<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1997
REGISTRATION NO. 333-23407
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AURORA BIOSCIENCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8731 33-0669859
(STATE OR JURISDICTION (PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER
ORGANIZATION)
</TABLE>
11149 NORTH TORREY PINES ROAD
LA JOLLA, CALIFORNIA 92037
(619) 452-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
TIMOTHY J. RINK
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
AURORA BIOSCIENCES CORPORATION
11149 NORTH TORREY PINES ROAD
LA JOLLA, CALIFORNIA 92037
(619) 452-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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THOMAS A. COLL, ESQ. JEFFREY S. MARCUS, ESQ.
ERIC J. LOUMEAU, ESQ. TAMARA POWELL TATE, ESQ.
COOLEY GODWARD LLP MORRISON & FOERSTER LLP
4365 EXECUTIVE DRIVE, SUITE 1100 1290 AVENUE OF THE AMERICAS
SAN DIEGO, CA 92121 NEW YORK, NY 10104
(619) 550-6000 (212) 468-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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====================================================================================================
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1)(2) PER SHARE(3) PRICE FEE
- ----------------------------------------------------------------------------------------------------
Common Stock, $.001 par value... 575,000 $11.00 $6,325,000 $1,917
====================================================================================================
</TABLE>
(1) The Registrant previously paid a registration fee of $11,500 on March 14,
1997 to register 3,450,000 shares of Common Stock.
(2) Includes 75,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(3) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act of
1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
JUNE 18, 1997
3,500,000 SHARES
[AURORA LOGO]
COMMON STOCK
------------------------
All of the 3,500,000 shares of Common Stock offered hereby are being sold
by Aurora Biosciences Corporation, a Delaware corporation ("Aurora" or the
"Company"). Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price of the Common Stock will be between $9.00 and $11.00 per share.
See "Underwriting" for the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol ABSC.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
=================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=================================================================================================
</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses of the offering estimated at $700,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
________________________, 1997.
ALEX. BROWN & SONS
INCORPORATED
HAMBRECHT & QUIST
ROBERTSON, STEPHENS & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3
[GRAPHIC DEPICTION OF UHTS SYSTEM]
[Items depicted will be identified by the following labels:]
Genomic Targets
Combinatorial Chemistry Libraries
Automated Storage and Retrieval System
Miniaturized Fluorescent Assays
NanoPlate(TM)
Microfluidics
Fluorescence Detector
Lead Compounds
Informatics
Mammalian Cells
Depicted above is a schematic representation of Aurora's integrated
technology platform designed to take advantage of the great number of targets
being identified through genomics and the large, diverse libraries of compounds
being generated from combinatorial chemistry. Aurora's ultra-high throughput
screening ("UHTS") system is designed to incorporate a store of over 1,000,000
compounds and is expected to screen in excess of 100,000 compounds per day in
miniaturized assays. The UHTS system is expected to be operational in three to
four years.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING THE ENTRY OF STABILIZING BIDS, OR SYNDICATE COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
NanoPlate(TM) is a trademark of the Company and Packard Instrument Company.
All other trade names or trademarks appearing in this Prospectus are the
property of their respective holders.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated by such
forward-looking statements.
THE COMPANY
Aurora Biosciences Corporation ("Aurora" or the "Company") designs and
develops proprietary drug discovery systems, services and technologies to
accelerate and enhance the discovery of new medicines. Aurora is developing an
integrated technology platform comprised of a portfolio of proprietary
fluorescent assay technologies and an ultra-high throughput screening ("UHTS")
system designed to allow assay miniaturization and to overcome many of the
limitations associated with the traditional drug discovery process. The Company
believes that this platform will enable Aurora and its collaborators, which
include Bristol-Myers Squibb ("BMS") and Eli Lilly and Company ("Lilly"), to
take advantage of the opportunities created by recent advances in genomics and
combinatorial chemistry that have generated many new therapeutic targets and an
abundance of new small molecule compounds. Aurora believes its integrated
platform will accelerate the drug discovery process by shortening the time
required to identify high quality lead compounds and to optimize those compounds
into drug development candidates.
The discovery and development of new medicines historically has been an
expensive, time-consuming and often unsuccessful process. Recent developments in
molecular biology and genomics as well as combinatorial chemistry have created
significant opportunities to discover greater numbers of high quality lead
compounds for development into new medicines. The advances in molecular biology
and genomics have resulted in a greater understanding of the molecular and
genetic basis of disease and have led to the identification of many new genes as
potential therapeutic targets for drug discovery. Many companies have used
combinatorial chemistry to quickly create libraries of hundreds of thousands or
even millions of small molecules for screening against established and novel
targets. However, the increasing numbers of targets and compounds have created
severe bottlenecks in the drug discovery process. These bottlenecks result from
the difficulty of quickly analyzing the function and disease relevance of newly
discovered targets, the complexity of incorporating the many different types of
targets into screening assays, and the inability to screen extensive compound
libraries quickly and at a reasonable cost. In order to address these issues,
the Company is integrating advanced technologies to develop superior assays, to
enable analysis of gene function in mammalian cells and to miniaturize and
accelerate compound screening.
Aurora's proprietary fluorescent assay technologies are being used today to
facilitate drug discovery by the Company's collaborators and in the Company's
existing high throughput screening system. Aurora's portfolio of fluorescent
assay technologies is designed to enable screening of compounds against nearly
all major classes of human drug targets, including receptors, ion channels and
enzymes, in most therapeutic areas. The Company's fluorescent assay technologies
are highly sensitive, and are designed to permit more rapid screen development
and the development of miniaturized assays important for cost-effective high
throughput screening. Additionally, many of the Company's screens are being
designed to be performed with living mammalian cells to better model human
disease processes.
The second principal component of Aurora's integrated technology platform
is its UHTS system, which is being designed to screen over 100,000 discrete
compounds per day in miniaturized assays.
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<PAGE> 5
The UHTS system will combine an automated storage and retrieval system,
microfluidic dispensing devices, and NanoPlates in which miniaturized assays are
performed. Specialized fluorescence detectors are designed to record and process
the signals from the NanoPlates, with advanced software and informatics to
capture the resulting data. In developing the UHTS system, the Company is
applying to the drug discovery process technological advances that have already
been deployed successfully in other industrial processes, while adding its own
proprietary innovations. In this regard, the Company has entered into strategic
technology alliances with several technology leaders, including Packard
Instrument Company and Carl Creative Systems, Inc. The Company expects the UHTS
system to be fully integrated and operational within the next three to four
years.
Aurora's goal is to become the leader in the development and
commercialization of technologies that will accelerate and enhance the discovery
of new medicines. The Company seeks to diversify business risk by generating
revenue from multiple collaborators seeking to exploit Aurora's fluorescent
assay technologies and UHTS system in many different drug discovery programs.
The Company expects to generate revenue by developing screens, providing
screening services, developing and providing UHTS systems to syndicate members,
licensing its proprietary technologies, and realizing royalty and milestone
payments from the development and commercialization of drug candidates
identified using Aurora's technologies. To date, the Company has entered into
collaborative agreements with BMS and Lilly to license the Company's fluorescent
assay technologies for their internal discovery research, to collaborate on
screen development and as initial members of a syndicate to co-develop Aurora's
UHTS system. In addition, Aurora has also entered into agreements to develop
screens for or provide screening services to Sequana Therapeutics, Inc., Allelix
Biopharmaceuticals, Inc. and Roche Bioscience. The Company has also entered into
agreements with Alanex Corporation and ArQule, Inc. providing Aurora with
non-exclusive access to certain of their combinatorial chemistry libraries.
The Company was incorporated in California in May 1995 and reincorporated
in Delaware in January 1996. Unless the context otherwise requires, references
in this Prospectus to "Aurora" and the "Company" refer to Aurora Biosciences
Corporation, a Delaware corporation, and, where applicable, to its California
predecessor. The Company's executive offices are located at 11149 North Torrey
Pines Road, La Jolla, California 92037, and its telephone number is (619)
452-5000.
THE OFFERING
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<S> <C>
Common Stock offered hereby........................... 3,500,000 shares
Common Stock to be outstanding after the offering..... 16,395,240 shares(1)
Use of proceeds....................................... Working capital and general corporate
purposes, including enhancement of
internal research and development
capabilities, the acquisition of
chemical libraries, and facilities
expansion and improvements. See "Use
of Proceeds."
Nasdaq National Market symbol......................... ABSC
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1997. Includes (i) an aggregate
of 45,290 shares of Common Stock to be issued upon exercise of outstanding
warrants and (ii) an aggregate of 9,915,975 shares of Common Stock to be
issued upon conversion of all outstanding shares of Preferred Stock, in each
case upon the closing of this offering. Excludes 581,320 shares of Common
Stock issuable upon exercise of outstanding stock options as of March 31,
1997 at a weighted average exercise price of $1.28 per share and 1,627,408
shares of Common Stock reserved for future grant under the Company's 1996
Stock Plan, Employee Stock Purchase Plan and Non-Employee Directors' Stock
Option Plan. See "Capitalization," "Management," "Description of Capital
Stock" and Notes 6 and 11 of Notes to Financial Statements.
4
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
THREE MONTHS
PERIOD FROM ENDED
MAY 8, 1995 MARCH 31,
(INCEPTION) TO YEAR ENDED ----------------
DECEMBER 31, 1995 DECEMBER 31, 1996 1996 1997
----------------- ----------------- ------ -------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenue:
UHTS system development............ $ -- $ 2,117 $ -- $ 650
Screening services................. -- 100 -- 405
License fees....................... -- -- -- 487
------- ------- ------ -------
Total revenue...................... -- 2,217 -- 1,542
Operating Expenses:
Cost of UHTS system development.... -- -- -- 688
Cost of screening services......... -- -- -- 287
Research and development........... 366 4,396 405 911
General and administrative......... 46 1,275 137 642
Interest income, net.................. -- 521 43 144
Net loss.............................. (412) (2,933) (499) (842)
Pro forma net loss per share(1)....... $ (0.26) $ (0.06)
Shares used in computing pro forma net
loss per share(1).................. 11,139 13,399
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------
ACTUAL AS ADJUSTED(2)
----------------- -----------------
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BALANCE SHEET DATA:
Cash, cash equivalents and investment securities
available for sale..................................... $13,639 $45,489
Total assets............................................. 18,344 50,194
Capital lease obligations, less current portion.......... 1,389 1,389
Accumulated deficit...................................... (4,187) (4,187)
Total stockholders' equity............................... 14,685 46,535
</TABLE>
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(1) See Note 1 of Notes to Financial Statements for a description of the
computation of the pro forma net loss per share and the number of shares
used in the pro forma net loss per share calculation.
(2) As adjusted to give effect to the sale by the Company of 3,500,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$10.00 per share and the application of the estimated net proceeds therefrom
and the exercise upon the closing of this offering of warrants to purchase a
total of 45,290 shares of Common Stock. See "Use of Proceeds" and
"Capitalization."
Except as otherwise specified, all information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." Except as otherwise noted, all information in this Prospectus
has been adjusted to give effect to (i) the four-for-five reverse split of the
Common Stock effected on April 25, 1997 and (ii) the conversion of all
outstanding shares of Preferred Stock into Common Stock upon the completion of
this offering. See "Capitalization" and "Description of Capital Stock."
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus. This Prospectus contains certain
statements of a forward-looking nature relating to future events or the future
financial performance of the Company. Prospective investors are cautioned that
such statements are only predictions and that actual events or results may
differ materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Prospectus,
including the matters set forth below, which could cause actual results to
differ materially from those indicated by such forward-looking statements.
Limited Operating History; History of Operating Losses; Uncertainty of
Future Profitability. The Company was formed in May 1995, has a limited
operating history and is at an early stage of development. To date, the Company
has not yet generated significant revenue from its systems, services or
technologies. For the period ended December 31, 1995, the year ended December
31, 1996 and the three months ended March 31, 1997, the Company had net losses
of approximately $412,000, $2.9 million and $842,000, respectively. As of March
31, 1997, the Company had an accumulated deficit of $4.2 million. The Company's
expansion of its operations and continued development of its ultra-high
throughput screening ("UHTS") system and fluorescent assay technologies will
require a substantial increase in expenditures for at least the next several
years. The Company currently expects to continue to incur operating losses at
least through 1998. The Company's ability to achieve profitability will depend
in part on its ability to successfully develop and install its UHTS system,
provide screen development and screening services to pharmaceutical and
biotechnology companies, achieve acceptable performance specifications for its
UHTS system and gain industry acceptance of its systems, services and
technologies. Accordingly, the extent of future losses and the time required to
achieve profitability is highly uncertain. The Company has completed less than
two years of operations and is subject to the risks inherent in the operation of
a new business, such as the difficulties and delays often encountered in the
development and production of new, complex technologies. There can be no
assurance that the Company will be able to address these risks. Payments from
corporate collaborators and interest income are expected to be the only sources
of revenue for the foreseeable future. The Company has not yet generated any
revenue from milestones under its collaborative agreements. Royalties or other
revenues from commercial sales of products based upon any compound identified by
using the Company's technologies are not expected for at least several years, if
at all. The time required to reach or sustain profitability is highly uncertain,
and there can be no assurance that the Company will be able to achieve or
maintain profitability. Moreover, if profitability is achieved, the level of
such profitability cannot be predicted and may vary significantly from quarter
to quarter. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
New and Uncertain Technology. The Company's UHTS technology and its methods
of screening molecular targets are new and unproven approaches to the
identification of lead compounds with therapeutic potential. The Company intends
to use its UHTS system and fluorescent assay technologies to rapidly identify
for itself and its collaborators as many compounds with commercial potential as
possible. Historically, because of the highly proprietary nature of such
activities, the importance of these activities to drug discovery and development
efforts and the desire to obtain maximum patent and other proprietary protection
on the results of their programs, pharmaceutical and biotechnology companies
have conducted molecular target screening and lead compound identification
within their own internal research departments. The Company's ability to succeed
will be dependent, in part, upon the willingness of potential collaborators to
use the Company's systems, services and technologies as a tool in the discovery
and development of compounds with commercial potential.
The Company's fluorescent assay technologies are novel for use in the drug
discovery process and have never been utilized in the discovery of any compound
that has been commercialized. The
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Company has not yet completed the development of a screen for any collaborator.
There can be no assurance that the Company's fluorescent assay technologies will
result in the successful development of broadly applicable screens for
collaborators or lead compounds that will be safe or efficacious. Furthermore,
there can be no assurance that the Company can develop, validate or consistently
reproduce its biochemical and cell-based assays or reagents or substrates
required for their use in volumes sufficient to fulfill the requirements of its
collaborative agreements or to meet the Company's needs for internal use.
Development of new pharmaceutical products is highly uncertain, and no assurance
can be given that the Company's drug discovery technology will result in any
commercially successful compound.
The Company's UHTS technology has never been implemented as a fully
operational system. The Company's UHTS system is not expected to be fully
integrated and operational for at least three to four years. The Company's UHTS
system will require significant additional investment and research and
development prior to commencement of full-scale commercial operation, including
integration of complex instrumentation and software and testing to validate
performance and cost effectiveness, and is subject to substantial risks. Complex
instrumentation systems that appear to be promising at early stages of
development may not become fully operational for a number of reasons. These
systems may be found ineffective, be difficult or uneconomical to produce, fail
to achieve expected performance levels or industry acceptance, or be precluded
from commercialization by the proprietary rights of third parties. Much of the
instrumentation and software expected to comprise the Company's UHTS system are
not now and have not previously been used in commercial applications. Many of
these technologies have not been validated or developed at levels necessary to
screen miniaturized assays, and there can be no assurance that UHTS
technologies, if developed, will achieve expected performance levels at these
scales. The successful implementation and operation of the Company's UHTS system
will be a complex process requiring integration and coordination of a number of
factors, including integration of and successful interface between complex
advanced robotics, microfluidics, automated storage and retrieval systems,
fluorescence detector technologies and software and information systems. The
liquid dispensing requirements for the NanoPlates being designed for the UHTS
system are far beyond current high throughput screening practices for dispensing
small volumes. The development of microfluidics to accurately and rapidly
aspirate and dispense the microscopic volumes necessary for the UHTS system is
particularly challenging. There can be no assurance that the Company will be
able to successfully engineer and implement this microfluidics technology or all
of the other instrumentation needed for the UHTS system.
As the system is developed, integrated and used, it is possible that
previously unanticipated limitations or defects may emerge. In addition,
operators using the system may require substantial new technical skills and
training. There can be no assurance that unforeseen complications will not arise
in the development, delivery and operation of the UHTS system that could
materially delay or limit its use by the Company and its corporate
collaborators, substantially increase the anticipated cost of development of the
system, result in the breach by the Company of its contractual obligations to
its collaborators and others, or render the system unable to perform at the
quality and capacity levels required for success. Such complications or delays
could subject the Company to litigation and have other material adverse effects
on the Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to successfully develop its
UHTS system, achieve anticipated throughputs, gain industry acceptance of the
Company's approach to the identification of lead compounds or develop a
sustainable profitable business.
Dependence on Pharmaceutical and Biotechnology Collaborations. The
Company's strategy for the development and commercialization of its integrated
technology platform involves the formation of multiple corporate collaborations.
To date, all revenue received by the Company has been from its collaborations
and technology alliances. The Company expects that substantially all revenue for
the foreseeable future will come from collaborators. Furthermore, the Company's
ability to achieve profitability will be dependent upon the ability of the
Company to enter into additional
7
<PAGE> 9
corporate collaborations for co-development of the UHTS system as well as for
development of screens and for screening services. Because pharmaceutical and
biotechnology companies engaged in drug discovery activities have historically
conducted drug discovery and screening activities through their own internal
research departments, these companies must be convinced that the Company's UHTS
technologies justify entering into collaborative agreements with the Company.
There can be no assurance that the Company will be able to negotiate additional
collaborative agreements in the future on acceptable terms, if at all, that such
current or future collaborative agreements will be successful and provide the
Company with expected benefits, or that current or future collaborators will not
pursue or develop alternative technologies either on their own or in
collaboration with others, including the Company's competitors, as a means for
identifying lead compounds or targets. To the extent the Company chooses not to
or is unable to enter into such agreements, it will require substantially
greater capital to undertake the research, development and marketing of systems,
services and technologies at its own expense. In the absence of such
collaborative agreements, the Company may be required to delay or curtail its
research and development activities to a significant extent.
In addition, the amount and timing of resources that current and future
collaborators, if any, devote to collaborations with the Company are not within
the control of the Company. There can be no assurance that such collaborators
will perform their obligations as expected or that the Company will derive any
additional revenue from such agreements. Further, the Company's collaborations
generally may be terminated by its collaborators without cause upon short
notice, which terminations would result in loss of anticipated revenue.
Termination of the Company's existing or future collaboration agreements, or the
failure to enter into a sufficient number of additional collaborative agreements
on favorable terms, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's strategy involves obtaining access to libraries of compounds
from third parties to be screened against multiple targets. Because of the
potential overlap of compounds and targets provided by the Company's
collaborators, there can be no assurance that conflicts will not arise among
collaborators as to rights to particular products developed as a result of being
identified through the use of the Company's technologies. Failure to
successfully manage existing and future collaborator relationships, maintain
confidentiality among such relationships or prevent the occurrence of such
conflicts could lead to disputes that result in, among other things, a
significant strain on management resources, legal claims involving significant
time and expense and loss of reputation, a loss of capital or a loss of
collaborators, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Uncertainty of Milestone Payments on Pharmaceutical Products."
Future Capital Needs; Uncertainty of Additional Funding. The Company may be
required to raise substantial additional capital over a period of several years
in order to conduct its operations. Such capital may be raised through
additional public or private equity financings, as well as collaborative
arrangements, borrowings and other available sources. The Company depends upon
its corporate collaborators for research and development funding. As of May 31,
1997, the Company had received approximately $5.0 million from its
collaborators. The Company believes that the net proceeds of this offering,
expected revenue from collaborations, existing capital resources and interest
income should be sufficient to fund its anticipated levels of operations at
least through mid-1999. No assurance can be given that the Company's business or
operations will not change in a manner that would consume available resources
more rapidly than anticipated, or that substantial additional funding will not
be required before the Company can achieve profitable operations. There can be
no assurance that the Company will continue to receive funding under the
existing collaborative agreements or that the Company's existing or potential
future collaborative agreements will be adequate to fund the Company's
operations. The Company's capital requirements depend on numerous factors,
including the ability of the Company to enter into additional collaborative
agreements, competing technological and market developments, changes in the
Company's existing
8
<PAGE> 10
collaborative relationships, the cost of filing, prosecuting, defending and
enforcing patent claims and other intellectual property rights, the purchase of
additional capital equipment, the development of the Company's UHTS system and
the progress of the Company's collaborators' drug development activities. There
can be no assurance that additional funding, if necessary, will be available on
favorable terms, if at all. If adequate funds are not available, the Company may
be required to curtail operations significantly or to obtain funds by entering
into arrangements with collaborators or others that may require the Company to
relinquish rights to certain of its systems, services, technologies or potential
markets that the Company would not otherwise relinquish, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. To the extent that additional capital is raised through
the sale of equity or securities convertible into equity, the issuance of such
securities would result in dilution to the Company's stockholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Management of Growth. The Company's success will depend on its ability to
expand and manage its operations and facilities. To be cost-effective and timely
in the development and installation of its systems, services and technologies,
the Company must coordinate the integration of multiple technologies in complex
systems, both internally and for its collaborators. The Company's officers and
employees have been with the Company for only a limited period of time, and many
of them came to the Company with limited or no experience integrating multiple
technologies into complex systems. There can be no assurance that the Company
will be able to manage its growth, to meet the staffing requirements of current
or additional collaborative relationships or to successfully assimilate and
train its new employees. In addition, to manage its growth effectively, the
Company will be required to expand its management base and enhance its operating
and financial systems. If the Company continues to grow, there can be no
assurance that the management skills and systems currently in place will be
adequate or that the Company will be able to manage any additional growth
effectively. Failure to achieve any of these goals could have a material adverse
effect on the Company's business, financial condition or results of operations.
Dependence on Technology Alliances. In order to further the development of
its UHTS system, the Company has formed and intends to continue to form
technology alliances with certain companies in the areas of informatics,
robotics, automated storage and retrieval, liquid handling systems,
microfluidics and detection devices. The Company relies on these companies, many
of which are single-source vendors, for the development, manufacture and supply
of certain components of the Company's UHTS system. Although the Company
believes that alternative sources for UHTS system components could be made
available, any interruption in the development, manufacture or supply of a
sole-sourced component could have a material adverse effect on the Company's
ability to develop its UHTS system until a new source of supply is qualified,
could subject the Company to penalties for delays in delivery of the UHTS system
and, as a result, could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance the Company will be able to enter into additional technology alliances
on commercially reasonable terms, if at all, or that the Company's current or
future technology suppliers will meet the Company's requirements for quality,
quantity or timeliness.
Dependence on Patents and Proprietary Rights. The Company's success will
depend in part on its ability to obtain patent protection for its systems,
services and technologies, and to operate without infringing the proprietary
rights of third parties. The Company has had one patent issued to date. The
Company is dependent, in part, on the patent rights licensed from third parties
with respect to its fluorescent assay technologies. There can be no assurance
that patent applications filed by the Company or its licensors will result in
patents being issued, that the claims of such patents will offer significant
protection of the Company's technology, or that any patents issued to, or
licensed by, the Company will not be challenged, narrowed, invalidated, or
circumvented. The Company may also be subject to legal proceedings that result
in the revocation of patent rights previously owned by or licensed to the
Company, as a result of which the Company may be required
9
<PAGE> 11
to obtain licenses from others to continue to develop, test or commercialize its
systems, services or technologies. There can be no assurance that the Company
will be able to obtain such licenses on acceptable terms, if at all.
The drug discovery industry, including screening technology companies, has
a history of patent litigation and will likely continue to have patent
litigation suits concerning drug discovery technologies. The patent positions of
pharmaceutical, biotechnology and drug discovery companies, including the
Company, are generally uncertain and involve complex legal and factual
questions. A number of patents have issued and may issue on certain targets or
their use in screening assays that could prevent the Company and its
collaborators from developing screens using such targets, or relate to certain
other aspects of technology utilized or expected to be utilized by the Company.
The Company has received invitations from third parties to license patents owned
or controlled by third parties. The Company evaluates these requests and intends
to obtain licenses that are compatible with its business objectives. There can
be no assurance, however, that the Company will be able to obtain any licenses
on acceptable terms, if at all. The Company's inability to obtain or maintain
patent protection or necessary licenses could have a material adverse effect on
the business, financial condition and results of operations of the Company.
The Company is aware of a third party Patent Cooperation Treaty application
that claims certain uses of green fluorescent protein including its use in
protein kinase assays. If a patent were to issue from such application that
relates to the Company's GFP kinase reporters, the Company believes that such
patent would be unlikely to require the Company to obtain a license. However,
the Company may need to obtain such a license and there can be no assurance that
any such license would be available on commercially reasonable terms, if at all.
The Company is also aware of third party patents and published patent
applications that contain issued or issuable claims that may cover certain
aspects of the Company's or its collaborators' technologies, including certain
types of fluorescent assay methods, certain assays for ligands to certain
classes of targets such as certain cell surface and intracellular receptors, and
certain transcription based assays for chemicals that modulate transcription of
a gene encoding a protein related to disease. There can be no assurance that the
Company would not be required to take a license under any such patents to
practice certain aspects of its fluorescent assay technologies or that such
license would be available on commercially reasonable terms, if at all. Any
action against the Company or its collaborators claiming damages and seeking to
enjoin commercial activities relating to the affected technologies could, in
addition to subjecting the Company to potential liability for damages, require
the Company or its collaborators to obtain a license in order to continue to
develop, manufacture or market the affected technologies. The Company could
incur substantial costs in defending patent infringement claims, obtaining
patent licenses, engaging in interference and opposition proceedings or other
challenges to its patent rights or intellectual property rights made by third
parties, or in bringing such proceedings or enforcing any patent rights against
third parties. The Company's inability to obtain necessary licenses or its
involvement in proceedings concerning patent rights could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
In addition to patent protection, Aurora also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities. In an effort to maintain the confidentiality and
ownership of trade secrets and proprietary information, the Company requires
employees, consultants and certain collaborators to execute confidentiality and
invention assignment agreements upon commencement of a relationship with the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or other confidential
information in the event of unauthorized use or disclosure of such information
or that adequate remedies would exist in the event of such unauthorized use or
disclosure. The loss or exposure of trade secrets possessed by the Company could
adversely affect its business. Like many high technology companies, the Company
may from time to time hire scientific personnel formerly employed by other
companies involved in one or more areas similar to the activities conducted by
the Company. Although the Company requires its employees to maintain the
10
<PAGE> 12
confidentiality of all confidential information of previous employers, there can
be no assurance that the Company or these individuals will not be subject to
allegations of trade secret misappropriation or other similar claims as a result
of their prior affiliations.
Competition and the Risk of Obsolescence of Technology. Competition among
pharmaceutical and biotechnology companies which attempt to identify compounds
for development is intense. Because the Company's UHTS system is being designed
to integrate a number of different technologies, the Company competes in many
areas, including assay development, high throughput screening and functional
genomics. In the pharmaceutical industry, the Company competes with the research
departments of pharmaceutical and biotechnology companies and other commercial
enterprises, as well as numerous academic and research institutions.
Pharmaceutical and biotechnology companies, academic institutions, governmental
agencies and other research organizations are conducting research in various
areas which constitute portions of the Company's technology platform, either on
their own or in collaboration with others. There can be no assurance that
pharmaceutical and biotechnology companies which currently compete with the
Company in specific areas will not merge or enter into joint ventures or other
alliances with one or more other such companies and become substantial
multi-point competitors or that the Company's collaborators will not assemble
their own ultra-high throughput screening systems by purchasing components from
competitors. Genomics and combinatorial chemistry companies may also expand
their business to include compound screening or screen development, either alone
or pursuant to alliances with others. The Company anticipates that it will face
increased competition in the future as new companies enter the market and
advanced technologies, including more sophisticated information technologies,
become available. The Company's technological approaches, in particular its UHTS
system, may be rendered obsolete or uneconomical by advances in existing
technological approaches or the development of different approaches by one or
more of the Company's current or future competitors. Many of these competitors
have greater financial and personnel resources, and more experience in research
and development, than the Company. Historically, pharmaceutical and
biotechnology companies have maintained close control over their research
activities, including the synthesis, screening and optimization of chemical
compounds. Many of these companies, which represent the greatest potential
market for the Company's systems, services and technologies, have developed or
are developing internal programs and other methodologies to improve
productivity, including major investments in robotics technology to permit the
automated screening of compounds.
Uncertainty of Milestone Payments on Pharmaceutical Products. The Company's
future revenue will depend in part on the realization of milestone payments and
royalties, if any, triggered by the successful development and commercialization
of lead compounds identified through the use of the Company's technologies. The
Company's screens may result in developed and commercialized pharmaceutical
products generating milestone payments and royalties only after lengthy and
costly preclinical and clinical development efforts, the receipt of requisite
regulatory approvals, and the integration of manufacturing capabilities and
successful marketing efforts, all of which must be performed by the Company's
collaborators. The commercialization of any such products is highly uncertain
due to the significant research, development, market, regulatory and other risks
associated with the drug development process. With the exception of certain
aspects of preclinical development, the Company does not currently intend to
perform any of these activities. The Company's agreements with its collaborators
do not obligate those parties to develop or commercialize lead compounds
identified through the use of the Company's technologies. Development and
commercialization of lead compounds will therefore depend not only on the
achievement of research objectives by the Company and its collaborators, which
cannot be assured, but also on each collaborator's own financial, competitive,
marketing and strategic considerations, all of which are outside the Company's
control. Such strategic considerations may include the relative advantages of
alternative products being marketed or developed by others, including relevant
patent and proprietary positions. There can be no assurance that the interests
and motivations of the Company's collaborators are, or will remain, aligned with
those of the Company, that current or future
11
<PAGE> 13
collaborators will not pursue alternative technology in preference to that of
the Company or that such collaborators will successfully perform their
development, regulatory, compliance, manufacturing or marketing functions.
Should a collaborator fail to develop or commercialize a lead compound
identified through the use of the Company's technologies, or should such a
compound be determined to be unsafe or of no therapeutic benefit, the Company
will not receive any future milestone payments or royalties associated with such
compound, and the Company may have only limited or no rights to independently
develop and commercialize such compounds or products. In addition, there can be
no assurance that any product will be developed and commercialized as a result
of such collaborations, that any such development or commercialization would be
successful or that disputes will not arise over the application of payment
provisions to such drugs.
Government Regulation. Regulation by the U.S. Food and Drug Administration
(the "FDA") and other governmental entities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by a collaborator. It is not
currently anticipated that the Company will develop its own drugs through
clinical trials. However, pharmaceutical products, if any, developed by the
Company's collaborators will require lengthy and costly pre-clinical and
clinical trials and regulatory approval by governmental agencies prior to
commercialization. The process of obtaining these approvals and the subsequent
compliance with appropriate federal, state and foreign statutes and regulations
are time consuming and require the expenditure of substantial resources. Delays
in obtaining regulatory approvals would adversely affect the marketing of any
drugs developed by the Company's collaborators, diminish any competitive
advantages that the Company's collaborators may attain and therefore adversely
affect the Company's ability to receive royalties or milestone payments. If the
product is classified as a new drug, a New Drug Application will be required to
be filed with, and product approval must be obtained from, the FDA before
commercial marketing of the drug. These testing and approval processes require
substantial time and effort and there can be no assurance that any approval will
be granted on a timely basis, if at all.
Attraction and Retention of Key Employees and Consultants. The Company is
highly dependent on the principal members of its scientific and management
staff, as well as its scientific consultants, particularly Drs. Timothy J. Rink,
J. Gordon Foulkes, Harry G. Stylli, Frank F. Craig and Roger Y. Tsien. The loss
of one or more members of its staff could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not maintain "key person" insurance on any of its employees. The Company's
future success will also depend in part on its ability to identify, recruit and
retain additional qualified personnel, including individuals holding doctoral
degrees in the basic sciences. There is intense competition for such personnel
in the areas of the Company's activities, and there can be no assurance that the
Company will be able to continue to attract and retain personnel with the
advanced technical qualifications necessary for the development of the Company's
business. Failure to attract and retain key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Scientific Advisors" and "Management."
Significant Fluctuations in Quarterly Results. To date, all revenue
received by the Company has been from the payment of license and up-front fees
and research and co-development funding paid pursuant to collaborative
agreements. The Company expects that a significant portion of its revenue for
the foreseeable future will be comprised of such payments. The timing of such
payments in the future will depend upon the completion of certain milestones as
provided for in such collaborative agreements. In any one quarter the Company
may receive multiple or no payments from its several collaborators. Operating
results may therefore vary substantially from quarter to quarter and will not
necessarily be indicative of results in subsequent periods.
Hazardous Materials. The research and development processes of the Company
involve the controlled use of hazardous materials, chemicals and various
radioactive compounds, including microbial organisms and other biological
materials. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such
12
<PAGE> 14
materials and certain waste products. The risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company. There can be
no assurance that the Company will not be required to incur significant costs to
comply with environmental laws and regulations in the future.
Control By Management and Existing Stockholders. Upon completion of this
offering, after giving effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock, the Company's principal stockholders,
executive officers, directors and affiliated individuals and entities together
will beneficially own approximately 54.3% of the outstanding shares of Common
Stock (52.6% if the Underwriters' over-allotment option is exercised in full).
As a result, these stockholders, acting together, will be able to influence
significantly and possibly control most matters requiring approval by the
stockholders of the Company, including approvals of amendments to the Company's
Certificate of Incorporation, mergers, a sale of all or substantially all of the
assets of the Company, going private transactions and other fundamental
transactions. In addition, the Company's Certificate of Incorporation, as it is
proposed to be amended and restated concurrently with the closing of this
offering (the "Restated Certificate"), does not provide for cumulative voting
with respect to the election of directors. Consequently, the present directors
and executive officers of the Company, together with the Company's principal
stockholders, will be able to control the election of the members of the Board
of Directors of the Company. Such a concentration of ownership could have an
adverse effect on the price of the Common Stock, and may have the effect of
delaying or preventing a change in control of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices.
Broad Discretion in Application of Net Proceeds. The net proceeds to the
Company from the sale of the shares of Common Stock offered hereby at an assumed
initial public offering price of $10.00 per share are estimated to be
approximately $31.9 million ($36.7 million if the Underwriters' overallotment
option is exercised in full) after deducting underwriting discounts and
commissions and estimated offering expenses. The Company intends to use the net
proceeds from this offering principally for working capital and general
corporate purposes, including approximately $10.0 million for enhancement of
internal research and development capabilities and the acquisition of chemical
libraries, and approximately $3.5 million for facilities expansion and
improvements. The Company's management and Board of Directors will have broad
discretion with respect to the application of such proceeds, and the amounts
actually expended by the Company for working capital purposes may vary
significantly depending on a number of factors, including future revenue growth,
if any, and the amount of cash, if any, generated by the Company's operations.
See "Use of Proceeds."
No Prior Public Market for Common Stock; Possible Volatility of Stock
Price. Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering. The initial public
offering price will be determined by negotiations between the Company and the
Underwriters and is not necessarily indicative of the market price at which the
Common Stock of the Company will trade after this offering. See "Underwriting"
for a discussion of the factors considered in determining the initial public
offering price. The market prices for securities of comparable companies have
been highly volatile and the market has experienced significant price and volume
fluctuations that are often unrelated to the operating performance of particular
companies. Announcements of technological innovations or new commercial products
by the Company or its competitors, disputes or other developments concerning
proprietary rights, including patents and litigation matters, publicity
regarding actual or potential results with respect to systems, services or
technologies under development by the Company, its collaborative partners or its
competitors, regulatory developments in both the United States and foreign
countries, public concern as to the efficacy of new technologies, general market
conditions, as well as quarterly fluctuations in the Company's revenues and
financial results and other factors, may have a significant impact on the
13
<PAGE> 15
market price of the Common Stock. In particular, the realization of any of the
risks described in these "Risk Factors" could have a dramatic and materially
adverse impact on such market price.
Availability of Preferred Stock for Issuance; Anti-Takeover Provisions. The
Restated Certificate authorizes the Board of Directors of the Company, without
stockholder approval, to issue additional shares of Common Stock and to fix the
rights, preferences and privileges of and issue up to 7,500,000 shares of
preferred stock with voting, conversion, dividend and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of Common Stock. The issuance of preferred stock, rights to purchase
preferred stock or additional shares of Common Stock may have the effect of
delaying or preventing a change in control of the Company. In addition, the
possible issuance of preferred stock or additional shares of Common Stock could
discourage a proxy contest, make more difficult the acquisition of a substantial
block of the Company's Common Stock or limit the price that investors might be
willing to pay for shares of the Company's Common Stock. Further, the Restated
Certificate provides that any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in writing.
Special meetings of the stockholders of the Company may be called only by the
Chairman of the Board of Directors, the President of the Company, by the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of authorized directors, or by the holders of 10% of the outstanding voting
stock of the Company. These and other provisions contained in the Restated
Certificate and the Company's Bylaws, as well as certain provisions of Delaware
law, could delay or make more difficult certain types of transactions involving
an actual or potential change in control of the Company or its management
(including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices) and may limit the ability of
stockholders to remove current management of the Company or approve transactions
that stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of the Company's Common Stock.
Shares Eligible for Future Sale and Potential Adverse Effect on Market
Price. Sales of Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock. Upon completion of this
offering, the Company will have 16,395,240 shares of Common Stock outstanding,
assuming no exercise of currently outstanding options, but including warrants to
purchase an aggregate of 45,290 shares of Common Stock to be exercised upon the
closing of this offering. Of these shares, the 3,500,000 shares sold in this
offering (plus any additional shares sold upon exercise of the Underwriters'
over-allotment option) will be freely transferable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), unless they are held
by "affiliates" of the Company as that term is used under the Securities Act and
the regulations promulgated thereunder. Approximately 10,826,367 shares of
Common Stock will be fully vested and eligible for sale under Securities Act
Rules 144 and 701 on the ninety-first day after the effectiveness of this
offering. Stockholders of the Company, holding an aggregate of 10,762,778 of
these 10,826,367 shares of Common Stock, have agreed pursuant to lock-up
agreements with the Underwriters, subject to certain limited exceptions, not to
sell or otherwise dispose of any of the shares held by them as of the date of
this Prospectus for a period of 180 days after the date of this Prospectus
without the prior written consent of Alex. Brown & Sons Incorporated. At the end
of such 180-day period, an additional 217,722 shares of Common Stock (plus
approximately 15,985 shares issuable upon exercise of vested options) will be
eligible for immediate resale, subject to compliance with Rule 144 or Rule 701.
The remainder of the approximately 1,849,725 shares of Common Stock held by
existing stockholders will become eligible for sale at various times over a
period of two years and could be sold earlier if the holders exercise any
available registration rights. The holders of 9,915,975 shares of Common Stock
have the right in certain circumstances to require the Company to register their
shares under the Securities Act for resale to the public beginning at the end of
the 180 day lock-up period. If such holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales could have an adverse effect on the market price
for the Company's Common Stock. If the Company were required to include in a
Company-initiated registration shares held by such holders pursuant to
14
<PAGE> 16
the exercise of their piggyback registration rights, such sales may have an
adverse effect on the Company's ability to raise needed capital. In addition,
the Company expects to file a registration statement on Form S-8 registering a
total of approximately 2,207,528 shares of Common Stock subject to outstanding
stock options or reserved for issuance under the Company's stock option plans.
Such registration statement is expected to be filed and to become effective as
soon as practicable after the effective date of this offering. Shares registered
under such registration statement will, subject to Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market, unless such
shares are subject to vesting restrictions with the Company or the lock-up
agreements described above. See "Management," "Description of Capital
Stock -- Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
Immediate and Substantial Dilution. Purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution in the
net tangible book value of their investment from the initial public offering
price. Additional dilution will occur upon exercise of outstanding options. See
"Dilution" and "Shares Eligible for Future Sale."
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered hereby at an assumed public offering price of $10.00 per
share are estimated to be $31.9 million ($36.7 million if the Underwriters'
over-allotment option is exercised in full) after deducting underwriting
discounts and commissions and estimated offering expenses.
The Company intends to use the net proceeds from this offering principally
for working capital and general corporate purposes, including approximately
$10.0 million for enhancement of internal research and development capabilities
and the acquisition of chemical libraries, and approximately $3.5 million for
facilities expansion and improvements. The amounts actually expended by the
Company for working capital purposes will vary significantly depending on a
number of factors, including future revenue growth, if any, and the amount of
cash, if any, generated by the Company's operations. The Company's management
will retain broad discretion in the allocation of the net proceeds of this
offering. The Company may also use a portion of the net proceeds to fund
acquisitions of complementary technologies, products or businesses, although the
Company has no current agreements or commitments for any such acquisition.
Pending such uses, the Company intends to invest the net proceeds of this
offering in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
To date, the Company has never declared nor paid any cash dividends on its
Common Stock. The Company currently intends to retain any earnings for funding
growth and, therefore, does not intend to pay any cash dividends on its Common
Stock in the foreseeable future.
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<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 (i) on an actual basis after giving effect to the conversion of
all outstanding Preferred Stock into 9,915,975 shares of Common Stock and (ii)
as adjusted to give effect to the receipt by the Company of the estimated net
proceeds from the sale of 3,500,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $10.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses, and the
exercise upon the closing of this offering of outstanding warrants to purchase
an aggregate of 45,290 shares of Common Stock:
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, less current portion(1)................... $ 1,389 $ 1,389
Stockholders' equity:
Preferred stock, $.001 par value, 25,000,000 shares authorized,
actual, and 7,500,000 shares authorized, as adjusted; no shares
issued or outstanding, actual and as adjusted................... -- --
Common stock, $.001 par value, 50,000,000 shares authorized;
12,849,950 shares issued and outstanding, actual; 16,395,240
shares issued and outstanding, as adjusted (2).................. 13 16
Additional paid-in capital......................................... 22,336 54,182
Deferred compensation, net......................................... (3,477) (3,477)
Accumulated deficit................................................ (4,187) (4,187)
------- -------
Total stockholders' equity...................................... 14,685 46,534
------- -------
Total capitalization....................................... $16,074 $47,923
======= =======
</TABLE>
- ---------------
(1) See Note 5 of Notes to Financial Statements for a description of the
Company's capital lease obligations.
(2) Excludes 581,320 shares of Common Stock issuable upon exercise of
outstanding stock options as of March 31, 1997 at a weighted average
exercise price of $1.28 per share and 1,627,408 shares of Common Stock
reserved for future grant under the Company's 1996 Stock Plan, Employee
Stock Purchase Plan and Non-Employee Directors' Stock Option Plan. See
"Capitalization," "Management," "Description of Capital Stock" and Notes 6
and 11 of Notes to Financial Statements.
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<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997
was approximately $14.6 million, or $1.13 per share. Pro forma net tangible book
value per share represents the amount of the Company's total tangible assets
less total liabilities divided by 12,895,240 shares of Common Stock outstanding
after giving effect to the conversion of all outstanding shares of Preferred
Stock into Common Stock and the exercise upon the closing of this offering of
outstanding warrants to purchase an aggregate of 45,290 shares of Common Stock.
Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the offering and the pro forma net tangible book value per share of
Common Stock immediately after completion of the Offering. After giving effect
to the sale of the 3,500,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $10.00 per share and the
application of the net proceeds therefrom, the Company's pro forma net tangible
book value at March 31, 1997 would have been approximately $46.4 million, or
$2.83 per share. This represents an immediate increase in pro forma net tangible
book value of $1.70 per share to existing stockholders and an immediate dilution
in pro forma net tangible book value of $7.17 per share to new investors
purchasing Common Stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................... $10.00
Pro forma net tangible book value per share as of March 31, 1997........ $1.13
Increase per share attributable to new investors........................ 1.70
-----
Pro forma net tangible book value per share after this offering........... 2.83
------
Net tangible book value dilution per share to new investors............... $ 7.17
======
</TABLE>
The following table summarizes on a pro forma basis, as of March 31, 1997,
the differences between the existing stockholders and the purchasers of shares
in this offering (at an assumed initial public offering price of $10.00 per
share) with respect to the number of shares purchased from the Company, the
total consideration paid and the average price per share paid.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)............. 12,895,240 78.7% $18,881,000 35.0% $ 1.46
New investors........................ 3,500,000 21.3 35,000,000 65.0 $ 10.00
---------- ----- ----------- -----
Total.............................. 16,395,240 100.0% $53,881,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Excludes 581,320 shares of Common Stock issuable upon exercise of
outstanding stock options as of March 31, 1997 at a weighted average
exercise price of $1.28 per share and 1,627,408 shares of Common Stock
reserved for future grant under the Company's 1996 Stock Plan, Employee
Stock Purchase Plan and Non-Employee Directors' Stock Option Plan. See
"Capitalization," "Management," "Description of Capital Stock" and Notes 6
and 11 of Notes to Financial Statements. To the extent that outstanding
options are exercised in the future, there may be further dilution to new
stockholders.
18
<PAGE> 20
SELECTED FINANCIAL DATA
The selected financial data presented below for the period from May 8, 1995
(inception) to December 31, 1995 and the year ended December 31, 1996 and at
December 31, 1995 and 1996 are derived from the Company's financial statements
audited by Ernst & Young LLP, independent auditors, which are included elsewhere
in this Prospectus. The statement of operations data for the three months ended
March 31, 1996 and 1997 and the balance sheet data at March 31, 1997 are derived
from unaudited financial statements also included elsewhere in this Prospectus,
which, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
position and results of operations of the Company for the unaudited interim
periods. The statement of operations data for the interim periods are not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
PERIOD FROM ENDED
MAY 8, 1995 MARCH 31,
(INCEPTION) TO YEAR ENDED -----------------
DECEMBER 31, 1995 DECEMBER 31, 1996 1996 1997
------------------- ----------------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
UHTS system development......... $ -- $ 2,117 $ -- $ 650
Screening services.............. -- 100 -- 405
License fees.................... -- -- -- 487
----- ------- ------ ------
Total revenue................... -- 2,217 -- 1,542
Operating expenses:
Cost of UHTS system
development................... -- -- -- 688
Cost of screening services...... -- -- -- 287
Research and development........ 366 4,396 405 911
General and administrative...... 46 1,275 137 642
----- ------- ------ ------
Total operating expenses........ 412 5,671 542 2,528
Interest income, net............... -- 521 43 144
----- ------- ------ ------
Net loss........................... $ (412) $(2,933) $ (499) $ (842)
===== ======= ====== ======
Pro forma net loss per share (1)... $ (0.26) $(0.06)
Shares used in computing pro forma
net loss per share (1).......... 11,139 13,399
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1996 MARCH 31, 1997
------------------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investment
securities available for sale...... $ 11 $13,167 $ 13,639
Total assets......................... 115 17,515 18,344
Capital lease obligations, less
current portion.................... -- 1,111 1,389
Accumulated deficit.................. (412) (3,345) (4,187)
Total stockholders' equity........... (412) 15,184 14,685
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for a description of the
computation of the pro forma net loss per share and the number of shares
used in the pro forma net loss per share calculation.
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<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption "Risk Factors," which could cause actual results to differ materially
from those indicated by such forward-looking statements.
OVERVIEW
Aurora Biosciences Corporation ("Aurora" or the "Company") designs and
develops proprietary drug discovery systems, services and technologies to
accelerate and enhance the discovery of new medicines. From May 8, 1995
(inception) to December 31, 1995, the Company's operating activities related
primarily to recruitment of personnel and raising capital. Operating activities
since the beginning of 1996 have focused on the development of Aurora's
portfolio of proprietary fluorescent assay technologies, as well as the
development of its ultra-high throughput screening ("UHTS") system, designed to
integrate advanced instrumentation and miniaturized assays. The Company has
incurred losses since inception and, as of March 31, 1997, had an accumulated
deficit of $4.2 million.
The Company's ability to achieve profitability will depend in part on its
ability to successfully develop the UHTS system, provide screen development and
screening services to pharmaceutical and biotechnology companies, achieve
acceptable performance specifications for its UHTS system, and gain industry
acceptance of its systems, services and technologies. Payments from corporate
collaborators and interest income are expected to be the only sources of revenue
for the foreseeable future. The Company has not yet generated any revenue from
milestones under its collaborative agreements. Royalties or other revenue from
commercial sales of products developed from any compound identified by using the
Company's technologies are not expected for at least several years, if at all.
Payments under collaborative agreements will be subject to significant
fluctuation in both timing and amount and therefore the Company's results of
operations for any period may not be comparable to the results of operations for
any other period.
In November 1996 and December 1996, Aurora announced collaborative
agreements with Bristol-Myers Squibb ("BMS") and Eli Lilly and Company
("Lilly"). Under the terms of each of the BMS and Lilly agreements, the Company
is required to develop and separately install three components to be integrated
into one complete UHTS system. The Company will also co-develop with each party
high throughput screening assays for use by such party. Each party will also
have the right to use the Company's fluorescent assay technologies for internal
research and drug development, including the development of screening assays.
Aurora has also entered into drug discovery collaborations with Sequana
Therapeutics, Inc., Alanex Corporation and ArQule, Inc. and into strategic
technology alliances for UHTS system development with several companies
including Packard Instrument Company ("Packard") and Carl Creative Systems, Inc.
Additionally, in December 1996 Aurora signed a collaborative agreement with
Roche Bioscience Corporation ("Roche") to access one of the Company's
fluorescent assay technologies and to develop specialized instrumentation, and
in February 1997 an agreement was entered into with Allelix Biopharmaceuticals,
Inc. ("Allelix") requiring Aurora to develop screening assays and perform
screening services. See "Business -- Corporate Collaborations" and "-- UHTS
Technology Alliances."
Revenue typically consists of non-refundable up-front fees, ongoing
research and co-development payments, and milestone, royalty and other
contingent payments. Revenue from non-refundable up-front fees is recognized
upon signing of the agreement. Revenue from ongoing research and
20
<PAGE> 22
co-development payments is recognized ratably over the term of the agreement,
and the Company believes such payments will approximate the research and
development expense being incurred in connection with the agreement. Revenue
from milestone, royalty and other contingent payments will be recognized as
earned. Revenue from screen development and screening and other services is
recognized as earned. Advance payments received under any agreements in excess
of amounts earned are classified as unearned revenue. Revenue under cost
reimbursement contracts is recognized as the related costs are incurred. The
Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the price of stock issued or
options granted and the deemed fair market value of the Common Stock at the time
of issue or grant. Stock and options generally vest over a four-year period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Revenue related to UHTS system development, screening services and license
fees totaled $650,000, $405,000 and $488,000, respectively, for the three months
ended March 31, 1997. There was no revenue in the three months ended March 31,
1996. The first quarter 1997 revenue resulted from the Company's collaborative
agreements with BMS, Lilly, Roche and Allelix and the technology alliance with
Packard.
Costs of UHTS system development and screening services totaled $688,000
and $287,000, respectively, for the three months ended March 31, 1997. There was
no cost of revenue for the three months ended March 31, 1996.
Research and development expenses increased to $911,000 for the three
months ended March 31, 1997 from $405,000 in the three months ended March 31,
1996. The increase in research and development expenses was attributable to
increased research and development personnel expenses, increased equipment and
depreciation and facilities expenses in connection with the expansion of
operations, payments under technology development and license agreements and the
purchase of laboratory supplies.
General and administrative expenses increased to $642,000 in the three
months ended March 31, 1997 from $137,000 in the three months ended March 31,
1996. The increase was primarily attributable to increased management and
administrative personnel expenses, increased depreciation expense from the
acquisition of equipment in connection with the expansion of operations, and
legal and professional fees incurred in connection with the overall scale-up of
the Company's operations and business development efforts.
Deferred compensation of approximately $3.2 million was recorded in the
three months ended March 31, 1997, of which $106,000 was recognized as expense
during the period.
The Company had net interest income of $144,000 in the three months ended
March 31, 1997 resulting from interest earned on proceeds from private
placements of equity securities and payments received under collaborative
agreements, partially offset by interest expense incurred on capital lease
obligations entered into in 1996 and 1997. The Company had interest income of
$43,000 in the three months ended March 31, 1996.
YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM MAY 8, 1995 (INCEPTION) TO
DECEMBER 31, 1995
Revenue related to UHTS system development and screening services totaled
$2.1 million and $100,000, respectively, for the year ended December 31, 1996.
The 1996 revenue resulted from the Company's collaborative agreements with BMS,
Lilly and Roche and the technology alliance with Packard. There was no license
fee revenue during 1996. The Company had no revenue during the period from May
8, 1995 (inception) through December 31, 1995 ("the 1995 Period").
Because the Company's collaborative agreements with BMS and Lilly were not
entered into until late 1996, and called for actual research and development to
begin in January 1997, there were no costs of UHTS system development recognized
in 1996 or in the 1995 Period. All costs associated with the Company's internal
development of its UHTS system technology in 1996 and the 1995 Period are
included in research and development expenses for the applicable period.
21
<PAGE> 23
Research and development expenses increased to $4.4 million in 1996 from
$366,000 in the 1995 Period as the Company began the development of its UHTS
system and fluorescence technologies. The increase in research and development
expenses was attributable to increased research and development personnel
expenses, increased equipment and depreciation and facilities expenses in
connection with the establishment of operations, payments under technology
development and license agreements, purchase of laboratory supplies and
increased expenses associated with the compensation paid to the Company's
scientific advisors.
General and administrative expenses increased to $1.3 million in 1996 from
$46,000 in the 1995 Period. The increase was primarily attributable to increased
management and administrative personnel expenses, increased depreciation
expenses from the acquisition of equipment in connection with the establishment
of operations and legal and professional fees incurred in connection with the
overall scale-up of the Company's operations and business development efforts.
Deferred compensation in the amount of approximately $374,000 was recorded
as of December 31, 1996.
The Company had net interest income of $521,000 in 1996 resulting from
interest earned on cash and investment securities derived from private
placements of equity securities, partially offset by interest expense incurred
on capital lease obligations entered into in 1996. The Company did not earn
interest income or incur interest expense in the 1995 Period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Aurora held cash, cash equivalents and investment
securities available for sale of $13.6 million and working capital of $12.3
million. The Company has funded its operations to date primarily through private
placements of equity securities with aggregate net proceeds of approximately
$18.7 million, capital equipment lease financing totaling $2.1 million and
interest income earned on the net proceeds of its private placements. Receipts
from corporate collaborations and strategic technology alliances totaled $4.7
million through March 31, 1997.
The Company has entered into various strategic technology agreements with
third parties regarding the development of instrumentation technology which
require the Company to make future payments totaling $1.2 million in 1997 and
1998 if all milestones are met. In addition, the Company has entered into
license agreements with third parties regarding certain inventions and
technologies for which the Company is obligated to make future payments totaling
$830,000 over the next seven years.
To date, all revenue received by the Company has been from its
collaborations and technology alliances. The Company expects that substantially
all revenue for the foreseeable future will come from collaborators and interest
income. Furthermore, the Company's ability to achieve profitability will be
dependent upon the ability of the Company to enter into additional corporate
collaborations. There can be no assurance that the Company will be able to
negotiate additional collaborative agreements in the future on acceptable terms,
if at all, or that such current or future collaborative agreements will be
successful and provide the Company with expected benefits.
The Company believes that the net proceeds from this offering, expected
revenue from collaborations, existing capital resources and interest income
should be sufficient to fund its anticipated levels of operations at least
through mid-1999. No assurance can be given that the Company's business or
operations will not change in a manner that would consume available resources
more rapidly than anticipated, or that substantial additional funding will not
be required before the Company can achieve profitable operations. The Company's
capital requirements depend on numerous factors, including the ability of the
Company to enter into additional collaborative agreements, competing
technological and market developments, changes in the Company's existing
collaborative relationships, the cost of filing, prosecuting, defending and
enforcing patent claims and other intellectual property rights, the purchase of
additional capital equipment, the develop-
22
<PAGE> 24
ment of the Company's UHTS system and the progress of the Company's
collaborators' milestone and royalty-producing activities. There can be no
assurance that additional funding, if necessary, will be available on favorable
terms, if at all. If adequate funds are not available, the Company may be
required to curtail operations significantly or to obtain funds by entering into
arrangements with collaborators or others that may require the Company to
relinquish rights to certain of its systems, services, technologies or potential
markets that the Company would not otherwise relinquish, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
23
<PAGE> 25
BUSINESS
OVERVIEW
Aurora Biosciences Corporation ("Aurora" or the "Company") designs and
develops proprietary drug discovery systems, services and technologies to
accelerate and enhance the discovery of new medicines. Aurora is developing an
integrated technology platform comprised of a portfolio of proprietary
fluorescent assay technologies and an ultra-high throughput screening ("UHTS")
system designed to allow assay miniaturization and to overcome many of the
limitations associated with the traditional drug discovery process. The Company
believes that this platform will enable Aurora and its collaborators, which
include Bristol-Myers Squibb ("BMS") and Eli Lilly and Company ("Lilly"), to
take advantage of the opportunities created by recent advances in genomics and
combinatorial chemistry that have generated many new therapeutic targets and an
abundance of new small molecule compounds. Aurora believes its integrated
platform will accelerate the drug discovery process by shortening the time
required to identify high quality lead compounds and to optimize those compounds
into drug development candidates.
Aurora's goal is to become the leader in the development and
commercialization of technologies that will accelerate and enhance the discovery
of new medicines. The Company seeks to diversify business risk by generating
revenue from multiple collaborators seeking to exploit Aurora's fluorescent
assay technologies and UHTS system in many different drug discovery programs.
The Company expects to generate revenue by developing screens, providing
screening services, developing and providing UHTS systems to syndicate members,
licensing its proprietary technologies, and realizing royalty and milestone
payments from the development and commercialization of drug candidates
identified using Aurora's technologies. To date, the Company has entered into
collaborative agreements with BMS and Lilly to license the Company's fluorescent
assay technologies for their internal discovery research, to collaborate on
screen development and as initial members of a syndicate to co-develop Aurora's
UHTS system. In addition, Aurora has also entered into agreements to develop
screens for or provide screening services to Sequana Therapeutics, Inc.
("Sequana"), Allelix Biopharmaceuticals, Inc. ("Allelix") and Roche Bioscience
("Roche"). The Company has also entered into agreements with Alanex Corporation
("Alanex") and ArQule, Inc. ("ArQule") providing Aurora with non-exclusive
access to certain of their combinatorial chemistry libraries.
THE DISCOVERY OF NEW MEDICINES
Drug discovery methods generally involve the synthesis and testing of large
libraries of different compounds in relatively simple assays, or tests,
containing targets designed to mimic aspects of a disease process. Assays are
employed to determine the effect of a compound upon a particular target. When
applied methodically, assays can be used as screens to identify active
chemicals, referred to as "hits," that may produce a desired effect upon a
target's function. Lead compounds can be identified by additional screening of
hits and may then be optimized to generate candidate compounds for development
as potential medicines.
- --------------------------------------------------------------------------------
ELEMENTS OF THE DRUG DISCOVERY PROCESS
Targets - Assays - SCREENING - Libraries of Compounds
Hits
Lead Compounds
Candidate Compounds
Drug Development
- --------------------------------------------------------------------------------
24
<PAGE> 26
TARGETS
Targets are specific biological molecules, often proteins such as
receptors, enzymes or ion channels, which are believed to play a role in the
onset or progression of disease. Most drugs work by binding to a target and
modulating the target's biological function or activity. Thus, most drugs are
discovered by identifying compounds that modulate an established target's
biological function. Until recently, pharmacologists and molecular biologists
had identified only a few hundred targets using conventional methods.
Recent developments in molecular biology and genomics have led to a
dramatic increase in the number of potential therapeutic targets available for
drug discovery. The chemical information required for cells to produce proteins
is encoded in genes. It is currently estimated that several thousand of the
roughly 100,000 different human genes encode potential targets. Industrial and
academic researchers have already identified tens of thousands of new genes as
they decipher the genomes of both humans and disease-causing organisms.
Determining the function of these genes and the proteins they encode, including
their evaluation as potential targets, is known as functional genomics and can
be a rate-limiting step in the selection of novel targets for drug discovery.
The large number of newly discovered targets has created the need for faster
screen development and higher throughput screening.
COMPOUNDS
Traditionally, chemists laboriously synthesized new compounds one at a
time, or painstakingly isolated them from natural sources, such as plants or
microbial fermentation broths. Over decades, chemists in major pharmaceutical
and chemical companies built up collections, or libraries, of hundreds of
thousands of compounds. During the last few years, however, many industrial and
academic groups have developed combinatorial chemistry techniques to greatly
increase the supply and diversity of small molecules for screening. Already,
many companies have used combinatorial chemistry to quickly create libraries of
hundreds of thousands, or even millions, of small molecules, which are now
available to be tested against both established and novel targets to yield
potential lead compounds for new medicines. These vast numbers of compounds
present a substantial challenge to the drug discovery process and create a need
for faster and more efficient screening.
ASSAYS
Targets can be incorporated into either biochemical or cell-based assays. A
biochemical assay consists of a target which is isolated from its natural
cellular environment. If enough of the target can be isolated, such assays can
be relatively simple to develop and perform. It is often desirable, however, to
test compounds on targets functioning in the environment of living human or
other mammalian cells. Such cell-based assays provide a number of advantages,
including in many cases greater predictive value of therapeutic effect and
potential toxicity. In addition, cell-based assays may be required to screen
certain targets not readily amenable to biochemical assays. However, cell-based
assays have typically been more difficult and time consuming both to develop and
to perform due to difficulties in detecting the function of a target in a living
cell and the inherent technical complexities of using human or other mammalian
cells in drug screens.
SCREENING
Screening is the process of methodically testing libraries of compounds for
potential therapeutic value by using assays to determine if any compounds affect
a selected target. Primary screening determines if any of the compounds tested
are hits. Re-testing confirms initial hits and secondary screening refines the
initial evaluation of hits. For example, secondary screening may measure a hit's
potency (the amount of the hit compound required to exert its effect) and
specificity (the degree to which the hit does not affect unintended targets).
These secondary screens help in selecting lead compounds for further discovery
efforts to identify candidate compounds for development.
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<PAGE> 27
Until the last five to ten years, screening was a labor intensive manual
process in which it was generally possible to test only tens of compounds per
day. Today, pharmaceutical and biotechnology companies with advanced drug
discovery programs use semi-automated or robotic high throughput screening
systems with microtiter plates that contain 96 separate wells for assays.
Certain current best practice screening systems can operate at throughputs of up
to approximately 10,000 discrete compounds per day per system, but typically
such systems operate at throughputs of less than 3,000 discrete compounds per
day.
THE NEED TO IMPROVE THE DRUG DISCOVERY PROCESS
The discovery and development of new medicines remains an expensive,
time-consuming and often unsuccessful process. Although many pharmaceutical,
biotechnology and clinical research organizations have significantly improved
the efficiency of the drug development phase, only about five to ten percent of
candidate compounds entering development will ultimately be approved for
marketing. Candidate compounds that are identified in discovery frequently fail
in the development phase due to insufficient therapeutic benefit or unexpected
side effects. To date, efforts to improve the initial discovery process have
been inadequate. If the discovery process were sufficiently improved,
pharmaceutical and biotechnology companies could more quickly and efficiently
discover larger numbers of higher quality candidate compounds that have a
greater chance of development into medicines that meet significant unmet needs.
The dramatic increases in the number of potential targets and the size of
compound libraries resulting from advances in genomics and combinatorial
chemistry, respectively, have created a significant opportunity to discover
greater numbers of higher quality lead compounds for development into medicines.
However, the increasing numbers of targets and compounds have created severe
bottlenecks in the drug discovery process. These bottlenecks result from the
difficulty of quickly analyzing function and disease relevance of newly
discovered targets, the complexity of incorporating the many different types of
targets into screens, and the inability to screen extensive compound libraries
quickly and at a reasonable cost.
AURORA'S APPROACH
TECHNOLOGY PLATFORM
Aurora is developing an integrated technology platform designed to allow
assay miniaturization and to overcome many of the limitations associated with
traditional drug discovery and enable the Company and its collaborators to take
advantage of the recent advances in genomics and combinatorial chemistry. The
two principal components of Aurora's platform are its proprietary fluorescent
assay technologies and its highly automated ultra-high throughput screening
system that is being designed to screen over 100,000 discrete compounds per day
per system in miniaturized assays.
Aurora's fluorescent assay technologies are being used today to facilitate
drug discovery by the Company's collaborators and in the Company's existing high
throughput screening system. In addition, the Company is currently developing
screens for collaborators which it expects to deliver in the next several
months. To significantly advance current high throughput screening capabilities
and to exploit the power of its fluorescent assay technologies, Aurora is
developing an ultra-high throughput screening system over the next three to four
years. Aurora believes that this integrated technology platform will allow
Aurora and its collaborators to accelerate the drug discovery process by
shortening the time required to identify higher quality lead compounds and to
optimize those compounds into drug development candidates.
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<PAGE> 28
AURORA'S INTEGRATED TECHNOLOGY PLATFORM
[FLUORESCENT ASSAY TECHNOLOGIES]
POTENTIAL BENEFITS
<TABLE>
<S> <C>
Applicable to most targets Reduced assay volumes
Cell-based and biochemical assays Simplified screening process
Faster assay development Versatile screening platform
Functional genomics in mammalian cells Automated access to compound libraries
Miniaturized assays Throughputs of 100,000 compounds per day
</TABLE>
The following are key features of Aurora's integrated technology platform:
Ability to Design Assays for a Broad Range of Targets. Aurora's portfolio
of novel fluorescent assay technologies is designed to enable screening
against nearly all major classes of human drug targets, including
receptors, ion channels and enzymes, in most therapeutic areas.
Ability to Conduct Both Cell-based and Biochemical Assays. Aurora's
fluorescent assay technologies include both cell-based and biochemical
approaches. Many of the Company's screens are being designed to be
performed with living mammalian cells to better model human disease
processes. In addition a cell-based approach may be needed because certain
important targets may not be amenable to biochemical assays.
Reduction in Time and Investment Required to Develop Cell-based
Assays. Aurora's fluorescent reporter technologies are highly sensitive.
The b-lactamase reporter system, for example, enables the measurement of
certain activation responses within a single living mammalian cell. For
many drug targets, this feature permits the rapid genetic selection and
multiplication of cells with optimal properties for particular screens,
which can reduce the time required for screen development from months, with
conventional methods, down to a few weeks.
Ability to Analyze Gene Function in Living Mammalian Cells. Certain of the
Company's fluorescent assay technologies may facilitate the understanding
of gene function in human and other mammalian cells. The Company believes
that this approach complements genetic approaches which employ fruit flies,
worms or yeast, and allows the functional analysis of human genes in a more
appropriate cellular context. This technology, if fully developed, could
prove valuable to companies with significant involvement in the genomics
area.
Increased Throughput and Reduced Costs Through Miniaturization of
Assays. The sensitivity and ratiometric readouts of Aurora's fluorescent
reporter technologies permit development of miniaturized assays, important
for cost-effective ultra-high throughput screening. The Company's
scientists have miniaturized both cell-based and biochemical assays for
certain applications. The Company believes that its assays will allow
increased throughput with decreased costs.
Advanced Instrumentation for Small Volumes. The Company is developing novel
screening plates (NanoPlates) and innovative microfluidics to enable
miniaturized assays in volumes approximately 100 times smaller than
conventional screens. Smaller volumes reduce the amount of expensive or
scarce reagents that may be required in a screen.
Simplified Screening Process. Most conventional high throughput screens
require special liquid handling devices to perform liquid dispensing and
washing steps before the data can be
27
<PAGE> 29
obtained from a screen. Liquid handling and washing often cause such long
delays in screening that it may be impossible to measure certain events as
they happen in real time. The Company's screens are designed to function
with a significantly reduced number of liquid handling steps and without
washing steps.
Versatile Ultra-high Throughput Screening Platform. The Company is
developing novel fluorescence instrumentation and NanoPlates to enable a
wide variety of targets to be screened in cell-based or biochemical assays
in the UHTS system. The Company believes that other systems being designed
for ultra-high throughput screening may be more restricted to certain
target classes and assay types.
Automated Access to Compound Libraries. Ultra-high throughput screening
requires automated rapid access both to organized collections of large
compound libraries, as well as to individual compounds in the collection
for re-testing. Aurora is unaware of any system currently available with
such capabilities. The Company is developing a compound storage and
retrieval system designed to allow fully automated access to over 1,000,000
compounds, for itself and each of its syndicate members.
Ultra-high Throughput. Aurora's technology platform is designed to
integrate the Company's proprietary fluorescent assays and automated
miniaturized systems with advanced informatics to create an ultra-high
throughput screening system capable of testing more than 100,000 discrete
compounds per day per system. If realized, this throughput would be over
ten times faster than current best practice high throughput screening
systems and would test each compound at a fraction of current costs.
BUSINESS STRATEGY
Aurora's goal is to become the leader in the development and
commercialization of technologies to accelerate and enhance the discovery of new
medicines. The Company seeks to diversify business risk by generating revenue
from multiple collaborators seeking to exploit Aurora's fluorescent assay
technologies and ultra-high throughput screening system in many different drug
discovery programs. To implement this strategy, the Company intends to:
Generate Multiple Revenue Streams from Screen Development and Screening
Services. Aurora generates revenue from multiple collaborators by
developing screens, primarily on a non-exclusive basis, for diverse targets
and providing screening services. To date, Aurora has entered into
agreements for screen development with pharmaceutical and biotechnology
companies, including BMS, Lilly, Roche and Allelix. The Company develops
screens with respect to specific targets rather than for broad therapeutic
areas. The developed screen is then either transferred to the collaborator
for internal research or is utilized by Aurora to provide screening
services. When Aurora provides such screening services, it will use a high
throughput screening system to screen the compounds for and provide
information and potential lead candidates to its collaborators.
Additionally, the Company is entitled to receive milestone payments and
royalties if any compound discovered through such screening is developed
and commercialized. Aurora plans to greatly enhance such screening services
once its own UHTS system is available for screening.
Establish a Syndicate for the Co-development of Aurora's UHTS
System. Aurora is currently establishing a syndicate consisting of up to
six leading pharmaceutical companies to co-develop Aurora's UHTS system.
Aurora has entered into collaborative agreements with BMS and Lilly as
initial syndicate members. Each member is scheduled to receive its own UHTS
system over a three- to four-year period for use in its internal drug
discovery programs. Through the syndicate, Aurora is able to share the cost
of the development of the UHTS system and offer to its syndicate members
co-exclusive access to the system. The Company believes that the payments
made by each syndicate member will be significantly lower than the cost for
any one company to develop a similar system on its own.
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<PAGE> 30
Expand Compound Libraries. In providing screening services, Aurora will
utilize compounds that are either supplied by its collaborators or from
compound libraries to which Aurora has access. In order to provide
additional opportunity for Aurora and its collaborators, the Company is
obtaining access to libraries of compounds focused on small molecules, but
also including selected natural product extracts, peptides and proteins. To
gain access to these diverse sets of compounds, the Company plans to enter
into collaborations with companies specializing in combinatorial chemistry
and natural extract discovery and purification, and to purchase compounds
from available commercial sources. To date, Aurora has entered into
agreements with Alanex and ArQule, providing Aurora with non-exclusive
access to certain of their combinatorial chemistry libraries.
Form Biotechnology Collaborations. Aurora is seeking to collaborate with
genomics companies that may have access to considerable numbers of
potentially important new targets, and with therapeutically focused
companies that have promising discovery programs with validated targets,
for which Aurora's screening technology could substantially accelerate the
identification of lead or candidate compounds. To date, Aurora has entered
into such collaborations with Allelix and Sequana. Aurora is also
considering providing screening services in three-party collaborations
among Aurora, genomics companies or other companies that provide targets
and specialized biologic expertise, and combinatorial chemistry companies
that provide compounds and chemical optimization expertise.
Develop Information Tools and Databases. Utilizing the fluorescent assay
technologies and the UHTS system, the Company expects to have the ability
to generate and analyze large amounts of complex information on molecular
and genomic targets and large numbers of chemical structures. Aurora
intends to exploit these applications of its technology either directly or
in collaborations with leaders in the areas of informatics, genomics and
drug discovery. Ultimately, the Company plans to leverage this information
to create new revenue opportunities in the future.
Maintain Technology Leadership. The Company has assembled a unique
multi-disciplinary team of scientists from leading companies in the
biology, chemistry, instrumentation, automation and computer science
industries. Aurora intends to continue investing significantly in research
and development in order to make advances in its core technologies and to
maintain its technology leadership. The Company also intends to continue to
form strategic technology alliances with leading companies from each of
these industries and with leading academic institutions to provide the
Company with access to those parties' technologies and expertise.
AURORA'S TECHNOLOGY
The two principal components of Aurora's integrated technology platform are
its proprietary fluorescent assay technologies and its highly automated
ultra-high throughput system that is being developed for screening miniaturized
assays. This unique platform results from the Company's innovative integration
of many different disciplines, including fluorescence chemistry, biophysics,
molecular biology, protein engineering, automation, process control, optics,
microfluidics, informatics and software development.
AURORA'S PROPRIETARY FLUORESCENT ASSAY TECHNOLOGIES
The Company has internally developed or licensed a broad range of
proprietary fluorescent assay technologies which the Company believes exhibit
significant advantages over existing screening assays. The Company's fluorescent
assay technologies utilize light glowing from fluorescent molecules to reveal
molecular and cellular activity with precision and sensitivity. Fluorescence is
the property of certain molecules to absorb and be excited by light of one color
(excitation wavelength) and to send, or emit, light of another color having a
longer wavelength (emission wavelength). Aurora's fluorescent assay technologies
allow monitoring of the function of tiny
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<PAGE> 31
amounts of biomolecules in a non-destructive manner, and therefore many aspects
of cell function can now be observed in single living cells.
Aurora's fluorescent assay technologies generally exploit certain special
types of fluorescence measurements, including ratiometric and fluorescence
resonance energy transfer measurements. These features enable highly accurate
data to be obtained in high throughput screening, significantly reducing the
number of replicates and the cost required to carry-out such screens. As used in
the Company's fluorescent assay technologies, these approaches provide a change
in color of the emitted light rather than just a change in the intensity of the
emitted light. Ratiometric measurements, the ratio of the signal at two
wavelengths, provide a measure that greatly reduces unwanted artifacts. These
artifacts may result from a variable number of cells in an assay, instrumental
fluctuation, photo-bleaching (light-induced degradation) of the probe molecules,
or the presence of quenching substances. Fluorescence resonance energy transfer
can occur when two fluorescent molecules interact as donor and acceptor over
very short distances. When the donor is illuminated with light at its wavelength
of excitation, instead of giving its usual color of emitted light, it transfers
energy to the acceptor that now emits at the acceptor's characteristic
wavelength. This transfer rapidly decreases if the two molecules move apart, for
example if a chemical linker is cleaved, and the fluorescence emission now
changes to the wavelength of the donor. The ratiometric signal change generated
can give a highly sensitive and reliable readout of molecular proximity.
Aurora's portfolio of fluorescent assay technologies is designed to enable
screening of compounds against nearly all major classes of human drug targets,
including receptors, ion channels and enzymes, in most therapeutic areas. The
following chart summarizes several of Aurora's key fluorescent assay
technologies, together with examples of the classes of targets and therapeutic
areas to which they may be applicable:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ASSAY TECHNOLOGY TARGET CLASSES THERAPEUTIC AREA
-------------------------------------------------------------------------------------------------
<S> <C> <C>
BETA-LACTAMASE REPORTER GENE cell surface receptors, intra- most areas, including
SYSTEM cellular receptors, and intra- cardiovascular diseases,
(cell-based assays) cellular signaling proteins inflammation, cancer, central
nervous system diseases and
endocrine diseases
-------------------------------------------------------------------------------------------------
PROMISCUOUS G-PROTEINS G-protein coupled receptors most areas, including
(cell-based assays) cardiovascular diseases,
inflammation, cancer, central
nervous system diseases and
endocrine diseases
-------------------------------------------------------------------------------------------------
MEMBRANE VOLTAGE REPORTERS ion channels cardiac diseases, central
(cell-based assays) nervous system conditions and
gastro-intestinal diseases
-------------------------------------------------------------------------------------------------
GFP PROTEASE REPORTERS proteases AIDS, cardiovascular diseases
(biochemical and cell-based and degenerative brain diseases
assays)
-------------------------------------------------------------------------------------------------
GFP KINASE REPORTERS protein kinases cancer and autoimmune diseases
(biochemical and cell-based
assays)
-------------------------------------------------------------------------------------------------
</TABLE>
To date, only a limited number of targets have been incorporated into
assays utilizing the Company's fluorescent assay technologies. There can be no
assurance that the Company will be able to develop screening assays for each
target selected by its collaborators in a timely and cost-effective manner, or
if developed, that such assays will function as anticipated.
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<PAGE> 32
Beta-lactamase Reporter Gene System
Reporter genes can be genetically engineered into cells to monitor the
activation of a particular signaling pathway that alters the expression (the
production of the protein coded by that gene) of the reporter gene. Reporter
genes are chosen to code for proteins that can be readily measured under
particular experimental conditions. Most reporter genes typically encode enzymes
that can act on reporter substrates to give some form of optical signal, such as
a colored product, or an enzyme-induced discharge of light. Reporter genes are
now used by many pharmaceutical and biotechnology companies to facilitate drug
discovery.
Over recent years, it has been discovered that many natural ligands (such
as hormones, growth factors and neurotransmitters) that act via receptors on the
surface membrane of cells can increase, or sometimes decrease, the expression of
particular genes. Thus, it is now possible to genetically engineer cell lines in
which a wide range of receptor targets are functionally linked to an
intracellular reporter gene. Such cells can then be used to screen for agonists
and antagonists, compounds that, respectively, activate or inhibit the receptor.
The Company utilizes an engineered bacterial enzyme, Beta-lactamase, as a
reporter gene in mammalian cells. The Company believes that its Beta-lactamase
reporter system is an important advance in reporter gene technology that can be
used to design drug screens for a number of major classes of drug targets
including growth factors, cytokine or G-protein coupled receptors, transcription
factors and signal transduction pathways. Functional cell-based assays have a
number of advantages over the commonly used binding assays that detect
interaction of test compounds with targets isolated from their natural cellular
environment. The Company's Beta-lactamase reporter system allows drug screens to
be constructed in the more physiological environment of mammalian cells, does
not require the use of radioactivity and can readily distinguish between
agonists and antagonists. In addition, the Beta-lactamase reporter system can
facilitate the search for compounds acting on newly discovered target receptors
where no natural ligands have been identified, also known as orphan receptors.
Certain aspects of the Beta-lactamase reporter system were exclusively licensed
from the Regents of the University of California.
The Company's Beta-lactamase reporter system was originally designed to
measure gene expression, including measurement of genes of great interest that
may be expressed only at very low levels, in single living cells and in real
time. These stringent criteria are critical for both rapid assay development and
ultra-high throughput miniaturized drug screens and call for the following
features:
- a reporter enzyme not naturally present in mammalian cells that can be
expressed in those cells with high efficiency, and with well researched
biochemical properties;
- the substrate that actually reports the enzyme activity should provide
extreme sensitivity and precision, coupled with advanced fluorescence
properties providing a ratiometric readout; and
- the substrate must be non-fluorescent when first added to the cells, be
able to freely enter living cells and then be trapped inside a cell with
a distinct fluorescence, and expression of the reporter must then change
the substrate's fluorescent properties.
The Company believes that these features have been demonstrated in its
proprietary forms of Beta-lactamase reporter gene and the proprietary substrate,
CCF2-AM. This reporter system signals activation by a green to blue ratio change
that can be readily measured in single cells. The Company has now linked the
Beta-lactamase reporter system to cell surface receptors in assays suitable for
high throughput screening.
The Company's Beta-lactamase reporter system has the potential to greatly
reduce both the time and cost of developing cell-based screens. This feature
derives from the ability to measure activation responses in single living cells.
Even with modern techniques for making genetically engineered
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<PAGE> 33
cells, cell line development is an unpredictable process. Making cell lines for
reporter gene assays with current methods usually takes many months and involves
testing hundreds or even thousands of individual cell "clones" to generate a
usable screening assay. In contrast, the Beta-lactamase reporter system employs
the power of fluorescence-activated cell sorting, which can rapidly isolate the
living cells in which the reporter gene is connected to the right signaling
elements. Thus, with the Company's Beta-lactamase reporter system, incorporation
of a target into a cell-based assay can be reduced to weeks instead of months.
Promiscuous G-proteins
Cell surface receptors are important targets because they transfer
information from the surface to the inside of the cell. One major class of cell
surface receptors is termed G-protein coupled receptors because G-proteins,
attached to the inner face of the cell membrane, transmit the information from
these receptors into the cell interior. These receptors are the targets of
numerous valuable medicines such as Zantac and Inderal, and many are the targets
of current drug discovery programs. It is believed that there are over 1,000
G-protein coupled receptors. Many new members of this class of receptor have
been cloned in recent years. However, for many of these receptors, the natural
activator and the biological function are not known. These are the so-called
orphan receptors, which could prove to be important targets.
Normally each receptor must couple to a specific type of G-protein to have
a biological effect. In order to engineer a cell-based assay for a G-protein
coupled receptor, it is necessary for that receptor to couple via its specific
suBeta-type of G-protein to a signaling pathway that provides a robust signal
for screening. For example, activation of many G-protein coupled receptors can
be measured with the Beta-lactamase reporter system. However, for many G-protein
coupled receptors, it is not yet known with which G-protein they communicate.
Even when this is known, many G-proteins produce signals that are difficult to
incorporate into assays in current practice. The Company has an exclusive
license from the California Institute of Technology to the use of novel
"promiscuous" G-proteins, which are "universal adapters" that couple to a wide
range of receptors of this family of targets to a signaling pathway that is well
suited to certain of the Company's fluorescent assays. Thus, the Company
believes that its proprietary promiscuous G-protein methods can be helpful in
developing screens containing G-protein coupled receptors previously difficult
to incorporate into mammalian cell-based assays. The promiscuous G-proteins may
also be useful in constructing screens for orphan receptors that can be used to
search for compounds that activate such receptors as tools to help analyze the
function of these newly discovered genes. To date, the Company has limited
experience developing G-protein coupled receptor assays based on its proprietary
promiscuous G-protein methods.
Membrane Voltage Reporters
Membrane voltage, a fundamental property of cells, is controlled by
membrane proteins. Unregulated membrane voltage can cause serious medical
conditions. Thus membrane proteins, particularly ion channels, help regulate
membrane voltage and can be targets for drug discovery in major disease areas
such as neurology and cardiology. Important medicines acting on ion channels
include certain anti-epileptic and anti-arrhythmic medicines. However, screening
in this area is typically limited to testing compounds with an electrical
measuring apparatus, which requires skilled scientists and has a low throughput
of only tens of compounds per day. There has been some success in adapting an
existing type of fluorescent probe of membrane voltage for semi-automated
screening. The Company believes that this approach is likely to have too slow of
a response to report on many relevant ion channel targets, and can be highly
susceptible to severe artifacts which limit assay performance.
Aurora's proprietary membrane voltage reporters incorporate fluorescence
resonance energy transfer and ratiometric readout to permit more reliable
detection of changes in membrane voltage. With Aurora's approach, two different
fluorescent probes are confined to the surface membrane of the cells in the
assay. When the membrane voltage changes due to cell stimulation, the two probes
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<PAGE> 34
move further apart, or closer together, depending on whether the stimulation
increases or decreases the voltage. Thus the degree of fluorescence energy
transfer between the probes varies and a ratiometric readout may be obtained.
These key features and other aspects of the Company's membrane voltage reporters
should provide faster responses, which should be less susceptible to the
artifacts that can defeat the older methods. The Company believes that assays
incorporating its membrane voltage reporters will be adaptable for sub-types of
ion channels, several of which are currently the targets of screening programs
in pharmaceutical company research departments and in certain specialized
biotechnology companies. The Company is currently developing a screen for an ion
channel subtype for one of its corporate collaborators.
Proprietary Variants of Green Fluorescent Protein
Green Fluorescent Protein ("GFP") is a naturally fluorescent protein
discovered in light-producing jellyfish. The fluorescence of GFP is an intrinsic
property of the protein and, therefore, the protein requires no additional
chemicals to make it fluoresce. This feature of GFP allows it to be expressed
within genetically engineered mammalian cells and to provide an intracellular
reporter with its own intrinsic fluorescence. Using various techniques of
protein engineering, Aurora has developed several mutants, or variants, of the
naturally occurring type of GFP, which are readily expressed in mammalian cells
and provide much brighter fluorescence than that of the naturally occurring GFP
protein. The Company has also engineered variants that have significantly
different excitation and emission wavelengths and hence they fluoresce with
different colors. This provides the basis for GFP-based reporters that use
fluorescence resonance energy transfer to give ratiometric signals. At present,
the Company utilizes three main proprietary GFP variants: blue, green and
yellow. The Company believes that the main application for GFP in drug discovery
requires the further engineering of GFP variants to produce reporters of
important biologic modifications to proteins, such as protein cleavage by
proteases and protein phosphorylation by protein kinases. Accordingly, the
Company is developing GFP protease assays and GFP kinase assays as summarized
below. Certain aspects of Aurora's technology related to GFP reporters are
exclusively licensed from the Regents of the University of California and from
the University of Oregon.
GFP Protease Reporters. Proteases are enzymes that break proteins into
smaller pieces, sometimes to create a functional product and sometimes to
degrade the protein. A number of diseases involve proteases, such as infectious
diseases and cardiovascular disorders. For example, several HIV medicines target
HIV protease. Aurora's proprietary protease reporters are designed to detect
protease activity in cell-based or biochemical assays. Aurora's protease
substrates change their color of fluorescence when they are cleaved by a
protease. Such changes can be detected with current high throughput screening
systems. While there are currently several approaches to developing screens for
proteases, these are nearly all biochemical. However, because some proteases
operate in the interior of the cell, the ability to screen for protease
inhibitors in a cell-based assay could be an important advance. To date, in
addition to research into this class of reporters, the Company has made
prototype biochemical assays for two different proteases.
GFP Kinase Reporters. Protein kinases are a family of enzymes that can add
phosphate groups to proteins and can thereby modulate the protein's biological
function. Aurora's ultra-bright variants of GFP may be engineered to provide
fluorescent assays for protein kinase activity. A number of companies have
targeted protein kinases to discover therapeutics to treat a wide range of
diseases, including cancer and autoimmune disease. These companies typically use
kinase screens involving biochemical assays that often require washing steps or
radioactivity. These types of assays can be difficult to adapt to high
throughput screening and may be less predictive than cell-based assays, because
kinases are often regulated by intra-cellular modulators, which are missing in a
biochemical assay. Aurora's fluorescent kinase reporters are designed to detect
kinase activity in cell-based or biochemical assays. These reporters use novel
fluorescent substrates that are designed to measure kinase activity through
changes in the fluorescence readout, without washing steps or radioactivity. To
date, Aurora has developed a prototype biochemical kinase assay, is researching
the incorpora-
33
<PAGE> 35
tion of this reporter into cell-based assays and is developing reporters for
other types of protein kinases.
AURORA'S ULTRA-HIGH THROUGHPUT SCREENING SYSTEM
Over the last five years, many of the major pharmaceutical companies and
some biotechnology companies have assembled high throughput screening systems
that incorporate varying degrees of robotics and automation to facilitate their
drug discovery efforts. These current systems, however, are unable to
accommodate miniaturized assays that are critical for screening at increasing
rates against the large number of new targets identified through genomics and
the growing libraries of test compounds being generated by combinatorial
chemistry. The Company believes that because most current systems have been
developed without an adequately integrated design concept, it can be challenging
to improve performance at certain rate-limiting steps without creating almost
equally limiting bottlenecks elsewhere in the process. In addition, the Company
believes that many of these systems are designed to screen only one class of
target or one type of assay.
To overcome limitations of present high throughput screening and to exploit
the power of its fluorescent assay technologies, Aurora is developing an
ultra-high throughput screening system over the next three to four years. Using
a fully integrated approach, the Company has combined a wide array of expertise
and technologies to develop its UHTS system. The Company is combining key
internally developed advances with the technologies accessed through its
strategic technology alliances, such as those with Packard and Carl Creative.
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<PAGE> 36
The following diagram summarizes the currently planned features of the UHTS
system:
[DIAGRAM]
35
<PAGE> 37
Automated Storage and Retrieval System
The UHTS system's automated storage and retrieval system is designed to
house over 1,000,000 compounds in solution for immediate access. The robotic
systems for storage and retrieval of compounds are being adapted from other
industrial settings where automated, rapid access to very large stores of small
items have been reliably deployed. Aurora is customizing the system for ultra-
high throughput screening. This approach exemplifies the Company's strategy of
bringing to the drug discovery process technological advances that have already
been deployed successfully in other industrial processes, while adding Aurora's
own proprietary innovations to adapt these advanced technologies to the UHTS
system.
The system is designed to allow ready replenishment of the compound store
from libraries in the master store. The robot that operates between the racks of
compound storage plates is designed to deliver (and once sampled, return to the
store for further use) over 100,000 selected compounds per day for primary
screening and over 2,000 hits for re-test and potency determination. This
capability should relieve a significant bottleneck in current screening
operations which have largely failed to automate these steps. The ability to
deliver selected compounds to the screen at ultra-high rates under computer
control is a key advance expected to be offered by the Aurora platform. The
automated storage and retrieval system is also being designed to facilitate high
throughput screening in conventional 96-well plates. The Company's automated
storage and retrieval system is expected to be available in 1998.
Microfluidics: Compound and Assay Component Dispensing
Current technologies for dispensing small volumes of liquid cannot meet the
requirements for screening in NanoPlates. The Company, together with Packard, is
developing microfluidic technologies to accurately and rapidly transfer
microscopic volumes of the compounds into the miniature assay wells of the
NanoPlates at rates of up to 10,000 wells per hour. While current screening
systems can dispense volumes down to a microliter (one millionth of a liter),
Aurora is developing miniaturized screening dispensers capable of accurately
dispensing sub-nanoliter volumes (less than one billionth of a liter) required
for the UHTS system. These sample dispensing devices are designed to remove
small amounts of the compounds from the storage plates and dispense at high
speed precise sub-nanoliter volumes into the appropriate wells of the
NanoPlates. The Company intends to incorporate these devices into proprietary
robotic platforms that are being co-developed with Carl Creative. These
platforms are designed to enable the precise location of the various components
in a manner superior to available compound dispensing technology. To date, the
Company has used prototype nanoliter dispensing devices to perform test assays
in prototype NanoPlates. The Company believes that its microfluidic systems
suitable for ultra-high throughput screening will be operational in 1999.
NanoPlates for Miniaturized Screening Assays
Another key component of Aurora's UHTS system is the NanoPlate, which has
3,456 miniaturized wells in which fluorescent assay screens may be performed.
The Company, in collaboration with Packard Instrument Company and specialized
manufacturers, has developed prototype proprietary NanoPlates. The diagram below
compares the new design with a conventional 96-well plate currently used in
almost all high throughput screening. A key feature is the small assay volume
(approximately 100 times smaller than conventional screening assays), which is
critical for reducing cost per test and conserving compounds made by
combinatorial methods that produce only very small amounts of each test
compound. In addition, the Company is developing technologies to reduce
evaporation that might occur in such small assay volumes. The Company is
developing its NanoPlates to be compatible with most of Aurora's fluorescent
assay technologies. Certain cell-based
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<PAGE> 38
and biochemical assays, based on the Company's fluorescent reporters, have
already been shown to work in a prototype NanoPlate.
[ASSAY PLATES GRAPHIC]
Fluorescence Detector for NanoPlates
There are a number of fluorescence plate readers presently available which
enable the use of Aurora's proprietary fluorescent assays for high throughput
screening in 96-well plates. However, none of these provide the necessary
sensitivity and precision to enable ultra-high throughput miniaturized screens.
Aurora is collaborating with Packard to develop highly sensitive fluorescence
detectors capable of measuring miniaturized fluorescent assays in NanoPlates.
The detector is designed to record and process, in real time, data from more
than 100,000 assays in 24 hours. Aurora's detector is designed to measure the
signals generated from the various fluorescent assays over the range of
different wavelengths that the Company's various reporters require and to
rapidly acquire ratiometric data. The Company believes that the resulting
quality of the fluorescent assays should minimize the number of replicates
required compared to traditional screening, thereby increasing throughput and
decreasing costs. Currently the Company is finalizing the design of its detector
and believes that detectors operational with a NanoPlate can be developed within
a two-year time frame.
Informatics and System Integration
Successful overall integration of the UHTS system will require a strategy
for user-friendly computer control. The Company will be required to link the
operation of the automated storage and retrieval system to existing chemistry
information databases and master compound store inventories in the discovery
operations of its syndicate members. The integration of the entire system will
need to ensure that the large amount of screening data from the UHTS system is
efficiently captured, processed and deposited in a centralized database. The
Company plans to integrate advanced software tools and systems from leading
providers. While the basic building blocks are being
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<PAGE> 39
acquired from leading suppliers, the supervisory control systems, the subsystem
controllers for the instruments, the data analysis tools and overall system
architecture and database structure for the UHTS system are being developed by
the Company's in-house informatics team.
The Company's UHTS system is not expected to be fully integrated and
operational for at least three to four years. The Company's UHTS system will
require significant additional investment and research and development prior to
commencement of full-scale commercial operation, including integration of
complex instrumentation and software and testing to validate performance and
cost effectiveness, and is subject to substantial risks. Much of the
instrumentation and software that will comprise the Company's UHTS system are
not now and have not previously been used in commercial applications. Many of
these technologies have not been developed or validated at levels necessary to
screen miniaturized assays, and there can be no assurance that UHTS technologies
will achieve expected performance levels at these scales. The successful
implementation and operation of the Company's UHTS system will be a complex
process requiring integration and coordination of a number of factors, including
integration of and successful interfacing among complex advanced robotics,
microfluidics, automated storage and retrieval systems, fluorescence detector
technologies and software and information systems.
CORPORATE COLLABORATIONS
Aurora has entered into corporate collaborations with a number of companies
relating to screen development, functional genomics, screening services, access
to compound libraries and the co-development with its syndicate members of the
Company's UHTS system. The Company's significant collaborations and their major
features are summarized below:
<TABLE>
<S> <C>
----------------------------------------------------------------------------------------
BRISTOL-MYERS SQUIBB Member of UHTS system syndicate
Screen development
License to fluorescent assay technologies
----------------------------------------------------------------------------------------
ELI LILLY AND COMPANY Member of UHTS system syndicate
Screen development
License to fluorescent assay technologies
----------------------------------------------------------------------------------------
ROCHE BIOSCIENCE Screen development
Specialized instrumentation
----------------------------------------------------------------------------------------
SEQUANA THERAPEUTICS Screen development
Functional genomics
Screening services
----------------------------------------------------------------------------------------
ALLELIX BIOPHARMACEUTICALS Screen development
Screening services
----------------------------------------------------------------------------------------
ARQULE Screening of combinatorial chemistry libraries
----------------------------------------------------------------------------------------
ALANEX CORPORATION Screening of combinatorial chemistry libraries
----------------------------------------------------------------------------------------
</TABLE>
Bristol-Myers Squibb. In November 1996, the Company and Bristol-Myers
Squibb Pharmaceutical Research Institute entered into a Collaborative Research
and License Agreement (the "BMS Agreement") regarding the development of the
Company's UHTS system and the installation of a UHTS system at BMS. Under the
terms of the BMS Agreement, the Company is required to develop and separately
install three components to be integrated into one complete UHTS system. In
return, BMS is obligated to make certain payments to the Company in the form of
non-refundable up-front fees, installation payments and ongoing research and
co-development funding. The Company is obligated to provide service and support
for the UHTS system installed at BMS for a limited period of time.
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<PAGE> 40
The Company and BMS will also co-develop high throughput screening assays
for use by BMS. In connection with such screen development, BMS is required to
pay Aurora certain fees. Certain target screens developed by the Company for BMS
will be exclusive for a limited period of time. In exchange for certain payments
to Aurora, BMS will also have the right to use the Company's fluorescent assay
technologies for internal research and drug development, including the
development of screening assays. BMS will also make certain milestone and
royalty payments to Aurora if BMS develops and commercializes any compound
identified using a screen based on Aurora's fluorescent assay technologies.
Under the terms of the BMS Agreement, subject to certain conditions, the
UHTS syndicate is restricted to six members for a limited period. BMS may
withdraw from the development of the UHTS system at any time without cause,
provided that certain withdrawal payments have been made. BMS may also withdraw
from the development of the UHTS system for "good cause," as defined in the
agreement, without obligation to make further payments relating to development
of the UHTS system. Each party also has the right to terminate the agreement
upon the material breach by the other party of its obligations under the
agreement. The BMS Agreement also provides for penalties payable by the Company
if it fails to deliver the completed UHTS system by a specified time.
Eli Lilly and Company. In December 1996, the Company and Lilly entered into
a Collaborative Research and License Agreement (the "Lilly Agreement") regarding
the development of the Company's UHTS system and the installation of a UHTS
system at Lilly. Under the terms of the Lilly Agreement, the Company is required
to develop and separately install three components to be integrated into one
complete UHTS system. In return, Lilly is obligated to make certain payments to
the Company in the form of non-refundable up-front fees, delivery payments and
ongoing co-development funding. The Company is obligated to provide service and
support for the UHTS system installed at Lilly for a limited period.
The Company and Lilly will also co-develop high throughput screening assays
for use by Lilly. In connection with such development, Lilly is required to pay
Aurora certain fees. In exchange for certain payments to Aurora, Lilly will also
have the right to use the Company's fluorescent assay technologies for internal
research and drug development, including the development of screening assays.
Lilly will also make certain milestone and royalty payments to Aurora if Lilly
develops and commercializes any compound identified using a screen based on
Aurora's fluorescent assay technologies, subject to certain limitations on the
royalties payable to Aurora.
Under the terms of the Lilly Agreement, subject to certain conditions, the
UHTS syndicate is restricted to six members for a limited period of time. Lilly
may terminate the agreement at any time without cause upon 45 days written
notice to Aurora, provided that certain withdrawal payments are made. Each party
has the right to terminate the agreement upon the material breach by the other
party of its obligations under the agreement. The Lilly Agreement also provides
for penalties payable by the Company if it fails to deliver the completed UHTS
system by a specified time.
Roche Bioscience. In December 1996, the Company and Roche entered into a
Collaborative Research and License Agreement ("Roche Agreement") regarding the
development and delivery of a certain screening instrument by Aurora. Roche is
obligated to make certain payments to the Company in the form of non-refundable
up-front fees and delivery payments. For a limited period of time specified in
the agreement, the Company is obligated to provide service and support for any
instrument delivered to Roche. The Company and Roche will also co-develop a
screening assay for use with a target identified in the Roche Agreement. In
connection with such development, Roche is obligated to make certain payments to
the Company in the form of non-refundable up-front fees and ongoing research and
co-development funding. Aurora is prohibited, for a period of time specified in
the agreement, from entering into any third-party collaboration with respect to
the specific target set forth in the Roche Agreement. Roche may elect to
terminate the agreement at any time without cause upon 30 days written notice to
Aurora, provided that certain payments are made.
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Sequana Therapeutics, Inc. In April 1996, the Company and Sequana entered
into a Research Agreement (the "Sequana Agreement") regarding the screening of
certain targets to be selected by Sequana. Under the terms of the Sequana
Agreement, Sequana may require the Company to provide functional analysis, assay
development and screening for such targets, and Sequana would then be obligated
to make certain payments to the Company in the form of non-refundable up-front
fees, delivery payments and ongoing research funding. Sequana will also be
obligated to make certain milestone and royalty payments to the Company if any
pharmaceutical product is developed and commercialized as a result of work
performed by the Company pursuant to the agreement.
During the term of the agreement, and subject to certain provisions, Aurora
is prohibited from performing services for third parties related to a limited
number of targets selected by Sequana and discovered as a result of positional
cloning or statistical genetics. Unless terminated earlier in accordance with
its provisions, the Sequana Agreement will terminate on June 17, 1999, subject
to Sequana's right to extend such term for up to two one-year periods. Each
party has the right to terminate the agreement in the event of a material breach
of the agreement by the other party by giving the other party notice of its
intention to terminate if within 90 days of such notice such party does not cure
the breach. In connection with the execution of the Sequana Agreement, Sequana
made a $1.5 million equity investment in Aurora. See "Certain Transactions."
Allelix Biopharmaceuticals, Inc. In February 1997, the Company and Allelix
entered into a Collaboration Agreement (the "Allelix Agreement") regarding the
development over a three-year period of screening assays for use with targets
identified by Allelix and agreed to by Aurora. Under the terms of the Allelix
Agreement, the Company is required to develop such screening assays and to
perform screening services, and Allelix is obligated to make certain payments to
the Company in the form of up-front fees, development payments and fees for
screening services. Allelix is also required to make certain milestone and
royalty payments to Aurora in the event of development and commercialization of
a compound identified using a screen based on Aurora's fluorescent assay
technologies.
ArQule, Inc. In September 1996, the Company and ArQule entered into a
Material Transfer and Screening Agreement (the "ArQule Agreement"), which was
amended in March 1997. The ArQule Agreement, as amended, provides for the
enrollment of the Company in ArQule's Mapping Array Program and entitles the
Company to receive a sample of each Mapping Array compound set that ArQule
develops and ships ("ArQule Compounds"). ArQule's Mapping Array Program consists
of up to 100,000 individual compounds per year. Should the Company detect
activity in one or more of the ArQule Compounds, the Company and ArQule under
certain conditions may enter into negotiations to establish a research
collaboration agreement. Unless terminated earlier in accordance with its
provisions, the ArQule Agreement is in effect for a period of six months
following the effective date of the agreement. The ArQule Agreement
automatically extends for successive additional six-month periods unless the
Company or ArQule provides 30 days written notice of termination prior to the
expiration of any such period.
Alanex Corporation. In November 1996, the Company and Alanex entered into a
Material Transfer and Screening Agreement (the "Alanex Agreement") regarding the
screening of the Alanex compound library consisting of 150,000 compounds
("Alanex Compounds"). Should the Company detect activity in one or more of the
Alanex Compounds during the term of the Alanex Agreement, the Company and Alanex
under certain conditions may enter into negotiations to establish a research
collaboration agreement. Unless terminated earlier in accordance with its
provisions, the Alanex Agreement shall be in effect for a period of six months
following the effective date of the agreement. Thereafter, the Alanex Agreement
will automatically extend for successive additional six-month periods unless the
Company or Alanex provides 30 days written notice prior to the expiration of any
such period.
To date, all revenue received by the Company has been from its
collaborations and technology alliances. The Company expects that substantially
all revenue for the foreseeable future will come
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from collaborators. Furthermore, the Company's ability to achieve profitability
will be dependent upon the ability of the Company to enter into additional
corporate collaborations. Because pharmaceutical and biotechnology companies
engaged in drug discovery activities have historically conducted drug discovery
and screening activities through their own internal research departments, these
companies must be convinced that the Company's UHTS technologies justify
entering into collaborative agreements with the Company. There can be no
assurance that the Company will be able to negotiate additional collaborative
agreements in the future on acceptable terms, if at all, that such current or
future collaborative agreements will be successful and provide the Company with
expected benefits, or that current or future collaborators will not pursue or
develop alternative technologies either on their own or in collaboration with
others, including the Company's competitors, as a means for identifying lead
compounds or targets. To the extent the Company chooses not to or is unable to
enter into such agreements, it will require substantially greater capital to
undertake the research, development and marketing of its systems, services and
technologies at its own expense. In the absence of such collaborative
agreements, the Company may be required to delay or curtail its research and
development activities to a significant extent.
In addition, the amount and timing of resources that current and future
collaborators, if any, devote to collaborations with the Company are not within
the control of the Company. There can be no assurance that such collaborators
will perform their obligations as expected or that the Company will derive any
additional revenue from such agreements. Termination of the Company's existing
or future collaboration agreements, or the failure to enter into a sufficient
number of additional collaborative agreements on favorable terms, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
UHTS TECHNOLOGY ALLIANCES
Aurora has entered into strategic technology alliances to design, develop
and implement its UHTS system with leading companies in the areas of
instrumentation, storage and retrieval systems and microfluidics, including the
alliances with Packard, Carl Creative and Universal Technologies, Inc. ("UTI")
summarized below.
Packard Instrument Company. In April 1996, the Company entered into a
Collaboration and License Agreement with Packard (the "Packard Agreement")
regarding the joint development of microfluidic components, NanoPlates and
fluorescence detectors for use, among other things, in the Company's UHTS
system. Under the terms of the Packard Agreement, Packard is required to develop
and deliver such components, and Aurora is obligated to make certain payments to
Packard in the form of non-refundable up-front fees and delivery payments.
Aurora was granted, for a period of two to three years from Aurora's acceptance
of an operational component, an exclusive right to use, market, lease and sell,
for use in certain applications defined in the agreement, the components
developed under the agreement. Packard was granted a worldwide, exclusive
sublicense under the Company's license with the University of California Regents
to make, have made and sell certain fluorescent reagents covered by such license
to non-profit organizations for their internal, non-commercial research. In
connection with the execution of the Packard Agreement, Packard made a $1.0
million equity investment in Aurora. Packard is also providing the Company with
research funding for the development of certain instrumentation.
The Packard Agreement, unless terminated earlier in accordance with its
terms, has an initial term of ten years. If either party fails to satisfy
certain milestones applicable to it under the agreement, and the parties fail to
reach a mutually satisfactory resolution within 90 days after such failure, the
other party shall have the right to terminate the agreement, unless the party
who failed to satisfy such milestone used reasonable good faith efforts to
accomplish such milestone, in which case the other party shall only have the
right to modify the agreement as specified therein. Each party has the right to
terminate the agreement, upon 90 days written notice, for a material breach by
the other party of its obligations under the agreement which is not cured within
such 90-day period.
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Carl Creative Systems, Inc. In November 1996, the Company entered into a
Development Agreement with Carl Creative (the "CCS Agreement") regarding the
development and sale of, among other things, liquid handling components and
robotics for use with the Company's UHTS system. Under the terms of the CCS
Agreement, Carl Creative is required to develop and deliver such components, and
the Company is obligated to make certain development payments to Carl Creative
in accordance with the payment schedule set forth in the CCS Agreement. A
portion of such development payments will be credited towards any purchases by
Aurora of components or services from Carl Creative. During the term of the CCS
Agreement, provided certain price and supply criteria are satisfied, the Company
is obligated to utilize Carl Creative as the primary manufacturer of certain
components. The Company was granted, for a period of time specified in the
agreement, an exclusive right to such components. The CCS Agreement, unless
terminated earlier in accordance with its terms, has an initial term of two
years, which shall automatically renew for successive six-month periods unless
either party provides at least 30 days written notice of its intent to terminate
at the end of the then-current term. Each party has the right to terminate the
agreement if the other party breaches or defaults in the performance of any of
its material obligation under the agreement, and such breach or default
continues for 60 days after written notice thereof.
Universal Technology, Inc. In December 1996, the Company entered into a
Development Agreement with UTI (the "UTI Agreement") regarding the development
and sale of storage and retrieval systems for use with the Company's UHTS
system. Under the terms of the UTI Agreement, UTI is required to develop and
deliver a storage and retrieval system for use with the Company's UHTS system,
and Aurora is obligated to make certain payments to UTI. Aurora was granted, for
a period of time specified in the agreement, an exclusive right to make, use,
and sell certain UTI technology, including the storage and retrieval system
developed under the agreement. The UTI Agreement, unless terminated earlier in
accordance with its terms, has an initial term of two years, which shall
automatically renew for successive six-month periods unless either party
provides at least 30 days written notice of its intent to terminate at the end
of the then-current term. Each party has the right to terminate the agreement if
the other party breaches or defaults in the performance of any material
obligation under the agreement, and such breach or default continues for 60 days
after written notice thereof.
The Company relies on these companies, many of which are single-source
vendors, for the development, manufacture and supply of certain components of
the Company's UHTS system. Although the Company believes these technology
alliances should provide the Company with a competitive advantage, the Company's
competitive advantage could be substantially weakened or displaced by other
technologies that supplant those made available to the Company through its
alliances. To the extent possible and commercially reasonable, the Company has,
and will continue to seek, alternative sources for various components of its
UHTS system, and may also develop various components of its UHTS system
utilizing its internal engineering capabilities. Although the Company believes
that alternative sources for UHTS system components could be made available, any
interruption in the development, manufacture or supply of a sole-sourced
component could have a material adverse effect on the Company's ability to
develop its UHTS system until a new source of supply is qualified, could subject
the Company to penalties for delays in delivery of the UHTS system and, as a
result, could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance the
Company will be able to enter into additional technology alliances on
commercially reasonable terms, if at all, or that the Company's current or
future allies or suppliers will meet the Company's requirements for quality,
quantity or timeliness.
PATENTS AND PROPRIETARY RIGHTS
The Company's patent portfolio includes 32 patent applications filed in the
United States and foreign patent jurisdictions. One United States patent
relating to the Company's Green Fluorescent Protein assay technology has
recently been issued, and two of the United States applications relating
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to the Company's fluorescent assay technology have recently been allowed. The
Company is either the assignee or exclusive licensee of these patent rights.
Certain aspects of the Company's technology related to GFP reporters,
b-lactamase based reporters, protease reporters, kinase reporters, and membrane
voltage reporters are exclusively licensed from The Regents of the University of
California ("The Regents"). Pursuant to the terms of the Exclusive License
Agreement between the Company and The Regents, the Company is obligated to pay
expenses associated with patent prosecution and maintenance, certain license
issue fees and royalties to the Regents. Certain aspects of the Company's
technology related to GFP reporters are exclusively licensed from the University
of Oregon ("UO"). Pursuant to the terms of the License Agreement between the
Company and UO, the Company is obligated to pay to UO expenses associated with
patent prosecution and maintenance, certain annual payments and, upon the
issuance of a patent related to the subject technology, to issue shares of the
Company's Common Stock to UO. Certain aspects of the Company's technology
related to G-protein coupled receptor reporters are exclusively licensed from
the California Institute of Technology ("Cal Tech"). In connection with the
execution of the License Agreement between the Company and Cal Tech, the Company
became obligated to pay certain expenses associated with patent prosecution and
maintenance, and the Company issued shares of its Common Stock to Cal Tech.
Additionally, the Company has obtained a non-exclusive license from SIBIA
Neurosciences, Inc. ("SIBIA"), with limited rights to sublicense, under patent
rights covering certain transcription-based assay technology (which relates to
certain uses of reporter genes) for screening. Pursuant to the terms of the
Non-Exclusive Cross-License Agreement between the Company and SIBIA, the Company
granted SIBIA a non-exclusive license to certain of Aurora's technologies, and
the Company issued to SIBIA shares of the Company's Common Stock. The Company
and SIBIA are also obligated to pay each other certain royalties. The Company is
dependent on the rights licensed from such parties. Any challenge to,
invalidation or loss of such rights could have a material adverse effect on the
business, financial condition and results of operation of the Company.
The Company's success will depend in part on its ability to obtain patent
protection for its systems, services and technologies, and to operate without
infringing the proprietary rights of third parties. The Company has had one
patent issued to date. The Company is dependent, in part, on the patent rights
licensed from third parties with respect to its fluorescent assay technologies.
There can be no assurance that patent applications filed by the Company or its
licensors will result in patents being issued, that the claims of such patents
will offer significant protection of the Company's technology, or that any
patents issued to, or licensed by, the Company will not be challenged, narrowed,
invalidated, or circumvented. The Company may also be subject to legal
proceedings that result in the revocation of patent rights previously owned by
or licensed to the Company, as a result of which the Company may be required to
obtain licenses from others to continue to develop, test or commercialize its
systems, services or technologies. There can be no assurance that the Company
will be able to obtain such licenses on acceptable terms, if at all.
The drug discovery industry, including screening technology companies, has
a history of patent litigation and will likely continue to have patent
litigation suits concerning drug discovery technologies. The patent positions of
pharmaceutical, biotechnology and drug discovery companies, including the
Company, are generally uncertain and involve complex legal and factual
questions. A number of patents have issued and may issue on certain targets or
their use in screening assays that could prevent the Company and its
collaborators from developing screens using such targets, or relate to certain
other aspects of technology utilized or expected to be utilized by the Company.
The Company has received invitations from third parties to license patents owned
or controlled by third parties. The Company evaluates these requests and intends
to obtain licenses that are compatible with its business objectives. There can
be no assurance, however, that the Company will be able to obtain any licenses
on acceptable terms, if at all. The Company's inability to obtain or maintain
patent protection or necessary licenses could have a material adverse effect on
the business, financial condition and results of operations of the Company.
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The Company is aware of a third party Patent Cooperation Treaty application
that claims certain uses of green fluorescent protein including its use in
protein kinase assays. If a patent were to issue from such application that
relates to the Company's GFP kinase reporters, the Company believes that such
patent would be unlikely to require the Company to obtain a license. However,
the Company may need to obtain such a license and there can be no assurance that
any such license would be available on commercially reasonable terms, if at all.
The Company is also aware of third party patents and published patent
applications that contain issued or issuable claims that may cover certain
aspects of the Company's or its collaborators' technologies, including certain
types of fluorescent assay methods, certain assays for ligands to certain
classes of targets such as certain cell surface and intracellular receptors, and
certain transcription based assays for chemicals that modulate transcription of
a gene encoding a protein related to disease. There can be no assurance that the
Company would not be required to take a license under any such patents to
practice certain aspects of its fluorescent assay technologies or that such
license would be available on commercially reasonable terms, if at all. Any
action against the Company or its collaborators claiming damages and seeking to
enjoin commercial activities relating to the affected technologies could, in
addition to subjecting the Company to potential liability for damages, require
the Company or its collaborators to obtain a license in order to continue to
develop, manufacture or market the affected technologies. The Company could
incur substantial costs in defending patent infringement claims, obtaining
patent licenses, engaging in interference and opposition proceedings or other
challenges to its patent rights or intellectual property rights made by third
parties, or in bringing such proceedings or enforcing any patent rights against
third parties. The Company's inability to obtain necessary licenses or its
involvement in proceedings concerning patent rights could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
In addition to patent protection, Aurora also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities. In an effort to maintain the confidentiality and
ownership of trade secrets and proprietary information, the Company requires
employees, consultants and certain collaborators to execute confidentiality and
invention assignment agreements upon commencement of a relationship with the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or other confidential
information in the event of unauthorized use or disclosure of such information
or that adequate remedies would exist in the event of such unauthorized use or
disclosure. The loss or exposure of trade secrets possessed by the Company could
adversely affect its business. Like many high technology companies, the Company
may from time to time hire scientific personnel formerly employed by other
companies involved in one or more areas similar to the activities conducted by
the Company. Although the Company requires its employees to maintain the
confidentiality of all confidential information of previous employers, there can
be no assurance that the Company or these individuals will not be subject to
allegations of trade secret misappropriation or other similar claims as a result
of their prior affiliations.
COMPETITION
Competition among pharmaceutical and biotechnology companies which attempt
to identify compounds for development is intense. Because the Company's UHTS
system is being designed to integrate a number of different technologies, the
Company competes in many areas, including assay development, high throughput
screening and functional genomics. In the pharmaceutical industry, the Company
competes with the research departments of pharmaceutical and biotechnology
companies and other commercial enterprises, as well as numerous academic and
research institutions. Pharmaceutical and biotechnology companies, academic
institutions, governmental agencies and other research organizations are
conducting research in various areas which constitute portions of the Company's
technology platform, either on their own or in collaboration with others. There
can be no assurance that pharmaceutical and biotechnology companies which
currently compete with the Company in specific areas will not merge or enter
into joint ventures or other alliances with one or more other such companies and
become substantial multi-point competitors or that the
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Company's collaborators will not assemble their own ultra-high throughput
screening systems by purchasing components from competitors. Genomics and
combinatorial chemistry companies may also expand their business to include
compound screening or screen development, either alone or pursuant to alliances
with others. The Company anticipates that it will face increased competition in
the future as new companies enter the market and advanced technologies,
including more sophisticated information technologies, become available. The
Company's technological approaches, in particular its UHTS system, may be
rendered obsolete or uneconomical by advances in existing technological
approaches or the development of different approaches by one or more of the
Company's current or future competitors. Many of these competitors have greater
financial and personnel resources, and more experience in research and
development, than the Company. Historically, pharmaceutical and biotechnology
companies have maintained close control over their research activities,
including the synthesis, screening and optimization of chemical compounds. Many
of these companies, which represent the greatest potential market for the
Company's systems, services and technologies, have developed or are developing
internal programs and other methodologies to improve productivity, including
major investments in robotics technology to permit the automated screening of
compounds.
GOVERNMENT REGULATION
Regulation by the FDA and other governmental entities in the United States
and other countries will be a significant factor in the production and marketing
of any pharmaceutical products that may be developed by a collaborator. It is
not currently anticipated that the Company will develop its own drugs through
clinical trials and marketing. However, pharmaceutical products, if any,
developed by the Company's collaborators will require lengthy and costly
pre-clinical and clinical trials and regulatory approval by governmental
agencies prior to commercialization. The process of obtaining these approvals
and the subsequent compliance with appropriate federal, state and foreign
statutes and regulations are time consuming and require the expenditure of
substantial resources. Delays in obtaining regulatory approvals would adversely
affect the marketing of any drugs developed by the Company's collaborators,
diminish any competitive advantages that the Company's collaborators may attain
and therefore adversely affect the Company's ability to receive royalties or
milestone payments. If the product is classified as a new drug, a New Drug
Application will be required to be filed with, and product approval must be
obtained from, the FDA before commercial marketing of the drug. These testing
and approval processes require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
The Company is subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of certain
materials and waste products used and produced by the Company. The risk of
accidental contamination or injury from these materials cannot be eliminated and
in the event of such an accident, the Company could be held liable for any
damages that result and any liability could exceed the resources of the Company
and, in addition, there can be no assurance that the Company will not be
required to incur significant costs to comply with environmental laws and
regulations in the future.
EMPLOYEES
As of May 31, 1997, the Company had a total of 59 employees, 22 of whom
hold M.D. or Ph.D. degrees and 10 of whom hold other advanced degrees. Of these,
42 were engaged in research, screen development, screening services and UHTS
system development. The remainder were engaged in legal, business development,
general administration and finance. The Company's future success depends in
significant part upon the continued service of its key scientific, technical and
senior management personnel and its continuing ability to attract and retain
highly qualified technical and managerial personnel. None of the Company's
employees is represented by a labor union or covered by a collective bargaining
agreement. The Company has not experienced any work stoppages and considers its
relations with its employees to be good.
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FACILITIES
The company's facilities are located in La Jolla, California. The Company
leases approximately 22,245 square feet of space used for laboratory and
administrative purposes. These facilities are leased through October 15, 1999.
The Company recently entered into an 11-year lease for approximately 67,000
square feet of laboratory and office space and plans to relocate its operations
to such facility in the fourth quarter of 1997. The Company believes that, upon
such relocation, the Company's facilities will be adequate for its current and
projected needs and that additional space at a nearby location will be available
as needed.
LEGAL PROCEEDINGS
Aurora is not a party to any legal proceedings.
SCIENTIFIC ADVISORS
The Company's scientific advisors, who have demonstrated expertise in
various fields, advise the Company from time to time concerning long-term
scientific planning, research and development. The scientific advisors also
evaluate the Company's research programs, recommend personnel to the Company,
and advise the Company on specific scientific and technical issues. The
scientific advisors are compensated by retainer and on a time and expenses basis
and have received shares of Common Stock of the Company. The Company has entered
into consulting agreements with a number of the scientific advisors.
None of the scientific advisors is employed by the Company, and they may
have other commitments to or consulting or advisory contracts with their
employers or other entities that may conflict or compete with their obligations
to the Company. Accordingly, such persons are expected to devote only a small
portion of their time to the Company. The Company's scientific advisors are:
Roger Y. Tsien, Ph.D. -- Investigator, Howard Hughes Medical Institute;
Professor, Department of Pharmacology, School of Medicine, University of
California, San Diego; Professor, Department of Chemistry and Biochemistry,
University of California, San Diego
Charles S. Zuker, Ph.D. -- Investigator, Howard Hughes Medical Institute;
Professor, Departments of Biology and Neurosciences, School of Medicine,
University of California, San Diego
Lubert Stryer, M.D. -- Winzer Professor in the School of Medicine and
Professor of Neurobiology, Stanford University
Michael Geoffrey Rosenfeld, M.D. -- Investigator, Howard Hughes Medical
Institute; Professor of Medicine, University of California, San Diego
Burton G. Christensen, Ph.D. -- former Senior Vice President for Chemistry,
Merck Sharp & Dohme
Tom Curran, Ph.D. -- Chairman, Department of Developmental Neurobiology, St.
Jude's Hospital Medical Center, Memphis; formerly Associate Director, Roche
Institute of Molecular Biology
Melvin I. Simon, Ph.D. -- Professor of Biological Sciences and Chairman of
the Biology Division, California Institute of Technology
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the Company's
directors, executive officers and key employees as of March 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Timothy J. Rink, M.D., Sc.D............... 50 Chairman of the Board, President and Chief
Executive Officer
J. Gordon Foulkes, Ph.D................... 43 Chief Technical Officer, Director
Paul A. Grayson........................... 32 Vice President, Corporate Development
Harry G. Stylli, Ph.D..................... 35 Vice President, Screen Technology
Frank F. Craig, Ph.D...................... 35 Senior Director, Screen Development
Deborah J. Tower.......................... 35 Senior Director, Finance and
Administration, Secretary and Treasurer
John D. Mendlein, Ph.D.................... 37 Senior Legal Counsel and Director,
Intellectual Property
James C. Blair, Ph.D. (1)................. 57 Director
Kevin J. Kinsella (1)..................... 51 Director, Co-founder
Hugh Y. Rienhoff, Jr., M.D.(1)(2)......... 44 Director
Lubert Stryer, M.D........................ 59 Director
Timothy J. Wollaeger (2).................. 53 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
All directors hold office until the next annual meeting of stockholders of
the Company and until their successors have been elected and qualified.
Directors do not receive any fees for services on the Board. Board members are
reimbursed for their expenses for each meeting attended. Officers serve at the
discretion of the Board of Directors. There are no family relationships between
any directors or executive officers of the Company.
Timothy J. Rink has served as Chairman of the Board, President and Chief
Executive Officer of the Company since February 1996. From 1990 through 1995,
Dr. Rink served as President and Chief Technical Officer of Amylin
Pharmaceuticals, Inc., a publicly held biopharmaceutical company. Dr. Rink was
Vice President, Research at SmithKline Beecham in the U.K. from 1984 to 1989,
and previously was Lecturer in Physiology at the University of Cambridge. Dr.
Rink currently serves on the Scientific Advisory Board of Amylin, and he is a
director of CoCensys, Inc. and NPS Pharmaceuticals, Inc., all publicly held
biopharmaceutical companies. Dr. Rink received his M.A., M.D. and Sc.D. in
Medical Sciences from the University of Cambridge, England.
J. Gordon Foulkes has been Chief Technical Officer and a director of the
Company since November 1996. From 1987 to 1996, Dr. Foulkes served in several
capacities at Oncogene Science, Inc., where he was a director and most recently
held the position of Chief Scientific Officer. Prior to joining Oncogene
Science, Dr. Foulkes led a research group at National Institute for Medical
Research in the U.K., and was previously a post-doctoral fellow in Dr. David
Baltimore's laboratory at the Massachusetts Institute of Technology. Dr. Foulkes
obtained his B.Sc. in Biochemistry at the University College, Cardiff, U.K. and
his Ph.D. in Biochemistry in Professor Philip Cohen's laboratory at the
University of Dundee, Scotland.
Paul A. Grayson joined the Company in April 1996 and currently serves as
Vice President, Corporate Development. From 1994 to 1996, Mr. Grayson served as
Director of Business Development for Advanced Tissue Sciences, Inc. From 1987 to
1994, Mr. Grayson held various research, marketing and business development
positions at Allergan Pharmaceuticals and Gensia Inc. Mr.
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Grayson received his B.S. in Biochemistry and Computer Science from the
University of California, Los Angeles, and his M.B.A. from the University of
California, Irvine.
Harry G. Stylli joined the Company in November 1995 and currently serves as
Vice President, Screen Technology. From 1987 to 1995, Dr. Stylli held several
positions at Glaxo Wellcome plc, where he was integrally involved in the
International Screening and Technology Program. Dr. Stylli obtained a Ph.D. in
Pharmaceutical Chemistry from Kings College London University, an M.B.A. from
Open University, Milton Keynes, U.K. and a B.Sc. in Biochemical Pharmacology,
with honors, from the University of East London.
Frank F. Craig joined the Company in November 1995 and currently serves as
Senior Director, Screen Development. From 1993 to 1995, Dr. Craig held several
positions in the Lead Discovery Division of Glaxo Wellcome plc. From 1989 to
1992 he worked as a Project Leader in the Life Sciences Division of Amersham
International plc. Dr. Craig received B.Sc. and Ph.D. degrees in Microbiology
from the University of Glasgow, U.K., and a Diploma in Business Studies and
Political Economy from the University of Westminster, U.K.
Deborah J. Tower joined the Company in May 1996 and currently serves as
Senior Director, Finance and Administration, Secretary and Treasurer. From 1994
to 1996, Ms. Tower served as Director of Finance and Accounting of Sequana
Therapeutics, Inc. From 1989 to 1993, she served as Controller of Vical Inc. Ms.
Tower received a B.S. in Accounting, with honors, from San Diego State
University and is a Certified Public Accountant.
John D. Mendlein has been Senior Legal Counsel and Director, Intellectual
Property since August 1996. From 1990 to 1996, Dr. Mendlein worked at Cooley
Godward LLP, Palo Alto, California, where he specialized in intellectual
property law. Dr. Mendlein received his Ph.D. in Physiology from the University
of California, Los Angeles, his J.D. from the University of California, Hastings
College of Law and his B.S. in Biology from the University of Miami, Florida.
James C. Blair has been a director of the Company since March 1996. Dr.
Blair has been a general partner of Domain Associates, a venture capital
investment firm, since 1985. Domain Associates manages Domain Partners III, L.P.
and DP III Associates, L.P. and is the U.S. venture capital advisor to
Biotechnology Investments Limited. From 1969 to 1985, Dr. Blair was an officer
of three investment banking and venture capital firms. Dr. Blair is a director
of Amylin Pharmaceuticals, Inc., CoCensys, Inc., Dura Pharmaceuticals, Inc.,
Gensia-Sicor, Inc., Trega Biosciences, Inc. and Vista Medical Technologies, Inc.
Dr. Blair received a B.S.E. from Princeton University and M.S.E. and Ph.D.
degrees in Electrical Engineering from the University of Pennsylvania.
Kevin J. Kinsella, a co-founder of the Company, has been a director of the
Company since its inception in May 1995. Mr. Kinsella was the founder of Sequana
Therapeutics, Inc. in February 1993, where he currently serves as President,
Chief Executive Officer and a director. He was the Managing General Partner of
Avalon Ventures, a venture capital firm. Avalon Ventures has financed over
thirty companies, many of which are in the biopharmaceutical field, including
Pharmacopeia, Inc., Athena Neurosciences Inc., ONYX Pharmaceuticals and Vertex
Pharmaceuticals Inc. He is also a director of ONYX Pharmaceuticals. He received
a B.S. from the Massachusetts Institute of Technology and an M.A. from The Johns
Hopkins School of Advanced International Studies.
Hugh Y. Rienhoff, Jr. has been a director of the Company since March 1996.
Dr. Rienhoff is a director of Abingworth Management Limited, a venture capital
investment firm. From 1992 to 1997, Dr. Rienhoff held various positions at New
Enterprise Associates Development Corporation, where he most recently served as
Partner. He is a director of Healtheon, Hexagen plc., Microcide Pharmaceuticals,
Inc., VacTex and Sensors for Medicine and Science. Dr. Rienhoff received an M.D.
degree from The Johns Hopkins University and a B.A. degree in English Literature
and Biology, with honors, from Williams College.
Lubert Stryer has been a director of the Company since March 1996, and
currently serves as a scientific advisor of the Company. He is a Winzer
Professor in the School of Medicine and Professor
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<PAGE> 50
of Neurobiology at Stanford University. He is a director of Affymetrix, Inc.
From 1989 to 1990, Dr. Stryer served as President and Director of Affymax
Research Institute. He is co-inventor of Affymetrix's light-directed synthesis
technology. Dr. Stryer has pioneered the development of novel fluorescence
detection techniques and holds ten patents involving fluorescence and
light-activated chemical syntheses. Dr. Stryer is the author of Biochemistry, a
major text used widely in colleges and universities around the world. Dr. Stryer
received the American Chemical Society Award in Biological Chemistry (the Eli
Lilly Award) and is a member of the National Academy of Sciences and received an
honorary Doctor of Science from The University of Chicago. Dr. Stryer received
his M.D. degree from Harvard University and his B.S. degree from the University
of Chicago.
Timothy J. Wollaeger has been a director of the Company since March 1996.
He has been the general partner of Kingsbury Associates and the general partner
of Kingsbury Capital Partners, L.P. and Kingsbury Capital Partners, L.P. II
venture capital investment partnerships since 1993. From 1990 to 1993, Mr.
Wollaeger served as Senior Vice President and was a director of Columbia
Hospital Corporation, a hospital management company now known as Columbia/HCA
Healthcare Corporation. From 1986 until 1993, he was a general partner of the
general partner of Biovest Associates, a venture capital investment firm. He is
a director of Amylin Pharmaceuticals, Inc., Chairman and a director of Biosite
Diagnostics, Inc. and a director of Phamis, Inc. He received an M.B.A. from
Stanford University and a B.A. in Economics from Yale University.
The Company and certain of its stockholders are party to a Voting Agreement
dated March 8, 1996 (the "Voting Agreement"). Pursuant to the terms of the
Voting Agreement, subject to certain conditions, each of Avalon Bioventures II,
L.P. ("Avalon"), Kingsbury Capital Partners, L.P. II ("Kingsbury"), Abingworth
Bioventures SICAV ("Abingworth"), New Enterprise Associates VI, L.P. ("NEA") and
Domain Partners III, L.P. ("Domain III") are entitled to designate a nominee for
election as one of the directors of the Company (collectively, the "Venture
Nominees"). Each party to the Voting Agreement has agreed to vote, at each
meeting (or action by written consent in lieu thereof) of stockholders of the
Company at or by which directors were to be elected, all or their respective
shares of the Company's capital stock to elect, as directors of the Company, (i)
the Venture Nominees, (ii) the Chief Executive Officer of the Company and (iii)
an individual designated jointly by Roger Y. Tsien and Charles S. Zuker. Venture
Nominees currently serving on the Board of Directors include Kevin J. Kinsella,
nominee of Avalon, Timothy J. Wollaeger, nominee of Kingsbury, Hugh Y. Rienhoff,
Jr., nominee of Abingworth, and James C. Blair, nominee of Domain III. Lubert
Stryer currently serves as the nominee of Roger Y. Tsien and Charles S. Zuker.
Timothy J. Rink, as Chief Executive Officer of the Company, was elected as a
director pursuant to the Voting Agreement. In accordance with its terms, the
Voting Agreement will terminate upon the conversion of the outstanding shares of
Preferred Stock into Common Stock upon the completion of the Offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee consists of Dr. Blair, Mr. Kinsella and Dr.
Rienhoff. The Compensation Committee makes recommendations regarding the
Company's 1996 Stock Plan, Non-Employee Directors' Stock Option Plan and
Employee Stock Purchase Plan and makes decisions concerning salaries and
incentive compensation for employees and consultants of the Company.
The Audit Committee consists of Dr. Rienhoff and Mr. Wollaeger. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.
DIRECTOR COMPENSATION
The Company's directors do not currently receive any cash compensation for
services on the Board of Directors or any committee thereof, but directors may
be reimbursed for certain expenses
49
<PAGE> 51
in connection with attendance at Board and committee meetings. All directors are
eligible to participate in the Company's 1996 Stock Plan. Non-employee directors
receive automatic grants of options under the Company's Non-Employee Directors'
Stock Option Plan as described below. See "-- Equity Incentive Plan" and
"-- Non-Employee Directors' Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. See "Certain Transactions" for a description of transactions between
the Company and entities affiliated with members of the Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid by, or accrued for services rendered to, the Company during the fiscal year
ended December 31, 1996 to the Company's Chief Executive Officer. No other
executive officer of the Company earned in excess of $100,000 in salary and
bonus during the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2)
- ------------------------------------------------------- -------- ------- ---------------
<S> <C> <C> <C>
Timothy J. Rink, M.D., Sc.D.
President, Chief Executive Officer and Chairman of
the Board............................................ $229,649 $50,000 $27,188
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Chief
Executive Officer which are available generally to all salaried employees of
the Company and certain perquisites and other personal benefits received by
the Chief Executive Officer which do not exceed the lesser of $50,000 or 10%
of any such officer's salary and bonus disclosed in this table. There were
no long-term compensation awards granted to the Chief Executive Officer
during the year ended December 31, 1996. As of December 31, 1996, the Chief
Executive Officer held 222,000 shares of restricted common stock having an
aggregate value of $83,250.
(2) Represents fees paid for consulting services rendered prior to employment
with the Company from January to March 1996.
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
The Company has entered into employment agreements with Drs. Rink and
Foulkes dated as of January 23, 1996 (as amended on March 8, 1996) and August 6,
1996, respectively. Dr. Rink's employment agreement provides for the payment of
an annual base salary of $275,000. In the event that Dr. Rink's employment is
terminated, other than "for cause" (as defined in his employment agreement),
prior to March 1, 1999, Dr. Rink will be entitled to severance payments equal to
six times his then-current monthly base salary. Dr. Foulkes' employment
agreement provides for the payment of an annual base salary of $250,000. In the
event that Dr. Foulkes' employment is terminated, other than "for cause" (as
defined in his employment agreement), prior to the second anniversary of his
commencement of employment with the Company, Dr. Foulkes will be entitled to
severance payments equal to 12 times his then-current monthly base salary, plus
$100,000. In the event that Dr. Foulkes' employment is terminated, other than
"for cause," after the second anniversary of his commencement of employment with
the Company, Dr. Foulkes will be entitled to severance payments equal to nine
times his then-current monthly base salary. Pursuant to his employment
agreement, Dr. Foulkes was reimbursed for relocation expenses aggregating
approxi-
50
<PAGE> 52
mately $19,000. He was also paid a mortgage allowance of $7,500, and was loaned,
on an interest-free basis, $150,000 for use in connection with the purchase of a
home in San Diego, California. Such loan is payable on the earlier of one year
following termination of employment or four years following the loan date. So
long as Dr. Foulkes is then employed with the Company, he will receive a bonus
in the amount of $150,000 from the Company upon such four-year anniversary. See
"Certain Transactions."
EQUITY INCENTIVE PLAN
The Company adopted its 1996 Stock Plan in January 1996 and amended and
restated the 1996 Stock Plan in February 1997 (as amended and restated, the
"Stock Plan"). An aggregate of 2,000,000 shares of the Company's Common Stock
have been reserved for issuance pursuant to the exercise of stock awards granted
to employees, directors and consultants under the Stock Plan. The Stock Plan
will terminate in January 2006, unless sooner terminated by the Board.
The Stock Plan permits the granting of options intended to qualify as
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers and employee directors), and options that do not
so qualify ("Nonstatutory Stock Options," and, together with Incentive Stock
Options, the "Options") to employees (including officers and employee
directors), directors and consultants (including non-employee directors). In
addition, the Stock Plan permits the granting of stock appreciation rights
("SARs") appurtenant to or independently of Options, as well as stock bonuses
and rights to purchase restricted stock (Options, SARs, stock bonuses and rights
to purchase restricted stock are hereinafter referred to as "Stock Awards"). No
person is eligible to be granted Options and SARs covering more than 200,000
shares of the Company's Common Stock in any 12-month period.
The Stock Plan is administered by the Board or a committee appointed by the
Board. Subject to the limitations set forth in the Stock Plan, the Board has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each Stock Award, to determine whether an
Option is to be an Incentive Stock Option or a Nonstatutory Stock Option, to
establish vesting schedules, to specify the Option exercise price and the type
of consideration to be paid to the Company upon exercise and, subject to certain
restrictions, to specify other terms of Stock Awards. In addition, the Board has
delegated to Timothy J. Rink the authority to grant Stock Awards to certain
non-executive officer employees of the Company.
The maximum term of Options granted under the Stock Plan is ten years. The
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by an optionee during any calendar year (under all such plans of
the Company and its affiliates) may not exceed $100,000. Options granted under
the Stock Plan generally are non-transferable and expire three months after the
termination of an optionee's service to the Company. In general, if an optionee
is permanently disabled or dies during his or her service to the Company, such
person's Options may be exercised up to 12 months following such disability and
up to 18 months following such death.
The exercise price of Options granted under the Stock Plan is determined by
the Board of Directors in accordance with the guidelines set forth in the Stock
Plan. The exercise price of an Incentive Stock Option cannot be less than 100%
of the fair market value of the Common Stock on the date of the grant. The
exercise price of a Nonstatutory Stock Option cannot be less than 85% of the
fair market value of the Common Stock on the date of grant. Options granted
under the Stock Plan vest at the rate specified in the option agreement. The
exercise price of Incentive Stock Options granted to any person who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of the Company's capital stock must be at least 110% of the
fair market value of such stock on the date of grant and the term of such
Incentive Stock Options cannot exceed five years.
51
<PAGE> 53
Any stock bonuses or restricted stock purchase awards granted under the
Stock Plan shall be in such form and will contain such terms and conditions as
the Board deems appropriate. The purchase price under any restricted stock
purchase agreement will not be less than 85% of the fair market value of the
Company's Common Stock on the date of grant. Stock bonuses and restricted stock
purchase agreements awarded under the Stock Plan are generally non-transferable.
Pursuant to the Stock Plan, shares subject to Stock Awards that have
expired or otherwise terminated without having been exercised in full again
become available for grant, but shares subject to exercised stock appreciation
rights will not again become available for grant. The Board of Directors has the
authority to reprice outstanding Options and SARs and to offer optionees and
holders of SARs the opportunity to replace outstanding options and SARs with new
options or SARs for the same or a different number of shares.
Upon certain changes in control of the Company, all outstanding Stock
Awards under the Stock Plan must either be assumed or substituted by the
surviving entity. In the event the surviving entity determines not to assume or
substitute such Stock Awards, with respect to persons then performing services
as employees, directors or consultants, the time during which such Stock Awards
may be exercised will be accelerated and such Stock Awards will be terminated if
not exercised prior to such change in control.
As of March 31, 1997, the Company had issued 431,272 shares of Common Stock
pursuant to the exercise of purchase rights granted under the Stock Plan, and
had granted Incentive Stock Options to purchase an aggregate of 501,320 shares
of Common Stock. As of March 31, 1997, 1,067,408 shares of Common Stock remained
available for future grants under the Stock Plan.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In February 1997, the Company adopted its Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of Common Stock to non-employee directors of the
Company. The Directors' Plan is administered by the Board, unless the Board
delegates administration to a committee of at least two disinterested directors.
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 240,000. Pursuant to the terms of
the Directors' Plan: (i) each person who upon the effective date of the
Directors' Plan was a Non-Employee Director automatically was granted a one-time
option to purchase 16,000 shares of Common Stock; (ii) each person who, after
the effective date of this offering, for the first time becomes a Non-Employee
Director automatically will be granted, upon the date of his or her initial
appointment or election to be a Non-Employee Director, a one-time option to
purchase 16,000 shares of Common Stock; and (iii) on the date of each annual
meeting of the stockholders of the Company after the effective date of this
offering (other than any such annual meeting held in 1997), each person who is
elected at such annual meeting to serve as a Non-Employee Director (other than a
person who receives a grant in accordance with (ii) above on or during the
three-month period preceding such date) automatically will be granted an option
to purchase 4,000 shares of Common Stock.
No options granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. Options granted under the
Directors' Plan vest monthly over a four-year period. The exercise price of
options under the Directors' Plan will equal 100% of the fair market value of
the Common Stock on the date of grant. Options granted under the Directors' Plan
are generally non-transferable. Unless otherwise terminated by the Board of
Directors, the Directors' Plan automatically terminates on the tenth anniversary
of the date of this offering. As of the date hereof, options to purchase an
aggregate of 80,000 shares of Common Stock have been granted under the
Directors' Plan.
52
<PAGE> 54
EMPLOYEE STOCK PURCHASE PLAN
In February 1997, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 400,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The initial offering
under the Purchase Plan will commence on the date of this Prospectus and
terminate on April 30, 1999.
Unless otherwise determined by the Board, employees are eligible to
participate in the Purchase Plan only if they are employed by the Company or a
subsidiary of the Company designated by the Board for at least 20 hours per week
and are customarily employed by the Company or a subsidiary of the Company
designated by the Board for at least five months per calendar year. Employees
who participate in an offering may have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld is then used to purchase
shares of the Common Stock on specified dates determined by the Board. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock at the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
In the event of a merger, reorganization, consolidation or liquidation
involving the Company, the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The Board has the
authority to amend or terminate the Purchase Plan, provided, however, that no
such action may adversely affect any outstanding rights to purchase Common
Stock.
401(k) PLAN
In January 1996, the Board adopted an employee retirement savings plan (the
"401(k) Plan") covering certain of the Company's employees who have at least 30
days of service with the Company and work a minimum of 1,000 hours during the
plan year. Pursuant to the 401(k) Plan, eligible employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit
($9,500 in 1996) and have the amount of such reduction contributed to the 401(k)
Plan. In addition, eligible employees may make roll-over contributions to the
401(k) Plan from a tax-qualified retirement plan. The 401(k) Plan allows for the
Company to make discretionary matching and additional profit sharing
contributions, each as determined by a committee of the Board of Directors. No
discretionary or profit sharing contributions were made by the Company in 1996
and the Company has no intention of making such contributions in the near
future. Company contributions, if any, become 20% vested after two years of
service, with an additional 20% becoming vested for each year of service
thereafter. The 401(k) Plan is intended to qualify under Section 401 of the
Code, so that contributions by employees and the Company to the 401(k) Plan, and
income earned on the 401(k) Plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions by the Company,
if any, will be deductible by the Company when made. The trustee under the
401(k) Plan, at the direction of each participant, invests the 401(k) Plan
employee salary deferrals in selected investment options.
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Amended and Restated Bylaws provide that the Company will
indemnify its directors and executive officers and may indemnify its other
officers, employees and other agents to the fullest extent permitted by Delaware
law. The Company is also empowered under its Amended and Restated Bylaws to
enter into indemnification contracts with its directors and officers and to
53
<PAGE> 55
purchase insurance on behalf of any person it is required or permitted to
indemnify. Pursuant to this provision, the Company has entered into
indemnification agreements with each of its directors and executive officers and
certain of its key employees.
In addition, the Company's Restated Certificate of Incorporation provides
that directors of the Company will not be personally liable to the Company or
its stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the directors' duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law or (iv) for any transaction from which the director
derives any improper personal benefit. The Restated Certificate of Incorporation
also provides that if the Delaware General Corporation Law is amended after the
approval by the Company's stockholders of the Restated Certificate of
Incorporation to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of the Company's directors
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
54
<PAGE> 56
CERTAIN TRANSACTIONS
The Company was incorporated in California in May 1995 and reincorporated
in Delaware in January 1996. In connection with its reincorporation, the Company
issued 80 shares of Common Stock to Avalon Medical Partners L.P. ("AMP"). From
May 1995 to March 1996, AMP and Avalon Bioventures II L.P. ("ABV") loaned the
Company an aggregate of $425,000 and $500,000, respectively, pursuant to
Convertible Promissory Notes issued by the Company to AMP and ABV. Such
Convertible Promissory Notes were canceled, and the interest thereon forgiven,
in connection with the sale and issuance of shares of Series A Preferred Stock
to AMP and ABV in March 1996. Kevin J. Kinsella, a member of the Board of
Directors of the Company and its Chairman of the Board and Acting Chief
Executive Officer at the time of these transactions, was a general partner of
AMP and ABV until their dissolution in February 1997.
Subsequent to its reincorporation in Delaware in January 1996 and through
March 31, 1997, the Company sold the following shares of its Common Stock and
Preferred Stock in private placement transactions: 2,006,800 shares of Common
Stock at a price of $.00125 per share; 215,720 shares of Common Stock at a price
of $.0875 per share; 529,040 shares of Common Stock at a price of $.125 per
share; 284,672 shares of Common Stock at a price of $.375 per share; 7,200
shares of Common Stock at a price of $1.50 per share; 8,191,282 shares of Series
A Preferred Stock at a price of $1.6625 per share; 666,665 shares of Series B
Preferred Stock at a price of $2.25 per share; 600,000 shares of Series C
Preferred Stock at a price of $2.50 per share; and 458,028 shares of Series D
Preferred Stock at a price of $4.50 per share. Upon the closing of this
offering, each share of Series A, Series B, Series C and Series D Preferred
Stock will automatically convert into one share of Common Stock.
The purchasers of Common and Preferred Stock described above included,
among others, the following officers and directors of the Company, entities
affiliated with certain of the Company's directors, and holders of more than 5%
of the Company's voting securities:
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK(1)
COMMON ------------------------------------------
PURCHASER STOCK SERIES A SERIES B SERIES C SERIES D
- -------------------------------------------- ------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Abingworth Bioventures SICAV(2)............. -- 2,105,262 -- -- --
Avalon Medical Partners L.P.(3)............. 348,000 255,638 -- -- --
Avalon Bioventures II L.P.(3)............... -- 300,751 -- -- --
Biotechnology Investments Limited(4)........ -- 1,142,856 -- -- --
DP III Associates, L.P.(4).................. -- 57,324 -- -- --
Domain Partners III, L.P.(4)................ -- 1,656,961 -- -- --
J. Gordon Foulkes, Ph.D..................... 208,000 -- -- -- --
Kingsbury Capital Partners, L.P. II(5)...... -- 601,503 -- -- --
Kevin J. Kinsella(3)........................ -- 30,074 -- -- --
NEA Ventures 1996, L.P.(6).................. -- 6,014 -- -- --
New Enterprise Associates VI
Limited Partnership(6).................... -- 1,654,135 -- -- --
Timothy J. Rink, M.D., Sc.D................. 492,000 15,036 -- -- --
Sequana Therapeutics, Inc.(3)............... -- -- -- 600,000 --
Lubert Stryer, M.D.......................... 60,000 45,112 -- -- --
</TABLE>
- ---------------
(1) Certain of these entities are parties to a voting agreement. See
"Management." The Purchasers of these securities are entitled to
registration rights after this offering. See "Description of Capital
Stock -- Registration Rights."
(2) Dr. Stephen W. Bunting, a Director of the Company from March 1996 until
February 1997, is a director of Abingworth Management Limited, the
investment adviser to Abingworth Bioventures SICAV.
55
<PAGE> 57
(3) Kevin J. Kinsella, a director of the Company and its Chairman of the Board
and Acting Chief Executive Officer until March 1996, was a general partner
of Avalon Medical Partners L.P. and Avalon Bioventures II L.P. until such
partnerships dissolved in February 1997. Mr. Kinsella is also the President,
Chief Executive Officer and a director of Sequana Therapeutics, Inc.
("Sequana").
(4) Dr. James C. Blair, a director of the Company, is a general partner of
Domain Associates, a venture capital investment firm. Domain Associates
manages Domain Partners III, L.P. and DP III Associates, L.P. and is the
U.S. venture capital advisor to Biotechnology Investments Limited.
(5) Timothy J. Wollaeger, a director of the Company, is the general partner of
Kingsbury Capital Partners, L.P. II.
(6) Dr. Hugh Y. Rienhoff, Jr., a director of the Company, was a partner of New
Enterprise Associates Development Corporation at the time of the
transactions listed above. New Enterprise Associates Development Corporation
manages NEA Ventures 1996, L.P. and New Enterprise Associates VI Limited
Partnership.
In connection with Sequana's purchase of Series C Preferred Stock, the
Company and Sequana entered into a Research Agreement dated April 2, 1996. See
"Business -- Corporate Collaborations." As noted above, Kevin J. Kinsella, a
director of the Company and its Chairman of the Board and Acting Chief Executive
Officer until February 1996, is the President and Chief Executive Officer of
Sequana.
The Company has employment agreements with Timothy J. Rink, its Chief
Executive Officer and President, and J. Gordon Foulkes, its Chief Technical
Officer. See "Management -- Employment Agreements and Severance Arrangements."
In October 1996, the Company loaned $150,000 to J. Gordon Foulkes, the
Company's Chief Technical Officer and a director of the Company, to assist with
the purchase of a residence in connection with Dr. Foulkes' relocation to San
Diego, California from Long Island, New York. The loan is interest-free and is
secured by a second deed of trust on the property purchased in part by such
funds. Such loan is payable on the earlier of one year following termination of
employment or four years following the loan date. So long as Dr. Foulkes is then
employed with the Company, he will receive a bonus in the amount of $150,000
from the Company upon such four-year anniversary. See "Management."
The Company has granted options to certain of its directors and executive
officers. The Company has also entered into an Indemnification Agreement with
each of its directors and executive officers.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
disinterested directors, and will continue to be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
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<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1997, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) the Company's Chief Executive Officer, (ii) each of the Company's directors,
(iii) each holder of more than 5% of the Company's Common Stock and (iv) all
current directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
SHARES --------------------------------
5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER
AND NAMED EXECUTIVE OFFICERS OWNED(1) OFFERING OFFERING
- ----------------------------------------------------- ------------ --------------- --------------
<S> <C> <C> <C>
Abingworth Bioventures SICAV......................... 2,105,262 16.4% 12.8%
c/o Sanne & Cie
Boite Postale 566
L-2015 Luxemberg
Biotechnology Investments Limited.................... 1,142,856 8.9% 7.0%
St. Peter Port House
Saus Marez Street
St. Peter Port, Guernsey
GY1 3PH
Entities affiliated with Domain Partners III,
L.P.(2)............................................ 1,715,284 13.3% 10.5%
One Palmer Square, Suite 515
Princeton, NJ 08542
Entities affiliated with New Enterprise Associates
Development Corporation(3)......................... 1,660,149 12.9% 10.1%
1119 St. Paul Street
Baltimore, MD 21202
Timothy J. Rink, M.A., M.D., Sc.D.(4)................ 491,036 3.8% 3.0%
J. Gordon Foulkes, Ph.D.............................. 208,000 1.6% 1.3%
James C. Blair, Ph.D.(5)............................. 1,715,284 13.3% 10.5%
Kevin J. Kinsella(6)................................. 779,221 6.0% 4.8%
Hugh Y. Rienhoff, Jr., M.D.(7)....................... 2,109,268 16.4% 12.9%
Lubert Stryer, M.D.(8)............................... 98,111 * *
Timothy J. Wollaeger(9).............................. 602,502 4.7% 3.7%
All directors and executive officers as a group (9
persons)........................................... 6,106,622 47.5% 37.2%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 12,849,950 shares of Common
Stock outstanding as of March 31, 1997 and 16,395,240 shares of Common Stock
outstanding after completion of this offering (in each case after giving
effect to the four-for-five reverse split of the Common Stock effected on
April 25, 1997 and the conversion of all outstanding shares of Preferred
Stock into Common Stock upon the completion of this offering).
(2) Represents 57,324 shares held by DP III Associates, L.P. ("DP III") and
1,656,961 shares held by Domain Partners III., L.P. ("Domain III"). One
Palmer Square Associates III, L.P. is the general partner of DP III and
Domain III.
(3) Represents 1,654,135 shares held by New Enterprise Associates VI Limited
Partnership and 6,014 shares held by NEA Ventures 1996, L.P. New Enterprise
Associates Development
57
<PAGE> 59
Corporation manages New Enterprise Associates VI Limited Partnership and NEA
Ventures 1996, L.P.
(4) Includes 222,000 shares held by Dr. Rink's spouse, Norma J. Rink, as her
separate property. Also includes 32,000 shares held by Dr. Rink as custodian
for two of his minor children. Dr. Rink disclaims beneficial ownership of
all of such shares.
(5) Represents 57,324 shares held by DP III and 1,656,961 shares held by Domain
III. Dr. Blair is a general partner of One Palmer Square Associates III,
L.P., the general partner of DP III and Domain III. Dr. Blair disclaims
beneficial ownership of such shares except to the extent of his partnership
interest therein. Also includes 999 shares subject to stock options granted
to Dr. Blair which are exercisable within 60 days of the date of this
Prospectus.
(6) Includes 600,000 shares held by Sequana Therapeutics, Inc., of which Mr.
Kinsella is the President and Chief Executive Officer and a member of the
board of directors. Mr. Kinsella disclaims beneficial ownership of such
shares. Also includes 999 shares subject to stock options granted to Mr.
Kinsella which are exercisable within 60 days of the date of this
Prospectus.
(7) Includes 2,105,262 shares held by Abingworth Bioventures SICAV. Dr. Rienhoff
is a director of Abingworth Management Limited, the investment adviser to
Abingworth Bioventures SICAV. Dr. Rienhoff disclaims beneficial ownership of
such shares except to the extent of his partnership interest therein. Also
includes 999 shares subject to stock options granted to Dr. Rienhoff which
are exercisable within 60 days of the date of this Prospectus.
(8) Includes 22,556 shares held by Dr. Stryer's spouse, Andrea S. Stryer. Also
includes 999 shares subject to stock options granted to Dr. Stryer which are
exercisable within 60 days of the date of this Prospectus.
(9) Includes 601,503 shares held by Kingsbury Capital Partners, L.P. II
("Kingsbury"). Mr. Wollaeger is the general partner of Kingsbury. Mr.
Wollaeger disclaims beneficial ownership of such shares except to the extent
of his partnership interest therein. Also includes 999 shares subject to
stock options granted to Mr. Wollaeger which are exercisable within 60 days
of the date of this Prospectus.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $.001 par value, and, effective upon the closing of this
offering, 7,500,000 shares of Preferred Stock, $.001 par value.
COMMON STOCK
As of March 31, 1997, there were 12,849,950 shares of Common Stock
outstanding, after giving effect to the conversion of all outstanding shares of
Preferred Stock into 9,915,975 shares of Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preferences of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive, conversion,
subscription or other rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
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<PAGE> 60
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred
Stock will be converted into 9,915,975 shares of Common Stock. See Notes 6 and
11 of Notes to Financial Statements for a description of the currently
outstanding Preferred Stock. Following the conversion, the Company's Restated
Certificate of Incorporation will be amended and restated to delete all
references to such shares of Preferred Stock. Under the Certificate of
Incorporation, as amended and restated upon the closing of this offering (the
"Restated Certificate"), the Board has the authority, without further action by
stockholders, to issue up to 7,500,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges, qualifications and
restrictions granted to or imposed upon such Preferred Stock, including dividend
rights, conversion rights, voting rights, rights and terms of redemption,
liquidation preference and sinking fund terms, any or all of which may be
greater than the rights of the Common Stock. The issuance of Preferred Stock
could adversely affect the voting power of holders of Common Stock and reduce
the likelihood that such holders will receive dividend payments and payments
upon liquidation. Such issuance could have the effect of decreasing the market
price of the Common Stock. The issuance of Preferred Stock could have the effect
of delaying, deterring or preventing a change in control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
After this offering, the holders of 9,915,975 shares of Common Stock will
be entitled to certain rights with respect to the registration of such shares
under the Securities Act, pursuant to that certain Amended and Restated Investor
Rights Agreement dated December 27, 1996 (the "Investors' Rights Agreement").
Under the terms of the Investors' Rights Agreement, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other security holders exercising registration
rights, such holders are entitled to notice of such registration and are
entitled, subject to certain limitations, to include shares therein. Commencing
with the date that is one year after this offering, the holders may also require
the Company to file a registration statement under the Securities Act with
respect to their shares, and the Company is required to use its best efforts to
effect to such registration. Furthermore, the holders may require the Company to
register their shares on Form S-3 when such form becomes available to the
Company. Generally, the Company is required to bear all registration and selling
expenses incurred in connection with any such registrations. These rights are
subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration. Such registration rights terminate on the seventh anniversary of
the effective date of the Offering.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is governed by the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales or other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock. The existence of this provision
would be expected to have anti-takeover effects with respect to transactions not
approved in advance by the Board of Directors, such as discouraging takeover
attempts that might result in a premium over the market price of the Common
Stock.
The Company's Restated Certificate provides that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing. In addition, special meetings of the
59
<PAGE> 61
stockholders of the Company may be called only by the Chairman of the Board, the
President of the Company, by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors, or by the
holders of 10% of the outstanding voting stock of the Company. The Company's
Restated Certificate also specifies that the authorized number of directors may
be changed only by resolution of the Board of Directors. These and other
provisions contained in the Restated Certificate and the Company's Amended and
Restated Bylaws could delay or make more difficult certain types of transactions
involving an actual or potential change in control of the Company or its
management (including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices) and may limit the ability
of stockholders to remove current management of the Company or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of the Company's Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Harris
Trust Company of California.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
the Offering because of certain contractual and legal restrictions on resale
described below, sales of substantial amounts of Common Stock of the Company in
the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of the Offering, the Company will have 16,395,240 shares of
Common Stock outstanding, assuming no exercise of currently outstanding options,
but including warrants to purchase an aggregate of 45,290 shares of Common Stock
to be exercised upon the closing of this offering. Of these shares, the
3,500,000 shares sold in this offering (plus any additional shares sold upon
exercise of the Underwriters' over-allotment option) will be freely transferable
without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), unless they are held by "affiliates" of the Company as that
term is used under the Securities Act and the regulations promulgated thereunder
("Affiliates"). Approximately 10,826,367 shares of Common Stock will be fully
vested and eligible for sale under Securities Act Rules 144 and 701 on the
ninety-first day after the effectiveness of this offering. Stockholders of the
Company holding an aggregate of 10,762,778 of these 10,826,367 shares have
agreed pursuant to lock-up agreements with the Underwriters, subject to certain
limited exceptions, not to sell or otherwise dispose of any of the shares held
by them for a period of 180 days after the effective date of this offering
without the prior written consent of Alex. Brown & Sons Incorporated. At the end
of such 180-day period, an additional 217,722 shares of Common Stock (plus
approximately 15,985 shares issuable upon exercise of vested options) will be
eligible for immediate resale, subject to compliance with Rule 144 and Rule 701.
The remainder of the approximately 1,849,725 shares of Common Stock held by
existing stockholders will become eligible for sale at various times over a
period of two years and could be sold earlier if the holders exercise any
available registration rights. The holders of 9,915,977 shares of Common Stock
have the right in certain circumstances to require the Company to register their
shares under the Securities Act for resale to the public beginning one year from
the effective date of this offering. If such holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales could have an adverse effect on the market price
for the Company's Common Stock. If the Company were required to include in a
Company-initiated registration shares held by such holders pursuant to the
exercise of their piggyback registration rights, such sales may have an adverse
effect on the Company's ability to raise needed capital. In
60
<PAGE> 62
addition, the Company expects to file a registration statement on Form S-8
registering a total of approximately 2,207,528 shares of Common Stock subject to
outstanding stock options or reserved for issuance under the Company's stock
option plans. Such registration statement is expected to be filed and to become
effective as soon as practicable after the effective date of this offering.
Shares registered under such registration statement will, subject to Rule 144
volume limitations applicable to Affiliates, be available for sale in the open
market, unless such shares are subject to vesting restrictions with the Company
or the lock-up agreements described above.
In general, under Rule 144 as in effect on the date of this Prospectus,
beginning 90 days after the effective date of the Offering, an Affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares (as defined under Rule 144) for at least
one year is entitled to sell within any three-month period a number of shares
that does not exceed greater of (i) one percent of the then outstanding shares
of the Company's Common Stock or (ii) the average weekly trading volume of the
Company's Common Stock in the Nasdaq National Market during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Commission. Sales pursuant to Rule 144 are subject to certain requirements
relating to the manner of sale, notice, and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who was not an Affiliate of the Company at any time during the 90 days
immediately preceding the sale and who has beneficially owned Restricted Shares
for at least two years is entitled to sell such shares under Rule 144(k) without
regard to the limitations described above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.
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<PAGE> 63
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Hambrecht & Quist LLC and Robertson, Stephens &
Company LLC, have severally agreed to purchase from the Company the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
---------
<S> <C>
Alex. Brown & Sons Incorporated.................................................
Hambrecht & Quist LLC...........................................................
Robertson, Stephens & Company LLC...............................................
---------
Total................................................................. 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all the shares of the Common Stock offered hereby if
any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the initial
public offering, the offering price and other selling terms may be changed by
the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 525,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it in the above table bears to 3,500,000, and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 3,500,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
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<PAGE> 64
Stockholders of the Company, holding in the aggregate 10,762,778 shares of
Common Stock, have agreed not to offer, sell, contract to sell or otherwise
dispose of (or enter into any transaction which is designed to, or could be
expected to, result in the disposition of any portion of) any Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated. The Company has entered into a
similar agreement, except that it may issue, and grant options to purchase,
shares of Common Stock under its 1996 Stock Plan, Employee Stock Purchase Plan
and Non-Employee Directors' Stock Option Plan and pursuant to currently
outstanding warrants. See "Shares Eligible for Future Sale."
In May 1996, Hambrecht & Quist Group, an entity affiliated with Hambrecht &
Quist LLC, purchased 222,221 shares of the Company's Series B Preferred Stock
for a purchase price of $2.25 per share, or an aggregate of $500,000. Such
shares will convert into 222,221 shares of Common Stock upon the closing of this
offering.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined by negotiation among the Company and the
Representatives. The factors to be considered in such negotiations include
prevailing market conditions, the results of operations of the Company in recent
periods, the market capitalizations and stages of development of other companies
which the Company and the Representatives believe to be comparable to the
Company, estimates of the business potential of the Company, the present stage
of the Company's development and other factors deemed relevant.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
the Common Stock in the open market. The Underwriters may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in the offering, if the Underwriters repurchase previously distributed
Common Stock in transactions to cover their short positions, in stabilization
transactions or otherwise. Finally, the Underwriters may bid for, and purchase,
shares of the Common Stock in market making transactions and impose penalty
bids. These activities may stabilize or maintain the market price of the Common
Stock above market levels that may otherwise prevail. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, San Diego, California. As of the
date of this Prospectus, certain members and associates of Cooley Godward own an
aggregate of 30,074 shares of Common Stock through an investment partnership.
Certain legal matters will be passed upon for the Underwriters by Morrison &
Foerster LLP, New York, New York.
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<PAGE> 65
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996
and for the period from May 8, 1995 (inception) through December 31, 1995 and
for the year ended December 31, 1996 included in this Prospectus and elsewhere
in the Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Risk
Factors -- Dependence on Patents and Proprietary Rights," "Business -- Patents
and Proprietary Rights," and other references herein to intellectual property of
the Company have been reviewed and approved by Fish & Richardson, PC, San Diego,
California, patent counsel for the Company, as experts on such matters, and are
included herein in reliance upon that review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is a part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents or
provisions of any contract or other document referred to herein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. A copy of
the Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any part of the
Registration Statement may be obtained from such offices upon the payment of the
fees prescribed by the Commission. In addition, registration statements and
certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's web site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
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<PAGE> 66
AURORA BIOSCIENCES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)........ F-3
Statements of Operations for the period from May 8, 1995 (inception) to December 31,
1995, the year ended December 31, 1996, and the three month periods ended March 31,
1996 and 1997 (unaudited)........................................................... F-4
Statements of Stockholders' Equity for the period from May 8, 1995 (inception) to
December 31, 1995, the year ended December 31, 1996 and the three month period ended
March 31, 1997 (unaudited).......................................................... F-5
Statements of Cash Flows for the period from May 8, 1995 (inception) to December 31,
1995, the year ended December 31, 1996 and the three month periods ended March 31,
1996 and 1997 (unaudited)........................................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 67
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Aurora Biosciences Corporation
We have audited the accompanying balance sheets of Aurora Biosciences
Corporation as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for the period from May 8, 1995
(inception) to December 31, 1995 and for the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aurora Biosciences
Corporation at December 31, 1995 and 1996, and the results of its operations and
its cash flows for the period from May 8, 1995 (inception) to December 31, 1995
and for the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Diego, California
April 7, 1997,
except as to Note 11, as to which the date is
April 25, 1997
F-2
<PAGE> 68
AURORA BIOSCIENCES CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------------- MARCH 31, STOCKHOLDERS' EQUITY
1995 1996 1997 AT MARCH 31, 1997
--------- ----------- ----------- --------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 11,119 $ 3,914,038 $ 4,500,743
Investment securities, available-for-sale -- 9,252,870 9,137,891
Accounts receivable under collaborative
agreements............................... -- 1,116,523 150,000
Notes receivable from officers and
employees................................ 69,798 -- --
Prepaid expenses............................ 18,333 228,029 358,131
Other current assets........................ -- 169,175 450,437
--------- ----------- -----------
Total current assets................ 99,250 14,680,635 14,597,202
Equipment, furniture and leaseholds, net...... 9,110 1,901,515 2,792,643
Notes receivable from officers and
employees................................... -- 200,000 260,000
Other assets.................................. 6,440 732,374 693,903
--------- ----------- -----------
$ 114,800 $17,514,524 $18,343,748
========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 41,589 $ 299,819 $ 540,850
Accrued compensation........................ 9,938 319,770 152,140
Notes payable............................... 475,000 -- --
Unearned revenue -- 250,000 1,105,000
Capital lease obligations, current
portion.................................. -- 350,247 472,190
--------- ----------- -----------
Total current liabilities........... 526,527 1,219,836 2,270,180
Capital lease obligations, less current
portion..................................... -- 1,110,897 1,388,912
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par
value, 25,000,000 shares authorized, no
shares issued and outstanding at December
31, 1995 and 9,915,975 shares issued and
outstanding at December 31, 1996 and
March 31, 1997 (7,500,000 shares
authorized and no shares issued and
outstanding pro forma); aggregate
liquidation preference of $18,679,128 at
December 31, 1996 and March 31, 1997..... -- 9,916 9,916 $ --
Common stock, $.001 par value, 50,000,000
shares authorized, 80, 2,865,160 and
2,933,975 shares issued and outstanding
at December 31, 1995, 1996 and March 31,
1997, respectively (12,849,950 shares pro
forma)................................... -- 2,865 2,934 12,850
Additional paid-in capital.................. -- 18,887,790 22,335,939 22,335,939
Deferred compensation....................... -- (371,573) (3,477,298) (3,477,298)
Accumulated deficit......................... (411,727) (3,345,207) (4,186,835) (4,186,835)
--------- ----------- ----------- -----------
Total stockholders' equity.......... (411,727) 15,183,791 14,684,656 $ 14,684,656
--------- ----------- -----------
$ 114,800 $17,514,524 $18,343,748
========= =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 69
AURORA BIOSCIENCES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1995 YEAR ENDED THREE MONTHS ENDED MARCH
(INCEPTION) TO DECEMBER 31,
DECEMBER 31, 31, --------------------------
1995 1996 1996 1997
-------------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue (Note 9):
UHTS system development........ $ -- $ 2,116,523 $ -- $ 650,000
Screening services............. -- 100,000 -- 405,000
License fees................... -- -- -- 487,500
---------- ----------- ---------- -----------
Total revenue.......... -- 2,216,523 -- 1,542,500
Operating expenses:
Cost of UHTS system
development................. -- -- -- 687,612
Cost of screening services..... -- -- -- 287,440
Research and development....... 365,548 4,395,914 405,138 910,829
General and administrative..... 46,179 1,275,032 137,246 642,168
---------- ----------- ---------- -----------
Total operating
expenses............. 411,727 5,670,946 542,384 2,528,049
---------- ----------- ---------- -----------
Loss from operations............. (411,727) (3,454,423) (542,384) (985,549)
Interest income.................. -- 580,382 43,173 203,183
Interest expense................. -- (59,439) - (59,262)
---------- ----------- ---------- -----------
Net loss......................... $ (411,727) $(2,933,480) $ (499,211) $ (841,628)
========== =========== ========== ===========
Pro forma net loss per share..... $ (0.26) $ (0.06)
=========== ===========
Shares used in computing pro
forma net loss per share....... 11,139,402 13,398,643
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 70
AURORA BIOSCIENCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------ ------------------ PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
--------- ------ --------- ------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock..... -- $ -- 80 $ -- $ -- $ -- $ -- $ --
Net loss..................... -- -- -- -- -- -- (411,727) (411,727)
--------- ------ --------- ------ ----------- ----------- ----------- -----------
Balance at December 31,
1995..................... -- -- 80 -- -- -- (411,727) (411,727)
Issuance of Series A
preferred stock, net....... 7,634,895 7,635 -- -- 12,617,058 -- -- 12,624,693
Issuance of Series A
preferred stock for
cancellation of notes
payable.................... 556,387 556 -- -- 924,441 -- -- 924,997
Issuance of Series B
preferred stock, net....... 666,665 667 -- -- 1,494,889 -- -- 1,495,556
Issuance of Series C
preferred stock, net....... 600,000 600 -- -- 1,496,800 -- -- 1,497,400
Issuance of Series D
preferred stock, net....... 458,028 458 -- -- 2,054,943 -- -- 2,055,401
Issuance of common stock,
net........................ -- -- 2,677,077 2,677 90,847 -- -- 93,524
Issuance of common stock for
acquired technology........ -- -- 188,000 188 63,312 -- -- 63,500
Deferred compensation related
to stock and stock
options.................... -- -- -- -- 145,500 (373,742) -- (228,242)
Amortization of deferred
compensation............... -- -- -- -- -- 2,169 -- 2,169
Net loss..................... -- -- -- -- -- -- (2,933,480) (2,933,480)
--------- ------ --------- ------ ----------- ----------- ----------- -----------
Balance at December 31,
1996..................... 9,915,975 9,916 2,865,157 2,865 18,887,790 (371,573) (3,345,207) 15,183,791
Costs incurred in connection
with issuance of Series D
preferred stock
(unaudited)................ -- -- -- -- (36,528) -- -- (36,528)
Issuance of common stock, net
(unaudited)................ -- -- 68,818 69 44,273 -- -- 44,342
Deferred compensation related
to stock and stock options
(unaudited)................ -- -- -- -- 3,440,404 (3,212,162) -- 228,242
Amortization of deferred
compensation (unaudited)... -- -- -- -- -- 106,437 -- 106,437
Net loss (unaudited)......... -- -- -- -- -- -- (841,628) (841,628)
--------- ------ --------- ------ ----------- ----------- ----------- -----------
Balance at March 31, 1997
(unaudited).............. 9,915,975 $9,916 2,933,975 $2,934 $22,335,939 $(3,477,298) $(4,186,835) $14,684,656
========= ====== ========= ====== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 71
AURORA BIOSCIENCES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS ENDED MARCH
MAY 8, 1995 31,
(INCEPTION) TO YEAR ENDED -------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 1996 1997
----------------- ----------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss....................................... $(411,727) $(2,933,480) $ (499,211) $ (841,628)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization................ 1,822 156,861 1,098 152,449
Forgiveness of notes receivable from officers
and employees.............................. -- 93,129 -- --
Issuance of common stock in exchange for
acquired technology........................ -- 63,500 -- --
Amortization of deferred compensation........ -- 2,169 -- 106,437
Changes in operating assets and liabilities:
Accounts receivable under collaborative
agreements............................... -- (1,116,523) -- 966,523
Prepaid expenses and other current
assets................................... (18,333) (378,871) (127,084) (411,364)
Accounts payable and accrued compensation...... 51,527 339,820 70,953 301,643
Unearned revenue............................... -- 250,000 -- 855,000
--------- ----------- ----------- -----------
Net cash (used in) provided by operating
activities................................... (376,711) (3,523,395) (554,244) 1,129,060
--------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of investment securities............. -- (12,147,818) (6,642,110) (1,485,021)
Sales and maturities of investment
securities................................... -- 2,894,948 -- 1,600,000
Purchases of equipment, furniture and
leaseholds................................... (10,932) (458,657) (102,741) (537,431)
Notes receivable from officers and employees... (69,798) (223,331) (23,331) (60,000)
Other assets................................... (6,440) (725,934) (72,209) 38,399
--------- ----------- ----------- -----------
Net cash used in investing activities.......... (87,170) (10,660,792) (6,840,391) (444,053)
--------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Issuance (cost) of convertible preferred stock,
net.......................................... -- 17,673,050 12,624,694 (36,528)
Issuance of common stock, net of repurchases... -- 93,524 2,509 44,342
Issuance of notes payable...................... 475,000 449,997 449,997 --
Principal payments on capital lease
obligations.................................. -- (129,465) -- (106,116)
--------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities................................... 475,000 18,087,106 13,077,200 (98,302)
--------- ----------- ----------- -----------
Net increase in cash and cash equivalents...... 11,119 3,902,919 5,682,565 586,705
Cash and cash equivalents at beginning of
period....................................... -- 11,119 11,119 3,914,038
--------- ----------- ----------- -----------
Cash and cash equivalents at end of period..... $ 11,119 $ 3,914,038 $ 5,693,684 $ 4,500,743
========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid.................................. $ -- $ 59,439 $ -- $ 59,262
========= =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired under capital leases........ $ -- $ 1,590,609 $ -- $ 506,074
========= =========== =========== ===========
Conversion of notes payable to convertible
preferred stock.............................. $ -- $ 924,997 $ 924,997 $ --
========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 72
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Aurora Biosciences Corporation (the "Company" or "Aurora") was incorporated
in California on May 8, 1995 and subsequently re-incorporated in Delaware on
January 22, 1996. The Company designs and develops proprietary drug discovery
systems, services and technologies to accelerate and enhance the discovery of
new medicines. Aurora is developing an integrated technology platform comprised
of a portfolio of proprietary fluorescent assay technologies and an ultra-high
throughput screening ("UHTS") system designed to allow assay miniaturization and
to overcome many of the limitations associated with the traditional drug
discovery process. This integrated technology platform will support functional
genomics in mammalian cells, facile assay development and extremely rapid
screening of molecular targets to identify lead compounds with novel therapeutic
potential.
Interim Financial Information (Unaudited)
The financial statements at March 31, 1997 and for the three-month periods
ended March 31, 1996 and 1997 are unaudited, but include all adjustments
(consisting only of normal recurring adjustments) which management considers
necessary for a fair statement of the financial position at such dates and the
operating results and cash flows for those periods. Results for interim periods
are not necessarily indicative of results for the entire year or any future
periods.
Cash, Cash Equivalents and Investment Securities
The Company considers all highly-liquid investments with maturities of
three months or less from the date of purchase to be cash equivalents.
Management determines the appropriate classification of its cash equivalents and
investment securities at the time of purchase and re-evaluates such
determination as of each balance sheet date. Management has classified the
Company's cash equivalents and investment securities as available-for-sale
securities in the accompanying financial statements. Available-for-sale
securities are carried at fair value, with unrealized gains and losses reported
in a separate component of stockholders' equity. The cost of debt securities
classified as available-for-sale is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion, as well as
interest and dividends, are included in interest income. Realized gains and
losses are also included in interest income. The cost of securities sold is
based on the specific identification method.
The Company invests its excess cash in U.S. Government and agency
securities and debt instruments of financial institutions and corporations with
strong credit ratings. The Company has established guidelines regarding
diversification of its investments and their maturities which should maintain
safety and liquidity.
Equipment, Furniture and Leaseholds
Equipment, including capitalized leased equipment, furniture and leaseholds
is stated at cost less accumulated depreciation and amortization. Depreciation
and amortization is calculated using the straight-line method over the shorter
of the estimated useful lives of the respective assets (generally three to five
years) or the term of the applicable lease.
F-7
<PAGE> 73
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Revenue under collaborative agreements typically consists of non-refundable
up-front fees, ongoing research and co-development payments, and milestone,
royalty and other contingent payments. Revenue from non-refundable up-front fees
is recognized upon signing of the agreement. Revenue from ongoing research and
co-development payments is recognized ratably over the term of the agreement,
and the Company believes such payments will approximate the research and
development expense being incurred associated with the agreement. Revenue from
milestone, royalty and other contingent payments will be recognized as earned.
Revenue from screen development and screening and other services is
recognized as earned. Advance payments received under any agreements in excess
of amounts earned are classified as unearned revenue. Revenue under cost
reimbursement contracts is recognized as the related costs are incurred.
Substantially all of the revenue recorded through December 31, 1996 was
derived from agreements with two collaborators and represented non-refundable
up-front licensing fees with no future performance obligations (Note 9).
Research and Development Expense
All research and development costs are expensed in the period incurred.
Pro Forma Net Loss Per Share
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding during the period. Pursuant to certain requirements
of the Securities and Exchange Commission, ("SEC"), common and common equivalent
shares issued by the Company during the twelve months immediately preceding the
initial filing of the Company's Registration Statement, including common and
common equivalent shares issued after December 31, 1996, have been included in
the calculation of the shares used in computing pro forma net loss per share as
if these shares were outstanding for all periods presented, using the treasury
stock method and assumed public offering price of $10 per share. In addition,
the calculation of the shares used in computing pro forma net loss per share
includes convertible preferred stock not included above that will automatically
convert into common stock upon completion of an initial public offering, as if
they were converted into common stock as of the original date of issuance.
Pro forma net loss per share information has been presented because
historical net loss per share information is not indicative of the Company's
continuing capital structure, assuming the successful completion of this initial
public offering. Historical net loss per share information is set forth below
and is computed using the weighted average number of shares of common stock
outstanding during the periods presented and the common and common equivalent
shares issued by the Company during the twelve months immediately preceding the
initial filing of the Company's Registration Statement using the treasury stock
method and an assumed public offering price of $10 per share.
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS ENDED
MAY 8, 1995 YEAR ENDED MARCH 31,
(INCEPTION) TO DECEMBER 31, -----------------------
DECEMBER 31, 1995 1996 1996 1997
----------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Net loss per share............... $ (.15) $ (.66) $ (.13) $ (.24)
========= ========= ========= =========
Shares used in computing net loss
per share...................... 2,759,485 4,469,998 3,744,045 3,482,668
========= ========= ========= =========
</TABLE>
F-8
<PAGE> 74
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Accounting Standard on Impairment of Long-Lived Assets
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," regarding the impairment of
long-lived assets, identifiable intangibles and goodwill related to those assets
when there are indications that the carrying values of those assets may not be
recoverable. The adoption of this standard had no impact on the Company's
financial position.
Accounting Standard on Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute loss per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is not expected to be material.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
2. CASH EQUIVALENTS AND INVESTMENT SECURITIES
A summary of the estimated fair value of cash equivalents and investment
securities is shown below:
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 31,
1996 1997
----------- -----------
<S> <C> <C>
Money market funds............................. $ 3,141,747 $ 2,707,137
U.S. government securities..................... 3,738,755 3,146,731
U.S. corporate securities...................... 5,012,834 6,190,810
Other debt securities.......................... 1,000,241 1,500,343
----------- -----------
Total debt securities..................... 12,893,577 13,545,021
Less amounts classified as cash equivalents.... (3,640,707) (4,407,130)
----------- -----------
Total investment securities.......... $ 9,252,870 $ 9,137,891
=========== ===========
</TABLE>
The estimated fair value of cash equivalents and investment securities
approximates cost and no unrealized gains or losses were reported as of December
31, 1996 or March 31, 1997. Realized gains or losses on sales of
available-for-sale securities in 1996 were not significant. There were no
realized gains or losses in the period from May 8, 1995 (inception) to December
31, 1995 or the three month period ended March 31, 1997. The estimated fair
value of available-for-sale debt securities as of December 31, 1996 by
contractual maturity is as follows: $9.7 million due within one year and $3.2
million due in one to two years.
3. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES
Notes receivable from officers and employees generally consist of
relocation and housing loans to assist in the relocation of new employees. These
notes are generally secured by all shares of the Company's common stock owned by
the individual or by a deed of trust on the individual's principal
F-9
<PAGE> 75
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
residence. During 1996, the notes outstanding at December 31, 1995 were
forgiven. Notes receivable as of December 31, 1996 and March 31, 1997 include an
interest-free $150,000 loan to an officer and director of the Company which is
secured by a deed of trust on the individual's principal residence.
4. EQUIPMENT, FURNITURE AND LEASEHOLDS
Equipment, furniture and leaseholds consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- ----------
1995 1996 1997
------- ---------- ----------
<S> <C> <C> <C>
Scientific equipment........................ $ -- $1,255,749 $1,957,593
Office furniture, computers and equipment... 10,932 731,423 1,063,522
Leasehold improvements...................... -- 73,026 78,721
------- ---------- ----------
10,932 2,060,198 3,099,836
Less accumulated depreciation and
amortization............................. (1,822) (158,683) (307,193)
------- ---------- ----------
$ 9,110 $1,901,515 $2,792,643
======= ========== ==========
</TABLE>
Equipment, furniture and leaseholds at December 31, 1996 and March 31, 1997
includes scientific equipment acquired under capital leases of $1,065,173 and
$1,281,972, respectively, and office furniture, computers and equipment acquired
under capital leases of $525,436 and $814,711, respectively. The amount of
related amortization included in accumulated depreciation and amortization at
December 31, 1996 and March 31, 1997 was $120,550 and $247,074, respectively.
5. COMMITMENTS
Consulting Agreements
The Company has entered into various consulting agreements with its
Scientific Advisors and others for aggregate minimum annual fees of
approximately $215,000. The agreements generally provide for four or five-year
terms and are cancelable by either party upon 60 or 90 days written notice.
During the period from May 8, 1995 (inception) through December 31, 1995, the
year ended December 31, 1996 and the three month period ended March 31, 1996 and
1997, the Company expensed approximately $95,000, $332,000, $158,000 and
$67,000, respectively, of fees and expense reimbursements related to these
agreements.
In February 1996, in connection with the various consulting agreements, the
Company issued 48,000 shares of common stock for $.001 per share, representing
the fair value on the date of grant as determined by the Board of Directors,
pursuant to restricted stock purchase agreements, excluding shares issued to
founders and directors of the Company who also serve as consultants as the
Scientific Advisors.
Technology and Licensing Agreements
The Company has entered into various strategic technology agreements with
third parties regarding the development of instrumentation technology. These
agreements contain varying terms and provisions which require the Company to
make payments to the third parties. Pursuant to these agreements, the Company
paid approximately $550,000 in 1996 and $179,000 during the three month period
ended March 31, 1997 and is obligated to make future payments totaling
approximately $1.2 million in 1997 and 1998 if all milestones are met.
F-10
<PAGE> 76
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has also entered into various license agreements with academic
institutions regarding certain inventions and technologies. Most such agreements
may be terminated by the Company with 60 days written notice without significant
financial penalty. Pursuant to these agreements, the Company paid approximately
$120,000 in 1996 and $24,000 during the three month period ended March 31, 1997
and is obligated to make future payments totaling approximately $830,000 over
the next seven years. In addition, the Company is required to make royalty
payments upon the sale of products incorporating inventions or technologies
covered under these agreements.
Leases
The Company leases its facilities and certain equipment under operating
lease agreements which expire at dates through September 2008. Lease payments
are subject to future increases based upon increases in the Consumer Price
Index, taxes and insurance. Rent expense totaled approximately $462,000 in the
year ended December 31, 1996 and $17,000 and $214,000 for the three month
periods ended March 31, 1996 and 1997, respectively.
The Company leases certain equipment under a $4.5 million capital lease
line which expires in December 1997. At December 31, 1996 and March 31, 1997,
the Company had $1.9 million and $2.4 million, respectively, available under the
capital lease line for future equipment acquisitions.
Annual future minimum lease payments for operating and capital leases as of
December 31, 1996, including payments required under operating leases entered
into during 1997, are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
Years ended December 31,
1997........................................... $ 1,059,040 $ 542,652
1998........................................... 2,001,947 542,652
1999........................................... 1,969,414 548,469
2000........................................... 1,377,325 237,413
2001........................................... 1,418,645 --
Thereafter..................................... 10,676,814 --
----------- -----------
Total minimum lease payments................... $ 18,503,185 1,871,186
===========
Less amounts representing interest............. (410,042)
-----------
Present value of capital lease payments........ 1,461,144
Less current portion........................... (350,247)
-----------
Capital lease obligations, noncurrent.......... $1,110,897
===========
</TABLE>
In connection with a facility lease agreement entered into during April
1997, the Company is required to place a Letter of Credit restricting $1.25
million of its cash balance and the Company will be required to increase the
restricted cash balance by an additional $1.25 million upon the occurrence of
certain events. The Letter of Credit will be released over the next three to
four years on a predetermined schedule.
F-11
<PAGE> 77
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Convertible preferred stock issued and outstanding at December 31, 1996 and
March 31, 1997 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND PREFERENCE IN
AUTHORIZED OUTSTANDING PAR VALUE LIQUIDATION
---------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Series A....................... 10,500,000 8,191,282 $ 8,191 $ 13,618,006
Series B....................... 833,332 666,665 667 1,499,996
Series C....................... 800,000 600,000 600 1,500,000
Series D....................... 572,536 458,028 458 2,061,126
--------- ------ -----------
9,915,975 $ 9,916 $ 18,679,128
========= ====== ===========
</TABLE>
The Company issued shares of Series A, B and C preferred stock at $1.66,
$2.25 and $2.50 per share, respectively, pursuant to March 1996 preferred stock
purchase agreements. The Company issued Series D preferred stock at $4.50 per
share pursuant to a December 1996 preferred stock purchase agreement.
The preferred stock is convertible into equal shares of common stock,
subject to certain anti-dilution provisions, at any time at the option of the
holder or automatically upon (i) the consent of not less than 67% of the
preferred stockholders, or (ii) the closing of an underwritten public offering
of common stock with gross proceeds of not less than $10,000,000 at not less
than $7.50 per common share. The holder of each share of preferred stock is
currently entitled to one vote for each share of common stock into which it
would convert.
Holders of Series A, B, C and D preferred stock are entitled to
noncumulative annual dividends of $0.133, $0.18, $0.20 and $0.36 per share,
respectively. These dividends are payable prior and in preference to any
declaration or payment of any dividend or other distribution on common stock
payable other than in common stock, when and if declared by the Board of
Directors. The Company has never declared or paid dividends on its capital stock
and does not intend to pay dividends in the foreseeable future.
In March 1996, the Company issued 556,389 shares of Series A preferred
stock in exchange for the cancellation of promissory notes payable totaling
approximately $925,000 (see Note 10).
Common Stock
The majority of the outstanding shares of common stock have been issued to
founders, directors and employees of, and consultants to, the Company. In
connection with certain stock purchase agreements, the Company has the option to
repurchase, at the original issuance price, the unvested shares in the event of
termination of employment or engagement. Shares issued under these agreements
generally vest over four years. At December 31, 1996 and March 31, 1997,
1,652,853 and 1,626,747 shares, respectively, of common stock were subject to
repurchase by the Company.
During 1996, the Company issued 188,000 shares of common stock in exchange
for certain licenses and rights. Research and development expense of $63,500 was
recorded related to such issuances, representing the fair value of such shares
as determined by the Board of Directors on the date of grant.
In December 1996, the Board of Directors committed to issue 71,072 shares
of common stock under stock purchase agreements to employees of the Company on
the date of grant. The shares were priced at $0.38 per share. In connection with
this commitment, the Company recorded
F-12
<PAGE> 78
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
deferred compensation of approximately $151,000 representing the difference
between the deemed fair value of such shares and the fair value as determined by
the Board of Directors.
Warrants
In May 1996, the Company issued warrants to purchase 54,320 shares of
Series A preferred stock at $1.66 per share to a leasing company in connection
with the execution of a $3.5 million capital lease agreement (Note 5). The
warrants expire in May 2002, subject to certain extensions based on the
utilization of the capital lease line. The warrants remain outstanding at
December 31, 1996 and March 31, 1997.
Deferred Compensation
The Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the price per share of
restricted stock issued or the exercise price of stock options granted and the
deemed fair value of the Company's common stock at the date of issuance or
grant. Shares included in the computation of deferred compensation at December
31, 1996 include restricted stock issued or committed and stock options granted
or committed from April 1996 through December 1996. Gross deferred compensation
at December 31, 1996 and March 31, 1997 totaled $373,742 and $3,585,904,
respectively, and related amortization expense totaled $2,169 and $106,437 in
1996 and 1997, respectively.
Stock Option Plans; Stock Purchase Plan
In January 1996, the Company adopted the 1996 Stock Plan (the "Stock
Plan"), under which 800,000 shares of the Company's common stock were reserved
for future issuance. During February 1997, the Board of Directors increased the
number of shares reserved under the Plan to 2,000,000. The Company's
stockholders approved this increase in April 1997. The Stock Plan provides for
the grant of incentive stock options and stock appreciation rights to employees
and nonstatutory stock options and stock purchase rights to employees, directors
and consultants.
All options and stock appreciation rights granted under the Stock Plan
expire not later than ten years from the date of grant and vest and become fully
exercisable after not more than five years of continued employment or
engagement. Options generally vest either monthly over four years or with
one-fourth of the shares vesting after one year and the remainder vesting
ratably over the next three years. The exercise price of incentive stock options
must be equal to at least the fair market value on the date of grant, and the
exercise price of nonstatutory options may be no less than 85% of the fair
market value on the date of grant.
In February 1997, the Board of Directors adopted a Non-Employee Directors'
Stock Option Plan (the "Directors' Plan"), under which 240,000 shares of the
Company's Common Stock were reserved for future issuance. The Company's
stockholders approved the adoption of the Directors' Plan in April 1997.
All options granted under the Directors' Plan expire no later than ten
years from the date of grant and vest and become fully exercisable after not
more than four years of continued service. Options generally vest monthly over
four years. The exercise price of each option must be equal to the fair market
value on the date of grant.
F-13
<PAGE> 79
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option activity under the Stock and
Directors' Plans:
<TABLE>
<CAPTION>
WEIGHTED-
OPTIONS AVERAGE EXERCISE
OUTSTANDING PRICE
----------- ----------------
<S> <C> <C>
Granted..................................... 4,000 $ 0.09
-------
Balance at December 31,1996................... 4,000 $ 0.09
Granted..................................... 577,720 $ 1.28
Cancelled................................... (400) $ 0.75
-------
Balance at March 31, 1997 (unaudited)......... 581,320 $ 1.28
=======
</TABLE>
At December 31, 1996 and March 31, 1997, options to purchase no shares and
1,668 shares, respectively, of common stock were exercisable. The weighted
average exercise price of common stock exercisable was $1.50 per share at March
31, 1997. The weighted average remaining contractual life of the options
outstanding at December 31, 1996 and March 31, 1997 was 9.5 years and 9.8 years,
respectively.
In December 1996, the Board of Directors committed to grant options to
purchase 36,336 shares of common stock to employees of the Company on the date
of grant. The shares were priced at $0.38 per share. In connection with this
commitment, the Company recorded deferred compensation of approximately $77,000
representing the difference between the deemed fair value of such shares and the
fair value as determined by the Board of Directors.
During 1996, the Company issued 353,960 shares of restricted common stock
under the Plan at prices ranging from $.09 to $.40 per share. Of the 353,960
shares issued, 52,800 shares were issued at prices below the deemed fair value
of the Company's common stock on the date of issuance. The weighted average
deemed fair value of these issuances was $2.75 per share and the difference
between the deemed fair value of such shares and the fair value as determined by
the Board of Directors has been included in deferred compensation as of December
31, 1996.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). In accordance with the provisions of SFAS 123, the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related Interpretations in accounting for its
employee stock options. Under APB 25, when the purchase price of restricted
stock or the exercise price of the Company's employee stock options equals or
exceeds the fair value of the underlying stock on the date of issuance or grant,
no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the minimum
value method with the following weighted average assumptions for 1996: risk-free
interest rate of 6.22%; no annual dividends; and an expected option life of five
years. The effect of applying the minimum value method of SFAS 123 to options
granted in 1996 did not result in pro forma net loss and loss per share amounts
that are materially different from amounts reported. Accordingly, such pro forma
information is not presented herein. Should the Company successfully complete an
initial public offering, it would no longer be able to utilize the minimum value
method and, therefore, the pro forma effect determined in 1996 may not be
representative of the pro forma effect to be reported in future years.
In February 1997, the Board of Directors adopted an Employee Stock Purchase
Plan which reserves 400,000 shares of common stock for issuance thereunder. The
Company's stockholders approved the adoption of the Employee Stock Purchase Plan
in April 1997.
F-14
<PAGE> 80
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C>
Conversion of Series A, B, C and D convertible preferred
stock................................................. 9,915,975 9,915,975
Warrants to purchase Series A convertible preferred
stock................................................. 54,320 54,320
Common stock and stock options under 1996 Stock Plan.... 446,040 1,568,728
Stock options under Directors' Plan..................... -- 240,000
Common stock under Employee Stock Purchase Plan......... -- 400,000
Other obligations....................................... 4,000 4,000
---------- ----------
10,420,335 12,183,023
========== ==========
</TABLE>
7. INCOME TAXES
At December 31, 1996, the Company had federal and California income tax net
operating loss carryforwards of approximately $3,210,000 and $3,286,000,
respectively. Federal and California tax loss carryforwards will begin to expire
in 2010 and 2003, respectively, unless previously utilized. The Company also had
federal and California research tax credit carryforwards of approximately
$165,000 and $89,000, respectively, which will begin to expire in 2010 unless
previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, use of these
net operating loss and credit carryforwards may be substantially limited because
of cumulative changes in the Company's ownership of more that 50%. However, the
Company does not believe such limitations will have a material impact upon the
utilization of these carryforwards.
Significant components of the Company's net deferred tax assets as of
December 31, 1995 and 1996 are shown below. A valuation allowance of $1,548,000
at December 31, 1996 has been recognized to offset the net deferred tax assets
as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
-------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 86,000 $ 1,321,000
Tax credit carryforwards................................ -- 223,000
Other................................................... -- 114,000
-------- -----------
Total deferred tax assets............................ 86,000 1,658,000
Deferred tax liability:
Depreciation............................................ -- (110,000)
-------- -----------
Net deferred tax assets................................... 86,000 1,548,000
Valuation allowance for deferred tax assets............... (86,000) (1,548,000)
-------- -----------
Net deferred taxes.............................. $ -- $ --
======== ===========
</TABLE>
8. 401(k) RETIREMENT SAVINGS PLAN
In January 1996, the Company adopted a 401(k) Retirement Savings Plan
covering substantially all employees who have completed certain service
requirements. Participants may contribute a portion of their compensation to the
Plan through payroll deductions. Company matching contributions, if any, are
determined by the Company at its sole discretion. To date, there have been no
Company contributions under the Plan.
F-15
<PAGE> 81
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COLLABORATIVE AGREEMENTS
The Company entered into the following collaborative agreements in 1996 and
1997:
Ultra High-throughput Screening System and Screen Development Agreements
The Company entered into collaborative agreements ("the Agreements") in
November and December 1996 with Bristol-Myers Squibb Pharmaceutical Research
Institute and Eli Lilly and Company, respectively (collectively, "the
Collaborators"), regarding the development and installation of the Company's
UHTS system at each of the Collaborators. Under the terms of the Agreements, the
Company is required to develop and separately install three components to be
integrated into one complete UHTS system. In return, the Collaborators are
obligated to make certain payments to the Company in the form of non-refundable
up-front fees, delivery or installation payments and ongoing research and
co-development funding. The Company is obligated to provide service and support
for the installed UHTS systems for a limited period of time.
The Company and the Collaborators will also co-develop high throughput
screening assays for use by the Collaborators. In addition to certain payments
to be made by the Collaborators for the use of these assays and assay
technologies, the Collaborators will also make certain milestone and royalty
payments to the Company if the Collaborators develop and commercialize any
compound identified using a screen based on the Company's fluorescent assay
technologies.
The Collaborators may terminate the agreement at any time without cause
upon written notice, provided that certain withdrawal payments are made. The
Agreements provide for penalties, defined at $2,777 per day up to $1 million per
agreement, payable by the Company if it fails to deliver the completed UHTS
systems by a specified time, as well as bonuses to the Company (up to $500,000
per agreement) in the event of early delivery of the systems.
Screen Development and Specialized Instrumentation Agreement
In December 1996, the Company and Roche Bioscience ("Roche") entered into a
Collaborative Research and License Agreement ("Roche Agreement") regarding the
development and delivery of a certain screening instrument by the Company. Roche
is obligated to make certain payments to the Company in the form of
non-refundable up-front fees and delivery payments. For a limited period of time
specified in the agreement, the Company is obligated to provide service and
support for any instrument delivered to Roche. The Company and Roche will also
co-develop a screening assay for use with a target identified in the Roche
Agreement. In connection with such development, Roche is obligated to make
certain payments to the Company in the form of non-refundable up-front fees and
ongoing research and co-development funding.
Screen Development Agreement, Functional Genomics, and Screening Services
Agreement
In April 1996, the Company and Sequana Therapeutics, Inc. ("Sequana")
entered into a Research Agreement (the "Sequana Agreement") regarding the
screening of certain targets to be selected by Sequana. Under the terms of the
Sequana Agreement, Sequana may require the Company to provide functional
analysis, assay development and screening for such targets, and Sequana would
then be obligated to make certain payments to the Company in the form of
non-refundable upfront fees, delivery payments and ongoing research funding.
Sequana will also be obligated to make certain milestone and royalty payments to
the Company if any pharmaceutical product is developed and commercialized as a
result of work performed by the Company pursuant to the agreement. Concurrent
with the execution of the agreement, Sequana purchased $1.5 million of the
Company's Series C preferred stock (Note 10).
In February 1997, the Company and Allelix Biopharmaceuticals, Inc.
("Allelix") entered into a collaborative agreement (the "Allelix Agreement")
regarding the development over a three-year period of screening assays for use
with targets identified by Allelix and agreed to by Aurora. Under
F-16
<PAGE> 82
AURORA BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the terms of the Allelix Agreement, the Company is required to develop such
screening assays and to perform screening services, and Allelix is obligated to
make certain payments to the Company in the form of up-front fees, development
payments and fees for screening services. Allelix is also required to make
certain milestone and royalty payments to Aurora in the event of development and
commercialization of a compound identified using a screen based on Aurora's
fluorescent assay technologies.
Screening Services Agreements
The Company has entered into collaborative agreements with ArQule, Inc. and
Alanex Corporation to screen compounds provided by these companies. Should the
Company detect activity in one or more of the compounds, the Company and the
collaborative partner under certain conditions may enter into negotiations to
establish a research collaboration agreement.
Strategic Technology Alliances
The Company has entered into strategic technology alliances with Packard
Instrument Company ("Packard"), Carl Creative Systems, Inc. and Universal
Technologies, Inc. to design, develop and implement certain instrumentation,
storage and retrieval systems and microfluidics. The alliances require the
Company to make certain payments for development work performed by these
companies (Note 5).
Pursuant to the agreement with Packard, Aurora receives certain payments
for development work it performs and Packard receives certain sublicense rights.
In addition, Packard purchased $1 million of the Company's Series B preferred
stock in May 1996 in connection with the collaboration.
10. RELATED PARTY TRANSACTIONS
During the period from May 8, 1995 (inception) to December 31, 1995 and the
year ended December 31, 1996, one of the Company's founding stockholders and an
affiliated venture fund loaned the Company $475,000 and $449,997, respectively.
The notes were converted into 556,387 shares of Series A preferred stock in
March 1996.
The general partner of the venture funds which made these loans was the
Company's Chairman of the Board and Acting Chief Executive Officer at the time
of these transactions. This individual and stockholder continues to serve on the
Company's Board of Directors and is also the President, Chief Executive Officer
and member of the Board of Directors of Sequana, a company which is both a
stockholder of and a party to a collaboration agreement with Aurora (see Note
9).
11. SUBSEQUENT EVENTS
Stockholders' Equity
In February 1997, the Board of Directors also authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. If the initial public offering is consummated under the terms presently
anticipated, all of the preferred stock outstanding at December 31, 1996 will
automatically convert into 9,915,975 shares of common stock. Unaudited pro forma
stockholders' equity, as adjusted for the assumed conversion of the preferred
stock, is set forth on the accompanying balance sheet.
On April 25, 1997, the Company effected a four-for-five reverse split of
its outstanding common stock. All share and per share amounts, including those
relating to preferred stock, in the accompanying financial statements have been
retroactively restated to reflect the reverse stock split.
F-17
<PAGE> 83
AURORA BIOSCIENCES CORPORATION
[COMPANY LOGO]
SELECTED FEATURES OF AURORA'S INTEGRATED TECHNOLOGY PLATFORM
FLUORESCENT ASSAY TECHNOLOGIES
POTENTIAL BENEFITS
- Applicable to most targets
- Cell-based and biochemical assays
- Faster assay development
- Functional genomics in mammalian cells
- Miniaturized assays
GREEN FLUORESCENT PROTEIN (GFP)
COMPUTER MODEL OF THREE DIMENSIONAL STRUCTURE
[DEPICTED IS A COMPUTER MODEL OF THE THREE DIMENSIONAL STRUCTURE OF GFP]
BETA-LACTAMASE CELL-BASED ASSAY
GREEN TO BLUE CHANGE IDENTIFIES HIT COMPOUND
[DEPICTED ARE PHOTOGRAPHS OF CELLS UNDERGOING A GREEN TO BLUE COLOR
CHANGE]
MINIATURIZATION TECHNOLOGIES
- Photograph of drops, one billionth of a liter, being dispensed through
the eye of a needle (Right)
- Assays in volumes of one millionth of a liter, in each well of the 3,456
well NanoPlate(TM) (Far Right)
MICROFLUIDICS
NANOPLATE(TM) [DEPICTED IS A PHOTOGRAPH OF FLUID DROPLETS PASSING THROUGH
THE EYE OF A NEEDLE, AND A NANOPLATE(TM)]
ADVANCED AUTOMATION
- Automated store designed to hold in excess of 1,000,000 compounds
- Expected throughput in excess of 100,000 compounds per day
AUTOMATED STORAGE AND RETRIEVAL SYSTEM
[DEPICTED IS AURORA'S AUTOMATED STORAGE AND RETRIEVAL SYSTEM]
<PAGE> 84
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Financial Data............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 24
Management............................ 47
Certain Transactions.................. 55
Principal Stockholders................ 57
Description of Capital Stock.......... 58
Shares Eligible for Future Sale....... 60
Underwriting.......................... 62
Legal Matters......................... 63
Experts............................... 64
Additional Information................ 64
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
3,500,000 SHARES
(AURORA LOGO)
COMMON STOCK
-------------------
PROSPECTUS
-------------------
ALEX. BROWN & SONS
INCORPORATED
HAMBRECHT & QUIST
ROBERTSON, STEPHENS & COMPANY
, 1997
======================================================
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration fee............................................. $ 13,500
NASD filing fee.................................................. 4,950
Nasdaq Stock Market Listing Application fee...................... 50,000
Blue sky qualification fees and expenses......................... 10,000
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 250,000
Accounting fees and expenses..................................... 125,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous.................................................... 36,550
--------
Total.................................................. $700,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its Directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act.
The Registrant's Restated Certificate of Incorporation and Amended and
Restated Bylaws include provisions to (i) eliminate the personal liability of
its directors for monetary damages resulting from breaches of their fiduciary
duty to the extent permitted by Section 102(b)(7) of the General Corporation Law
of Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify
its Directors and officers to the fullest extent permitted by Section 145 of the
Delaware Law, including circumstances in which indemnification is otherwise
discretionary. Pursuant to Section 145 of the Delaware Law, a corporation
generally has the power to indemnify its present and former directors, officers,
employees and agents against expenses incurred by them in connection with any
suit to which they are or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as Directors
and officers. These provisions do not eliminate the Directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each Director will continue to be subject to liability for breach of
the Director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the Director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the Director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the Director's duty to the Registrant or its
stockholders when the Director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the Director's duty to the Registrant or its stockholders, for improper
transactions between the Director and the Registrant and for improper
distributions to stockholders and loans to Directors and officers. The provision
also does not affect a Director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.
II-1
<PAGE> 86
The Registrant has entered into indemnity agreements with each of its
Directors and executive officers that require the Registrant to indemnify such
persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a Director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder. The Registrant has entered into similar indemnity
agreements with certain of its key employees.
At present, there is no pending litigation or proceeding involving a
Director, officer or key employee of the Registrant as to which indemnification
is being sought nor is the Registrant aware of any threatened litigation that
may result in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception in May 1995, the Registrant has sold and issued the
following unregistered securities:
(a) From May 1995 to March 1996, Avalon Medical Partners, L.P. ("AMP") and
Avalon Bioventures II L.P. ("ABV") loaned the Registrant an aggregate of
$425,000 and $500,000, respectively, pursuant to Convertible Promissory Notes
issued by the Registrant to AMP and ABV. Such Convertible Promissory Notes were
canceled, and the interest thereon forgiven, in connection with the sale and
issuance of shares of Series A Preferred Stock to AMP and ABV in March 1996. The
Registrant issued such Convertible Promissory Notes in reliance on the exemption
provided by Section 4(2) of the Act.
(b) In connection with its reincorporation in Delaware in January 1996, the
Registrant issued 100 shares of Common Stock to AMP. The Registrant issued such
shares in reliance on the exemption provided by Section 4(2) of the Act.
(c) Subsequent to its reincorporation in Delaware and on various dates
through March 31, 1997, the Registrant sold an aggregate of 3,043,332 shares of
its Common Stock to 56 directors, officers, employees and consultants pursuant
to restricted stock purchase agreements. The purchase price for such sales
ranged from $.00125 to $1.50 per share. The Registrant issued such shares of
Common Stock in reliance upon the exemption provided by Rule 701 under the Act.
(d) Subsequent to its reincorporation in Delaware and on various dates
through March 31, 1997, the Registrant issued incentive and nonstatutory stock
options to purchase an aggregate of 581,320 shares of Common Stock to 55
directors, officers, employees and consultants. The exercise price for such
options ranges from $.0875 to $1.50 per share. The Registrant issued such
options in reliance upon the exemption provided by Rule 701 under the Act.
(e) On March 8, 1996, the Registrant sold 8,191,282 shares of Series A
Preferred Stock at a price of $1.6625 per share to certain investors. On April
2, 1996, the Registrant sold 600,000 shares of Series C Preferred Stock at a
price of $2.50 per share to Sequana Therapeutics, Inc. On May 6, 1996, the
Registrant sold 666,665 shares of Series B Preferred Stock at a price of $2.25
per share to certain investors. Upon the closing of this offering, the shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
will automatically convert into 8,191,282, 600,000 and 666,665 shares of Common
Stock, respectively. The Registrant issued such shares of Preferred Stock in
reliance upon the exemption provided by Rule 506 promulgated under Regulation D
under the Act.
II-2
<PAGE> 87
(f) On August 13, 1996, the Registrant issued 28,000 shares of Common
Stock, valued at $3,500.00, to California Institute of Technology in connection
with the execution of a license agreement. The Registrant issued such shares of
Common Stock in reliance upon the exemption provided by Section 4(2) under the
Act.
(g) On December 20, 1996, the Registrant issued 160,000 shares of Common
Stock, valued at $60,000.00, to SIBIA Neurosciences, Inc. in connection with the
execution of a license agreement. The Registrant issued such shares of Common
Stock in reliance upon the exemption provided by Section 4(2) under the Act.
(h) On December 27, 1996, the Registrant sold 458,028 shares of Series D
Preferred Stock at a price of $4.50 per share to certain investors. Upon the
closing of this offering, the shares of Series D Preferred Stock will
automatically convert into 458,028 shares of Common Stock. The Registrant issued
such shares of Preferred Stock in reliance upon the exemption provided by Rule
506 promulgated under Regulation D under the Act.
The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. All recipients had adequate access, through
employment or other relationships, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
3.1+ Restated Certificate of Incorporation.
3.2+ Amended and Restated Bylaws.
3.3+ Certificate of Amendment of Restated Certificate of Incorporation.
3.4+ Form of Restated Certificate of Incorporation, to be filed and become
effective upon completion of the offering.
3.5+ Form of Restated Bylaws to become effective upon completion of the
offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2+ Form of Common Stock Certificate.
4.3+ Amended and Restated Investors' Rights Agreement dated as of December
27, 1996 between the Registrant and the individuals and entities listed
in the signature pages thereto.
5.1+ Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement entered into between Registrant and its
directors and officers.
10.2+ Registrant's 1996 Stock Plan, as amended and restated (the "1996 Stock
Plan").
10.3+ Form of Incentive Stock Option Agreement under the 1996 Stock Plan.
10.4+ Form of Nonstatutory Stock Option Agreement under the 1996 Stock Plan.
10.5+ Form of Restricted Stock Purchase Agreement under the 1996 Stock Plan.
10.6+ Registrant's Employee Stock Purchase Plan and related offering document.
10.7+ Registrant's Non-Employee Directors' Stock Option Plan.
10.8+ Form of Nonstatutory Stock Option under Registrant's Non-Employee
Directors' Stock Option Plan.
10.9+ Employment Agreement dated January 23, 1996 between the Registrant and
Timothy J. Rink, as subsequently amended on March 8, 1996.
10.10+ Employment Agreement dated August 6, 1996 between the Registrant and J.
Gordon Foulkes.
</TABLE>
II-3
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------------------
<S> <C>
10.11+ Preferred Stock Purchase Agreement dated as of March 8, 1996 between the
Registrant and the individuals and entities listed in the signature
pages thereto.
10.12+ Series D Preferred Stock Purchase Agreement dated as of December 27,
1996 between the Registrant and the individual and entities listed in
the signature pages thereto.
10.13+ SubLease dated May 29, 1996 between the Registrant and Torrey Pines
Science Center Limited Partnership, as subsequently amended on August
31, 1996.
10.14+ Master Lease Agreement dated May 17, 1996 between the Registrant and
Lease Management Services Incorporated.
10.15+ Equipment Financing Agreement dated May 17, 1996 between the Registrant
and Lease Management Services Incorporated.
10.16+ Security Deposit Pledge Agreement dated May 17, 1996 between the
Registrant and Lease Management Services Incorporated.
10.17*+ Exclusive License Agreement for Fluorescent Assay Technologies dated
June 17, 1996 between the Registrant and The Regents of the University
of California.
10.18*+ License Agreement dated August 2, 1996 between the Registrant and
California Institute of Technology.
10.19*+ License Agreement dated October 4, 1996 between the Registrant and the
State of Oregon, acting by and through the State Board of Higher
Education on behalf of the University of Oregon.
10.20*+ Research Agreement dated April 2, 1996 between the Registrant and
Sequana Therapeutics, Inc.
10.21*+ Collaboration and License Agreement effective as of April 24, 1996
between the Registrant and Packard Instrument Company, Inc.
10.22*+ Collaborative Research and License Agreement dated November 26, 1996
between the Registrant and Bristol-Myers Squibb Pharmaceutical Research
Institute.
10.23*+ Collaborative Research and License Agreement dated December 18, 1996
between the Registrant and Eli Lilly and Company.
10.24*+ Collaboration Agreement effective as of February 1, 1997 between the
Registrant and Allelix Biopharmaceuticals Inc.
10.25+ Multi-Tenant Industrial Lease dated April 7, 1997 between the Registrant
and AEW/LBA Acquisition Co. II, LLC., as subsequently amended on June
12, 1997.
11.1+ Computation of Net Loss per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2+ Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
23.3+ Consent of Fish & Richardson P.C.
24.1+ Power of Attorney. Reference is made to page II-6.
</TABLE>
- ---------------
* Confidential Treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
+ Previously filed.
(b) SCHEDULES.
All schedules are omitted because they are not required, are not applicable
or the information is included in the consolidated financial statements or notes
thereto.
II-4
<PAGE> 89
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 15 or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(2) That, for purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 4 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, County of San Diego, State of
California, on the 17th day of June, 1997.
By: /s/ TIMOTHY J. RINK
------------------------------------
Timothy J. Rink
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------- ----------------
<S> <C> <C>
/s/ TIMOTHY J. RINK Chairman of the Board, June 17, 1997
- --------------------------------------------- President and Chief Executive
Timothy J. Rink, M.A., M.D., Sc.D. Officer (Principal Executive
Officer)
* Senior Director of Finance June 17, 1997
- --------------------------------------------- and Administration
Deborah J. Tower (Principal Financial and
Accounting Officer)
* Director June 17, 1997
- ---------------------------------------------
J. Gordon Foulkes, Ph.D.
* Director June 17, 1997
- ---------------------------------------------
James C. Blair, Ph.D.
* Director June 17, 1997
- ---------------------------------------------
Kevin J. Kinsella
* Director June 17, 1997
- ---------------------------------------------
Hugh Y. Rienhoff, Jr., M.D.
* Director June 17, 1997
- ---------------------------------------------
Lubert Stryer
* Director June 17, 1997
- ---------------------------------------------
Timothy J. Wollaeger
* By: /s/ TIMOTHY J. RINK
- ---------------------------------------------
Timothy J. Rink, M.A., M.D., Sc.D.
Attorney-In-Fact
</TABLE>
II-6
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- -------------------------------------------------------------------------- ----
<C> <S> <C>
1.1+ Form of Underwriting Agreement. ..........................................
3.1+ Restated Certificate of Incorporation. ...................................
3.2+ Amended and Restated Bylaws. .............................................
3.3+ Certificate of Amendment of Restated Certificate of Incorporation. .......
3.4+ Form of Restated Certificate of Incorporation, to be filed and become
effective upon completion of the offering. ...............................
3.5+ Form of Restated Bylaws to become effective upon completion of the
offering. ................................................................
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5. ................
4.2+ Form of Common Stock Certificate. ........................................
4.3+ Amended and Restated Investors' Rights Agreement dated as of December 27,
1996 between the Registrant and the individuals and entities listed in the
signature pages thereto. .................................................
5.1+ Opinion of Cooley Godward LLP. ...........................................
10.1+ Form of Indemnity Agreement entered into between Registrant and its
directors and officers. ..................................................
10.2+ Registrant's 1996 Stock Plan, as amended and restated (the "1996 Stock
Plan"). ..................................................................
10.3+ Form of Incentive Stock Option Agreement under the 1996 Stock Plan. ......
10.4+ Form of Nonstatutory Stock Option Agreement under the 1996 Stock Plan. ...
10.5+ Form of Restricted Stock Purchase Agreement under the 1996 Stock Plan. ...
10.6+ Registrant's Employee Stock Purchase Plan and related offering
document. ................................................................
10.7+ Registrant's Non-Employee Directors' Stock Option Plan. ..................
10.8+ Form of Nonstatutory Stock Option under Registrant's Non-Employee
Directors' Stock Option Plan. ............................................
10.9+ Employment Agreement dated January 23, 1996 between the Registrant and
Timothy J. Rink, as subsequently amended on March 8, 1996. ...............
10.10+ Employment Agreement dated August 6, 1996 between the Registrant and J.
Gordon Foulkes. ..........................................................
10.11+ Preferred Stock Purchase Agreement dated as of March 8, 1996 between the
Registrant and the individuals and entities listed in the signature pages
thereto. .................................................................
10.12+ Series D Preferred Stock Purchase Agreement dated as of December 27, 1996
between the Registrant and the individual and entities listed in the
signature pages thereto. .................................................
10.13+ SubLease dated May 29, 1996 between the Registrant and Torrey Pines
Science Center Limited Partnership, as subsequently amended on August 31,
1996. ....................................................................
10.14+ Master Lease Agreement dated May 17, 1996 between the Registrant and Lease
Management Services Incorporated. ........................................
10.15+ Equipment Financing Agreement dated May 17, 1996 between the Registrant
and Lease Management Services Incorporated. ..............................
10.16+ Security Deposit Pledge Agreement dated May 17, 1996 between the
Registrant and Lease Management Services Incorporated. ...................
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- -------------------------------------------------------------------------- ----
<C> <S> <C>
10.17*+ Exclusive License Agreement for Fluorescent Assay Technologies dated June
17, 1996 between the Registrant and The Regents of the University of
California. ..............................................................
10.18*+ License Agreement dated August 2, 1996 between the Registrant and
California Institute of Technology. ......................................
10.19*+ License Agreement dated October 4, 1996 between the Registrant and the
State of Oregon, acting by and through the State Board of Higher Education
on behalf of the University of Oregon. ...................................
10.20*+ Research Agreement dated April 2, 1996 between the Registrant and Sequana
Therapeutics, Inc. .......................................................
10.21*+ Collaboration and License Agreement effective as of April 24, 1996 between
the Registrant and Packard Instrument Company, Inc. ......................
10.22*+ Collaborative Research and License Agreement dated November 26, 1996
between the Registrant and Bristol-Myers Squibb Pharmaceutical Research
Institute. ...............................................................
10.23*+ Collaborative Research and License Agreement dated December 18, 1996
between the Registrant and Eli Lilly and Company. ........................
10.24*+ Collaboration Agreement effective as of February 1, 1997 between the
Registrant and Allelix Biopharmaceuticals Inc. ...........................
10.25+ Multi-Tenant Industrial Lease dated April 7, 1997 between the Registrant
and AEW/LBA Acquisition Co. II, LLC, as subsequently amended on June 12,
1997. ....................................................................
11.1+ Computation of Net Loss per Share. .......................................
23.1 Consent of Ernst & Young LLP, Independent Auditors. ......................
23.2+ Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. .........
23.3+ Consent of Fish & Richardson P.C. ........................................
24.1+ Power of Attorney. Reference is made to page II-6. .......................
</TABLE>
- ---------------
* Confidential Treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
+ Previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated April 7, 1997
(except Note 11, as to which the date is April 25, 1997), in Amendment No. 4 to
the Registration Statement (Form S-1 No. 333-23407) and related Prospectus of
Aurora Biosciences Corporation for the registration of 4,025,000 shares of its
common stock.
ERNST & YOUNG LLP
San Diego, California
June 13, 1997
