please refer to the legend located beneath the table entitled "Cancer
Programs" on page 30 for an explanation of the terms used to describe the
status of our programs.
JNK Inhibitors for Cardiovascular Disease
Heart failure can occur when muscle cells in the heart fail due to a
massive influx of inflammatory cytokines such as TNFa. As a result, the heart
fails to adequately pump blood to the body. The JNK pathway is a key regulator
of TNFa gene expression and protein production. This pathway becomes
over-activated in cardiac tissue when the heart undergoes damage or other
stress. We have identified selective and potent inhibitors of the JNK pathway
that will undergo evaluation in models of cardiovascular disease.
NF-kB and p38 Inhibitors for Cardiovascular Disease
Restenosis, or the narrowing of blood vessels that restricts blood flow,
can occur when cells that line the inside of blood vessels are over-stimulated
during balloon angioplasty procedures. This often causes the over-expression of
growth factor genes and subsequent over-proliferation of smooth muscle cells in
the blood vessel wall leading to a re-blocking of the blood vessel. NF-kB and
p38 pathways have been demonstrated to be over-activated in animal models of
angioplasty-induced restenosis. We have identified several inhibitors of targets
in these pathways that will be evaluated in models of cardiovascular disease.
In November 1997, we entered into a collaboration with Ares-Serono to
develop inhibitors of NF-kB for potential treatment of cardiovascular and other
diseases.
Estrogen Gene Regulation for Cardiovascular Disease
We are applying multiple gene discovery technologies to identify gene
regulating drugs for preventing and treating cardiovascular diseases, including
our proprietary functional genomics technology known as PhaRMA(TM). We have used
these technologies to identify over 75 human genes that are regulated by
estrogen in human cardiovascular cells. Many of these genes are regulated by
estrogen in a tissue-selective manner. A number of these genes currently are not
disclosed in public gene databases and represent novel gene regulating targets.
In addition, we have developed and implemented a proprietary cell-based
screening platform for profiling gene expression in panels of estrogen-regulated
genes in cardiovascular cells. These
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advanced technologies have led to the discovery and development of new SERMs
which we believe will be cardio-protective, and several of these novel SERMs are
being evaluated in models of cardiovascular disease.
NEUROLOGICAL DISEASE PROGRAMS
The human nervous system consists of two distinct components: the central
nervous system, or CNS, which includes the brain and spinal cord, and the
peripheral nervous system, or PNS, which includes all nerves outside the CNS.
Within the PNS, neurons transmit information such as pain to the CNS, and motor
pathways then transmit these commands from the CNS to muscles. Defects or damage
in the CNS can lead to Parkinson's disease, Alzheimer's disease, stroke or
epilepsy, as well as psychiatric disorders such as depression and schizophrenia.
PNS disorders can lead to acute and chronic pain, and peripheral neuropathies
caused by chemotherapy and diabetes can cause chronic sensory or motor defects.
In 1998, annual worldwide sales of drugs that act upon the various parts of the
nervous system, or neuropharmaceuticals, totaled $17.8 billion, including
pharmaceuticals such as anti-depressants, pain-killers, anti-anxiety drugs and
anti-epileptics. Many current CNS and PNS drugs exhibit undesirable side
effects. There also are disorders such as Alzheimer's disease and peripheral
neuropathies for which there are no effective treatments due to a limited
understanding of neurological disease processes at the level of gene function.
Neuropharmaceuticals are the second largest area of research and drug
development among pharmaceutical companies today and, as a result, we believe
our potential to enter into collaborations in this area is significant.
Our researchers and collaborators have developed a proprietary cell
immortalization technology for producing cloned human neuronal cells that can be
designed to mimic important features of normal and diseased neurons and can be
used for drug discovery. We have engineered human neuronal and other cell lines
of the CNS and, we believe, the first human sensory neuronal cell lines of the
PNS. Unlike many other approaches, our cell lines are readily renewable and
therefore are amenable to the application of advanced genomic technologies for
target and drug discovery. For example, we have generated a library of genes
associated with Alzheimer's disease using genomics in combination with our
proprietary neuronal cell lines. In addition, our human CNS cell lines can be
used to generate models of diseases and to identify gene regulating targets for
drug discovery in the disease areas of stroke, traumatic head injury and
neurological diseases.
We have developed several drug leads and drug candidates in our JNK3 and
neuroprotectant programs that we believe have significant potential for treating
disease of the central and peripheral nervous systems. In addition, we are
developing neuronal cell lines from different regions of the brain to identify
new drug targets and drug candidates.
NEUROLOGY DRUG PROGRAMS
- --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL
- ------------------
JNK3 Signal Lead optimization Epilepsy, stroke, head trauma,
Parkinson's disease, Alzheimer's
disease, spinal cord injury
- ------------------
NEUROPROTECTANT Nippon Kayaku/Signal Lead optimization Diabetic neuropathy,
neurodegenerative disease
- ------------------
NOVEL TARGETS Signal Target discovery CNS and PNS disorders
- ------------------
- ---------------
* Please refer to the legend located beneath the table entitled "Cancer
Programs" on page 30 for an explanation of the terms used to describe the
status of our programs.
JNK3 Inhibitors for Neurological Disease
We are applying our expertise in engineering neuronal cell lines and in
mapping the JNK gene regulating pathway to identify novel drug targets and drug
leads for neurological diseases. JNK3 is known to be located primarily in the
brain and mice engineered to be deficient in JNK3 are resistant to
experimentally induced epilepsy and stroke. For these reasons, we believe JNK3
inhibitors will have therapeutic value for treating epilepsy, as well as
neurodegeneration associated with Alzheimer's disease, Parkinson's disease,
stroke and
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head trauma. Using our high throughput screening, we have identified potent and
selective inhibitors of the JNK gene regulating pathway, including the JNK3 drug
target. We have demonstrated that one of our drug leads can block seizures in an
animal model of epilepsy and can prevent neuronal cell damage in a cellular
model of Parkinson's disease. Current efforts are focused on improving potency,
selectivity and other pharmaceutical properties of our drug leads for
preclinical development. We believe that JNK inhibitors offer the potential for
improved drugs to treat important neurodegenerative diseases for which current
therapies are inadequate.
NEUROPROTECTANT PROGRAMS
A number of neurological disorders are due to a progressive loss of neurons
over time. This can lead to peripheral neuropathy in diabetes, motor dysfunction
in Parkinson's disease and memory dysfunction in Alzheimer's disease. Small
molecule drugs that prevent the death of neurons cells have the potential to
treat these important disorders. We have discovered compounds, including
NSP6783, that prevent the death of specific types of neurons in cellular models
of neurodegenerative diseases. We plan to investigate the efficacy of our
clinical candidate, NSP6783, and related compounds in animal models of
neurodegenerative disease for potential clinical development.
VIROLOGY PROGRAMS
Viruses are microorganisms that infect cells and can cause serious disease.
Worldwide, an estimated 33 million people are infected with human
immunodeficiency virus, or HIV, and 170 million people are estimated to be
infected with the hepatitis C virus, or HCV. Human papilloma virus, or HPV, is
another viral pathogen being transmitted at an epidemic rate. HPV causes
chronic, lifelong genital infection and afflicts an estimated six million people
in the United States. Despite the high incidence of chronic viral infections,
only a limited number of antiviral drugs have been approved to date. New classes
of antiviral treatments are needed which act on novel, virus-specific gene
regulating targets while overcoming problems of toxicity and viral resistance.
We are applying our expertise in gene regulation to the discovery of small
molecule antiviral drugs that selectively inhibit viral genes. Viruses insert
their genetic material into host cells and then use the infected cells'
biochemical machinery to produce new viruses. Viral transcription, translation
and replication events are key steps in the production of new viruses and the
resulting damage that a viral infection can cause. We believe that gene
regulating antivirals may provide more potent and selective therapy due to three
factors:
- Viral gene switches are structurally different from those found in human
cells and, therefore, potentially may be targeted with drugs to more
selectively and safely inhibit the spread of the virus without
interfering with normal human cellular functions.
- Each virus possesses distinct gene switches that distinguish it from
other viruses, facilitating the design of virus-specific therapeutics.
- Drugs that target these mechanisms may be useful in treating viral
infections resistant to current therapies.
VIROLOGY DRUG PROGRAMS
- --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL
- ------------------
VARIOUS DuPont Screening HCV infection
- ------------------
VARIOUS DuPont Screening HIV infection
- ------------------
E2 Signal Screening HPV infection
- ------------------
- ------------
* Please refer to the legend located beneath the table entitled "Cancer
Programs" on page 30 for an explanation of the terms used to describe the
status of our programs.
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Our virology program is directed toward four viral gene regulating targets:
two regulatory factors for HCV, a transcription factor for HIV and the E2
transcription factor for HPV. We and our collaborators have validated each of
these targets in vitro. We have developed a proprietary viral infection screen
for identifying novel inhibitors of HPV gene activation. We have developed
target-specific screens for small molecule HCV and HIV inhibitors as part of our
three-year collaboration with DuPont Pharmaceuticals initiated in December 1997,
and compounds with selective antiviral activity have been identified and are
entering lead optimization. In December 1999, DuPont Pharmaceuticals paid us a
$1 million equity milestone for the successful development of three novel high
throughput screening drug discovery screens for HCV and HIV antivirals.
[Graphic depicting Signal's discovery engine for gene regulating targets and
drugs. The top portion of the graphic depicts Signal's target discovery engine,
consisting of cellular molecular and genomic technologies. The middle portion of
the graphic depicts Signal's drug discovery engine, consisting of proprietary
screens and compound libraries. The bottom portion of the graphic depicts the
profiling of Signal's drug candidates in specific disease models in preparation
for clinical development.]
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ENGINE FOR DISCOVERING GENE REGULATING TARGETS
We are developing and applying advanced cellular, molecular and genomic
technologies to discover clinically important targets that are the focus of our
drug discovery programs and corporate collaborations. These discovery
technologies include:
Proprietary Human Cell Lines. We have developed a proprietary technology to
immortalize and engineer human cells for use in our target and drug discovery
programs. These cell lines are designed to include the relevant genes and
related pathways involved in both normal and abnormal cellular functions. We use
proprietary human cell lines to develop in vitro models of important disease
processes, including bone metabolism, cardiovascular and neurodegenerative
disease. We then use these human cell lines to identify and validate novel
disease-related genes and specific drug targets in gene regulating pathways and
in screens for drug discovery.
Functional Genomics and Proteomics. We apply functional genomics and
proteomics to determine the role specific genes and their protein products play
in health and disease. We have implemented advanced genomic technologies to
accelerate the identification and prioritization of gene regulating disease
targets. These proprietary methods are designed to identify genes in cells or
tissues that are expressed under disease conditions in comparison to normal
conditions and include differential gene display, subtraction hybridization and
gene chip arrays. We have developed and filed a patent for our proprietary
PhaRMA(TM) genomics system, which is a technology to rapidly determine the
differences in gene expression between normal and diseased tissue and to
evaluate the effects of drug candidates on relevant genes within a cell or
tissue. To map the gene regulating pathways involved in specific diseases, we
are developing capabilities that integrate protein separation and analysis. This
includes mass spectrometry, a highly sensitive analytical method to determine
the unique weight of individual proteins, for identification of potential drug
targets that regulate specific disease pathways. We use these gene and protein
discovery tools, in combination with our proprietary cell lines, to generate a
more comprehensive profile of gene regulating pathways involved in diseases and
to facilitate the rapid identification of novel and specific therapeutic
targets. For example, we are applying functional genomics technologies to
identify and characterize the role of genomic targets and their regulatory
pathways in cancer, inflammation, bone metabolism, cardiovascular and
neurological diseases.
Pathway Mapping and Target Identification. We apply cellular, molecular and
genomic techniques to elucidate the regulatory pathways of disease-related
genes. An initial step in this process involves mapping the regulatory regions
of disease-related genes to identify which transcription factors selectively
activate or inhibit each gene's expression. We then use genomics and proteomics
to identify and characterize specific enzymes or other targets in a pathway that
regulate the activation of these transcription factors. When novel gene
regulating enzymes or other targets are identified, we apply advanced computer
programs to search proprietary and public gene databases and to identify
subtypes of these targets with distinct therapeutic applications and specificity
for different tissues.
After a potential target has been identified, we use antisense, which is a
complementary piece of genetic material used to inactivate a gene of interest,
mutant enzymes, which are modified forms of a protein used to determine its
function in cells, animals in which the gene has been inactivated, antibodies
and other techniques to validate the role of the target in specific disease
processes and to determine its utility for drug discovery. Such target
validation is a critical step before committing resources to assay development
and screening for target-specific drug leads.
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[DIAGRAM]
ENGINE FOR DISCOVERING AND DEVELOPING GENE REGULATING DRUGS
Once key gene regulating drug targets are identified, we use our advanced
drug discovery engine to rapidly discover and optimize drugs active on these
targets. Our drug discovery engine permits the target-directed screening of
diverse and focused compound libraries in a wide range of high throughput
screening assays. We optimize drug leads by integrating medicinal chemistry with
computational chemistry and combinatorial chemistry, which is the rapid creation
of large compound libraries. We further optimize drug leads using technologies
for profiling the effects of drug leads on specific gene regulating targets in
cellular pathways. These drug discovery activities are coordinated using
computer programs and databases to collect and analyze chemical and biological
data. This integrated information facilitates library design, primary and
secondary screening and the subsequent design and synthesis of optimized drug
candidates for preclinical and clinical development.
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Assay Development. We develop and use proprietary biochemical and
cell-based assays to screen for compounds that regulate gene expression in a
target- and cell-specific manner. Our researchers have designed modular systems
for developing biochemical and cell-based assays, enabling us to substitute
different drug targets into standardized assay formats for use in various
discovery programs. We develop and use biochemical assays to screen compounds
for activity on specific targets. These biochemical assays are designed to mimic
the functional activity of a drug target in its native cellular environment. Our
cell-based assays facilitate the identification of compounds that modulate gene
expression through distinct pathways and in specific cell types. Active
compounds identified in these primary assays are rapidly qualified in a series
of secondary pharmacological assays that provide further information regarding a
compound's clinical potential. These secondary assays measure the effects of
potential drug leads on disease-related genes and proteins, including inhibition
of specific gene-regulating enzymes, inhibition of abnormal protein production,
toxicity to cells, potency and target selectivity. We have developed 29 drug
discovery assays and are continuing to develop additional high throughput
screening assays.
High Throughput Screening. We use automated, high-volume drug discovery
systems, known as high throughput screening, or HTS, systems for rapid,
target-specific screening of diverse compound libraries. These robotic systems
enhance the precision, reproducibility and integration of chemical and
biological data. Our screening library currently consists of more than 300,000
distinct compounds, which include small molecules, natural products and
compounds derived from combinatorial chemistry. We have the capacity to screen
approximately 40,000 compounds per week, including an average of 10,000
compounds against each of four distinct classes of targets such as transcription
factors, kinases, ligases and viral targets, using three different detection
technologies. We also employ computer information systems to ensure that data
obtained from screening programs is used efficiently to drive the drug discovery
process.
Our Kinase Inhibitor Library. Based on our extensive knowledge of the three
dimensional structures of gene regulating targets, we have designed a large,
proprietary collection of compounds focused on kinase-binding small molecules.
This library currently consists of approximately 17,000 distinct drug-like
compounds, and we plan to continue expanding this proprietary kinase-focused
library. To date we have screened the library against six kinase gene regulating
targets, and have successfully identified inhibitors with attractive
pharmaceutical properties for each of these targets. When screened against new
gene regulating targets, we believe our kinase inhibitor library will quickly
yield quality drug leads for further optimization.
Optimization and Preclinical Development of Drug Candidates. We develop
drug candidates by integrating our chemistry and pharmacology expertise. We use
traditional medicinal chemistry approaches in conjunction with combinatorial and
computational chemistry and structure-based drug design to optimize potential
drug candidates. We apply combinatorial chemistry techniques to accelerate the
generation of potent and selective drug candidates that are evaluated in
pharmacological models of disease. We further expedite the drug optimization
process by employing structure-based drug design techniques, which are
techniques that use computer models of drug targets to design drug candidates
that interact more precisely with a target. Our scientists have designed
computer-generated three-dimensional models of JNK2, JNK3, and ER-a and ER-b.
These structure-based drug design efforts have resulted in new series of drug
leads and drug candidates with enhanced potency and selectivity in animal models
of disease. Throughout the drug optimization process our chemists are guided by
results from efficacy, drug absorption, distribution, metabolism and safety
studies conducted by our pharmacology and preclinical development group.
CORPORATE COLLABORATORS
Collaborative arrangements with pharmaceutical and biotechnology companies
are an integral part of our business strategy. As of December 31, 1999, we had
received approximately $54.3 million in upfront fees, research and development
funding, milestone payments and equity investments from our past and current
collaborators. We had a collaboration with Organon, which expired in July 1999,
and a collaboration with Tanabe, which was terminated in March 1998. In
connection with the termination of our collaboration with Tanabe, we licensed
exclusive worldwide rights for a drug lead to Tanabe. In addition, the research
phase of our collaboration with Roche Bioscience expired in August 1999, and
Roche has exclusively licensed two
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immortalized PNS cell lines from us for use in drug discovery for pain,
incontinence and peripheral vascular disease.
NIPPON KAYAKU
In February 1998, we entered into a collaborative agreement with Nippon
Kayaku under which Nippon Kayaku agreed to fund specified research at our
facility for two years. Under the agreement, we and Nippon Kayaku agreed to
develop and commercialize products based on or derived from a compound supplied
by Nippon Kayaku for the treatment and prevention of diseases and disorders of
the PNS and CNS. We agreed to perform combinatorial chemistry and use our
proprietary human neuronal cell lines to further optimize the compound and
characterize its mechanism of action prior to the start of clinical studies. As
of December 31, 1999, Nippon Kayaku had paid us $4.3 million to support research
and development efforts under the collaboration. Each party also is obligated to
pay the other royalties on future product sales arising from the collaboration.
In February 2000, following the initial research phase of the
collaboration, we entered into a joint agreement with Nippon Kayaku to develop
and commercialize neuroprotectant drugs for PNS and CNS disorders. This
agreement, which superseded the collaboration agreement described above,
provides for the parties to share equally the costs of development and
commercialization of these drugs and the revenues, if any, generated from these
drugs worldwide, with the exception of Japan. Nippon Kayaku has sole
responsibility for development and commercialization of these drugs for PNS and
CNS disorders in Japan and is obligated to pay us royalties on sales of any such
products in Japan.
If either we or Nippon Kayaku willfully reduce our participation in and
contribution to the joint development and commercialization activities under the
agreement with respect to a collaborative project or geographical area, then
that party will lose its co-commercialization rights with respect to that
project or area. Instead, the party reducing its participation will be entitled
to royalty payments from the commercializing party based on sales of products
either that from that project or that are made in that geographical area.
Under the agreement, the parties granted each other the right to
independently develop and commercialize products discovered as part of the
collaboration for indications other than PNS and CNS disorders, subject to
royalty payment obligations. The parties also granted each other the right to
independently develop and commercialize, for any indication, compounds
discovered by the collaboration but not selected as research leads or
development candidates, subject to royalty payment obligations.
ARES-SERONO
In November 1997, we entered into a collaborative agreement with
Ares-Serono, under which Ares-Serono agreed to fund specified research for an
initial three-year period and which contained provisions for extensions to the
initial research term as further described below. The Ares-Serono collaboration
is focused on identifying compounds that modulate NF-kB gene regulating pathways
to which Ares-Serono has rights for all diseases. The original agreement granted
Ares-Serono exclusive rights to these compounds in all countries of the world
except Asia. In April 1999, Ares-Serono expanded the collaboration to include
Asia by making a $2.0 million license payment to us and agreeing to pay us
milestones and royalties for products commercialized in Asia. Under the original
agreement, Ares-Serono S.A. purchased approximately $10.1 million of our Series
E and Series F preferred stock. Ares-Serono also agreed to provide us with
annual research and development support. In addition, Ares-Serono is obligated
to make payments to us based on the achievement of specified research and
development milestones and to pay us royalties on future sales of products
licensed under the collaboration. As of December 31, 1999, Ares-Serono had paid
us $7.0 million in research and development support.
Under an exclusive license that we granted to Ares-Serono, Ares-Serono will
be responsible for preclinical and clinical development of drug candidates and
the development of any drugs arising from the collaboration in all countries of
the world. We have co-promotion rights for all products marketed in the United
States, which are exercisable at any time during the term of the agreement and
up to 30 days following receipt of notice from Ares-Serono of the filing of an
NDA or equivalent regulatory application,
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with respect to products arising from the collaboration. If we exercise our
co-promotion rights, we will forego royalties in exchange for a share of product
revenue and we will be obligated to reimburse Ares-Serono for our share of
development costs out of a portion of revenue.
Under the original agreement, following the expiration of the initial
three-year research term, Ares-Serono's research support obligations were to
continue for additional three-year periods, unless terminated by Ares-Serono by
written notice given to us at least six months prior to the end of the first
three-year term or any subsequent three year term. In February 2000, the parties
amended the agreement to effectively extend the initial three-year research term
by one year and to provide Ares-Serono with the right to terminate the
collaborative research by written notice given to us at least three months prior
to the end of this one-year extension or any subsequent one-year extension.
Ares-Serono may also terminate the agreement upon six months' notice any time
after the end of the initial three-year term.
AXYS
In October 1999, we entered into a collaborative agreement with Axys
Pharmaceuticals, under which Axys agreed to fund specified research at our
facility for two years. The agreement may be extended for an additional year at
Axys' option. Our collaboration with Axys is focused on the discovery and
development of ER-b-selective SERMs for cancer therapy. We have rights for all
indications outside of cancer. Axys has exclusive worldwide development and
marketing rights to our ER-b-selective SERMs for the treatment of cancer. Axys
will provide payments to us in the form of research funding at a level
approximating our cost of this program, research milestones and royalties. We
may exercise a profit-share option in the United States and possibly other
territories at a predetermined point during development in lieu of royalties on
product sales. If we exercise this right, we will share equally in the profits
in the United States on product sales by Axys but will be responsible for an
equal share of the remaining development and commercialization costs in the
United States. Either party may terminate this agreement in the event a material
breach by the other party remains uncured for 90 days. As of December 31, 1999,
Axys had paid us $2.0 million in license fees and $316,000 in research funding.
DUPONT PHARMACEUTICALS
In December 1997, we entered into a collaborative agreement with DuPont
Pharmaceuticals, under which DuPont Pharmaceuticals agreed to fund specified
research at our facility for three years. DuPont Pharmaceuticals has the option
to extend the research term for up to three additional years. The DuPont
Pharmaceuticals collaboration is focused on identifying compounds for the
treatment or prevention of HCV and HIV infections, and we have granted DuPont
Pharmaceuticals worldwide exclusive rights to these compounds. Under this
collaboration, we and DuPont Pharmaceuticals are responsible for developing
target-specific screening assays and are jointly responsible for identifying
lead compounds. DuPont Pharmaceuticals is solely responsible for lead
optimization and the worldwide development and commercialization of any drugs
arising from the collaboration.
DuPont Pharmaceuticals agreed to provide us with annual research and
development support at a level approximating our cost of these programs. DuPont
Pharmaceuticals also is obligated to make payments to us upon the achievement of
specified research and development milestones and to pay us royalties on any
future product sales arising from the collaboration. This agreement may be
terminated by either party upon 60 days written notice upon a material breach
that remains uncured or upon the bankruptcy of the other party. DuPont
Pharmaceuticals paid us a license fee of $1.0 million and, through December 31,
1999, had paid us $3.6 million to support research and development efforts. In
December 1999, DuPont Pharmaceuticals purchased 144,354 shares of our Series F-1
preferred stock for an aggregate purchase price of $1.0 million, under terms
specified in the original agreement in December 1997. This represented a
milestone payment for our successful development and validation of three new
antiviral drug discovery assays, each of which is designed to identify small
molecule inhibitors of key HCV and HIV viral targets. In addition, DuPont
Pharmaceuticals will purchase $2.0 million of shares of our common stock in a
private transaction concurrent with the closing of this offering at the initial
public offering price.
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LICENSE AGREEMENTS
We have established a number of license agreements with academic
institutions. Our principal license agreements are:
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
In October 1993, we entered into a license agreement with The Regents of
the University of California, as amended in June 1997 and February 1998, under
which we obtained a worldwide exclusive license for the JNK gene regulating
enzyme based on the research of Dr. Michael Karin, one of our scientific
founders and advisors. The license also covers methods for the production and
screening of nerve cells. In February 1998, we also secured from The Regents
exclusive worldwide license rights to certain patents filed by Dr. Karin
relating to specified NF-kB signaling molecules, IKK1 and IKK2. Under the
license agreement, we paid initial license fees and extension payments and
issued shares of our common stock to The Regents, and are obligated to make
specified royalty and milestone payments. The term of the license remains in
effect for the life of the last-to-expire patent covered under each agreement.
THE UNIVERSITY OF MASSACHUSETTS
In October 1996 and 1997, we entered into worldwide exclusive license
agreements with the University of Massachusetts. Under the license agreements,
we have exclusive rights under patent applications and nonexclusive worldwide
rights under unpatented know-how to develop drugs targeting JNK and three
intracellular gene regulating proteins in the p38 pathway, MKK3, MKK4 and MKK6,
based on the research of Dr. Roger J. Davis, one of our scientific advisors.
Upon entering into both of the license agreements, we paid a license fee and
issued shares of our common stock to the University of Massachusetts and are
obligated to make royalty and milestone payments. The term of the licenses
remains in effect for the longer of 10 years or the life of the last-to-expire
patent under the agreements.
PATENTS AND PROPRIETARY RIGHTS
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
Accordingly, we seek patent protection for our proprietary technology, targets
and potential products. As of December 31, 1999, we owned or had licensed 29
issued United States patents, 2 notices of allowance from the United States
Patent and Trademark Office, 9 corresponding issued foreign patents and 35
pending United States patent applications. In addition, as of that date, we
owned or had licensed 7 corresponding international filings under the Patent
Cooperation Treaty and 43 pending foreign national patent applications.
Our policy is to file patent applications and to protect technology,
inventions and improvements to inventions that are commercially important to the
development of our business. We seek United States and international patent
protection for the molecular targets we discover, as well as therapeutic
products and processes, drug discovery technologies and other inventions. Our
commercial success will depend in part on obtaining this patent protection. We
also intend to seek patent protection or rely upon trade secret rights to
protect other technologies that may be used to discover and characterize
molecular targets and that may be used to develop novel drugs. We seek
protection, in part, through confidentiality and proprietary information
agreements.
We have developed proprietary technology for use in molecular target
discovery, regulatory pathway identification and assay design and, in addition
to our issued patents, have filed a number of patent applications in these
areas. Also, an increasing percentage of our recent patent applications have
been related to potential product candidates, or compounds, that we have
discovered.
We are aware of one issued United States patent relating to specific
methods for regulating gene expression. We believe that we have not infringed,
and are not currently infringing, the claims of the patent. Nonetheless, we may
in the future have to prove we are not infringing the patent or be required to
obtain a license to the patent, and we do not know whether such a license will
be available on commercially
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reasonable terms, or at all. We are also aware of a United States patent which
has issued to a third party claiming subject matter relating to the NF-kB
pathway which appears to overlap with technology claimed in some of our pending
NF-kB patent applications. We believe that one or more interference proceedings
will be initiated by the U.S. Patent and Trademark Office to determine priority
of invention for this subject matter. While we cannot predict the outcome of any
such proceedings, in the event we do not prevail we believe we can use
alternative methods for our NF-kB drug discovery program for which we have
issued United States patents that are not claimed by the subject matter of the
third party patents.
COMPETITION
We face, and will continue to face, intense competition from pharmaceutical
and biotechnology companies and other commercial enterprises, as well as
numerous academic and research institutions and governmental agencies. Other
companies are pursuing the same and similar technologies, including the
discovery of targets that regulate genes.
Many of our competitors and potential competitors have substantially
greater advantages in the following areas:
- capital resources;
- research and development resources;
- manufacturing;
- sales and marketing; and
- production facilities.
Additionally, many of our competitors have significantly greater experience
than we do in the following:
- undertaking target and drug discovery;
- preclinical product development;
- testing and clinical trials of potential pharmaceutical products; and
- obtaining FDA and other regulatory clearances.
Smaller companies also may prove to be significant competitors,
particularly through proprietary research discoveries and collaborative
arrangements with large pharmaceutical and established biotechnology companies.
Many of our competitors have significant products that have been approved or are
in development and operate large, well funded research and development programs.
We also face competition from academic institutions, governmental agencies and
other public and private research organizations in developing drugs and in
recruiting and retaining highly qualified scientific and management personnel.
Our competitors, either alone or with their collaborative partners, may
succeed in developing technologies or drugs that are more effective, safer, more
affordable or more easily administered and may achieve patent protection or
commercialize drugs sooner than us. Developments by others may render our
product candidates or our technologies obsolete. Our failure to compete
effectively could have a material adverse effect on our business.
GOVERNMENT REGULATION
The manufacturing and marketing of our potential products and our ongoing
research and development activities are subject to extensive regulation by
numerous governmental authorities in the United States and other countries.
Before marketing in the United States, any drug developed by us must undergo
rigorous preclinical testing and clinical trials and an extensive regulatory
clearance process implemented by the FDA under the federal Food, Drug, and
Cosmetic Act. The FDA regulates, among other things, the development, testing,
manufacture, safety, efficacy, record keeping, labeling, storage, clearance,
advertising, promotion, sale and distribution of biopharmaceutical products.
None of our product candidates has received marketing
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clearance in the United States or any foreign market. The regulatory review and
clearance process, which includes preclinical testing and clinical trials of
each product candidate, is lengthy, expensive and uncertain. Securing FDA
clearance requires the submission of extensive preclinical and clinical data and
supporting information to the FDA for each indication to establish a product
candidate's safety and efficacy. The process takes many years, requires the
expenditure of substantial resources, involves post-marketing surveillance, and
may involve ongoing requirements for post-marketing studies. Before commencing
clinical investigations in humans, we must submit to, and receive clearance
from, the FDA of an Investigational New Drug application. We expect to rely on
some of our corporate collaborators to file INDs and generally direct the
regulatory review process for some of our products.
Clinical testing must meet requirements for institutional review board
oversight, informed consent and good clinical practices. Clinical testing must
be conducted under FDA oversight. Before receiving FDA clearance to market a
product, we must demonstrate that the product is safe and effective on the
patient population that will be treated. If regulatory clearance of a product is
granted, this clearance will be limited to those disease states and conditions
for which the product is useful, as demonstrated through clinical trials.
Marketing or promoting a drug for an unapproved indication is generally
prohibited. Furthermore, clearance may entail ongoing requirements for
post-marketing studies. Even if this regulatory clearance is obtained, a
marketed product, its manufacturer and its manufacturing facilities are subject
to continual review and periodic inspections by the FDA. Discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on this product or manufacturer, including costly recalls or
withdrawal of the product from the market.
The length of time necessary to complete clinical trials varies
significantly and may be difficult to predict. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory clearances. Additional factors that can cause delay or termination of
our clinical trials, or the costs of these trials to increase, include:
- slow patient enrollment due to the nature of the protocol, the proximity
of patients to clinical sites, the eligibility criteria for the study or
other factors;
- inadequately trained or insufficient personnel at the study site to
assist in overseeing and monitoring clinical trials;
- delays in approvals from a study site's review board;
- longer treatment time required to demonstrate effectiveness or determine
the appropriate product dose;
- lack of sufficient supplies of the product candidate; adverse medical
events or side effects in treated patients; and
- lack of effectiveness of the product candidate being tested.
In addition, information obtained from preclinical testing and clinical
trials is susceptible to varying interpretations which could delay, limit or
prevent us from obtaining regulatory clearance of any potential drug. In
addition, delays or rejection may be encountered based upon changes in FDA
policy for drug clearance during the period of product development and FDA
regulatory review of each submitted new drug application, or NDA, or product
license application, or PLA. Similar delays or rejection also may be encountered
in foreign countries. We cannot assure you that regulatory clearance will be
obtained for any potential products developed by us or our collaborators.
Moreover, regulatory clearance may entail limitations on the indicated uses of a
drug. Further, even if regulatory clearance is obtained, a marketed drug and its
manufacturer are subject to continuing review, and discovery of previously
unknown problems with a drug or manufacturer can result in the withdrawal of a
drug from the market or a significant decrease in market demand.
Any drug is likely to produce some toxicities or undesirable side effects
in animals and in humans when administered at sufficiently high doses and/or for
sufficiently long periods of time. Unacceptable toxicities or side effects may
occur at any dose level at any time in the course of studies in animals designed
to identify unacceptable effects of a drug candidate, known as toxicological
studies, or clinical trials of our potential
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products. The appearance of any unacceptable toxicity or side effect could cause
us or regulatory authorities to interrupt, limit, delay or abort the development
of any of our product candidates and could ultimately prevent their clearance by
the FDA or foreign regulatory authorities for any or all targeted indications.
Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials,
marketing authorization, pricing and reimbursement vary widely from country to
country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Union registration procedures are
available to companies wishing to market a product in more than one European
Union member state. If the regulatory authority is satisfied that adequate
evidence of safety, quality and efficacy has been presented, a marketing
authorization will be granted. This foreign regulatory approval process involves
all of the risks associated with FDA clearance discussed above.
Violations by us of regulatory requirements at any stage of drug
development, including preclinical testing and clinical trials, the regulatory
review process or post-clearance, may result in various adverse consequences
including the following:
- a delay by the FDA or other applicable regulatory authority in completing
regulatory review of a potential product;
- the FDA or other authority's refusal to grant marketing clearance for a
potential product,
- required withdrawal of a drug from the market; and
- the imposition of criminal penalties against us.
Neither we nor our collaborators have submitted any IND applications for
any potential product of ours. We cannot assure you that we or our collaborators
will be able to obtain FDA or other applicable regulatory authority clearance
for any potential products. If we do not obtain the required regulatory
authorizations or the scope of authorization we request, it will delay or
preclude us or our collaborators from marketing our or our collaborators'
products and limit the commercial use of the potential products.
MANUFACTURING
To date, we have not manufactured any products for preclinical, clinical or
commercial purposes and do not have any manufacturing facilities. We intend to
use third-party contract manufacturers or our corporate collaborators for the
production of material for use in preclinical and clinical trials and for the
manufacture of future products for commercialization. In the event that we are
unable to secure such outside manufacturing capabilities, we will not be able to
conduct preclinical product development, clinical trials or commercialize our
potential products as planned. Even if we were able to establish our own
internal manufacturing capability, doing so would require the expenditure of
significant resources which could have a material adverse effect on our
business, financial condition and results of operations. We cannot assure you
that we or any outside manufacturers can produce potential products of suitable
quality in sufficient quantity in a cost-effective manner, if at all.
We and our contract manufacturers also are required to comply with the
applicable FDA and other applicable domestic and foreign regulatory authorities'
current good manufacturing practice regulations. Good manufacturing practice
regulations include requirements relating to quality control and quality
assurance as well as the corresponding maintenance of records and documentation.
Manufacturing facilities are subject to inspection by the FDA. These facilities
must be approved before we can use them in commercial manufacturing of our
products. We or our contract manufacturers may not be able to comply with the
applicable good manufacturing practice requirements and other FDA or other
applicable domestic and foreign regulatory requirements.
OTHER THIRD PARTY SERVICES
In addition to manufacturing arrangements with third parties, we have also
contracted with third parties for the performance of preclinical studies,
including studies regarding the biological activity, safety,
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absorption, metabolism and elimination of our drug candidates, and we expect to
continue to contract with third parties for these and similar services. We also
expect that we will contract with third parties to conduct all clinical trials,
if any, of our drug candidates. There are multiple companies capable of
performing these services, and, accordingly, we do not expect to be dependent on
any single company for these services.
EMPLOYEES
As of December 31, 1999, we had 87 full-time employees, including 38 with
Ph.D. degrees. Of our workforce, 69 employees are engaged in research and
development and 18 are engaged in business development, finance and
administration. We have assembled a group of experienced scientists and managers
skilled in each phase of target and drug discovery. We also retain outside
consultants. None of our employees are covered by collective bargaining
arrangements, and our management considers its relationships with our employees
to be good.
FACILITIES
We currently lease 25,000 square feet of laboratory and office space at
5555 Oberlin Drive, San Diego, California. Our lease for this facility expires
on January 31, 2001, with an option to renew for two additional periods of three
years each. We also lease 11,000 square feet of laboratory and office space at
5626 Oberlin Drive and 9,500 square feet of office space at 5627 Oberlin Drive,
San Diego, California. Our leases for these facilities expires on December 31,
2003. We believe that our existing facilities are adequate to meet our business
requirements for the near-term and that additional space will be available on
commercially reasonable terms, if required.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings at this time.
SCIENTIFIC ADVISORY BOARD
Our scientific advisory board consists of our five scientific founders, as
well as other individuals with expertise in the fields of kinase biology,
immunology, cytokine biology, virology and synthetic chemistry. The scientific
advisory board generally advises us concerning long-term scientific planning,
research and development, and also evaluates our research programs, recommends
personnel to us and advises us on specific scientific and technical issues. The
scientific advisory board meets at least once per year, and some individual
scientific advisors consult with and meet informally with us on a more frequent
basis. Some of our scientific advisors own shares of our common stock, and we
have entered into consulting agreements with all of our scientific advisors.
None of our scientific advisors is employed by us, and any or all of our
advisors may have commitments to or consulting or advisory contracts with their
employers or other entities that may conflict or compete with their obligations
to us. Accordingly, these persons are expected to devote only a small portion of
their time to us. The members of our scientific advisory board are:
SCIENTIFIC FOUNDERS
Tony Hunter, Ph.D., is a Professor at The Salk Institute and an American
Cancer Society Research Professor. Dr. Hunter is a world-renowned expert in the
field of gene regulating kinases and established their roles in the regulation
of cellular growth and tumor development. Dr. Hunter was elected a fellow of the
Royal Society of London and has received several awards for his research,
including a 1994 Gairdner Foundation International Award.
Michael Karin, Ph.D., is a Professor in the Department of Pharmacology,
University of California, San Diego. He is an internationally recognized expert
in the field of transcriptional regulation and has made fundamental
contributions to the understanding of a variety of gene regulating pathways,
including JNK, FRK and NF-kB.
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Inder Verma, Ph.D., is Chairman of our Scientific Advisory Board. Dr. Verma
is an American Cancer Society Professor of Molecular Biology and Co-Director of
the Laboratory of Genetics at The Salk Institute, and is a member of the
National Academy of Sciences. Dr. Verma is internationally recognized for his
work in the field of NF-kB gene regulation.
Fred H. Gage, Ph.D., is a Professor in the Laboratory of Genetics of the
Salk Institute for Biological Studies. He is an internationally respected
innovator in the fields of neurological diseases and transplantation. Dr. Gage
has won the IPSEN Prize, the Ameritec Prize, the Metropolitan Award, the
Chancellor's Associate Award and the Allied Signal Award.
Stephen F. Heinemann, Ph.D., is a Professor and Director of the Molecular
Neurobiology Laboratory at The Salk Institute and an external member of the Max
Planck Institute. Dr. Heinemann is the recipient of the Bristol-Myers Squibb
Distinguished Achievement Award in Neuroscience Research. He is considered one
of the foremost experts in the field of receptor neurobiology and is a member of
the National Academy of Sciences.
OTHER SCIENTIFIC ADVISORY BOARD MEMBERS
Roger J. Davis, Ph.D., is a Professor in Molecular Medicine and the
Department of Biochemistry & Molecular Biology at the University of
Massachusetts Medical Center, and an Associate Investigator at the Howard Hughes
Medical Institute. Dr. Davis is regarded as one of the leading researchers
worldwide in the field of signal transduction. Dr. Davis is a principal or
co-discoverer of several important gene regulating kinases, including molecular
mechanisms of the JNK and p38 signaling pathways.
Melanie Cobb, Ph.D., is a Professor in the Department of Pharmacology at
the University of Texas Southwestern Medical Center in Dallas. Dr. Cobb is
internationally renowned for her research on MAP kinase gene regulating
pathways.
Anjana Rao, Ph.D., is an Associate Professor of Pathology at the Harvard
Medical School. Dr. Rao has conducted seminal research on signal transduction
mechanisms of the human immune system, including the NF-ATp and NF-kB
transcription factors. Dr. Rao is a recipient of the Leukemia Society of America
Scholar Award.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information regarding our current executive
officers, directors and key employees as of January 31, 2000:
NAME AGE POSITION
---- --- --------
Alan J. Lewis, Ph.D. ................... 54 President, Chief Executive Officer and
Director
David W. Anderson, Ph.D. ............... 47 Senior Vice President, Chief Scientific
Officer
Bradley B. Gordon....................... 46 Senior Vice President Finance, Chief Financial
Officer and Corporate Secretary
Douglas E. Richards..................... 37 Vice President, Corporate Development
Shripad S. Bhagwat, Ph.D. .............. 44 Senior Director of Drug Discovery
Anthony M. Manning, Ph.D. .............. 38 Senior Director of Target Biology and
Preclinical Development
John P. Walker.......................... 51 Chairman of the Board
Harry F. Hixson, Ph.D.(2)............... 61 Director
Patrick F. Latterell(1)(2).............. 41 Director
Gary L. Neil, Ph.D.(1).................. 59 Director
Arnold Oronsky, Ph.D.(1)(2)............. 59 Director
- -------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Alan J. Lewis, Ph.D. has served as our Chief Executive Officer and Director
since 1996 and as our President since 1994. Prior to joining us, Dr. Lewis
worked for 15 years at the Wyeth-Ayerst Research division of American Home
Products Corporation, a pharmaceutical company, where he served as Vice
President of Research from 1990 to 1994. At Wyeth-Ayerst, Dr. Lewis was
responsible for drug discovery efforts in CNS, cardiovascular, inflammatory,
allergy and bone metabolism diseases. Dr. Lewis currently serves as a Director
of Allergan Specialty Therapeutics, Inc. a pharmaceutical company. He holds a
Ph.D. in Pharmacology from the University of Wales in Cardiff and completed his
post-doctoral training at Yale University.
David W. Anderson, Ph.D. has served as our Chief Scientific Officer since
October 1999 and as our Vice President of Drug Discovery and Preclinical
Development from 1994 to October 1999. Prior to joining us, Dr. Anderson spent
six years at Johnson & Johnson, a healthcare company, most recently as Director
of Drug Discovery at the R.W. Johnson Pharmaceutical Research Institute, where
he assisted in the development of two drug products, Procrit(TM) and
Leustatin(TM). He also led teams which filed three INDs in the areas of cancer
and inflammatory diseases. Prior to his tenure with Johnson & Johnson, Dr.
Anderson was one of the first senior scientists and group leaders in immunology
and inflammation at Monsanto. Dr. Anderson holds a Ph.D. in Medical Microbiology
and Immunology from the University of Missouri-Columbia. He conducted
post-doctoral training at the Webb-Waring Lung Institute and served as an
Institute Fellow of the Eleanor Roosevelt Institute for Cancer Research both
located at the University of Colorado Health Science Center.
Bradley B. Gordon has served as our Vice President Finance, Chief Financial
Officer and Corporate Secretary since 1994. For the seven years prior to joining
us, Mr. Gordon served in various management positions with Viagene, Inc., a
biopharmaceutical company acquired by Chiron Corp. in 1995, including Corporate
Vice President, Vice President Corporate Development and Vice President,
Finance. Mr. Gordon received an M.B.A. from the University of Southern
California.
Douglas E. Richards has served as our Vice President, Corporate Development
since May 1998. Before joining us, Mr. Richards served as Director of
Biotechnology Licensing at Bristol-Myers Squibb. While at
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Bristol-Myers Squibb, from 1995 to 1998, Mr. Richards was responsible for
completing a number of major collaborations with biotechnology companies with a
potential value of well over two-hundred million dollars. Between 1992 and 1995,
Mr. Richards served in the corporate development department at Gensia, where he
was responsible for corporate partnering and technology in-licensing activities.
Mr. Richards received an M.B.A. from the University of Chicago and an M.S. in
Molecular Biology from the University of Wisconsin.
Shripad Bhagwat, Ph.D. has served as our Senior Director of Drug Discovery
since 1999 and was our Director of Medicinal Chemistry from May 1998 to 1999.
Dr. Bhagwat has fifteen years of research experience in medicinal chemistry and
drug discovery in the pharmaceutical industry. Prior to joining us in 1998, Dr.
Bhagwat was Senior Group Leader, Neuroscience Research at Abbott Laboratories
for four years with responsibility for managing the medicinal chemistry
activities for two lead optimization programs, including one drug candidate in
clinical development. From 1985 through 1994 Dr. Bhagwat was employed at
Ciba-Geigy Corp. where he managed several medicinal chemistry programs in the
area of cardiovascular, atherosclerosis and antiviral research. Dr. Bhagwat
received his Ph.D. in Organic Chemistry from the State University of New York at
Stony Brook and conducted post-doctoral research at Columbia University.
Anthony M. Manning has served as our Senior Director, Target Biology &
Preclinical Development since November 1999. Dr. Manning joined Signal in July
1996 as Director, Inflammation and Immunology. Before joining us, Dr. Manning
served as Senior Research Scientist at Pharmacia & Upjohn. While at Pharmacia &
Upjohn, from 1992 to 1996, Dr. Manning was a Drug Discovery Program Team Leader
in the inflammation area. Dr. Manning completed a Fogarty International Center
NIH Fellowship in Human Molecular Genetics at Baylor College of Medicine and a
Masonic Fellowship in Pediatrics at the University of Otago, New Zealand. Dr.
Manning received a Ph.D. in Biochemistry from the University of Otago, New
Zealand.
John P. Walker has served as our Chairman of the Board since 1996 and has
served as a consultant to us since June 1995. Mr. Walker is currently Chairman,
Chief Executive Officer and a director of Axys Pharmaceuticals, Inc., a public
biopharmaceutical company. From 1993 to year end 1997, he was President and
Chief Executive Officer of Arris Pharmaceutical Corporation, a predecessor
corporation of Axys. Prior to his association with Arris, Mr. Walker was the
Chairman and Chief Executive Officer of Vitaphore Corporation, a biomaterials
company which was sold to Union Carbide in 1990, and for a period of 15 years
was an executive with American Hospital Supply Corporation, most recently
serving as President of the Hospital Company. Mr. Walker also serves as Chairman
of the Board of Directors of Microcide Corporation and as a director of Geron
Corporation and the Biotechnology Industry Organization.
Harry F. Hixson, Ph.D. has served as one of our directors since 1993. He is
currently the Chairman of the Board of Directors and the Chief Executive Officer
of Elitra Pharmaceuticals, Inc., a privately-held biopharmaceutical company. Dr.
Hixson was employed by Amgen Inc. from 1985 to 1991, where he last served as
President, Chief Operations Officer and a director. From 1991 to present, Dr.
Hixson has been a private investor specializing in biotechnology start-up
companies. From 1991 until its merger with Somatix Therapy Corporation in 1992,
Dr. Hixson served as President and Chief Executive Officer of GeneSys
Therapeutics, Inc., a biotechnology company. Dr. Hixson holds a Ph.D. in
Physical Biochemistry from Purdue University and an M.B.A. from The University
of Chicago.
Patrick F. Latterell has served as one of our directors since 1993, as
Chairman of the Board from 1993 to 1996, and as our Chief Executive Officer from
1994 to 1996. Mr. Latterell is a General Partner of Venrock Associates, a
venture capital investment group, which he joined in 1989. Prior to Venrock Mr.
Latterell was a General Partner with Rothschild Ventures Inc. and an executive
with Syntex Pharmaceuticals. Mr. Latterell currently is a director of Vical,
Inc. Oratec Interventions, Inc. and several private biomedical companies. Mr.
Latterell holds an M.B.A. from the Stanford University Graduate School of
Business.
Gary L. Neil, Ph.D. has served as one of our directors since January 2000.
Dr. Neil is President, Chief Executive Officer and a director of Crescendo
Pharmaceuticals Corporation, a pharmaceutical development and commercialization
company, which he joined in 1997. Dr. Neil was a director and the President and
Chief Executive Officer of Therapeutic Discovery Corporation from 1993 until
September 1997. Prior to joining Therapeutic Discovery Corporation, from 1989 to
1993, Dr. Neil was with the Wyeth-Ayerst Research division of Wyeth
Laboratories, Inc., a subsidiary of American Home Products Corporation, a large
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pharmaceutical company. At Wyeth-Ayerst, among other positions, Dr. Neil served
as Executive Vice President and was responsible for Wyeth-Ayerst's worldwide
research and development activities. Prior to that time, Dr. Neil served for 23
years in various scientific and management positions with the Upjohn Company.
Dr. Neil is a director of Allergan Specialty Therapeutics, Inc. and Geron
Corporation, each of which is a publicly held corporation.
Arnold Oronsky, Ph.D. has served as one of our directors since 1994. Since
1994, Dr. Oronsky has been a general partner at InterWest Partners, a private
venture capital firm. From 1995 to 1996, Dr. Oronsky served as President and
Chief Executive Officer of Coulter Pharmaceutical, Inc., a biopharmaceutical
company. From 1984 to 1994, Dr. Oronsky served as Vice President for Discovery
Research at Lederle Laboratories, a pharmaceutical division of American
Cyanamid, Inc., where he was responsible for the research of new drugs. Since
1988, Dr. Oronsky has been a senior lecturer in the Department of Medicine at
Johns Hopkins Medical School. Dr. Oronsky received his Ph.D. in Physiology and
Biochemistry from Columbia University College of Physicians and Surgeons.
Under the terms of our restated certificate, our board of directors is
divided into three classes, serving staggered terms of three years, and any
vacancies that occur during the year may be filled by our board of directors for
the remainder of the full term. Dr. Hixson and Dr. Oronsky serve as Class I
directors, whose term will expire at the first annual meeting of stockholders
following the closing of this offering. Mr. Walker and Mr. Latterell serve as
Class II directors, whose term will expire at the second annual meeting of
stockholders following the closing of this offering. Dr. Lewis and Dr. Neil
serve as Class III directors, whose term will expire at the third annual meeting
of stockholders following the closing of this offering. Officers serve at the
discretion of the board of directors. There are no family relationships between
any of our directors or executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee consists of Dr. Hixson, Mr. Latterell and Dr.
Oronsky. The Compensation Committee makes recommendations regarding our 2000
Equity Incentive Plan, Non-Employee Directors' Stock Option Plan and Employee
Stock Purchase Plan, as well as prior stock option plans, and makes decisions
concerning salaries and incentive compensation for our employees and
consultants.
The Audit Committee consists of Mr. Latterell, Dr. Neil and Dr. Oronsky.
The Audit Committee is composed of three independent directors who make
recommendations to the board of directors regarding the selection of independent
auditors, reviews the results and scope of the audit and other services provided
by our independent auditors and reviews and evaluates our audit and control
functions.
DIRECTOR COMPENSATION
Our directors currently do not receive any cash compensation for services
on the board of directors or any committee thereof, but directors may be
reimbursed for expenses in connection with attendance at board and committee
meetings. Notwithstanding the foregoing, Mr. Walker, the Chairman of the Board
of Directors, currently receives $1,000 compensation for each day of on-site
activities and each meeting of the board of directors that he attends under a
consulting agreement dated April 1, 1996. In 1997, each non-employee director
also received options to purchase 25,000 shares of common stock. All directors
are eligible to participate in our 2000 Equity Incentive Plan. Non-employee
directors receive automatic grants of options under our Non-Employee Directors'
Stock Option Plan as described below.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or Compensation Committee. See
"Certain Transactions" for a description of transactions between us and entities
affiliated with members of our Compensation Committee.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation that
was earned during 1999 to our Chief Executive Officer and each of the other
executive officers who earned more than $100,000 during 1999. All option grants
were made under our stock option plans.
In accordance with the rules of the Securities and Exchange Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits which are available generally to all of our salaried
employees and certain perquisites and other personal benefits received which do
not exceed the lesser of $50,000 or 10% of any officer's salary and bonus
disclosed in this table.
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
--------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
--------------------------- --------- -------- ---------------------
Alan J. Lewis, Ph.D. ............................. $300,593 $54,000 --
President, Chief Executive Officer and Director
David W. Anderson, Ph.D. ......................... 230,125 32,000 --
Senior Vice President, Drug Development
Bradley B. Gordon................................. 176,588 27,000 25,000
Senior Vice President Finance, Chief Financial
Officer and Corporate Secretary
Douglas E. Richards............................... 181,253 27,000 --
Vice President, Corporate Development
EMPLOYMENT AGREEMENTS AND INDEBTEDNESS OF MANAGEMENT
We entered into an employment letter agreement with Alan J. Lewis, dated
December 8, 1993, providing for an annual salary, subject to adjustment from
time to time, a signing bonus of $50,000, additional bonuses and options subject
to specified performance milestones, assistance with home financing, and an
opportunity to acquire 225,000 shares of common stock under our stock option
plan. The term of the employment letter agreement was for one year, renewable
annually.
We entered into an employment letter agreement with David W. Anderson,
dated March 4, 1994, providing for an annual salary, subject to adjustment from
time to time, a signing bonus of $25,000, and an opportunity to acquire 100,000
shares of common stock under our stock option plan. The employment letter
agreement indicates that Dr. Anderson's employment is terminable at will by
either party.
We entered into an employment letter agreement with Bradley B. Gordon,
dated August 18, 1994, providing for an annual salary, subject to adjustment
from time to time, plus bonuses subject to unspecified performance milestones
and an opportunity to acquire 75,000 shares of common stock under our stock
option plan. The employment letter agreement indicates that Mr. Gordon's
employment is terminable at will by either party.
We entered into an employment letter agreement with Douglas E. Richards,
dated May 18, 1998, providing for an annual salary, subject to adjustment from
time to time, plus bonuses subject to unspecified performance milestones and an
opportunity to acquire 112,500 shares of common stock under our stock option
plan. Mr. Richards' employment agreement also provided for a loan, which we
describe below, and reimbursement of specified expenses incurred by Mr. Richards
in connection with his family's relocation to San Diego, California. If we and
Mr. Richards mutually agree to terminate his employment with us, or if we
terminate his employment for any reason, the employment letter agreement
obligates us to pay him severance payments in an amount equal to six months of
his then current salary and to continue his benefits during such time. The
employment letter agreement indicates that Mr. Richards' employment is
terminable at will by either party.
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In June 1994, we loaned $250,000 to Alan J. Lewis, our President and Chief
Executive Officer and a director, to assist with the purchase of a residence in
connection with Dr. Lewis' relocation to San Diego, California. Under the terms
of a Promissory Note dated June 14, 1994, as amended on May 14, 1998 and October
27, 1999, the principal amount of the loan plus accrued interest shall be
amortized over a period of five years following June 14, 2002, with monthly
payments commencing in July 2002. The principal amount of the loan will be
interest-free for eight years from the date of the Promissory Note, and
thereafter will accrue interest at the per annum rate of 7.52%, compounded
annually. Interest will also begin to accrue at the same rate in the event that
Dr. Lewis' employment is terminated for any reason. The parties also entered
into a security agreement on the same date whereby Dr. Lewis pledged all present
and future shares of our common stock held by him (plus all cash and stock
dividends attributable to such shares) as security for the loan. As of December
31, 1999, the total amount outstanding under this loan was $250,000.
In May 1998, we loaned $62,000 to Alan J. Lewis in connection with the
exercise of options to purchase 225,000 shares of our common stock. Under the
terms of a promissory note delivered to us by Dr. Lewis, dated May 8, 1998, the
principal amount of the loan plus accrued interest at a per annum rate equal to
5.69%, compounded annually, shall be due and payable five years from the date of
the loan. Under a stock pledge agreement entered into on the same date, Dr.
Lewis pledged all present and future shares of our common stock held by him,
plus all cash and stock dividends attributable to such shares, as security for
the loan. As of December 31, 1999, the total amount outstanding under this loan
was $62,000.
In August 1998, we loaned $60,000 to Douglas E. Richards, our Vice
President of Corporate Development, to assist Mr. Richards with his relocation
to San Diego, California. Under the terms of a promissory note dated August
1998, the principal amount of this loan, together with accrued interest at the
rate of 4.83% per year, will be due and payable one year from the date of
termination of Mr. Richards' employment with us for any reason. Provided he
remains in continuous employment with us, we will forgive the principal amount
of the loan in three increments of $20,000 on June 8, 2000, June 8, 2001 and
June 8, 2002. We also entered into a security agreement with Mr. Richards under
which he pledged all shares of our common stock now or in the future held by
him, plus all cash and stock dividends attributable to those shares, as security
for the loan. As of December 31, 1999, the total amount outstanding under this
loan was $60,000.
2000 EQUITY INCENTIVE PLAN
We adopted our 1993 Stock Option Plan, 1993 Founders' Stock Option Plan and
1997 Stock Option Plan and amended, restated and retitled these plans in
February 2000 as the 2000 Equity Incentive Plan. Outstanding options will
continue to be governed by the original terms of those grants. We have reserved
an aggregate of 3,500,000 shares of common stock (including the shares subject
to options that were outstanding under our prior plans) for issuance under the
exercise of stock awards granted to employees, directors and consultants under
the 2000 Equity Incentive Plan. The 2000 Equity Incentive Plan will terminate in
February 2010, unless sooner terminated by the board.
The 2000 Equity Incentive Plan permits the granting of options intended to
qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, to employees, including officers and
employee directors, and options that do not so qualify to employees, directors
and consultants, including non-employee directors. In addition, the 2000 Equity
Incentive Plan permits the granting of stock bonuses and rights to purchase
restricted stock. No person is eligible to be granted options covering more than
750,000 shares of common stock in any calendar year.
The 2000 Equity Incentive Plan is administered by the board or a committee
appointed by the board. Subject to the limitations set forth in the 2000 Equity
Incentive Plan, the board has the authority to select the persons to whom grants
are to be made, to designate the number of shares to be covered by each stock
award, to determine whether an option is to be an incentive stock option or a
nonstatutory stock option, to establish vesting schedules, to specify the option
exercise price and the type of consideration to be paid upon exercise and,
subject to some restrictions, to specify other terms of stock awards.
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The maximum term of options granted under the 2000 Equity Incentive Plan is
10 years. The aggregate fair market value, determined at the time of grant, of
the shares of common stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year may not
exceed $100,000, or the options or portion thereof which exceed such limit,
according to the order in which they are granted, will be treated as
nonstatutory stock options. Options granted under the 2000 Equity Incentive Plan
generally are non-transferable and expire three months after the termination of
an optionee's service to us. In general, if an optionee is permanently disabled
or dies during his or her service to us, such person's options may be exercised
up to 12 months following such disability and following such death.
The exercise price of options granted under the 2000 Equity Incentive Plan
is determined by the board of directors in accordance with the guidelines set
forth in the 2000 Equity Incentive Plan. The exercise price of an incentive
stock option cannot be less than 100% of the fair market value of the common
stock on the date of the grant. The exercise price of a nonstatutory stock
option cannot be less than 85% of the fair market value of the common stock on
the date of grant. Options granted under the 2000 Equity Incentive Plan vest at
the rate specified in the option agreement. The exercise price of incentive
stock options granted to any person who at the time of grant owns stock
representing more than 10% of the total combined voting power of all classes of
our capital stock must be at least 110% of the fair market value of such stock
on the date of grant and the term of such incentive stock options cannot exceed
five years.
Any stock bonuses or restricted stock purchase awards granted under the
2000 Equity Incentive Plan will be in such form and will contain such terms and
conditions as the board deems appropriate. The purchase price under any
restricted stock purchase agreement will not be less than 85% of the fair market
value of the common stock on the date of grant. Stock bonuses and restricted
stock purchase agreements awarded under the 2000 Equity Incentive Plan are
generally non-transferable.
Under the 2000 Equity Incentive Plan, shares subject to stock awards that
have expired or otherwise terminated without having been exercised in full again
become available for grant, but shares subject to exercised stock appreciation
rights will not again become available for grant. The board of directors has the
authority to reprice outstanding options and to offer optionees the opportunity
to replace outstanding options with new options for the same or a different
number of shares.
Upon a change in control of our company, all outstanding stock awards under
the 2000 Equity Incentive Plan must either be assumed or substituted by the
surviving entity. In the event the surviving entity does not assume or
substitute such stock awards, such stock awards will be terminated to the extent
not exercised prior to such change in control.
The information in this paragraph is presented as though the February 2000
amendment, restatement and retitling of our 1993 Stock Option Plan, 1993
Founders' Stock Option Plan and 1997 Stock Option Plan into the 2000 Equity
Incentive Plan had already occurred as of December 31, 1999. As of December 31,
1999, we had issued 1,165,399 shares of common stock, net of repurchases of
64,559, upon the exercise of options granted under the 2000 Equity Incentive
Plan, and had granted additional options to purchase an aggregate of 1,493,607
shares of common stock. Since December 31, 1999, we have granted options to
purchase an aggregate of 589,375 additional shares of common stock. As of
February 23, 2000, 1,417,018 shares of common stock remained available for
future grants under the 2000 Equity Incentive Plan.
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The following table sets forth summary information regarding the option
grants made to our Chief Executive Officer and each of our executive officers
who earned more than $100,000 during 1999:
OPTION GRANTS IN YEAR ENDED 1999
INDIVIDUAL GRANTS POTENTIAL
------------------------------------- REALIZABLE VALUE
PERCENT OF AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED APPRECIATION FOR
UNDERLYING TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION --------------------
NAME GRANTED IN 1999 PER SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- -------- --------
Alan J. Lewis.................... -- --% $ -- -- $ -- $ --
David W. Anderson................ -- -- -- -- -- --
Bradley B. Gordon................ 25,000 14.3 1.00 1/19/09 506,121 772,228
Douglas E. Richards.............. -- -- -- -- -- --
Twenty-five percent of the options listed in the table above vest on the
first anniversary of the grant date and the remaining options vest thereafter in
36 equal monthly installments. The board of directors has the right to
accelerate the vesting of these options. The term of the options is 10 years.
The exercise price of the options listed in the table above is equal to the
fair market value of our common stock on the date of grant, as determined by the
board of directors. Because there has been no public market for our common
stock, in determining the fair market value, the board gives consideration to a
number of factors, including the following:
- the share price in our most recent round of preferred stock financing;
- the material differences between the rights, preferences and privileges
of the most-recently issued series of preferred stock and the rights of
the common stock;
- the stage of development of our company, our research and development
programs and our collaborative agreements;
- the valuations of other companies in our industry at similar stages of
development; and
- other factors that the board deems relevant.
In view of the variety of factors considered by the board in determining
the fair market value of our common stock on any given date, the board does not
believe it is practicable to quantify or otherwise assign relative weight to the
specific factors considered in determining fair market value.
You should note the disparity between the exercise price of the options in
the table above and the assumed public offering price. Because of this
disparity, we have used the assumed public offering price to compute the
potential realizable option values in the table above.
The potential realizable value is calculated based on the term of the
option and is calculated by assuming that the fair market value of common stock
on the date of the grant as determined by the board appreciates at the indicated
annual rate compounded annually for the entire term of the option and that the
option is exercised and the common stock received therefor is sold on the last
day of the term of the option for the appreciated price. The 5% and 10% rates of
appreciation are derived from the rules of the Securities and Exchange
Commission. The actual value realized may be greater than or less than the
potential realizable values set forth in the table.
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The following table sets forth summary information regarding the number and
value of options exercised during 1999 and held as of December 31, 1999 for our
Chief Executive Officer and each of the other executive officers who earned more
than $100,000 in 1999:
AGGREGATED 1999 OPTION EXERCISES AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR END AT YEAR END
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
Alan J. Lewis.......... -- $ -- 37,500 -- $ 504,000 --
David W. Anderson...... -- -- 70,000 -- 945,700 --
Bradley B. Gordon...... -- -- 165,000 -- 2,227,600 --
Douglas E. Richards.... -- -- 112,500 -- 1,462,500 --
The values of unexercised in-the-money options at year-end in the table
above were determined based on an assumed initial public offering price of
$14.00 per share minus the per share exercise price multiplied by the number of
shares.
All stock options that we have granted are immediately exercisable for
shares of restricted common stock, subject to our right of repurchase under a
vesting schedule. At year-end, Dr. Lewis held 39,532 shares and 19,532
exercisable options remaining subject to a vesting schedule; Dr. Anderson held
34,929 exercisable options remaining subject to a vesting schedule; Mr. Gordon
held 58,855 exercisable options remaining subject to a vesting schedule; and Mr.
Richards held 67,969 exercisable options remaining subject to a vesting
schedule.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In February 2000, we adopted our Non-Employee Directors' Stock Option Plan
to provide for the automatic grant of options to purchase shares of common stock
to our non-employee directors. The Directors' Plan is administered by the board,
unless the board delegates administration to a committee of at least two
disinterested directors.
The maximum number of shares of common stock that may be issued upon
exercise of options granted under the Directors' Plan is 250,000. Under the
terms of the Directors' Plan:
- each person who, after the effective date of this offering, for the first
time becomes a non-employee director automatically will be granted, upon
the date of his or her initial appointment or election to be a
non-employee director, a one-time option to purchase 20,000 shares of
common stock; and
- on the date of each annual meeting of stockholders after the effective
date of this offering, other than any such annual meeting held in 2000,
each person other than the Chairman of the Board who is serving as a
non-employee director, and who was also a non-employee director prior to
such annual meeting, automatically will be granted an option to purchase
5,000 shares of common stock, and the Chairman of the Board, provided he
is serving as a non-employee director and was a non-employee director
prior to such annual meeting, automatically will be granted an option to
purchase 7,500 shares of common stock.
No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. Options granted under the
Directors' Plan vest monthly over a three-year period. The exercise price of
options under the Directors' Plan will equal 100% of the fair market value of
the common stock on the date of grant. Options granted under the Directors' Plan
are generally non-transferable. Unless otherwise terminated by the board of
directors, the Directors' Plan automatically terminates on the tenth anniversary
of the date of this offering. As of the date hereof, no options to purchase
shares of common stock have been granted under the Directors' Plan. Options
granted under the Directors' Plan vest in full upon a change in control of our
company.
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EMPLOYEE STOCK PURCHASE PLAN
In February 2000, we adopted our Employee Stock Purchase Plan covering an
aggregate of 500,000 shares of common stock. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Code. Under the Purchase Plan, the board may authorize participation by
eligible employees, including officers, in periodic offerings following the
commencement of the Purchase Plan. The initial offering under the Purchase Plan
will commence on the effective date of this offering and terminate on July 31,
2001.
Unless otherwise determined by the board, employees are eligible to
participate in the Purchase Plan only if they are employed by us or our
subsidiary designated by the board for at least 20 hours per week and are
customarily employed by us or our subsidiary designated by the board for at
least five months per calendar year. Employees who participate in an offering
may have up to 15% of their earnings withheld under the Purchase Plan. The
amount withheld is then used to purchase shares of the common stock on specified
dates determined by the board. The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the
Common Stock at the commencement date of each offering period or the relevant
purchase date. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment with us.
In the event of a merger, reorganization, consolidation or liquidation
involving our company, the board has discretion to provide that each right to
purchase common stock will be assumed or an equivalent right substituted by the
successor corporation, or the board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The board has the
authority to amend or terminate the Purchase Plan, provided, however, that no
such action may adversely affect any outstanding rights to purchase common
stock.
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent permitted by Delaware law, except with respect to certain
proceedings initiated by such persons. We are also empowered under our bylaws to
enter into indemnification contracts with our directors and executive officers
and to purchase insurance on behalf of any person we are required or permitted
to indemnify. Under this provision, we have entered into indemnification
agreements with each of our directors and executive officers.
In addition, our restated certificate provides that no director will be
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derives an improper personal
benefit.
The restated certificate also provides that if the Delaware General
Corporation Law is amended after the approval by our stockholders of the
restated certificate to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of our
directors shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended. The provision does not affect a
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
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CERTAIN TRANSACTIONS
The following is a description of transactions since January 1, 1997, to
which we have been a party, in which the amount involved in the transaction
exceeds $60,000 and in which any director, executive officer or holder of more
than five percent of our capital stock had or will have a direct or indirect
material interest, other than compensation arrangements that are otherwise
required to be described under "Management."
In December 1999, we sold in a private placement 144,354 shares of Series
F-1 preferred stock to DuPont Pharmaceuticals in exchange for an aggregate
purchase price of $1,000,000, under a stock purchase agreement dated December
26, 1997 and concurrent with a collaborative research and license agreement
dated December 26, 1997. Upon the closing of this offering, each share of Series
F-1 preferred stock will automatically convert into one share of common stock.
Note 5 of notes to financial statements describes the Series F-1 preferred
stock.
In December 1997, we sold in a private placement 1,361,256 shares of Series
F preferred stock to Ares-Serono, a five percent holder of our capital stock, in
exchange for an aggregate purchase price of $8,200,001, under a Series F
preferred stock purchase agreement dated November 25, 1997. Upon the closing of
this offering, each share of Series F preferred stock will automatically convert
into one share of common stock. Note 5 of notes to financial statements
describes the Series F preferred stock. In addition, on November 25, 1997, we
entered into a research development and license agreement with Ares-Serono
focused on the identification of compounds that modulate NF-k B gene regulating
pathways. Ares-Serono has paid us a license fee and is obligated to provide us
with annual research and development support, make payments to us based on the
achievement of specified research and development milestones, and to pay us
royalties on any future product sales arising from the collaboration.
In September 1997, we sold in a private placement 3,227,740 shares of
Series E preferred stock in exchange for an aggregate purchase price of
$11,999,997, under a Series E preferred stock purchase agreement dated September
9, 1997. Upon the closing of this offering, each share of Series E preferred
stock will automatically convert into one share of common stock. Note 5 of notes
to financial statements describes the Series E preferred stock. The following
directors and beneficial owners of more than five percent of our common stock
(assuming the conversion of all shares of preferred stock into common stock)
acquired beneficial ownership of Series E preferred stock under the Series E
Agreement:
NUMBER
DIRECTORS/5% STOCKHOLDERS OF SHARES
------------------------- ---------
Patrick F. Latterell/Venrock Associates..................... 50,546
Accel Partners.............................................. 50,546
Kleiner Perkins Caufield & Byers............................ 50,546
Arnold Oronsky/InterWest Partners........................... 39,652
Oxford Bioscience Partners.................................. 26,434
U.S. Venture Partners....................................... 26,434
Ares-Serono S.A............................................. 493,151
Lombard Odier Immunology Fund............................... 785,340
We have entered into other agreements in connection with the Series E and
Series F Agreements. Under one of these agreements, some of our stockholders
acquired registration rights. See "Description of Capital Stock -- Registration
Rights." Further, our stockholders and we agreed to restrictions on the issuance
and transfer of shares of our capital stock, and to voting rights relating to
the election of directors, all of which restrictions and voting rights are not
applicable to and will terminate upon the closing of this offering.
In October 1999, we entered into a collaborative agreement with Axys
Pharmaceuticals. See "Business -- Corporate Collaborators." John P. Walker, our
Chairman of the Board of Directors, is the Chairman, Chief Executive Officer and
a director of Axys Pharmaceuticals.
We have granted options to some of our directors and executive officers. We
have made loans to some of our executive officers. For a description of these
loans, please see the section entitled "Management -- Employment Agreements and
Indebtedness of Management." We have also entered into an indemnification
agreement with each of our directors and executive officers.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of common stock as of January 31, 2000 by:
- each person who is known by us to own beneficially more than five percent
of our common stock;
- each of our current directors, our Chief Executive Officer and our other
executive officers who earned more than $100,000 during 1999; and
- all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the stockholders named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. Percentage ownership is based on
14,114,552 shares of common stock outstanding as of January 31, 2000, together
with applicable options and warrants for each stockholder.
SHARES ISSUABLE PERCENTAGE OF
UPON EXERCISE OF SHARES
OPTIONS THAT VEST BENEFICIALLY OWNED
SHARES WITHIN 60 DAYS -------------------
BENEFICIALLY OF JANUARY 31, BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED 2000 OFFERING OFFERING
------------------------ ------------ ----------------- -------- --------
Ares-Serono S.A.................................. 1,854,407 -- 13.1% 9.6%
15bis Chemin des Mines
1202 Geneva, Switzerland
Patrick F. Latterell(1).......................... 1,491,333 -- 10.6 7.7
Venrock Associates
30 Rockefeller Plaza, Room 5508
New York, New York 10112
Accel Partners(2)................................ 1,466,327 -- 10.4 7.6
428 University Avenue
Palo Alto, California 94301
Kleiner Perkins Caufield & Byers................. 1,416,331 -- 10.0 7.4
2750 Sand Hill Road
Menlo Park, California 94025
Arnold Oronsky, Ph.D.(3)......................... 1,129,309 18,229 8.0 5.9
InterWest Partners
3000 Sand Hill Road, Bldg. 3, Suite 255
Menlo Park, California 94025
Lombard Odier & Cie.............................. 785,340 -- 5.6 4.1
11, rue de la Corraterie
1204 Geneva, Switzerland
Oxford Bioscience Partners(4).................... 740,719 -- 5.2 3.8
650 Town Center Drive, Suite 180
Costa Mesa, California 92626
U.S. Venture Partners(5)......................... 740,719 -- 5.2 3.8
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Alan J. Lewis, Ph.D.............................. 375,000 20,312 2.7 *
Harry F. Hixson, Ph.D.(6)........................ 192,989 18,229 1.4 1.0
David W. Anderson, Ph.D.......................... 170,000 39,228 1.2 *
Bradley B. Gordon................................ 165,000 116,977 1.2 *
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SHARES ISSUABLE PERCENTAGE OF
UPON EXERCISE OF SHARES
OPTIONS THAT VEST BENEFICIALLY OWNED
SHARES WITHIN 60 DAYS -------------------
BENEFICIALLY OF JANUARY 31, BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED 2000 OFFERING OFFERING
------------------------ ------------ ----------------- -------- --------
John P. Walker(7)................................ 75,000 -- * *
Douglas E. Richards.............................. 51,562 51,562 * *
All directors and executive officers as a group
(9 persons).................................... 3,554,210 246,537 25.0 18.2
- -------------------------
* Represents beneficial ownership of less than one percent.
(1) Includes 999,204 shares held by Venrock Associates and 473,379 shares held
by Venrock Associates II, L.P., entities for which Mr. Latterell is a
general partner. Mr. Latterell disclaims beneficial ownership of all such
shares, except to the extent of his pecuniary or pro rata interest in such
shares.
(2) Includes the following shares held by the following affiliated entities:
- 1,227,321 shares held by Accel IV L.P.;
- 54,252 shares held by Accel Investors '93 L.P.;
- 26,393 shares held by Accel Keiretsu L.P.;
- 117,307 shares held by Accel Japan L.P.;
- 32,257 shares held by Ellmore C. Patterson Partners; and
- 8,797 shares held by Prosper Partners.
(3) Includes 1,104,136 shares held by InterWest Partners V and 6,944 shares held
by InterWest Investors V, which are affiliated entities. Dr. Oronsky is a
general partner of InterWest Partners V. Dr. Oronsky disclaims beneficial
ownership of all such shares, except to the extent of his pecuniary or pro
rata interest in such shares.
(4) Includes the following shares held by the following affiliated entities:
- 463,885 shares held by Oxford Bioscience Partners L.P.;
- 148,144 shares held by Oxford Bioscience Partners (Adjunct) L.P.; and
- 128,690 shares held by Oxford Bioscience Partners (Bermuda) Limited
Partnership.
(5) Includes:
- 640,723 shares held by U.S. Venture Partners IV, L.P.;
- 77,775 shares held by Second Ventures II, L.P.; and
- 22,221 shares held by USVP Entrepreneur Partners II, L.P.
(6) Includes 192,989 shares held by the Harry F. Hixson, Jr. Separate Property
Trust Dated December 15, 1995, of which Dr. Hixson is the sole trustee.
(7) Includes 75,000 shares held by the Walker Living Trust Dated March 3, 1995,
of which Mr. Walker is the sole trustee.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering and the filing of our amended and
restated certificate of incorporation, our authorized capital stock will consist
of 50,000,000 shares of common stock, $.001 par value per share, and 5,000,000
shares of preferred stock, $.001 par value per share.
COMMON STOCK
As of December 31, 1999, there were 14,093,899 shares of common stock
outstanding that were held of record by approximately 123 stockholders, after
giving effect to the conversion of all outstanding shares of preferred stock
into 12,246,296 shares of common stock.
Based upon the number of shares outstanding as of December 31, 1999, there
will be 19,236,756 shares of common stock outstanding after giving effect to the
sale of the shares of common stock offered by this prospectus and the sale of
142,857 shares of common stock to DuPont Pharmaceuticals at an assumed initial
public offering price of $14.00 per share.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common stock
are entitled to receive ratably such dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of Signal, holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of preferred stock.
Holders of common stock have no preemptive, conversion, subscription or other
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are, and all shares of
common stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred
stock will be converted into 12,246,296 shares of common stock. See note 5 of
notes to financial statements for a description of the currently outstanding
preferred stock. Following the conversion, our certificate of incorporation will
be amended and restated to delete all references to such shares of preferred
stock. Under the restated certificate, the board has the authority, without
further action by stockholders, to issue up to 5,000,000 shares of preferred
stock in one or more series and to fix or alter the rights, preferences,
privileges, qualifications and restrictions granted to or imposed upon any
wholly unissued series of preferred stock, and to establish from time to time
the number of shares constituting any such series or any of them; and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. The issuance of preferred stock could adversely affect
the voting power of holders of common stock and reduce the likelihood that such
holders will receive dividend payments and payments upon liquidation. Such
issuance could have the effect of decreasing the market price of the common
stock. The issuance of preferred stock could have the effect of delaying,
deterring or preventing a change in control. We have no present plans to issue
any shares of preferred stock.
WARRANTS
As of December 31, 1999, there were warrants outstanding to purchase an
aggregate of 125,000 shares of Series C-1 preferred stock at an exercise price
of $4.20 per share, which will convert into warrants to purchase 125,000 shares
of common stock at an exercise price of $4.20 per share upon the closing of this
offering. The warrant also contains a net issuance provision which allows the
warrant holder to convert the warrant into a specified number of shares in a
cashless exercise.
REGISTRATION RIGHTS
After this offering, the holders of 12,246,296 shares of common stock will
be entitled to rights with respect to the registration of such shares under the
Securities Act, under an amended and restated investor
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rights agreement dated September 9, 1997, as amended on November 25, 1997. Under
the terms of the investors' rights agreement, if we propose to register any of
our securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled, subject to
limitations, to include shares in the offering. Commencing with the date that is
180 days after this offering, the holders may also require us to file a
registration statement under the Securities Act with respect to their shares,
and we are required to use our best efforts to effect to such registration.
Furthermore, the holders may require us to register their shares on a
registration statement on Form S-3 when such form becomes available to us. Such
registration rights terminate on the seventh anniversary of the effective date
of this offering.
The holder of a warrant to purchase 125,000 shares of Series C-1 preferred
stock, granted November 23, 1996, will be entitled, upon exercise of such
warrant, to notice whenever we propose to register any of our securities under
the Securities Act, either for its own account or for the account of other
security holders exercising registration rights. The holder of such warrant is
entitled to include in any such registration the shares of common stock into
which the Series C-1 preferred stock underlying the warrant may be converted.
Such registration rights terminate on the seventh anniversary of the effective
date of this offering.
After this offering, a holder of 8,662 shares of common stock purchased
under two restricted stock purchase agreements dated October 26, 1993 and
February 18, 1998, respectively, will be entitled, if we propose to register any
of our securities under the Securities Act, either for our own account or for
the account of other security holders exercising registration rights, to notice
of such registration and, subject to limitations, to include such shares in the
offering. In addition, such holder may obtain an additional 47,500 shares of
common stock upon the attainment of specified regulatory milestones whereby such
additional shares would be entitled to the same registration rights as the 8,662
shares currently held.
After this offering, a holder of 15,000 shares of common stock purchased
under two restricted stock purchase agreements dated October 31, 1996 and
December 7, 1997, respectively, will be entitled, if we propose to register any
of our securities under the Securities Act, either for our own account or for
the account of other security holders exercising registration rights, to notice
of such registration and, subject to limitations, to include such shares in the
offering. In addition, such holder may obtain an additional 11,250 shares of
common stock upon the attainment of specified regulatory milestones whereby such
additional shares would be entitled to the same registration rights as the
15,000 shares currently held.
Generally, we are required to bear all registration and selling expenses
incurred in connection with any of the registrations described above. The
registration rights are also subject to conditions and limitations, among them
the right of the underwriters of a public offering to limit the number of shares
included in the registration statement filed in connection therewith.
DELAWARE ANTI-TAKEOVER LAW AND SPECIFIC CHARTER PROVISIONS
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years, did own, 15% or more of the
corporation's outstanding voting stock. This provision could delay, discourage
or prohibit transactions not approved in advance by the board of directors, such
as takeover attempts that might result in a premium over the market price of the
common stock.
Our restated certificate provides that the board of directors will be
divided into three classes of directors, with each class serving a staggered
three-year term. The classification system of electing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us and may maintain the composition of the board of directors,
as the classification of the board of directors generally increases the
difficulty of replacing a majority of directors. Our restated certificate
provides that any action required or permitted to be taken by our stockholders
must be effected at a duly called annual or
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special meeting of stockholders and may not be effected by any consent in
writing. In addition, our bylaws provide that special meetings of the
stockholders may be called only by the Chairman of the Board of Directors, by
the Chief Executive Officer, by the board of directors upon a resolution adopted
by a majority of the total number of authorized directors, or by the holders of
10% of the outstanding voting stock. Our restated certificate also specifies
that the authorized number of directors may be changed only by resolution of the
board of directors and does not include a provision for cumulative voting for
directors. Under cumulative voting, a minority stockholder holding a sufficient
percentage of a class of shares may be able to ensure the election of one or
more directors. These and other provisions contained in our restated certificate
and bylaws could delay or discourage transactions involving an actual or
potential change in control of Signal or our management, including transactions
in which stockholders might otherwise receive a premium for their shares over
then current prices, and may limit the ability of stockholders to remove our
current management or approve transactions that stockholders may deem to be in
their best interests and, therefore, could adversely affect the price of our
common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices. Furthermore, since only a
limited number of shares will be available for sale shortly after the offering
because of contractual and legal restrictions on resale described below, sales
of substantial amounts of common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, and the sale of shares to DuPont at an
aggregate purchase price of $2.0 million, we will have 19,236,756 shares of
common stock outstanding, assuming no exercise of currently outstanding options
or warrants. Of these shares, the 5,000,000 shares sold in this offering, plus
any additional shares sold upon exercise of the underwriters' over-allotment
option, will be freely transferable without restriction under the Securities
Act, unless they are held by our "affiliates" as that term is used under the
Securities Act and the rules and regulations promulgated thereunder. The
remaining 14,236,756 shares of common stock held by existing stockholders are
restricted shares. Restricted shares may be sold in the public market only if
registered or of they qualify for an exemption from registration under Rules 144
or 701 promulgated under the Securities Act, which rules are summarized below.
As a result of lock-up agreements and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
- no restricted shares will be eligible for immediate sale on the effective
date of this offering;
- 12,101,942 restricted shares, plus approximately 1,184,609 shares of
common stock issuable upon exercise of vested stock options, will be
eligible for sale upon expiration of the lock-up agreements 180 days
after the date of this prospectus; and
- the remainder of the restricted shares will be eligible for sale from
time to time thereafter upon expiration of their respective one-year
holding periods and could be sold earlier if the holders exercise any
available registration rights.
The holders of 15,568,152 shares of common stock have the right in
specified circumstances to require us to register their shares under the
Securities Act for resale to the public beginning 180 days from the effective
date of this offering. If those holders, by exercising their demand registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could have an adverse effect on the market price for the
common stock. If we were required to include in a registration that we initiated
shares held by such holders upon the exercise of their piggyback registration
rights, such sales may have an adverse effect on our ability to raise needed
capital. In addition, we expect to file a registration statement on Form S-8
registering shares of common stock subject to outstanding stock options or
reserved for issuance under our stock option plans. We expect to file this
registration statement as soon as practicable after the effective date of this
offering. Shares registered under this registration statement will, subject to
Rule 144 volume limitations applicable to affiliates, be available for sale in
the open market, unless such shares are subject to vesting restrictions with us
or the lock-up agreements described above.
In general, under Rule 144 as in effect on the date of this prospectus,
beginning 90 days after the effective date of this offering, an affiliate of
Signal, or a person (or persons whose shares are aggregated) who has
beneficially owned restricted shares (as defined under Rule 144) for at least
one year is entitled to sell within any three-month period a number of shares
that does not exceed greater of one percent of the then outstanding shares of
common stock or the average weekly trading volume of the common stock on The
Nasdaq National Market during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Commission. Sales under Rule
144 are subject to requirements relating to the manner of sale, notice, and the
availability of current public information about us. A person (or persons whose
shares are aggregated) who was not an affiliate of Signal at any time during the
90 days immediately preceding the sale and who has beneficially owned restricted
shares for at least two years is entitled to sell such shares under Rule 144(k)
without regard to the limitations described above.
68
73
An employee, officer or director of or consultant to Signal who purchased
or was awarded shares or options to purchase shares under a written compensatory
plan or contract is entitled to rely on the resale provisions of Rule 701 under
the Securities Act, which permits affiliates and non-affiliates to sell their
Rule 701 shares without having to comply with the Rule 144 holding period
restrictions, in each case commencing 90 days after the effective date of this
offering. In addition, non-affiliates may sell Rule 701 shares without complying
with the public information, volume and notice provisions of Rule 144.
69
74
UNDERWRITING
The underwriters name below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc. and CIBC World
Markets Corp., have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth opposite their names below. The underwriters
are committed to purchase and pay for all of these shares if any are purchased.
NUMBER OF
UNDERWRITER SHARES
----------- ---------
FleetBoston Robertson Stephens Inc. ........................
Chase Securities Inc. ......................................
CIBC World Markets Corp. ...................................
---------
Total..................................................... 5,000,000
=========
The underwriters' representatives have advised us that the underwriters
propose to offer the shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus and to certain
dealers at such price less a concession of not more than $ per share, of
which $ may be reallowed to other dealers. After the completion of this
offering, the initial public offering price, concession and reallowance to
dealers may be reduced by the underwriters' representatives. No such reduction
shall change the amount of proceeds to be received by us as set forth on the
cover page of this prospectus. The common stock is offered by the underwriters
as stated herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part.
Over-Allotment Option
We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 750,000
additional shares of common stock at the same price per share as we will receive
for the 5,000,000 shares that the underwriters have agreed to purchase. To the
extent that the underwriters exercise such option, each of the underwriters will
have a firm commitment, subject to certain conditions, to purchase approximately
the same percentage of such additional shares that the number of shares of
common stock to be purchased by it shown in the above table represents as a
percentage of the 5,000,000 shares offered hereby. If purchased, such additional
shares will be sold by the underwriters on the same terms as those on which the
5,000,000 shares are being sold. We will be obligated, under the option, to sell
shares to the extent the option is exercised. The underwriters may exercise this
option only to cover over-allotments made in connection with the sale of the
shares of common stock offered hereby. If this option is exercised in full, the
total public offering price, underwriting discounts and commissions and proceeds
to us will be $80,500,000, $5,635,000 and $74,865,000, respectively.
The following table summarizes the compensation to be paid to the
underwriters by us:
TOTAL
----------------------------
WITHOUT WITH OVER-
PER SHARE OVER-ALLOTMENT ALLOTMENT
--------- -------------- ----------
Underwriting discounts and commissions payable by us... $0.98 $4,900,000 $5,635,000
We estimate that expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will be
approximately $850,000.
Indemnity
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933 and
liabilities arising from breaches of representations and warranties contained in
the underwriting agreement, or to contribute to payments that the underwriters
may be required to make in respect thereof.
70
75
Lock-up Agreements
Our directors and executive officers, have agreed to the underwriters'
representatives that, for a period of 180 days after the date to this
prospectus, they will not offer to sell, contract to sell or otherwise sell,
dispose of, loan, pledge or grant any option to purchase any shares of common
stock or any securities convertible into, or exchangeable for, or any rights to
purchase or acquire, shares of common stock, now owned or hereafter acquired
directly by such holders or with respect to which they have the power to
disposition, without the prior written consent of FleetBoston Robertson Stephens
Inc., which may, in its sole discretion and at any time or from time to time,
without notice, release all or any portion of the shares subject to the lock-up
agreements.
Future Sales
We have agreed that, for a period of 180 days after the date of this
prospectus, we will not without prior written consent of FleetBoston Robertson
Stephens Inc., issue, sell contract to sell or otherwise dispose of any shares
of common stock, any options or warrants to purchase any shares of common stock
or any securities convertible into, exercisable for or exchangeable for shares
of common stock other than our sale of shares in this offering, the issuance of
common stock upon the exercise of outstanding options and our grant of options
to purchase shares of common stock under existing stock option or stock purchase
plans.
Directed Share Program
The underwriters have reserved up to five percent of the common stock to be
issued by us and offered for sale in this offering, at the initial public
offering price, to directors, officers, employees, business associates and
persons otherwise connected to us. The number of shares of common stock
available for sale to the general public will be reduced to the extent these
individuals purchase reserved shares. Any reserved shares not purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered by this prospectus.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed 5% of the total number of shares offered.
Listing
We have applied to list our common stock on the Nasdaq National Market
under the symbol "SGNL."
No Prior Public Market
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the common stock will be determined
by negotiation between us and the representatives. Among the factors to be
considered in determining the initial public offering price are the prevailing
market and economic conditions, our revenues and earnings, market valuations of
other companies engaged in activities similar to ours, estimates of our business
potential and prospects, the present state of our business operations, our
management and other factors deemed relevant. The estimated initial public
offering price range set forth on the cover page of this prospectus is subject
to change as a result of market conditions and other factors. A pricing
committee of our board of directors will establish the initial public offering
price following such negotiations.
Stabilization
The underwriters' representatives have advised us that, pursuant to
Regulation M under the Securities Exchange Act of 1934, as amended, certain
persons participating in the offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the common stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the common
stock on behalf of the underwriters for the purpose of fixing or maintaining the
price of the common stock. A
71
76
"syndicate covering transaction" is a bid for or the purchase of the common
stock on behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with this offering. A "penalty bid" is an arrangement
permitting the underwriters' representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with the
offering if the common stock originally sold by such underwriter or syndicate
member is purchased by underwriters' representatives in a syndicate covering
transaction and has therefore not been effectively placed by such underwriter or
syndicate member. The underwriters' representatives have advised us that such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered hereby. This prospectus,
which constitutes a part of the registration statement, does not contain all of
the information set forth in the registration statement or the exhibits and
schedules which are part of the registration statement. For further information
with respect to Signal and the common stock offered by this prospectus, we refer
you to the registration statement and the exhibits and schedules filed as part
of the registration statement. You may read and copy any document we file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
website at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the SEC. These periodic reports, proxy
statements and other information will be available for inspection and copying at
the SEC's public reference rooms and the website of the SEC referred to above.
LEGAL MATTERS
Cooley Godward LLP, San Diego, California, will pass upon the validity of
the common stock offered by this prospectus for us. Brobeck, Phleger & Harrison
LLP, San Diego, California, will pass upon legal matters for the underwriters.
EXPERTS
The financial statements of Signal Pharmaceuticals, Inc. as of December 31,
1998 and 1999, and for each of the years in the three-year period ended December
31, 1999, have been included herein and in the registration statement, of which
this prospectus is a part, in reliance upon the report of Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of said firm as experts in accounting and auditing.
72
77
SIGNAL PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
F-1
78
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Signal Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Signal Pharmaceuticals,
Inc. as of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. 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 Signal Pharmaceuticals, Inc.
at December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 1999, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
February 4, 2000, except for Note 7,
as to which the date is , 2000.
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the restatement of the capital accounts described in Note 7 to the financial
statements.
/s/ ERNST & YOUNG LLP
March 21, 2000
F-2
79
SIGNAL PHARMACEUTICALS, INC.
BALANCE SHEETS
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
---------------------------- DECEMBER 31,
1998 1999 1999
------------ ------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,496,363 $ 6,613,834
Short-term investments.................................... 6,456,226 2,806,093
Grant revenue receivable.................................. 147,248 108,959
Other current assets...................................... 487,234 427,394
------------ ------------
Total current assets.................................... 13,587,071 9,956,280
Property and equipment, net................................. 4,497,541 3,405,147
Licensed technology, net.................................... 916,668 583,338
Deposits and other assets................................... 223,520 202,605
Notes receivable from officers.............................. 333,419 391,495
------------ ------------
Total assets............................................ $ 19,558,219 $ 14,538,865
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 461,967 $ 896,260
Accrued liabilities....................................... 872,484 522,454
Current portion of promissory note........................ 1,000,080 396,817
Current portion of obligations under capital leases and
equipment notes payable................................. 432,122 730,765
Current portion of deferred revenue under collaborative
agreements.............................................. 1,697,775 3,449,790
------------ ------------
Total current liabilities............................... 4,464,428 5,996,086
Promissory note, net of current portion..................... 349,674 --
Obligations under capital leases and equipment notes
payable, net of current portion........................... 2,110,651 1,805,297
Deferred revenue under collaborative agreements, net of
current portion........................................... 333,324 650,002
Deferred rent............................................... 174,705 104,918
Commitments
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 12,371,319
shares authorized; 12,101,942 and 12,246,296 shares
issued and outstanding at December 31, 1998 and 1999,
respectively; liquidation preference -- $40,909,587 and
$41,909,587 at December 31, 1998 and 1999, respectively
(5,000,000 shares authorized, no shares issued and
outstanding pro forma).................................. 12,102 12,246 $ --
Common stock, $.001 par value; 17,644,354 shares
authorized; 1,766,769 and 1,847,603 shares issued and
outstanding at December 31, 1998 and 1999, respectively
(50,000,000 shares authorized, 14,093,899 shares issued
and outstanding pro forma).............................. 1,766 1,847 14,093
Additional paid-in capital................................ 42,225,684 45,112,167 45,112,167
Deferred compensation..................................... (922,892) (1,272,014) (1,272,014)
Notes receivable from stockholders........................ (95,600) (95,600) (95,600)
Accumulated other comprehensive income.................... 6,226 -- --
Accumulated deficit....................................... (29,101,849) (37,776,084) (37,776,084)
------------ ------------ ------------
Total stockholders' equity.............................. 12,125,437 5,982,562 $ 5,982,562
------------ ------------ ============
Total liabilities and stockholders' equity.............. $ 19,558,219 $ 14,538,865
============ ============
SEE ACCOMPANYING NOTES.
F-3
80
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
Revenue under collaborative agreements:
Related party...................................... $ 250,000 $ 3,000,000 $ 4,525,000
Unrelated parties.................................. 7,065,356 12,027,064 6,695,715
Grant income......................................... 264,257 387,178 527,610
----------- ----------- -----------
Total Revenue................................... 7,579,613 15,414,242 11,748,325
----------- ----------- -----------
Expenses:
Research and development........................... 10,337,318 15,572,627 16,747,627
General and administrative......................... 2,791,084 4,798,262 3,010,975
----------- ----------- -----------
Total Expenses.................................. 13,128,402 20,370,889 19,758,602
----------- ----------- -----------
Loss from operations................................. (5,548,789) (4,956,647) (8,010,277)
Interest income...................................... 325,529 1,052,854 607,413
Interest expense..................................... (516,709) (452,609) (452,884)
----------- ----------- -----------
Net loss............................................. (5,739,969) (4,356,402) (7,855,748)
Inputed dividend on preferred stock.................. -- -- (818,487)
----------- ----------- -----------
Net loss applicable to common shareholders........... $(5,739,969) $(4,356,402) $(8,674,235)
=========== =========== ===========
Historical net loss per share applicable to common
shareholders, basic and diluted.................... $ (5.65) $ (3.31) $ (5.29)
=========== =========== ===========
Weighted average shares outstanding, basic and
diluted............................................ 1,016,182 1,318,027 1,641,020
=========== =========== ===========
Pro forma net loss per share applicable to common
shareholders, basic and diluted.................... $ (0.63)
===========
Pro forma weighted average shares outstanding, basic
and diluted........................................ 13,752,454
===========
SEE ACCOMPANYING NOTES.
F-4
81
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE
-------------------- ------------------ ADDITIONAL DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL COMPENSATION STOCKHOLDERS
---------- ------- --------- ------ --------------- ------------ ------------
Balance at December 31, 1996..... 7,396,646 $ 7,397 1,044,046 $1,044 $20,509,387 $ -- $ --
Issuance of Series D preferred
stock........................ 116,300 116 -- -- (116) -- --
Issuance of Series E preferred
stock........................ 3,227,740 3,228 -- -- 10,973,903 -- --
Issuance of Series F preferred
stock........................ 1,361,256 1,361 -- -- 8,160,719 -- --
Issuance of common stock, net
of repurchases............... -- -- 273,111 273 84,563 -- --
Issuance of common stock for
technology and services...... -- -- 11,250 11 14,589 -- --
Deferred compensation.......... -- -- -- -- 615,855 (615,855) --
Amortization of deferred
compensation................. -- -- -- -- -- 104,345 --
Net loss....................... -- -- -- -- -- -- --
Unrealized gain on available
for sale securities.......... -- -- -- -- -- -- --
Comprehensive loss............. -- -- -- -- -- -- --
---------- ------- --------- ------ ----------- ----------- --------
Balance at December 31, 1997..... 12,101,942 12,102 1,328,407 1,328 40,358,900 (511,510) --
Issuance of common stock, net
of repurchases............... -- -- 305,862 305 120,747 -- (95,600)
Issuance of common stock for
technology................... -- -- 132,500 133 726,867 -- --
Deferred compensation.......... -- -- -- -- 1,019,170 (1,019,170) --
Amortization of deferred
compensation................. -- -- -- -- -- 607,788 --
Net loss....................... -- -- -- -- -- -- --
Unrealized loss on available
for sale securities.......... -- -- -- -- -- -- --
Comprehensive loss............. -- -- -- -- -- -- --
---------- ------- --------- ------ ----------- ----------- --------
Balance at December 31, 1998..... 12,101,942 12,102 1,766,769 1,766 42,225,684 (922,892) (95,600)
Issuance of Series F-1
preferred stock.............. 144,354 144 -- -- 992,738 -- --
Issuance of common stock, net
of repurchases............... -- -- 80,122 80 26,097 -- --
Deferred compensation.......... -- -- -- -- 1,024,244 (1,024,244) --
Amortization of deferred
compensation................. -- -- -- -- -- 675,122 --
Issuance of common stock and
options for services......... -- -- 712 1 24,917 -- --
Imputed dividend on Series F-1
preferred stock.............. -- -- -- -- 818,487 -- --
Net loss....................... -- -- -- -- -- -- --
Unrealized loss on available
for sale securities.......... -- -- -- -- -- -- --
Comprehensive loss............. -- -- -- -- -- -- --
---------- ------- --------- ------ ----------- ----------- --------
Balance at December 31, 1999..... 12,246,296 $12,246 1,847,603 $1,847 $45,112,167 $(1,272,014) $(95,600)
========== ======= ========= ====== =========== =========== ========
ACCUMULATED OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
INCOME (LOSS) DEFICIT EQUITY
----------------- ------------ -------------
Balance at December 31, 1996..... $ -- $(19,005,478) $ 1,512,350
Issuance of Series D preferred
stock........................ -- -- --
Issuance of Series E preferred
stock........................ -- -- 10,977,131
Issuance of Series F preferred
stock........................ -- -- 8,162,080
Issuance of common stock, net
of repurchases............... -- -- 84,836
Issuance of common stock for
technology and services...... -- -- 14,600
Deferred compensation.......... -- -- --
Amortization of deferred
compensation................. -- -- 104,345
Net loss....................... -- (5,739,969) (5,739,969)
Unrealized gain on available
for sale securities.......... 48,341 -- 48,341
-----------
Comprehensive loss............. -- -- (5,691,628)
-------- ------------ -----------
Balance at December 31, 1997..... 48,341 (24,745,447) 15,163,714
Issuance of common stock, net
of repurchases............... -- -- 25,452
Issuance of common stock for
technology................... -- -- 727,000
Deferred compensation.......... -- -- --
Amortization of deferred
compensation................. -- -- 607,788
Net loss....................... -- (4,356,402) (4,356,402)
Unrealized loss on available
for sale securities.......... (42,115) -- (42,115)
-----------
Comprehensive loss............. -- -- (4,398,517)
-------- ------------ -----------
Balance at December 31, 1998..... 6,226 (29,101,849) 12,125,437
Issuance of Series F-1
preferred stock.............. -- -- 992,882
Issuance of common stock, net
of repurchases............... -- -- 26,177
Deferred compensation.......... -- -- --
Amortization of deferred
compensation................. -- -- 675,122
Issuance of common stock and
options for services......... -- -- 24,918
Imputed dividend on Series F-1
preferred stock.............. -- (818,487) --
Net loss....................... -- (7,855,748) (7,855,748)
Unrealized loss on available
for sale securities.......... (6,226) -- (6,226)
-----------
Comprehensive loss............. -- -- (7,861,974)
-------- ------------ -----------
Balance at December 31, 1999..... $ -- $(37,776,084) $ 5,982,562
======== ============ ===========
SEE ACCOMPANYING NOTES.
F-5
82
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
OPERATING ACTIVITIES
Net loss.................................................... $ (5,739,969) $ (4,356,402) $ (7,855,748)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................... 879,327 1,498,312 1,711,501
Amortization of interest expense related to warrants.... 47,142 47,142 47,142
Amortization of deferred compensation................... 104,345 607,788 675,122
Amortization of purchased technology.................... -- 83,332 333,330
Common stock and stock options issued for technology and
services.............................................. 14,600 7,000 24,918
Deferred revenue under collaborative agreements......... 1,363,134 (2,334,111) 2,068,693
Deferred rent........................................... 10,316 96,538 (69,787)
Changes in operating assets and liabilities:
Other current assets.................................. 246,997 (354,667) 98,129
Accounts payable...................................... (158,004) 193,253 434,293
Accrued liabilities................................... 895,120 (335,235) (350,030)
------------ ------------ ------------
Net cash flows used for operating activities....... (2,336,992) (4,847,050) (2,882,437)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of short-term investments......................... (12,081,165) (15,585,368) (11,642,049)
Maturities of short-term investments........................ -- 21,216,533 15,285,956
Purchases of property and equipment......................... (630,220) (1,400,252) (92,979)
Purchase of technology...................................... -- (280,000) --
Other assets................................................ 341,038 (117,501) (37,161)
------------ ------------ ------------
Net cash flows provided by (used for) investing
activities....................................... (12,370,347) 3,833,412 3,513,767
------------ ------------ ------------
FINANCING ACTIVITIES
Principal payments on obligations under capital leases,
equipment notes payable and promissory note............... (1,239,935) (1,251,920) (1,532,918)
Issuance of preferred stock, net............................ 19,139,211 -- 992,882
Issuance of common stock, net............................... 84,836 25,452 26,177
------------ ------------ ------------
Net cash flows provided by (used for) financing
activities....................................... 17,984,112 (1,226,468) (513,859)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents............ 3,276,773 (2,240,106) 117,471
Cash and cash equivalents at beginning of year.............. 5,459,696 8,736,469 6,496,363
------------ ------------ ------------
Cash and cash equivalents at end of year.................... $ 8,736,469 $ 6,496,363 $ 6,613,834
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 469,565 $ 395,462 $ 452,884
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations entered into for equipment........ $ 221,507 $ 2,343,033 $ 526,128
============ ============ ============
Issuance of common stock for technology..................... $ -- $ 720,000 $ --
============ ============ ============
Issuance of common stock for promissory notes from
stockholders.............................................. $ -- $ 95,600 $ --
============ ============ ============
Comprehensive income (loss) on investments.................. $ 48,341 $ (42,115) $ (6,226)
============ ============ ============
Deferred compensation related to stock options.............. $ 615,855 $ 1,019,170 $ 1,024,244
============ ============ ============
Imputed dividend on Series F-1 preferred stock.............. $ -- $ -- $ 818,487
============ ============ ============
SEE ACCOMPANYING NOTES.
F-6
83
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated
drug discovery and development company focused on identifying new classes of
small molecule drugs that regulate disease-associated genes. Utilizing
biological information from the field of human genomics, the Company applies
advanced cellular, molecular and genomic technologies to map gene regulating
pathways in cells and to identify proprietary molecular targets that control
genes and result in disease. Signal is advancing the application of genomics
beyond identifying and elucidating the function of genes to designing novel
classes of disease-modifying drugs that selectively regulate the activation of
disease-causing genes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
related disclosures at the date of the financial statements, and the amounts of
revenues and expenses reported during the period. Actual results could differ
from those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers instruments purchased with an original maturity of
three months or less, principally a money market account and U.S. government and
corporate debt securities, to be cash equivalents.
All investment securities are classified as available-for-sale, and are
carried at fair value. Unrealized gains and losses, if any, are reported in a
separate component of stockholders' equity. The cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
The amortization, along with realized gains and losses, is included in interest
income. The cost of securities sold is based on the specific identification
method.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents, and short-term investments are financial
instruments which potentially subject the Company to concentration of credit
risk. The Company invests its excess cash primarily in U.S. government
securities and marketable debt securities of financial institutions and
corporations with strong credit ratings. The Company also has established
guidelines relative to diversification and maturities to maintain safety and
liquidity. These guidelines are reviewed periodically and may be modified to
take advantage of trends in yields and interest rates. Pursuant to Company
policy, the Company has historically held the investments to maturity. However,
the Company has the ability to sell these investments before maturity and has
therefore classified the investments as available for sale. The Company has not
experienced any significant losses on its investments.
F-7
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SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS
The fair value of the financial instruments approximates their carrying
value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (three to five years) using the
straight-line method. Leasehold improvements are stated at cost and amortized on
a straight-line basis over the shorter of the estimated useful life of the
assets or the lease term.
LICENSED TECHNOLOGY
Licensed technology is stated at cost and depreciated over the estimated
useful life of three years using the straight-line method. The licensed
technology is reported net of accumulated amortization of $83,332 and $416,662
as of December 31, 1998 and 1999, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, if indicators of
impairment exist, the Company assesses the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can
be recovered through undiscounted future operating cash flows. If impairment is
indicated, the Company will value the asset at fair value. While the Company's
current and historical operating and cash flow losses are indicators of
impairment, the Company believes the future cash flows to be received from the
long-lived assets will exceed the assets' carrying value, and accordingly the
Company has not recognized any impairment losses through December 31, 1999.
REVENUE RECOGNITION
Contract revenue is recognized ratably over the period during which the
research is conducted, which approximates the actual costs incurred to perform
the research services. Up-front license fees received under these agreements are
recorded as deferred revenue and recognized ratably over the initial term of the
contract. If the initial term of the agreement is subsequently modified by the
collaborator, the period over which the up-front license fee is recognized is
modified accordingly on a prospective basis. Revenues from the achievement of
research and development milestones will be recognized when and if the
milestones are achieved. Continuation of certain contracts and grants are
dependent upon the Company achieving specific contractual milestones; however,
none of the payments received to date are refundable regardless of the outcome
of the project. Grant revenue is recognized in accordance with the terms of the
grant and as services are performed, which generally equals the related research
and development expense.
Axys Pharmaceutical ("Axys") is a related party, as the chief executive
officer of Axys serves on the Board of Directors of the Company. Therefore,
revenues of $625,000 recognized in 1999 from Axys are classified as related
party revenue.
Ares Serono S.A. ("Ares") is a related party, based on its ownership
interest in the Company. Therefore, revenues of $3,000,000 and $3,900,000
recognized from Ares in 1998 and 1999, respectively, are classified as related
party revenue. The Company does not have the right or the obligation to
repurchase any of the rights provided to Ares, or to refund any research
payments received from Ares under the collaboration, nor does it intend to do
so.
F-8
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SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's revenue is concentrated among a small number of customers, as
follows:
YEAR ENDED
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
DuPont..................................................... -- 12% 20%
Ares ...................................................... * 19% 33%
Roche Bioscience........................................... 21% * *
Organon.................................................... 34% 19% 13%
Nippon Kayaku.............................................. -- 12% 20%
Tanabe..................................................... 39% 27% --
Axys....................................................... -- -- *
* Amount earned represents less than 10% of revenues for the year.
The Company's revenue under collaborative agreements is derived from the
following:
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ----------- -----------
License fees from collaborative
agreements................................ $ 724,992 $ 3,139,566 $ 1,858,332
Research and development revenues under
collaborative agreements.................. 6,590,364 11,887,498 9,362,383
---------- ----------- -----------
Total revenue under collaborative
agreements............................. $7,315,356 $15,027,064 $11,220,715
========== =========== ===========
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
SOFTWARE COSTS
Purchased software is capitalized at cost and amortized over the estimated
useful life, generally three years. The Company has no significant
internally-developed software.
STOCK-BASED COMPENSATION
As permitted by SFAS 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations ("APB 25")
in accounting for its employee stock options. Under APB 25, when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant, no compensation expense is recognized.
When the exercise price of the employee or director stock options is less
than the fair value of the underlying stock on the grant date, the Company
records deferred compensation for the difference and amortizes this amount to
expense in accordance with FASB Interpretation No. 28 ("FIN 28") over the
vesting period of the options. Options or stock awards issued to non-employees
and consultants are recorded at their fair value as determined in accordance
with SFAS No. 123 and EITF 96-18 and recognized over the related service period.
F-9
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SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
In accordance with SFAS No. 130, Reporting Comprehensive Income, unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, are included in other comprehensive income
(loss).
SEGMENT REPORTING
SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, requires the use of a management approach in identifying and
disclosing financial information about segments of an enterprise. Management has
determined that the Company operates in one business segment.
NET LOSS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff
Accounting Bulletin (or SAB) No. 98, basic net loss per share is computed by
dividing the 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 common equivalent shares outstanding during the period. Potentially dilutive
securities composed of incremental common shares issuable upon the exercise of
stock options and warrants, and common shares issuable on conversion of
preferred stock, were excluded from historical diluted loss per share because of
their anti-dilutive effect.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares arising from preferred stock that will
automatically convert upon the closing of the initial public offering
contemplated by this prospectus (using the as-if converted method from the
original date of issuance).
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Unaudited pro forma stockholders' equity at December 31, 1999 reflects the
conversion of the convertible preferred stock into 12,246,296 shares of common
stock.
NEW ACCOUNTING PRONOUNCEMENTS
The Company expects to adopt SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective January 1, 2001. SFAS No. 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of the SFAS No. 133
will have a significant effect on its results of operations or financial
position.
F-10
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SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION
INVESTMENTS
The following is a summary of the Company's cash, cash equivalents and
short-term investments, all of which mature within one year of the balance sheet
date:
DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------------------------- ------------------------------------
GROSS GROSS
UNREALIZED ESTIMATED UNREALIZED ESTIMATED
COST GAINS FAIR VALUE COST GAINS FAIR VALUE
----------- ---------- ----------- ---------- ---------- ----------
Cash................... $ 6,496,363 $ -- $ 6,496,363 $4,636,426 $-- $4,636,426
Corporate debt
securities........... 6,450,000 6,226 6,456,226 4,783,501 -- 4,783,501
----------- ------ ----------- ---------- --- ----------
$12,946,363 $6,226 $12,952,589 $9,419,927 $-- $9,419,927
=========== ====== =========== ========== === ==========
There were no gross realized gains or losses on sales of available-for-sale
securities for the years ended December 31, 1998 and 1999. The gross unrealized
gains of $6,226 and $0 in 1998 and 1999, respectively, are reflected as a
separate component of stockholders' equity. The unrealized gain had no cash
effect and therefore is not reflected in the statement of cash flows.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
Machinery and equipment............................... $ 4,818,472 $ 5,328,565
Office furniture and equipment........................ 1,597,943 1,655,263
Leasehold improvements................................ 1,915,689 1,967,383
----------- -----------
8,332,104 8,951,211
Less accumulated depreciation and amortization........ (3,834,563) (5,546,064)
----------- -----------
$ 4,497,541 $ 3,405,147
=========== ===========
DEPOSITS AND OTHER ASSETS
Deposits and other assets consist of the following:
DECEMBER 31,
--------------------
1998 1999
-------- --------
Deposits.................................................. $ 73,520 $ 52,605
Restricted cash........................................... 150,000 150,000
-------- --------
$223,520 $202,605
======== ========
3. COMMITMENTS
LEASES
The Company leases its office and research facilities under three operating
lease agreements. The minimum annual rents are subject to specified annual
rental increases. The Company also reimburses the lessor for taxes, insurance
and operating costs associated with the leases. Under the terms of the lease,
the
F-11
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SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company has an outstanding letter of credit for $150,000 in favor of the lessor,
which is fully collateralized by cash. Accordingly, such cash is classified as
restricted in the balance sheet.
In addition, the Company leases certain machinery and equipment and office
furniture under capital leases with three year terms and options to extend the
lease term to five years.
LONG-TERM DEBT
In November 1996, the Company issued a secured promissory note for
$3,000,000. The proceeds of the note payable were used for general corporate
purposes and working capital. The note payable accrues interest at a rate of
14%, is due May 22, 2000, and is secured by certain assets of the Company.
In conjunction with the issuance of the promissory note, the Company issued
the creditor a warrant to purchase 125,000 shares of Series C-1 Preferred Stock
at a price of $4.20 per share. The warrant expires at the earliest of ten years
from the date of grant or five years from the date of an initial public
offering. The warrant was valued at $165,000, which has been recorded as a
discount on the related debt. The value of the warrant is being amortized as
interest expense over the period of the debt.
Annual future minimum lease and equipment note payments as of December 31,
1999 are as follows:
OBLIGATIONS
UNDER
CAPITAL
LEASES AND
OPERATING EQUIPMENT
YEAR ENDING DECEMBER 31, LEASES NOTES PAYABLE
------------------------ ---------- -------------
2000................................................... $ 935,032 $ 964,616
2001................................................... 430,502 967,662
2002................................................... 432,295 857,701
2003................................................... 443,370 61,861
---------- ----------
Total minimum lease and equipment note payments... $2,241,199 2,851,840
==========
Less amount representing interest........................... (315,778)
----------
Present value of remaining minimum capital lease and
equipment lease line payments............................. 2,536,062
Less amount due in one year................................. (730,765)
----------
Long-term portion of obligations under capital leases and
equipment notes payable................................... $1,805,297
==========
Rent expense for equipment and facility leases was $784,337, $809,028 and
$771,302 for the years ended December 31, 1997, 1998 and 1999, respectively.
Cost and accumulated depreciation of equipment under capital leases and
equipment notes payable were as follows:
ACCUMULATED
COST DEPRECIATION
---------- ------------
December 31, 1998...................................... $2,943,246 $ 594,452
December 31, 1999...................................... $3,458,659 $1,213,886
F-12
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SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS
In connection with certain license agreements, the Company paid fees of
$196,333 and $87,000 for the years ended December 31, 1998 and 1999,
respectively, which were charged to research and development. In addition, the
Company paid $280,000 in cash and issued 120,000 shares of common stock related
to a license agreement with the University of Massachusetts in 1998. The Company
determined the value of the common shares issued as $720,000 and capitalized the
total consideration of $1.0 million as licensed technology. The Company has
future commitments to pay up to an additional $4,100,000 to the licensees based
on the achievement of certain milestones, as well as royalties upon commercial
sales, if any, of certain products. Such fees or milestone payments may also
involve the issuance of up to 30,000 shares of common stock, which would be
recorded at the fair value at the date of issuance.
Axys
On October 15, 1999, the Company entered into a two-year collaborative
research and license agreement with Axys to develop and commercialize certain
compounds for use in the prevention and/or treatment of certain human diseases.
The Company received an initial non-refundable license fee of $2,000,000 and
will receive additional payments based on the achievement of certain program
milestones, as well as royalties upon commercial sales of certain products, if
any. We may exercise a profit share option in the United States and possibly
other territories at a predetermined point during development in lieu of
royalties on product sales. In addition, Axys has agreed to pay the Company
certain amounts for the full time equivalent personnel working on the research.
Nippon Kayaku
In February 1998, the Company entered into a two-year collaborative
research and license agreement with Nippon Kayaku to develop and commercialize
products based on or derived from a compound supplied by Nippon Kayaku for the
treatment and prevention of diseases and disorders of the CNS and PNS. Nippon
Kayaku has agreed to pay the Company certain amounts for the full-time
equivalent personnel working on the research. Each party is obligated to pay the
other royalties on future product sales arising from the collaboration.
In February 2000, following the initial research phase of the
collaboration, the Company executed an interim agreement with Nippon Kayaku
under which the Company agreed to enter into a joint agreement to develop and
commercialize neuroprotectant drugs for PNS and CNS disorders.
Dupont
On December 26, 1997, the Company entered into a three-year collaborative
research and license agreement with DuPont Pharmaceuticals ("DuPont") to develop
and commercialize novel products for the treatment and prevention of human
immunodeficiency virus and hepatitis C virus infection. The Company received an
initial non-refundable license fee of $1,000,000 and will receive additional
payments based on the achievement of certain program milestones, as well as
royalties upon commercial sales of certain products, if any. In addition, DuPont
has agreed to pay the Company certain amounts for the full time equivalent
personnel working on the research. Due to the Company's achievement of a certain
milestone in 1999, DuPont purchased 144,354 shares of Series F-1 Preferred Stock
for total cash proceeds of $1,000,000. In accordance with EITF 98-5 the Company
recognized an imputed dividend of $818,487 to reflect a beneficial conversion
feature on these preferred shares. Pursuant to the collaborative research
agreement, DuPont is also obligated to purchase $2,000,000 of common stock in a
private transaction concurrent with the initial public offering of common stock
by the Company and at the public offering price per common share.
F-13
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SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Ares-Serono
On November 25, 1997, the Company entered into a three-year collaborative
research, development and license agreement with Ares to perform research within
the field of the modulation of NF-kB. The Company will receive payments based on
the achievement of certain program milestones, as well as royalties upon
commercial sales of certain products, if any. In addition, Ares has agreed to
pay the Company certain amounts for the full time equivalent personnel working
on the research. In conjunction with the license agreement, Ares purchased
1,361,256 shares of the Company's Series F Preferred Stock at $6.02 per share
for a total of $8,194,761.
Roche Bioscience
On August 26, 1996, the Company entered into a three-year collaborative
research agreement with Roche Bioscience ("Roche") to conduct a joint research
program to develop human and rat nociceptive and/or sensory neuronal cell lines.
The Company received an initial non-refundable license fee of $500,000 and will
receive additional payments based on the achievement of certain program
milestones. In addition, Roche has paid the Company certain amounts for the full
time equivalent personnel working on the research. In 1999, the Company and
Roche agreed to conclude their collaboration; therefore, the Company has no
future performance obligations under this collaboration.
Organon
On July 30, 1996, the Company entered into a three-year collaborative
research agreement with N.V. Organon ("Organon") to assist Organon in the
discovery and development of tissue-specific, estrogen-regulated genes. The
Company received an initial non-refundable license fee of $1,000,000 and will
receive additional payments based on the achievement of certain program
milestones, as well as royalties upon commercial sales of certain products, if
any. In addition, Organon has paid the Company certain amounts for the full time
equivalent personnel performing the research. In 1999, the Company and Organon
agreed to conclude their collaboration; therefore, the Company has no future
performance obligations under this collaboration.
Tanabe
From March 1996 to March 1998, Signal and Tanabe were engaged in a
collaborative program under which Tanabe funded certain research by Signal in
target and drug discovery in the fields of inflammatory disease and
osteoporosis. In connection with the collaboration, Tanabe paid Signal an
initial $1,000,000 non-refundable license fee and reimbursed Signal for research
and development costs. Tanabe also purchased 250,000 shares of Signal's Series D
Preferred Stock at $8.00 per share. Pursuant to certain anti-dilution provisions
of the Series D Preferred Stock agreement triggered by the sale of shares of the
Company's Series E Preferred Stock at $3.82 per share, the Company issued an
additional 116,300 shares of Series D Preferred Stock to Tanabe during 1997.
In March 1998, Signal and Tanabe mutually agreed to conclude their
collaboration and Tanabe licensed from Signal a lead compound that was
discovered during the collaboration. Signal retained all other intellectual
property rights, including rights to all other drug targets and drug leads,
created before or during the collaboration. Tanabe paid an additional
non-refundable fee of $1,800,000 to Signal for the exclusive worldwide license
to the lead compound and is obligated to make payments to Signal based on the
achievement of certain research and development milestones and royalties on any
future product sales. Signal has no future performance obligations under this
collaboration.
F-14
91
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
A summary of the convertible preferred stock at December 31, 1999 is as
follows:
SHARES ISSUED PREFERENCE IN
AND OUTSTANDING LIQUIDATION
--------------- -------------
Series A........................................... 1,313,438 $ 2,626,892
Series B........................................... 1,437,498 3,450,000
Series C........................................... 4,395,710 12,308,005
Series D........................................... 366,300 2,000,000
Series E........................................... 3,227,740 12,329,929
Series F........................................... 1,361,256 8,194,761
Series F-1......................................... 144,354 1,000,000
---------- -----------
12,246,296 $41,909,587
========== ===========
Each of the shares of Series A, B, C, D, E, F and F-1 preferred stock is
convertible on a one-for-one basis, at the option of the holder, into shares of
the Company's common stock. Therefore, 12,246,296 shares of common stock have
been reserved for issuance upon conversion of the preferred stock, subject to
certain anti-dilution adjustments. The preferred stock will convert
automatically upon the closing of an underwritten public offering of the
Company's common stock with proceeds to the Company of at least $15,000,000 and
at a price not less than $5.00 per share after adjustment for any stock splits.
The holders of the Series A, B, C, E and F preferred stock as a group are
entitled to elect four directors to the Board of Directors, and in all other
matters the holder of each share of preferred stock is entitled to one vote for
each share of common stock into which it would convert.
Annual dividends of $.16, $.19, $.22, $.64, $.32, $.48 and $.55 per share
of Series A, B, C, D, E, F and F-1 preferred stock, respectively, are payable
whenever funds are legally available and when and as declared by the Board of
Directors.
COMMON STOCK
In connection with certain stock purchase agreements, the Company has the
option to repurchase, at the original issue price, unvested shares in the event
of termination of employment or engagement. Shares issued under these agreements
generally vest over four to five years. At December 31, 1999, 128,911 shares
were subject to repurchase by the Company.
STOCK OPTION PLANS
In June 1993, the Company adopted the 1993 Founders' Stock Option Plan (the
"Founders' Plan"), under which 275,000 shares of common stock were reserved for
issuance upon exercise of options granted by the Company. The Founders' Plan
provides for the grant of incentive and nonstatutory options. The exercise price
of incentive stock options must equal at least the fair market value on the date
of grant, and the exercise price of nonstatutory stock options may be no less
than 85% of the fair market value on the date of grant. The maximum term of
options granted under the Founders' Plan is ten years. Options generally are
immediately exercisable. Common stock or options issued under the Founders' Plan
generally vest over five years. Unvested shares issued pursuant to the exercise
of options are subject to repurchase, at the original purchase price, in the
event of termination of employment or engagement.
F-15
92
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In November 1993, the Company adopted the 1993 Stock Option Plan, under
which 225,000 shares of the Company's common stock were reserved for issuance
upon exercise of options granted by the Company under provisions similar to the
Founders' Plan. In 1995 and 1996, the Company authorized an additional 500,000
and 525,000 shares, respectively, of the Company's common stock to be reserved
for issuance upon exercise of options granted by the Company under the 1993
Stock Option Plan.
In June 1997, the Company adopted the 1997 Stock Option Plan, under which
500,000 shares of common stock were reserved for issuance upon exercise of
options granted by the Company. In February 1998, the Company authorized an
additional 1,000,000 shares of the Company's common stock to be reserved for
issuance upon exercise of options granted by the Company under the 1997 Stock
Option Plan. The options contain similar provisions to those options issued
under the 1993 Founders' Stock Option Plan and the 1993 Stock Option Plan.
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of year... 795,650 $.25 1,084,244 $.40 1,632,097 $ .67
Granted............................ 623,343 $.55 993,750 $.85 175,100 $1.00
Exercised.......................... (277,044) $.31 (356,651) $.38 (80,997) $ .30
Cancelled.......................... (57,705) $.32 (89,246) $.61 (232,593) $ .75
--------- --------- ---------
Outstanding at end of year......... 1,084,244 $.40 1,632,097 $.67 1,493,607 $ .72
========= ========= =========
Vested options at end of year...... 250,532 $.58 269,825 $.25 682,703 $ .64
========= ========= =========
Exercise prices for options outstanding as of December 31, 1999 ranged from
$.20 to $1.00. The weighted average remaining contractual life of those options
is 6.8 years. The weighted-average fair value of options granted in 1997, 1998
and 1999, using the minimum value pricing model, was $.14, $.22 and $.22,
respectively.
As of December 31, 1999, options for 365,994 common shares were available
for future grant.
The Company recorded $615,855, $1,019,170 and $1,024,244 of deferred
compensation for options granted during the years ended December 31, 1997, 1998
and 1999, respectively, representing the difference between the option exercise
price and the estimated fair value of the underlying stock for financial
statement presentation purposes. The Company is amortizing the deferred
compensation over the vesting period of the options. The Company recorded
$104,355, $607,788 and $675,122 of compensation expense during the years ended
December 31, 1997, 1998 and 1999, respectively.
Pro forma information regarding net loss is required to be disclosed by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method prescribed in that Statement.
The fair value of these options was estimated at the date of grant using the
minimum value pricing model with the following weighted-average assumptions for
1997, 1998 and 1999: risk-free interest rate of 6%, dividend yield of 0%; and an
expected life of four years.
The minimum value pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor for volatility. In addition, option valuation
models require
F-16
93
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the related options.
The adjusted pro forma net loss for the years ended December 31, 1997, 1998 and
1999 was $5,757,845, $4,384,804 and $7,913,695, respectively. The adjusted pro
forma net loss per share, basic and diluted, for the years ended December 31,
1997, 1998 and 1999 was $5.67, $3.33 and $4.82, respectively. The effects are
not likely to be representative of the effects on pro forma net loss in future
years because it does not take into consideration pro forma compensation expense
related to grants made prior to 1996.
COMMON SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1999, the Company has reserved shares of common stock for
future issuance as follows:
Conversion of convertible preferred stock................... 12,246,296
Stock option plans.......................................... 1,859,601
Warrants.................................................... 125,000
----------
14,230,897
==========
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1998 and 1999 are shown below. A valuation allowance of $15,290,000, of
which $2,779,000 is related to 1999, has been recognized as of December 31, 1999
to offset the deferred tax assets as realization of such assets is uncertain.
DECEMBER 31,
----------------------------
1998 1999
DEFERRED TAX ASSETS: ------------ ------------
Capitalized research expenses........................... $ 965,000 $ 921,000
Net operating loss carryforwards........................ 9,276,000 11,389,000
Research and development credits........................ 1,458,000 1,877,000
Depreciation............................................ 57,000 952,000
Other, net.............................................. 755,000 151,000
------------ ------------
Total deferred tax assets............................... 12,511,000 15,290,000
Valuation allowance for deferred tax assets............. (12,511,000) (15,290,000)
------------ ------------
Net deferred taxes...................................... $ -- $ --
============ ============
At December 31, 1999, the Company has federal and California net operating
loss carryforwards of approximately $30,621,000 and $11,680,000, respectively.
The difference between the federal and California tax loss carryforwards is
attributable to the capitalization of research and development expenses for
California tax purposes and the fifty percent limitation on California loss
carryforwards prior to 1997. The federal tax loss carryforwards will begin
expiring in 2007, unless previously utilized. The California tax loss
carryforwards will continue to expire in 2000 (approximately $1,035,000 expired
in 1999). The Company also has federal and California research and development
tax credit carryforwards of approximately $1,368,000 and $783,000, respectively,
which will begin expiring in 2008 unless previously utilized.
F-17
94
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pursuant to Sections 382 and 383 of the Internal Revenue Code, the annual
use of the Company's net operating loss and credit carryforwards may be limited
if a cumulative change in ownership (as defined) of more than 50% occurs within
a three-year testing period.
7. SUBSEQUENT EVENT
In January 2000, the Company's Board of Directors authorized management of
the Company to file a Registration Statement with the Securities and Exchange
Commission for the Company to sell shares of its Common Stock in an initial
public offering. The Board of Directors also approved (subject to stockholder
ratification) that, prior to the effective date of the Offering contemplated by
this Prospectus, the Company will change the authorized shares of Preferred
Stock from 12,371,319 to 5,000,000 and the authorized shares of Common Stock
from 17,644,354 to 50,000,000; will reincorporate the Company in Delaware; will
effect a 1 for 2 stock split of the Preferred and Common Stock; will adopt a
2000 Equity Incentive Plan, which will amend the 1993 Stock Option Plans and the
1997 Stock Option Plan; increase the share reserve of the 2000 Equity Incentive
Plan to 3,500,000 shares; adopt the 2000 Non-Employee Directors' Stock Option
Plan with 250,000 shares reserved; and adopt the 2000 Employee Stock Purchase
Plan with 500,000 shares reserved. The financial statements and accompanying
notes have been retroactively restated to reflect the effect of the reverse
split and reincorporation in Delaware.
F-18
95
[INSIDE BACK COVER ARTWORK]
OUR DISCOVERY ENGINE FOR GENE REGULATING TARGETS AND DRUGS
[Graphic depicting Signal's discovery engine for gene regulating targets
and drugs. The top portion of the graphic depicts Signal's target discovery
engine, consisting of cellular molecular and genomic technologies. The middle
portion of the graphic depicts Signal's drug discovery engine, consisting of
proprietary screens and compound libraries. The bottom portion of the graphic
depicts the profiling of Signal's drug candidates in specific disease models in
preparation for clinical development.]
Target Discovery Engine: We are developing and applying advanced cellular,
molecular, and genomic technologies to discover new gene regulating targets.
Drug Discovery Engine: Using our proprietary screens and compound
libraries, we identify and optimize drug leads which control disease processes
at the level of gene function.
Drug Development: We profile the ability of our drug candidates to
selectively control gene regulation pathways in specific disease models in
preparation for clinical development. We currently have no drugs in clinical
development.
96
[SIGNAL LOGO]
97
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[INTERNATIONAL]
SUBJECT TO COMPLETION, DATED MARCH 22, 2000
[SIGNAL LOGO]
5,000,000 SHARES
COMMON STOCK
Signal Pharmaceuticals, Inc. is offering 5,000,000 shares of its common
stock. This is our initial public offering and no public market currently exists
for our shares. We have applied to have our common stock approved for quotation
on the Nasdaq National Market under the symbol "SGNL." We anticipate that the
initial public offering price will be between $13.00 and $15.00 per share.
As part of our collaboration agreement with DuPont Pharmaceuticals Company,
DuPont Pharmaceuticals has agreed to purchase $2.0 million of our common stock
in a private transaction concurrent with the closing of this offering at the
initial public offering price.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------------
PER SHARE TOTAL
---------- ----------
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Signal Pharmaceuticals, Inc. ................... $ $
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Signal Pharmaceuticals, Inc. has granted the underwriters a 30-day option
to purchase up to an additional 750,000 shares of common stock to cover
over-allotments.
------------------------------
ROBERTSON STEPHENS INTERNATIONAL
CHASE H&Q
CIBC WORLD MARKETS
THE DATE OF THIS PROSPECTUS IS , 2000.
98
UNDERWRITING
The underwriters name below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc. and CIBC World
Markets Corp., have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth opposite their names below. The underwriters
are committed to purchase and pay for all of these shares if any are purchased.
NUMBER OF
UNDERWRITER SHARES
----------- ---------
FleetBoston Robertson Stephens Inc. ........................
Chase Securities Inc. ......................................
CIBC World Markets Corp. ...................................
INTERNATIONAL UNDERWRITER
-------------------------
FleetBoston Robertson Stephens International Limited........
Chase Manhattan International Limited.......................
CIBC World Markets Inc. ....................................
---------
Total..................................................... 5,000,000
=========
The underwriters' representatives have advised us that the underwriters
propose to offer the shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus and to certain
dealers at such price less a concession of not more than $ per share, of
which $ may be reallowed to other dealers. After the completion of this
offering, the initial public offering price, concession and reallowance to
dealers may be reduced by the underwriters' representatives. No such reduction
shall change the amount of proceeds to be received by us as set forth on the
cover page of this prospectus. The common stock is offered by the underwriters
as stated herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part.
Over-Allotment Option
We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 750,000
additional shares of common stock at the same price per share as we will receive
for the 5,000,000 shares that the underwriters have agreed to purchase. To the
extent that the underwriters exercise such option, each of the underwriters will
have a firm commitment, subject to certain conditions, to purchase approximately
the same percentage of such additional shares that the number of shares of
common stock to be purchased by it shown in the above table represents as a
percentage of the 5,000,000 shares offered hereby. If purchased, such additional
shares will be sold by the underwriters on the same terms as those on which the
5,000,000 shares are being sold. We will be obligated, under the option, to sell
shares to the extent the option is exercised. The underwriters may exercise this
option only to cover over-allotments made in connection with the sale of the
shares of common stock offered hereby. If this option is exercised in full, the
total public offering price, underwriting discounts and commissions and proceeds
to us will be $80,500,000, $5,635,000 and $74,865,000, respectively.
The following table summarizes the compensation to be paid to the
underwriters by us:
TOTAL
----------------------------
WITHOUT WITH OVER-
PER SHARE OVER-ALLOTMENT ALLOTMENT
--------- -------------- ----------
Underwriting discounts and commissions payable by us... $0.98 $4,900,000 $5,635,000
We estimate that expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will be
approximately $850,000.
99
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee, the NASD filing fee and
the Nasdaq listing fee.
SEC Registration fee........................................ $ 22,770
NASD filing fee............................................. 8,550
Nasdaq Stock Market Listing Application fee................. 95,000
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 125,000
Legal fees and expenses..................................... 450,000
Accounting fees and expenses................................ 120,000
Transfer agent and registrar fees........................... 15,000
Miscellaneous............................................... 8,680
--------
Total..................................................... $850,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act.
The Registrant's Second Amended and Restated Certificate of Incorporation
and Bylaws include provisions to (i) eliminate the personal liability of its
directors for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by Section 102(b)(7) of the General Corporation Law of
Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its
directors and executive officers to the fullest extent permitted by Section 145
of the Delaware Law, including circumstances in which indemnification is
otherwise discretionary. Pursuant to Section 145 of the Delaware Law, a
corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are or are threatened to be made, a party
by reason of their serving in such positions so long as they acted in good faith
and in a manner they reasonably believed to be in or not opposed to, the best
interests of the corporation and with respect to any criminal action, they had
no reasonable cause to believe their conduct was unlawful. The Registrant
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers. These provisions do not eliminate the
directors' duty of care, and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware Law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant, for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for acts or omissions that the director believes to
be contrary to the best interests of the Registrant or its stockholders, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to the
Registrant or its stockholders when the director was aware or should have been
aware of a risk of serious injury to the Registrant or its stockholders, for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Registrant or its
stockholders, for improper transactions between the director and the Registrant
and for improper distributions to stockholders and loans to directors and
officers. The provision also does not affect a director's responsibilities under
any other law, such as the federal securities law or state or federal
environmental laws.
The Registrant has entered into indemnity agreements with each of its
directors and executive officers that require the Registrant to indemnify such
persons against any and all expenses (including attorneys' fees), witness fees,
damages, judgments, fines, settlements and other amounts incurred (including
expenses of a derivative action) in connection with any action, suit or
proceeding, whether actual or threatened, to which any such person
II-1
100
may be made a party by reason of the fact that such person is or was a director,
an officer or an employee of the Registrant or any of its affiliated
enterprises, provided that such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
Director, officer or key employee of the Registrant as to which indemnification
is being sought nor is the Registrant aware of any threatened litigation that
may result in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1997, the Registrant has sold and issued the following
unregistered securities (after giving effect to the 1-for-2 stock split to be
effected prior to the completion of this offering):
1. On September 9, 11 and 12, 1997, the Company sold an aggregate of
3,227,740 shares of Series E Preferred Stock at a price of $3.82 per share
to the following purchasers: Accel Investors '93 L.P., (1,870 shares),
Accel IV L.P. (42,307 shares), Accel Japan L.P. (4,044) shares), Accel
Keiretsu L.P. (910 shares), Ares-Serono S.A. (493,151 shares), Bayview
Investors Ltd. (30,408 shares), Biocentive (261,780 shares), Ellmore C.
Patterson Partners (1,112 shares), Finsbury Worldwide Pharmaceutical Trust,
plc (261,780 shares), Hambrecht & Quist LLC (21,596 shares), Harry F.
Hixson, Jr. Separate Property Trust, Dated December 15, 1995 (11,010
shares), InterWest Investors V (248 shares), InterWest Partners V (39,404
shares), Kleiner Perkins Caufield & Byers VI (50,546 shares), Lehman
Brothers (43,193 shares), Lombard Odier & Cie (785,340 shares),
Neuroscience Partners Limited Partnership (261,780 shares), New York Life
Insurance Company (392,670 shares), Oxford Bioscience Partners (Adjunct)
L.P. (5,287 shares), Oxford Bioscience Partners (Bermuda) L.P. (4,592
shares), Oxford Bioscience Partners, L.P. (16,555 shares), Pharma/wHealth
(261,780 shares), Prosper Partners (303 shares), Robertson, Stephens &
Company LLC (21,596 shares), Second Ventures II, L.P. (2,775 shares), The
Health Care and Biotechnology Venture Fund (130,890 shares), U.S. Venture
Partners IV, L.P. (22,866 shares), USVP Entrepreneur Partners II, L.P. (793
shares), Venrock Associates (21,735 shares), Venrock Associates II, L.P.
(28,811 shares), and Vertical Fund Associates, L.P. (6,608 shares).
2. On December 1, 1997, the Company sold 1,361,256 shares of Series F
Preferred Stock at a price of $6.02 per share to Ares-Serono, S.A.
3. On December 8, 1997, the Company issued 10,000 shares of Common
Stock, valued at $.56 per share, to the University of Massachusetts.
4. On December 31, 1997, the Company issued 1,250 shares of Common
Stock, valued at $7.20 per share, to Dr. David J. Baylink under a
consulting agreement.
5. On January 14, 1998, the Company issued 2,499 shares of Common
Stock, valued at $.56 per share, to The Regents of the University of
California.
6. On March 8, 1998, the Company issued 12,497 shares of Common Stock
in the aggregate, valued at $.56 per share, to five scientists affiliated
with The Regents of the University of California.
7. On December 7, 1999, the Company sold 144,354 shares of Series F-1
Preferred Stock for an aggregate purchase price of $1,000,000 to DuPont
Pharmaceuticals Company.
8. As of February 16, 2000, the Company had granted options to
purchase an aggregate of 3,844,168, including options subsequently
cancelled that then became available for new option grants, shares of its
Common Stock to directors, employees and consultants under its 2000 Equity
Incentive Plan. The exercise prices for such options range from $0.20 to
$2.50 per share. As of February 16, 2000, the Company had issued an
aggregate of 1,352,432 shares of its Common Stock upon the exercise of
stock options under its 2000 Equity Incentive Plan.
II-2
101
The offers, sales and issuances of the above securities were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act, and/or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving a public offering or transactions under compensatory
benefit plans and contracts relating to compensation as provided under such Rule
701. The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access, through employment or other relationships,
to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
1.1+ Form of Underwriting Agreement.
3.1 Articles of Incorporation effective prior to reincorporation
of the Company in Delaware.(1)
3.2 Bylaws effective prior to reincorporation of the Company in
Delaware.(1)
3.3 Certificate of Incorporation of the Company's Delaware
subsidiary.(1)
3.4 Form of Amended and Restated Certificate of Incorporation,
to be filed and become effective prior to the effectiveness
of this Registration Statement.(1)
3.5 Form of Second Amended and Restated Certificate of
Incorporation, to be filed and become effective upon
completion of the offering.(1)
3.6 Form of Bylaws to become effective prior to the
effectiveness of this Registration Statement.(1)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and
3.6.
4.2+ Form of Common Stock Certificate.
5.1+ Opinion of Cooley Godward LLP.
10.1 Second Amended and Restated Voting Agreement, dated
September 8, 1994, entered into between the Registrant and
certain of its stockholders.(1)
10.2 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.(1)
10.3 Registrant's 2000 Equity Incentive Plan.
10.4 Form of Incentive and Nonstatutory Stock Option Agreements
under the 2000 Equity Incentive Plan.(1)
10.5 Registrant's Employee Stock Purchase Plan and related
offering document.(1)
10.6 Registrant's Non-Employee Directors' Stock Option Plan.
10.7 Form of Nonstatutory Stock Option under Registrant's
Non-Employee Directors' Stock Option Plan.(1)
10.8 Registrant's Employees Retirement Investment Plan and Trust,
effective as of January 1, 1998.(1)
10.9 Amended and Restated Investors' Rights Agreement, dated
September 9, 1997, entered into between the Registrant and
certain of its stockholders.(1)
10.10 Amendment to the Amended and Restated Investors' Rights
Agreement dated November 25, 1997, entered into between the
Registrant and certain of its stockholders.(1)
10.11 Loan and Security Agreement, dated November 22, 1996,
entered into between the Registrant and MMC/GATX Partnership
No. 1.(1)
10.12 Warrant to Purchase shares of Series C-1 Preferred Stock,
issued by the Registrant to MMC/ GATX Partnership No. 1.(1)
10.13 Secured Promissory Note, dated December 2, 1996, issued by
the Registrant to MMC/ GATX Partnership No. 1.(1)
10.14 Series E Preferred Stock Purchase Agreement, dated September
9, 1997, between the Registrant and certain of its
stockholders.(1)
10.15 Series F Preferred Stock Purchase Agreement, dated November
25, 1997, between the Registrant and Ares-Serono S.A.(1)
II-3
102
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.16 Promissory Note, dated June 14, 1994, as amended on May 14,
1998 and October 27, 1999, issued to the Registrant by Alan
J. Lewis.(1)
10.17 Security Agreement, dated June 14, 1994, entered into
between the Registrant to Alan J. Lewis.(1)
10.18 Employment letter agreement, dated December 8, 1993, between
the Registrant and Alan J. Lewis.(1)
10.19 Employment letter agreement, dated March 4, 1994, between
the Registrant and David W. Anderson.(1)
10.20 Employment letter agreement, dated August 18, 1994, between
the Registrant and Bradley B. Gordon.(1)
10.21 Consulting Agreement, dated April 1, 1996, between the
Registrant and John P. Walker.(1)
10.22 Lease, dated April 30, 1993, as amended, between the
Registrant and Sorrento Valley Business Park.(1)
10.23 Master Lease Agreement, dated July 8, 1993, between the
Registrant and E.I. DuPont de Nemours & Co.(1)
10.24 Master Equipment Lease, dated September 1, 1993, between the
Registrant and Phoenix Leasing Incorporated.(1)
10.25 Master Lease Agreement, dated January 1, 1998, between the
Registrant and Transamerica Business Credit Corporation.(1)
10.26 Lease, dated January 1, 1998, between the Registrant and
Sorrento Valley Business Park.(1)
10.27* Exclusive License Agreement, dated October 26, 1993, between
the Registrant and The Regents of the University of
California.(1)
10.28* First Amendment to Exclusive License Agreement, dated June
22, 1997, between the Registrant and The Regents of the
University of California.(1)
10.29* Second Amendment to Exclusive License Agreement, dated
February 2, 1998, between the Registrant and The Regents of
the University of California.(1)
10.30* Restricted Stock Purchase Agreement, dated October 26, 1993,
between the Registrant and the Regents of the University of
California.(1)
10.31* License Agreement, dated February 18, 1998, between the
Registrant and The Regents of the University of
California.(1)
10.32* Restricted Stock Purchase Agreement, dated February 18,
1998, between the Registrant and The Regents of the
University of California.(1)
10.33* Collaborative Development and Licensing Agreement, dated
March 31, 1996, between the Registrant and Tanabe Seiyaku
Co., Ltd.(1)
10.34* Amendment to Collaborative Development and Licensing
Agreement, dated March 31, 1998, between the Registrant and
Tanabe Seiyaku Co., Ltd.(1)
10.35 Stock Purchase Agreement, dated March 31, 1996, between the
Registrant and Tanabe Seiyaku Co., Ltd.(1)
10.36* Agreement dated July 30, 1996, between the Registrant and
N.V. Organon.(1)
10.37* First Amendment to Agreement, dated January 30, 1998,
between the Registrant and N.V. Organon.(1)
10.38* Exclusive License Agreement, dated October 1996, between the
Registrant and the University of Massachusetts.(1)
10.39* Restricted Stock Purchase Agreement, dated October 31, 1996,
between the Registrant and the University of
Massachusetts.(1)
10.40* License Agreement, dated October 28, 1997, between the
Registrant and the University of Massachusetts.(1)
10.41* Restricted Stock Purchase Agreement, dated December 8, 1997,
between the Registrant and the University of
Massachusetts.(1)
10.42* Research, Development and License Agreement, dated November
25, 1997, between the Registrant and Ares Trading S.A.(1)
II-4
103
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.43* Collaborative Research and License Agreement, dated December
26, 1997, between the Registrant and The DuPont Merck
Pharmaceutical Company.(1)
10.44* Stock Purchase Agreement dated December 26, 1997, between
the Registrant and The DuPont Merck Pharmaceutical Company.
10.45* Joint Development and Commercialization Agreement, dated
February 9, 2000, between the Registrant and Nippon Kayaku
Co., Ltd.
10.46 Promissory Note, dated May 8, 1998, issued to the Registrant
by Alan J. Lewis. (1)
10.47* Collaborative Research and License Agreement, dated October
15, 1999, between the Registrant and Axys Pharmaceuticals,
Inc.(1)
10.48 Lease, dated December 28, 1999, between the Registrant and
HUB Properties Trust.(1)
10.49* First Amendment to Research, Development and License
Agreement, dated February 1999, between the Registrant and
Ares Trading S.A.(1)
10.50 Second Amendment to Research, Development and License
Agreement, dated February 18, 2000, between the Registrant
and Ares Trading S.A.
10.51 Employment Agreement, dated May 18, 1998, between the
Registrant and Douglas E. Richards.(1)
10.52 Promissory Note, dated August 1998, issued to the Registrant
by Douglas E. Richards.(1)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of Attorney. Reference is made to page II-7.
27.1 Financial Data Schedule.
- -------------------------
* Confidential Treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
+ To be filed by amendment.
(1) Previously filed.
(b) SCHEDULES.
All schedules are omitted because they are not required, are not applicable
or the information is included in the consolidated Financial Statements or Notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 of this Registration
Statement, or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
104
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(2) That, for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
105
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, County of San
Diego, State of California, on the 22nd day of March, 2000.
SIGNAL PHARMACEUTICALS, INC.
By: /s/ BRADLEY B. GORDON
------------------------------------
Bradley B. Gordon
Senior Vice President Finance, Chief
Financial Officer and Corporate
Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed by the following persons
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALAN J. LEWIS President, Chief Executive Officer March 22, 2000
- ----------------------------------- and Director
Alan J. Lewis, Ph.D. (Principal Executive Officer)
/s/ BRADLEY B. GORDON Senior Vice President, Finance, March 22, 2000
- ----------------------------------- Chief Financial Officer and
Bradley B. Gordon Secretary
(Principal Financial and
Accounting Officer)
* Chairman of the Board March 22, 2000
- -----------------------------------
John P. Walker
* Director March 22, 2000
- -----------------------------------
Harry F. Hixson, Ph.D.
* Director March 22, 2000
- -----------------------------------
Patrick F. Latterell
* Director March 22, 2000
- -----------------------------------
Gary L. Neil, Ph.D.
* Director March 22, 2000
- -----------------------------------
Arnold Oronsky, Ph.D.
*By: /s/ BRADLEY B. GORDON
- -----------------------------------
Bradley B. Gordon
Attorney-in-fact
II-7
106
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
1.1+ Form of Underwriting Agreement.
3.1 Articles of Incorporation effective prior to reincorporation
of the Company in Delaware.(1)
3.2 Bylaws effective prior to reincorporation of the Company in
Delaware.(1)
3.3 Certificate of Incorporation of the Company's Delaware
subsidiary.(1)
3.4 Form of Amended and Restated Certificate of Incorporation,
to be filed and become effective prior to the effectiveness
of this Registration Statement.(1)
3.5 Form of Second Amended and Restated Certificate of
Incorporation, to be filed and become effective upon
completion of the offering.(1)
3.6 Form of Bylaws to become effective prior to the
effectiveness of this Registration Statement.(1)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and
3.6.
4.2+ Form of Common Stock Certificate.
5.1+ Opinion of Cooley Godward LLP.
10.1 Second Amended and Restated Voting Agreement, dated
September 8, 1994, entered into between the Registrant and
certain of its stockholders.(1)
10.2 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.(1)
10.3 Registrant's 2000 Equity Incentive Plan.
10.4 Form of Incentive and Nonstatutory Stock Option Agreements
under the 2000 Equity Incentive Plan.(1)
10.5 Registrant's Employee Stock Purchase Plan and related
offering document.(1)
10.6 Registrant's Non-Employee Directors' Stock Option Plan.
10.7 Form of Nonstatutory Stock Option under Registrant's
Non-Employee Directors' Stock Option Plan.(1)
10.8 Registrant's Employees Retirement Investment Plan and Trust,
effective as of January 1, 1998.(1)
10.9 Amended and Restated Investors' Rights Agreement, dated
September 9, 1997, entered into between the Registrant and
certain of its stockholders.(1)
10.10 Amendment to the Amended and Restated Investors' Rights
Agreement dated November 25, 1997, entered into between the
Registrant and certain of its stockholders.(1)
10.11 Loan and Security Agreement, dated November 22, 1996,
entered into between the Registrant and MMC/GATX Partnership
No. 1.(1)
10.12 Warrant to Purchase shares of Series C-1 Preferred Stock,
issued by the Registrant to MMC/ GATX Partnership No. 1.(1)
10.13 Secured Promissory Note, dated December 2, 1996, issued by
the Registrant to MMC/ GATX Partnership No. 1.(1)
10.14 Series E Preferred Stock Purchase Agreement, dated September
9, 1997, between the Registrant and certain of its
stockholders.(1)
10.15 Series F Preferred Stock Purchase Agreement, dated November
25, 1997, between the Registrant and Ares-Serono S.A.(1)
10.16 Promissory Note, dated June 14, 1994, as amended on May 14,
1998 and October 27, 1999, issued to the Registrant by Alan
J. Lewis.(1)
10.17 Security Agreement, dated June 14, 1994, entered into
between the Registrant to Alan J. Lewis.(1)
10.18 Employment letter agreement, dated December 8, 1993, between
the Registrant and Alan J. Lewis.(1)
10.19 Employment letter agreement, dated March 4, 1994, between
the Registrant and David W. Anderson.(1)
10.20 Employment letter agreement, dated August 18, 1994, between
the Registrant and Bradley B. Gordon.(1)
107
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.21 Consulting Agreement, dated April 1, 1996, between the
Registrant and John P. Walker.(1)
10.22 Lease, dated April 30, 1993, as amended, between the
Registrant and Sorrento Valley Business Park.(1)
10.23 Master Lease Agreement, dated July 8, 1993, between the
Registrant and E.I. Dupont de Nemours & Co.(1)
10.24 Master Equipment Lease, dated September 1, 1993, between the
Registrant and Phoenix Leasing Incorporated.(1)
10.25 Master Lease Agreement, dated January 1, 1998, between the
Registrant and Transamerica Business Credit Corporation.(1)
10.26 Lease, dated January 1, 1998, between the Registrant and
Sorrento Valley Business Park.(1)
10.27* Exclusive License Agreement, dated October 26, 1993, between
the Registrant and The Regents of the University of
California.(1)
10.28* First Amendment to Exclusive License Agreement, dated June
22, 1997, between the Registrant and The Regents of the
University of California.(1)
10.29* Second Amendment to Exclusive License Agreement, dated
February 2, 1998, between the Registrant and The Regents of
the University of California.(1)
10.30* Restricted Stock Purchase Agreement, dated October 26, 1993,
between the Registrant and the Regents of the University of
California.(1)
10.31* License Agreement, dated February 18, 1998, between the
Registrant and The Regents of the University of
California.(1)
10.32* Restricted Stock Purchase Agreement, dated February 18,
1998, between the Registrant and The Regents of the
University of California.(1)
10.33* Collaborative Development and Licensing Agreement, dated
March 31, 1996, between the Registrant and Tanabe Seiyaku
Co., Ltd.(1)
10.34* Amendment to Collaborative Development and Licensing
Agreement, dated March 31, 1998, between the Registrant and
Tanabe Seiyaku Co., Ltd.(1)
10.35 Stock Purchase Agreement, dated March 31, 1996, between the
Registrant and Tanabe Seiyaku Co., Ltd.(1)
10.36* Agreement dated July 30, 1996, between the Registrant and
N.V. Organon.(1)
10.37* First Amendment to Agreement, dated January 30, 1998,
between the Registrant and N.V. Organon.(1)
10.38* Exclusive License Agreement, dated October 1996, between the
Registrant and the University of Massachusetts.(1)
10.39* Restricted Stock Purchase Agreement, dated October 31, 1996,
between the Registrant and the University of
Massachusetts.(1)
10.40* License Agreement, dated October 28, 1997, between the
Registrant and the University of Massachusetts.(1)
10.41* Restricted Stock Purchase Agreement, dated December 8, 1997,
between the Registrant and the University of
Massachusetts.(1)
10.42* Research, Development and License Agreement, dated November
25, 1997, between the Registrant and Ares Trading S.A.(1)
10.43* Collaborative Research and License Agreement, dated December
26, 1997, between the Registrant and The DuPont Merck
Pharmaceutical Company.(1)
10.44* Stock Purchase Agreement dated December 26, 1997, between
the Registrant and The DuPont Merck Pharmaceutical Company.
10.45* Joint Development and Commercialization Agreement, dated
February 9, 2000, between the Registrant and Nippon Kayaku
Co., Ltd.
10.46 Promissory Note, dated May 8, 1998, issued to the Registrant
by Alan J. Lewis.(1)
10.47* Collaborative Research and License Agreement, dated October
15, 1999, between the Registrant and Axys Pharmaceuticals,
Inc.(1)
10.48 Lease, dated December 28, 1999, between the Registrant and
HUB Properties Trust.(1)
108
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.49* First Amendment to Research, Development and License
Agreement, dated February 1999, between the Registrant and
Ares Trading S.A.(1)
10.50* Second Amendment to Research, Development and License
Agreement, dated February 18, 2000, between the Registrant
and Ares Trading S.A.
10.51 Employment Agreement, dated May 18, 1998, between the
Registrant and Douglas E. Richards.(1)
10.52 Promissory Note, dated May 18, 1998, between the Registrant
and Douglas E. Richards.(1)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of Attorney. Reference is made to page II-7.
27.1 Financial Data Schedule.
- -------------------------
* Confidential Treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
+ To be filed by amendment.
(1) Previously filed.