<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 1997
REGISTRATION NO. 333-22297
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
PATHOGENESIS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2834 91-1542150
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
201 ELLIOTT AVENUE WEST
SEATTLE, WASHINGTON 98119
(206) 467-8100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------------
WILBUR H. GANTZ
PRESIDENT AND CHIEF EXECUTIVE OFFICER
201 ELLIOTT AVENUE WEST
SEATTLE, WASHINGTON 98119
(206) 467-8100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
STEPHEN H. KAY, ESQ. DENNIS N. BERMAN, ESQ.
Squadron, Ellenoff, Plesent & Sonnenschein Nath & Rosenthal
Sheinfeld, LLP 1221 Avenue of the Americas
551 Fifth Avenue New York, New York 10020
New York, New York 10176 (212) 768-6700
(212) 661-6500
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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, as amended, 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, 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. / /
--------------------------
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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 17, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,000,000 SHARES
[LOGO]
[LOGO]
COMMON STOCK
ALL OF THE 2,000,000 SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE (THE
"COMMON STOCK"), OFFERED HEREBY ARE BEING SOLD BY PATHOGENESIS CORPORATION
("PATHOGENESIS" OR THE "COMPANY"). THE COMMON STOCK IS TRADED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "PGNS." ON FEBRUARY 21, 1997 THE LAST REPORTED
SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $30.75 PER
SHARE. SEE "PRICE RANGE OF COMMON STOCK."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS
PUBLIC DISCOUNT (1) TO COMPANY (2)
<S> <C> <C> <C>
PER SHARE..................... $ $ $
TOTAL (3)..................... $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $450,000 .
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
300,000 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS,
IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO
PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL $ AND
THE PROCEEDS TO COMPANY WILL TOTAL $ . SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICE OF MONTGOMERY SECURITIES ON OR ABOUT , 1997.
-------------------
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
HAMBRECHT & QUIST
, 1997
<PAGE>
[PICTURE OF CHILD USING NEBULIZER TO INHALE TOBI (TOBRAMYCIN FOR INHALATION)]
TOBI-TM- (Tobramycin for Inhalation)
<TABLE>
<CAPTION>
Indications Status
- ------------------------------------- --------------------------------------------------------------------------
<S> <C>
Cystic Fibrosis RESULTS OF U.S. PHASE III CLINICAL TRIALS ANNOUNCED IN JANUARY 1997;
INTEND TO FILE NDA IN SECOND QUARTER OF 1997.
EUROPEAN STUDIES INTENDED TO COMMENCE IN 1997.
Bronchiectasis U.S. PHASE II CLINICAL TRIALS INTENDED TO COMMENCE IN 1997.
Tuberculosis U.S. PHASE II CLINICAL TRIALS INTENDED TO COMMENCE IN 1997.
</TABLE>
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M.
SEE "UNDERWRITING."
TOBI-TM- and RAM-TM- and the Company's name are trademarks of the Company.
This prospectus also includes brand names or trademarks of companies other than
PathoGenesis.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS, INCLUDING INFORMATION UNDER "RISK FACTORS." UNLESS OTHERWISE
INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
THE COMPANY
PathoGenesis Corporation ("PathoGenesis" or the "Company") develops novel
drugs to treat serious, chronic human infectious diseases where there is a
significant need for improved therapy. In January 1997, PathoGenesis announced
results from its two pivotal Phase III clinical trials of its lead drug
candidate, TOBI-TM- (tobramycin for inhalation), for treatment of chronic
PSEUDOMONAS AERUGINOSA lung infections in people with cystic fibrosis. The
trials, which were completed in October 1996, included data from a total of 468
patients in 69 cystic fibrosis care centers in the United States.
TOBI improved lung function in the two pivotal trials, resulting in an
improvement of more than 11% compared with placebo by the end of the six-month
study period. The mean number of hospitalization days across both studies
declined 36% to 5.2 days for the TOBI group versus 8.2 days for the placebo
group. Observed bacterial counts in the sputum (phlegm) of patients taking TOBI
declined, while observed bacterial counts increased in the placebo group. Over
the six-month study period, the difference in observed bacterial density between
the two groups was 10-fold. The foregoing data were statistically significant
when analyzed on an "intent to treat" basis.
Reported adverse events were comparable between the groups taking TOBI and
the placebo. In TOBI patients, the presence of pseudomonal bacteria potentially
resistant to levels of tobramycin in the lungs achieved by aerosol
administration was low: 4.0% at the beginning and 5.4% at the end of the trials.
Based on the results of these trials, the Company intends to file a New Drug
Application ("NDA") for TOBI in cystic fibrosis patients with the United States
Food and Drug Administration ("FDA") in the second quarter of 1997. The FDA has
agreed to an expedited review of such NDA, which may accelerate the application
review process.
TOBI is a stable, premixed, proprietary formulation of the antibiotic
tobramycin for delivery by inhalation using a nebulizer. Tobramycin, a
broad-spectrum antibiotic, has been administered intravenously to cystic
fibrosis patients with lung infections for more than 20 years. However, its use
has been limited to patients hospitalized for acute flare-ups of their chronic
lung infections primarily because severe kidney damage or hearing loss can
result from extended intravenous treatment. Conversely, delivery by inhalation
permits application of much higher concentrations than intravenous
administration, since the drug is deposited directly to the site of infection in
the lungs with little absorption into the bloodstream. TOBI is designed to
expand the use of tobramycin beyond short-term hospitalizations to long-term,
home administration to suppress the life-threatening pseudomonal lung infections
that are common in cystic fibrosis patients. PathoGenesis has received a U.S.
formulation patent for TOBI and an Orphan Drug designation from the FDA for
inhaled tobramycin to treat pulmonary infections in people with cystic fibrosis.
The Company believes that the market opportunity for TOBI is significant and
growing. There are approximately 30,000 cystic fibrosis patients in the United
States, according to the Cystic Fibrosis Foundation, and a comparable number in
Europe. Pseudomonal bacteria infect the lungs of approximately 60% of all
patients with the disease, according to data gathered during 1995 by the Cystic
Fibrosis Foundation.
Based on the potential efficacy of delivering a high concentration of
tobramycin directly to the site of infection in the lungs, the Company also
intends to conduct clinical trials of TOBI in patients suffering from other
bacterial lung infections, including bronchiectasis (a form of severe chronic
bronchitis) and
3
<PAGE>
tuberculosis. Bronchiectasis afflicts approximately 100,000 patients in the
United States. In addition, there are approximately 25,000 new cases of
tuberculosis diagnosed annually in the United States. The Company intends to
commence Phase II clinical trials for TOBI in patients with bronchiectasis as
well as in patients with tuberculosis during 1997.
The Company's second drug candidate, PA-1648, a derivative of the antibiotic
rifampin, is being developed for the treatment of tuberculosis. The efficacy of
current therapies for tuberculosis is limited due to drug toxicity, the
emergence of drug-resistant strains and the need to ensure patient compliance
with multiple drug regimens over extended treatment periods. Animal studies
indicate that PA-1648 is more active against tuberculosis than any of the drugs
currently approved for clinical use. PathoGenesis completed Phase I clinical
trials for PA-1648 during 1996. The Company intends to commence Phase II
clinical trials in tuberculosis patients during 1997.
While the Company currently expects to file an NDA for TOBI in cystic
fibrosis patients in the second quarter of 1997 and the FDA has agreed to an
expedited review, there can be no assurance as to the timing of such filing or
the outcome or timing of the FDA's review of such filing. Additionally, there
can be no assurance that TOBI, if approved by the FDA, will achieve market
acceptance. Furthermore, no assurance can be given that the results of any of
the anticipated additional clinical trials to be conducted by the Company will
be consistent with results obtained in the clinical trials for TOBI in cystic
fibrosis patients or that such trials will be completed within anticipated time
frames, if at all.
The Company is a Delaware corporation organized in December 1991. The
Company's principal executive offices are located at 201 Elliott Avenue West,
Seattle, Washington 98119, and its telephone number is (206) 467-8100.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered......................... 2,000,000 shares
Common Stock Outstanding after the
Offering................................... 15,932,322 shares (1)
Use of Proceeds.............................. Launch costs, including sales and marketing,
of TOBI for cystic fibrosis, clinical
testing, research and development and general
corporate purposes, including working capital
and capital expenditures. See "Use of
Proceeds."
Nasdaq National Market symbol................ PGNS
</TABLE>
- ------------------------
(1) Excludes as of January 31, 1997: (i) 1,686,450 shares of Common Stock
issuable upon the exercise of outstanding options to purchase shares of
Common Stock at a weighted average exercise price of approximately $15.40
per share; (ii) 111,660 shares of Common Stock reserved for issuance under
outstanding warrants at an average exercise price of $13.79; and (iii)
1,946,811 shares of Common Stock underlying options available for future
grants under the Company's stock option plans. See "Management--Stock Option
Plans" and "Description of Capital Stock."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 10,
1991
(INCORPORATION)
YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------------- DECEMBER 31
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue--grants and royalties............................ $ 440 $ -- $ -- $ -- $ --
Operating expenses:
Research and development............................... 20,673 15,668 12,789 8,213 758
General and administrative............................. 4,241 3,609 3,215 3,615 2,698
---------- ---------- ---------- ---------- -------
Total operating expenses............................. 24,914 19,277 16,004 11,828 3,456
Net loss................................................. $ (21,264) $ (18,024) $ (14,762) $ (10,805) $ (2,930)
Net loss per common share................................ $ (1.66) $ (2.20) $ (1.95) $ (1.77) $ (0.87)
Weighted average common shares outstanding............... 12,829 8,210 7,585 6,111 3,367
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(1)
--------- --------------
BALANCE SHEET DATA:
Cash, cash equivalents and investment securities..................................... $ 60,688 $ 118,355
Total current assets................................................................. 61,809 119,477
Total assets......................................................................... 69,999 127,666
Total current liabilities............................................................ 2,974 2,974
Long-term liability.................................................................. 98 98
Total stockholders' equity........................................................... 66,926 124,594
</TABLE>
- ------------------------
(1) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $30.75 per share
and the application of the estimated net proceeds therefrom (after deducting
underwriting discounts and commissions and estimated offering expenses
payable by the Company). See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ALL SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES OR OTHER FACTORS
WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION TO
STATEMENTS WHICH EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, INVESTORS ARE
URGED TO CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES," "BELIEF,"
"EXPECTS," "PLANS," "ANTICIPATES," OR "INTENDS" TO BE UNCERTAIN AND
FORWARD-LOOKING. AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION SET FORTH IN
THIS PROSPECTUS, IN CONNECTION WITH AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY. ALL CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ
AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY
APPEAR IN THIS PROSPECTUS.
EARLY STAGE OF DEVELOPMENT; CONTINUING OPERATING LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
The Company is in a development stage and currently has no sources of
operating revenues from any of its drug candidates and has limited sources of
revenue from grants and royalties. The Company has incurred net operating losses
since its inception in December 1991. At December 31, 1996, the Company had a
deficit accumulated during the development stage of $67,785,433. Such losses
have resulted principally from costs incurred in research and development and
clinical trials and from general and administrative costs associated with the
Company's operations. The Company expects that operating losses will continue
and increase for at least the next year as its research and development,
clinical testing and marketing activities expand. The Company's ability to
achieve profitability will depend in part on its ability to obtain regulatory
approvals for its drug candidates and to develop the capability to manufacture
and market any approved products either by itself or in collaboration with third
parties. There can be no assurance if or when the Company will receive any
regulatory approvals required for the clinical development, commercial
manufacturing or marketing of its proposed products, or achieve profitability.
Accordingly, the extent of future losses and the time required to achieve
profitability are highly uncertain. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ABSENCE OF PRODUCTS
The Company does not currently have regulatory approval to market or
generate revenues from any of its drug candidates. The Company's drug
candidates, other than TOBI for cystic fibrosis, are not expected to be
commercially available for at least several years, and TOBI for cystic fibrosis
is not expected to be commercially available until at least 1998, if ever. The
Company's drug candidates require significant research and development and
laboratory testing, significant clinical testing and regulatory approval prior
to commercialization. Although the Company is currently seeking to identify
other drug candidates, to expand the number of drug candidates it has under
development and to expand the potential indications for which its drug
candidates under development may be used, there can be no assurance that it will
be successful in such development or expansion. See "Risk Factors--Government
Regulation; No Assurance of Regulatory Approvals" and "Business--Products Under
Development."
DEPENDENCE ON TOBI
The Company is dependent on its ability to obtain regulatory approvals of
TOBI for pseudomonal lung infections in cystic fibrosis patients and thus,
generate revenues while it continues the research, development and regulatory
approval processes for other drug candidates and potential uses of TOBI for
other indications. Although the Company completed its Phase III clinical trials
for TOBI in cystic fibrosis patients in October 1996, the Company must apply for
and obtain the approval of the FDA prior to commercially marketing TOBI in the
United States. While the Company currently expects to file an NDA for TOBI in
cystic fibrosis patients in the second quarter of 1997 and the FDA has agreed to
an expedited review, there can be no assurance as to the timing of such filing
or the outcome or timing of the FDA's review of such filing. Furthermore, there
can be no assurance that TOBI for cystic fibrosis, if approved by the FDA, will
achieve market acceptance. The Company has not yet commenced clinical trials of
TOBI for
6
<PAGE>
any other indications. No assurance can be given that the results of such
trials, when commenced, will be consistent with results obtained in the clinical
trials for TOBI in cystic fibrosis patients or that the Company will be
successful in developing TOBI for other indications. See "Risk
Factors--Uncertainties Regarding Development of Drug Candidates; Clinical
Trials" and "Risk Factors--Government Regulation; No Assurance of Regulatory
Approvals."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
The production and marketing of the Company's products, as well as its
ongoing research and development activities, are subject to regulation by
governmental agencies, including the FDA in the United States and regulatory
authorities in other countries. Any potential therapeutic product developed by
the Company will be subject to rigorous preclinical and clinical testing and
approval pursuant to regulations administered by the FDA, comparable agencies in
other countries and, to a lesser extent, state regulatory authorities. The
approval process for the Company's drug candidates is likely to involve
significant expenditures. In October 1996, the Company completed its Phase III
clinical trials of its most advanced drug candidate, TOBI for pseudomonal lung
infections in cystic fibrosis patients. The Company expects to file an NDA for
TOBI for cystic fibrosis with the FDA in the second quarter of 1997 and the FDA
has agreed to an expedited review of such NDA. No assurance can be made that the
Company will be able to file its NDA in the foregoing time frame, or at all, or
that such filing will result in FDA approval of TOBI for cystic fibrosis.
Furthermore, the Company cannot predict with any degree of certainty when it
might be in a position to file any NDA with respect to any other drug candidate
or the length of time involved between the filing of any NDA and obtaining any
FDA approval, if at all. The cost to the Company of conducting human clinical
trials for any potential product can vary dramatically based on a number of
factors, including the order and timing of clinical indications pursued and the
extent of development and financial support, if any, from corporate partners.
The Company may have difficulty obtaining sufficient patient populations,
clinicians or support to conduct its clinical trials as planned and may have to
expend substantial additional funds to obtain access to such resources, or delay
or modify its plans significantly. See "Business--Government Regulation and
Product Testing."
The effect of government regulation may be to delay marketing of the
Company's proposed products for a considerable period of time, to impose costly
procedures upon the Company's activities and to furnish a competitive advantage
to other companies that compete with the Company. There can be no assurance that
FDA or other regulatory authority approval for any product candidates developed
by the Company will be granted on a timely basis or at all. Any delay in
obtaining or any failure to obtain such approvals would materially and adversely
affect the marketing of the Company's drug candidates and the Company's
business, financial position and results of operations. In addition, legislation
may be enacted in the future which might adversely affect the Company's ability
to develop, manufacture or market its drug candidates. Any FDA approvals that
may be granted will be subject to continual review, and later discovery of
previously unknown problems may result in withdrawal of products from marketing.
See "Business-- Government Regulation and Product Testing."
The Company intends, either on its own or in collaboration with others, to
market its products in major markets outside of the United States. There can be
no assurance that the Company will be successful in establishing marketing
relationships, conducting clinical testing in foreign countries or obtaining
required foreign regulatory approvals in a timely manner, if at all. To market
its products abroad, the Company must comply with numerous and varying foreign
regulatory requirements implemented by foreign health authorities, governing,
among other things, the design and conduct of clinical trials, pricing
regulations and marketing approval. The approval procedure may vary among
countries and can involve, for example, additional testing, and the time
required to obtain approval may differ from the time required to obtain FDA
approval. The foreign regulatory approval process includes all of the risks
associated with obtaining FDA approval. Approval by the FDA of any drug
candidate does not ensure approval by the regulatory agencies of other
countries. See "Business--Government Regulation and Product Testing."
7
<PAGE>
UNCERTAIN ABILITY TO PROTECT PATENTS AND PROPRIETARY TECHNOLOGY AND INFORMATION
Because of the substantial length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the pharmaceutical industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. The Company's ability to compete effectively depends on its success
in protecting its proprietary technology, both in the United States and abroad.
The patent positions of pharmaceutical firms generally are highly uncertain and
involve complex legal and factual questions. The Company intends to file
applications as appropriate for patents covering formulation, composition of
matter, or uses of its drug candidates, its proprietary processes and any gene
sequences that it discovers. The Company has 13 patent applications pending with
the United States Patent and Trademark Office ("PTO"), and the Company has been
issued three United States patents. The Company has filed, and intends to
continue to file, patent applications in certain foreign jurisdictions. There
can be no assurance that the PTO will grant the Company's pending patent
applications or that the Company will obtain any patents for which it applies.
No assurance can be given that patents issued to or licensed by or to the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide any competitive advantage.
The Company also relies on trade secrets, know-how and continuing
technological advancement to maintain its competitive position. Although the
Company has entered into confidentiality and invention agreements with its
employees and consultants, no assurance can be given that such agreements will
be honored or that the Company will be able to effectively protect its rights to
its unpatented trade secrets and know-how. Moreover, no assurance can be given
that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets, know-how and proprietary technology.
In addition to protecting its trade secrets, know-how and proprietary
technology, the Company may be required to obtain licenses to patents or other
proprietary rights from third parties. No assurance can be given that any
licenses required under any patents or proprietary rights would be made
available on acceptable terms, if at all. If the Company does not obtain
required licenses, it could encounter delays in product development while it
attempts to design around blocking patents, or it could find that the
development, manufacture or sale of products requiring such licenses could be
foreclosed.
The Company may, from time to time, support and collaborate in research
conducted by universities and by governmental research organizations. There can
be no assurance that the Company will have or be able to acquire exclusive
rights to the inventions or technical information derived from such
collaborations or that disputes will not arise as to rights in derivative or
related research programs conducted by the Company or such collaborators. See
"Business--Licenses and Other Agreements."
In addition, the Company could incur substantial costs in defending any
patent infringement suits or in asserting any patent rights, including those
granted by third parties. The PTO could institute interference proceedings
against the Company in connection with one or more of the Company's patent
applications, and such proceedings could result in an adverse decision as to
priority of invention. The PTO could also institute reexamination proceedings
against the Company in connection with one or more of the Company's patents and
such proceedings could result in an adverse decision as to the validity or scope
of the patents. See "Business--Patents."
UNCERTAINTIES REGARDING DEVELOPMENT OF DRUG CANDIDATES; CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of the
Company's proposed products, such products will be subjected to extensive
preclinical and clinical testing to demonstrate their safety and efficacy in
humans. Results of initial preclinical and clinical testing of drug candidates
under development by the Company are not necessarily indicative of results that
will be obtained from subsequent or more extensive preclinical and clinical
testing or long-term efficacy studies. Adverse or inconclusive clinical trial
results concerning any of the Company's drug candidates could significantly
delay the filing for marketing approval for such drug candidate with the FDA or
result in a filing for a narrower indication. In such event, further studies
would have to be conducted with respect to the excluded indications to support
any filing of a supplemental application covering such indications. There can be
no
8
<PAGE>
assurance that the Company's research and development, preclinical testing,
clinical trials or long-term safety and efficacy studies will be successfully
completed, that regulatory approvals will be obtained or will be as broad as
sought, that the Company's drug candidates will be capable of being produced in
commercial quantities at reasonable costs or that any products, if introduced,
will achieve market acceptance. See "Business--Products Under Development."
The Company's drug candidates under development and future product
development efforts are subject to the risks of failure inherent in the
development of pharmaceutical products. These risks include the possibilities
that any or all of the Company's drug candidates will be found to be
ineffective, unsafe, toxic or otherwise fail to meet applicable regulatory
standards or receive necessary regulatory clearances; that the drug candidates,
if safe and effective, will be difficult to develop into commercially viable
products, to manufacture on a large scale or be uneconomical to market; or that
proprietary rights of third parties will preclude the Company from marketing
such drug candidates. There is, therefore, substantial risk that the Company's
product development efforts will not prove to be successful. Moreover, the
Company is seeking to develop new treatments for conditions that are also the
subject of research and development efforts by other companies and entities. The
Company's competitors may succeed in developing technologies or products that
are more effective or cost-effective than those of the Company. Rapid
technological changes or developments by others may result in the Company's drug
candidates becoming obsolete or noncompetitive. See "Risk Factors--Competition"
and "Business--Competition."
DEPENDENCE ON LICENSES; POTENTIAL NEED FOR ADDITIONAL PARTNERS OR COLLABORATORS
The Company has obtained, and intends to obtain in the future, licensed
rights to certain proprietary technologies from other entities, individuals and
research institutions to which it will be obligated to pay royalties and
milestone payments if it develops products based upon the licensed technology.
Furthermore, the Company's strategy for the research, development and
commercialization of its drug candidates and proprietary technologies may
require the Company to enter into various arrangements with corporate and
academic collaborators, licensors, licensees and others, and the Company may,
therefore, be dependent upon the subsequent success of these third parties in
performing their responsibilities. There can be no assurance that the Company
will be able to enter into collaborative, license or other arrangements that the
Company deems necessary or appropriate to develop and commercialize its drug
candidates or proprietary technologies, or that any or all of the contemplated
benefits from such collaborative, license or other arrangements will be
realized. Certain of the collaborative, license or other arrangements that the
Company may enter into in the future may place responsibility on the Company's
collaborative partners for preclinical testing and human clinical trials and for
the preparation and submission of applications for regulatory approval for
potential pharmaceutical or other products. Should any collaborative partner
fail to develop or commercialize successfully any drug candidate or proprietary
technology to which it has rights, the Company's business, financial position
and results of operations may be materially adversely affected. There can be no
assurance that collaborators will not pursue alternative technologies or drug
candidates either on their own or in collaboration with others, including the
Company's competitors, as a means for developing treatments for the diseases
sought to be addressed by the Company's programs. See "Business--Licenses and
Other Agreements."
UNCERTAINTY OF ORPHAN DRUG STATUS
In October 1994, the Company received an Orphan Drug designation from the
FDA for the use of tobramycin for inhalation in the treatment of pulmonary
infections in cystic fibrosis patients. The Orphan Drug designation would
provide the Company with a seven-year marketing exclusivity in the United States
if the Company is the first FDA-approved applicant for the drug for the
specified indication. In October 1996, the Company completed its Phase III
clinical trials of TOBI for the treatment of chronic lung infections in cystic
fibrosis patients. While the Company is not aware of any other companies that
have sought Orphan Drug designation for this drug for this indication, there can
be no assurance that other companies will not seek such designation in the
future and obtain FDA marketing approval before the Company obtains such
approval. If another company obtains marketing approval for the use of
tobramycin for inhalation in the treatment of pseudomonal pulmonary infections
in cystic fibrosis patients
9
<PAGE>
and receives seven-year marketing exclusivity, the Company would not be
permitted by the FDA to market TOBI in the United States during the exclusivity
period. In addition, the Company could incur substantial costs in asserting any
rights to prevent such uses it may have under the Orphan Drug Act.
Tobramycin is a generic drug currently FDA-approved for intravenous and
intrathecal (injection into spinal fluid) use. These formulations of tobramycin
can be modified by pharmacists, physicians or patients for inhalation use.
Although this practice is not an FDA-approved use, there are no assurances that
this practice would not continue and would not have a material adverse effect on
reimbursement levels, sales and market acceptance of TOBI.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS; NEED FOR
REIMBURSEMENT
The future revenues and profitability of, and availability of capital for,
pharmaceutical companies such as the Company may be affected by the continuing
efforts of governmental and private third-party payors to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets the pricing and profitability of prescription drugs is subject to
government control. There have been, and the Company expects there will continue
to be, a number of federal and state proposals to control the cost of drugs
through governmental regulation. It is uncertain what form any health care
reform legislation may take or what actions the federal, state and private
payors may take in response to the proposed reforms. The Company cannot predict
when any suggested reforms will be implemented, if ever, or the effect of any
implemented reform on the Company's business. There can be no assurance,
however, that any implemented reform will not have a material adverse effect on
the Company's business, financial position or results of operations.
The Company's ability to commercialize its products successfully may depend,
in part, on the extent to which reimbursement for the cost of such products and
related treatments will be available from government health administration
authorities, such as Medicare and Medicaid in the United States, private health
insurers and other organizations. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be no
assurance that adequate third-party coverage will be available to enable the
Company to maintain price levels sufficient to realize an appropriate return on
its investment in product research and development. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
use of the Company's products, the market acceptance of those products would be
adversely affected.
LIMITED MARKETING AND NO SALES CAPABILITY
The Company has limited internal marketing and no sales resources and
personnel. In order to market TOBI, or any other products that it may develop,
the Company will have to substantially increase its marketing staff and
establish a sales force by hiring personnel with technical expertise. There can
be no assurance that the Company will be able to establish sales and
distribution capabilities or that the Company or its collaborators will be
successful in gaining market acceptance for any products that may be developed
by the Company. See "Risk Factors--Dependence on Licenses; Potential Need for
Additional Partners or Collaborators" and "Business--Marketing."
10
<PAGE>
NO ASSURANCE OF MARKET ACCEPTANCE
There can be no assurance that TOBI, or any other product developed by the
Company, will achieve market acceptance, if approved by the FDA. The degree of
market acceptance will depend upon a number of factors, including the receipt
and timing of regulatory approvals, and the establishment and demonstration in
the medical community of the clinical safety, efficacy and cost-effectiveness of
the Company's drug candidates and their advantages over existing technologies
and therapeutics. There can be no assurance that the Company will be able to
manufacture and market successfully its drug candidates even if they perform
successfully in clinical applications. Furthermore, there is no assurance that
physicians or the medical community in general will accept and utilize any
therapeutic products that may be developed by the Company.
LIMITED MANUFACTURING CAPABILITIES; DEPENDENCE ON SUPPLIERS
The Company presently does not have the internal capability to manufacture
pharmaceutical products under the current Good Manufacturing Practice ("cGMP")
regulations prescribed by the FDA. The Company has an agreement with an
FDA-inspected supplier of bulk powdered tobramycin and also purchases bulk
powdered tobramycin from another FDA-inspected supplier. Other contract
manufacturers are used for formulating and packaging of TOBI. No assurance can
be made that the Company will be able to obtain future supplies of TOBI on
favorable terms, if at all. The Company obtains bulk powdered PA-1648 from
Kaneka Corporation ("Kaneka"). Pursuant to the Company's license and supply
agreements with Kaneka, Kaneka is supplying the Company with PA-1648 for
clinical development at no additional charge. The Company has an agreement with
Kaneka for the supply of commercial quantities of such product at specified
prices if and when the Company receives marketing approval for PA-1648 from the
FDA. Kaneka is currently the only known manufacturer of the bulk powdered drug
and the Company has no alternative supply source. The Company believes that it
has sufficient quantities of PA-1648 to complete Phase II testing.
The Company's dependence upon third parties for the manufacture of its
proposed products may adversely affect the Company's profit margins and its
ability to develop and deliver its proposed products on a timely and competitive
basis. If for any reason the Company is unable to obtain sufficient quantities
of any materials required to produce its proposed products or the Company is
unable to obtain or retain third-party manufacturers on commercially acceptable
terms, it may not be able to commercialize its proposed products as planned. If
the Company should encounter delays or difficulties with contract manufacturers
in producing, packaging or distributing its proposed products, market
introduction and subsequent sales of such products would be adversely affected
and the Company may have to seek alternative sources of supply. No assurance can
be made that the Company will be able to enter into alternative supply
arrangements at commercially acceptable rates, if at all. No assurance can be
made that the manufacturers utilized by the Company will be able to provide the
Company with sufficient quantities of its products or that the products supplied
to the Company will meet the Company's specifications or delivery and other
requirements.
Moreover, contract manufacturers that the Company may use must adhere to
cGMP regulations enforced by the FDA through its facilities inspection program.
These facilities must pass a pre-approval plant inspection before the FDA will
issue a pre-market approval of the product. While the Company does not currently
intend to manufacture any pharmaceutical products itself, it may choose to do so
in the future. The Company has no experience in the manufacture of
pharmaceutical products for clinical trials or commercial purposes. Should the
Company decide to manufacture products itself, the Company would be subject to
the regulatory requirements described above, would be subject to similar risks
regarding delays or difficulties encountered in manufacturing any such
pharmaceutical products and would require substantial additional capital. In
addition, there can be no assurance that the Company will be able to manufacture
any such products successfully or in a cost-effective manner. See
"Business--Manufacturing" and "Business--Government Regulation and Product
Testing."
11
<PAGE>
COMPETITION
There are many companies, both public and private, including well-known
pharmaceutical companies, chemical companies and specialized genetic engineering
companies, engaged in developing pharmaceuticals, including biotechnological
products, for human therapeutic applications. Many of these companies have
substantially greater financial, research and development, manufacturing,
marketing and human resources and experience than the Company and represent
significant competition for the Company. Such companies may succeed in
developing products that are more effective or less costly than any that may be
developed by the Company and may also prove to be more successful than the
Company in manufacturing and marketing. See "Business--Competition."
TECHNOLOGICAL CHANGES AND UNCERTAINTY
The Company is engaged in the pharmaceutical business, which is
characterized by extensive research efforts and rapid technological progress.
New developments in molecular biology, medicinal pharmacology, recombinant DNA
technology and other fields of biology and pharmaceutical chemistry are expected
to continue at a rapid pace in both industry and academia. There can be no
assurance that research and discoveries by others will not render some or all of
the Company's programs or drug candidates non-competitive or obsolete.
The Company's business strategy is based, in part, upon the application of
the Company's technology platform, which encompasses various elements from the
fields of biotechnology and pharmaceutical chemistry, and the application of
these technologies to the discovery and development of pharmaceutical products.
This strategy is subject to the risks inherent in the development of new
products using new and emerging technologies and approaches. There can be no
assurance that unforeseen problems will not develop with these technologies or
applications, that the Company will be able to overcome technological challenges
it encounters in its research and development programs or that commercially
feasible products will ultimately be developed by the Company. See "Risk
Factors--Competition" and "Business-- Competition."
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company will require substantial funds for its research and development
programs, preclinical and clinical testing, operating expenses, regulatory
processes and manufacturing and marketing programs. The Company's capital
requirements will depend on numerous factors, including the progress of its
research and development programs; the progress of preclinical and clinical
testing; the time and cost involved in obtaining regulatory approvals; the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights; competing technological and market developments;
changes and developments in the Company's existing collaborative, licensing and
other relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish; and the development of
commercialization activities and arrangements. Moreover, the Company's fixed
commitments, including salaries and fees for current employees and consultants,
rent, payments under license agreements and other contractual commitments, are
substantial and are likely to increase as additional agreements are entered into
and additional personnel are retained. See "Business--Licenses and Other
Agreements," "Business--Patents," "Management" and "Notes to Financial
Statements." The Company believes that the net proceeds of this offering,
together with its available cash, cash equivalents, investment securities and
investment income, should be sufficient to meet its operating expenses and
capital expenditures through at least the next 24 months. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company may need to raise substantial additional capital to fund its
future operations. The Company may seek such additional funding through public
or private financings or collaborative, licensing and other arrangements with
corporate partners. If additional funds are raised by issuing equity securities,
further dilution to existing stockholders will result and future investors may
be granted rights superior to those of existing stockholders. There can be no
assurance, however, that additional financing will be
12
<PAGE>
available when needed, or if available, will be available on acceptable or
affordable terms. Insufficient funds may prevent the Company from implementing
its business strategy or may require the Company to delay, scale back or
eliminate certain of its research and development programs or to license to
third parties rights to commercialize products or technologies that the Company
would otherwise seek to develop itself.
DEPENDENCE ON QUALIFIED PERSONNEL
Because of the specialized scientific nature of the Company's business, the
Company is highly dependent upon its ability to attract and retain qualified
scientific, technical and managerial personnel. The loss of Wilbur H. Gantz,
Chief Executive Officer and President, A. Bruce Montgomery, M.D., Senior Vice
President, Research and Development, or Alan R. Meyer, Senior Vice President and
Chief Financial Officer, would be detrimental to the Company. The Company's
current employment agreements with Mr. Gantz and Dr. Montgomery expire by their
terms in March and May 1997, respectively. See "Management--Employment
Agreements." The Company does not maintain insurance on the lives of any of Mr.
Gantz, Mr. Meyer or Dr. Montgomery.
There is intense competition for qualified personnel in the pharmaceutical
field, and there can be no assurance that the Company will be able to continue
to attract and retain qualified personnel necessary for the development of its
business. The loss of the services of existing personnel as well as the failure
to recruit additional key scientific, technical and managerial personnel in a
timely manner would be detrimental to the Company's research and development
programs and to its business. In addition, the Company's anticipated growth and
expansion into areas and activities requiring additional expertise, such as
marketing, will require the addition of new management personnel. The failure to
attract and retain such personnel could adversely affect the Company's business.
See "Business--Human Resources," "Management" and "Certain Transactions."
ENVIRONMENTAL MATTERS AND HAZARDOUS MATERIALS
The Company's research and development processes involve the controlled use
of hazardous, infectious and radioactive materials. The Company is subject to
stringent federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials and wastes. There can be
no assurance that the Company will not be required to incur significant costs to
comply with environmental laws, rules, regulations and policies, or that the
business, financial position or results of operations of the Company will not be
materially and adversely affected by current or future environmental laws,
rules, regulations and policies or by any releases or discharges of materials
which could be hazardous.
In its research activities, the Company utilizes radioactive and other
materials that could be hazardous to human health, safety or the environment.
These materials and various wastes resulting from their use are stored at the
Company's facility pending ultimate use and disposal. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with federal, state and local laws, rules, regulations and policies, the
risk of accidental injury or contamination from these materials cannot be
entirely eliminated. In the event of such an accident, the Company could be held
liable for any resulting damages, and any such liability could exceed the
Company's resources. The Company does not maintain a separate insurance policy
for these types of risks.
PRODUCT LIABILITY
The Company's business exposes it to potential product liability risks which
are inherent in the testing, manufacturing and marketing of human therapeutic
products. The Company maintains insurance against product liability and defense
costs in the amount of $5 million per occurrence and $5 million in the
aggregate. There can be no assurance that claims against the Company arising
with respect to products will be successfully defended, that the insurance
carried by the Company will be sufficient or that the Company will be able to
obtain additional, or maintain its current level of, product liability insurance
on acceptable terms. A successful claim against the Company in excess of the
Company's insurance coverage could have a material adverse effect on the
Company.
13
<PAGE>
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to be, highly
volatile as frequently occurs with publicly traded emerging growth companies and
biopharmaceutical companies. Factors such as results of clinical trials,
announcements of technological innovations or new products by the Company or its
competitors, government regulatory action affecting the Company's or its
competitors' drug candidates in both the United States and foreign countries,
developments or disputes concerning patent or proprietary rights and market
conditions for emerging growth and biopharmaceutical companies in general, as
well as period-to-period fluctuations in financial results, could have a
significant impact on the Company's business and the market price of the Common
Stock. See "Price Range of Common Stock."
CONCENTRATION OF OWNERSHIP
Upon the consummation of this offering, directors, officers and entities
affiliated with them, who in the aggregate currently own beneficially
approximately 9.3% of the outstanding shares of Common Stock (excluding
outstanding options and warrants to purchase shares of Common Stock), will own
beneficially in the aggregate approximately 8.1% of the outstanding shares of
Common Stock (8.0% if the Underwriters' over-allotment option is exercised in
full). Although, the Company's officers, directors and entities affiliated with
them do not presently have any agreements or understandings to act in concert,
any such agreements or understandings could make it difficult for others to
elect the entire Board of Directors and to control the disposition of any matter
submitted to a vote of the stockholders, including amendments to the Company's
Certificate of Incorporation, mergers, share exchanges, the sale of all or
substantially all of the Company's assets, going private transactions and other
fundamental transactions. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. See "Principal
Stockholders."
AVAILABILITY OF PREFERRED STOCK FOR ISSUANCE
In addition to its authorized shares of Common Stock, the Company's Amended
and Restated Certificate of Incorporation authorizes the issuance of up to
1,000,000 shares of preferred stock ("Preferred Stock"). No shares of Preferred
Stock of the Company are currently outstanding, and the Company has no present
intention to issue any shares of Preferred Stock. However, because the rights
and preferences of any series of Preferred Stock may be set by the Board of
Directors in its sole discretion, the rights and preferences of any such
Preferred Stock may be superior to those of the Common Stock and thus may
adversely affect the rights of the holders of Common Stock. See "Description of
Capital Stock-- Preferred Stock."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, By-Laws, as amended, and Delaware law may make a change in
control of the Company more difficult to effect, even if a change in control
were in the stockholders' interest. These provisions include certain
super-majority vote requirements contained in the Company's Amended and Restated
Certificate of Incorporation and By-Laws, as amended. In addition, the Company's
Amended and Restated Certificate of Incorporation allows the Board of Directors
to determine the terms of Preferred Stock which may be issued by the Company
without approval of the holders of the Common Stock. The ability of the Company
to issue Preferred Stock in such manner could enable the Board of Directors to
prevent changes in the management and control of the Company. Under applicable
Delaware law, the Company's Board of Directors has the ability to adopt
additional anti-takeover measures either in response to a specific threat or in
furtherance of their general fiduciary duties. The Company's Board of Directors
may, from time to time, consider the adoption of such measures and may adopt
additional anti-takeover provisions in the future. The Board of Directors is
divided into three classes of directors elected for staggered three-year terms.
Such staggered terms may affect the ability of the holders of Common Stock to
effect a change in control of the Company. See "Description of Capital
Stock--Delaware Law and Certain Charter and By-Law Provisions."
14
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have a total of
15,932,322 shares of Common Stock outstanding (16,232,322 shares if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
2,000,000 shares of Common Stock offered hereby (2,300,000 shares if the
Underwriters' over-allotment option is exercised in full), the 3,000,000 shares
of Common Stock sold in the Company's initial public offering in November 1995
and the 2,875,000 shares of Common Stock sold in the Company's public offering
in April 1996 will be freely tradeable without restriction or registration under
the Securities Act of 1933 (the "Securities Act"), by persons other than
"affiliates" of the Company, as defined under the Securities Act. Of the
remaining 8,057,322 shares of Common Stock outstanding, 3,613,915 are
"restricted securities" as that term is defined by Rule 144 as promulgated under
the Securities Act.
Under Rule 144 (and subject to the conditions thereof), approximately
3,557,253 shares of the restricted securities are currently eligible for sale
and approximately 56,662 shares will become eligible for sale after March 1997.
The Company has obtained from all of the executive officers and directors of the
Company holding in the aggregate 1,052,925 shares of the restricted securities
agreements not to directly or indirectly, sell, offer to sell or otherwise
dispose of any such Common Stock or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock for a period of 90
days from the date of this Prospectus without the prior written consent of
Montgomery Securities. However, such agreements permit up to approximately
670,000 shares to continue to be subject to pledge during such 90-day period.
The pledgee of such pledged shares shall not be subject to the agreements
described in this paragraph. See "Shares Eligible for Future Sale" and
"Underwriting."
As of January 31, 1997, options to purchase a total of 1,265,650 shares of
Common Stock pursuant to the Company's 1992 Stock Option Plan (the "1992 Plan")
were outstanding with a weighted average exercise price of $13.07 per share, of
which options to purchase 749,959 shares of Common Stock were exercisable.
Options to purchase 42,000 shares of Common Stock pursuant to the Company's 1996
Stock Option Plan (the "1996 Plan") were outstanding with a weighted average
exercise price at $17.62 per share, all of which options were exercisable. In
addition, subject to stockholder approval, options to purchase a total of
378,800 shares of Common Stock pursuant to the Company's 1997 Stock Option Plan
(the "1997 Plan") were outstanding with a weighted average exercise price of
$22.94 as of January 31, 1997. An additional 1,946,811 shares of Common Stock
were available for future option grants under the Company's stock option plans.
An aggregate of 467,124 shares subject to options held by executive officers and
directors of the Company are expected to be subject to lockup agreements. The
Company has also granted warrants to purchase Common Stock. As of January 31,
1997, warrants to purchase 111,660 shares of Common Stock were outstanding with
a weighted average exercise price of $13.79 per share. The Company has an
effective registration statement on Form S-8 under the Securities Act
registering shares of Common Stock subject to stock options granted under the
1992 Plan and the 1996 Plan. The Company intends to register shares of Common
Stock issuable pursuant to stock options granted under the 1997 Plan. See
"Management--Stock Option Plans" and "Underwriting."
Sales of substantial amounts of such shares in the public market, or the
perception that such sales could occur, could adversely affect the trading price
of the Common Stock and could impair the Company's future ability to raise
capital through an offering of its equity securities. See "Shares Eligible for
Future Sale" and "Description of Capital Stock."
NO DIVIDENDS
The Company has not declared or paid dividends on its Common Stock since its
inception and does not intend to declare or pay any dividends to its
stockholders in the foreseeable future. See "Dividend Policy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DILUTION
Upon completion of this offering, purchasers of Common Stock in this
offering will incur immediate and substantial dilution of $22.93 in the per
share net tangible book value of their Common Stock from the assumed public
offering price of $30.75 per share. See "Dilution."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby at an assumed public offering price of $30.75 per share are
estimated to be $57,667,500 ($66,385,125 if the Underwriters' over-allotment
option is exercised in full) after deducting the underwriting discount and
estimated offering expenses payable by the Company.
The Company anticipates that, combined with its existing resources, the net
proceeds of this offering will enable it to continue its development of novel
drugs to treat serious, chronic human infectious diseases where there is a
significant need for improved therapy. Specifically, the Company anticipates
spending portions of its resources over the next few years on the following: (i)
the Company's launch costs of TOBI for cystic fibrosis in the United States,
including the establishment of a dedicated sales force to market the Company's
proposed products; (ii) conducting additional clinical trials of its drug
candidates; (iii) preclinical development of drug candidates and expansion of
research and development programs; (iv) acquisition of drug candidates or
technologies complementary to the Company's business, should favorable
opportunities arise; and (v) other general corporate purposes, including working
capital and capital expenditures. The foregoing represents the Company's best
estimate of its use of the net proceeds from the sale of the shares of Common
Stock offered hereby based upon the current state of its business operations,
its current plans and current economic and industry conditions and is subject to
reallocation among the categories listed above or to new categories. Pending
such uses, the Company intends to invest the net proceeds of this offering in
government securities and investment-grade, interest-bearing securities,
primarily with expected maturities of one-and-one-half years or less.
The Company believes that the net proceeds of this offering, together with
its available cash, cash equivalents, investment securities and investment
income, should be sufficient to meet its capital requirements through at least
the next 24 months. This estimate is based on certain assumptions, which may not
hold true, and there can be no assurance that the proceeds of this offering,
together with its available cash, cash equivalents, investment securities and
investment income, will be sufficient to meet the Company's capital needs
through at least the next 24 months. The Company's cash requirements may vary
materially from those now planned because of future results of research and
development, results of preclinical and clinical testing, relationships with
strategic corporate partners, changes in direction and focus of the Company's
research and development programs, changes in the scale, timing or cost of any
future commercial production facilities, competitive and technological advances,
the FDA regulatory process, changes in the Company's marketing and distribution
strategy and other factors. See "Risk Factors-- Substantial Capital
Requirements."
16
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"PGNS." The following table sets forth, for the fiscal periods indicated, the
range of high and low closing prices per share of the Common Stock as reported
by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1995:
Fourth Quarter (from November 21, 1995).................................. $ 11.00 $ 9.25
1996:
First Quarter............................................................ $ 17.50 $ 10.88
Second Quarter........................................................... 18.75 13.50
Third Quarter............................................................ 17.75 11.50
Fourth Quarter........................................................... 26.13 17.00
1997:
First Quarter (through February 21, 1997)................................ $ 32.50 $ 21.00
</TABLE>
As of January 31, 1997 there were approximately 370 holders of record of the
Common Stock; however, the Company believes the actual number of beneficial
holders is substantially greater. On February 21, 1997, the last reported sale
price for the Common Stock on the Nasdaq National Market was $30.75.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock
and does not anticipate declaring or paying cash dividends in the foreseeable
future. The Company expects that any earnings which it may realize will be
retained to finance the development and growth of its business.
17
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of December 31, 1996 and as adjusted to give effect to the sale of the 2,000,000
shares of Common Stock offered by the Company hereby at the assumed public
offering price of $30.75 per share and the application of the estimated net
proceeds of $57,667,500 therefrom (after deducting the underwriting discount and
estimated offering expenses payable by the Company). See "Use of Proceeds." This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
AS
ACTUAL ADJUSTED
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Long-term liability................................................... $ 98 $ 98
---------- ----------
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares authorized; none
issued and outstanding............................................ -- --
Common Stock, $.001 par value, 20,000,000 shares authorized;
13,930,760 shares issued and outstanding at December 31, 1996;
15,930,760 shares issued and outstanding, as adjusted(1).......... 14 16
Additional paid-in capital.......................................... 134,728 192,394
Unrealized loss on investment securities............................ (30) (30)
Deficit accumulated during the development stage.................... (67,786) (67,786)
---------- ----------
Total stockholders' equity........................................ 66,926 124,594
---------- ----------
Total capitalization............................................ $ 67,024 $ 124,692
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Excludes as of December 31, 1996: (i) 1,266,775 shares of Common Stock
issuable upon the exercise of outstanding options to purchase shares of
Common Stock at a weighted average exercise price of approximately $12.90
per share; (ii) 111,660 shares of Common Stock reserved for issuance under
outstanding warrants at an average exercise price of $13.79; and (iii)
368,048 shares of Common Stock underlying options available for future
grants under the Company's stock option plans. See "Management--Stock Option
Plans" and "Description of Capital Stock."
18
<PAGE>
DILUTION
The net tangible book value of the Company as of December 31, 1996, was
$66,926,214, or $4.80 per share of Common Stock. Net tangible book value per
share represents the amount of the Company's net tangible assets (tangible
assets of the Company less total liabilities), divided by the 13,930,760 shares
of Common Stock outstanding as of such date.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of the 2,000,000 shares of Common Stock
in the offering made hereunder and the pro forma net tangible book value per
share of Common Stock immediately after this offering. After giving effect to
the sale by the Company of 2,000,000 shares of Common Stock offered hereby at an
assumed offering price of $30.75 per share, the pro forma net tangible book
value of the Company as of December 31, 1996 would have been approximately
$124,593,714, or $7.82 per share (after deduction of the underwriting discount
and estimated offering expenses payable by the Company). This represents an
immediate increase in pro forma net tangible book value of $3.02 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $22.93 per share to purchasers of Common Stock in this offering.
<TABLE>
<S> <C> <C>
Public offering price per share.............................. $ 30.75
Net tangible book value per share before offering........ $ 4.80
Increase per share attributable to new investors......... 3.02
--------- ---------
Pro forma net tangible book value per share after offering... 7.82
---------
Net tangible book value dilution per share to new
investors.................................................. $ 22.93
---------
---------
</TABLE>
The above calculation excludes as of December 31, 1996: (i) 1,266,775 shares
of Common Stock issuable upon the exercise of outstanding options to purchase
shares of Common Stock at a weighted average exercise price of approximately
$12.90 per share; (ii) 111,660 shares of Common Stock reserved for issuance
under outstanding warrants at an average exercise price of $13.79; and (iii)
368,048 shares of Common Stock underlying options available for future grants
under the Company's stock option plans. See "Management--Stock Option Plans" and
"Description of Capital Stock."
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the period from December 10, 1991
(incorporation) through December 31, 1992 and each of the four years ended
December 31, 1993, 1994, 1995 and 1996 were derived from audited financial
statements of the Company. The data set forth below should be read in
conjunction with the financial statements, related notes and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 10,
1991
(INCORPORATION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------------------------ DECEMBER 31,
1996 1995 1994 1993 1992
--------- --------- --------- --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue--grants and royalties............................ $ 440 $ -- $ -- $ -- $ --
--------- --------- --------- --------- -------
Operating expenses:
Research and development............................... 20,673 15,668 12,789 8,213 758
General and administrative............................. 4,241 3,609 3,215 3,615 2,698
--------- --------- --------- --------- -------
Total operating expenses................................. 24,914 19,277 16,004 11,828 3,456
--------- --------- --------- --------- -------
Operating loss........................................... (24,474) (19,277) (16,004) (11,828) (3,456)
--------- --------- --------- --------- -------
Other income (expense):
Investment income, net................................. 3,294 1,287 1,285 1,064 545
Other expense.......................................... (84) (34) (43) (41) (19)
--------- --------- --------- --------- -------
Net other income..................................... 3,210 1,253 1,242 1,023 526
--------- --------- --------- --------- -------
Net loss............................................. $ (21,264) $ (18,024) $ (14,762) $ (10,805) $ (2,930)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Net loss per common share................................ $(1.66) $(2.20) $(1.95) $(1.77) $(0.87 )
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Weighted average common shares outstanding............... 12,829 8,210 7,585 6,111 3,367
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1995 1994 1993 1992
1996 1996 --------- --------- --------- ---------
-------------- ---------
AS ADJUSTED(1) ACTUAL
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and investment
securities.................................... $ 118,355 $ 60,688 $ 37,447 $ 25,994 $ 20,421 $ 38,458
Total current assets............................ 119,477 61,809 38,884 26,694 20,862 38,559
Total assets.................................... 127,666 69,999 46,963 36,086 30,301 41,992
Total current liabilities....................... 2,974 2,974 3,453 2,925 1,300 2,686
Long-term liability............................. 98 98 462 -- -- --
Total stockholders' equity...................... 124,594 66,926 43,048 33,161 29,001 39,306
</TABLE>
- ------------------------
(1) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $30.75 per share
and the application of the estimated net proceeds therefrom (after deducting
the underwriting discount and estimated offering expenses payable by the
Company). See "Use of Proceeds" and "Capitalization."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its incorporation in December 1991, the Company has been engaged in
research and development, clinical trials and administrative activities.
During 1992, the Company focused its efforts primarily on corporate
organization, recruiting key scientific and administrative staff, raising
capital through private sales of Common Stock and commencing the construction of
the Company's laboratory in Seattle, Washington. During 1992, the Company
received net proceeds of $42,340,034 from a private offering of Common Stock at
$10.00 per share (the "1992 Private Placement").
In March 1993, the Company completed construction of its laboratory and
commenced research and development operations. By the end of 1993, the Company
had recruited scientific research staff and had entered into a research
collaboration agreement with the Public Health Research Institute of New York
for the diagnosis and treatment of tuberculosis, a licensing agreement with
Kaneka for development of PA-1648 and a licensing and development agreement with
Baxter Healthcare Corporation for a monoclonal antibody targeted against
pseudomonal bacteria.
During 1994, the Company received net proceeds of $19,095,384 from a private
offering of Common Stock at $12.00 per share (the "1994 Private Placement").
During 1994, the Company entered into a license agreement with the Cystic
Fibrosis Foundation and Children's Hospital and Medical Center in Seattle to
obtain worldwide, exclusive rights to patents, research and technology relating
to the use of an aerosolized tobramycin solution or any other aerosolized
aminoglycoside solution for the treatment of bronchopulmonary infections.
During 1995, the Company commenced its Phase III clinical trials of TOBI in
cystic fibrosis patients and Phase I clinical trials of PA-1648. In November
1995, the Company completed an initial public offering of 3,000,000 shares of
Common Stock at $10.00 per share, resulting in net proceeds to the Company of
$27,095,726.
In April 1996, the Company completed a public offering of 2,875,000 shares
of Common Stock at $16.25 per share, resulting in net proceeds to the Company of
$43,505,340. In October 1996, the Company completed its Phase III clinical
trials of TOBI for the treatment of chronic pseudomonal lung infections in
patients with cystic fibrosis, the results of which were announced in January
1997. In addition, in December 1996, the Company completed its Phase I clinical
trials of PA-1648.
The Company has incurred losses since inception and had an accumulated
deficit through December 31, 1996 of $67,785,433. Such losses have resulted
principally from costs incurred in research and development and clinical trials
and from general and administrative costs associated with the Company's
operations. The Company expects that operating losses will continue and increase
for at least the next year as its research and development, clinical testing and
marketing activities expand.
To date, the Company has not marketed or generated revenues from the
commercialization of any of its drug candidates. The Company's current drug
candidates, other than TOBI for cystic fibrosis, are not expected to be
commercially available for at least several years, and TOBI for cystic fibrosis
is not expected to be available commercially until at least 1998, if ever.
The Company's results may vary significantly from period to period depending
on several factors, such as the timing of certain expenses and the progress of
the Company's research and development efforts.
21
<PAGE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue from grants and royalties was $439,880 in 1996. The Company did not
have any revenue in 1995. Revenues in 1996 represented income received from a
two-year competitive grant from the FDA and royalties from sales of a
proprietary combinatorial chemistry system invented by the Company.
Research and development expense increased by $5,004,632 to $20,673,049 in
1996 from $15,668,417 in 1995. This increase was primarily due to increases in
clinical development activity. General and administrative expense increased by
$632,264 to $4,241,339 in 1996 from $3,609,075 in 1995. Such increase was due
primarily to an increase in costs related to operation as a public company, such
as personnel, investor relations and insurance. The Company expects total costs
and expenses to continue to increase in the future due principally to the
advancement of the Company's clinical development programs through various
phases of clinical trials and, if successful, the cost of commercializing its
first product.
Investment income, net increased by $2,006,325 to $3,293,782 in 1996 from
$1,287,457 in 1995. This increase was due to higher invested balances.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Research and development expense increased by $2,879,536 to $15,668,417 in
1995 from $12,788,881 in 1994. This increase was primarily due to increases in
clinical development activity. General and administrative expense increased by
$394,245 to $3,609,075 in 1995 from $3,214,830 in 1994. Such increase was due
primarily to an increase in compensation expense resulting from a new agreement
with the Company's former Chairman of the Board, which was partially offset by
the reversal in 1995 of a portion of the discretionary bonuses accrued in 1994,
but not awarded by the Board in 1995. Excluding these compensation-related
items, general and administrative expense would have increased by $196,987 to
$3,052,405 in 1995 from $2,855,418 in 1994. The Company expects total costs and
expenses to continue to increase in the future due principally to the
advancement of the Company's clinical development programs through various
phases of clinical trials and, if successful, the cost of commercializing its
first product.
Investment income, net increased marginally to $1,287,457 in 1995 from
$1,284,399 in 1994. Decreases in investment income relating to lower invested
balances were offset by higher effective interest rates earned on invested
funds.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily by the
issuance of equity securities with aggregate net proceeds of approximately
$135,000,000 and investment income of approximately $7,500,000.
The Company's combined cash, cash equivalents and investment securities
totaled $60,687,796 at December 31, 1996, an increase of $23,240,962 from the
balance at December 31, 1995. The primary uses of cash during 1996 were to
finance the Company's operations. Until such time as the Company can generate
sufficient levels of cash from operations, the Company will have to continue to
finance future cash needs through some or all of the sources previously used or
through other means. The Company does not expect to generate a positive internal
cash flow for at least the next two years due to the expected increase of
spending for research and development programs and the expected cost of
commercializing its first product. The Company may need to arrange additional
financing for the future operation of its business, including the
commercialization of its drug candidates currently under development. There can
be no assurances that such additional financing can be obtained and, if
obtained, at reasonable terms. However, the Company expects that the net
proceeds of this offering, together with its available cash, cash
22
<PAGE>
equivalents and investment securities and investment income, should be
sufficient to meet its operating expenses and capital requirements through at
least the next 24 months. See "Risk Factors--Substantial Capital Requirements"
and "Use of Proceeds."
From the Company's inception through December 31, 1996, the Company
purchased approximately $13,000,000 of property and equipment. The Company's
future capital requirements will depend on many factors, including the progress
of its research and development programs; the progress of preclinical and
clinical testing; the time and cost involved in obtaining regulatory approvals;
the cost of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights; competing technological and market
developments; changes and developments in the Company's existing collaborative,
licensing and other relationships and the terms of any new collaborative,
licensing and other arrangements that the Company may establish; the development
of commercialization activities and arrangements; and the purchase of additional
facilities and capital equipment.
The Company plans to continue its policy of investing excess funds in
government securities and investment grade, interest-bearing securities,
primarily with expected maturities of one-and-one-half years or less. The
Company does not invest in derivative financial instruments, as defined by SFAS
119, DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF
FINANCIAL INSTRUMENTS.
At December 31, 1996, the Company had tax net operating loss carryforwards
of approximately $65,175,000 and research tax credits of approximately $747,000,
which will begin to expire in the year 2007. In conjunction with this offering,
the Company does not anticipate a change in ownership under Section 382 of the
Internal Revenue Code of 1986, as amended, that would result in limitations on
the use of the tax net operating losses, or tax credits. However, there can be
no assurance that future issuances of the Company's securities will not trigger
limitations under Section 382.
23
<PAGE>
BUSINESS
SUMMARY
PathoGenesis develops novel drugs to treat serious, chronic human infectious
diseases where there is a significant need for improved therapy. The Company's
lead drug candidate, TOBI-TM- (tobramycin for inhalation), is a stable,
premixed, proprietary formulation of the antibiotic tobramycin for delivery by
inhalation using a nebulizer. In January 1997, PathoGenesis announced results
from its two pivotal Phase III clinical trials of TOBI for treatment of chronic
PSEUDOMONAS AERUGINOSA lung infections in people with cystic fibrosis. The
Company intends to file an NDA for TOBI in cystic fibrosis patients with the FDA
in the second quarter of 1997. The FDA has agreed to an expedited review of such
NDA, which may accelerate the application review process. Based on the potential
efficacy of delivering a high concentration of tobramycin directly to the site
of infection in the lungs, the Company also intends to commence Phase II
clinical trials of TOBI in patients suffering from bronchiectasis (a form of
severe chronic bronchitis) and tuberculosis during 1997. The Company's second
drug candidate, PA-1648, a derivative of the antibiotic rifampin, is being
developed for the treatment of tuberculosis. The Company intends to commence
Phase II clinical trials of PA-1648 in tuberculosis patients during 1997. The
Company is also developing PA-824, a proprietary antibiotic, to treat
tuberculosis.
While the Company currently intends to file an NDA for TOBI in cystic
fibrosis patients in the second quarter of 1997 and the FDA has agreed to an
expedited review of such NDA, there can be no assurance as to the timing of such
filing or the outcome or timing of the FDA's review of such filing.
Additionally, there can be no assurance that TOBI, if approved by the FDA, will
achieve market acceptance. Furthermore, no assurance can be given that the
results of any of the anticipated additional clinical trials to be conducted by
the Company will be consistent with results obtained in the clinical trials for
TOBI in cystic fibrosis patients or that such trials will be completed within
anticipated time frames, if at all.
PRODUCTS UNDER DEVELOPMENT
The following table summarizes the indication, development status, estimated
length of therapy and approximate number of U.S. patients for the drug
candidates under development by the Company.
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
DRUG ESTIMATED U.S.
INDICATION CANDIDATE DEVELOPMENT STATUS* LENGTH OF THERAPY PATIENTS
- ------------------------ --------- ------------------------ ----------------- ---------
<S> <C> <C> <C> <C>
Cystic fibrosis lung TOBI Phase III clinical 10-15 years 30,000
infections............ trials completed;
intended NDA filing in
second quarter of 1997
Bronchiectasis (a form TOBI Phase II clinical trials 5-10 years 100,000
of severe chronic intended to commence in
bronchitis)........... 1997
Tuberculosis (adjunct TOBI Phase II clinical trials Less than 1 month 25,000
therapy for patients intended to commence in
with contagious 1997
pulmonary
tuberculosis).........
Tuberculosis............ PA-1648 Phase II clinical trials 4-6 months 25,000
intended to commence in
1997
Tuberculosis............ PA-824 Preclinical development 4-6 months 25,000
</TABLE>
-------------------------------
* See "Business--Government Regulation and Product Testing" for a description
of the various phases of clinical testing.
24
<PAGE>
TOBI FOR CYSTIC FIBROSIS LUNG INFECTIONS
TOBI is a stable, premixed, proprietary formulation of the antibiotic
tobramycin for delivery by inhalation. Intravenous tobramycin has been approved
for marketing for over 20 years. Tobramycin is a member of an antibiotic complex
called nebramycin, a fermentation product which was isolated in 1967 from
STREPTOMYCES TENEBRARIUS by scientists at Eli Lilly and Company. This
fermentation product was designated tobramycin, a water-soluble compound
belonging to the group of antibiotics called aminoglycosides. Like other
aminoglycosides, tobramycin inhibits bacterial protein synthesis and is most
active against gram-negative bacteria.
The Company is initially seeking to develop TOBI for the treatment of
chronic pseudomonal lung infections in cystic fibrosis patients. The Company
also intends to develop TOBI as a primary therapy for bronchiectasis, a form of
severe chronic bronchitis, and as an adjunct therapy for tuberculosis.
CYSTIC FIBROSIS
Cystic fibrosis is a genetic disease that occurs in one out of every 3,000
births in the United States and Europe. The genetic defect results in the
accumulation of thick, tenacious mucus in the lungs. Early in life, cystic
fibrosis patients typically have bacterial infections comparable to other
children. While the majority of these infections are treated effectively in
these patients, the accumulation of mucus in the lungs usually leads to
life-long infections predominantly with a bacterium known as PSEUDOMONAS
AERUGINOSA (P. AERUGINOSA).
Once established, persistent pseudomonal infection becomes the predominant
factor in the progression of the lung disease. The persistent local infection
causes a strong inflammatory response in the patient resulting in progressive
destruction of lung tissue. In addition, periodic flare-ups of pseudomonal
infection cause life-threatening episodes and hospitalization. Over a period of
decades, the persistent infection and acute flare-ups lead to death, occurring
at an average age of 30 years. Treatment of pseudomonal infection using TOBI
would be expected to begin at the first detection of pseudomonal bacteria and
then to continue throughout the patient's lifetime.
For over 20 years, intravenous delivery of tobramycin for short periods
(typically 10-14 days) has been available to treat acute flare-ups of
pseudomonal infection common in patients with cystic fibrosis. Compared to other
aminoglycosides, tobramycin is more active against P. AERUGINOSA by at least
two- to four-fold and is generally less toxic. However, high doses of
intravenous tobramycin are required in the blood, which increases the risk of
adverse side effects such as significant kidney damage and hearing loss.
Furthermore, P. AERUGINOSA is rarely permanently eradicated following therapy
for acute flare-ups. Thus, cystic fibrosis patients are subjected to frequent
periods of hospitalization for intravenous therapy with tobramycin. As the
cumulative systemic exposure increases, so does the risk of potential adverse
side effects. Intravenous therapy also increases the hardship on the patient
because it normally requires hospitalization, which increases treatment costs,
exposes the patient to potential hospital-acquired infections and disrupts
education and family life.
The Company believes that inhalation of TOBI will prove to be superior to
intravenous tobramycin therapy for cystic fibrosis patients, since on average
100-fold greater concentrations of the antibiotic can be delivered to the actual
site of infection by directly depositing the antibiotic on the airway lining.
The Company believes that such concentrations of TOBI should suppress the growth
of P. AERUGINOSA in the lungs of cystic fibrosis patients. Aerosol delivery
should also reduce the risk of toxicity because the airway lining restricts the
absorption of tobramycin into the bloodstream, thereby preventing tobramycin
from reaching toxic systemic levels. Thus, the improved safety profile of
tobramycin by inhalation may allow long-term therapy. See
"Business--PathoGenesis' Development of TOBI for Cystic Fibrosis."
The Company believes that the market opportunity for TOBI as a treatment for
chronic pseudomonal lung infections in cystic fibrosis patients is significant
and growing. There are approximately 30,000 cystic fibrosis patients in the
United States, according to the Cystic Fibrosis Foundation, and a comparable
number in Europe. Pseudomonal bacteria infect the lungs of approximately 60% of
all patients with the disease, according to data gathered during 1995 by the
Cystic Fibrosis Foundation. Infection with
25
<PAGE>
pseudomonal bacteria occurs increasingly as the patient ages, resulting in over
70% of cystic fibrosis patients above the age of 15 being infected.
HISTORICAL DEVELOPMENT OF INHALED TOBRAMYCIN FOR CYSTIC FIBROSIS
Inhaled tobramycin has been used experimentally by various clinical
investigators and physicians to treat pseudomonal infection in cystic fibrosis
patients for approximately 20 years. Various solutions of tobramycin for
inhalation have been formulated by pharmacists and physicians from commercially
available sources; however, the use of these formulations for inhalation has not
been approved by the FDA. Because physicians using inhaled tobramycin used
different formulations and reported conflicting results, the Cystic Fibrosis
Foundation financed a long-term program to develop a more complete understanding
of aerosol administration. In conjunction with this program, investigators at
Children's Hospital and Medical Center in Seattle found that not all nebulizers
(devices used to produce the aerosol) studied delivered the tobramycin to the
affected area of the lung. In addition, the doses used were frequently
insufficient. Higher doses are required in inhaled therapy than in intravenous
therapy, since inhaled therapy has to pass through the sputum (phlegm), which
partially binds and inactivates tobramycin. In a series of Phase I and Phase II
trials between 1983 and 1988, the Children's Hospital investigators arrived at a
safe and potentially therapeutic dosage, solution and nebulizer combination.
Subsequently, the investigators tested their method in a multi-center randomized
controlled trial. The results of this study were published in the NEW ENGLAND
JOURNAL OF MEDICINE ("NEJM") in June 1993. The study population consisted of 71
clinically stable cystic fibrosis patients who had persistent infection with P.
AERUGINOSA in their lung air passages. The study design was a cross-over, with
half the patients starting on inhaled tobramycin and the other half on a placebo
aerosol. After one month the groups were switched and the study continued for an
additional two months.
The goals of the multi-center study were to show that inhaled tobramycin
reduces pseudomonal bacteria in the lungs of cystic fibrosis patients, mitigates
the inflammatory response to the bacteria (the cause of progressive lung
destruction), improves lung function and demonstrates safety. The study was
successful in all four areas. While on inhaled tobramycin therapy, patients
maintained on average a 100-fold decrease in their pseudomonal bacteria counts.
One month after the cessation of treatment with inhaled tobramycin, the levels
of bacteria returned to the baseline prior to treatment. Inflammation, the cause
of progressive lung destruction in cystic fibrosis patients, was diminished
during therapy. This was measured by the white blood cell count that dropped on
average 15% during treatment. After one month, lung function compared to placebo
was on average 10% better in the inhaled tobramycin-treated group. Toxicities
associated with intravenous administration of tobramycin, such as significant
kidney damage or hearing loss, were not found.
The Company believes that these study results indicate that tobramycin for
inhalation could represent a significant advance in the care of patients with
cystic fibrosis. A cystic fibrosis patient's pulmonary function on average
declines two to three percent per year with the median age of death currently at
30 years. Thus, a 10% improvement in lung function typically represents a return
to what a cystic fibrosis patient's lung function was three to four years
earlier. In addition, since physical activity is largely determined by level of
lung function, exercise tolerance could improve in patients.
One concern with long-term administration of any antibiotic is the emergence
of drug-resistant bacteria. However, intravenous tobramycin therapy for acute
flare-ups of pseudomonal infection in cystic fibrosis patients is usually
efficacious even though resistant pseudomonal bacteria are frequently found. The
Company does not believe that resistant pseudomonal bacteria will significantly
limit the potential efficacy of TOBI for cystic fibrosis patients because on
average 100-fold greater concentrations of tobramycin can be delivered by
inhalation to affected areas of the lung, while limiting the concentration of
the antibiotic in the bloodstream.
The Company obtained exclusive worldwide licenses from each of the Cystic
Fibrosis Foundation and Children's Hospital and Medical Center in Seattle for
patents, research and technology relating to the use of an aerosol tobramycin
solution or any other aerosol aminoglycoside solution for the treatment of
26
<PAGE>
bronchopulmonary infections. See "Business--Licenses and Other Agreements." The
Company will submit the clinical data from the Cystic Fibrosis
Foundation-sponsored study in support of its anticipated NDA for TOBI for cystic
fibrosis.
PATHOGENESIS' DEVELOPMENT OF TOBI FOR CYSTIC FIBROSIS
In order to provide a more economical and convenient form of therapy, the
Company developed a number of modifications to the initial treatment protocol
published in the NEJM, including a new concentrated, preservative-free
formulation of tobramycin solution for inhalation in jet nebulizers. The Company
has also developed an easy-to-use, disposable plastic vial that contains
premixed tobramycin solution. These improvements have resulted in a substantial
reduction of set-up and treatment time. The new hand-held jet nebulizers are
commercially available, are powered by a portable air compressor, and are
convenient to use and to clean. In March 1996, the Company was awarded a
competitive $470,000 grant by the FDA Office of Orphan Products Development to
support its Phase III clinical trials of TOBI for the treatment of chronic lung
infections in cystic fibrosis patients.
In January 1997, PathoGenesis announced results from its two pivotal
double-blind, placebo-controlled Phase III clinical trials of TOBI in patients
with cystic fibrosis. A total of 468 patients in 69 cystic fibrosis care centers
in the United States completed the trials. Treatment with the drug or a placebo
was intermittent for six months, with patients on aerosolized treatment twice
daily for four weeks, then off therapy for four weeks. During the trials,
patients continued to be treated with standard therapies as symptoms warranted.
TOBI improved lung function, the primary end point of the study, in the two
pivotal trials, resulting in an improvement of more than 11% compared with
placebo by the end of the six-month study period. In addition, the mean number
of hospitalization days (the secondary end point) across both studies declined
36% to 5.2 days for the TOBI group versus 8.2 days for the placebo group.
Observed bacterial counts in the sputum of patients taking TOBI declined, while
observed bacterial counts increased in the placebo group. Over the six-month
study period, the difference in observed bacterial density between the two
groups was 10-fold. The foregoing data were statistically significant when
analyzed on an "intent to treat" basis.
Reported adverse events were comparable between the groups taking TOBI and
the placebo. In TOBI patients, the presence of pseudomonal bacteria potentially
resistant to levels of tobramycin in the lungs achieved by aerosol
administration was low: 4.0% at the beginning and 5.4% at the end of the trials.
All patients who completed the Phase III clinical trials were eligible for a
follow-on program, allowing them to receive TOBI treatment for another 12-month
period. More than 85% of the patients chose to participate. This program is
designed to allow PathoGenesis to gather longer-term safety and efficacy data,
and will be part of the NDA for TOBI for cystic fibrosis that the Company
intends to file with the FDA. PathoGenesis also completed a long-term (180-day)
animal toxicology study in 1996, which showed no safety problems at clinically
relevant doses.
The Company intends to file an NDA for TOBI in cystic fibrosis patients with
the FDA in the second quarter of 1997. In February 1997, the FDA notified the
Company that it has agreed to an expedited review of the Company's anticipated
NDA for TOBI for cystic fibrosis. The FDA has agreed that in order to facilitate
an expedited review, the Company may pre-submit chemistry, stability and other
non-clinical data as addenda to its previously filed IND application. See
"Business--Government Regulation and Product Testing."
The Company is currently working with a nine-member advisory board comprised
of European clinicians to initiate open-label clinical trials of TOBI for cystic
fibrosis in 1997. The studies will be conducted in several European countries to
seek to validate TOBI's safety and efficacy given the differences in standard
therapy between the United States and Europe. For example, the trials would
evaluate nebulizers commonly in use in Europe, but not in use in the United
States. PathoGenesis expects to use this data to supplement its U.S. data on
TOBI in filings with European regulatory authorities in 1998.
27
<PAGE>
There can be no assurances that the Company's planned drug development
efforts for TOBI, or any other compound, will be successful or completed within
anticipated time frames, or at all, or that regulatory approvals will be
obtained. See "Risk Factors--Dependence on TOBI," "Risk Factors-- Absence of
Products," "Risk Factors--Uncertainties Regarding Development of Drug
Candidates; Clinical Trials" and "Risk Factors--Government Regulation; No
Assurance of Regulatory Approvals."
ORPHAN DRUG DESIGNATION; PATENT FILINGS
In October 1994, the Company received an Orphan Drug designation from the
FDA for the use of tobramycin for inhalation in the treatment of pseudomonal
pulmonary infections in cystic fibrosis patients. The Orphan Drug designation
would provide the Company with a seven-year marketing exclusivity in the United
States if the Company is the first FDA-approved applicant for the drug in the
specified indication. While the Company is not aware of any other companies that
have sought an Orphan Drug designation for tobramycin for inhalation for this
indication, there can be no assurance that other companies will not seek such a
designation in the future and obtain FDA marketing approval before the Company
obtains such approval. If another company obtains marketing approval for the use
of tobramycin for inhalation in the treatment of pseudomonal pulmonary
infections in cystic fibrosis patients and receives seven-year marketing
exclusivity, the Company would not be permitted by the FDA to market TOBI in the
United States during the exclusivity period. In addition, in April 1996, the
Company received a United States patent on the TOBI formulation and has filed
patent applications in major foreign markets. See "Risk Factors-- Uncertain
Ability to Protect Patents and Proprietary Technology and Information" and "Risk
Factors-- Uncertainty of Orphan Drug Status."
TOBI FOR BRONCHIECTASIS
Bronchiectasis is a lung disease in which previous bouts of viral or
bacterial infection have damaged the air passages and compromised the lungs'
normal defenses against airway infection. In bronchiectasis, persistent
bacterial infection is present in air passages of the lungs and causes
inflammation, which leads to progressive lung damage. The late-stage clinical
manifestations are similar to cystic fibrosis lung disease, except the age group
is usually older (in the age range of 50 to 70 years). There are approximately
100,000 people afflicted with bronchiectasis in the United States. These
patients are often diagnosed as having a form of severe chronic bronchitis and
require a significant number of hospitalizations to treat complications of the
condition.
Due to certain clinical similarities between cystic fibrosis and
bronchiectasis, the Company believes TOBI should suppress bacterial growth in
the lungs of bronchiectasis patients and thereby decrease inflammation and
progressive lung damage. The Company intends to commence Phase II clinical
trials of TOBI for bronchiectasis in 1997. The Company has prepared protocols
and selected clinical investigators for the proposed trials. The Company intends
to commence these trials upon receipt of all applicable regulatory and
independent institutional review board ("IRB") approvals. There can be no
assurance, however, that the Company will be successful in its efforts to
develop TOBI for this indication, or, that the Company's Phase II clinical
trials will be commenced or completed within the anticipated time frames, if at
all. See "Risk Factors--Absence of Products," "Risk Factors--Uncertainties
Regarding Development of Drug Candidates; Clinical Trials" and "Risk
Factors--Government Regulation; No Assurance of Regulatory Approvals."
TUBERCULOSIS DRUG DEVELOPMENT PROGRAM
For the past 25 years, there has been limited development of drugs to treat
tuberculosis, which ranks as one of the most serious infectious diseases
worldwide because of its highly contagious nature, worldwide prevalence and
increasing levels of drug resistance. For these reasons, as well as its
experience in respiratory infections, PathoGenesis has identified tuberculosis
as a target for three drug candidates: TOBI, PA-1648 and PA-824.
The goal of PathoGenesis' tuberculosis drug development program is to
develop drug candidates that can provide significant benefit to tuberculosis
patients, either as an adjunct (supplemental) therapy or as a
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replacement for one of the four drugs in the current standard primary regimen of
therapy (isoniazid, rifampin, ethambutol and pyrazinamide). For example, the
Company intends to research whether TOBI can shorten the contagious period,
reducing the risk that tuberculosis patients might infect family members or
medical personnel. The Company believes PA-1648 may be a candidate to replace
rifampin and may require less frequent dosing. Additionally, in preclinical
development, PA-824 has shown action against multi-drug-resistant strains of
tuberculosis and may be a candidate to replace or supplement isoniazid.
TUBERCULOSIS
A century after the discovery of MYCOBACTERIUM TUBERCULOSIS (M.
TUBERCULOSIS), the bacterium causing tuberculosis, this disease continues to be
one of the most serious infectious diseases outside of developed countries, with
over one billion people infected worldwide. The vast majority of these
infections are latent (inactive) cases, which may typically exist for decades
prior to activation and manifestation of lung disease. The worldwide infection
rate results in approximately eight million active tuberculosis cases annually
and over two million deaths per year.
In the United States, an average of 25,000 new cases of active tuberculosis
has been reported annually for the past five years. Active cases are increasing
due to the susceptibility of AIDS patients, who have a shortened or non-existent
latent phase, and to increased immigration from developing countries that have a
high prevalence of latent infection. The Centers for Disease Control and
Prevention ("CDC") estimate that over 10 million people in the United States
have latent infections.
Initial exposure to M. TUBERCULOSIS from an active case results in a latent
infection of the lung, which can usually be diagnosed using a tuberculosis skin
test. After a latent phase ranging from months to decades, the bacteria may
resume active growth. If untreated, the patient then typically develops
progressive tuberculosis pneumonia with loss of lung function, severe weight
loss and eventual death. Patients with active tuberculosis are extremely
infectious. Those in close contact with such patients are at risk of becoming
infected by exposure to airborne droplets produced from coughing. The most
effective way to control the spread of tuberculosis is through early
identification and thorough treatment of active cases.
For the past 25 years, there has been limited development of
anti-tuberculosis drugs. Patents on all four of the drugs in the current
standard regimen of therapy to treat tuberculosis have expired. Currently,
active tuberculosis is treated with a regimen of at least three different drugs
taken daily for a minimum of six months. Multi-drug therapy is used in order to
reduce the emergence of drug-resistant bacteria and shorten the treatment
duration. Failure to fully comply with this complicated, long-term therapy can
result in relapse. In addition, the therapy can be toxic, often causing side
effects including severe gastrointestinal upset and hepatitis. Overall the
mortality rate of drug-related adverse effects is approximately one in two
thousand. While studies have shown that current therapies are effective if the
patient adheres to and completes the treatment course, up to 30% of these
patients relapse due to non-compliance.
Partial or incomplete treatment of active tuberculosis is the primary cause
of the development of drug-resistant tuberculosis. Almost 20% of recent active
tuberculosis cases in New York City have shown resistance to two or more of the
components of the standard regimen of therapy. At present, the pharmaceutical
component of tuberculosis therapy is relatively inexpensive. However, a number
of cities have instituted, at a very high cost, directly observed therapy
programs in which administration of every oral dose is observed by a health care
worker. The growth of directly observed treatment procedures, while intended to
reduce non-compliance, has greatly increased the overall cost of therapy.
Consequently, the Company believes that a significant market opportunity exists
for a tuberculosis drug regimen which could decrease the frequency of
administration and shorten the course of multi-drug treatment. This could result
in improved compliance levels and diminished risk of relapse.
TOBI FOR TUBERCULOSIS
The increasing incidence of multi-drug-resistant strains of tuberculosis has
compromised the ability of the health care system to treat active cases in order
to prevent the transmission of the infection by coughing. In IN VITRO testing,
tuberculosis bacteria, including multi-drug-resistant strains, have been killed
by high concentrations of TOBI. The Company believes that TOBI therapy may
potentially be most useful
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in patients with multi-drug-resistant tuberculosis who respond slowly to primary
therapy and require expensive isolation until they are no longer infectious.
Generally, patients are contagious for a period of up to two weeks.
The Company intends to commence Phase II clinical trials of TOBI in 1997 as
an adjunct therapy for patients with contagious pulmonary tuberculosis to
shorten the infectious period after systemic anti-tuberculosis therapy has been
started. The Company believes that this adjunct therapy may benefit the patient
as well as prevent secondary transmission to family members and health care
workers.
In April 1996, the Company filed a provisional patent application with the
PTO for use of the TOBI formulation for the treatment of tuberculosis. There can
be no assurance that the Company will be successful in its efforts to develop
TOBI for this indication, or that the Company's Phase II clinical trials will be
commenced or completed within the anticipated time frames, if at all. See "Risk
Factors--Absence of Products," "Risk Factors--Uncertainties Regarding
Development of Drug Candidates; Clinical Trials" and "Risk Factors--Government
Regulation; No Assurance of Regulatory Approvals."
PA-1648
PA-1648 is one of the Company's drug candidates to be included in the
standard regimen of therapy for the treatment of tuberculosis. PA-1648 is a
novel derivative of the generic drug rifampin, one of the antibiotics in the
current standard regimen of therapy used to treat tuberculosis. PA-1648 was
synthesized, tested for anti-mycobacterial activity and patented in the United
States and major foreign markets by Kaneka under the name KRM-1648. Kaneka has
granted exclusive rights to the Company for the development, marketing and sale
of PA-1648 in the United States, Canada and Mexico.
More than 20 peer-reviewed articles have reported the IN VITRO and IN VIVO
(animal) efficacy of PA-1648 against both tuberculosis and disseminated
MYCOBACTERIUM AVIUM complex (MAC) infections, a tuberculosis-like disease
affecting AIDS patients. The Company has also conducted confirmatory IN VITRO
and IN VIVO studies. In preclinical studies, PA-1648 has demonstrated several
characteristics suggesting that it could be superior to rifampin for use in
treating tuberculosis and MAC. In IN VITRO studies, PA-1648 has been shown to be
(i) eight- to 80-fold more potent than rifampin against M. TUBERCULOSIS and MAC;
(ii) active against multiple strains of M. TUBERCULOSIS and MAC; and (iii)
potent against other intracellular pathogens, particularly chlamydia. PA-1648
has also shown efficacy in animal models of tuberculosis and disseminated MAC
infections that are generally believed to have been predictive of the clinical
efficacy of other antibiotics. With the advent of new therapies to treat HIV
infections, the incidence of MAC has declined significantly. Because of MAC's
declining frequency, the Company has decided to focus on the clinical
development of PA-1648 for tuberculosis and to conduct studies of PA-1648 to
treat MAC infections at a later date only if the market warrants further
development for this indication.
In December 1996, PathoGenesis completed a series of Phase I clinical trials
of PA-1648 in healthy volunteers under an FDA-approved investigational new drug
("IND") application. The Phase I data suggest that PA-1648 has a longer
half-life in humans than rifampin. The half-life for rifampin in humans averages
two to three hours, while the Company's Phase I results indicate PA-1648 has an
average half-life of at least 48 hours. In addition, PathoGenesis' data
indicates that the ratio of intracellular drug concentrations to extracellular
drug concentrations is much higher for PA-1648 compared with other rifampins.
PathoGenesis believes this may allow a 25 mg dose to be taken once a week to
treat rifampin-sensitive tuberculosis bacteria. Rifampin is typically dosed at
approximately 300 mg once a day.
PA-1648 and rifampin can produce flu-like symptoms and transient reductions
in white blood cell counts in some individuals. The Company believes that lower
dosage levels of PA-1648, such as 25 mg or 50 mg once a week, may be efficacious
and less likely to produce these side effects.
Based on its preclinical and human pharmacokinetic data, the Company
believes that PA-1648 may be a component of a more efficacious standard regimen
of therapy for the treatment of patients suffering from tuberculosis. Medical
compliance is a severe problem in the treatment of mycobacterial infection.
Failure to comply with or finish the usual six-month course of antibiotics for
tuberculosis is the principal reason for both development of drug-resistant
strains and relapse, with potential spread of resistant strains
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to uninfected individuals by coughing. PA-1648 may potentially increase efficacy
to allow shorter overall treatment periods and offer a longer half-life so fewer
administrations would be needed.
The Company intends to commence Phase II clinical trials in 1997 for PA-1648
as a component of standard therapy for tuberculosis. The Company has prepared a
protocol to commence such trials in a facility in Brazil supervised by a United
States university, pending receipt of necessary governmental and IRB approvals.
The Company expects to test whether PA-1648 will be safe and effective when
taken once a week and if it has the potential to reduce the length of treatment
from the standard six months. There can be no assurance that the Company's
planned drug development efforts for PA-1648, or any other drug candidate, will
be successful or completed within the anticipated time frames, if at all, or
that regulatory and IRB approvals will be obtained. See "Risk Factors--Absence
of Products," "Risk Factors--Uncertainties Regarding Development of Drug
Candidates; Clinical Trials" and "Risk Factors--Government Regulation; No
Assurance of Regulatory Approvals."
PA-824
PA-824, the Company's second candidate for primary anti-tuberculosis
treatment, is designed to replace or to supplement isoniazid. Isoniazid is
currently one of the four components of the standard regimen of therapy to treat
tuberculosis. PA-824 was developed by PathoGenesis, possesses a simple chemical
structure and is readily prepared in the laboratory. The Company has filed a
patent application in the United States and plans to file patent applications in
significant foreign markets for PA-824 and a series of related compounds
synthesized to date. PA-824 studies show IN VITRO activity against
non-drug-resistant and drug-resistant strains of tuberculosis. Furthermore, IN
VIVO studies indicate that PA-824 has activity against tuberculosis organisms in
the lung and spleen. The Company's IN VITRO studies indicate that PA-824 is
killing tuberculosis bacteria by mechanisms that appear to differ from those of
the current standard therapies, since PA-824 demonstrates activity on
multiple-drug-resistant strains. In addition, a novel formulation for PA-824 was
developed by the Company to improve the oral bioavailability of this drug
candidate. See "Risk Factors--Absence of Products," "Risk Factors--Uncertainties
Regarding Development of Drug Candidates; Clinical Trials" and "Risk
Factors--Government Regulation; No Assurance of Regulatory Approvals."
RESEARCH AND DEVELOPMENT
PathoGenesis has focused its research and development efforts on drug
candidates characterized by potentially unique therapeutic profiles and
accelerated development processes. The Company seeks to shorten drug discovery
and development processes through the integration of technical programs for drug
discovery and development with the Company's clinical and regulatory strategy.
The Company's three major technical programs are: (i) a molecular genetics
program for the discovery of new approaches to the treatment of pathogens; (ii)
a molecular microbiology program that focuses on the discovery of new approaches
to the treatment of pathogens and on developing "smart screens" using reporter
gene technology to facilitate the testing of drug candidates; and (iii) a
pharmaceutical chemistry program that uses combinatorial chemistry to create new
drug candidates. PathoGenesis also has internal capabilities in microbiology,
analytical chemistry and pharmacokinetics to support drug development. The
Company involves its clinical and regulatory personnel in the early stages of
the drug discovery and development processes to select drug candidates which the
Company believes can be developed on an accelerated basis due to their
significant interest to both physicians and regulators and outcomes that can be
readily measured in clinical trials. The Company intends to focus on developing
those drug candidates it believes it can best exploit through its own resources.
In other instances, the Company intends to sell, license, joint venture or
otherwise collaborate where such an approach is determined to be preferable.
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MANUFACTURING
The Company does not currently intend to establish internal manufacturing
capabilities. Instead, the Company has contracted and intends to contract with
third parties for the production of compounds in bulk quantities and for the
subsequent manufacturing and packaging of products. The Company has an agreement
with an FDA-inspected supplier of bulk powdered tobramycin and also purchases
bulk powdered tobramycin from another FDA-inspected supplier. The Company has
used an FDA-inspected manufacturer to formulate and package TOBI utilizing a
form-fill-seal technology to manufacture and fill a plastic vial in a sterile
environment. The resulting vials have a snap-top access port for delivering TOBI
directly into a jet nebulizer. Another contract manufacturer has been used to
package the plastic vials in aluminum foil pouches. No assurance can be made
that the Company will be able to obtain future supplies of TOBI on favorable
terms, if and when it receives marketing approval from the FDA.
The Company intends to designate the Pari LC Plus Nebulizer, manufactured
and distributed in the United States by Pari Corporation of Germany, to deliver
TOBI. The Company intends to test other nebulizers for use with TOBI.
The Company obtains bulk powdered PA-1648 from Kaneka. Pursuant to the
Company's license and supply agreements with Kaneka, Kaneka is supplying the
Company with PA-1648 for clinical development at no additional charge. The
powdered drug is then formulated into single dose capsules at a contract
manufacturer. In addition, the Company and Kaneka are parties to a supply
agreement pursuant to which Kaneka is obligated to supply, and the Company is
obligated to purchase at specified prices, all bulk powdered drug if and when
the Company receives marketing approval of PA-1648 from the FDA. Such
obligations will remain for the duration of the license agreement. The Company
believes that it has obtained a sufficient supply of PA-1648 to complete Phase
II clinical testing. However, Kaneka is currently the only known manufacturer of
the bulk powdered drug. Should Kaneka be unable to satisfy the Company's needs,
the Company has the right to seek alternative supply sources. There can be no
assurance that the Company will be able to obtain sufficient quantities of
PA-1648 to satisfy its needs.
All contractors utilized by the Company have FDA-inspected facilities that
operate under cGMP. In the event the Company decides to establish a
manufacturing facility, the Company will require substantial additional funds,
will be required to hire and train significant additional personnel and comply
with the extensive cGMP regulations applicable to such a facility. See "Risk
Factors--Limited Manufacturing Capabilities; Dependence on Suppliers" and
"Business--Government Regulation and Product Testing."
MARKETING
The Company currently has limited internal marketing and no sales resources
and personnel. The Company intends to market TOBI for cystic fibrosis directly
to physicians, hospitals and cystic fibrosis treatment centers. Cystic fibrosis
represents a niche market, involving a small group of physicians or treating
institutions both in the United States and abroad. Currently, more than 65% of
cystic fibrosis patients in the United States are treated by institutions or
physicians associated with the 113 cystic fibrosis care centers sponsored by the
Cystic Fibrosis Foundation. Of those 113 cystic fibrosis centers, 69 centers
participated in the Company's Phase III clinical trials for TOBI. Consequently,
the Company intends to hire a sales force of 15 to 20 persons and believes that
this sales force will provide sufficient coverage for the United States. The
Company intends to take a similar approach with respect to marketing PA-1648 and
subsequent product candidates.
In addition, PathoGenesis intends to establish a European office in 1997 as
part of the process of registering TOBI for cystic fibrosis in the European
Union. PathoGenesis expects to file for approval of TOBI for cystic fibrosis
with European regulatory authorities in 1998, and, if and when it obtains such
approval, to market TOBI for cystic fibrosis directly in major European
countries. However, there can be no assurances that the Company's planned drug
development efforts for TOBI for cystic fibrosis, or any
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other compound, will be successful or completed within anticipated time frames,
or at all, or that regulatory approvals will be obtained.
LICENSES AND OTHER AGREEMENTS
The Company has entered into several key license agreements and research
collaboration arrangements. In addition to those mentioned below, the Company is
pursuing additional licensing agreements and collaborations.
PathoGenesis has licensed from the Cystic Fibrosis Foundation and Children's
Hospital and Medical Center in Seattle exclusive worldwide rights to patents,
research and technology relating to the use of an aerosolized tobramycin
solution or any other aerosolized aminoglycoside solution for the treatment of
bronchopulmonary infections. The Company has agreed under each of these
licensing agreements to make a substantial one-time payment to each licensor in
the event the Company receives marketing approval of TOBI or any other
aerosolized aminoglycoside from the FDA and to pay a royalty based on net sales.
The term of each licensing agreement continues until the expiration of any
patent rights under the license and may be terminated earlier upon a material
breach by either party.
The Company has licensed from Kaneka exclusive rights for the United States,
Canada and Mexico to develop, market and sell PA-1648 for use in the treatment
of tuberculosis, MAC and other infections. Pursuant to the license agreement,
the Company is responsible for the clinical development, regulatory affairs,
marketing and sales of PA-1648. The Company has agreed to pay Kaneka certain
clinical and regulatory milestone payments of substantial amounts. In addition,
the Company has agreed to pay Kaneka a royalty based upon net sales for 15 years
from the date of commercial production of PA-1648. After such 15-year period,
the license is fully paid and remains in effect as a non-exclusive license.
Kaneka has the option to convert this license to a non-exclusive license should
the Company fail to achieve certain milestones. In addition, the license may
terminate should the Company fail to achieve certain other milestones. As
partial consideration for this license, the Company paid $500,000 in cash and
issued 50,000 shares of Common Stock to Kaneka. In addition, in lieu of a cash
milestone payment, the Company issued Kaneka an additional 50,000 shares of
Common Stock in March 1995. Pursuant to a related supply agreement between the
Company and Kaneka, Kaneka is responsible for manufacturing the bulk powdered
PA-1648 in Japan for final dosage form preparation in the United States. To
date, the Company believes that Kaneka has supplied sufficient quantities of
PA-1648 to enable the Company to complete Phase II clinical testing. See
"Business--Manufacturing."
PathoGenesis is engaged in research and development collaborations and
licensing arrangements with various academic institutions and government and
commercial research groups. The Company has exclusive, worldwide license rights
from Cold Spring Harbor Laboratory for the use of RDA to discover pathogens in
infectious diseases. This license extends until the expiration of the patent
covered by the license. However, the license becomes non-exclusive commencing in
May 1997. The Company also intends to enter into a contract with the Cystic
Fibrosis Foundation and the University of Washington to sequence the P.
AERUGINOSA genome (DNA or genetic code) to assist in the drug discovery process.
In general, the Company's research and development agreements and licensing
arrangements with academic institutions and government research groups provide
for sponsorship of research and development by the Company in exchange for
exclusive, royalty-bearing licenses or rights of first refusal during the course
of the sponsored research. In general, the license agreements grant the Company
exclusive licenses in exchange for varying combinations of license fees,
milestone payments, royalties and minimum royalties. In addition, the license
agreements typically place commercialization obligations on the Company which,
if not satisfied, may result in the licensor having the right to render the
license non-exclusive or to terminate the agreement. Typically, the agreements
are terminable by either party for breach. See "Risk Factors-- Dependence on
Licenses; Potential Need for Additional Partners or Collaborators."
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In May 1996, PathoGenesis entered into a license and distribution agreement
with Bohdan Automation, Inc. Under this agreement, Bohdan manufactures and sells
the Rapid Analog Matrix ("RAM") Synthesizer, a proprietary combinatorial
chemistry system invented by Company scientists. Bohdan is obligated to pay the
Company royalties based on its sales, if any, of RAM Synthesizers.
PATENTS
The Company's success will depend in part on its ability to develop
patentable products and technologies and obtain patent protections for its
products and technologies both in the United States and other countries.
PathoGenesis generally applies for patents for its proprietary compounds,
formulations or technologies.
In April 1996, the Company obtained a formulation patent for TOBI in the
United States. A corresponding international patent application was filed in
1995 under the Patent Cooperation Treaty designating Europe, Canada, Japan and
other countries.
The Company is the exclusive licensee in the United States, Canada and
Mexico of rights under three issued patents relating to PA-1648. The Company has
been issued three United States patents and has 13 patent applications pending
that cover several different compounds. The Company has also filed patent
applications with respect to several product candidates in many other countries,
including Europe and Canada.
There can be no assurance that any of the Company's pending patent
applications will result in the issuance of patents or that competitors will not
successfully challenge the Company's patents, if issued, or circumvent the
Company's patent position. The failure of patents to issue on pending
applications could result in increased competition.
The patent positions of companies in the pharmaceutical industry are highly
uncertain, involve complex legal and factual questions and have been and
continue to be the subject of much litigation. A significant number of patents
have been applied for by and issued to other companies in PathoGenesis'
industry, and other companies may have filed applications for, may have been
issued patents or may obtain, additional patents and proprietary rights relating
to products competitive with those of the Company.
In addition, the Company's drug candidates may give rise to claims that they
infringe on the products or proprietary rights of others. There can be no
assurance that any license required under any such patents or rights would be
made available on terms acceptable to the Company, if at all. If the Company
does not obtain such licenses, it may encounter delays in product market
introductions while it attempts to design around such patents, or may find that
the development, manufacture or sale of products requiring such licenses may be
precluded. The Company could also incur substantial costs in defending any
patent infringement suits or in asserting any patent rights, including those
granted by third parties. See "Risk Factors--Uncertain Ability to Protect
Patents and Proprietary Technology and Information."
GOVERNMENT REGULATION AND PRODUCT TESTING
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the Company's ongoing research and product
development activities and in the manufacturing and marketing of the Company's
drug candidates. Virtually all the Company's products will require regulatory
approval by governmental agencies, principally the FDA, prior to
commercialization. In particular, therapeutic products for human use are subject
to rigorous preclinical and clinical testing and other approval procedures by
the FDA and similar health authorities in foreign countries. Various federal
statutes and regulations also govern or influence the manufacturing, safety,
effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and marketing of such products. The process of obtaining
these approvals and the subsequent compliance with appropriate federal statutes
and
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regulations require the expenditure of substantial resources. Any failure by the
Company or its collaborators, licensors or licensees to obtain, or any delay in
obtaining, regulatory approval could adversely affect the marketing of products
then being developed by the Company and its ability to receive product or
royalty revenues. In addition, noncompliance with applicable regulatory
requirements can result in, among other things, fines, injunctions, seizures of
products, total or partial suspension of product marketing, failure of the
government to grant premarket approval, withdrawal of marketing approvals and
criminal prosecution.
Upon approval in the United States, a drug may only be marketed for the
approved indications in the approved dosage forms and dosages. The FDA also may
require post-marketing testing and surveillance to monitor safety and efficacy
history of the approved product and continued compliance with regulatory
requirements. The FDA also mandates that drugs be manufactured in conformity
with cGMP regulations. In complying with the cGMP regulations, manufacturers
must continue to expend time, money and effort in production, record keeping and
quality control to ensure that the product meets applicable specifications and
other requirements. The FDA periodically inspects drug manufacturing facilities
to ensure compliance with applicable cGMP requirements. Failure to comply
subjects the manufacturer to possible FDA action, such as suspension of
manufacturing, seizure of the product or voluntary recall of a product. Adverse
experiences with the product must be reported to the FDA. Product approvals may
be withdrawn if compliance with regulatory requirements is not maintained or if
problems concerning safety or efficacy of the product occur following approval.
FULL CLINICAL TESTING REQUIREMENTS
The steps required before a new drug may be commercially distributed in the
United States, include: (i) conducting appropriate preclinical laboratory and
animal tests; (ii) submitting to the FDA an application for an IND which must be
approved before clinical trials may commence; (iii) conducting controlled human
clinical trials that establish the safety and efficacy of the drug product; (iv)
filing with the FDA an NDA; and (v) obtaining FDA approval of the NDA prior to
any commercial sale or shipment of the drug. In addition to obtaining FDA
approval for each indication to be treated with each product, each domestic drug
manufacturing establishment must register with the FDA, list its drug products
with the FDA, comply with cGMP requirements and be subject to inspection by the
FDA. Foreign manufacturing establishments distributing drugs in the United
States also must comply with cGMP requirements and list their products and are
subject to periodic inspection by the FDA.
With respect to any non-biological drug product with an active ingredient
not previously approved by the FDA, a prospective manufacturer must usually
submit a full NDA, including complete reports of preclinical, clinical and
laboratory studies, to prove that the product is safe and effective. A full NDA
may also need to be submitted for a drug product with a previously approved
active ingredient if studies are required to demonstrate safety and efficacy,
such as when the drug will be used to treat an indication for which the drug was
not previously approved, or where the method of drug delivery is changed. A
manufacturer intending to conduct clinical trials will usually first be required
to submit an IND to the FDA containing information relating to previously
conducted preclinical studies.
Preclinical testing includes formulation development, laboratory evaluation
of product chemistry and animal studies to assess the potential safety and
efficacy of the product formulation. Preclinical trials usually must be
conducted in accordance with the FDA regulations concerning Good Laboratory
Practices ("GLPs"). The results of the preclinical trials are submitted to the
FDA as part of the IND and are reviewed by the FDA prior to authorizing the
sponsor to conduct clinical trials in human subjects. Unless the FDA objects to
an IND, the IND will become effective 30 days following its receipt by the FDA.
There is no certainty that submission of an IND will result in FDA authorization
to commence clinical trials or that authorization of one phase of clinical
trials will result in authorization of other phases or that the performance of
any clinical trials will result in FDA approval. See "Risk Factors--Government
Regulation; No Assurance of Regulatory Approvals."
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Clinical trials for newly marketed drugs typically are conducted in three
phases and are subject to detailed protocols. Clinical trials involve the
administration of the investigational drug product to human subjects. Each
protocol indicating how the clinical trial will be conducted must be submitted
for review to the FDA. The FDA's review of a study protocol does not necessarily
mean that, if the study is successful, it will constitute proof of efficacy or
safety. Further, each clinical trial must be conducted under the auspices of an
IRB, which must be constituted and operated in conformance with FDA regulations.
The IRB considers, among other factors, ethical concerns and informed consent
requirements. The FDA or the IRB may require changes in a protocol both prior to
and after the commencement of a trial. There is no assurance that the IRB or the
FDA will permit a study to go forward or, once started, to be completed.
Clinical trials may be placed on hold at any time for a variety of reasons,
particularly if safety concerns exist.
The three phases of clinical trials are generally conducted sequentially,
but they may overlap. In Phase I, the initial introduction of the drug into
humans, the drug is tested for safety, side effects, dosage tolerance,
metabolism and clinical pharmacology. Phase II involves controlled tests in a
larger but still limited patient population to determine the efficacy of the
drug for specific indications, to determine optimal dosage and to identify
possible side effects and safety risks. Phase II testing for an indication
typically takes from one-and-one-half to two-and-one-half years to complete. If
preliminary evidence suggesting effectiveness has been obtained during Phase II
evaluations, expanded Phase III trials are undertaken to gather additional
information about effectiveness and safety that is needed to evaluate the
overall risk-benefit relationship of the drug and to provide an adequate basis
for product labeling. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed successfully within any specified time period, if
at all, with respect to any of the Company's drug candidates.
Reports of results of the preclinical trials and clinical trials for
non-biological drugs are submitted to the FDA in the form of an NDA for approval
of marketing and commercial shipment. The NDA also includes information
pertaining to the preparation of drug substances, analytical methods, drug
product formulation, details on the manufacture of finished product and proposed
product packaging and labeling. Submission of an NDA does not assure FDA
approval for marketing. The application review process generally takes two to
three years to complete, although reviews of treatments for AIDS, cancer and
other serious diseases may be accelerated. The FDA may grant expedited review to
new drug applications for therapies intended to treat people with
life-threatening and severely debilitating illnesses, especially where no
satisfactory alternative therapy exists. The granting of an expedited review may
accelerate the application review process; however, there can be no assurance
that any approval will be granted on a timely basis, or at all. The approval
process may take substantially longer if, among other things, the FDA has
questions or concerns about the safety and/or efficacy of a product.
In general, the FDA requires at least two properly conducted, adequate and
well-controlled clinical trials demonstrating efficacy with sufficient levels of
statistical assurance. The FDA also may request long-term toxicity studies or
other studies relating to product safety or efficacy. For example, the FDA may
require additional clinical tests following NDA approval to confirm product
safety and efficacy (Phase IV clinical tests). Notwithstanding the submission of
such data, the FDA ultimately may decide that the application does not satisfy
its regulatory criteria for approval. The full NDA process for newly marketed
non-biological drugs takes a number of years and involves the expenditure of
substantial resources.
The FDA has issued regulations to expedite the review of new non-biological
drug products for life-threatening or severely-debilitating illnesses that
provide meaningful therapeutic benefit to patients over existing treatments
(e.g., the ability to treat patients unresponsive to, or intolerant of,
available therapy, or improved patient response over available therapy). Under
the expedited review program, the FDA has established procedures designed to
expedite the development, evaluation and marketing of therapies intended to
treat persons with life-threatening and severely-debilitating illnesses,
especially when no satisfactory alternative therapy exists. The term
"life-threatening" is defined by the FDA to mean: (1) diseases or conditions
where the likelihood of death is high unless the course of the disease is
interrupted;
36
<PAGE>
and (2) diseases or conditions with potentially fatal outcomes, where the
endpoint of clinical trial analysis is survival. "Severely-debilitating" is
defined by the FDA to mean diseases or conditions that cause major irreversible
morbidity. As a condition of approval, the FDA may require the sponsor to
conduct certain post-marketing studies to delineate additional information about
the drug's risks, benefits and optimal use. The Company has been notified by the
FDA that the Company's NDA for the use of TOBI to treat pseudomonal pulmonary
infections in patients with cystic fibrosis will receive expedited review.
However, there can be no assurance as to the timing of such NDA filing or the
outcome or timing of the FDA's review of such filing.
Treatment of patients with an experimental drug not in clinical trials may
also be allowed under a Treatment IND before general marketing begins and
pending FDA approval. Charging for an investigational drug also may be allowed
under a Treatment IND to recover certain costs of development if various
requirements are met. These expedited review and Treatment IND regulations are
limited, for example, to drug products intended to treat AIDS, cancer or other
life-threatening or severely-debilitating diseases and which provide either
meaningful therapeutic benefit to patients over existing treatments or that are
for diseases for which no satisfactory alternative therapy exists. Although the
FDA has agreed to an expedited review of the Company's NDA for the use of TOBI
to treat pseudomonal pulmonary infections in patients with the cystic fibrosis,
there can be no assurance that any of the Company's other drug candidates will
qualify for expedited review or for treatment use.
FOREIGN REGULATIONS
To market its products abroad, the Company is also subject to numerous and
varying foreign regulatory requirements, governing, among other things, the
design and conduct of human clinical trials, pricing regulations and marketing
approval. The approval procedure may vary among countries and can involve
additional testing, and the time required to obtain approval may differ from
that required to obtain FDA approval. At present, foreign marketing
authorizations are applied for at a national level, although within the EU
certain registration procedures are available to companies wishing to market a
product in more than one EU member country. If a regulatory authority is
satisfied that adequate evidence of safety, quality and efficacy has been
presented, marketing authorization is usually granted. The foreign regulatory
approval process includes all of the risks associated with obtaining FDA
approval. Approval by the FDA does not ensure approval by other countries.
OTHER REGULATIONS
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with the Company's
research work. The extent of government regulation which might result from
future legislation or administrative action cannot be accurately predicted.
COMPETITION
The Company competes with pharmaceutical companies and specialized
biotechnology firms that produce and market products in the United States,
Europe and elsewhere. Many pharmaceutical companies have focused their
development efforts in the therapeutics areas described herein and many
healthcare companies have existing supply arrangements with other pharmaceutical
companies.
The Company expects to encounter significant competition for the principal
products it plans to develop. Companies that complete clinical trials, obtain
required regulatory approvals and commence commercial sales of their products
before PathoGenesis may achieve a significant competitive advantage.
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<PAGE>
The use of antibiotics to treat pseudomonal, mycobacterial and other
bacterial infections is well established. The most commonly used intravenous
antibiotic is Nebcin-Registered Trademark- (Tobramycin Sulfate Injection, USP)
manufactured by Eli Lilly and Company. Medical therapies for patients with
cystic fibrosis include antibiotics, anti-inflammatory drugs, oral replacement
enzymes to maintain nutrition, physical therapy to the chest to loosen lung
secretions and mucolytics to clear pulmonary secretions such as
Pulmozyme-Registered Trademark- (dornase alpha) manufactured by Genentech, Inc.
The Company believes that these therapies are complementary with TOBI for the
treatment of chronic pseudomonal lung infections in cystic fibrosis patients.
However, the optimal combination may vary between patients. In addition, the
potential high cost of combination therapy may limit the use of TOBI in
conjunction with other therapies. Accordingly, there can be no assurance that
alternative formulations of tobramycin, other antibiotics or different
approaches to therapy will not prove to be more efficacious, safer or more
cost-effective than TOBI for the treatment of pseudomonal lung infections in
cystic fibrosis patients.
Antibiotic therapies are currently used to treat tuberculosis. The Company
believes that PA-1648 could be used in combination with certain existing
therapies as part of multi-drug therapy regimens and that TOBI could be used as
an adjunct therapy for patients with contagious pulmonary tuberculosis. However,
optimal combination therapies may vary between patients. Furthermore, there can
be no assurance that alternative antibiotics or other therapies will not prove
to be more efficacious, safer or more cost-effective than PA-1648 or TOBI.
Significant levels of research in chemistry and biotechnology occur in
universities and other nonprofit research institutions. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. They also compete with the Company in recruiting
skilled scientific talent.
The Company believes that its ability to compete successfully will be based
on its ability to create and maintain scientifically advanced technology,
develop proprietary products, attract and retain scientific personnel, obtain
patent or other protection for its products, obtain required regulatory
approvals and manufacture and successfully market its products either alone or
through outside parties. Many of the Company's competitors have substantially
greater financial, research and development, manufacturing, marketing and human
resources than PathoGenesis.
HUMAN RESOURCES
As of January 31, 1997, PathoGenesis had 115 full-time employees, 90 of whom
are engaged in research and development activities at its laboratory facility in
Seattle, Washington. A significant number of the Company's management and
professional employees have had prior experience with pharmaceutical,
biotechnology or medical products companies. None of the Company's employees is
covered by collective bargaining agreements.
FACILITIES
The Company's principal facility consists of approximately 70,000 square
feet of leased laboratory and office space in Seattle, Washington. A portion of
this space has been subleased by the Company to a third party. The lease expires
in March 2003.
The Company also leases an administrative and marketing office of
approximately 4,500 square feet in Skokie, Illinois. This lease expires in
January 1999. A third leased laboratory and office in Annandale, New Jersey
consists of approximately 18,000 square feet and houses manufacturing support
and distribution support operations. The lease expires in December 2001. In
addition, PathoGenesis rents office space in New York City, which is subject to
an oral, month-to-month lease agreement between the Company and the lessor. See
"Certain Transactions."
LEGAL PROCEEDINGS
The Company has no material pending legal proceedings.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
person who is currently a Director and executive officer of the Company.
<TABLE>
<CAPTION>
YEAR TERM AS
NAME AGE POSITIONS DIRECTOR EXPIRES
- --------------------------------------- --- ------------------------------------------------- -----------------
<S> <C> <C> <C>
Wilbur H. Gantz(1)..................... 59 Chief Executive Officer, President and Director 1997
Alan R. Meyer.......................... 44 Senior Vice President, Chief Financial Officer, 1999
Treasurer, Assistant Secretary and Director
A. Bruce Montgomery, M.D. ............. 43 Senior Vice President, Research and Development
Marvin B. Tepper....................... 65 Secretary
Elizabeth M. Greetham.................. 47 Director 1999
Lawrence C. Hoff(2).................... 68 Director 1997
Edward J. Mathias(3)................... 55 Director 1997
Michael J. Montgomery(3)............... 42 Director 1999
Talat M. Othman(1)(2).................. 60 Director 1998
Eugene L. Step(1)(3)................... 68 Director 1998
Fred Wilpon(1)(2)(3)................... 60 Director, Chairman of the Board 1998
</TABLE>
- ------------------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit/Finance Committee.
WILBUR H. GANTZ is a founder of the Company and has been the Chief Executive
Officer, President and a Director of the Company since March 1992. Prior to
joining the Company, he was President of Baxter International Inc. ("Baxter").
Mr. Gantz joined Baxter in 1966 and held several positions including Vice
President of Europe, located in Brussels, Belgium, President of the
International Division, Executive Vice President and Chief Operating Officer. He
also served on the Board of Directors of Baxter. He was named President of
Baxter in 1987, which position he held until joining the Company. Mr. Gantz is a
director of the Gillette Company, W.W. Grainger, Inc. and Bank of Montreal.
ALAN R. MEYER has been a Senior Vice President, Treasurer and Assistant
Secretary of the Company since July 1995, Chief Financial Officer and a Director
of the Company since December 1992 and was a Vice President of the Company from
December 1992 to July 1995. From 1991 to 1992, Mr. Meyer was Vice President and
Chief Financial Officer of Oculon Corporation ("Oculon"), a biopharmaceutical
company. Prior to Oculon, he was Chief Financial Officer of HealthTech Services
Corporation, a medical device company, and Memtec America Corporation
("Memtec"), an industrial separations company. Before joining Memtec, Mr. Meyer
was employed by Baxter Healthcare Corporation and Arthur Andersen & Co.
A. BRUCE MONTGOMERY, M.D. has been a Senior Vice President, Research and
Development of the Company since July 1995 and was Vice President of Medical and
Regulatory Affairs of the Company from December 1993 to July 1995. From 1989 to
November 1993, Dr. Montgomery was Associate Director of Clinical Research at
Genentech, Inc. where he was involved in the clinical development of Pulmozyme,
an inhaled drug for cystic fibrosis patients. From 1988 to 1989 he was Assistant
Professor of Medicine, Director of the Medical Intensive Care Unit, Pulmonary
Disease Section, Department of Medicine, State University of New York, Stony
Brook, New York. Previously Dr. Montgomery was Assistant Professor of
39
<PAGE>
Medicine in Residence, University of California, San Francisco and
Cardiovascular Research Institute, Chest Service, San Francisco General
Hospital. He is a co-inventor on two use patents related to aerosolized
pentamidine, a drug for an AIDS-related infection. Dr. Montgomery is the brother
of Michael J. Montgomery, a Director of the Company.
MARVIN B. TEPPER has been Secretary of the Company since September 1992. He
has been Executive Vice President and General Counsel of Sterling Equities, Inc.
("Sterling Equities") since 1989. Previously, Mr. Tepper was a partner in the
law firm of Botein Hays & Sklar, New York, New York.
ELIZABETH M. GREETHAM has been a Director of the Company since November
1996. She is currently Portfolio Manager of Life Science L.P. Funds and handles
analytical responsibilities for all health care investments for the
institutional, mutual and high individual net worth accounts at Weiss, Peck &
Greer Investments, where she has been employed since 1990. Ms. Greetham also
serves as a director of various pharmaceutical companies, including Medco
Research Inc., Access Pharmaceutical, Guilford Pharmaceutical, ChiRex and
SangStat Medical Corporation. Ms. Greetham has a M.A. in Economics from
Edinburgh University.
LAWRENCE C. HOFF has been a Director of the Company since April 1992. He was
President of The Upjohn Company ("Upjohn") from 1984 through 1990, Chief
Operating Officer from 1987 through 1990 and a director from 1973 until Upjohn's
merger in 1995. Mr. Hoff is also a director of Medimmune Inc., Curative Health
Systems and Alpha Beta Technologies, Inc. He is a past Chairman of the
Pharmaceutical Manufacturers Association.
EDWARD J. MATHIAS has been a Director of the Company since November 1994. He
has been a Managing Director of The Carlyle Group, a Washington, D.C. merchant
banking firm, since January 1994. Previously, Mr. Mathias was with T. Rowe Price
Associates, Inc. where he served on its board of directors and was a member of
its Management Committee for over ten years. In addition, he is a director of
U.S. Office Products Company and SIRROM Capital.
MICHAEL J. MONTGOMERY has been a Director of the Company since July 1995. He
has been President and Chief Operating Officer of SEGA GAMEWORKS LLC since
September 1996. He was a senior executive at DreamWorks SKG involved with
financial matters from January 1995 to September 1996. He was Executive Vice
President and Chief Financial Officer of Euro Disney SCA from April 1993 to
August 1994, Vice President of The Walt Disney Company from 1989 to 1993 and
Treasurer from 1991 to 1993. Previously, Mr. Montgomery was employed by Atlantic
Richfield Company. Mr. Montgomery is the brother of Dr. Montgomery, Senior Vice
President, Research and Development, of the Company.
TALAT M. OTHMAN has been a Director of the Company since September 1992. He
has been Chairman and Chief Executive Officer of Grove Financial, Inc. since
September 1995. He was President of Dearborn Financial, Inc. from 1984 to August
1995 and Chairman and Chief Executive Officer from 1993 to August 1995. He is
also director for the Middle East Policy Council in Washington, D.C. and a
member of the Dean's Advisory Council, the Kennedy School of Government at
Harvard University. He was a director of Harken Energy Corporation and Hartmarx
Corporation. He was founding President of the Mid-America Arab Chamber of
Commerce as well as of the Midwest Chapter of the Forex Association of North
America. From 1985 to 1987, he served as President of the Arab Bankers
Association of North America.
EUGENE L. STEP has been a Director of the Company since April 1992. He was
Executive Vice President of Eli Lilly and Company ("Eli Lilly") from 1986 to
1992 and President of its Pharmaceutical Division from 1973 to 1992. He was also
a director and a member of the Executive Committee of Eli Lilly. Mr. Step is a
past Chairman of the Pharmaceutical Manufacturers Association and past President
of the International Pharmaceutical Manufacturers Association. Mr. Step is
currently a director of Medco Research Inc., CellGenesys Inc., Scios-Nova Inc.
and Guidant Corp.
40
<PAGE>
FRED WILPON has been a Director of the Company since January 1992 and
Chairman of the Board of Directors since May 1995. He is Co-Founder of and has
been Chairman of the Board of Sterling Equities for over 20 years, and the
President and Chief Executive Officer of the New York Mets baseball team for
over 10 years. Mr. Wilpon's business interests include real estate as well as
other businesses. In addition, Mr. Wilpon is a director of Bear, Stearns & Co.
Inc.
The Board of Directors is divided into three classes of Directors, each of
whom serves for a three-year period following the year of his or her election.
Each class consists, as nearly as practicable, of one-third of the total number
of Directors serving on the Board of Directors. Officers are elected for
one-year terms by the Board of Directors. See "Management--Employment
Agreements."
BOARD COMMITTEES AND COMPENSATION
The Board of Directors has designated an Audit/Finance Committee that
reviews the scope and results of the audit and other services performed by the
Company's independent accountants. The Audit/ Finance Committee currently
consists of Messrs. Mathias, Step (Chairman), Wilpon and M. Montgomery. The
Board of Directors has also designated a Compensation Committee that establishes
objectives for the Company's senior executive officers, sets the compensation of
Directors, executive officers and other employees of the Company and is charged
with the administration of the 1992 Plan and the 1997 Plan. The Compensation
Committee currently consists of Messrs. Hoff, Othman (Chairman) and Wilpon. The
Board of Directors also has an Executive Committee which has the authority to
take all actions that the Board of Directors may take, subject to certain
restrictions imposed by law. The Executive Committee currently consists of
Messrs. Gantz (Chairman), Othman, Step and Wilpon. The Directors do not receive
cash compensation for service on the Board of Directors or on any of its
Committees, but Directors may be reimbursed for certain expenses in connection
with attendance at Board and Committee meetings. During 1996, the Company's
non-employee Directors were granted fully vested options to purchase an
aggregate of 42,000 shares of Common Stock at a weighted average exercise price
of $17.62 per share under the 1996 Plan. In January 1997, the Company's
non-employee Directors were granted fully vested options to purchase an
aggregate of 44,000 shares of Common Stock at an exercise price of $22.25 per
share under the 1992 Plan. See "Management--Stock Option Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the Company's fiscal year ended December 31, 1996, the Compensation
Committee of the Board of Directors consisted of Messrs. Hoff, Othman (Chairman)
and Wilpon. None of these individuals has ever served as an executive officer or
an employee of the Company. In addition, no executive officer of the Company has
ever served as (i) a member of the compensation committee or equivalent of
another entity, one of whose executive officers served on the Compensation
Committee, (ii) a director of another entity, one of whose executive officers
served on the Compensation Committee, or (iii) a member of the compensation
committee or equivalent of another entity, one of whose executive officers
served as a director of the Company.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid or earned for the fiscal
years ended December 31, 1996, December 31, 1995 and December 31, 1994 for those
persons who were, at December 31, 1996, (i) the chief executive officer and (ii)
the two other most highly compensated executive officers of the Company
(collectively, the "Named Executive Officers").
41
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION OTHER
--------------------------------- ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION
- ------------------------------------------------ --------- ---------- ---------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
Wilbur H. Gantz................................. 1996 $ 290,690 $ 116,276 -- --
Chief Executive Officer and President 1995 279,510 -- -- --
1994 279,510 -- -- --
A. Bruce Montgomery, M.D. ...................... 1996 194,070 67,865 -- --
Senior Vice President, Research and 1995 183,057 63,665 -- --
Development 1994 170,000 24,000 -- $ 58,318(2)
Alan R. Meyer................................... 1996 180,000 63,000 -- --
Senior Vice President and Chief Financial 1995 168,667 58,800 -- --
Officer 1994 160,417 24,000 -- --
</TABLE>
- ------------------------
(1) Excludes items which are, in the aggregate, less than $50,000 or 10% of the
total annual salary and bonus.
(2) Represents amounts paid to Dr. Montgomery for moving expenses.
The following table sets forth certain information concerning options
granted to the Named Executive Officers during the fiscal year ended December
31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
PERCENT
OF POTENTIAL
TOTAL REALIZABLE
OPTIONS VALUE AT ASSUMED
GRANTED ANNUAL RATES OF
NUMBER OF TO STOCK PRICE
SECURITIES EMPLOYEES EXERCISE APPRECIATION FOR
UNDERLYING IN OR OPTION TERM
OPTIONS FISCAL BASE PRICE EXPIRATION ------------------------
NAME GRANTED(1) YEAR ($/SHARE) DATE 5% 10%
- ------------------------------------------------ ----------- --------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Wilbur H. Gantz................................. 60,000 14% 16.25 1/24/06 $ 613,200 $ 1,553,900
A. Bruce Montgomery, M.D. ...................... 25,000 6% 16.25 1/24/06 255,500 647,500
Alan R. Meyer................................... 15,000 4% 16.25 1/24/06 153,300 388,500
</TABLE>
- ------------------------
(1) All options were granted at an exercise price equal to the fair market value
of the Common Stock on the date of grant.
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<PAGE>
AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED
DECEMBER 31, 1996 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning the number and
value of securities underlying exercisable and unexercisable stock options as of
the fiscal year ended December 31, 1996 by the Named Executive Officers. No
options were exercised by any of the Named Executive Officers during the fiscal
year ended December 31, 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------- ----------- ------------- ------------ -------------
Wilbur H. Gantz.......................................... 191,250 -- $ 1,734,695 $ --
A. Bruce Montgomery, M.D. ............................... 28,124 56,251 302,333 451,573
Alan R. Meyer............................................ 53,125 49,375 611,719 448,906
</TABLE>
- ------------------------
(1) These figures are based on a fair market value of the Common Stock at
December 31, 1996 of $21.75 per share, the closing price of the Common Stock
as reported on the Nasdaq National Market as of such date.
EMPLOYMENT AGREEMENTS
Wilbur H. Gantz entered into a five-year employment agreement with the
Company (the "Gantz Employment Agreement") which commenced in March 1992. Under
the terms of Mr. Gantz's employment agreement, Mr. Gantz is entitled to receive
an annual base salary and bonus (up to 60% of his annual base salary) as
determined by the Board of Directors. Mr. Gantz is also entitled to receive
benefits offered to the Company's employees generally. The Gantz Employment
Agreement provides that the employment of Mr. Gantz may be terminated by the
Company for "cause." "Cause" is defined as (i) willful and repeated failure by
Mr. Gantz to perform his duties under the Gantz Employment Agreement, which
failure is not remedied within 30 days after written notice from the Company;
(ii) conviction of Mr. Gantz for a felony; (iii) Mr. Gantz's dishonesty or
willfully engaging in conduct that is demonstrably and materially injurious to
the Company; or (iv) willful violation by Mr. Gantz of any provision of the
Gantz Employment Agreement which violation is not remedied within 30 days after
written notice from the Company. In addition, Mr. Gantz may terminate his
employment if (i) the Company substantially reduces his duties, position,
authority or responsibility under the Gantz Employment Agreement and does not
reinstate the same within 30 days or (ii) the Company breaches its obligations
with regard to Mr. Gantz's compensation, expenses and benefits. The agreement
also contains a provision prohibiting Mr. Gantz from competing with the Company
for a one-year period following termination of his employment.
In conjunction with the Gantz Employment Agreement, Mr. Gantz entered into a
Stock Subscription and Stock Repurchase Agreement (the "Stock Agreement")
pursuant to which he purchased 281,250 shares of Common Stock at $0.08 per
share.
A. Bruce Montgomery, M.D. has an employment agreement with the Company which
extends until May 1997. Under the terms of Dr. Montgomery's employment agreement
(the "Montgomery Employment Agreement"), Dr. Montgomery is entitled to receive
an annual base salary and bonus (up to 30% of his annual base salary) as
determined by the Board of Directors. Dr. Montgomery is also entitled to receive
benefits offered to the Company's employees generally. The Montgomery Employment
Agreement provides that the employment of Dr. Montgomery may be terminated by
the Company for "cause." "Cause" is defined as: (i) willful and repeated failure
by Dr. Montgomery to perform his duties under the
43
<PAGE>
Montgomery Employment Agreement, which failure is not remedied within 30 days
after written notice from the Company; (ii) conviction of Dr. Montgomery for a
felony; (iii) Dr. Montgomery's dishonesty or willfully engaging in conduct that
is demonstrably and materially injurious to the Company; or (iv) willful
violation by Dr. Montgomery of any provision of the Montgomery Employment
Agreement which violation is not remedied within 30 days after written notice
from the Company. The agreement also contains a provision prohibiting Dr.
Montgomery from competing with the Company for a one-year period following
termination of his employment.
STOCK OPTION PLANS
1992 STOCK OPTION PLAN
The 1992 Plan was approved by the Board of Directors and the stockholders in
February 1992.
The purpose of the 1992 Plan is to attract and retain key personnel. The
1992 Plan provides for the grant of options to acquire a maximum of 1,500,000
shares of the Common Stock. Of such shares, as of January 31, 1997, 1,265,650
shares were subject to outstanding options and 67,611 shares remained available
for grant. The weighted average exercise price at which options were issued
under the 1992 Plan is $13.07. The 1992 Plan permits the granting of qualified
incentive stock options ("ISOs") or nonqualified stock options ("NSOs"), at the
discretion of the administrator of the 1992 Plan (the "Plan Administrator"). The
Board of Directors has appointed the Compensation Committee of the Board, which
consists of Messrs. Hoff, Othman (Chairman) and Wilpon, as the Plan
Administrator. Subject to the terms of the 1992 Plan, the Plan Administrator
determines the terms and conditions of options granted under the 1992 Plan.
Options granted under the 1992 Plan are evidenced by written agreements which
contain such terms, conditions, limitations and restrictions as the Plan
Administrator deems advisable and which are not inconsistent with the 1992 Plan.
ISOs may be granted to individuals who, at the time of grant, are employees
of the Company or its affiliates. NSOs may be granted to Directors, employees,
consultants and other agents of the Company or its affiliates.
The 1992 Plan provides that the Plan Administrator must establish an
exercise price for ISOs that is not less than the fair market value per share of
the Common Stock at the date of grant and an exercise price for NSOs of not less
than 85% of such fair market value. Each ISO must expire within 10 years of the
date of grant. However, if ISOs are granted to persons owning more than 10% of
the voting stock of the Company, the 1992 Plan provides that the exercise price
may not be less than 110% of the fair market value per share at the date of
grant and that the term of such ISOs may not exceed five years. Unless otherwise
provided by the Plan Administrator, options granted under the 1992 Plan vest at
a rate of 25% per year over a four-year period.
An optionee whose relationship with the Company or any related corporation
ceases for any reason (other than termination for cause, death or total
disability, as such terms are defined in the 1992 Plan) may exercise options in
the three-month period following such cessation (unless such options terminate
or expire sooner by their terms), or in such longer period determined by the
Plan Administrator in the case of NSOs. Unexercised options granted under the
1992 Plan terminate upon a merger (other than a stock merger), reorganization or
liquidation of the Company; however, immediately prior to such a transaction,
optionees may exercise such options without regard to whether the vesting
requirements have been satisfied.
Options granted under the 1992 Plan convert into options to purchase shares
of another corporation involved in a stock merger with the Company, unless the
Company and such other corporation, in their sole discretion, determine that
such options terminate. Such converted options become fully vested without
regard to whether the vesting requirements in the option agreements for such
options have been satisfied, unless the Board of Directors determines otherwise.
44
<PAGE>
The option exercise price must be paid in full at the time the notice of
exercise of the option is delivered to the Company and must be tendered in cash,
by bank certified or cashier's check or by personal check. Options may also be
exercised in "cashless exercises" (delivery of such shares of stock of the
Company having a fair market value equal to the exercise price). Options are
nontransferable with certain exceptions. The Board of Directors has certain
rights to suspend, amend or terminate the 1992 Plan provided stockholder
approval is obtained.
1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The 1996 Plan was approved by the Board of Directors in January 1996 and was
approved by the stockholders in July 1996.
The purpose of the 1996 Plan is to promote the interests of the Company and
its stockholders by increasing the proprietary and vested interest of
non-employee Directors in the growth and performance of the Company.
The 1996 Plan provides for awards of nonqualified options to Directors
("Eligible Directors") of the Company who are not employees of the Company or
its affiliates and who have not, within one year immediately preceding the
determination of such Director's eligibility, received any award under any other
plan of the Company or its affiliates that entitles the participants therein to
acquire stock, stock options or stock appreciation rights of the Company or its
affiliates (other than options granted prior to the effective date of the
Company's initial public offering or options granted under any other plan under
which participants' entitlements are governed by provisions meeting the
requirements of Rule 16b-3(c)(2)(ii) promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")). The options are exercisable in
whole or in part at all times during the period beginning on the date of grant
until the earlier of (i) 10 years from the date of grant and (ii) one year from
the date on which an optionee ceases to be an Eligible Director. The exercise
price per share of Common Stock shall be 100% of the fair market value per share
on the date the option is granted.
Pursuant to the 1996 Plan, in January 1996, each non-employee Director was
awarded an Annual Grant (as defined below). In addition, upon first election or
appointment to the Board, each newly elected Eligible Director will be granted
an option to purchase 10,000 shares of Common Stock (the "Initial Grant").
Immediately following each Annual Meeting of the Stockholders commencing with
the meeting following the close of fiscal year 1996, (i) the Eligible Director
serving as Chairman of the Board will be granted an option to purchase 8,000
shares of Common Stock as of the date of such meeting, (ii) each Eligible
Director serving on the Executive Committee of the Board, will be granted an
option to purchase 6,000 shares of Common Stock; and (iii) each remaining
Eligible Director, will be granted an option to purchase 4,000 shares of Common
Stock (each grant under (i), (ii) and (iii), an "Annual Grant"). No Director may
be awarded more than one Initial Grant and no Director may be awarded both an
Initial Grant and an Annual Grant in any 12-month period.
The maximum number of shares of Common Stock in respect of which awards may
be granted under the 1996 Plan is 300,000. Of such shares, as of January 31,
1997, 42,000 shares are subject to outstanding options at a weighted average
exercise price of $17.62 per share, and 258,000 shares remained available for
grant. Shares of Common Stock subject to awards that are forfeited, terminated,
cancelled or settled without the delivery of Common Stock will again be
available for awards. Also, shares tendered to the Company in satisfaction or
partial satisfaction of the exercise price of any award will increase the number
of shares available for awards to the extent permitted by Rule 16b-3 under the
Exchange Act. The shares of Common Stock to be delivered under the 1996 Plan
will be made available from the authorized but unissued shares of Common Stock
or from treasury shares.
The 1996 Plan is administered by the Board of Directors. Subject to the
provisions of the 1996 Plan, the Board is authorized to interpret the 1996 Plan,
to establish, amend and rescind any rules and regulations relating to it and to
make all other determinations necessary or advisable for its administration;
45
<PAGE>
provided, however, that the Board has no discretion with respect to the
selection of Directors to receive options, the number of shares of Common Stock
subject to any such options, the purchase price thereunder or the timing of
grants of options. The determinations of the Board in the administration of the
1996 Plan, as described herein, shall be final and conclusive.
The exercise price of options may be satisfied in cash or, unless otherwise
determined by the Board, by exchanging shares of Common Stock owned by the
optionee, or by a combination of cash and shares of Common Stock. The ability to
pay the option exercise price in shares of Common Stock would enable an optionee
to engage in a series of successive stock-for-stock exercises of an option and
thereby fully exercise an option with little or no cash investment. However, the
Board's current policy is to require any shares tendered in satisfaction of the
option exercise price to have been owned by the exercising optionee for at least
six months.
The options granted under the 1996 Plan may not be assigned or transferred,
except by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order.
No award may be granted under the 1996 Plan after the day following the
tenth Annual Meeting of Stockholders at which Directors are elected succeeding
the annual meeting at which the 1996 Plan was approved by stockholders.
The Company's Board of Directors has decided not to grant any additional
options under the 1996 Plan.
1997 STOCK OPTION PLAN
The Board of Directors adopted the 1997 Plan in January 1997 and the
stockholders will be asked to approve the 1997 Plan at the 1997 Annual Meeting
of Stockholders.
The purpose of the 1997 Plan is to attract and retain key personnel. The
1997 Plan provides for the grant of options to acquire a maximum of 2,000,000
shares of the Common Stock. Of such shares, as of January 31, 1997, 378,800
shares were subject to outstanding options and 1,621,200 shares remained
available for grant. The weighted average exercise price at which options were
issued under the 1997 Plan is $22.94. The 1997 Plan permits the granting of
qualified ISOs or NSOs, at the discretion of the administrator of the 1997 Plan
(the "Plan Administrator"). The Board of Directors has appointed the
Compensation Committee of the Board, which consists of Messrs. Hoff, Othman
(Chairman) and Wilpon, as the Plan Administrator. Subject to the terms of the
1997 Plan, the Plan Administrator determines the terms and conditions of options
granted under the 1997 Plan. Options granted under the 1997 Plan are evidenced
by written agreements which contain such terms, conditions, limitations and
restrictions as the Plan Administrator deems advisable and which are not
inconsistent with the 1997 Plan.
ISOs may be granted to individuals who, at the time of grant, are employees
of the Company or its affiliates. NSOs may be granted to Directors, employees,
consultants and other agents of the Company or its affiliates.
The 1997 Plan provides that the Plan Administrator must establish an
exercise price for ISOs that is not less than the fair market value per share of
the Common Stock at the date of grant and an exercise price for NSOs of not less
than 85% of such fair market value. Each ISO must expire within 10 years of the
date of grant. However, if ISOs are granted to persons owning more than 10% of
the voting stock of the Company, the 1997 Plan provides that the exercise price
may not be less than 110% of the fair market value per share at the date of
grant and that the term of such ISOs may not exceed five years. Unless otherwise
provided by the Plan Administrator, options granted under the 1997 Plan vest at
a rate of 25% per year over a four-year period.
An optionee whose relationship with the Company or any related corporation
ceases for any reason (other than termination for cause, death or total
disability, as such terms are defined in the 1997 Plan) may
46
<PAGE>
exercise options in the three-month period following such cessation (unless such
options terminate or expire sooner by their terms), or in such longer period
determined by the Plan Administrator in the case of NSOs. Unexercised options
granted under the 1997 Plan terminate upon a merger (other than a stock merger),
reorganization or liquidation of the Company; however, immediately prior to such
a transaction, optionees may exercise such options without regard to whether the
vesting requirements have been satisfied.
Options granted under the 1997 Plan convert into options to purchase shares
of another corporation involved in a stock merger with the Company, unless the
Company and such other corporation, in their sole discretion, determine that
such options terminate. Such converted options become fully vested without
regard to whether the vesting requirements in the option agreements for such
options have been satisfied, unless the Board of Directors determines otherwise.
The option exercise price must be paid in full at the time the notice of
exercise of the option is delivered to the Company and must be tendered in cash,
by bank certified or cashier's check or by personal check. Options may also be
exercised in "cashless exercises" (delivery of such shares of stock of the
Company having a fair market value equal to the exercise price). Unless
otherwise provided by the Plan Administrator, options are nontransferable. The
Board of Directors has certain rights to suspend, amend or terminate the 1997
Plan provided stockholder approval is obtained.
Pursuant to the 1997 Plan, subject to stockholder approval, in January 1997,
options for an aggregate of 175,000 shares of Common Stock were granted at
exercise prices ranging from $22.25 per share to $25.00 per share to the
executive officers of the Company including the following: Mr. Gantz (75,000
shares), Dr. Montgomery (80,000 shares) and Mr. Meyer (20,000 shares). These
options vest over a four-year period.
401(K) PROFIT SHARING PLAN & TRUST
In November 1993, the Company adopted a 401(k) Profit Sharing Plan & Trust
(the "401(k) Plan"), a tax-qualified plan covering all of its employees who are
at least 18 years of age and have completed three months of service with the
Company. Each employee may elect to reduce his or her current compensation by up
to 20%, subject to the statutory limit (a maximum of $9,500 in 1996) and have
the amount of the reduction contributed to the 401(k) Plan. The 401(k) Plan
provides that the Company may, as determined from time to time by the Board of
Directors, provide a matching contribution. In addition, the Company may
contribute an additional amount to the 401(k) Plan, as determined by the Board
of Directors, which will be allocated based on the proportion of the employee's
compensation for the plan year to the aggregate compensation for the plan year
for all eligible employees.
All employee contributions to the 401(k) Plan are fully vested at all times.
Upon termination of employment, a participant may elect a lump sum distribution
or, if his or her total amount in the 401(k) Plan is greater than $3,500, may
elect to receive benefits as retirement income.
As of the fiscal year ended December 31, 1996, the Company had made no
contributions to the 401(k) Plan.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 14, 1997, as adjusted to reflect
the sale by the Company of the Common Stock offered hereby, by (i) each person
or group who is known by the Company to own beneficially more than five percent
of the Common Stock, (ii) each of the Company's Directors, (iii) each of the
Named Executive Officers and (iv) all current executive officers and Directors
as a group.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
NUMBER OF SHARES ------------------------------
BENEFICIALLY AFTER
NAME AND ADDRESS OWNED(1) BEFORE OFFERING OFFERING
- ------------------------------------------------------------ -------------------- --------------- -------------
<S> <C> <C> <C>
The Capital Group Companies, Inc.(2)........................ 870,000 6.2% 5.5%
333 South Hope Street
Los Angeles, California 90071
Scudder Stevens & Clark, Inc.(3)............................ 787,900 5.7% 4.9%
345 Park Avenue
New York, New York 10154
T. Rowe Price Associates, Inc.(4)........................... 714,000 5.1% 4.5%
100 E. Pratt Street
Baltimore, Maryland 21202
Fred Wilpon(5).............................................. 703,500 5.0% 4.4%
c/o Sterling PathoGenesis Company
575 Fifth Avenue
New York, New York 10017
Wilbur H. Gantz(6).......................................... 544,525 3.9% 3.4%
c/o PathoGenesis Corporation
201 Elliott Avenue West
Seattle, Washington 98119
Elizabeth M. Greetham (7)................................... 256,000 1.8% 1.6%
c/o Weiss, Peck & Greer, LLC
1 New York Plaza
New York, New York 10004
Lawrence C. Hoff(8)......................................... 19,250 * *
12821 Marsh Landing
Palm Beach Gardens, Florida 33418
Edward J. Mathias(9)........................................ 14,250 * *
c/o The Carlyle Group
1001 Pennsylvania Avenue N.W.
Washington, D.C. 20004
Alan R. Meyer(10)........................................... 76,500 * *
c/o PathoGenesis Corporation
201 Elliott Avenue West
Seattle, Washington 98119
A. Bruce Montgomery, M.D.(11)............................... 45,024 * *
c/o PathoGenesis Corporation
201 Elliott Avenue West
Seattle, Washington 98119
Michael J. Montgomery(12)................................... 20,500 * *
c/o SEGA GAMEWORKS LLC
10 Universal City Plaza
Building 509
Universal City, California 91608
Talat Othman(13)............................................ 24,500 * *
c/o Grove Financial, Inc.
750 Lake Cook Road
Buffalo Grove, Illinois 60089
Eugene L. Step(14).......................................... 29,500 * *
741 Round Hill Road
Indianapolis, Indiana 46260
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
NUMBER OF SHARES ------------------------------
BENEFICIALLY AFTER
NAME AND ADDRESS OWNED(1) BEFORE OFFERING OFFERING
- ------------------------------------------------------------ -------------------- --------------- -------------
<S> <C> <C> <C>
Marvin B. Tepper(15)........................................ 697,250 5.0% 4.4%
c/o Sterling PathoGenesis Company
575 Fifth Avenue
New York, New York 10017
All Directors and Executive Officers as a group of 11
persons(5)(6)(7)(8)(9)(10)(11)
(12)(13)(14)(15).......................................... 1,762,049 12.2% 10.7%
</TABLE>
- ------------------------
* Less than 1.0%
(1) Unless otherwise indicated, the persons named in the table above have sole
voting and investment power with respect to all Common Stock beneficially
owned by them, subject to applicable community property laws.
(2) Based on Form 13-G filed on February 12, 1997.
(3) Based on Form 13-G filed on February 10, 1997.
(4) Based on Form 13-G filed on February 14, 1997.
(5) Represents: (i) 668,750 shares of Common Stock held by Sterling PathoGenesis
Company, of which Mr. Wilpon is managing partner and (ii) options to
purchase 34,750 shares of Common Stock.
(6) Includes: (i) 112,500 shares of Common Stock held by The Wilbur H. Gantz
1992 Irrevocable Children's Trust; (ii) 18,750 shares of Common Stock held
by The Wilbur H. Gantz 1992 Irrevocable GST Trust; (iii) 3,750 shares of
Common Stock held by The Wilbur H. Gantz Children's Graduate School Trust;
and (iv) options to purchase 191,250 shares of Common Stock. Mr. Gantz is
the trustee of the foregoing trusts and disclaims beneficial ownership of
the Common Stock held thereby. Includes 1,875 shares of Common Stock held by
Mr. Gantz's wife and 26,400 shares of Common Stock held by the Linda T.
Gantz Revocable Trust. Does not include 15,000 shares of Common Stock held
by certain relatives of Mr. Gantz. Mr. Gantz disclaims beneficial ownership
of the Common Stock held by his wife and relatives.
(7) Includes: (i) options to purchase 14,000 shares of Common Stock and (ii)
242,000 shares of Common Stock held by Weiss, Peck & Greer Investments. Ms.
Greetham handles all healthcare investments for the institutional, mutual
and high individual net worth accounts at Weiss, Peck & Greer Investments,
and may be deemed to have share voting and investment power in such shares
arising from her interest in the entity above. Ms. Greetham disclaims
beneficial ownership of such shares, except to the extent of her interest in
the entity referred to above.
(8) Represents: (i) 5,000 shares of Common Stock held by the Lawrence C. Hoff
Trust and (ii) options to purchase 14,250 shares of Common Stock.
(9) Includes options to purchase 14,250 shares of Common Stock. Does not include
176,042 shares of Common Stock and warrants to purchase 30,483 shares of
Common Stock held by The Carlyle Group. Mr. Mathias is a managing director
of The Carlyle Group. Mr. Mathias does not have or share voting or
investment power for the shares held by The Carlyle Group.
(10) Includes options to purchase 72,500 shares of Common Stock.
(11) Includes options to purchase 34,374 shares of Common Stock. Does not
include shares beneficially owned by Michael J. Montgomery.
(12) Includes options to purchase 14,250 shares of Common Stock. Does not
include shares beneficially owned by A. Bruce Montgomery.
(13) Includes options to purchase 24,500 shares of Common Stock.
(14) Includes options to purchase 24,500 shares of Common Stock.
(15) Represents: (i) 668,750 shares of Common Stock held by Sterling
PathoGenesis Company, of which Mr. Tepper is a partner and (ii) options to
purchase 28,500 shares of Common Stock.
49
<PAGE>
CERTAIN TRANSACTIONS
The Company rents office space in New York, New York from an affiliate of
Sterling PathoGenesis Company ("Sterling"), a founding stockholder of the
Company, pursuant to an oral lease, at an annual rental of $36,200. The Company
believes such annual rate to be comparable to a rate which could be obtained
from an independent third party. Messrs. Fred Wilpon and Marvin B. Tepper are
two of the partners of Sterling.
On June 6, 1995, the Company entered into a new employment agreement with
Dr. Robert Nowinski, former Chairman of the Board of the Company, which will
terminate on April 30, 1998. Pursuant to such agreement, Dr. Nowinski is
employed as the Chairman Emeritus of the Company and is obligated to provide the
Company with advice, assistance and consultation with regard to its scientific
programs and strategies, as well as its financing activities. Dr. Nowinski
receives annual compensation of $280,000. He is also entitled to the same
health, medical and dental insurance benefits that are generally made available
to all employees of the Company. The Company is obligated to provide Dr.
Nowinski with the full compensation and benefits which he otherwise would be
entitled to receive under his employment agreement regardless of whether or not
his services are utilized thereunder and regardless of whether or not his
employment is terminated prior to the expiration of such agreement, and
irrespective of the reason for any such termination. In addition, Dr. Nowinski
has the right to accelerate the payments due in the third year of his agreement
to April 30, 1997, with such payment amount discounted based on the present
value thereof. Dr. Nowinski has previously purchased 281,250 shares of Common
Stock at a price of $0.08 per share.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 20,000,000 shares of Common Stock, par
value $.001 per share, and 1,000,000 shares of Preferred Stock, $.01 par value
per share. An amendment to the Company's Amended and Restated Certificate of
Incorporation was approved by the Company's Board of Directors in January 1997.
The amendment would increase the authorized number of shares of Common Stock to
60,000,000 shares. The stockholders will be asked to approve such amendment at
the 1997 Annual Meeting of Stockholders. At January 31, 1997, there were
13,932,322 shares of Common Stock outstanding held by approximately 370
stockholders of record and no shares of Preferred Stock were outstanding;
however, the Company believes the actual number of beneficial holders of Common
Stock is substantially greater.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Subject to any preferential dividend rights granted to holders of
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and any preferential payment to
holders of Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. All the outstanding shares of
Common Stock are, and the Common Stock to be issued in this offering will be,
validly issued, fully paid and nonassessable.
At January 31, 1997, the Company had outstanding warrants to purchase 28,325
shares of Common Stock at an exercise price of $12.00 per share and 83,335
shares of Common Stock at an exercise price of $14.40 per share. The warrants
expire between 1998 and 2001. The warrants do not contain anti-dilution
provisions relating to issuances or sales of Common Stock at prices below the
exercise price or the then prevailing market price of the Common Stock. The
warrants may be exercised in whole or in part, and may be exercised in
"cashless" exercises. The warrants were issued to certain registered
representatives and
50
<PAGE>
broker-dealers, and certain consultants in connection with the 1992 Private
Placement, the 1994 Private Placement and certain consulting activities.
PREFERRED STOCK
The Company has an authorized class of undesignated Preferred Stock
consisting of 1,000,000 shares, $.01 par value per share. The Board of Directors
will be authorized, subject to any limitations prescribed by law, without
further stockholder approval, to issue from time to time up to 1,000,000 shares
of Preferred Stock, in one or more series. Each such series of Preferred Stock
shall have such number of shares, designations, preferences, voting powers,
qualifications and special or relative rights or privileges as shall be
determined by the Board of Directors, which may include, among others, dividend
rights, voting rights, redemption and sinking fund provisions, liquidation
preferences, conversion rights and preemptive rights.
The stockholders of the Company have granted the Board of Directors
authority to issue the Preferred Stock and to determine its rights and
preferences in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company. The Company
has no present plans to issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held 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 (i) before such person
became an interested stockholder, the board of directors of the corporation
approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person becomes an interested stockholder, the business
consummation is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of 66 2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, 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 voting stock.
The Company's By-Laws, as amended (the "By-Laws") provide for the division
of the Board of Directors into three classes as nearly equal in size as possible
with staggered three-year terms. See "Management." Under the By-Laws, any
vacancy of the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board, may only be filled by voting of a
majority of the Directors then in office. The classification of the Board of
Directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The By-Laws provide that special meetings of the stockholders may only be
called by the Chairman of the Board of Directors, if any, the Chief Executive
Officer, the Secretary of the Company or a majority of
51
<PAGE>
the Board of Directors or by stockholders who own in the aggregate 66 2/3% of
the outstanding stock of all classes entitled to vote at such meeting. The
foregoing provisions could have the effect of delaying until the next
stockholders' meeting stockholder actions which are favored by the holders of a
majority of the outstanding voting securities of the Company.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's Certificate of Incorporation or By-Laws,
unless a corporation's Certificate of Incorporation or By-Laws, as the case may
be, requires a greater percentage. The Amended and Restated Certificate of
Incorporation and By-Laws require the affirmative vote of the holders of at
least 66 2/3% of the shares of capital stock of the Company issued and
outstanding and entitled to vote to amend or repeal any of the provisions
described in the prior two paragraphs.
The Amended and Restated Certificate of Incorporation contains certain
provisions permitted under the General Corporation Law of Delaware relating to
the liability of directors. The provisions eliminate a Director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. Further, the Amended and Restated Certificate of Incorporation contains
provisions to indemnify the Company's Directors and officers to the fullest
extent permitted by the General Corporation Law of Delaware. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
Harris Trust and Savings Bank serves as transfer agent and registrar for the
shares of Common Stock.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have a total of
15,932,322 shares of Common Stock outstanding (16,232,322 shares if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
2,000,000 shares of Common Stock offered hereby (2,300,000 shares if the
Underwriters' over-allotment option is exercised in full), the 3,000,000 shares
of Common Stock sold in the Company's initial public offering in November 1995
and the 2,875,000 shares of Common Stock sold in the Company's public offering
in April 1996 will be freely tradeable without restriction or registration under
the Securities Act by persons other than "affiliates" of the Company, as defined
under the Securities Act. Of the remaining 8,057,322 shares of Common Stock
outstanding, 3,613,915 are "restricted securities" as that term is defined by
Rule 144 as promulgated under the Securities Act.
Under Rule 144 (and subject to the conditions thereof), approximately
3,557,253 shares of the restricted securities are currently eligible for sale
and approximately 56,662 shares will become eligible for sale after March 1997.
The Company has obtained from all of the executive officers and directors of the
Company holding in the aggregate 1,052,925 shares of the restricted securities
agreements not to directly or indirectly, sell, offer to sell or otherwise
dispose of any such Common Stock or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock for a period of 90
days from the date of this Prospectus without the prior written consent of
Montgomery Securities. However, such agreements permit up to approximately
670,000 shares to continue to be subject to pledge during such 90-day period.
The pledge of such pledged shares shall not be subject to the agreements
described in this paragraph. See "Underwriting."
As of January 31, 1997, options to purchase a total of 1,265,650 shares of
Common Stock pursuant to the 1992 Plan were outstanding with a weighted average
exercise price of $13.07 per share, of which options to purchase 749,959 shares
of Common Stock were exercisable. Options to purchase 42,000 shares of Common
Stock pursuant to the 1996 Plan were outstanding with a weighted average
exercise price at $17.62 per share, all of which options were exercisable. In
addition, subject to stockholder approval, options to purchase a total of
378,800 shares of Common Stock pursuant to the 1997 Plan were outstanding with a
weighted average exercise price of $22.94 as of January 31, 1997. An additional
1,946,811 shares of Common Stock were available for future option grants under
the Company's stock option plans. An aggregate of 467,124 shares subject to
options held by executive officers and directors of the Company are expected to
be subject to lockup agreements. The Company has also granted warrants to
purchase Common Stock. As of January 31, 1997, warrants to purchase 111,660
shares of Common Stock were outstanding with a weighted average exercise price
of $13.79 per share. The Company has an effective registration statement on Form
S-8 under the Securities Act registering shares of Common Stock subject to stock
options granted under the 1992 Plan and the 1996 Plan. The Company intends to
register shares of Common Stock issuable pursuant to stock options granted under
the 1997 Plan. See "Management--Stock Option Plans" and "Underwriting."
Sales of substantial amounts of such shares in the public market, or the
perception that such sales could occur, could adversely affect the trading price
of the Common Stock and could impair the Company's future ability to raise
capital through an offering of its equity securities. See "Description of
Capital Stock."
53
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), represented by Montgomery
Securities, Prudential Securities Incorporated and Hambrecht & Quist LLC, have
severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement (the "Underwriting Agreement") among the Company and the
Underwriters, to purchase from the Company the number of shares of Common Stock
indicated below opposite their respective names at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriters to
pay for and accept delivery of the shares of Common Stock are subject to certain
conditions precedent, and that the Underwriters are committed to purchase all of
the shares if they purchase any of the shares.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Montgomery Securities............................................................
Prudential Securities Incorporated...............................................
Hambrecht & Quist LLC............................................................
Total........................................................................ 2,000,000
----------
----------
</TABLE>
The Company has been advised by the Underwriters that they propose initially
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per share
to certain other dealers. After the public offering, the offering price and
other selling terms may be changed by the Underwriters. The Common Stock is
offered subject to receipt and acceptance by the Underwriters, and to certain
other conditions, including the right to reject orders in whole or in part.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to a maximum of
300,000 additional shares of Common Stock at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
be committed, subject to certain conditions, to purchase such additional shares
in approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
The Company has obtained from all of the executive officers and directors of
the Company, holding in the aggregate 1,052,925 shares of Common Stock and
options to purchase 467,124 shares of Common Stock, agreements not to directly
or indirectly offer, sell or otherwise dispose of any of such Common Stock or
any securities convertible into or exchangeable therefor for a period of 90 days
after the date of this Prospectus without the prior written consent of
Montgomery Securities. However, such agreements permit up to approximately
670,000 shares to continue to be subject to pledge during such 90-day period.
The pledgee of such pledged shares shall not be subject to the agreements
described in this paragraph. The Company has agreed that, for a period of 90
days after the date of this Prospectus, it will not, without the prior written
consent of Montgomery Securities, issue, offer for sale, sell, transfer, grant
options to purchase or otherwise dispose of any shares of its Common Stock or
securities convertible into or
54
<PAGE>
exchangeable for its Common Stock or other equity security, except pursuant to
the Company's stock option plans.
In connection with this offering, certain Underwriters and selling group
members may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market immediately prior to the commencement of sales in
this offering, in accordance with Rule 103 under Regulation M. Passive market
making consists of displaying bids on the Nasdaq National Market limited by the
bid prices of independent market makers for a security and making purchases of a
security which are limited by such prices and effected in response to order
flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified prior period and must be discontinued
when such limit is reached. Passive market making may stabilize the market price
of the Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York.
Howard M. Squadron, a partner in such firm, owns 3,125 shares of Common Stock.
Certain legal matters will be passed upon for the Underwriters by Sonnenschein
Nath & Rosenthal, New York, New York.
EXPERTS
The financial statements of PathoGenesis Corporation as of December 31, 1996
and 1995 and for the period December 10, 1991 (incorporation) through December
31, 1996, and for each of the years in the three-year period ended December 31,
1996, have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act with respect to the
Common Stock offered hereby via the Electronic Data Gathering Analysis and
Retrieval system ("EDGAR") and may be found on the Commission's Web site at
http://www.sec.gov. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part thereof. Statements contained in this Prospectus as to
the contents of any contract or any other document referred to are not
necessarily complete, and, in each instance, if such contract or document is
filed as an exhibit to the Registration Statement, each such statement is
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office at 450 Fifth Street, N. W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from such office after payment of fees prescribed by the Commission.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files periodic reports, proxy statements, and
other information with the Commission. Such reports, proxy statements, and other
information can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at 7 World Trade Center, Suite 1300, New York, New York 10048; and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Electronic filings made via
EDGAR are publicly available through the Commission's Web site referenced above.
In addition, copies of such reports, proxy statements, and other information
concerning the Company may also be inspected and copied at the library of the
Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006, upon which
the Common Stock of the Company is included.
55
<PAGE>
PATHOGENESIS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE NO.
- -------------------------------------------------------------------------------------------------------- -------------
<S> <C>
Independent Auditors' Report............................................................................ F-2
Balance Sheets as of December 31, 1996 and 1995......................................................... F-3
Statements of Operations for the years ended December 31, 1996, 1995, 1994 and the period from December
10, 1991 (incorporation) through December 31, 1996.................................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 and the period
from December 10, 1991 (incorporation) through December 31, 1996...................................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and the period from
December 10, 1991 (incorporation) through December 31, 1996........................................... F-6
Notes to Financial Statements........................................................................... F-7
</TABLE>
All financial statement schedules have been omitted since the information is
not required or because the information required is included in the financial
statements or the notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
PathoGenesis Corporation:
We have audited the accompanying balance sheets of PathoGenesis Corporation
(a development stage enterprise) as of December 31, 1996 and 1995, and the
related statements of operations, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996 and for the period
from December 10, 1991 (incorporation) through December 31, 1996. 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 generally accepted auditing
standards. 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 PathoGenesis Corporation (a
development stage enterprise) as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1996 and for the period from December 10, 1991
(incorporation) through December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Seattle, Washington
January 17, 1997, except as to note 8 to the financial statements,
which is as of January 30, 1997
F-2
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 14,785,818 575,297
Investment securities......................................................... 45,901,978 36,871,537
Interest receivable........................................................... 298,437 765,216
Other current assets.......................................................... 823,092 671,711
-------------- -------------
Total current assets...................................................... 61,809,325 38,883,761
-------------- -------------
Restricted investment............................................................. 675,000 --
Property and equipment, at cost:
Leasehold improvements........................................................ 6,766,935 6,435,336
Furniture and equipment....................................................... 5,967,110 5,338,435
-------------- -------------
12,734,045 11,773,771
Less accumulated depreciation and amortization................................ 5,320,039 3,702,152
-------------- -------------
Net property and equipment................................................ 7,414,006 8,071,619
-------------- -------------
Other assets, net................................................................. 100,370 7,758
-------------- -------------
$ 69,998,701 46,963,138
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 812,259 1,635,711
Compensation and benefits..................................................... 774,258 859,462
Clinical development costs.................................................... 818,629 876,132
Other accrued expenses........................................................ 569,068 81,473
-------------- -------------
Total current liabilities................................................. 2,974,214 3,452,778
-------------- -------------
Long-term liability............................................................... 98,273 461,986
Commitments and subsequent events
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 1,000,000 shares; none issued and
outstanding................................................................. -- --
Common stock, $.001 par value. Authorized 20,000,000 shares; 13,930,760 shares
and 10,897,715 shares issued and outstanding at December 31, 1996 and 1995,
respectively................................................................ 13,931 10,898
Additional paid-in capital.................................................... 134,727,920 89,520,221
Unrealized gain (loss) on investment securities............................... (30,204) 38,458
Deficit accumulated during the development stage.............................. (67,785,433) (46,521,203)
-------------- -------------
Total stockholders' equity................................................ 66,926,214 43,048,374
-------------- -------------
$ 69,998,701 46,963,138
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 10,
1991
(INCORPORATION)
YEARS ENDED DECEMBER 31, THROUGH
-------------------------------------------- DECEMBER 31,
1996 1995 1994 1996
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue--grants and royalties...................... $ 439,880 -- -- 439,880
-------------- ------------- ------------- --------------
Operating expenses:
Research and development....................... 20,673,049 15,668,417 12,788,881 58,101,538
General and administrative..................... 4,241,339 3,609,075 3,214,830 17,377,525
-------------- ------------- ------------- --------------
Total operating expenses..................... 24,914,388 19,277,492 16,003,711 75,479,063
-------------- ------------- ------------- --------------
Operating loss............................... (24,474,508) (19,277,492) (16,003,711) (75,039,183)
-------------- ------------- ------------- --------------
Other income (expense):
Investment income, net......................... 3,293,782 1,287,457 1,284,399 7,475,047
Other expense.................................. (83,504) (33,888) (42,805) (221,297)
-------------- ------------- ------------- --------------
Net other income............................. 3,210,278 1,253,569 1,241,594 7,253,750
-------------- ------------- ------------- --------------
Net loss..................................... $ (21,264,230) (18,023,923) (14,762,117) (67,785,433)
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Net loss per common share.......................... $ (1.66) (2.20) (1.95)
-------------- ------------- -------------
-------------- ------------- -------------
Weighted average common shares outstanding......... 12,829,386 8,209,643 7,585,390
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF GAIN (LOSS)
COMMON PRICE ADDITIONAL ON
SHARES PER COMMON PAID-IN INVESTMENT
DATE DESCRIPTION OUTSTANDING SHARE STOCK CAPITAL SECURITIES
- ----------------------- ----------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
February to March 1992 Shares issued for cash............. 1,870,000 $ .08 1,870 147,730 --
June to December 1992 Shares issued for cash, net of
issue costs of $744,966.......... 4,308,500 10.00 4,309 42,335,725 --
November 1992 Repurchase of common stock through
forgiveness of note receivable... (25,000) 10.00 (25) (249,975) --
November 1992 Repurchase of common stock for
cash............................. (46,875) .08 (47) (3,703) --
Net loss for the period ended
December 31, 1992................ -- -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 1992...... 6,106,625 6,107 42,229,777 --
October 1993 Shares issued in payment of license
fees............................. 50,000 10.00 50 499,950 --
Net loss for the year ended
December 31, 1993................ -- -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 1993...... 6,156,625 6,157 42,729,727 --
March 1994 Shares issued for cash, net of
issue costs of $1,251,739........ 1,690,677 12.00 1,690 19,093,694 --
Unrealized loss on investment
securities....................... -- -- -- -- (172,809)
Net loss for the year ended
December 31, 1994................ -- -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 1994...... 7,847,302 7,847 61,823,421 (172,809)
March 1995 Shares issued in payment of license
fees............................. 50,000 12.00 50 599,950 --
April to August 1995 Exercise of stock options for
cash............................. 413 10.00 1 4,124 --
November 22, 1995 Shares issued for cash, net of
issue costs of $2,904,274........ 3,000,000 10.00 3,000 27,092,726 --
Unrealized gain on investment
securities....................... -- -- -- -- 211,267
Net loss for the year ended
December 31, 1995................ -- -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 1995...... 10,897,715 10,898 89,520,221 38,458
Redemption of fractional shares for
cash............................. (48) 12.00 -- (576) --
February 1996 Shares issued in payment of license
fees............................. 6,250 10.00 6 62,494 --
February 1996 Repurchase of common stock for
cash............................. (45,000) .08 (45) (3,555) --
May 1996 Shares issued for cash, net of
issue costs of $3,213,410........ 2,875,000 16.25 2,875 43,502,465 --
Exercise of options and warrants
for cash and cancellation of
warrants......................... 196,843 10.00-14.40 197 1,646,871 --
Unrealized loss on investment
securities....................... -- -- -- -- (68,662)
Net loss for the year ended
December 31, 1996................ -- -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 1996...... 13,930,760 $ 13,931 134,727,920 (30,204)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT STOCKHOLDERS'
DATE STAGE EQUITY
- ----------------------- ----------- -----------
<S> <C> <C>
February to March 1992 -- 149,600
June to December 1992
-- 42,340,034
November 1992
-- (250,000)
November 1992
-- (3,750)
(2,930,285) (2,930,285)
----------- -----------
(2,930,285) 39,305,599
October 1993
-- 500,000
(10,804,878) (10,804,878)
----------- -----------
(13,735,163) 29,000,721
March 1994
-- 19,095,384
-- (172,809)
(14,762,117) (14,762,117)
----------- -----------
(28,497,280) 33,161,179
March 1995
-- 600,000
April to August 1995
-- 4,125
November 22, 1995
-- 27,095,726
-- 211,267
(18,023,923) (18,023,923)
----------- -----------
(46,521,203) 43,048,374
-- (576)
February 1996
-- 62,500
February 1996
-- (3,600)
May 1996
-- 43,505,340
-- 1,647,068
-- (68,662)
(21,264,230) (21,264,230)
----------- -----------
(67,785,433) 66,926,214
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 10,
1991
(INCORPORATION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------------------------ DECEMBER 31,
1996 1995 1994 1996
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (21,264,230) (18,023,923) (14,762,117) (67,785,433)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................. 1,618,982 1,557,195 1,436,570 5,435,563
Amortization of investment premiums
(discounts)................................. (33,083) 110,855 190,181 339,267
Common stock issued in payment of license
fees........................................ 62,500 600,000 59,000 1,159,000
Loss on sale of property and equipment........ 315 62,859 -- 63,174
Changes in certain assets and liabilities:
Interest receivable......................... 466,779 (485,430) (120,647) (298,437)
Other current assets........................ (151,381) (251,102) (139,057) (823,092)
Other assets................................ (92,612) 40,926 195,373 (100,370)
Accounts payable............................ (823,452) 1,209,078 328,141 812,259
Compensation and benefits................... (85,204) 160,682 121,378 834,258
Clinical development costs.................. (57,503) (737,618) 1,613,750 818,629
Other accrued expenses...................... 487,595 (44,519) (69,666) 569,068
Long-term liability......................... (363,713) 461,986 -- 98,273
-------------- ------------ ------------ --------------
Net cash used in operating activities..... (20,235,007) (15,339,011) (11,147,094) (58,877,841)
-------------- ------------ ------------ --------------
Cash flows from investing activities:
Purchases of investment securities................ (116,498,821) (72,862,897) (30,753,408) (251,004,472)
Sales of investment securities.................... 106,757,801 59,211,912 20,393,561 204,058,023
Purchases of property and equipment............... (961,784) (448,350) (1,953,362) (13,012,843)
Proceeds from sale of property and equipment...... 100 40,000 -- 40,100
Issuance of note receivable....................... -- -- -- (250,000)
-------------- ------------ ------------ --------------
Net cash used in investing activities..... (10,702,704) (14,059,335) (12,313,209) (60,169,192)
-------------- ------------ ------------ --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock........ 43,505,340 27,095,726 19,036,384 132,185,834
Repurchase of common stock........................ (4,176) -- -- (4,176)
Stock option and warrant exercises................ 1,647,068 4,125 -- 1,651,193
-------------- ------------ ------------ --------------
Net cash provided by financing
activities.............................. 45,148,232 27,099,851 19,036,384 133,832,851
-------------- ------------ ------------ --------------
Net increase (decrease) in cash and cash
equivalents............................. 14,210,521 (2,298,495) (4,423,919) 14,785,818
Cash and cash equivalents at beginning of period.... 575,297 2,873,792 7,297,711 --
-------------- ------------ ------------ --------------
Cash and cash equivalents at end of period.......... $ 14,785,818 575,297 2,873,792 14,785,818
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
Supplemental disclosure of noncash investing and
financing activities - repurchase of common stock
through forgiveness of note receivable............ $ -- -- -- 250,000
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF DEVELOPMENT STAGE ACTIVITIES
PathoGenesis Corporation (the Company) is a development stage, health care
company focused on developing drugs for the treatment of serious infectious
diseases where there is a significant need for improved therapy. The Company was
incorporated on December 10, 1991. Principal activities to date include
conducting human clinical trials, defining and conducting research programs,
entering into collaborative licensing agreements, raising capital, recruiting
scientific and management personnel, and construction of a research facility.
(B) DEPRECIATION AND AMORTIZATION
Furniture and equipment are depreciated using the straight-line method over
the assets' estimated useful lives of five to ten years. Leasehold improvements
are amortized using the straight-line method over the shorter of the assets'
estimated useful lives or the remaining term of the lease.
(C) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
(D) INCOME TAXES
Deferred income taxes are provided based on the estimated future tax effects
of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
that are expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(E) INVESTMENT SECURITIES
The Company's investment securities are classified as available-for-sale and
carried at market value, with unrealized gains and losses excluded from the
statement of operations and reported as a separate component of stockholders
equity. Realized gains and losses on the sales of investment securities are
determined on the specific identification method and included in investment
income, net.
(F) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments other than investments consisting of
cash, accounts payable and a long-term liability. The Company has determined the
fair value of the above financial instruments
F-7
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
using available market information and appropriate valuation methodologies. The
fair value of the Company's financial instruments approximates their carrying
amount.
(G) CASH EQUIVALENTS
All investments with a maturity of three months or less at the date of
purchase are considered to be cash equivalents.
(H) NET LOSS PER SHARE
Net loss per common share is computed using the weighted average number of
common shares outstanding during the periods using the treasury stock method.
Net loss per common share does not include the effect of common share
equivalents, which include stock options and warrants, as their impact is
antidilutive.
(I) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) INVESTMENT SECURITIES
The following summarizes the Company's investment securities:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
1996:
U.S. Treasury notes....................................... $ 10,641,041 3,823 (11,272) 10,633,592
Federal mortgage notes.................................... 6,719,925 7,430 (4,276) 6,723,079
Corporate obligations..................................... 28,571,216 48,441 (74,350) 28,545,307
-------------- ----------- ----------- ------------
$ 45,932,182 59,694 (89,898) 45,901,978
-------------- ----------- ----------- ------------
-------------- ----------- ----------- ------------
1995:
U.S. Treasury notes....................................... $ 19,609,492 44,743 -- 19,654,235
Federal mortgage notes.................................... 2,261,791 4,189 -- 2,265,980
Corporate obligations..................................... 13,547,425 25,322 -- 13,572,747
Foreign obligations....................................... 1,414,371 -- (35,796) 1,378,575
-------------- ----------- ----------- ------------
$ 36,833,079 74,254 (35,796) 36,871,537
-------------- ----------- ----------- ------------
-------------- ----------- ----------- ------------
</TABLE>
Amortized cost and market value of investment securities at December 31,
1996, by contractual maturity are shown below. Actual maturities may be
different than the contractual maturities because
F-8
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Contractual maturities are as follows:
<TABLE>
<CAPTION>
AMORTIZED
MATURITIES COST MARKET VALUE
- ----------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Due in one year or less.......................................... $ 15,290,665 15,278,842
Due between one year through five years.......................... 17,396,480 17,369,280
Due between five years through ten years......................... 9,560,809 9,572,170
Due after ten years.............................................. 3,684,228 3,681,686
------------- ------------
$ 45,932,182 45,901,978
------------- ------------
------------- ------------
</TABLE>
Investment income, net includes interest of $3,412,097, $1,308,127 and
$1,766,953 earned on investments and losses of $118,315, $20,669 and $325,902
realized upon the sale of investments for 1996, 1995 and 1994, respectively.
The Company does not invest in derivative financial instruments, as defined
by SFAS 119, DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF
FINANCIAL INSTRUMENTS.
(3) LONG-TERM LIABILITY
In the second quarter of 1995, the Board of Directors reached an agreement
with the Company's former chairman of the board which obligated the Company to
pay $944,958 over three years which is included in 1995 general and
administrative expenses. The portion of this obligation payable within the next
year is included in current liabilities under compensation and benefits.
(4) STOCKHOLDERS' EQUITY
(A) COMMON AND PREFERRED STOCK
Effective October 17, 1995, the Company's stockholders approved a
one-for-eight reverse split of the Company's issued and outstanding common
stock, a change to the authorized number of shares of the Company's $.001 par
value common stock to 20,000,000 shares, and an authorization of 1,000,000
shares of preferred stock, par value $.01. The accompanying financial statements
and related notes to the financial statements have been restated to reflect
these changes for all periods presented.
(B) STOCK OPTION PLANS
The Company's 1992 Stock Option Plan (Stock Plan) has 1,500,000 shares of
common stock which have been authorized to be reserved for grants. At December
31, 1996, 110,048 shares remain available for future awards. Options granted
under this plan may be designated as qualified or nonqualified at the discretion
of the compensation committee of the Board of Directors.
Generally, options vest and may be exercised over a four-year period in
increments of 25% each year beginning one year from the date of grant; however,
options can vest upon granting. All options expire not later than ten years from
the date of grant. Qualified stock options are exercisable at not less than the
fair market value of the stock at the date of grant and nonqualified stock
options are exercisable at prices
F-9
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
determined at the discretion of the Board of Directors, but not less than 85% of
the fair market value of the stock at the date of grant.
In 1996, the Company adopted the 1996 Stock Option Plan for Non-Employee
Directors (Directors Plan), under which 300,000 shares of common stock are
reserved for grants. At December 31, 1996, 258,000 shares remain available for
future awards. Nonemployee directors are granted between 4,000 and 8,000 options
immediately following each Annual Stockholders Meeting. Options are exercisable
from the date of grant for a period of ten years or one year after termination
as a director. Options are granted at the fair market of the Company's common
stock on the date of grant.
A summary of stock options follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
DIRECTORS EXERCISE
STOCK PLAN PLAN PRICE
---------- ----------- -------------
<S> <C> <C> <C>
Balances at December 31, 1993............................................... 695,375 -- $ 10.00
Granted..................................................................... 132,500 -- 12.00
Canceled.................................................................... (30,813) -- 10.00
---------- -----------
Balances at December 31, 1994............................................... 797,062 -- 10.33
Granted..................................................................... 303,125 -- 12.00
Canceled.................................................................... (74,121) -- 10.00
Exercised................................................................... (413) -- 10.28
---------- -----------
Balances at December 31, 1995............................................... 1,025,653 -- 10.83
Granted..................................................................... 438,850 42,000 16.18
Canceled.................................................................... (69,941) -- 11.17
Exercised................................................................... (169,787) -- 10.11
---------- -----------
Balances at December 31, 1996............................................... 1,224,775 42,000 $ 12.90
---------- -----------
---------- -----------
</TABLE>
The weighted average fair value of options granted was $8.87 and $4.97 in
1996 and 1995, respectively.
An additional 44,000 shares of common stock were granted under the Stock
Plan to the Board of Directors in January 1997.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's two
stock-based compensation plans been determined consistent with FASB Statement
No. 123, the Company's net loss and loss per share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Net loss--as reported................................................................ $21,264,230 18,023,923
Net loss--pro forma.................................................................. 23,930,975 19,131,780
Loss per share--as reported.......................................................... 1.66 2.20
Loss per share--pro forma............................................................ 1.87 2.33
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following assumptions used for
grants in 1995 and 1996: dividend yield of 0.0% for
F-10
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
both years; expected volatility of 46% for 1995 and 57% to 67% for 1996;
risk-free interest rate of 5.46% to 7.15% for 1995 and 5.18% to 6.85% for 1996;
expected lives from three to six years for both years.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- ----------------- ----------- -------------- ----------- ----------- -----------
<C> <C> <S> <C> <C> <C>
$ 10.00 396,700 6.2 years $ 10.00 336,686 $ 10.00
12.00 416,975 8.2 years 12.00 250,085 12.00
13.75 to 14.75 141,150 9.5 years 14.51 -- --
16.13 to 16.75 268,550 9.2 years 16.25 101,000 16.25
22 43,400 9.9 years 22.00 20,000 22.00
----------- -----------
$ 10.00 to 22.00 1,266,775 8.0 years $ 12.90 707,771 $ 11.94
----------- -----------
----------- -----------
</TABLE>
(C) COMMON STOCK WARRANTS
As of December 31, 1996, the Company had outstanding warrants, with
expiration terms ranging from September 20, 1998 to February 6, 2001, to
purchase 111,660 shares of common stock which are fully exercisable at the
following per share prices:
<TABLE>
<CAPTION>
PER SHARE
SHARES PRICE
- -------------------------------------------------------------------- --------------
<S> <C>
28,325............................................................. $ 12.00
83,335.............................................................. 14.40
111,660............................................................. $12.00-14.40
</TABLE>
(5) INCOME TAXES
Federal income taxes reported by the Company differ from the amount computed
by applying the U.S. Federal income tax rate of 34% to pretax losses due to
limitations on utilizing net operating losses.
F-11
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(5) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Deferred tax assets:
Start-up costs deferred for tax purposes......................................... $ 5,817 29,087
Orphan Drug credit............................................................... 100,000 100,000
Deferred compensation............................................................ 116,080 333,247
License agreements............................................................... 446,068 484,427
Research and experimentation credit carryforwards................................ 747,456 633,961
Net operating loss carryforwards................................................. 22,159,516 14,663,765
Depreciation..................................................................... 310,432 95,204
Other............................................................................ 212,701 304,757
------------- ------------
Total gross deferred tax assets................................................ 24,098,070 16,644,448
Less valuation allowance......................................................... 24,098,070 16,644,448
------------- ------------
Net deferred tax assets........................................................ $ -- --
------------- ------------
------------- ------------
</TABLE>
The increases in the valuation allowance for deferred tax assets of
$7,453,622, $6,388,860 and $5,266,640 in 1996, 1995 and 1994, respectively, are
primarily attributable to increases in net operating loss carryforwards whose
utilization cannot reasonably be assured.
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $65,175,000 and research and experimentation credit carryforwards
of approximately $747,000, which are available to offset future Federal taxable
income and income taxes, respectively, if any, and expire beginning in 2007.
(6) COMMITMENTS
(A) LEASES
The Company leases various office and research facilities under
noncancelable operating leases which expire between 1998 and 2003. With respect
to one of the leases, the Company is required to maintain collateral on a letter
of credit in the amount of a $675,000 certificate of deposit which is recorded
as a restricted investment.
F-12
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
Minimum lease payments under noncancelable operating leases (with initial or
remaining lease terms in excess of one year) and related sublease income as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
LEASE PAYMENTS SUBLEASE INCOME
-------------- ---------------
<S> <C> <C>
1997............................................................................ $ 1,692,000 333,000
1998............................................................................ 1,810,000 333,000
1999............................................................................ 1,757,000 333,000
2000............................................................................ 1,757,000 333,000
2001............................................................................ 1,717,000 --
Thereafter...................................................................... 884,000 --
-------------- ---------------
$ 9,617,000 1,332,000
-------------- ---------------
-------------- ---------------
</TABLE>
Rent expense for operating leases was approximately $1,026,000, $746,000 and
$644,000 for 1996, 1995 and 1994, respectively, and $3,298,000 for the period
December 10, 1991 (incorporation) through December 31, 1996.
Included in rent expense are payments to a partnership in which a member of
the Board of Directors and an officer of the Company are partners of
approximately $36,200, $35,500 and $49,500 for 1996, 1995 and 1994,
respectively.
(B) EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has employment and consulting agreements with certain key
executives, research scientists and advisors. The terms of these agreements
range from two to five years, provide for discretionary bonuses, as determined
by the Company's Board of Directors and provide for annual increases in
compensation to be determined at the discretion of the Board of Directors.
Approximate minimum compensation payments due pursuant to these employment
and consulting agreements are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997............................................................................ $ 959,000
1998............................................................................ 517,000
1999............................................................................ 294,000
2000............................................................................ 151,000
------------
$ 1,921,000
------------
------------
</TABLE>
(7) COLLABORATION AGREEMENTS
In May 1996, the Company entered into a distribution agreement with Bohdan
Automation, Inc. (Bohdan), pursuant to which Bohdan has agreed to manufacture
and sell a proprietary combinatorial chemistry system invented by the Company.
Royalties of $238,000 were earned from this arrangement during 1996.
In 1994, the Company entered into a license agreement with two U.S.
institutions to obtain worldwide rights to a product currently in clinical
trials. A $1.5 million milestone payment will be payable by the Company if the
product receives approval for marketing by the FDA. The Company is responsible
for
F-13
<PAGE>
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
clinical trials, sales, marketing, manufacturing and regulatory affairs related
to the product. The Company will pay a royalty on net product sales.
In 1993, the Company entered into a license agreement with a Japanese
company to obtain rights for North America to a product in preclinical trials.
The initial payment for these rights was $500,000 cash and 50,000 shares of
common stock. A second milestone payment of 50,000 shares of common stock was
paid in 1995 when the Investigational New Drug application was filed. Subsequent
payments will be made upon accomplishment of certain milestones. The Company is
responsible for clinical trials, sales, marketing and regulatory affairs related
to the product. The Japanese company is responsible for manufacturing the bulk
form of the product. The Company will pay a royalty on net product sales.
In 1993, the Company entered into a collaborative research agreement with a
research institution. The agreement calls for payments to the research
institution of up to $1.5 million over three years, not to exceed $500,000 in
any one year. In addition, the Company was committed to spend $1 million per
year in research and development to support this collaborative research. As of
December 31, 1996, the Company has fulfilled its obligation under this
commitment to the research institution.
In 1993, the Company entered into a license and manufacturing agreement with
a then significant shareholder to obtain worldwide rights to a product in
clinical trials. Under the agreement, the Company was to make certain fixed
payments to the licensor upon accomplishment of certain milestones. Initial
payment for these rights was $550,000 and the Company was responsible for
clinical trials, sales, marketing and regulatory affairs related to the product.
In 1994, the Company decided to cease development of this product and has
fulfilled its obligation under this agreement.
In 1993, the Company also entered into a development agreement with a then
significant shareholder pursuant to which the Company was assisted with its
research and development activities relating to a product currently in clinical
trials. The Company paid research and development fees of $923,100 related to
this agreement. The Company has entered into an additional development agreement
dated as of August 15, 1994 with this shareholder pursuant to which the Company
will continue to receive assistance in developing this product. As of December
31, 1996, the Company has paid $1,265,000 under this agreement.
(8) SUBSEQUENT EVENTS
On January 30, 1997, the Board of Directors adopted the 1997 Stock Option
Plan (1997 Plan) subject to stockholder approval. The 1997 Plan provides for the
grant of options to acquire a maximum of 2,000,000 shares of common stock of
which 378,800 shares were granted as of January 30, 1997. Additionally, the
Board of Directors approved an increase in the authorized number of shares of
common stock to 60,000,000 shares subject to stockholder approval.
F-14
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES, OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY................................. 3
RISK FACTORS....................................... 6
USE OF PROCEEDS.................................... 16
PRICE RANGE OF COMMON STOCK........................ 17
DIVIDEND POLICY.................................... 17
CAPITALIZATION..................................... 18
DILUTION........................................... 19
SELECTED FINANCIAL DATA............................ 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............. 21
BUSINESS........................................... 24
MANAGEMENT......................................... 39
PRINCIPAL STOCKHOLDERS............................. 48
CERTAIN TRANSACTIONS............................... 50
DESCRIPTION OF CAPITAL STOCK....................... 50
SHARES ELIGIBLE FOR FUTURE SALE.................... 53
UNDERWRITING....................................... 54
LEGAL MATTERS...................................... 55
EXPERTS............................................ 55
AVAILABLE INFORMATION.............................. 55
INDEX TO FINANCIAL STATEMENTS...................... F-1
</TABLE>
2,000,000 SHARES
[LOGO]
[LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
HAMBRECHT & QUIST
, 1997
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby (items
marked with an asterisk (*) represent estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee........................................... $20,734.85
Legal Fees and Expenses........................................ 100,000.00*
Blue Sky Fees (including counsel fees)......................... 5,000.00*
NASD Filing Fee................................................ 7,342.50
Nasdaq National Market Fee..................................... 17,500.00*
Accounting Fees and Expenses................................... 50,000.00*
Transfer Agent and Registrar Fees.............................. 5,000.00*
Printing and Engraving Expenses................................ 120,000.00*
Miscellaneous Expenses......................................... 124,422.65
Total...................................................... $450,000.00
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. Article Eighth of the Company's Amended and Restated
Certificate of Incorporation includes the following language:
"No director of the Corporation shall be liable to the Corporation or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this provision does not eliminate the liability of the
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from
which the director derived an improper personal benefit. For purposes of the
prior sentence, the term "damages" shall, to the extent permitted by law,
include without limitation, any judgment, fine, amount paid in settlement,
penalty, punitive damages, excise or other tax assessed with respect to an
employee benefit plan, or expense of any nature (including, without limitation,
counsel fees and disbursements). Each person who serves as a director of the
Corporation while this Article EIGHTH is in effect shall be deemed to be doing
so in reliance on the provisions of this Article EIGHTH, and neither the
amendment or repeal of this Article EIGHTH, nor the adoption of any provision of
this Certificate of Incorporation inconsistent with this Article EIGHTH, shall
apply to or have any effect on the liability or alleged liability of any
director of the Corporation for, arising out of, based upon, or in connection
with any acts or omissions of such director occurring prior to such amendment,
repeal, or adoption of an inconsistent provision. The provisions of this Article
EIGHTH are cumulative and shall be in addition to and independent of any and all
other limitations on or eliminations of the liabilities of directors of the
Corporation, as such, whether such limitations or eliminations arise under or
are created
II-1
<PAGE>
by any law, rule, regulation, By-Law, agreement, vote of stockholders or
disinterested directors, or otherwise."
Additionally, Article Seventh of the Company's Amended and Restated
Certificate of Incorporation provides as follows:
"A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director, officer, employee, or
agent of the Corporation or any of its direct or indirect subsidiaries or is or
was serving at the request of the Corporation as a director, officer, employee,
or agent of any other corporation or of a partnership, joint venture, trust, or
other enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee, or agent or in
any other capacity while serving as a director, officer, employee, or agent,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the DGCL, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than permitted prior
thereto), against all expense, liability, and loss (including attorneys' fees,
judgments, fines, excise or other taxes assessed with respect to an employee
benefit plan, penalties, and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith, and such indemnification
shall continue as to an indemnitee who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the indemnitee's heirs,
executors, and administrators; provided, however, that, except as provided in
Paragraph C of this Article SEVENTH with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
B. The right to indemnification conferred in Paragraph A of this Article
SEVENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any proceeding for which such right to indemnification is
applicable in advance of its final disposition (hereinafter an "advancement of
expenses"); PROVIDED, HOWEVER, that, if the DGCL requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Article SEVENTH or otherwise.
C. The rights to indemnification and to the advancement of expenses
conferred in Paragraphs A and B of this Article SEVENTH shall be contract
rights. If a claim under Paragraph A or B of this Article SEVENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be 20 days, the indemnitee
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim. If successful in whole or in part in any such suit,
or in a suit brought by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expense of prosecuting or defending such suit. In (i) any suit
brought by the indemnitee to enforce a right to indemnification hereunder (but
not in a suit brought by an indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that the indemnitee has not met any applicable
standard for indemnification set forth in the DGCL, and (ii) any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon a
final adjudication that the indemnitee has not met any applicable standard for
indemnification set forth in the DGCL. Neither the
II-2
<PAGE>
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the DGCL, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article SEVENTH or otherwise, shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article SEVENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, this
Certificate of Incorporation, By-Law, agreement, vote of stockholders or
disinterested directors, or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee, or agent of the Corporation or another
corporation, partnership, joint venture, trust, or other enterprise against any
expense, liability, or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability, or loss under the
DGCL.
F. The Corporation's obligation, if any, to indemnify any person who was or
is serving as a director, officer, employee, or agent of any direct or indirect
subsidiary of the Corporation or, at the request of the Corporation, of any
other corporation or of a partnership, joint venture, trust, or other enterprise
shall be reduced by any amount such person may collect as indemnification from
such other corporation, partnership, joint venture, trust, or other enterprise.
G. Any repeal or modification of the foregoing provisions of this Article
SEVENTH shall not adversely affect any right or protection hereunder of any
person in respect of any act or omission occurring prior to the time of such
repeal or modification."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
From February 1994 through March 1994, the Company sold 1,690,677 shares of
Common Stock in the 1994 Private Placement at a price of $12.00 per share. The
Company believes that each such issuance and sale was exempt from registration
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder. Warrants to purchase an aggregate of 100,514 shares of Common Stock
at an exercise price of $14.40 were also issued for nominal consideration to
certain brokers that assisted the Company in the sale of Common Stock in the
1994 Private Placement. The Company believes that each such issuance and sale
was exempt from registration pursuant to Section 4(2) of the Securities Act.
In each of November 1993 and March 1995, the Company issued 50,000 shares of
Common Stock to Kaneka Corporation pursuant to a license agreement. The Company
believes that each such issuance and sale was exempt from registration pursuant
to Section 4(2) of the Securities Act.
Since inception the Company has sold 775,833 shares of Common Stock to
certain employees and consultants of the Company. In addition, the Company has
issued options for the purchase of an aggregate of 1,265,650 shares of Common
Stock under its 1992 Plan, 171,762 shares of which have been exercised, options
for the purchase of an aggregate of 42,000 shares of Common Stock under its 1996
Plan and, subject to stockholder approval, options for the purchase of an
aggregate of 378,800 shares of Common Stock under its 1997 Plan. The Company
believes that each of the foregoing transactions was exempt from registration
under the Act pursuant to Sections 4(2) and/or 3(b) of the Securities Act.
II-3
<PAGE>
Each purchaser of the securities described above has represented that he or
she understands that the securities acquired may not be sold or otherwise
transferred absent registration under the Act or the availability of an
exemption from the registration requirements of the Act, and each certificate
evidencing the securities owned by each purchaser bears or will bear upon
issuance a legend to that effect.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement. (1)
3.1 Amended and Restated Certificate of Incorporation, as amended. (1)
3.2 Amended and Restated By-Laws. (1)
4.1 Form of Stock Certificate. (3)
4.2 1992 Stock Option Plan. (3)
4.3 1996 Non-Employee Director Plan. (6)
4.4 Form of 1997 Stock Option Plan. (1)
5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP. (2)
10.1 Employment Agreement between the Company and Wilbur H. Gantz, dated March 23, 1992. (3)
10.2 Employment Agreement between the Company and Alan R. Meyer, dated October 12, 1992. (6)
10.3 Form of Employment Agreement between the Company and A. Bruce Montgomery, dated September 19, 1995.
(3)
10.4 Employment Agreement between the Company and Marc C. Wipperman, effective as of July 1, 1996. (1)
10.5 Agreement between the Company and Robert C. Nowinski, dated June 6, 1995. (3)
10.6 Consulting Agreement between the Company and Sidney Altman, dated March 10, 1992. (4)
10.7 Consulting Agreement between the Company and Stephen Benkovic, dated March 26,
1992. (3)
10.8 Consulting Agreement between the Company and Lucy Shapiro, dated as of August 1, 1995. (3)
10.9 Consulting Agreement between the Company and Michael Wigler, dated March 23, 1992 as amended, dated
May 13, 1994. (3)
10.10 Consulting Agreement between the Company and Arnold Smith, dated October 1, 1996. (1)
10.11 Licensing Agreement between the Company and Kaneka Corporation, dated October 25, 1993 and amendment
thereto, dated March 3, 1995. (3)(5)
10.12 Supply Agreement between the Company and Kaneka Corporation, dated as of October 25, 1993. (3)(5)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
10.13 Stock Purchase Agreement between the Company and Kaneka Corporation, dated October 25, 1993. (3)(5)
10.14 Development Agreement between the Company and Baxter Healthcare Corporation, dated December 1, 1993.
(3)(5)
10.15 Product Development Agreement between the Company and Baxter Healthcare Corporation, dated August 15,
1994. (3)(5)
10.16 License Agreement between the Company and Children's Hospital and Medical Center, dated January 1,
1994. (3)(5)
10.17 License Agreement between the Company and the Cystic Fibrosis Foundation, dated January 1, 1994.
(3)(5)
10.18 Agreement between the Company and Cold Spring Harbor Laboratory, dated as of March 11, 1993(3) and
amendments thereto, dated May 13, 1994(3) and December 8, 1995. (5)(6)
10.19 Stock Purchase Agreement between the Company and Cold Spring Harbor Laboratory, dated December 8,
1995. (5)(6)
10.20 Research Agreement between the Company and the Public Health Research Institute, dated February 26,
1993. (3)
10.21 Lease for laboratory in Seattle, Washington, between David A. Sabey and Sandra L. Sabey and the
Company, dated June 8, 1992, as amended by the Second Amendment, dated November 16, 1992 (3), and as
amended by the Third Amendment, dated August 1,
1996. (1)
10.22 Lease for principal executive office in Seattle, Washington, between PFC Holdings and the Company,
dated December 15, 1991, as amended May 26, 1992 and as further amended, effective as of February 23,
1995. (3)
10.23 Lease for the Skokie, Illinois facility, between The Equitable Life Assurance Society of the United
States and the Company, dated October 1992, as amended, dated March 31, 1995(3) and as amended, dated
April 30, 1996. (1)
10.24 Lease for Annandale, New Jersey facility, between Exxon Research and Engineering Company and the
Company, dated November 25, 1996. (1)
23.1 Consent of KPMG Peat Marwick LLP. (2)
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the Opinion filed as Exhibit
5.1). (2)
24.1 Power of Attorney (included on the signature page hereof). (1)
27.1 Financial Data Schedule. (1)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Filed herewith.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-97070).
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-2956).
II-5
<PAGE>
(5) Contains confidential material omitted and filed separately with the
Securities and Exchange Commission. Brackets denote such omissions.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
All schedules have been omitted because they are not required, are
inapplicable or the information required is included in the financial statements
or notes thereto.
ITEM 17. UNDERTAKINGS.
The Company 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 Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange 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 Company of expenses
incurred or paid by a director, officer or controlling person of the Company 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 Company 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.
The Company hereby undertakes 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.
The Company hereby undertakes that, 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
<PAGE>
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 Seattle, State of
Washington, on March 17, 1997.
PATHOGENESIS CORPORATION
By: /s/ WILBUR H. GANTZ
-----------------------------------------
Wilbur H. Gantz
PRESIDENT
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Executive Officer,
/s/ WILBUR H. GANTZ President and Director
- ------------------------------ (Principal Executive March 17, 1997
Wilbur H. Gantz Officer)
Senior Vice President,
/s/ ALAN R. MEYER Chief Financial Officer
- ------------------------------ and Director (Principal March 17, 1997
Alan R. Meyer Financial and Accounting
Officer)
*
- ------------------------------ Director March 17, 1997
Elizabeth M. Greetham
*
- ------------------------------ Director March 17, 1997
Lawrence C. Hoff
*
- ------------------------------ Director March 17, 1997
Edward Mathias
II-7
<PAGE>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
*
- ------------------------------ Director March 17, 1997
Michael J. Montgomery
*
- ------------------------------ Director March 17, 1997
Talat M. Othman
*
- ------------------------------ Director March 17, 1997
Eugene L. Step
*
- ------------------------------ Director March 17, 1997
Fred Wilpon
<TABLE>
<S> <C> <C>
*By: /s/ WILBUR H. GANTZ
------------------------------------
Wilbur H. Gantz
AS ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ------------- ---------------------------------------------------------------------------------------------- -----
<S> <C> <C>
1 Form of Underwriting Agreement. (1)
3.1 Amended and Restated Certificate of Incorporation, as amended. (1)
3.2 Amended and Restated By-Laws. (1)
4.1 Form of Stock Certificate. (3)
4.2 1992 Stock Option Plan. (3)
4.3 1996 Non-Employee Director Plan. (6)
4.4 Form of 1997 Stock Option Plan. (1)
5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP. (2)
10.1 Employment Agreement between the Company and Wilbur H. Gantz, dated March 23, 1992. (3)
10.2 Employment Agreement between the Company and Alan R. Meyer, dated October 12, 1992. (6)
10.3 Form of Employment Agreement between the Company and A. Bruce Montgomery, dated September 19,
1995. (3)
10.4 Employment Agreement between the Company and Marc C. Wipperman, effective as of July 1, 1996.
(1)
10.5 Agreement between the Company and Robert C. Nowinski, dated June 6, 1995. (3)
10.6 Consulting Agreement between the Company and Sidney Altman, dated March 10, 1992. (4)
10.7 Consulting Agreement between the Company and Stephen Benkovic, dated March 26,
1992. (3)
10.8 Consulting Agreement between the Company and Lucy Shapiro, dated as of August 1, 1995. (3)
10.9 Consulting Agreement between the Company and Michael Wigler, dated March 23, 1992 as amended,
dated May 13, 1994. (3)
10.10 Consulting Agreement between the Company and Arnold Smith, dated October 1, 1996. (1)
10.11 Licensing Agreement between the Company and Kaneka Corporation, dated October 25, 1993 and
amendment thereto, dated March 3, 1995. (3)(5)
10.12 Supply Agreement between the Company and Kaneka Corporation, dated as of October 25, 1993.
(3)(5)
10.13 Stock Purchase Agreement between the Company and Kaneka Corporation, dated October 25, 1993.
(3)(5)
10.14 Development Agreement between the Company and Baxter Healthcare Corporation, dated December 1,
1993. (3)(5)
10.15 Product Development Agreement between the Company and Baxter Healthcare Corporation, dated
August 15, 1994. (3)(5)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ------------- ---------------------------------------------------------------------------------------------- -----
<S> <C> <C>
10.16 License Agreement between the Company and Children's Hospital and Medical Center, dated
January 1, 1994. (3)(5)
10.17 License Agreement between the Company and the Cystic Fibrosis Foundation, dated January 1,
1994. (3)(5)
10.18 Agreement between the Company and Cold Spring Harbor Laboratory, dated as of March 11, 1993(3)
and amendments thereto, dated May 13, 1994(3) and December 8, 1995. (5)(6)
10.19 Stock Purchase Agreement between the Company and Cold Spring Harbor Laboratory, dated December
8, 1995. (5)(6)
10.20 Research Agreement between the Company and the Public Health Research Institute, dated
February 26, 1993. (3)
10.21 Lease for laboratory in Seattle, Washington, between David A. Sabey and Sandra L. Sabey and
the Company, dated June 8, 1992, as amended by the Second Amendment, dated November 16, 1992
(3), and as amended by the Third Amendment, dated August 1, 1996. (1)
10.22 Lease for principal executive office in Seattle, Washington, between PFC Holdings and the
Company, dated December 15, 1991, as amended May 26, 1992 and as further amended, effective as
of February 23, 1995. (3)
10.23 Lease for the Skokie, Illinois facility, between The Equitable Life Assurance Society of the
United States and the Company, dated October 1992, as amended, dated March 31, 1995(3) and as
amended, dated April 30, 1996. (1)
10.24 Lease for Annandale, New Jersey facility, between Exxon Research and Engineering Company and
the Company, dated November 25, 1996. (1)
23.1 Consent of KPMG Peat Marwick LLP. (2)
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the Opinion filed as
Exhibit 5.1). (2)
24.1 Power of Attorney (included on the signature page hereof). (1)
27.1 Financial Data Schedule. (1)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Filed herewith.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-97070).
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-2956).
(5) Contains confidential material omitted and filed separately with the
Securities and Exchange Commission. Brackets denote such omissions.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
<PAGE>
Exhibit 5.1
Squacron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, NY 10176
March 13, 1997
PathoGenesis Corporation
201 Elliott Avenue West
Seattle, Washington 98119
Re: Registration Statement on Form S-1 (Registration No. 333-22297)
Ladies and Gentlemen:
You have requested our opinion, as counsel for PathoGenesis Corporation, a
Delaware corporation (the "Company"), in connection with the registration
statement on Form S-1 (Registration No. 333-22297) (the "Registration
Statement"), filed with the Securities and Exchange Commission under the
Securities Act of 1933 (the "Act"). The Registration Statement relates to,
among other things, an offering by the Company of 2,000,000 shares of common
stock, par value $.001 per share, of the Company (the "Common Stock"), and up
to 300,000 shares of Common Stock to be issued solely to cover
over-allotments (collectively, the "Shares").
We have examined such records and documents and made such examinations of
law as we have deemed relevant in connection with this opinion. It is our
opinion that when there has been compliance with the Act and the applicable
state securities laws, the Shares to be sold by the Company, when issued,
delivered, and paid for in the manner described in the form of Underwriting
Agreement filed as Exhibit 1 to the Registration Statement, will be legally
issued, and the Shares, when so issued, delivered and paid for will also be
fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Registration Statement. In so doing, we do not admit
that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
Very truly yours,
