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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27150
__________________
PathoGenesis Corporation
(Exact name of Registrant as specified in its charter)
Delaware 91-1542150
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
201 Elliott Avenue West, Seattle, Washington 98119
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 467-8100
__________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of Each Class)
__________________
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the Registrant held by
stockholders who were not affiliates (as defined by regulations of the
Securities and Exchange Commission) of the Registrant was approximately
$510,536,959 on March 20, 1998 (based on the closing price quoted on the Nasdaq
National Market on March 20, 1998, as reported by The Wall Street Journal). On
March 20, 1998, the Registrant had issued and outstanding an aggregate of
16,245,547 shares of common stock.
Documents Incorporated by Reference
Those portions of the Registrant's proxy statement to be filed pursuant to
Regulation 14A for the annual meeting of stockholders to be held on June 3,
1998, described in Part III hereof, are incorporated by reference in this
report.
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PART I
This annual report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in "Item 1.
Business" and "Item 7. Management's Discussion and Analysis" of this Form 10-K,
and in Exhibit 99 to this Form 10-K.
Item 1. Business
Summary
PathoGenesis Corporation ("PathoGenesis" or the "Company") is a Delaware
corporation organized in 1991. The Company develops novel drugs to treat
serious, chronic human infectious diseases where there is a significant need for
improved therapy. In December 1997, the United States Food and Drug
Administration ("FDA") approved the Company's first drug, TOBI(TM) (tobramycin
solution for inhalation). The Company began marketing TOBI in 1998. TOBI is a
stable, premixed, proprietary formulation of the antibiotic tobramycin for
delivery by inhalation using a nebulizer. The drug is indicated for the
management of cystic fibrosis ("CF") patients with Pseudomonas aeruginosa ("P.
aeruginosa").
Based on the potential efficacy of delivering a high concentration of
tobramycin directly to the site of infection in the lungs, the Company initiated
Phase II clinical trials of TOBI in patients with bronchiectasis (a form of
severe chronic bronchitis) and tuberculosis during 1997. In addition, the
Company initiated Phase II clinical trials of a second drug candidate, PA-1648.
This oral drug candidate is being developed as a potential replacement for the
antibiotic rifampin in tuberculosis treatment. The Company is developing
additional inhaled and oral drug candidates for lung infections. The table below
shows the development status and targeted market for each of PathoGenesis' drug
candidates in clinical trials. See "Government Regulation and Product Testing"
for a description of the various phases of product testing. The number of
patients shown refers to the total number of patients with the underlying
disease; not all of such patients have (or will develop) lung infections the
company's drug candidates are designed to treat.
<TABLE>
<CAPTION>
Approximate
Indication Drug Candidate Development Status Number of Patients
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<S> <C> <C> <C>
Cystic fibrosis TOBI Approved by FDA in 30,000 (U.S.)
1997; filed for 30,000 (Europe)
approval in Canada in 10,000 (rest of world)
March 1998; regulatory
filings in Europe
expected in 1998
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Bronchiectasis (a form of TOBI Phase II clinical trials 100,000 (U.S.)
severe chronic bronchitis) commenced in 1997 100,000 (Europe)
100,000 (Japan)
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Tuberculosis (adjunct TOBI Phase II clinical 25,000 (U.S. and Canada)
therapy for patients trials commenced in 1997
with contagious
pulmonary tuberculosis)
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Tuberculosis PA-1648 Phase II clinical 25,000 (U.S. and Canada)
(rifalazil) trials commenced in 1997
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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There can be no assurance that TOBI will achieve market acceptance. In
addition, the results of the clinical trials of TOBI for other indications being
conducted by the Company may not be consistent with results obtained in the
clinical trials for TOBI in cystic fibrosis patients, and such trials may not be
completed within anticipated time frames, if at all. No assurance can be given
that the Company will develop any of its other drug candidates successfully.
Anti-Pseudomonas Drug Development Program
The goal of PathoGenesis' anti-pseudomonas drug development program is to
develop drug candidates that can provide significant benefit to people with
pseudomonal lung infections. The Company's first drug, TOBI, was developed to
treat people with cystic fibrosis and is currently being tested in patients with
bronchiectasis (a form of severe chronic bronchitis) who have pseudomonal lung
infections.
PathoGenesis is conducting further research into P. aeruginosa therapy,
including investigation of additional aerosolized antibiotics. In October 1997,
the Company received a Therapeutics Development Grant from the Cystic Fibrosis
Foundation, which will help support the preclinical development of PA-1420
(polymyxin E1), a purified form of the antibiotic colistin. The drug candidate
is a broad-spectrum gram-negative antibiotic designed to be administered by
aerosol. The Company has applied for patents on PA-1420.
In September 1997, PathoGenesis, the Cystic Fibrosis Foundation and the
University of Washington Genome Center announced a partnership to collaborate on
laboratory research into the genetic makeup of P. aeruginosa. See "Research and
Development."
TOBI for Cystic Fibrosis Lung Infections
In December 1997, TOBI became the first FDA-approved antibiotic solution
for inhalation to treat people with CF. The drug is indicated for the management
of CF patients with P. aeruginosa. TOBI is a stable, premixed, proprietary
formulation. It has received orphan drug designation from the FDA, which
provides the Company with seven years of marketing exclusivity in the U.S. from
the time of approval. TOBI also is covered by a U.S. formulation patent that
will expire in 2013. Patent applications are pending in other countries. See
"Patents."
Tobramycin is a fermentation product isolated from Streptomyces tenebrarius
in 1967. It is 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.
Compared with other aminoglycosides, tobramycin is more active against P.
aeruginosa by at least two- to four-fold and is generally less toxic.
Intravenous tobramycin has been approved for marketing for more than 20 years.
Cystic Fibrosis
Cystic fibrosis is the most common life-shortening inherited disease in the
U.S., affecting about 30,000 Americans. According to the Cystic Fibrosis
Foundation, CF is diagnosed in one of every 3,300 newborns in the U.S. Most
people with CF are diagnosed by age three. The median survival age is 31.3
years.
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Cystic fibrosis is characterized by the production of unusually thick,
sticky mucus that obstructs the airways of the lungs, the bronchial tubes and
bronchioles. Early in life, cystic fibrosis patients typically have bacterial
infections comparable to other children. While the majority of their early lung
infections are treated effectively, the accumulation of mucus in the lungs
usually leads to life-long infections. This results in gradual destruction of
lung tissue, and eventually, respiratory failure. P. aeruginosa is the dominant
type of bacteria, infecting the lungs of about 60 percent of all people with CF
in the U.S. Infection with pseudomonal bacteria is increasingly likely as the
patient ages. Furthermore, P. aeruginosa is rarely if ever permanently
eradicated after antibiotic treatment.
An estimated 90% of all illnesses associated with CF are related to the
respiratory system. Periodic flare-ups of pseudomonal infection can cause life-
threatening episodes and hospitalization, which increases treatment costs,
exposes the patient to potential hospital-acquired infections, and disrupts
education and family life. For more than 20 years, the standard treatment for
these flare-ups was intravenous tobramycin, typically for periods of 10-14 days.
However, cumulative systemic exposure to intravenous tobramycin increases the
risk of adverse side effects, such as significant kidney damage and hearing
loss. As an antibiotic specifically formulated for inhalation, TOBI is delivered
directly to the lungs where the infection resides. The drug is formulated to
minimize its absorption into the bloodstream through the airway lining, thereby
reducing the risk of adverse effects. On average, 100-fold greater
concentrations of tobramycin can be delivered to the actual site of infection by
directly depositing the antibiotic on the airway lining as compared with
intravenous delivery.
Treatment of pseudomonal infection using TOBI would be expected to begin at
the first detection of pseudomonal bacteria and may continue throughout the
patient's lifetime. The Company believes that the market for TOBI is significant
and growing. About 60% of the 30,000 CF patients in the U.S. have been diagnosed
with pseudomonal lung infections. Market growth may occur as new patients are
diagnosed and improved therapy extends the lives of patients. Most CF patients
are treated at 113 centers accredited by the Cystic Fibrosis Foundation.
The Development of TOBI for Cystic Fibrosis
For the past 20 years, inhaled tobramycin has been used experimentally to
treat pseudomonal infections in CF patients. Various solutions of tobramycin for
inhalation have been compounded by pharmacists and patients from commercially
available sources; however, the use of these formulations for inhalation has not
been approved by the FDA. Because physicians employing inhaled tobramycin used
different formulations and reported conflicting results, the Cystic Fibrosis
Foundation sponsored early research in aerosol administration. Researchers at
Children's Hospital and Medical Center in Seattle found that not all nebulizers
(devices used to produce the aerosol) deliver 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 the inhaled
drug must pass through the sputum (phlegm), which partially binds and
inactivates tobramycin.
Subsequently, the investigators tested inhaled tobramycin in a multi-center
randomized controlled trial of 71 cystic fibrosis patients with P. aeruginosa.
The results were published in the New England Journal of Medicine in June 1993.
In this study, aerosolized tobramycin appeared safe and held promise for
reducing pseudomonal bacterial counts, thereby improving lung function. However,
the treatment regimen of 600 milligrams three times daily would not have been
practical, given the compounded drug's lack of stability, lengthy treatment
times, and an estimated annual retail cost of about $30,000 per patient at that
time.
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PathoGenesis has 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 bronchopulmonary infections. See "Licenses and Other Agreements."
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.
The Company significantly modified the treatment protocol published in the
New England Journal of Medicine. Its goal was to provide a more economical and
convenient therapy by developing TOBI, a concentrated, preservative-free
formulation of tobramycin solution for inhalation. The Company has obtained a
formulation patent on TOBI in the U.S., and patent applications are pending in
other countries. Each ready-to-use ampule of TOBI contains 300 milligrams of
tobramycin in a 5 milliliter solution. TOBI is aerosolized and administered
using a Pari LC Plus(TM) reusable nebulizer and a DeVilbiss Pulmo-Aide(R) air
compressor. It is inhaled twice daily and requires an average of about 15
minutes per treatment. The TOBI treatment regimen consists of repeated cycles of
28 days on drug, followed by 28 days off drug.
In January 1997, PathoGenesis announced results from two pivotal double-
blind, placebo-controlled Phase III clinical trials of TOBI in patients with
cystic fibrosis. A total of 520 cystic fibrosis patients aged 6 to 63 with P.
aeruginosa lung infections participated in the studies, which were conducted for
24 weeks at 69 cystic fibrosis centers across the U.S. Patients were divided
into two groups -- those receiving placebo plus standard CF therapy and those
receiving TOBI plus standard CF therapy. Compared with placebo plus standard CF
therapy, the six-month clinical trials of TOBI showed:
(i) Improved and maintained lung function: TOBI-treated patients demonstrated
a significant improvement in lung function compared to those receiving
standard CF therapy. At the end of the six months, the average improvement
in lung function from baseline was 11% in one trial, and 7% in the other.
To put this into perspective: A CF patient's pulmonary function declines
2% to 3% a year on average, with the median age of death currently at 31
years. Thus, a 10% improvement in lung function typically represents a
return to what the patient's lung function was three to four years
earlier.
(ii) Fewer days in the hospital: On average, TOBI-treated patients were
hospitalized three fewer days than patients receiving standard CF therapy
-- 5.1 days for TOBI patients, compared to 8.1 days for placebo patients
over the six months.
(iii) Fewer days requiring anti-pseudomonal antibiotics: On average, TOBI-
treated patients required 4.4 fewer days of intravenous anti-pseudomonal
therapies than patients receiving standard CF therapies -- 9.7 days for
TOBI patients, compared to 14.1 days for placebo patients.
(iv) Safety: TOBI was well-tolerated by patients, although more TOBI-treated
patients experienced hoarseness (13% versus 7% in placebo patients) and
ringing in the ears (3% versus none of the placebo patients). All episodes
of ringing in the ears were temporary and resolved without stopping the
TOBI treatment regimen.
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(v) Reduction in bacterial counts: TOBI therapy resulted in a significant
reduction in P. aeruginosa density in sputum during the on-drug periods.
Sputum bacterial density returned to baseline during the off-drug periods.
Reductions in sputum bacterial density were smaller in each successive
cycle.
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 CF patients is usually
efficacious, even though resistant pseudomonal bacteria are frequently found.
Treatment for six months with TOBI in the clinical trials did not affect the
susceptibility of the majority of P. aeruginosa isolates tested. However,
microbiological measures of increased drug resistance were noted in some
patients. The relationship of in vitro (laboratory) susceptibility test results
and clinical outcome with TOBI therapy has not been established.
All patients who completed the Phase III clinical trials were eligible for
an 18-month follow-on program, allowing them to continue receiving TOBI. More
than 85% of the patients chose to participate, allowing PathoGenesis to gather
longer-term safety and efficacy data. Longer-term results are expected to be
released at scientific meetings in 1998 and 1999. A long-term (180-day) animal
toxicology study completed by the Company in 1996 showed no safety problems at
clinically relevant doses.
TOBI for Cystic Fibrosis Patients Outside the U.S.
PathoGenesis filed in March 1998 for approval to market TOBI to cystic
fibrosis patients in Canada. The Company anticipates filing in 1998 for
regulatory approval to market TOBI for cystic fibrosis in the United Kingdom,
and later in other European countries. About 30,000 people in Europe have CF.
PathoGenesis intends to file its U.S. data on TOBI as administered using a Pari
LC Plus jet nebulizer and DeVilbiss Pulmo-Aide compressor. In preparation for
that filing, the Company initiated a study in 1997 to evaluate the drug's
stability according to European standards. In 1998, the Company expects to
initiate a small-scale open-label clinical trial of TOBI in Europe to validate
TOBI's safety and efficacy given the differences in standard therapy between the
U.S. and Europe. The Company currently intends to market TOBI using its own
sales force in northern Europe, where most CF patients are treated in
centralized CF centers, and to seek sales and distribution partners in other
markets.
The Company began marketing TOBI for cystic fibrosis in the U.S. in January
1998. There can be no assurance that TOBI will achieve market acceptance.
Furthermore, there can be no assurance that the Company will succeed in
obtaining regulatory approvals to enable it to introduce TOBI in other markets
on a timely basis. Even if the Company obtains the necessary foreign regulatory
approvals, no assurance can be given that the Company will be able to market
TOBI successfully in foreign markets.
TOBI for Bronchiectasis
Bronchiectasis (a form of severe chronic bronchitis) 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 that bronchiectasis patients are usually older. Approximately 100,000
people in the U.S. have bronchiectasis, based on hospital admission records.
These patients often require a significant number of hospitalizations to treat
complications of the condition.
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Due to certain clinical similarities between cystic fibrosis and
bronchiectasis, the Company believes TOBI can suppress bacterial growth in the
lungs of bronchiectasis patients and thereby decrease inflammation and
progressive lung damage. In 1997, the Company initiated a double-blind, placebo-
controlled, randomized Phase II clinical trial of TOBI in bronchiectasis
patients. The Company plans to enroll about 50 patients aged 18 or older who
have been diagnosed with bronchiectasis and P. aeruginosa airway infections. The
28-day trial is being conducted in about 12 medical centers in the U.S. The
principal endpoint will be microbiological response as measured by changes in
observed bacterial levels in the sputum. TOBI's potential benefits may include
decreased hospitalizations and a slowing of decline in lung function of
patients. Results are expected to be announced in 1998.
There can be no assurance that the Company's planned development of TOBI
for this indication will be successful or completed within anticipated time
frames, or at all, or that regulatory approvals will be obtained.
TOBI for Ventilator Patients
Accidents, premature birth, and chronic lung diseases are among the reasons
that patients have to be connected to ventilators for long periods of time.
PathoGenesis estimates about 15,000 long-term ventilator patients live in the
U.S., with a similar number in Europe. These patients are susceptible to
infection by P. aeruginosa and other pathogens. As a result, they may be
hospitalized 2-3 times a year. For example, about 75% of U.S. tracheotomy
patients experience pseudomonal lung infections. The Company is evaluating the
market potential, and may initiate a clinical study of TOBI in ventilator
patients.
Tuberculosis Drug Development Program
For the past 25 years, development of anti-tuberculosis drugs has been
limited. However, tuberculosis ("TB") ranks as one of the most serious
infectious diseases worldwide because of its highly contagious nature, worldwide
prevalence and increasing levels of drug resistance. PathoGenesis' goal is to
develop drug candidates that can provide significant benefit to TB patients,
either as an adjunct (supplemental) therapy or as a replacement for one of the
four drugs in the current standard primary regimen of therapy (isoniazid,
rifampin, pyrazinamide and ethambutol). PathoGenesis' drug candidates include:
(i) TOBI to treat patients newly diagnosed with tuberculosis. TOBI's potential
benefits as an addition to oral TB therapies could include shorter
hospital quarantines. A shorter contagious period also helps safeguard
healthcare workers and family members. A Phase II trial is currently being
conducted.
(ii) PA-1648, an oral drug candidate to replace rifampin in the standard
regimen of therapy. Potential benefits may include reduced length of
therapy, less frequent dosing, and fewer or milder side effects than
current therapies. This could help improve patient compliance with the
recommended course of therapy. A Phase II trial is currently being
conducted.
(iii) PA-824, one of a novel class of compounds called the nitroimidazoles that
were developed by PathoGenesis. PA-824 has demonstrated activity against
multiple-drug-resistant TB strains in preclinical testing and is being
investigated as a possible replacement or supplement for isoniazid, one of
the drugs in the standard treatment regimen for TB.
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Tuberculosis
Worldwide, more than a billion people are infected with Mycobacterium
tuberculosis ("M. tuberculosis"), the bacterium that causes TB. The vast
majority of these infections are latent (inactive) cases, which may exist for
decades before the lung disease manifests itself. An estimated eight million
active tuberculosis cases are diagnosed and more than two million deaths occur
worldwide each year. In the U.S., the Centers for Disease Control and Prevention
report an average of 25,000 active TB cases per year and more than 10 million
latent cases.
Initial exposure to M. tuberculosis results in a latent infection of the
lung, which usually can be diagnosed using a tuberculosis skin test. After a
latent phase ranging from months to decades, the bacterium may resume active
growth. If untreated, patients typically develop 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 TB is through early identification and thorough treatment of active
cases.
Patents have expired on all four drugs in the current standard regimen of
therapy to treat tuberculosis. Currently, active TB is treated with a regimen of
at least three different drugs taken daily for a minimum of six months. The goal
of multi-drug therapy is to reduce the emergence of drug-resistant bacteria and
shorten the treatment duration. However, side effects can include severe
gastrointestinal upset and hepatitis, and the mortality rate of drug-related
adverse effects is about one in 2,000. While current therapies are effective if
the patient adheres to and completes the treatment course, up to 30% of patients
relapse due to noncompliance. Lack of compliance also is the primary cause of
drug-resistant TB. As a result, a number of cities have instituted costly
"directly observed therapy programs," in which healthcare workers observe
administration of every oral dose in an effort to improve compliance.
Consequently, the Company believes that a significant market opportunity exists
for drug candidates that can lower overall treatment costs by shortening the
length of therapy, decreasing the frequency of administration and improving
compliance levels.
TOBI for Tuberculosis
In vitro, 300 milligrams of TOBI demonstrated activity against TB bacteria,
including multi-drug-resistant strains. As a result, the Company believes TOBI
may be a valuable adjunct to current tuberculosis drug regimens, with the
potential to shorten the period of initial infectivity. A shorter contagious
period may reduce hospital stays and help prevent secondary transmission to
family members and healthcare workers. TB takes about a week to culture and
diagnose. Patients with known or suspected infectious pulmonary tuberculosis are
typically placed in hospital isolation wards for about two weeks until systemic
antibiotics can eliminate tuberculosis in the sputum. Sputum samples are taken
daily. Once three consecutive sputum smears are negative, the patient is
considered non-infectious and may go home to finish the remaining months of
standard TB treatment.
In 1997, the Company initiated an open-label Phase II clinical trial of
TOBI in patients with contagious pulmonary TB. PathoGenesis plans to enroll 15-
20 patients aged 18 or older who have been newly diagnosed with pulmonary TB.
During the eight-day open-label trial, patients will receive 300 milligrams of
TOBI twice daily for five consecutive days using a nebulizer. The study will
examine whether TOBI decreases bacterial counts in the sputum more rapidly than
standard systemic therapies. At the study's conclusion, all patients will be
treated with a standard multi-drug regimen of tuberculosis therapy. Results are
expected to be announced in 1998.
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In April 1996, the Company filed a provisional patent application with the
U.S. Patent and Trademark Office 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 completed within the anticipated time
frames, if at all.
PA-1648
PA-1648 (rifalazil) is being developed as a candidate for inclusion in the
standard regimen of TB therapy. This oral drug candidate was synthesized, tested
for anti-mycobacterial activity, and patented in the U.S. and major foreign
markets by Kaneka Corporation ("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 U.S., Canada and Mexico. See "Manufacturing" and "Licenses and
Other Agreements."
PA-1648 is a novel derivative of the generic drug rifampin. More than 20
peer-reviewed articles have reported its efficacy in vitro and in vivo (in
animals) against tuberculosis and disseminated Mycobacterium avium complex
("MAC") infections, a tuberculosis-like disease affecting AIDS patients. The
Company has conducted confirmatory studies. In preclinical studies, PA-1648
demonstrated several characteristics suggesting that it could be superior to
rifampin for use in treating TB. In vitro, 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
pneumoniae and Helicobacter pylori.
Phase I clinical trial data on PA-1648 in healthy volunteers suggest that
PA-1648 has a longer half-life in humans than rifampin -- at least 48 hours on
average, versus two to three hours for rifampin. In addition, PathoGenesis' data
indicate that the ratio of intracellular drug concentrations to extracellular
drug concentrations is much higher for PA-1648 than for other rifampins.
PathoGenesis believes this may allow a 25- or 50-milligram dose to be taken once
or twice a week to treat rifampin-sensitive TB bacteria. In addition, a lower
dose may reduce the risk of side effects. Rifampin is typically dosed at about
300 milligrams once a day, and can cause flu-like side effects and transient
reductions in white blood cell counts in some individuals.
In 1997, the Company initiated a randomized multiple-dose open-label Phase
II trial of PA-1648 in patients with pulmonary tuberculosis. The trial is being
conducted in Brazil in collaboration with the National Institute of Allergy and
Infectious Diseases Tuberculosis Research Unit at Case Western Reserve
University, Cleveland. The Company plans to enroll 60 patients aged 18-65 who
have been diagnosed with pulmonary TB. Patients will be divided into four
treatment groups, which will receive various combinations of PA-1648 and
isoniazid, isoniazid alone, or isoniazid plus rifampin. The 14-day protocol is
designed to evaluate the early bactericidal activity of PA-1648. After
completion of the 14-day study, the patients will be given standard treatment of
tuberculosis (isoniazid, rifampin, pyrazinamide and ethambutol) under the
supervision of their own physicians. The Company expects to use the trial
results to evaluate whether PA-1648 may be safe and effective when taken less
frequently than rifampin and whether it has the potential to reduce the length
of treatment. Results are expected to be announced in 1998.
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There can be no assurance that the Company's planned development of drug
candidates and the necessary clinical trials will be successful or completed
within the anticipated time frames, if at all.
Research and Development
PathoGenesis focuses its research and development on drug candidates with
potentially unique therapeutic profiles, as well as those it believes it can
develop relatively quickly. The Company seeks to shorten drug discovery and
development by involving its clinical and regulatory personnel in the early
stages of drug discovery and development. This allows PathoGenesis to choose
drug candidates that are of significant interest to physicians and regulators
and that have readily measurable effects in clinical trials. PathoGenesis
intends to focus on drug candidates it believes it can develop through its own
resources, although it may also sell, license, joint venture or otherwise
collaborate where it determines such an approach is preferable.
PathoGenesis' three major technical programs are: (i) a molecular genetics
program to discover new approaches to the treatment of pathogens; (ii) a
molecular microbiology program that focuses on discovering new approaches to
treating pathogens and using "smart screens" or reporter gene technology to
facilitate drug candidate testing; and (iii) a pharmaceutical chemistry program
that uses combinatorial chemistry to create new drug candidates. PathoGenesis
also has internal capabilities in functional genomics and molecular target
discovery, assay development for compound screening, the development and
application of technology and informatics to accelerate drug discovery,
medicinal chemistry and Rapid Analog Matrix ("RAM(R)") synthesis, compound
evaluation in animal infection models, and preclinical development capabilities.
In addition, the Company has developed specialized expertise in the drug
mechanisms of action and resistance, aerosol drug delivery, surrogate markers
and assays for clinical trials, and clinical microbiology. The Company spent
approximately $28.0 million, $20.7 million and $15.7 million on research and
development of proposed drug candidates in 1997, 1996 and 1995, respectively.
In September 1997, PathoGenesis, the Cystic Fibrosis Foundation and the
University of Washington Genome Center announced a two-year genetic research
project to fund and perform laboratory research to determine the genetic makeup
of P. aeruginosa, a bacterium that affects cystic fibrosis, burn and cancer
patients. Greater knowledge of the bacterial genome (DNA or genetic code) may
provide new insights into how P. aeruginosa causes infection and defends itself
against antibiotics, which in turn can assist PathoGenesis researchers in
developing new anti-pseudomonal therapies. In addition, the Company may patent
significant gene sequences. The genetic data derived from this project are
being published on the Internet at www.pseudomonas.com. From this site,
researchers can download gene sequences to their own computers or use resident
software to search for similarities between a given gene and the sequences
contained in the growing P. aeruginosa database.
Manufacturing
The Company currently does not intend to establish internal manufacturing
capabilities. Instead, it has contracted and intends to contract with third
parties for the production and packaging of its products. Contract
manufacturing is monitored by PathoGenesis' manufacturing and distribution
support operation in Annandale, New Jersey, which had 12 employees as of year-
end 1997. All manufacturing facilities used by the Company are subject to
inspection by the FDA.
The Company sources bulk powdered tobramycin from two of the principal
worldwide suppliers of the drug, and it is anticipated that either one of these
suppliers alone will be able to supply sufficient
9
<PAGE>
quantities to meet the Company's current needs. Formulation and packaging of
TOBI occurs at a facility that also packages other drugs for inhalation for
other pharmaceutical companies. The powdered tobramycin is mixed with water and
excipients, then injected into plastic ampules (vials) using a form-fill-seal
technology in a sterile environment. Each ampule has a snap-top access port,
simplifying the action of delivering TOBI directly into a nebulizer for
inhalation. Another contract manufacturer handles final packaging of the drug.
Four plastic ampules are inserted in an aluminum foil pouch, then 14 pouches are
placed into a single box to comprise a 28-day supply. The contract manufacturer
that performs formulation and packaging for the Company currently does so under
an oral arrangement. The Company has been negotiating a written agreement with
that manufacturer and hopes to finalize such written agreement in the near
future. No assurance can be given that the Company will be able to obtain future
supplies of tobramycin on favorable terms, or that the contract manufacturers
will be able to provide the Company with sufficient supplies of TOBI.
To deliver TOBI, the Company has designated the Pari LC Plus nebulizer,
manufactured and distributed in the U.S. by Pari Corporation of Germany. The
nebulizer has a useful life of about six months and costs about $15 at retail.
The Company's research shows that this nebulizer efficiently aerosolizes the
TOBI solution and delivers the optimal drug particle size to the lung airways,
minimizing the amount of drug that is absorbed systemically or coughed out.
The Company obtains bulk powdered PA-1648 from Kaneka. PathoGenesis 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 the
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 with Kaneka, as described under "Licenses and Other Agreements" below.
Sales and Marketing
Cystic fibrosis is a focused market segment that involves a small group of
physicians and treating institutions in the U.S. and abroad. Currently, more
than 65% of cystic fibrosis patients in the U.S. are treated by institutions or
physicians associated with the 113 cystic fibrosis care centers sponsored by the
Cystic Fibrosis Foundation. Of those centers, 69 sites participated in the
Company's Phase III clinical trials for TOBI. Consequently, the Company believes
a relatively small sales force can provide sufficient coverage for the U.S.
PathoGenesis relies upon 21 full- and part-time dedicated sales personnel
employed by a third party to market TOBI to physicians, hospitals and CF
treatment centers.
TOBI shipments began on January 2, 1998. PathoGenesis is selling TOBI to
drug wholesalers and mail order pharmacies, including Cystic Fibrosis Services.
Cystic Fibrosis Services is a mail order pharmacy affiliate of the Cystic
Fibrosis Foundation that serves 20% to 25% of people with CF in the U.S. Cystic
Fibrosis Services and other pharmacies accept assignment of benefits and help
patients request reimbursement from third party payors. To assist patients,
pharmacists and caregivers, the Company has established a toll-free hotline.
Other drugs for cystic fibrosis have achieved reimbursement levels of greater
than 98% from third party payors, including private insurance plans and
Medicaid, which covers about 20% of CF patients. The Company expects TOBI to
have a comparable reimbursement level, although no assurance can be given that
such a level will be achieved.
The Company filed in March 1998 for approval to market TOBI to cystic
fibrosis patients in Canada. In 1997, PathoGenesis established a European office
in Brentford, England, as part of the process of registering TOBI for cystic
fibrosis in the European Union. The Company expects to file in 1998 for approval
of TOBI for CF in England. If and when it obtains approval, the Company plans to
market TOBI using its own sales force in the major northern European countries,
which have centralized cystic fibrosis
10
<PAGE>
centers similar to those in the U.S. PathoGenesis plans to seek sales and
distribution partners in other markets.
Licenses and Other Agreements
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. A $1.5 million milestone payment
became payable by the Company upon the product receiving FDA approval. This
payment is included in accrued clinical development costs at December 31, 1997.
In addition, the Company has agreed to pay a royalty based on net sales. Each
licensing agreement continues in effect 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 U.S., Canada
and Mexico to develop, market and sell PA-1648 for use in the treatment of
tuberculosis and other infections. The license agreement provides that 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 on 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 an option to convert the 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 the 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 in 1995, the Company issued to Kaneka an additional 50,000
shares of Common Stock. Under a related supply agreement, Kaneka is responsible
for providing bulk powdered PA-1648 for the Company's clinical trials. The
Company believes Kaneka has supplied sufficient quantities of PA-1648 to allow
the completion of Phase II clinical testing of the drug to treat tuberculosis.
See "Tuberculosis Drug Development Program."
In 1996, PathoGenesis entered into a license and distribution agreement
with Bohdan Automation, Inc. Under this agreement, Bohdan manufactures and
sells the RAM(R) Synthesizer, a patented combinatorial chemistry system invented
by the Company and Bohdan scientists.
PathoGenesis engages in research and development collaborations and
licensing arrangements with various academic institutions, government and
commercial research groups, and other companies. For example, the Company has
entered into a contract with the Cystic Fibrosis Foundation and the University
of Washington to sequence the P. aeruginosa genome as described under "Research
and Development." The Company believes that none of the licenses under these
arrangements is currently material in relation to the Company's business as a
whole. The Company expects to pursue additional license agreements and research
collaboration arrangements.
Patents
PathoGenesis generally applies for patents for its proprietary compounds,
formulations or technologies. The Company has seven U.S. patents, including a
formulation patent for TOBI. In addition, the Company is the exclusive licensee
in the U.S., Canada and Mexico of rights under three issued patents relating to
PA-1648. The Company has seven patent applications pending in the U.S. In
addition, an international application for a formulation patent for TOBI was
filed in 1995 under the Patent Cooperation
11
<PAGE>
Treaty designating Europe, Canada, Japan and other countries. There can be no
assurance that these patents or others, if obtained, will provide substantial
protection or commercial benefit to PathoGenesis. In addition, other companies
may have filed patent applications or have been granted patents in areas of
interest to the Company. There can be no assurance that any licenses required
under such patents would be available under reasonable terms, if at all.
Government Regulation and Product Testing
In order to conduct clinical trials, manufacture and market products for
therapeutic use, PathoGenesis must comply with regulation by governmental
authorities in the U.S. and foreign countries. The Company also is subject to
various federal, state and local laws, regulations and recommendations,
including environmental laws and regulations.
Before a drug may be commercially distributed in the U.S., its developer
must (i) conduct the appropriate preclinical laboratory and animal tests; (ii)
submit an Investigational New Drug application ("IND") that must be approved
before clinical trials may commence; (iii) conduct controlled human clinical
trials that establish the safety and efficacy of the drug candidate; (iv) file a
New Drug Application ("NDA") with the FDA; (v) comply with FDA inspection of
drug manufacturing facilities to ensure compliance with the applicable
requirements; and (vi) obtain FDA approval of the NDA prior to any commercial
sale or shipment of the drug.
Clinical trials involve the administration of an investigational drug
product to human subjects. In Phase I, the drug candidate is first tested in
humans for safety, side effects, dosage tolerance, metabolism and clinical
pharmacology. Phase II trials help determine efficacy, optimal dosage and
possible side effects in specific indications. Phase III trials are undertaken
to gather additional information about efficacy and safety in order to evaluate
the drug candidate's risks and benefits and to provide an adequate basis for
product labeling.
Upon approval in the U.S., a drug may be marketed only for the approved
indications in the approved dosage forms and dosages. The FDA 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 may require an additional review of manufacturing facilities if a material
change is made to manufacturing equipment, locations or processes.
To market its products outside the U.S., the Company must comply with the
varying regulations of foreign markets. In the European Union, foreign
marketing authorizations are approved at the national level, although certain
registration procedures are available to companies wishing to market a product
in more than one country in the Union. If a regulatory authority is satisfied
that adequate evidence of safety, quality and efficacy has been presented,
marketing authorization is usually granted. Approval by the FDA does not ensure
approval by other countries.
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 being pursued by the Company.
Certain of these competitors have secured supply arrangements with other
healthcare companies, which may give them a competitive advantage. The Company
expects to encounter significant competition for the principal products it plans
to develop.
12
<PAGE>
The use of antibiotics to treat pseudomonal, mycobacterial and other
bacterial infections is well established. In cystic fibrosis patients with
pseudomonal lung infections, tobramycin is the most commonly used intravenous
antibiotic. Medical therapies for patients with CF 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(R) (dornase alpha), manufactured by
Genentech, Inc. The Company believes those CF therapies complement TOBI.
However, the optimal combination may vary among patients. In addition, the
potential high cost of combination therapy may limit the use of TOBI in
conjunction with other therapies. 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.
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 TB. However, optimal
combination therapies may vary among patients. 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.
Human Resources
As of December 31, 1997, PathoGenesis had 159 full-time employees, 103 of
whom were engaged in research and development activities at its laboratory
facility in Seattle, Washington. Since the beginning of 1998, an additional 18
full-time employees of a third party have been selling TOBI on a full-time
basis. 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.
Item 2. Properties
The Company's principal facility consists of approximately 70,000 square
feet of leased laboratory and office space in Seattle, Washington. The lease
expires in March 2003. A portion of this space has been subleased by the
Company to a third party. In addition, in 1997 the Company leased about 11,500
square feet of additional office space in Seattle to accommodate its growth into
a commercial enterprise. The lease expires in March 2003.
The Company also leases an administrative and marketing office of
approximately 10,500 square feet in Skokie, Illinois. This lease expires in
March 2003. A third leased laboratory and office space 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, in 1997 PathoGenesis leased 1,200 square feet of office space
in Brentford, Middlesex, England, to facilitate its European expansion plans.
PathoGenesis also rents office space in New York City, which is subject to an
oral, month-to-month lease agreement referenced under "Item 13. Certain
Relationships and Related Transactions."
Item 3. Legal Proceedings
The Company has no material pending legal proceedings.
13
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
14
<PAGE>
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The Company's Common Stock trades on the Nasdaq National Market System
under the symbol PGNS. As of March 20, 1998, there were approximately 183
holders of record of the Company's Common Stock. However, the Company believes
the actual number of beneficial holders is substantially greater. No cash
dividends have been paid on the Common Stock to date, and the Company currently
intends to retain any earnings for the development and growth of its business.
The following table sets forth the range of high and low closing sales
prices of the Common Stock as quoted on the Nasdaq National Market System for
each quarter in 1997 and 1996. On March 20, 1998, the last reported sale price
for the Company's Common Stock was $34.125.
<TABLE>
<CAPTION>
High Low
1997:
<S> <C> <C>
Fourth Quarter............................................ $40.75 $33.625
Third Quarter............................................. 38.00 27.50
Second Quarter............................................ 30.50 22.50
First Quarter............................................. 33.00 20.75
1996:
Fourth Quarter............................................ 26.13 17.00
Third Quarter............................................. 17.75 11.50
Second Quarter............................................ 18.75 13.50
First Quarter............................................. 17.50 10.88
</TABLE>
The Company issued shares of Common Stock upon cashless exercise of
outstanding warrants as follows:
<TABLE>
<CAPTION>
Number of
Shares Issued Exercise price
<S> <C> <C>
1997:
October 8,398 $38.103
August 17,254 30.206
March 1,889 30.344
1996:
December 3,074 24.006
November 32,078 24.563
</TABLE>
Such shares of Common Stock were issued without registration under the
Securities Act of 1933, as amended, in reliance on section 4(2) of such Act and
Rule 506 of Regulation D promulgated under such Act.
15
<PAGE>
Item 6. Selected Financial Data
The following selected financial data for the period from December 10, 1991
(date of incorporation) through December 31, 1997 and each of the five years
ended December 31, 1993, 1994, 1995, 1996 and 1997 were derived from the
financial statements of the Company. The data set forth below should be read in
conjunction with the audited financial statements, related notes and the other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
Period from
December 10,
Years ended December 31, 1991 through
----------------------------------------------------- December 31,
(In thousands, except per share data) 1997 1996 1995 1994 1993 1997
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue -- grants and royalties......... $ 442 $ 440 $ -- $ -- $ -- $ 882
Operating expenses:
Research and development.............. 28,018 20,673 15,668 12,789 8,213 86,119
General and administrative............ 10,582 4,241 3,609 3,215 3,615 27,960
-------- -------- -------- -------- -------- ---------
Total operating expenses........... 38,600 24,914 19,277 16,004 11,828 114,079
-------- -------- -------- -------- -------- ---------
Operating loss..................... (38,158) (24,474) (19,277) (16,004) (11,828) (113,197)
-------- -------- -------- -------- -------- ---------
Other income (expense)
Investment income, net................ 5,278 3,294 1,287 1,285 1,064 12,753
Other expense......................... (158) (84) (34) (43) (41) (379)
-------- -------- -------- -------- -------- ---------
Net other income................... 5,120 3,210 1,253 1,242 1,023 12,374
-------- -------- -------- -------- -------- ---------
Net loss........................... $(33,038) $(21,264) $(18,024) $(14,762) $(10,805) $(100,823)
======== ======== ======== ======== ======== =========
Net loss per common share --
basic and diluted..................... $ (2.10) $ (1.66) $ (2.20) $ (1.95) $ (1.77)
======== ======== ======== ======== ========
Weighted average common shares
outstanding -- basic and diluted....... 15,704 12,829 8,210 7,585 6,111
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and investment
securities........................... $79,041 $60,688 $37,447 $25,994 $20,421
Total current assets.................. 87,190 61,809 38,884 26,694 20,862
Total assets.......................... 97,596 69,999 46,963 36,086 30,301
Total current liabilities............. 8,107 2,974 3,453 2,925 1,300
Long-term liability................... -- 98 462 -- --
Total stockholders' equity............ 89,489 66,926 43,048 33,161 29,001
</TABLE>
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
PathoGenesis develops novel drugs to treat serious, chronic human
infectious diseases where there is a significant need for improved therapy. From
its incorporation in December 1991 through the end of 1997, the Company has
engaged primarily in research, development, clinical trials and administrative
activities.
In December 1997, the FDA approved the Company's first drug, TOBI. In 1998,
PathoGenesis began marketing TOBI for the management of cystic fibrosis patients
with P. aeruginosa. TOBI is the first FDA-approved antibiotic solution for
inhalation for CF patients. An estimated 60% of the 30,000 CF patients in the
U.S. have pseudomonal lung infections. For more than 20 years, the standard of
care was to treat flare-ups of pulmonary symptoms with intravenous tobramycin,
typically for periods of 10-14 days. This generally required hospitalization.
In order to commercialize TOBI in record time -- just three years from the
time the Company filed an Investigational New Drug application with the
FDA -- PathoGenesis achieved a series of milestones in 1997:
(i) In January, the Company announced the results of two Phase III clinical
trials of TOBI in 520 CF patients. The TOBI groups had improved and
maintained lung function, fewer days in the hospital, and fewer days of
anti-pseudomonal antibiotic therapy.
(ii) In May, the Company formed a European subsidiary, PathoGenesis Limited,
to oversee the process of filing for regulatory approval and bringing
TOBI to market in Europe. About 30,000 people in Europe have CF.
(iii) In July, PathoGenesis filed a new drug application with the FDA for TOBI
in CF patients. The FDA agreed to expedite its review of the data.
(iv) In November, the Company presented data on TOBI to the FDA's Anti-
Infective Drugs Advisory Committee, which unanimously recommended that
TOBI be cleared for marketing.
(v) TOBI was approved by the FDA on December 22, 1997.
Also in 1997, the Company initiated two Phase II clinical trials to test
TOBI in patients with bronchiectasis (a form of severe chronic bronchitis) and
tuberculosis. In the U.S., about 100,000 people have bronchiectasis, and an
average of 25,000 active tuberculosis cases are diagnosed annually. In October,
PathoGenesis initiated a Phase II clinical trial of an oral drug, PA-1648, in
people with tuberculosis. The Company intends to report the results of these
clinical trials in 1998. At the preclinical level, PathoGenesis is investigating
additional aerosolized antibiotics as follow-up drug candidates to TOBI, as well
as additional oral antibiotics for treating tuberculosis.
The Company also has begun collaborating with the Cystic Fibrosis
Foundation and University of Washington Genome Center on a two-year project to
analyze the genetic composition of P. aeruginosa. These data may assist
PathoGenesis researchers in developing new anti-pseudomonal therapies.
During 1997, PathoGenesis completed its third public offering of stock. The
offering, 2.1 million shares of common stock at $27.00 per share, was completed
in March and resulted in net proceeds of about $53.0 million to the Company.
PathoGenesis became a publicly owned company in November 1995.
17
<PAGE>
The Company has incurred losses since inception and had an accumulated
deficit through December 31, 1997 of $100.8 million. Such losses resulted
principally from research, development, clinical trial, general and
administrative costs. As of year-end 1997, the Company had not marketed or
generated sales revenues from any drugs. Other than TOBI for cystic fibrosis,
the Company's current drug candidates are not expected to be commercially
available for at least several years. The Company's results may vary
significantly from period to period depending on several factors, such as the
timing of expenses or sales and the progress of research and development
activities.
In 1998, PathoGenesis began its first year as a commercial enterprise. The
Company's goals for the year include introducing TOBI for cystic fibrosis in the
United States; supporting CF patients' efforts to obtain reimbursement for TOBI
from third party payors; filing for regulatory approval to market TOBI in Canada
(filed in March 1998) and Europe; and further developing drug candidates in the
pipeline for cystic fibrosis, tuberculosis and other lung infections. The
Company expects a net cash outflow of $10.0 million to $15.0 million for the
year, including 1998 capital expenditures of approximately $5.0 million to $7.0
million. This compares with a net cash outflow of $37.0 million in 1997,
including capital expenditures of $4.4 million.
Results of Operations
Years Ended December 31, 1997 and 1996
Revenue from grants and royalties was $442,000 in 1997, an increase of
$2,000 from 1996. Revenues were comprised of 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 and Bohdan.
Research and development expense increased by $7.3 million to $28.0 million
in 1997 from $20.7 million in 1996. This increase was primarily due to increases
in personnel and professional costs relating to clinical development, filing of
a New Drug Application, and costs related to registration of TOBI in Europe.
General and administrative expense increased by $6.4 million to $10.6 million in
1997 from $4.2 million in 1996. Such increase was due to higher personnel and
professional costs relating to marketing and recruiting. The Company implemented
a sales and marketing program in the second half of 1997. In 1998, the launch of
TOBI is expected to generate further increases in sales, marketing, general and
administrative expenditures.
Investment income, net increased by $2.0 million to $5.3 million in 1997
from $3.3 million in 1996. This increase was due to higher invested balances.
Years Ended December 31, 1996 and 1995
Revenue from grants and royalties was $440,000 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 and Bohdan.
Research and development expense increased by $5.0 million to $20.7 million
in 1996 from $15.7 million in 1995. This was primarily due to increases in
clinical development activity. General and administrative expense increased by
$632,000 to $4.2 million in 1996 from $3.6 million in 1995. This
18
<PAGE>
was due primarily to an increase in costs related to operation as a public
company, such as personnel, investor relations and insurance.
Investment income, net increased by $2.0 million to $3.3 million in 1996
from $1.3 million in 1995. This increase was due to higher invested balances.
Liquidity and Capital Resources
From its inception through December 31, 1997, the Company has financed its
operations primarily by issuing equity securities with aggregate net proceeds of
approximately $185.0 million and investment income of approximately $12.8
million.
The Company's combined cash, cash equivalents and investment securities
totaled $79.0 million at December 31, 1997, an increase of $18.4 million from
the balance at December 31, 1996. The Company expects that these funds, in
combination with expected revenues from sales of TOBI beginning in 1998, should
be sufficient to meet its operating expenses and capital requirements for the
foreseeable future. The primary uses of cash during the year ended December 31,
1997 were to finance the Company's operations, build inventory of TOBI, upgrade
the Company's communications and computer infrastructure, develop a
manufacturing control and support center, and expand its Chicago-area sales and
marketing office. From its inception through December 31, 1997, the Company
purchased approximately $17.3 million 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 is reviewing its computer systems to ensure that Year 2000
transactions can be processed properly and that modifications and replacements,
where necessary, can be obtained in a timely manner. The cost is not expected to
have a significant impact on the ongoing results of operations.
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
Statement of Financial Accounting Standards No. 119 (SFAS 119), Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments.
At December 31, 1997, the Company had tax net operating loss carryforwards
of approximately $95.0 million and research tax credits of approximately
$970,000, which will begin to expire in 2007. The Company also has Orphan Drug
credits of approximately $5.0 million, which will expire beginning in 2007. 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 of the Internal Revenue Code.
19
<PAGE>
Item 8. Consolidated Financial Statements
The Consolidated Financial Statements for the fiscal year ended December
31, 1997 may be found beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of Registrant
The information appearing under the captions "Election of Directors",
"Executive Officers" and "Executive Compensation" in the Company's proxy
statement for the annual meeting of stockholders to be held on June 3, 1998 (the
"Proxy Statement"), is incorporated in this report by reference.
Item 11. Executive Compensation
Information appearing under the caption "Executive Compensation" in the
Proxy Statement is incorporated in this report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated in this
report by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions" in the
Proxy Statement is incorporated in this report by reference.
20
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed As a Part of This Report
(1) Financial Statements. The financial statements of PathoGenesis
Corporation for the year ended December 31, 1997, together with the
report of the Independent Certified Public Accountants, are set forth
beginning on page F-1 hereof.
(3) Exhibits. The exhibits to this report are listed in the Exhibit Index
included elsewhere in this report. Included in the exhibits listed in
the Index are the following exhibits which constitute management
contracts or compensatory plans or arrangements:
10.1 Employment Agreement between the Company and Wilbur H. Gantz,
dated March 23, 1992
10.3 Employment Agreement between the Company and A. Bruce
Montgomery, dated September 19, 1995
10.4 Employment Agreement between the Company and Marc F.
Wipperman, effective as of July 1, 1996
10.26 1992 Stock Option Plan
10.27 1996 Non-Employee Director Plan
10.28 1997 Stock Option Plan
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on December 30, 1997, relating to
marketing clearance of TOBI by the FDA.
(c) Exhibits
The exhibits to this report are listed in the Exhibit Index which appears
after the signature page of this report and is hereby incorporated by reference.
21
<PAGE>
PathoGenesis Corporation
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report.............................................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996.............................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995, and the period from
December 10, 1991 (inception) through December 31, 1997................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995, and the period from
December 10, 1991 (inception) through December 31, 1997................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995, and the period from
December 10, 1991 (inception) through December 31, 1997................................ F-7
Notes to Consolidated Financial Statements................................................ F-8
</TABLE>
All financial statement schedules have been omitted, since the information
is not required or because the required information is included in the
consolidated 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 consolidated balance sheets of
PathoGenesis Corporation (a development stage enterprise) and subsidiary as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997 and for the period from December 10,
1991 (inception) through December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PathoGenesis
Corporation and subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 and for the period from December 10, 1991
(inception) through December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Seattle, Washington
January 23, 1998
F-2
<PAGE>
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION> December 31,
------------------------------
Assets 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,171,591 $ 14,785,818
Investment securities 73,869,541 45,901,978
Interest receivable 656,396 298,437
Inventories 4,935,758 --
Other current assets 2,556,409 823,092
------------- ------------
Total current assets 87,189,695 61,809,325
------------- ------------
Restricted investment 675,000 675,000
Property and equipment, at cost:
Leasehold improvements 7,941,149 6,766,935
Furniture and equipment 8,805,566 5,967,110
------------- -------------
16,746,715 12,734,045
Less accumulated depreciation and amortization 7,138,050 5,320,039
------------- -------------
Net property and equipment 9,608,665 7,414,006
------------- -------------
Other assets 122,189 100,370
------------- -------------
$ 97,595,549 $ 69,998,701
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,168,865 $ 812,259
Compensation and benefits 1,461,167 774,258
Clinical development costs 2,885,107 818,629
Other accrued expenses 2,591,660 569,068
------------- ------------
Total current liabilities 8,106,799 2,974,214
------------- ------------
Long-term liability -- 98,273
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares;
none issued and outstanding -- --
Common stock, $0.001 par value. Authorized 60,000,000 shares in 1997 and
20,000,000 shares in 1996; 16,238,649 shares and 13,930,760 shares issued
and outstanding at December 31, 1997 and 1996, respectively 16,239 13,931
Additional paid-in capital 191,613,454 134,727,920
Deferred compensation (1,295,145) --
Unrealized loss on investment securities (22,635) (30,204)
Deficit accumulated during the development stage (100,823,163) (67,785,433)
------------- ------------
Total stockholders' equity 89,488,750 66,926,214
------------- ------------
$ 97,595,549 $ 69,998,701
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION> December 10,
1991
(inception)
Years ended December 31, through
------------------------------------------------- December 31,
1997 1996 1995 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenue - grants and royalties $ 441,880 $ 439,880 $ -- $ 881,760
------------ ------------ ------------ -------------
Operating expenses:
Research and development 28,017,738 20,673,049 15,668,417 86,119,276
General and administrative 10,582,072 4,241,339 3,609,075 27,959,597
------------ ------------ ------------ -------------
Total operating expenses 38,599,810 24,914,388 19,277,492 114,078,873
------------ ------------ ------------ -------------
Operating loss (38,157,930) (24,474,508) (19,277,492) (113,197,113)
------------ ------------ ------------ -------------
Other income (expense):
Investment income, net 5,278,098 3,293,782 1,287,457 12,753,145
Other expense (157,898) (83,504) (33,888) (379,195)
------------ ------------ ------------ -------------
Net other income 5,120,200 3,210,278 1,253,569 12,373,950
------------ ------------ ------------ -------------
Net loss $(33,037,730) $(21,264,230) $(18,023,923) $(100,823,163)
============ ============ ============ =============
Net loss per common share - basic and diluted $ (2.10) $ (1.66) $ (2.20)
============ ============ ============
Weighted average common shares outstanding -
basic and diluted 15,704,151 12,829,386 8,209,643
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Number of
common Price
shares per
Date Description outstanding share
----------- ------------
<S> <C> <C> <C>
February to March 1992 Shares issued for cash 1,870,000 $ 0.08
June to December 1992 Shares issued for cash, net of issue costs of $744,966 4,308,500 10.00
November 1992 Repurchase of common stock through forgiveness of
note receivable (25,000) 10.00
November 1992 Repurchase of common stock for cash (46,875) 0.08
Net loss for the period ended December 31, 1992 -- 0.00
---------- ------------
Balances at December 31, 1992 6,106,625
October 1993 Shares issued in payment of license fees 50,000 10.00
Net loss for the year ended December 31, 1993 -- 0.00
---------- ------------
Balances at December 31, 1993 6,156,625
March 1994 Shares issued for cash, net of issue costs of $1,251,739 1,690,677 12.00
Unrealized loss on investment securities -- 0.00
Net loss for the year ended December 31, 1994 -- 0.00
---------- ------------
Balances at December 31, 1994 7,847,302
March 1995 Shares issued in payment of license fees 50,000 12.00
April to August 1995 Exercise of stock options for cash 413 10.00
November 22, 1995 Shares issued for cash, net of issue costs of $2,904,274 3,000,000 10.00
Unrealized gain on investment securities -- 0.00
Net loss for the year ended December 31, 1995 -- 0.00
---------- ------------
Balances at December 31, 1995 10,897,715
Redemption of fractional shares for cash (48) 12.00
February 1996 Shares issued in payment of license fees 6,250 10.00
February 1996 Repurchase of common stock for cash (45,000) 0.08
May 1996 Shares issued for cash, net of issue costs of $3,213,410 2,875,000 16.25
Exercise of options and warrants for cash and
cancellation of warrants 196,843 10.00-14.40
Unrealized loss on investment securities -- 0.00
Net loss for the year ended December 31, 1996 -- 0.00
---------- ------------
Balances at December 31, 1996 13,930,760
March 1997 Shares issued for cash, net of issue costs of $3,546,639 2,100,000 27.00
Exercise of options and warrants for cash and 207,889 10.00-25.87
cancellation of warrants
Deferred compensation from granting of stock options -- --
Compensation expense from stock options -- --
Unrealized gain on investment securities -- --
Net loss for the year ended December 31, 1997 -- --
---------- ------------
Balances at December 31, 1997 16,238,649 $
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Unrealized Deficit
gain (loss) accumulated
Additional on during the Total
Common paid-in Deferred investment development stockholders'
stock capital compensation securities stage equity
- -------------- ------------------ -------------------------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$ 1,870 $ 147,730 $ - $ - $ - $ 149,600
4,309 42,335,725 - - - 42,340,034
(25) (249,975) - - - (250,000)
(47) (3,703) - - - (3,750)
- - - - (2,930,285) (2,930,285)
- -------------- ------------------ ----------------- ---------------- ------------------ ------------------
6,107 42,229,777 - - (2,930,285) 39,305,599
50 499,950 - - - 500,000
- - - - (10,804,878) (10,804,878)
- -------------- ------------------ ----------------- ---------------- ------------------ ------------------
6,157 42,729,727 - - (13,735,163) 29,000,721
1,690 19,093,694 - - - 19,095,384
- - - (172,809) - (172,809)
- - - - (14,762,117) (14,762,117)
- -------------- ------------------ ----------------- ---------------- ----------------- ------------------
7,847 61,823,421 - (172,809) (28,497,280) 33,161,179
50 599,950 - - - 600,000
1 4,124 - - - 4,125
3,000 27,092,726 - - - 27,095,726
- - - 211,267 - 211,267
- - - - (18,023,923) (18,023,923)
- -------------- ------------------ ------------------ ---------------- ----------------- ------------------
10,898 89,520,221 - 38,458 (46,521,203) 43,048,374
- (576) - - - (576)
6 62,494 - - - 62,500
(45) (3,555) - - - (3,600)
2,875 43,502,465 - - - 43,505,340
197 1,646,871 - - - 1,647,068
- - - (68,662) - (68,662)
- - - - (21,264,230) (21,264,230)
- -------------- ------------------ ------------------ ---------------- ----------------- ------------------
13,931 134,727,920 - (30,204) (67,785,433) 66,926,214
2,100 53,151,262 - - - 53,153,362
208 2,140,248 - - - 2,140,456
- 1,594,024 (1,594,024) - - -
- - 298,879 - - 298,879
- - - 7,569 - 7,569
- - - - (33,037,730) (33,037,730)
- -------------- ------------------- ------------------ ---------------- ----------------- ------------------
$ 16,239 $ 191,613,454 $ (1,295,145) $ (22,635) $ (100,823,163) $ 89,488,750
============== =================== ================== ================ ================= ==================
</TABLE>
F-6
<PAGE>
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
December 10,
1991
(inception)
Years ended December 31, through
----------------------------------------------------- December 31,
1997 1996 1995 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (33,037,730) $ (21,264,230) $ (18,023,923) $ (100,823,163)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,076,900 1,618,982 1,557,195 7,512,463
Amortization of investment premiums (discounts) 33,082 (33,083) 110,855 372,349
Compensation expense from stock options 298,879 -- -- 298,879
Common stock issued in payment of license fees -- 62,500 600,000 1,159,000
Loss on sale of property and equipment 42,643 315 62,859 105,817
Changes in certain assets and liabilities:
Interest receivable (357,959) 466,779 (485,430) (656,396)
Inventories (4,935,758) -- -- (4,935,758)
Other current assets (1,733,317) (151,381) (251,102) (2,556,409)
Other assets (21,819) (92,612) 40,926 (122,189)
Accounts payable 356,606 (823,452) 1,209,078 1,168,865
Compensation and benefits 686,909 (85,204) 160,682 1,461,167
Clinical development costs 2,066,478 (57,503) (737,618) 2,885,107
Other accrued expenses 2,022,592 487,595 (44,519) 2,591,660
Long-term liability (98,273) (363,713) 461,986 --
--------------- --------------- -------------- ---------------
Net cash used in operating activities (32,600,767) (20,235,007) (15,339,011) (91,538,608)
--------------- --------------- -------------- ---------------
Cash flows from investing activities:
Purchases of investment securities (177,646,664) (116,498,821) (72,862,897) (428,651,136)
Sales of investment securities 149,653,588 106,757,801 59,211,912 353,711,611
Purchases of property and equipment (4,370,202) (961,784) (448,350) (17,323,045)
Proceeds from sale of property and equipment 56,000 100 40,000 96,100
Issuance of note receivable -- -- -- (250,000)
--------------- --------------- -------------- ---------------
Net cash used in investing activities (32,307,278) (10,702,704) (14,059,335) (92,416,470)
--------------- --------------- -------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 53,153,362 43,505,340 27,095,726 185,339,196
Repurchase of common stock - (4,176) - (4,176)
Stock option and warrant exercises 2,140,456 1,647,068 4,125 3,791,649
--------------- --------------- -------------- ---------------
Net cash provided by financing activities 55,293,818 45,148,232 27,099,851 189,126,669
--------------- --------------- -------------- ---------------
Net increase (decrease) in cash and
cash equivalents (9,614,227) 14,210,521 (2,298,495) 5,171,591
Cash and cash equivalents at beginning of period 14,785,818 575,297 2,873,792 --
--------------- --------------- -------------- ---------------
Cash and cash equivalents at end of period $ 5,171,591 $ 14,785,818 $ 575,297 $ 5,171,591
=============== =============== ============== ===============
Supplemental schedule of noncash investing and
financing activities - repurchase of common stock
through forgiveness of note receivable $ -- $ -- $ -- $ 250,000
=============== =============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
AND SUBSIDIARY
Notes to Consolidated Financial Statements, December 31, 1997 and 1996
(1) Organization and Summary of Significant Accounting Policies
Nature of Development Stage Activities
Through 1997, PathoGenesis was a development stage healthcare company. The
Company develops drugs to treat 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. In
December 1997, the Company received marketing clearance from the FDA for
TOBI, the Company's first drug. Sales of TOBI commenced in January 1998.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned European subsidiary, PathoGenesis Limited.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Cash Equivalents
All investments in debt instruments with a maturity of three months or less
at the date of purchase are considered to be cash equivalents.
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
consolidated 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.
Inventories
Inventories are stated at the lower of cost, as determined by the first-in,
first-out method, or market.
Depreciation and Amortization
Furniture and equipment are depreciated using the straight-line method over
the assets' estimated useful lives of five to 10 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.
Research and Development Costs
Research and development costs are charged to expense as incurred.
F-8
<PAGE>
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. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Fair Value of Financial Instruments
The Company has financial instruments other than investments consisting of
cash, interest receivable and accounts payable. The fair value of these
financial instruments approximates their carrying amount due to their short-
term nature.
Stock-Based Compensation
The Company accounts for its stock option plans for employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense related to employee stock options is recorded only
if, on the date of grant, the fair value of the underlying stock exceeds the
exercise price. The Company applies the disclosure-only requirements of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, which allows entities to continue to apply the
provisions of APB Opinion No. 25 for transactions with employees, and to
provide pro forma results of operations disclosures for employee stock option
grants made in 1995 and subsequent years as if the fair-value-based method of
accounting in SFAS No. 123 had been applied to these transactions.
Net Loss Per Share
The Company has adopted the provisions of SFAS No. 128, Earnings Per Share,
in 1997 and, accordingly, has reported both basic and diluted net loss per
common share for each period presented. Basic loss per share is computed on
the basis of the weighted average number of shares outstanding for the year.
Diluted loss per share is computed on the basis of the weighted average
number of common shares plus dilutive potential common shares outstanding
using the treasury stock method. Potential dilutive common shares consist of
unexercised employee stock options and warrants outstanding. Stock options
and warrants outstanding were not included in the computation of diluted loss
per share, because the representative share increments would be antidilutive.
There was no change in previously reported loss per share when calculated in
accordance with the provisions of SFAS No. 128.
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.
F-9
<PAGE>
2) Investment Securities
The following summarizes the Company's investment securities at December
31:
<TABLE>
<CAPTION>
Gross Gross
Amortized cost unrealized unrealized Market
gains losses value
---------------- ----------------- ----------------- ------------
<S> <C> <C> <C> <C>
1997:
U.S. Treasury notes $ 6,165,367 $ 5,856 $ -- $ 6,171,223
Federal mortgage notes 7,255,781 19,958 (4,707) 7,271,032
Municipal bonds 1,199,960 400 -- 1,200,360
Corporate obligations 59,271,068 76,132 (120,274) 59,226,926
---------------- ----------------- ----------------- ------------
$ 73,892,176 $ 102,346 $ (124,981) $ 73,869,541
================ ================= ================= ============
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
================ ================= ================= ============
</TABLE>
Amortized cost and market value of investment securities at December 31,
1997, by contractual maturity are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Market
Maturities cost value
------------------- -------------------
<S> <C> <C>
Due in 1 year or less $ 12,906,819 $ 12,814,289
Due between 1 year to 5 years 34,003,855 34,031,720
Due between 5 years to 10 years 23,160,542 23,197,325
Due after 10 years 3,820,960 3,826,207
------------------- -------------------
$ 73,892,176 $ 73,869,541
=================== ===================
</TABLE>
Investment income, net includes interest of $5,216,693, $3,412,097 and
$1,308,126 earned on investments and gains (losses) of $61,405, $(118,315)
and $(20,669) realized upon the sale of investments for 1997, 1996 and 1995,
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) Inventories
Inventories consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Finished goods $ 2,096,300
Work in progress 733,068
Raw materials and supplies 2,106,390
------------------
$ 4,935,758
==================
</TABLE>
F-10
<PAGE>
(4) 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. The Company recorded a charge against
operations in 1995 and recorded such amount in general and administrative
expenses. The remaining balance on this obligation of $98,273 is included
under compensation and benefits at December 31, 1997.
(5) Stockholders' Equity
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 $0.001 par value
common stock to 20,000,000 shares, and an authorization of 1,000,000 shares
of preferred stock, par value $0.01. The accompanying consolidated
financial statements reflect the reverse split for all periods presented.
Effective June 25, 1997, the Company's stockholders approved a change to
the authorized number of shares of the Company's $0.001 par value common
stock to 60,000,000 shares.
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, 1997, 9,220 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.
In 1997, the Company adopted the 1997 Stock Option Plan, under which
2,000,000 shares of common stock are reserved for grants. At December 31,
1997, 1,360,155 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. A
number of options were granted under the 1997 plan prior to the plan
receiving stockholder approval. This resulted in deferred compensation of
approximately $1,594,000, based on the excess of the fair market value of
the stock at the time of plan approval (measurement date) over the exercise
price, which was based on the fair value of the stock at the time of option
grant. Deferred compensation is being amortized on the straight-line method
over the four-year vesting period of the options.
In 1996, the Company adopted the 1996 Directors Stock Option Plan
(Directors Plan) for nonemployee directors, under which 300,000 shares of
common stock were reserved for grants. Upon adoption of the 1997 Stock
Option Plan, the Directors Plan was terminated with no further grants to be
made.
Generally, options vest over a four-year period in installments of 25% each
year beginning one year from the date of grant; however, certain options
can vest upon granting. Vested options may be exercised at any time before
their expiration date. All options expire not later than 10 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 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.
F-11
<PAGE>
A summary of stock options follows:
<TABLE>
<CAPTION>
Weighted
average
1992 Directors 1997 exercise
Stock Plan Plan Stock Plan price
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
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 - 12.73
Granted 134,205 - 658,995 26.04
Canceled (33,108) - (19,150) 18.52
Exercised (169,543) (8,000) - 12.10
--------- ------ ------- ------
Balances at December 31, 1997 1,156,329 34,000 639,845 $18.51
========= ====== ======= ======
</TABLE>
The weighted average fair value of options granted was $14.06, $8.87, and $4.97
in 1997, 1996 and 1995, respectively.
Had compensation cost for the Company's stock option 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>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net loss - as reported $33,037,730 $21,264,230 $18,023,923
Net loss - pro forma 38,075,062 23,930,975 19,131,780
Loss per share - basic and diluted, as
reported 2.10 1.66 2.20
Loss per share - basic and diluted,
pro forma 2.42 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, 1996 and 1997: dividend yield of 0.0% for all years; expected
volatility of 46% for 1995, 57% to 67% for 1996 and 58% to 64% for 1997; risk-
free interest rate of 5.46% to 7.15% for 1995, 5.18% to 6.85% for 1996 and 5.72%
to 6.44% for 1997; expected lives from three to six years for all years.
F-12
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
average Weighted Weighted
Range of Number remaining average Number average
exercise outstanding contractual exercise exercisable exercise
prices at 12/31/97 life price at 12/31/97 price
- ----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 10.00 281,200 5.3 years $10.00 281,200 $10.00
12.00 369,549 7.2 years 12.00 278,593 12.00
13.75 to 14.75 131,650 8.5 years 14.52 32,913 14.52
16.13 to 16.75 247,825 8.2 years 16.25 130,864 16.25
22.00 to 22.25 350,900 9.0 years 22.22 61,850 22.15
25.00 to 25.88 231,000 9.2 years 25.53 46,000 25.68
28.13 to 28.75 120,450 9.5 years 28.37 -- --
35.00 to 36.81 58,400 9.8 years 35.72 -- --
38.00 39,200 9.9 years 38.00 10,000 38.00
--------- -------
$ 10.00 to 38.00 1,830,174 8.0 years $18.51 841,420 $13.89
========= =======
</TABLE>
Common Stock Warrants
As of December 31, 1997, the Company had outstanding warrants, with
expiration terms ranging from April 22, 2000 to February 6, 2001, to purchase
58,223 shares of common stock which are fully exercisable at the following
per share prices:
<TABLE>
<CAPTION>
Per share
Shares price
---------------------------
<S> <C> <C>
3,375 $ 12.00
54,848 14.40
---------------------------
58,223 $12.00-14.40
===========================
</TABLE>
Shareholder Rights Plan
The Board of Directors adopted a Shareholder Rights Plan in 1997 and
declared a dividend of one right for each outstanding share of common
stock. Such rights only become exercisable after a person or group, whose
action has not received prior approval from the Board of Directors,
acquires beneficial ownership of, or commences a tender or exchange offer
for, 15% or more of the Company's common stock. Each right then may be
exercised to acquire one one-thousandth of a share of preferred stock,
designated as Series A Junior Preferred Stock, at an exercise price of
$250, subject to adjustment. The rights may be redeemed by the Company at
$0.01 per right at any time until the 10th day following the public
announcement that a 15% position has been acquired. The rights expire on
June 26, 2007.
(6) 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-13
<PAGE>
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Start-up costs $ -- $ 5,817
Orphan drug credit carryforwards 5,010,532 2,266,232
Deferred compensation 14,858 116,080
License agreements 411,894 446,068
Research and experimentation credit carryforwards 970,285 747,456
Net operating loss carryforwards 32,293,864 21,425,678
Depreciation 488,064 310,432
Other 376,211 212,701
------------ ------------
Total gross deferred tax assets 39,565,708 25,530,464
Less valuation allowance 39,565,708 25,530,464
------------ ------------
Net deferred tax assets $ -- $ --
============= ============
</TABLE>
The increases in the valuation allowance for deferred tax assets of
$14,035,244, $7,453,622 and $6,388,860 in 1997, 1996 and 1995,
respectively, are primarily attributable to increases in net operating loss
and tax credit carryforwards whose utilization cannot reasonably be
assured.
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $94,980,000, research and experimentation credit
carryforwards of approximately $970,000 and orphan drug credit
carryforwards of approximately $5,010,000, which are available to offset
future Federal taxable income and income taxes, respectively, if any, and
expire beginning in 2007.
(7) Commitments
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.
Minimum lease payments under noncancelable operating leases and related
sublease income as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Lease Sublease
payments income
---------- --------
<S> <C> <C>
1998 $2,090,000 $333,000
1999 2,125,000 333,000
2000 2,129,000 333,000
2001 2,094,000 --
2002 1,136,000 --
Thereafter 225,000 --
---------- --------
$9,799,000 $999,000
========== ========
</TABLE>
F-14
<PAGE>
Rent expense for operating leases was approximately $2,002,000, $1,026,000
and $746,000 for 1997, 1996 and 1995, respectively, and $5,300,000 for the
period December 10, 1991 (inception) through December 31, 1997.
Included in rent expense are payments to a partnership in which a member of
the Board of Directors and the Secretary are partners of approximately
$37,500, $36,200 and $35,500 for 1997, 1996 and 1995, respectively.
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>
<C> <S> <C>
1998 $517,000
1999 294,000
2000 151,000
--------
$962,000
========
</TABLE>
(8) Collaboration Agreements
In 1997, the Company entered into a two-year research agreement with the
Cystic Fibrosis Foundation and the University of Washington to sequence the
Pseudomonas aeruginosa genome to assist in the drug discovery process.
Under this agreement, the Company is required to pay $1.0 million over the
two-year period. As of December 31, 1997, the Company has made payments
totaling $412,421.
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 and Bohdan scientists. Royalties of $206,000 and $238,000
were earned from this arrangement during 1997 and 1996, respectively.
In 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 rights to TOBI. A $1.5 million milestone payment is
payable by the Company pursuant to the product receiving approval for
marketing by the FDA, and is included in accrued clinical development costs
at December 31, 1997. The Company is responsible for 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 Kaneka
Corporation (Kaneka) to obtain North American rights to PA-1648, a product
then 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 PA-
1648. Kaneka is responsible for manufacturing the bulk form of the product.
The Company will pay a royalty on net product sales.
F-15
<PAGE>
In 1993, the Company entered into a collaborative research agreement with
Public Health Research Institute (PHRI). 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 $1.0 million per year in research and development to support this
collaborative research. As of December 31, 1997, the Company has fulfilled
its obligation under this commitment to PHRI.
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.
Also in 1993, the Company 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 entered into an additional
development agreement dated August 15, 1994 with this shareholder, pursuant
to which the Company continues to receive assistance in developing this
product. The Company has made payments under this agreement of
approximately $289,000, $1,055,000 and $210,000 in 1997, 1996 and 1995,
respectively.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, State of Washington, on March 30, 1998.
PATHOGENESIS CORPORATION
By: /s/ Wilbur H. Gantz
-------------------
Wilbur H. Gantz
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Wilbur H. Gantz Chairman, Chief Executive )
- ------------------------------- Officer, President and )
Wilbur H. Gantz Director )
(Principal Executive Officer) )
)
/s/ Alan R. Meyer Executive Vice President, )
- ------------------------------- Chief Financial Officer and )
Alan R. Meyer Director (Principal Financial )
and Accounting Officer) )
)
/s/ John L. Gordon Director )
- ------------------------------- )
John L. Gordon )
)
)
/s/ Elizabeth M. Greetham Director )
- ------------------------------- )
Elizabeth M. Greetham ) March 30, 1998
)
)
/s/ Michael J. Montgomery Director )
- ------------------------------- )
Michael J. Montgomery )
)
)
/s/ Talat M. Othman Director )
- ------------------------------- )
Talat M. Othman )
)
)
/s/ Eugene L. Step Director )
- ------------------------------- )
Eugene L. Step )
)
)
/s/ Fred Wilpon Director )
- ------------------------------- )
Fred Wilpon )
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Description of Exhibit
--- ----------------------
<S> <C>
3.1(a) Amended and Restated Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Registration No. 333-22297).
3.1(b) Certificate of Amendment of Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 4.1(b) to the
Company's Registration Statement on Form S-8, Registration No.
333-45571).
3.1(c) Certificate of Designations (incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-8,
Registration No. 333-45571).
3.2 By-Laws, as amended through January 30, 1998.
4.1(a) Form of Stock Certificate (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-97070).
4.1(b) Rights Agreement dated as of June 25, 1997 between the Company
and Harris Trust and Savings Bank, as Rights Agent, including the
form of Right Certificate as Exhibit B (incorporated by reference
to Exhibit 1 to the Company's Current Report on Form 8-K filed on
July 10, 1997, File No. 0-27150).
4.1(bb) First Amendment, dated as of March 8, 1998, to Rights Agreement
between the Company and Harris Trust and Savings Bank, as Rights
Agent.
4.1(c) Form of Right (included in Exhibit 4.1(b)).
4.2 PathoGenesis Corporation 1992 Stock Option Plan (incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement
on Form S-1, Registration No. 33-97070).
4.3 1996 Non-Employee Director Plan (incorporated by reference to
Exhibit 4.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 0-27150).
4.4 PathoGenesis Corporation 1997 Stock Option Plan (incorporated by
reference to Annex A to the Company's proxy statement dated April
29, 1997, File No. 0-27150).
10.1 Employment Agreement between the Company and Wilbur H. Gantz,
dated March 23, 1992 (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1, Registration
No. 33-97070).
10.3 Form of Employment Agreement between the Company and A. Bruce
Montgomery, dated September 19, 1995 (incorporated by reference
to Exhibit 10.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-97070).
10.4 Employment Agreement between the Company and Marc F. Wipperman,
effective as of July 1, 1996 (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-1,
Registration No. 333-22297).
10.6 Consulting Agreement between the Company and Sidney Altman, dated
March 10, 1992 (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Registration No.
333-2956).
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
No. Description of Exhibit
--- ----------------------
<C> <S>
10.7 Consulting Agreement between the Company and Stephen Benkovic,
dated March 26, 1992 (incorporated by reference to Exhibit 10.5
to the Company's Registration Statement on Form S-1, Registration
No. 33-97070).
10.8 Consulting Agreement between the Company and Lucy Shapiro, dated
as of August 1, 1995 (incorporated by reference to Exhibit 10.6
to the Company's Registration Statement on Form S-1, Registration
No. 33-97070).
10.10 Consulting Agreement between the Company and Arnold Smith, dated
October 1, 1996 (incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1, Registration
No. 333-22297).
10.11 Licensing Agreement between the Company and Kaneka Corporation,
dated October 25, 1993 and amendment thereto, dated March 3, 1995
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Registration No. 33-97070).*
10.12 Supply Agreement between the Company and Kaneka Corporation,
dated as of October 25, 1993 (incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on Form
S-1, Registration No. 33-97070).*
10.16 License Agreement between the Company and Children's Hospital and
Medical Center, dated January 1, 1994 (incorporated by reference
to Exhibit 10.14 to the Company's Registration Statement on Form
S-1, Registration No. 33-97070).*
10.17 License Agreement between the Company and the Cystic Fibrosis
Foundation, dated January 1, 1994 (incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on Form
S-1, Registration No. 33-97070).*
10.21(a) Lease for laboratory in Seattle, Washington, between David A.
Sabey and Sandra L. Sabey and the Company, dated June 8, 1992
(the "Laboratory Lease"), as amended by the Second Amendment,
dated November 16, 1992 (incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1,
Registration No. 33-97070).
10.21(b) Third Amendment to the Laboratory Lease, dated August 1, 1996
(incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1, Registration No. 333-22297).
10.23(a) Lease for the Skokie, Illinois facility, between The Equitable
Life Assurance Society of the United States and the Company,
dated October 1992 (the "Skokie Lease"), as amended, dated March
31, 1995 (incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1, Registration No.
33-97070).
10.23(b) Amendment to Skokie Lease, dated April 30, 1996 (incorporated by
reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-1, Registration No. 333-22297).
10.24 Lease for Annandale, New Jersey Facility, between Exxon Research
and Engineering Company and the Company, dated November 25, 1996
(incorporated by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1, Registration No. 333-22297).
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
No. Description of Exhibit
--- ----------------------
<C> <S>
10.25 Rights Agreement dated as of June 25, 1997 between PathoGenesis
Corporation and Harris Trust and Savings Bank, as Rights Agent,
including the form of Right Certificate as Exhibit B, and the
First Amendment to Rights Agreement, dated as of March 8, 1998
(included in Exhibits 4.1(b) and 4.1 (bb)).
10.26 1992 Stock Option Plan (included in Exhibit 4.2).
10.27 1996 Non-Employee Director Plan (included in Exhibit 4.3).
10.28 1997 Stock Option Plan (included in Exhibit 4.4).
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
99 Important Information on Forward-Looking Statements.
</TABLE>
* Contains confidential material omitted and filed separately with the
Securities and Exchange Commission. Brackets denote such omissions.
3
<PAGE>
EXHIBIT 3.2
PathoGenesis Corporation
BY-LAWS
[as amended through January 30, 1998]
Section 1
Offices
The principal office of the corporation shall be located at its principal
place of business or such other place as the Board of Directors ("Board") may
designate. The corporation may have such other offices, either within or
without the State of Delaware, as the Board may designate or as the business of
the corporation may require from time to time.
Section 2
Stockholders
2.1 Annual Meeting. An annual meeting of stockholders for the purposes of
electing Directors and of transacting such other business as may come before it
shall be held each year at such date, time, and place, either within or without
the State of Delaware, as may be specified by the Board. At any time prior to
the commencement of the annual meeting, the Board may postpone the annual
meeting for a period of up to 120 days from the date fixed for such meeting in
accordance with this subsection 2.1.
2.2 Special Meetings. Special meetings of stockholders for any purpose or
purposes may be held at any time upon call of the Chairman of the Board, if any,
the Chief Executive Officer, the Secretary, or a majority of the Board, at such
time and place either within or without the State of Delaware as may be stated
in the notice. A special meeting of stockholders shall be called by the
President or the Secretary upon the written request, stating time, place, and
the purpose or purposes of the meeting, of stockholders who together own of
record not less than 66-2/3% of the outstanding stock of all classes entitled to
vote at such meeting. Any action which would be taken at any special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall (a) be signed by stockholders who together own of record not less than
66-2/3% of the outstanding stock of all classes entitled to vote with respect to
the subject matter thereof (as determined in accordance with subsection 2.6.2
hereof) and (b) be delivered to the corporation by delivery to its registered
office in the State of Delaware, its principal place of business, or an officer
or agent of the corporation having custody of the records of proceedings of
meetings of stockholders. Delivery made to the corporation's registered office
shall be by hand or by certified mail or registered mail, return receipt
requested. Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless written consents signed by
stockholders entitled to vote with respect to the subject matter thereof are
delivered to the corporation, in the manner required by this
<PAGE>
section, within sixty days of the earliest dated consent delivered to the
corporation in the manner required by this section. Any such consent shall be
inserted in the minute book as if it were the minutes of a meeting of the
stockholders.
2.3 Place of Meeting. All meetings shall be held at the principal office
of the corporation or at such other place within or without the State of
Delaware designated by the Board, by any persons entitled to call a meeting
hereunder or in a waiver of notice signed by all of the stockholders entitled to
notice of the meeting.
2.4 Notice of Meeting. The Chairman, the President, any Vice-President,
the Secretary, the Board, or stockholders calling an annual or special meeting
of stockholders as provided for herein, shall cause to be delivered to each
stockholder entitled to notice of or to vote at the meeting either personally or
by mail, not less than ten nor more than sixty days before the meeting, written
notice stating the place, day and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. At
any time, upon written request of the holders of not less than the number of
outstanding shares of the corporation specified in subsection 2.2 and entitled
to vote at the meeting, it shall be the duty of the Secretary to give notice of
a special meeting of stockholders to be held on such date and at such place and
hour as the Secretary may fix, not less than ten nor more than sixty days after
receipt of said request, and if the Secretary shall neglect or refuse to issue
such notice, the person making the request may do so and may fix the date for
such meeting. If such notice is mailed, it shall be deemed delivered when
deposited in the official government mail properly addressed to the stockholder
at his or her address as it appears on the stock transfer books of the
corporation with postage prepaid. If the notice is telegraphed, it shall be
deemed delivered when the content of the telegram is delivered to the telegraph
company. [amended 1/30/98]
2.5 Waiver of Notice.
2.5.1 Whenever any notice is required to be given to any stockholder under
the provisions of these By-Laws, the Certificate of Incorporation or the General
Corporation Law of Delaware, a waiver thereof in writing, signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
2.5.2 The attendance of a stockholder at a meeting shall constitute a
waiver of notice of such meeting, except when a stockholder attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
2.6. Fixing of Record Date for Determining Stockholders.
2.6.1 Meetings. For the purpose of determining stockholders entitled to
notice of and to vote at any meeting of stockholders of any adjournment thereof,
the Board may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board, and
which record date shall not be more than sixty nor less than ten days before the
date of such meeting. If no record date is fixed by the Board, the record date
for determining stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record
2
<PAGE>
entitled to notice of and to vote at the meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
2.6.2 Consent to Corporate Action Without a Meeting. For the purpose of
determining stockholders entitled to consent to corporate action in writing
without a meeting, the Board may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the Board. If no
record date has been fixed by the Board, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board is required by Chapter 1 of the
General Corporation Law of the State of Delaware, as now or hereafter amended,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the corporation by delivery
to its registered office in the State of Delaware, its principal place of
business, or an officer or agent of the corporation having custody of the book
in which proceedings of meetings of stockholders are recorded. Delivery made to
a corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. If no record date has been fixed by the Board
and prior action by the Board is required by Chapter 1 of the General
Corporation Law of the State of Delaware, as now or hereafter amended, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the day on
which the Board adopts the resolution taking such prior action.
2.6.3 Dividends, Distributions and Other Rights. For the purpose of
determining stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to exercise
any rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board adopts the resolution relating thereto.
2.7 Voting List. At least ten days before each meeting of stockholders, a
complete list of the stockholders entitled to vote at such meeting, or any
adjournment thereof, shall be made, arranged in alphabetical order, with the
address of and number of shares held by each stockholder. This list shall be
open to examination by any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. This list shall also be produced and
kept at such meeting for inspection by any stockholder who is present.
2.8 Quorum. A majority of the outstanding shares of the corporation
entitled to vote, present in person or represented by proxy at the meeting,
shall constitute a quorum at a meeting of the stockholders; provided, that where
a separate vote by a class or classes is required, a majority of the outstanding
shares of such class or classes, present in person or represented by proxy at
the meeting, shall constitute a quorum entitled to take action with respect to
that vote on that matter. If less than a majority of the outstanding shares
entitled to
3
<PAGE>
vote are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. If a quorum is
present or represented at a reconvened meeting following such an adjournment,
any business may be transacted that might have been transacted at the meeting as
originally called. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
2.9 Manner of Acting. In all matters other than the election of
Directors, if a quorum is present, the affirmative vote of the majority of the
outstanding shares present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders,
unless the vote of a greater number is required by these By-Laws, the
Certificate of Incorporation or the General Corporation Law of Delaware. Where
a separate vote by a class or classes is required, if a quorum of such class or
classes is present, the affirmative vote of the majority of outstanding shares
of such class or classes present in person or represented by proxy at the
meeting shall be the act of such class or classes. Directors shall be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of Directors.
2.10 Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for such
stockholders by proxy executed in writing by the stockholder or by his or her
attorney-in-fact. Such proxy shall be filed with the Secretary of the
corporation before or at the time of the meeting. A proxy shall become invalid
three years after the date of its execution, unless otherwise provided in the
proxy. A proxy with respect to a specified meeting shall entitle the holder
thereof to vote at any reconvened meeting following adjournment of such meeting
but shall not be valid after the final adjournment thereof.
2.11 Voting of Shares. Each outstanding share entitled to vote with
respect to the subject matter of an issue submitted to a meeting of stockholders
shall be entitled to one vote upon each such issue.
2.12 Voting for Directors. Each stockholder entitled to vote at an
election of Directors may vote, in person or by proxy, the number of shares
owned by such stockholder for as many persons as there are Directors to be
elected and for whose election such stockholder has a right to vote.
Section 3
Board of Directors
3.1 General Powers. The business and affairs of the corporation shall be
managed by the Board.
3.2 Number and Tenure. The Board shall be composed of not less than three
nor more than 10 Directors, the specific number to be set by resolution of the
Board or the stockholders. The number of Directors may be changed from time to
time by amendment to these By-Laws, but no decrease in the number of Directors
shall have the effect of shortening the term of any incumbent Director. The
Directors, other than those who may be elected by the
4
<PAGE>
holders of any series of Preferred Stock, will be classified with respect to the
time for which they severally hold office into three classes, as nearly equal in
number as possible, designated Class I, Class II and Class III. The Directors
appointed to Class I will hold office for a term expiring at the annual meeting
of stockholders to be held in 1996; the Directors appointed to Class II will
hold office for a term expiring at the annual meeting of stockholders to be held
in 1997; and the Directors appointed to Class III will hold office for a term
expiring at the annual meeting of stockholders to be held in 1998, with the
members of each class to hold office until their respective successors are
elected and qualified. At each succeeding annual meeting the stockholders of
the Corporation, the successors of the class of Directors whose terms expire at
that meeting will be elected by plurality vote of all votes cast at such meeting
to hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. Election of Directors of
the Corporation need not be by written ballot unless requested by the Chairman
or by the holders of a majority of the outstanding stock present in person or
represented by proxy at a meeting of the stockholders at which Directors are to
be elected. Directors need not be stockholders of the corporation or residents
of the State of Delaware.
3.3 Annual and Regular Meetings. An annual Board meeting shall be held
without notice immediately after and at the same place as the annual meeting of
stockholders. By resolution, the Board or any committee designated by the Board
may specify the time and place either within or without the State of Delaware
for holding regular meetings thereof without other notice than such resolution.
3.4 Special Meetings. Special meetings of the Board or any committee
appointed by the Board may be called by or at the request of the Chairman, the
President, the Secretary or, in the case of special Board meetings, any one
Director and, in the case of any special meeting of any committee appointed by
the Board, by the Chairman thereof. The person or persons authorized to call
special meetings may fix any place either within or without the State of
Delaware as the place for holding any special Board or committee meeting called
by them. [amended 1/30/98]
3.5 Meetings by Telephone. Members of the Board or any committee
designated by the Board may participate in a meeting of such Board or committee
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation by such means shall constitute presence in person at a meeting.
3.6 Notice of Special Meetings. Notice of a special Board or committee
meeting stating the place, day and hour of the meeting shall be given to a
Director in writing or orally by telephone or in person. Neither the business
to be transacted at, nor the purpose of, any special meeting need be specified
in the notice of such meeting.
3.6.1 Personal Delivery. If notice is given by personal delivery, the
notice shall be effective if delivered to a Director at least two days before
the meeting.
3.6.2 Delivery by Mail. If notice is delivered by mail, the notice shall
be deemed effective if deposited in the official government mail properly
addressed to a Director at his or her address shown in the records of the
corporation with postage prepaid at least five days before the meeting.
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3.6.3 Delivery by Telecopy. If notice is delivered by telecopy, the
notice shall be deemed effective if it is transmitted to a facsimile number
provided by a Director for that purpose from time to time and successful
transmission thereof is confirmed by telephone with the operator of the
receiving equipment at least three days before the meeting.
3.6.4 Oral Notice. If notice is delivered orally, by telephone or in
person, the notice shall be deemed effective if personally given to the Director
at least two days before the meeting.
3.7 Waiver of Notice.
3.7.1 In Writing. Whenever any notice is required to be given to any
Director under the provisions of these By-Laws, the Certificate of Incorporation
or the General Corporation Law of Delaware, a waiver thereof in writing, signed
by the person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of such notice.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board or any committee appointed by the Board need be
specified in the waiver of notice of such meeting.
3.7.2 By Attendance. The attendance of a Director at a Board or committee
meeting shall constitute a waiver of notice of such meeting, except when a
Director attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
3.8 Quorum. A majority of the total number of Directors fixed by or in
the manner provided in these By-Laws shall constitute a quorum for the
transaction of business at any Board meeting but, if less than a majority are
present at a meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
3.9 Manner of Acting. The act of the majority of the Directors present at
a Board meeting at which there is a quorum shall be the act of the Board, unless
the vote of a greater number is required by these By-Laws, the Certificate of
Incorporation or the General Corporation Law of Delaware.
3.10 Presumption of Assent. A Director of the corporation present at a
Board or committee meeting at which action on any corporate matter is taken
shall be presumed to have assented to the action taken unless his or her dissent
is entered in the minutes of the meeting, or unless such Director files a
written dissent to such action with the person acting as the secretary of the
meeting before the adjournment thereof, or forwards such dissent by registered
mail to the Secretary of the corporation immediately after the adjournment of
the meeting. A Director who voted in favor of such action may not dissent.
3.11 Action by Board or Committees Without a Meeting. Any action which
could be taken at a meeting of the Board or of any committee appointed by the
Board may be taken without a meeting if a written consent setting forth the
action so taken is signed by each of the Directors or by each committee member.
Any such written consent shall be inserted in the minute book as if it were the
minutes of a Board or a committee meeting.
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3.12 Resignation. Any Director may resign at any time by delivering
written notice to the Chairman, the President, the Secretary or the Board, or to
the registered office of the corporation. Any such resignation shall take
effect at the time specified therein, or if the time is not specified, upon
deliver thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. [amended 1/30/98]
3.13 Removal. At a meeting of stockholders called expressly for that
purpose, one or more members of the Board (including the entire Board) may be
removed, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote on the election of Directors. If the Certificate
of Incorporation provides for cumulative voting in the election of Directors,
then if less than the entire Board is to be removed, no one of the Directors may
be removed if the votes cast against his or her removal would be sufficient to
elect such Director if then cumulatively voted at an election of the entire
Board.
3.14 Vacancies. Any vacancy occurring on the Board whether by reason of
removal, resignation, death or otherwise shall be filled exclusively by the
affirmative vote of a majority of the remaining Directors though less than a
quorum of the Board. A Director elected to fill a vacancy shall be elected for
the unexpired term of his or her predecessor in office. Any directorship to be
filled by reason of an increase in the number of Directors may be filled by the
board.
3.15 Executive and Other Committees.
3.15.1 Creation and Authority of Committees. The Board may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the Directors of the Corporation. The
Board may designate one or more Directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise all the powers and
authority of the Board in the management of the business, property, and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; but no such committee shall have power or
authority in reference to amending the Certificate of Incorporation (except that
a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board pursuant to
authority expressly granted to the Board by the Certificate of Incorporation,
fix any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of the assets of the Corporation, or
the conversion into, or the exchange of such shares for, shares of any other
class or classes or any other series of the same or any other class or classes
of stock of the Corporation), adopting an agreement of merger or consolidation
under Section 251 or 252 of the General Corporation Law of the State of
Delaware, recommending to the stockholders the sale, lease, or exchange of all
or substantially all of the Corporation's property and assets, recommending to
the stockholders a dissolution of the Corporation or a revocation of
dissolution, or amending these By-Laws; and, unless such resolution or
resolutions expressly so provided, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
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Corporation Law of the State of Delaware. Each committee which has been
established by the Board pursuant to these By-Laws may fix its own rules and
procedures. The Board may designate one or more Directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board to act at the
meeting in the place of any such absent or disqualified member.
3.15.2 Minutes of Meetings. All committees so appointed shall keep
regular minutes of their meetings and shall cause them to be recorded in books
kept for that purpose.
3.15.3 Quorum and Manner of Acting. A majority of the number of Directors
composing any committee of the Board, as established and fixed by resolution of
the Board, shall constitute quorum for the transaction of business at any
meeting of such committee but, if less than a majority are present at a meeting,
a majority of such Directors present may adjourn the meeting from time to time
without further notice. The act of a majority of the members of a committee
present at a meeting at which a quorum is present shall be the act of such
committee.
3.15.4 Resignation. Any member of any committee may resign at any time by
delivering written notice thereof to the Chairman, the President, the Secretary,
the Board or the Chairman of such committee. Any such resignation shall take
effect at the time specified therein, or if the time is not specified, upon
delivery thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. [amended 1/30/98]
3.15.5 Removal. The Board may remove from office any member of any
committee elected or appointed by it or by an Executive Committee, but only by
the affirmative vote of not less than a majority of the number of Directors
fixed by or in the manner provided in these By-Laws.
3.16 Compensation. By Board resolution, Directors and committee members
may be paid their expenses, if any, of attendance at each Board or committee
meeting, or a fixed sum for attendance at each Board or committee meeting, or a
stated salary as Director or a committee member, or a combination of the
foregoing. No such payment shall preclude any Director or committee member from
serving the corporation in any other capacity and receiving compensation
therefor.
Section 4
Officers
4.1 Number. The officers of the corporation shall be a Chairman, a
President, a Secretary and a Treasurer, each of whom shall be elected by the
Board. One or more Vice Presidents and such other officers and assistant
officers may be elected or appointed by the Board, such officers and assistant
officers to hold office for such period, have such authority and perform such
duties as are provided in these By-Laws or as may be provided by resolution of
the Board. Any officer may be assigned by the Board any additional title that
the Board
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deems appropriate. The Board may delegate to any officer or agent the power to
appoint any such subordinate officers or agents and to prescribe their
respective terms of office, authority and duties. Any two or more offices may
be held by the same person. [amended 1/30/98]
4.2 Election and Term of Office. The officers of the corporation shall be
elected annually by the Board at the Board meeting held after the annual meeting
of the stockholders. If the election of officers is not held at such meeting,
such election shall be held as soon thereafter as a Board meeting conveniently
may be held. Unless an officer dies, resigns, or is removed from office, he or
she shall hold office until the next annual meeting of the Board or until his or
her successor is elected.
4.3 Resignation. Any officer may resign at any time by delivering written
notice to the Chairman, the President, a Vice President, the Secretary or the
Board. Any such resignation shall take effect at the time specified therein, or
if the time is not specified, upon delivery thereof and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. [amended 1/30/98]
4.4 Removal. Any officer or agent elected or appointed by the Board may
be removed by the Board whenever in its judgment the best interests of the
corporation would be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the persons so removed.
4.5 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification, creation of a new office or any other cause may be
filled by the Board for the unexpired portion of the term, or for a new term
established by the Board.
4.6 Chairman. The Chairman shall be the chief executive officer of the
corporation, shall preside over meetings of the Board and stockholders, and,
subject to the Board's control, shall supervise and control all of the assets,
business and affairs of the corporation. The Chairman may sign certificates for
shares of the corporation, deeds, mortgages, bonds, contracts or other
instruments, except when the signing and execution thereof have been expressly
delegated by the Board of these By-Laws to some other officer or agent of the
corporation or are required by law to be otherwise signed or executed by some
other officer or in some other manner. In general, the Chairman shall perform
all duties incident to the office of the chief executive officer and such other
duties as are prescribed by the Board from time to time. [amended 1/30/98]
4.7 President. The President shall be the chief operating officer of the
corporation. In the event of the death of the Chairman or his or her inability
to act, the President shall perform the duties of the Chairman, except as may be
limited by resolution of the Board, with all the powers of and subject to all
the restrictions upon the Chairman. The President may sign with the Secretary
or any Assistant Secretary certificates for shares of the corporation. The
President shall have, to the extent authorized by the Chairman or the Board, the
same powers as the Chairman to sign deeds, mortgages, bonds, contracts or other
instruments. The President shall perform such other duties as from time to time
may be assigned by the Chairman or the Board. [amended 1/30/98]
4.8 Vice President. In the event of the death of the President or his or
her inability to act, the Vice President (or if there is more than one Vice
President, the Vice President who
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was designated by the Board as the successor to the President, or if no Vice
President is so designated, the Vice President first elected to such office)
shall perform the duties of the President, except as may be limited by
resolution of the Board, with all the powers of and subject to all the
restrictions upon the President. Any Vice President may sign with the Secretary
or any Assistant Secretary certificates for shares of the corporation. Any Vice
President shall have, to the extent authorized by the Chairman, the President or
the Board, the same powers as the President to sign deeds, mortgages, bonds,
contracts or other instruments. Each Vice President shall perform such other
duties as from time to time may be assigned by the Chairman, the President or
the Board. [amended 1/30/98]
4.9 Secretary. The Secretary shall: (a) keep minutes of meetings of the
stockholders and the Board in one or more books provided for that purpose; (b)
see that all notices are duly given in accordance with the provisions of these
By-Laws or as required by law; (c) be custodian of the corporate records and
seal of the corporation; (d) keep registers of the post office address of each
stockholder and Director; (e) sign certificates for shares of the corporation;
(f) have general charge of the stock transfer books of the corporation; (g)
sign, with the Chairman, the President or other officer authorized by the
Chairman, the President or the Board, deeds, mortgages, bonds, contracts or
other instruments; and (h) in general perform all duties incident to the office
of the Secretary and such other duties as from time to time may be assigned by
the Chairman, the President or the Board. In the absence of the Secretary, an
Assistant Secretary may perform the duties of the Secretary. [amended 1/30/98]
4.10. Treasurer. If required by the Board, the Treasurer shall give a
bond for the faithful discharge of his or her duties in such amount and with
such surety or sureties as the Board shall determine. The Treasurer shall have
charge and custody of and be responsible for all funds and securities of the
corporation; receive and give receipts for moneys due and payable to the
corporation from any source whatsoever, and deposit all such moneys in the name
of the corporation in banks, trust companies or other depositories selected in
accordance with the provisions of these By-Laws; sign certificates for shares of
the corporation; and in general perform all of the duties incident to the office
of Treasurer and such other duties as from time to time may be assigned to him
or her by the Chairman, the President or the Board. In the absence of the
Treasurer, an Assistant Treasurer may perform the duties of the Treasurer.
[amended 1/30/98]
4.11 Salaries. The salaries of the officers shall be fixed from time to
time by the Board or by any person or persons to whom the Board has delegated
such authority. No officer shall be prevented from receiving such salary by
reason of the fact that he or she is also a Director of the corporation.
Section 5
Contracts, Loans, Checks and Deposits
5.1 Contracts. The Board may authorize any officer or officers, or agent
or agents, to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the corporation. Such authority may be general or
confined to specific instances.
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5.2 Loans to the Corporation. No loans shall be contracted on behalf of
the corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the Board. Such authority shall be
confined to specific instances.
5.3 Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation shall be signed by such officer or officers, or agent or agents,
of the corporation and in such manner as is from time to time determined by
resolution of the Board.
5.4 Deposits. All funds of the corporation not otherwise employed shall
be deposited from time to time to the credit of the corporation in such banks,
trust companies or other depositories as the Board may select.
Section 6
Certificates for Shares and Their Transfer
6.1 Issuance of Shares. No shares of the corporation shall be issued
unless authorized by the Board, which authorization shall include the maximum
number of shares to be issued and the consideration to be received for each
share.
6.2 Certificates for Shares. Certificates representing shares of the
corporation shall be signed by the Chairman or the President or the Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary. Any or all the signatures on the certificate may be a
facsimile. All certificates shall include on their face written notice of any
restrictions which may be imposed on the transferability of such shares and
shall be consecutively numbered or otherwise identified. [amended 1/30/98]
6.3 Stock Records. The stock transfer books shall be kept at the
registered office or principal place of business of the corporation or at the
office of the corporation's transfer agent or registrar. The name and address
of each person to whom certificates for shares are issued, together with the
class and number of shares represented by each such certificate and the date of
issue thereof, shall be entered on the stock transfer books of the corporation.
The person in whose name shares stand on the books of the corporation shall be
deemed by the corporation to be the owner thereof for all purposes.
6.4 Restriction on Transfer. Except to the extent that the corporation
has obtained an opinion of counsel acceptable to the corporation that transfer
restrictions are not required under applicable securities laws, or has otherwise
satisfied itself that such transfer restrictions are not required, all
certificates representing shares of the corporation shall bear a legend on the
face of the certificate, or on the reverse of the certificate if a reference to
the legend is contained on the face, which reads substantially as follows:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 or any applicable state law, and no
interest therein may be sold, distributed, assigned, offered, pledged or
otherwise transferred unless (a) there is an effective registration
statement under such Act and applicable state securities laws covering any
such transaction involving said securities or (b) this corporation receives
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an opinion of legal counsel for the holder of these securities (concurred
in by legal counsel for this corporation) stating that such transaction is
exempt from registration or this corporation otherwise satisfies itself
that such transaction is exempt from registration. Neither the offering of
the securities nor any offering of materials have been reviewed by any
administrator under the Securities Act of 1933 or any applicable state
law."
6.5 Transfer of Shares. The transfer of shares of the corporation shall
be made only on the stock transfer books of the corporation pursuant to
authorization or document of transfer made by the holder of record thereof or by
his or her legal representative, who shall furnish proper evidence of authority
to transfer, or by his or her attorney-in-fact authorized by power of attorney
duly executed and filed with the Secretary of the corporation. All certificates
surrendered to the corporation for transfer shall be cancelled and no new
certificate shall be issued until the former certificates for a like number of
shares shall have been surrendered and cancelled.
6.6 Lost or Destroyed Certificates. In the case of a lost, destroyed or
mutilated certificate, a new certificate may be issued therefor upon such terms
and indemnity to the corporation as the Board may prescribe.
Section 7
Books and Records
The corporation shall keep correct and complete books and records of
account, stock transfer books, minutes of the proceedings of its stockholders
and Board and such other records as may be necessary or advisable.
Section 8
Accounting Year
The accounting year of the corporation shall be the calendar year, provided
that if a different accounting year is at any time selected for purposes of
federal income taxes, the accounting year shall be the year so selected.
Section 9
Seal
The seal of the corporation shall consist of the name of the corporation,
the state of its incorporation and the year of its incorporation.
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Section 10
Indemnification
10.1 Right to Indemnification. Each person who was or is made a party or
is threatened to be made a party to or is otherwise involved (including, without
limitation, as a witness) in any actual or threatened 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 or officer of the corporation or that, being or having been such a
Director or officer or an employee of the corporation, he or she is or was
serving at the request of the corporation as a Director, officer, employee or
agent of another 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 such a Director, officer, employee or agent or
in any other capacity while serving as such a Director, officer, employee or
agent, shall be indemnified and held harmless by the corporation to the full
extent permitted by the General Corporation Law of Delaware, 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), or by other applicable law
as then in effect, against all expense, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) actually and 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 subsection 10.2 of this Section with respect
to proceedings seeking 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 or ratified by the Board. The right to indemnification conferred
in this subsection 10.1 shall be a contract right and shall include the rights
to be paid by the corporation the expenses incurred in defending any such
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that if the General Corporation Law of Delaware
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 that such indemnitee is not entitled to be indemnified for such expenses
under this subsection 10.1 or otherwise.
10.2 Right of Indemnitee to Bring Suit. If a claim under subsection 10.1
of this Section 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 twenty 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. The indemnitee
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shall be presumed to be entitled to indemnification under this Section upon
submission of a written claim (and, in an action brought to enforce a claim for
an advancement of expenses, where the required undertaking, if any is required,
has been tendered to the corporation), and thereafter the corporation shall have
the burden of proof to overcome the presumption that the indemnitee is not so
entitled. Neither the failure of the corporation (including its Board,
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 not an actual determination by the corporation
(including its Board, independent legal counsel or its stockholders) that the
indemnitee is not entitled to indemnification shall be a defense to the suit or
create a presumption that the indemnitee is not so entitled.
10.3 Nonexclusivity of Rights. The rights to indemnification and to the
advancement of expenses conferred in this Section shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
agreement, vote of stockholders or disinterested Directors, provisions of the
Certificate of Incorporation or By-Laws of the corporation or otherwise.
10.4 Insurance, Contracts and Funding. 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 General Corporation Law of Delaware. The
corporation, without further stockholder approval, may enter into contracts with
any Director, officer, employee or agent in furtherance of the provisions of
this Section and may create a trust fund, grant a security interest or use other
means (including, without limitation, a letter of credit) to ensure that payment
of such amounts as may be necessary to effect indemnification as provided in
this Section.
10.5 Indemnification of Employees and Agents of the Corporation. The
corporation may, by action of the Board, grant rights to indemnification and
advancement of expenses to employees or agents or groups of employees or agents
of the corporation with the same scope and effects as the provisions of this
Section with respect to the indemnification and advancement of expenses of
Directors and officers of the corporation; provided, however, that an
undertaking shall be made by an employee or agent only if required by the Board.
10.6 Persons Serving Other Entities. Any person who is or was a Director,
officer or employee of the corporation who is or was serving as a Director or
officer of another corporation of which a majority of the shares entitled to
vote in the election of its Directors is held by the corporation shall be deemed
to be so serving at the request of the corporation and entitled to
indemnification and advancement of expenses under subsection 10.1 of this
Section.
Section 11
Amendments
These By-Laws may be amended or repealed and new By-Laws may be adopted by
the Board. The stockholders may also amend and repeal these By-Laws or adopt
new By-Laws. All By-Laws made by the Board may be amended or repealed by the
stockholders.
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Notwithstanding the foregoing and anything contained in the Certificate of
Incorporation of the Corporation or these By-Laws to the contrary, Sections 2.2,
3.2, 3.14 and this Section 11 of the By-Laws of the Corporation may not be
amended or repealed by the stockholders, and no provision inconsistent therewith
may be adopted by the stockholders, without the affirmative vote of the holders
of at least 66-2/3% of the outstanding stock of all classes entitled to vote
thereon.
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EXHIBIT 4.1(bb)
FIRST AMENDMENT
TO
RIGHTS AGREEMENT
First Amendment, dated as of March 8, 1998, to Rights Agreement by and
between PathoGenesis Corporation, a Delaware corporation (the "Company"), and
Harris Trust and Savings Bank, an Illinois banking corporation (the "Rights
Agent").
W I T N E S S E T H :
WHEREAS, the Company and the Rights Agent entered into a Rights Agreement
dated as of June 26, 1997 (the "Rights Agreement"); and
WHEREAS, the Company and the Rights Agent desire to amend the Rights
Agreement,
NOW THEREFORE, in consideration of the promises and the mutual agreements
herein set forth, the parties hereby agree to amend the Rights Agreement as
follows:
1. Section 1(a) is amended to delete the following after "Board of
Directors of the Company determines in good faith":
(but only if at the time of such determination by the Board of
Directors there are then in office not less than a majority of
directors who are Continuing Directors (as such term is hereinafter
defined) and such action is approved by a majority of the Continuing
Directors then in office)
2. Section 1(h) is deleted in its entirety.
3. Section 1(r) is amended to delete the following after "approved by a
majority of the Board of Directors":
(provided, that at the time of such approval by the Board of Directors
there are then in office not less than a majority of directors who are
Continuing Directors and such offer is approved by a majority of the
Continuing Directors then in office)
4. Section 1(v) is amended to delete "Continuing Directors" and to add in
its place "Board of Directors."
5. Section 11(a) (iii) is amended to delete the following after "the
Company may, if the Board of Directors determines":
<PAGE>
(but only if at the time of such determination by the Board of
Directors there are then in office not less than a majority of
directors who are Continuing Directors and such action is approved by
a majority of the Continuing Directors then in office)
6. Section 11(a)(iii) is further amended to delete the following after
"determined by an investment banking firm selected by the Board of Directors":
(but only if at the time of such selection there are then in office
not less than a majority of directors who are Continuing Directors and
such selection is approved by a majority of the Continuing Directors
then in office)
7. Section 13(a) is amended to delete the following after "Except for any
transaction approved by the Board of Directors":
(but only if at the time of such approval by the Board of Directors
there are in office not less than a majority of directors who are
Continuing Directors and such action is approved by a majority of the
Continuing Directors then in office)
8. Section 23(a) is amended to delete the following after "subject to
adjustments as provided in subsection (c) below (the "Redemption Price")":
; provided, however, that from and after the time that any Person
shall become an Acquiring Person (other than pursuant to a Qualifying
Tender Offer), the Company may redeem the Rights only if at the time
of the action of the Board of Directors there are then in office not
less than a majority of directors who are Continuing Directors and
such redemption is approved by a majority of the Continuing Directors
then in office
9. Section 24(a) is amended to delete the following after "The Company, at
its option and upon approval by the Board of Directors":
(but only if at the time of such approval by the Board of Directors
there are in office not less than a majority of directors who are
Continuing Directors and such action is approved by a majority of the
Continuing Directors then in office)
10. Section 27 is amended by deleting the last sentence of the first
paragraph and inserting the following in its place:
Notwithstanding anything contained in this Rights Agreement to the
contrary, no supplement or amendment shall be made which changes the
Redemption Price or the Final Expiration Date.
11. Except as provided in this First Amendment to the Rights Agreement,
the Rights Agreement shall remain in full force and effect.
2
<PAGE>
12. This First Amendment to the Rights Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
Rights Agreement to be duly executed, as of the day and year first above
written.
PATHOGENESIS CORPORATION
By: /s/ Alan R. Meyer
-----------------------------------
Alan R. Meyer
Executive Vice President
HARRIS TRUST AND SAVINGS BANK
By: /s/ Susan M. Shadel
-----------------------------------
Susan M. Shadel
Assistant Vice President
3
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
The Board of Directors
PathoGenesis Corporation:
We consent to incorporation by reference in the registration statements (Nos.
333-05095 and 333-45571) on Form S-8 of PathoGenesis Corporation (a development
stage enterprise) of our report dated January 23, 1998, relating to the
consolidated balance sheets of PathoGenesis Corporation as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997 and for the period from December 10, 1991 (inception) through
December 31, 1997, which report appears in the December 31, 1997 annual report
on Form 10-K of PathoGenesis Corporation.
KPMG Peat Marwick LLP
Seattle, Washington
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
financial statements of PathoGenesis Corporation for the fiscal year ended
12/31/97 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,171,591
<SECURITIES> 73,869,541
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 4,935,758
<CURRENT-ASSETS> 87,189,695
<PP&E> 16,746,715
<DEPRECIATION> 7,138,050
<TOTAL-ASSETS> 97,595,549
<CURRENT-LIABILITIES> 8,106,799
<BONDS> 0
0
0
<COMMON> 16,239
<OTHER-SE> 191,613,454
<TOTAL-LIABILITY-AND-EQUITY> 97,595,549
<SALES> 0
<TOTAL-REVENUES> 441,880
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 38,599,810
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (33,037,730)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,037,730)
<EPS-PRIMARY> (2.10)
<EPS-DILUTED> (2.10)
</TABLE>
<PAGE>
EXHIBIT 99
Important Information on Forward-Looking Statements
Statements in the Company's Annual Report on Form 10-K, news releases and
other public documents, as well as oral statements that may be made by or on
behalf of the Company, and that are not statements of historical fact,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to known and unknown risks, uncertainties or other factors which may
cause the actual results of the Company to be materially different from the
historical results or from any results expressed or implied by the forward-
looking statements. In addition to statements which explicitly describe such
risks and uncertainties, the terms "believes," "belief," "expects," "plans,"
"anticipates," "intends" and similar expressions identify forward-looking
statements. All cautionary statements made in this Annual Report on Form 10-K
should be read as being applicable to all related forward-looking statements
wherever they appear.
The following discussion identifies some important factors that may cause
the 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.
(i) Uncertainty of Future Profitability: The Company commenced the commercial
sale of its first drug product, TOBI, in January 1998. Before then, the
Company had no sources of operating revenues from any of its drug
candidates and limited sources of revenue from grants and royalties. At
December 31, 1997, the Company had an accumulated deficit of $100.8
million. The Company's ability to achieve profitability will depend on
its ability to successfully commercialize TOBI. There can be no assurance
if or when the Company will achieve profitability.
(ii) Dependence on TOBI. The Company's drug candidates other than TOBI are not
expected to be commercially available for at least several years, if at
all. The Company must depend on successfully marketing its only product,
TOBI, in order to generate revenues to fund development of additional
drug candidates. However, TOBI for cystic fibrosis may not achieve market
acceptance. In addition, the Company may not be successful in developing
other drug candidates as commercial products. The Company has seven years
of marketing exclusivity for TOBI in the U.S. from the time of TOBI's
approval in December 1997. However, tobramycin also has been approved by
the FDA for intravenous and intrathecal (injection into spinal fluid)
use. These generic formulations of tobramycin can be modified by
pharmacists, physicians or patients for inhalation use. Although this
practice is not approved by the FDA, it may continue and may have a
material adverse effect on reimbursement levels, sales and market
acceptance of TOBI. Furthermore, the Company could incur substantial
costs in asserting any rights to prevent such uses under the Orphan Drug
Act. See also Factor (vi): "Uncertain Ability to Protect Patents and
Proprietary Technology."
<PAGE>
(iii) Uncertainty of Third Party Reimbursement and Product Pricing: How
successfully the Company can commercialize its products may depend, in
part, on the extent to which reimbursement for the cost of such products
will be available from third party payors, such as private health
insurers or Medicaid in the U.S. Adequate reimbursement in the U.S. or
foreign countries may not be available for any products the Company has
developed or will develop. 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.
(iv) Limited Sales and Marketing Capabilities: The company only recently
established capabilities in sales, marketing and distribution of products
in anticipation of TOBI's introduction in January 1998. These
capabilities may not be sufficient or successful.
(v) Limited Manufacturing Capability; Dependence on Suppliers: The Company
relies on others to supply raw materials and manufacture TOBI according
to the FDA's requirements. There can be no assurance that the Company
will be able to obtain future supplies of bulk tobramycin on favorable
terms, that contract manufacturers will be able to provide the Company
with sufficient quantities of TOBI, or that the products supplied will
meet the Company's and the FDA's specifications. The Company obtains bulk
powdered PA-1648 from Kaneka Corporation, currently the only known
manufacturer of the bulk powdered drug. The Company has no alternative
supply source, although it believes that it has sufficient quantities of
PA-1648 to complete Phase II testing.
(vi) Uncertain Ability to Protect Patents and Proprietary Technology: The
Company's ability to compete effectively depends on its ability to
protect its proprietary technology in the U.S. and abroad. 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 significant gene sequences that it
discovers. However, the Company may not obtain any patents for which it
applies. Even if obtained, these patents may be challenged, invalidated
or circumvented, or may not provide any competitive advantage. The
Company also relies on trade secrets, know-how and continuing
technological advancement to maintain its competitive position. The
Company has entered into confidentiality and invention agreements with
its employees and consultants, but there can be no assurance that each of
these agreements will be honored. Moreover, the Company may not be able
to effectively protect its patents or its rights to unpatented trade
secrets, or others may independently develop substantially equivalent
proprietary information.
(vii) Government Regulation: The Company's research, clinical trials, drug
production and marketing are subject to regulation by numerous
governmental agencies in the U.S. and other countries. The effect of
government regulation, or a change in the regulations, may be to increase
product development costs, delay marketing of the Company's proposed
products, or furnish a competitive advantage to the Company's
competitors. Regulatory authorities may not approve any product
candidates developed by the Company on a timely basis or at all. In
addition, noncompliance with regulatory requirements could result in
fines, injunctions, seizures of products, total or partial suspension of
product marketing,
<PAGE>
withdrawal of marketing approvals, or criminal prosecution, among other
outcomes. Compliance with regulations may be burdensome.
(viii) Uncertainty of Drug Development and Clinical Trials: Results of initial
studies of drug candidates 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 could significantly delay regulatory filings or
result in a filing for a narrower indication. There can be no assurance
that the Company's research and development, preclinical testing,
clinical trials, or long-term safety and efficacy studies will be
successfully completed. The Company may not obtain regulatory approvals
or may obtain approvals that are not as broad as sought. Even if the
Company succeeds in obtaining the desired regulatory approval for a drug
candidate, it may not be able to produce the drug candidates in
commercial quantities at reasonable costs. Furthermore, products may not
achieve market acceptance.
(ix) Technological Change: The pharmaceutical business 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 industry and academia.
Research and discoveries by others may render some or all of the
Company's programs or drug candidates noncompetitive or obsolete.
(x) Competition: Many companies, including well-known pharmaceutical
companies, chemical companies and specialized genetic engineering
companies, are engaged in developing pharmaceuticals for human
therapeutic applications. Many of these companies have substantially
greater financial, research and development, manufacturing, marketing and
human resources than the Company and represent significant competition.
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.
(xi) 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 $25 million
per occurrence and $25 million in the aggregate. There can be no
assurance that product liability claims will not occur, that the Company
will be able to obtain or maintain product liability insurance on
acceptable terms, or that such insurance will provide adequate coverage
against any potential claims.
(xii) Use of Hazardous Materials: The Company's research and development
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. The Company may incur
significant costs to comply with environmental laws, rules, regulations
and policies. The business, financial position or
<PAGE>
results of operations of the Company may 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. The Company does not maintain a separate insurance policy to
cover the risk of accidental injury or contamination from these
materials.
(xiii) Dependence on Qualified Personnel: In view of the intense competition for
qualified personnel in the pharmaceutical field, the Company may not be
able to continue to attract and retain the qualified personnel necessary
for the development of its business. The unexpected 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.
(xiv) Dependence on Others: The Company's strategy for the research,
development and commercialization of its drug candidates and proprietary
technologies may require it to enter into various arrangements with
corporate and academic collaborators, licensors, licensees and others.
There can be no assurance that any revenues or profits will be derived
from such arrangements, or that the Company will be able to enter into
future collaborations.
<PAGE>
(xv) Stock Price Volatility: The market price of the Common Stock has
fluctuated significantly, and is likely to do so in the future, as is
typical for publicly traded emerging growth companies and
biopharmaceutical companies. Factors such as results of clinical trials,
announcements of new products by the Company or its competitors,
regulatory actions, developments or disputes concerning patent or
proprietary rights, and period-to-period fluctuations in the Company's
financial results could have a significant impact on the market price of
the Common Stock.
(xvi) Access to Capital: 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, 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 available on acceptable or
affordable terms when needed.
